(Reuters) - After the rejection last summer of a proposed $27.5 million settlement of tokenholders’ class action securities fraud claims and an aborted takeover of the litigation by a different plaintiffs' firm, blockchain company Block.one has reached a new $22 million deal with investors – and this one could turn out to provide a template for future crypto class action settlements.
The new settlement proposal from lead plaintiffs' counsel at Grant & Eisenhofer would exclude claims by investors who acquired their tokens in foreign transactions. Only investors who bought tokens on U.S. crypto exchanges — including Coinbase, Kraken, Binance.US and Genesis — or who otherwise conducted trades in the U.S. are eligible to receive a share of the proposed $22 million settlement fund.
That new restriction is intended to assuage the concerns of U.S. District Judge Lewis Kaplan, who refused last August to approve the proposed $27.5 million settlement because it did not distinguish between foreign and domestic transactions in the Block.one EOS and ERC-20 tokens.
As you know, and as Kaplan discussed in his August ruling, the U.S. Supreme Court held in 2010’s Morrison v. National Australia Bank Ltd that U.S. securities laws apply only to U.S. transactions. Block.one’s lawyers from Davis Polk & Wardwell relied heavily on Morrison in the company’s motion to dismiss the tokenholders' class action, which was filed back in November 2020. Block.one, which also denies that it misled investors about the prospects for its blockchain when it raised $4 billion in a so-called initial coin offering in 2017 and 2018, argued in the dismissal motion that Grant & Eisenhofer failed to establish that any of the lead plaintiff's tokens were acquired in domestic transactions. (Kaplan has not ruled on the motion to dismiss.)
Grant & Eisenhofer subsequently offered evidence that the lead plaintiff, an investor group called Crypto Assets Opportunity Fund LLC, conducted nearly half of its trades for Block.one tokens on U.S. crypto exchanges. But when Kaplan refused last year to approve the originally proposed settlement, the judge said he wasn’t convinced the crypto fund could adequately represent the interests of domestic investors because it also had a conflicting interest in recovering money for tokenholders whose claims would otherwise be barred by Morrison.
Kaplan said in his August decision that the conflict within the class was structural and that Grant & Eisenhofer hadn’t done anything wrong by agreeing to a deal that would compensate both categories of claimants. Nevertheless, Selendy Gay Elsberg asked Kaplan after his August ruling to replace Grant & Eisenhofer and its client, the crypto fund, as leads in the class action.
Selendy Gay argued that its client, an individual investor, had suffered nearly all of his losses in trades on the U.S. Kraken exchange, so, unlike G&E's client, he had no incentive to compromise the interests of domestic investors to obtain recovery for non-U.S. traders. (Selendy Gay’s initial proposal included co-counsel from the firm then known as Roche Freedman but that firm, now known as Freedman Normand Friedland, withdrew from the case last September.)
Grant & Eisenhofer persuaded Kaplan that the firm and its client – which had, after all, suffered losses in domestic transactions, albeit not all of its losses – was still best positioned to represent the interests of tokenholders with viable claims.
Selendy Gay’s Jordan Goldstein declined to comment when I asked in an email if his client intends to contest the new proposed settlement, which must still be approved by Kaplan. Daniel Berger of Grant & Eisenhofer also declined to comment. G&E had proposed at $5.5 million fee in the original settlement but did not specify a fee request in the new deal. The $22 million settlement, if it goes through, would (to the best of my knowledge) still be the second-biggest recovery for a class of crypto tokenholders alleging securities fraud, behind a $25 million settlement by the Tezos Foundation in 2020.
If Kaplan ends up approving this deal, future crypto defendants and lead plaintiffs should pay attention to the criteria Grant & Eisenhofer and Block.one used to define the class in order to encompass investors with valid claims under Morrison but to exclude those whose claims would be barred by interpretations of the 2010 decision. (Somehow, there’s still gray area when it comes to exotic securities.)
In his decision rejecting the original deal last year, Kaplan had suggested that under the 2nd U.S. Circuit Court of Appeals’ post-Morrison test for domestic transactions, the best way to distinguish between viable and non-viable crypto trading claims might be to determine the location of the first computer, or blockchain node, to verify the token’s transfer from one owner to another. That verification, the judge said, was the moment of “irrevocable liability” for the token purchase.
But in the new proposed deal, Block.one and the lead plaintiff came up with several different ways to define domestic transactions. The most obvious are token trades that took place on U.S. crypto exchanges. There’s also a category that expands on Kaplan’s suggestion, defining EOS and ERC-20 token purchases as domestic transactions if they were verified by blockchain producers in the U.S. In addition, the class includes U.S.-located tokenholders who bought their coins from sellers also located in the U.S.
Morrison, as I’ve reported several times over the last few years, has been a big stumbling block for crypto investors, which is just what many crypto defendants intended. Block.one’s new proposed settlement is obviously smaller than its original deal. But if it provides a framework for defining valid crypto claims under Morrison, it’s still an important accomplishment for investors.
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