Cryptocurrency Securities Class Action Litigation 2022 Year Review

In 2022, crypto securities class action litigation cases were primarily filed5 in California (eight cases) and New York (seven cases), which is also where most of the crypto securities class action litigation has been filed in previous years.6 Specifically, California had five cases in the Northern District of California, two cases in the Southern District of California, and one case in the Central District of California. New York had five cases in the Southern District of New York and two in the Eastern District of New York. New Jersey was the state with the third most cases, with four in the District of New Jersey. Florida had two cases, with one in the Southern District of Florida and another in the Middle District of Florida. And both Texas and Utah had one case each, in the Western District of Texas and District of Utah, respectively.

Types of Crypto Defendants and Allegations

Plaintiffs brought cases against a variety of crypto and blockchain related companies including “coin issuers, cryptocurrency exchanges, cryptocurrency miners, securitizers of cryptocurrencies or cryptocurrency mining contracts, and companies adjacent to cryptocurrency” with a majority of cases brought against exchanges or trading and lending platforms.7 The key issues generally raised in the complaints include allegations regarding (1) the sale or offering of unregistered securities (i.e. those not registered with the U.S. Securities & Exchange Commission), in violation of §§ 5, 12, and 15 of the Securities Act of 1933 and/or (2) false and/or misleading statements and/or omissions/failures to make proper disclosures, resulting in alleged financial losses for purchasers or investors.

Of the crypto-related cases filed, Plaintiffs brought cases against companies involved with non-fungible tokens or NFTs, blockchain networks, and speculative cryptocurrencies. The majority of 2022 cases (thirteen) were brought against crypto exchanges and/or lending or trading platforms such as: Gemini (a crypto asset exchange and lending platform)8, Compound (a business allowing users to borrow and lend crypto assets)9, Silvergate (which provides payments, lending, and funding solutions for digital currency companies and investors)10, Voyager (a cryptocurrency trading, lending, borrowing company and platform) (two cases)11, Coinbase (a centralized marketplace for cryptocurrency traders) (two cases)12, Celsius (a cryptocurrency trading, lending, and borrowing company)13, BAM Trading Services (a crypto-asset exchange)14, HUMBL (an app for paying or transferring digital assets)15, Bakkt (a digital asset marketplace)16, Uniswap (a crypto-asset exchange)17, and Blockfi (a cryptocurrency trading, lending, and borrowing company)18. Notably, investors brought securities class actions against two of the larger platforms, Voyager (which filed for bankruptcy in July 2022) and Coinbase. It is likely that exchanges will continue to be a target of class actions until the SEC and courts provide additional clarification and guidance as to what crypto assets are considered securities.

A few 2022 crypto securities class action cases involved NFT companies or allegations related to NFTs: Nifty Gateway (a platform for NFTs)19, Yuga Labs (a company selling digital assets including NFTs such as its Bored Ape Yacht Club collection)20, Safemoon (a company that announced an intention to develop an NFT exchange)21, Universal Navigation (which developed the Uniswap protocol allowing for the trade of various tokens related to NFTs or tokens with plans to incorporate NFTs)22, Legacy Bakkt (a digital asset marketplace where NFTs could be traded)23, HUMBL (which launched an NFT Gallery allowing for the creation and purchase of NFTs)24, and Solana (which is a blockchain network upon which decentralized apps such as NFTs are built)25. It should be noted that because celebrity promotions have been common to NFT’s, investors brought complaints against celebrity individual defendants as well.26

For example, plaintiffs filed an action against Yuga Labs (Yuga Labs, Inc.: ApeCoins, NFTs Securities Litigation), a Delaware company that sells digital assets, including its flagship NFT collection known as the Bored Ape Yacht Club (“BAYC”), ApeCoins, and virtual land.  The complaint was brought on behalf of all investors who purchased Yuga’s NFTs or ApeCoin tokens and also named as defendants many celebrities including Paris Hilton, James (“Jimmy”) Fallon, Justin Bieber, Gwyneth Paltrow, Serena Williams, Kevin Hart, and Stephen Curry II, among others.27 The securities class action suit was filed in the Central District of California, alleging violations of Sections §§ 10(b) and  20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 and §§ 5, 12(a)(1), and 15 of the Securities Act of 1933 (“Securities Act”).28 Plaintiffs alleged a “vast scheme” between a blockchain start-up company and a Hollywood talent agent, and a “front operation”, who “all united for the purpose of promoting and selling a suite of digital assets” by misleading potential investors through the use of celebrities.29 Plaintiffs alleged that defendant Yuga Labs thereby mislead investors regarding the “failed launch of the BAYC metaverse and botched sale of virtual land in the Otherside.”30 Plaintiffs alleged that upon this failed launch and botched sale, the price of “BAYC NFT fell from a floor price of $114,000  to a Relevant Period low of 50 ether (i.e., approximately $62,000) on November 14, 2022,” the price of ApeCoins dropped by 90%, and the price of Otherdeed NFT “went from a Relevant Period high of 4.7 ether (about $13,200) on May 1, 2022 all the way down to a low of 0.8 ether (worth only $1,000) on November 15, 2022.31 

In addition to cases brought against NFT companies, there were a number of cases brought against crypto mining companies, which engage in cryptocurrency mining, “a process of creating new digital ‘coins.’”32 In 2022, there were four complaints filed against crypto mining-related companies, including Singularity (a global logistics company involved in selling and marketing crypto mining equipment)33, Iris (owner and operator of Bitcoin mining data centers)34, Core Scientific (a blockchain computing data center provider and digital asset mining company)35, and Stronghold (a Bitcoin mining company).36 For example, in Iris Energy Limited Securities Litigation, investors brought a securities class action in the District of New Jersey, alleging violations of §§ 10(b) and 20(a) of the Exchange Act and §§ 11 and 15 of the Securities Act.37 In particular, Plaintiffs alleged “the Offering Documents made false and/or misleading statements and/or failed to disclose that: (i) certain of Iris’s Bitcoin miners, owned through its Non-Recourse SPVs, were unlikely to produce sufficient cash flow to service their respective debt financing obligations; (ii) accordingly, Iris’s use of equipment financing agreements to procure Bitcoin miners was not as sustainable as Defendants had represented; (iii) the foregoing was likely to have a material negative impact on the Company’s business, operations, and financial condition.”38 “On November 2, 2022, Iris issued a press release disclosing, among other things, that ‘[c]ertain equipment (i.e., Bitcoin miners) owned by [NonRecourse SPV 2 and Non-Recourse SPV 3] currently produce insufficient cash flow to service their respective debt financing obligations, and have a current market value well below the principal amount of the relevant loans’ and that ‘[r]estructuring discussions with the lender remain ongoing.’”39 Plaintiffs alleged that upon this news, the stock dropped by “$0.51 per share, or 15.04%, to close at $2.88 per share on November 2, 2022—a nearly 90% decline from the Offering price.”40

In addition, Plaintiffs also filed two complaints against blockchain networks including Solana (a blockchain network upon which decentralized apps (“dApps”) are built)41 and Terraform Labs (which “operates the Terra blockchain and its related protocol, which hosts, supports, and funds a community of decentralized financial applications and products known collectively as the Terra ecosystem.”).42 In Terra Tokens Securities Litigation, investors brought a securities class action in the Northern District of California, alleging violations of §§ 10(b) and 20(a) of the Exchange Act and Rule 10b-5, and §§ 5, 12(a)(1) and 15 of the Securities Act.43 According to the complaint, defendant, TFL, a company operating the Terra blockchain and ecosystem, allegedly “made a series of false and misleading statements regarding the largest Terra ecosystem digital assets by market cap, UST and LUNA, in order to induce investors into purchasing these digital assets at inflated rates.”44 The complaint alleges that “these misrepresentations and omissions related to: (i) the stability of the UST/LUNA algorithmic stablecoin pair, the Anchor Proto[co]l’s yield rate, and the Terra ecosystem itself; (ii) the ability for the Luna Foundation Guard to defend and maintain the peg of UST/LUNA during periods of high volatility in the market; and (iii) the inability for TFL to support Anchor’s yield rate the Anchor Yield Reserve fund.”45 Upon the news regarding structural vulnerabilities in the Terra ecosystem, the price of UST and LUNA Tokens dropped by 91% and 99.7%, respectively from May 7, 2022 to May 12, 2022.46 Last, there were two complaints filed against speculative cryptocurrencies LGBCoin (a controversial digital commodity)47 and Safemoon token (a speculative digital token).48

Of the twenty-three complaints filed in 2022, only eight were filed against companies traded on a public exchange with five on NASDAQ, two on the New York Stock Exchange, and one Over-the-Counter Bulletin Board.

Stock or Crypto Asset Price Declines

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