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How Crypto Investors Make Money in Court

How Crypto Investors Make Money in Court
  • Crypto investors have lost billions of dollars in the plummeting market. Some say they have been deceived.
  • More than 200 applications have been filed. Some have settled for millions, some have lost and some are in progress.
  • Insider spoke to 7 attorneys and investigators about what investors are doing to get their money back.

Investing in crypto has never been easy, whether it’s timing, filing taxes, or trying to keep “FOMO” and “FUD” in check. Now, with prices plummeting and some companies filing for bankruptcy, more and more crypto investors are also taking up the challenge of going to court.

More than 200 crypto-related lawsuits have been filed by private parties in US courts since 2014, according to law firm Morrison Cohen. Even more cases have been brought to arbitrations behind closed doors. And there are signs that the latest crypto crash is sparking additional conflict.

Twelve securities class action lawsuits have been filed regarding crypto since March, according to a Stanford databasemore than the 11 filed in 2021. And since companies like Celsius and Voyager Digital filed for bankruptcy in July, dozens more investors have filed lawsuits and creditors have hired counsel.

Insider spoke with seven lawyers and investigators about the legal avenues crypto investors are pursuing in an effort to get their money back. They said it’s usually best to talk to a professional before taking any action, but investors have options.

“It really comes down to two things,” said Kyle Roche, an attorney at Roche Freedman who has represented crypto investors. “First, can we identify a defendant who has committed some form of wrongdoing, and second, is that wrongdoing inconsistent with a fundamental obligation that exists with other types of assets than issuers or participants to the market owe investors?”

Some investors say they were misled.

Lawyers say they are more likely to accept a case if they feel someone has been cheated.

Halston Thayer, an NFT marketer from Nevada, complaints that a Pepe the Frog-related token he bought using over $500,000 of Ether lost most of its value after people auctioned it off as a “scarce asset” and ” single” sold more copies. The accused said that Thayer indicated he was happy with his purchase and did not trust any of the statements about NFT scarcity that he now claims to be false.

Other investors have sued because, they say, they weren’t given all the information they needed to properly assess their risks. A proposed class action lawsuit filed in New Jersey by two people who deposited their crypto with BlockFi to generate a return claims the interest rates BlockFi paid weren’t high enough to cover undisclosed risks, like lending of the company to bankrupt fund Three Arrows Capital. The case is at an early stage and BlockFi has not filed an official response.

Joshua Harrow, an attorney with Gerstein Harrow, recently sued a Decentralized Autonomous Organization, or DAO, and its backers over what he claims were false promises that crypto would be stored securely.

“They think they’re smart with these DAOs, don’t use LLCs and don’t use companies, being anonymous on the blockchain,” he said. “What we’re trying to do is say no. At least in some cases there are people who can be held accountable.”

What if no one was lying?

The law has its limits. If you made a speculative investment on your own initiative in a popular token like Bitcoin, Dogecoin or Ether, and the price fell, there’s probably not much you can do, the lawyers say.

But if there is evidence that a token should have been a registered security, the issuers of the token could be prosecuted under US securities law, which generally prohibits unregistered securities offerings. In theory, they could be forced to redeem the tokens.

Companies that issue securities sold under the Securities Act of 1933 are required to disclose information about their business. Some critics have said the law is unsuitable for crypto. But Roche, which has brought several Securities Act cases, said the law’s drafters recognized that “finding fraud can be very difficult” when investors don’t have the same information as insiders.

Some crypto-related securities cases are ongoing and some have been dismissed. Others have settled; companies involved in the Tezos project agreed to pay $25 million, and others involved in EOS’ Block.one bid paid $27.5 million.

Roche said Securities Act cases are one of four general types that are filed in crypto. Others involve allegations of market manipulation, violations of consumer protection law and breach of contract.

What if you can’t afford a lawyer?

Just because you can’t afford a lawyer’s high hourly rates doesn’t mean you can’t seek justice. Some crypto investors have sued major exchanges like Coinbase on their own initiative in small claims court. Court costs and the maximum amount you can sue vary by state, but it’s usually less expensive than filing a lawsuit in another court.

On July 8, Joshua Browder, CEO of Not paying, which helps consumers file disputes without a lawyer, told Insider that more than 1,600 people used the platform to send demand letters to Celsius, which froze its users’ crypto accounts. Dozens of them went further and filed their own actions in small claims court, Browder said.

However, it’s unclear whether any of those cases have been resolved before Celsius filed for bankruptcy on July 13. Bankruptcy typically results in lawsuits against a debtor being stayed and resolved in bankruptcy court, where the timing is uncertain and creditors who have negotiated special protections are usually paid first.

If you suffer significant losses or are part of a larger group of investors who may have been harmed, a lawyer may also be willing to take on your case. Lawyers working under contingencies take their fees as a percentage of any settlement, usually 25% to 40%.

Litigation funding – where an investor pays fees and legal costs in exchange for a reduction in any potential recoveries – is another option. A Swiss company called Liti Capital said it advanced $5 million to a group of Binance users who banded together to file lawsuits against the company in Hong Kong.

What about arbitration?

Trials can be slow. Some cases have dragged on for years, ping-ponging between lower courts and appellate courts. Some cases, filed under consumer protection laws, tend to move faster than securities cases, lawyers say.

Outside of public view, many cases are resolved in arbitration. Arbitration can be faster and, in simple cases, cheaper than going to court, but critics often say that arbitration is stacked in favor of big business. While judges are government employees, arbitrators are paid by the parties, and the process generally offers less chance of unearthing a defendant’s internal records.

“It’s a lot faster, but it’s more expensive,” said Peter Cane, a lawyer in New York who has represented crypto investors in complex disputes with big money at stake. , but you’re not saving money.”

Insider found more than a dozen claims against exchanges like Kraken, Coinbase, and Bittrex in the records of JAMS and AAA, two leading arbitration providers. And the Binance arbitration funded by Liti Capital would involve hundreds of aggrieved traders.

Alex Farzan, who runs his own law firm in Los Angeles, said he has filed about a dozen arbitration claims against Coinbase and other online exchanges, often on behalf of clients who have lost assets to cause of “SIM swap” attacks. He said he had success in some of the cases.

“They have a bunch of preventative terms and conditions in their user agreements that most consumers don’t bother to read,” Farzan said.

How the government can help

Investors do not always need to hire a lawyer to obtain redress. In some cases, the government will attempt to seize — and possibly return — digital assets that have been tainted with breaches of the law.

Last month, the Department of Justice revealed that he managed to seize around $500,000 in crypto-ransomware payments and would return the money to the victims. The SEC also creates “Fair Funds” to reimburse wronged investors in certain cases, as it did in its enforcement action against BitClave in 2020.

But the feds can’t handle all the tips they get. “People get caught for 20, 25 thousand every day,” said Chris Tarbell, a former FBI agent whose consulting firm Naxo advises people who have had a crypto stolen. Even in cases where the government is interested, he said, bureaucratic blockages and secrecy can leave investors in the dark.

“They can work on an entire case and they don’t have to tell you,” he said.

Even when the federal government cannot act, regulators can issue warnings. Reports filed at IC3.gov allow law enforcement to spot the patterns. And the Federal Trade Commission said in June that it was obtained more than 46,000 fraud reports, with $1 billion lost, since January 2021.

State regulators are also investigating crypto firms and asking for guidance. The New York Attorney General sued Tether and BitFinex for alleged misrepresentation, a case that was colonized in 2021, and sent cease and desist letters to other major players.

One of the top regulators is the Texas State Securities Board, which has filed 150 crypto-related actions since 2017, according to Joe Rotunda, who heads its enforcement arm. He told Insider in an email that a survey of state regulators in late 2021 found they viewed crypto and digital asset systems as “the biggest threat to retail investors. , beating all other products”.


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