Could 11 class-action lawsuits filed against major players from the crypto space do damage to the industry, or will they help it mature?
Roche Cyrulnik Freedman LLP, working with Selendy & Gay PLLC, filed 11 class-action lawsuits on April 3 in the Southern District of New York against seven token issuers and four of the world’s largest cryptocurrency exchanges.
The sweeping filings name exchange giants Binance, Bibox, BitMEX and KuCoin as defendants, along with Block.one, the Tron Foundation, the Bprotocol Foundation — which oversees the Bancor protocol — Civic, KayDex Pte. Ltd. — which operates as Kyber Network — Quantstamp and Status. Executives were not spared, with heavyweights Changpeng Zhao, Dan Larimer, Vinny Lingham and Brendan Blumer also named in the suits.
The lead plaintiffs named in the lawsuits are varying combinations of four individuals. Their claims on behalf of the class identified are that token issuers marketed and sold unregistered securities to United States investors in violation of federal and state securities laws. Exchanges listed them, profiting off the original violation.
The modus operandi of Roche Cyrulnik Freedman
Roche Cyrulnik Freedman is no stranger to crypto-related legal action. It is involved in the lawsuit against Craig Wright, representing Ira Kleiman, the brother of the late Dave Kleiman. That lawsuit seeks 50% of Craig Wright’s Bitcoin (BTC), which the claimant argues rightfully belongs to the Kleiman estate.
Tether, Bitfinex and their backers have also found themselves in Roche Cyrulnik Freedman’s crosshairs. The law firm may be familiar with the sector and some of the dubious conduct to which it bears witness, but is the exorbitantly priced litigiousness that is apparently its modus operandi likely to help the industry mature?
Cynical class-action suits a blight on due process
Class-action suits help level legal playing fields by offering a viable path of redress to those who would otherwise not be able to afford litigation. They also hold corporations to account for violations that might otherwise go unpunished if the settlement to any given individual would be too small to warrant the cost of civil action.
Class-action lawsuits are a powerful tool for deterring and punishing illegal corporate behavior that may be prohibitive for any single harmed individual to pursue.
But they exist because of inefficiencies in the legal system and inadequate regulatory oversight. Where it might be more appropriate for regulators and consumer protection agencies to process claims against companies, class-action devices have the impact of crowding out those mechanisms.
They are also prone to abuse by law firms. In creating what is effectively a market for the private enforcement of the law, law firms are attracted to identify classes to sue on behalf of, and they often take a substantial fee.
Attorney fees in class-action lawsuits are typically around one-third of the gross settlement. Roche Cyrulnik Freedman was admonished by Judge Reinhart for excessive legal fees in the Kleiman v. Wright case. The judge argued:
“I find all these rates to be excessive. I am personally familiar with the hourly rates charged by the top civil litigators in Palm Beach County.”
The class in each of these suits will likely number into the millions. With class-action suits designed to redress claimants for small losses, any large investors who feel they have been harmed may take the opportunity to refrain from joining the class and personally sue later. That means that most members will have very little influence over the attorney’s fee and the settlement negotiations.
Roche Cyrulnik Freedman will hold sway over those negotiations with the court. The average claimant is unlikely to see very much redress at all.
Long-term crypto antagonists deny the industry a path to maturity
Securities-related class-action suits in particular place enormous pressure on defendants to settle. That is because in suits claiming securities violations, the class can rely on fraud-on-the-market, rather than be required to prove fraud to each individual class member. Facing a potentially ruinous judgment, defendants are incentivized to settle.
If there is a settlement, there will be no finding of wrongdoing, confidentiality over many details and members will get redress for less than their losses. The big winners will be the law firm and the industry will be no closer to regulatory clarity on what is and isn’t a security.
Roche Cyrulnik Freedman’s multi-suit declaration of war on the sector has targeted the largest companies in the space — the ones with the largest warchests. It ignores smaller token issuers, token issuers with few resources left or that have since gone out of business, and issuers that cannot be found — the genuine scams, in other words.
Those genuine scams will go unpunished and only the largest players will bear the brunt of the litigation. Harmed investors will not be fully compensated for their losses, and it will not result in legal clarity. That hardly takes the crypto sector any closer to legal compliance and it will not help the industry mature.
A process of creative destruction is the only way the crypto sector will find its way into a state of maturity, and only the market itself can make that happen. Unedifying class-action suits targeting well-financed crypto companies are not the sword on which projects will live or die.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.