Crypto Caselaw Minute #20–1/24/2019
Common issues of law and tote-bags, the case of the stolen Mongolian tether, and Midwestern jurisdictional peregrinations (as the courthouses close down?) Strap in for our TWENTIETH CCM, which covers a crypto trifecta — one new lawsuit(stolen tether), one new brief in the bazillion dollar tezos litigation, one new opinion (mind your jurisdiction counsel). [As always, Rosario summaries are “NMR” and Palley summaries are “SDP”]
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes. (Picture credit: https://pixabay.com/en/climbing-rappelling-rope-cliff-1154100/; CC0 Creative Commons).
In re Tezos Securities Litigation, Memorandum of Law in Support of Plaintiffs’ Motion for Class Certification, (17-cv-06779-RS, D.N.D.Cal., January 9, 2019) [SDP]
It’s one thing to file a class action, is another thing for your class action to be certified by a court. Until you’re certified, you’re a putative class action which means you’re … not actually a class action yet, just a potential one. So a big milestone in class action cases is class certification briefing and argument. Until that happens, you’re just a lone plaintiff (or maybe handful), and you don’t actually represent a class of people just yet. This is why it’s kinda big news that class action certification motion was filed earlier this month (on 1/9) the Tezos consolidated class action pending in federal court in San Francisco.
For those of you who were asleep during the ICO boom in 2017, Tezos was a major event that raised 232 million dollars in crypto and cash — an amount that went up in value to well over a billion dollars as the market rose. Plaintiffs say this was an illegal and unregistered securities offering. Defendants say it was a fundraising event in which tokens were never guaranteed but were like a gift that you get after donating to a public radio fund drive. (I am over-simplifying, and not making a tote bag joke, but that is the gist).
There are a number of things that you have to show in order for a court to certify a class action. A handy mnemonic for some of this “CAN’T” (which I memorized years ago for the bar exam). You can’t have a class action unless you show commonality, adequacy, numerosity and typicality (there are some other elements too but this isn’t a civil procedure class).
Commonality refers to a require that there be “question of law and fact common to the class.” I mean, what good’s a class action if the class members have no factual or legal issues in common, right? Here, I want to point one of the questions that the Plaintiffs raise in their brief because it leads to citation of some interesting evidence (and may have an impact on this asset down the line, after the court rules). Specifically, Plaintiffs say one of the question is “where the the offer of the Tezos tokens through the Tezos ICO constituted the offer and sale of ‘securities’?”
In support of their answer that, yeah, this was securities offering, the Plaintiffs cite some documents — some of which were presumably provided in discovery, others that may have been public already. One document is an email from one of the Tezos founders that asks whether he had “decided to invest in the crowdsale.” Another to a different investor says that she would be “delighted to meet up for coffee or a meal while .. in town if [he is] still weighing a Tezos purchase.”
Now we don’t know what the Defendants say in response. They have argued in the past that this wasn’t a securities offering and there were no purchases and sales of tokens. These statements — which are admissible non-hearsay party opponent statement, to be technical about it under the federal rules of evidence — seem to directly contradict that position. Now if I were a defense lawyer I’d say something “look, the fact that my non-lawyer client used sloppy language in informal emails doesn’t mean that this was a securities offering; you have to look at substance of the transaction and when we do that we see it wasn’t a securities offering — this desperate cherry-picking of emails shows what a weak case they have.” (Actually, that’s not bad …)
That’s what’s most interesting in the briefing to me. We’ll see a response from the defendants shortly, and then reply brief. This appears to be set for argument in April and if I can find a reason to be in San Francisco then, I am going to stop by the Courthouse and listen. There’s a chance that the Court in ruling on this briefing will give an indication as to whether it believes that the tokens are in fact securities. It’s probably not going to be a definitive ruling on the merits of that claim — which we might not see until a summary judgment motion, but it might be close.
ZG Top Technology Co., Lt. v. John Doe, (D.W.D.Wash., 2:19-cv-00092, January 22, 2019) [SDP]
As we’ve discussed in prior posts, the way that you sue an unknown hacker who steals your crypto is to sue them as a John or Jane Doe defendant and then issue a bunch of subpoenas to get information about IP addresses, service providers and if they are dumb enough to move the stuff to a U.S. exchange to the exchange you trace the crypto to. That’s what this lawsuit is about — allegedly stolen crypto that made its way to an account on Bittrex.
The nutshell is this: Plainitff operates a “global trading platform and has offices in Mongolia and China.” On November 25, 2018, John Doe “attacked” Plaintiff and stole 100 ETH and 330,000 USDT. Using the magic of immutable blockchain ledger wizardry, plaintiff was able to track the crypto to wallet addresses maintained by Bittrex.
The Complaint has four counts — Violation of the Computer Fraud and Abuse Act, Two violations of the Washington Cyber Crime Act, and a count for conversion. The prayer for relief asks for mostly standard stuff, including actual and punitive damages. One request jumped out at me as odd — for “forfeiture” of property used to commit the alleged acts. Private plaintiffs don’t usually get asset forfeiture as a remedy. Other than that last bit, pretty much what you would expect.
But … why is this in federal court in Seattle, and why should a U.S. Court have to deal with this dispute. I have to admit that I scratched my head the first time I read this lawsuit to figure out why it was filed in Federal Court in Seattle. The lawsuit alleges that the plaintiff is based in Ulan Bator, which is in Mongolia, not Washington state. And the defendant, well it’s a John Doe — we don’t actually know anything about the defendant.
Presumably, plaintiff chose to file this in Seattle beacuse that’s where Bittrex is, which will make it easier to serve a subpoena on it. It might have slightly complicated matters to add Bittrex as a defendant in a declaratory judgement count but might also have made it marginally easier to enforce a judgment against it.
But here’s the thing — subject matter jurisdiction is a funny thing. Courts can raise it on their motion, which is what happened in the Smoak case, which Nelson covers today. I think there’s a chance that the Court will ask the Plaintiff to explain what this is doing in his courtroom.
Christopher Smoak v. Bitcoin Market, LLC, et al. (W.D. Okla. 5:18-cv-01096-G, January 14, 2019)[NMR]
Contrary to popular opinion you cannot just willy nilly file a lawsuit for any reason whatsoever in whatever jurisdiction you like. There are in fact pretty strict rules surrounding what you can sue for, and where you can bring a lawsuit. If you do not follow those rules then your opponent in the lawsuit, or in some cases the court where you filed your silly lawsuit, will challenge your suit on procedural grounds and your suit will be thrown out.
As we’ve talked about previously in the CCM, federal courts are courts of limited jurisdiction. What this means is that federal courts can only hear cases over which they have subject matter jurisdiction, and personal jurisdiction. One way for a court to have subject matter jurisdiction over a case is what’s known as diversity jurisdiction, which means that the amount in controversy is at least $75,000 and no plaintiff shares a state of citizenship with any defendant. Great, wonderful, you’re not here for a civil procedure class. What does this have to do with Smoak? A lot at this moment.
Plaintiff Christopher Smoak got the bitcoin bug early. According to the alleged facts, on May 26, 2011 sent a $1,000 check to the defendant exchange. Brief sidebar, how many people can say that they sent a check to a crypto exchange to buy bitcoin, or any other cryptocurrency? The number can’t be that high. Returning to the case, Smoak allegedly did some trading on Bitcoin Market, and ended up with 75 bitcoins that he kept on Bitcoin Market’s site. From the filing, it appears that from June 2011 to March 2013 Smoak did nothing with his coins on Bitcoin Market’s site. That’s when the troubles began.
In March of 2013, Smoak was allegedly unable to login to his account at Bitcoin Market. On April 8, 2013, Smoak sends an email to support inquiring about his account. Then on November 9, 2013, Smoak sends an email to support at Bitcoin Market, and to defendant Dustin Dollar asking about his coins. He allegedly receives no responses. Fast forward a few years, and in November 7, 2018, Smoak files a lawsuit in federal court in Oklahoma alleging breach of contract. What does any of this have to do with diversity jurisdiction? Nothing, but at this stage of the lawsuit diversity jurisidiction is the only thing the judge in the case cares about.
On January 4, 2019, the judge in the case issued a one page order. As the order points out to to the attorneys in the case “[t]he court has a duty to inquire into its own jurisdiction.” That’s not something an attorney wants to read from a judge in any lawsuit. The order explains that the plaintiff brought the lawsuit and alleged diversity jurisdiction as satisfying the requirement for subject matter jurisdiction. The court disagreed, and directed the plaintiffs to “file a second amended complaint no later than January 22, 2019, which identifies all members of Defendant Bitcoin Market, LLC and the citizenship of those members. Failure to comply may result in dismissal of this action without prejudice.”
The plaintiff’s second amended complaint filed on January 14, 2019, attempts to correct the deficiency by identifying the alleged two owners of Bitcoin Market, Dustin Dollar and Tiffany Dollar, as well as their citizenship being in Oklahoma. Assuming the judge finds the plaintiffs new amended complaint sufficient the case may eventually get to the question of what actually happened to Smoak’s bitcoin, but only if his attorneys follow the rules along the way.
