How cryptocurrency investors are winning back money in court

  • Cryptocurrency investors have lost billions of dollars in the free fall market. Some say they have been deceived.
  • Over 200 cases have been filed. Some have settled for millions, others have lost and others are ongoing.
  • Insider spoke to 7 lawyers and investigators about what investors are doing to get their money back.

Investing in cryptocurrencies has never been easy, whether it’s time trading, tax filing, or trying to keep “FOMO” and “FUD” in check. Now, with prices falling and some companies filing for bankruptcy, even more cryptocurrency investors are facing the challenge of going to court.

According to the Morrison Cohen law firm, more than 200 cryptocurrency-related lawsuits have been filed by private individuals in US courts since 2014. Even more cases have been initiated in closed-door arbitration. And there are signs that the latest cryptocurrency crash is spurring further controversy.

Twelve class actions on stocks involving cryptocurrencies have been filed since March, according to a Stanford database, more than 11 filed in all of 2021. And as companies like Celsius and Voyager Digital filed for bankruptcy in July, dozens of other investors took action. legal, and creditors have insured.

Insider spoke to seven lawyers and legal investigators who upset cryptocurrency investors in an effort to get their money back, from participating in class action with lawyers working in an emergency to shelling out for high-risk confidential arbitration. They said it’s generally best to speak to a professional before taking any concrete action, but investors have options.

“It really boils down to two points,” said Kyle Roche, a lawyer with the Roche Freedman firm who represented cryptocurrency investors. “One, can we identify a defendant who has committed some form of wrongdoing and, second, is that wrongdoing contrary to some basic duties that exist with other types of assets that issuers or market participants owe to investors?”

Some investors claim they have been misled.

Lawyers say they are more likely to face a case if they believe someone has been deceived.

Halston Thayer, a Nevada NFT buyer, says a token related to Pepe the Frog he bought using over $ 500,000 worth of Ether lost most of its value after people auctioned it off as a “rare commodity. “and” a single good “has sold more copies. Defendants alleged that Thayer stated that he was satisfied with his purchase of him and did not rely on any of the claims about the rarity of the NFT that he now claims to be false.

Other investors have filed lawsuits because, they say, they have not received all the information they need to properly assess their risks. A class action proposal filed in New Jersey by two people who deposited their cryptocurrency with BlockFi to generate a return claims that the interest rates BlockFi paid were not high enough to cover undisclosed risks, such as the company’s loan to the fund. failed Three Arrows Capital. The case is in an early stage and BlockFi has not presented a formal response.

Jason Harrow, an attorney at Gerstein Harrow, recently sued a decentralized autonomous organization, or DAO, and its supporters for what he believed were false promises that cryptocurrencies would be securely stored.

“They think they are smart with these DAOs, not using LLCs and not using 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 nobody lied?

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

But if it is necessary to argue that a token should have been a registered security, issuers of the token could be sued under the US Securities Act, which generally prohibits offers of unregistered securities. In theory, they could be forced to buy back tokens.

Companies that issue securities sold under the Securities Act of 1933 are required to disclose information about their business. Some detractors have argued that the law is not suitable for cryptocurrencies. But Roche, who has brought forward several Securities Act cases, said the law’s editors acknowledged that “finding fraud can be very difficult” when investors don’t have the same information as insiders.

Some cases of cryptocurrency-related securities are ongoing and some have been filed. Others have settled; the companies involved in the Tezos project agreed to pay $ 25 million and others involved in EOS’s Block.one offering paid $ 27.5 million.

Roche said Securities Act cases are one of four general types that are filed in cryptography. Others involve claims 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 pay a lawyer’s high hourly rates doesn’t mean you can’t seek justice. Some cryptocurrency investors have filed lawsuits against major exchanges like Coinbase on their own initiative in a small claims court. Court fees and the maximum amount you can sue on vary by state, but it’s generally cheaper than filing a complaint in another court.

On July 8, Joshua Browder, CEO of DoNotPay, which helps consumers file disputes without a lawyer, told Insider that more than 1,600 people had used the platform to send inquiry letters to Celsius, who had frozen crypto accounts. of its users. Dozens of them went one step further and filed their actions in a small claims court, Browder said.

However, it is unclear whether any of these cases were resolved before Celsius filed for bankruptcy on July 13. Bankruptcy generally results in legal action against a debtor who is stopped and settled in bankruptcy court, where the timing is uncertain and creditors who have negotiated special protections typically get paid first.

If you have major losses, or if you are part of a larger group of investors who may have been wronged, an attorney may also be willing to address your case in an emergency. Contingency lawyers take their compensation as a percentage of any settlement, typically 25% to 40%.

Litigation financing, in which an investor pays legal fees and expenses in exchange for a reduction of any potential recovery, is another option. A Swiss company called Liti Capital claims to have advanced $ 5 million to a group of Binance users who have teamed up to take action against the company in Hong Kong.

What about arbitration?

The causes can be slow. Some cases have dragged on for years, playing ping-pong 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 opinion, many cases are resolved in arbitration. Arbitration can be faster and, in simple cases, cheaper than going to court, but detractors often claim that arbitration is stacked in favor of large corporations. While the judges are government employees, the arbitrators are paid by the parties, and the trial usually offers less chance of digging into a defendant’s internal records.

“It’s much faster, but it’s more expensive,” said Peter Cane, a New York-based attorney who has represented cryptocurrency investors in complex litigation with a lot of money at stake. “You’re saving time, but you’re not saving money.”

Insiders found more than a dozen complaints against exchanges like Kraken, Coinbase, and Bittrex on file with JAMS and AAA, two major arbitration providers. And according to reports, the Binance arbitration funded by Liti Capital involves hundreds of damaged traders.

Alex Farzan, who runs his law firm in Los Angeles, said he has filed 10 arbitration requests against Coinbase and other online exchanges, often on behalf of clients who have lost assets due to “SIM swap” attacks. He said he was successful in some cases.

“They have a lot of preemptive terms and conditions in their user agreements that most consumers don’t bother reading,” Farzan said.

How the government can help

Investors don’t always need a lawyer to get relief. In some cases, the government will try to seize – and eventually return – digital assets that have been tainted by violations of the law.

Last month, the Justice Department revealed that it managed to seize around $ 500,000 in cryptocurrency payments and return the money to the victims. The SEC also creates “Fair Funds” to repay damaged investors in some cases, as it did in its enforcement action against BitClave in 2020.

But the feds can’t handle all the tips they get. “People are being taken for 20.25 thousand every single day,” said Chris Tarbell, a former FBI agent whose consulting firm Naxo advises people who have experienced crypto theft. Even in cases where the government is concerned, he said, red tape 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 feds can’t take action, regulators can issue warnings. Reports filed on IC3.gov allow law enforcement to locate patterns. And the Federal Trade Commission said in June that it had received more than 46,000 reports of fraud, with $ 1 billion lost, since January 2021.

State regulators are also investigating crypto activities and appealing for suggestions. The New York Attorney General is suing Tether and BitFinex for alleged misrepresentation, a case that was resolved in 2021, and sent termination and withdrawal letters to other major players.

One of the top regulators is the Texas State Securities Board, which has initiated 150 cryptocurrency-related stocks since 2017, according to Joe Rotunda, who leads its counter arm. He told Insider in an email that a survey of state regulators in late 2021 revealed that they viewed cryptocurrency and digital asset schemes as “the main threat to retail investors, beating all others. products”.

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