Crypto Caselaw Minute #22–2/7/2019

Bitcoin string cites, click wrap arb clauses, and crypto con-men: This week’s CCM covers a new case dealing with Federal law money transmission licensing requirements for bitcoin traders, enforceability of the Coinbase arbitration clause, and a new lawsuit involving allegations of a crypto-scam that targeted senior citizens. [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/ropes-fishing-beachcombing-found-1185751/; CC0 Creative Commons).

United States v. Stetkiw, 2019 U.S. Dist. LEXIS 16607 (E.D. Mich, Feb. 1, 2019) [SDP]

A string cite has nothing to do with string, which is something you probably only know if you’re a lawyer or went to law school. It’s a bunch of case citations that are used seriatim (that means “in order” and is also a lawyer word) to support a legal proposition. So if you wanted to say that a negligence claim requires breach of a duty to a foreseeable plaintiff, you would show how well-established that principle is by citing a whole bunch of cases, a STRING, in other words. Hence “string cite.”

Why am I going on about string cites? It’s because it looks like we are close to having a pretty good string cite for the proposition that bitcoin is “money” or “funds” for purposes of a U.S. federal law that requires licensure for money transmission businesses. And that’s what this new case from a Michigan federal court deals with. (If you are a regular reader of these posts you will remember we dealt with a similar issue last week under Florida law, in the Espinoza case).

This particular opinion rules on a criminal defendant’s motion to dismiss a criminal indictment and to suppress evidence. He was charged with “violat[ing] 18 U.S.C. § 1960 by operating an unlicensed money transmitting business — i.e., a Bitcoin exchange service — that did not comply with the money transmitting business registration requirements of 31 U.S.C. § 5330.”

The defendant argued that buying/selling Bitcoin without a license isn’t a crime under the statute because (1) bitcoin isn’t money or funds as those terms are used in the statute and because it doesn’t enjoy the protection of a “sovereign government” and (2) it “covers only situations where a defendant acts as an intermediary to transfer money from one person or entity on behalf of another; he says it does not cover the type of two-party transactions Stetkiw is accused of conducting, where he would buy Bitcoin, store it in his own digital wallet, and then later sell and transfer that Bitcoin to an unrelated second person.”

The Court rejected all of these arguments.

First, it said Bitcoin is money or funds under the statute because “they can be easily purchased in exchange for ordinary currency, act[ ] as a denominator of value, and [are] used to conduct financial transactions.” It gave a string cite for that proposition, citing a bunch of cases (and can now be added to a string cite for the next opinion on the subject).

Second, the Court said that the transactions were money transmission because the transactions involved ultimately movement of money from one location to another location and different people. It cited FinCEN interpretive guidance to this effect, noting that it did not have force of law, but as useful persuasive authority. (If defendant had been “buying and selling Bitcoin strictly as an investment for his own account”, there likely would have been a different resolution but here the indictment said that he “engaged as a business in the exchange of Bitcoin for real currency” and also charged a per transaction fee).

Finally the Court rejected a Hail Mary argument that the statute was ambiguous and that under something called the Rule of Lenity he should be cut a break.

Bottom line — this appears to be one more case for the string cite supporting the proposition that bitcoin is “money or funds” under federal law governing money transmission and MSB licensure.

Sultan v. Coinbase, E.D.N.Y., 18–934, 1/24/19. [SDP]

You know those “accept” or “agree” buttons you click on websites and agree to terms of service that you’ve never actually read? Are they actually enforceable? Ask a lawyer and you will probably get “it depends.” (Facts and circumstances, the terms at issue, jurisdiction, etc etc yada yada lawyer hedging). We’ve talked about these so-called clickwrap agreements in prior CCM’s, and this case particular case involves the enforceability of an arbitration clause in Coinbase’s click wrap terms of service.

The plaintiff sued Coinbase, alleging that it “negligently failed to prevent a scam that allowed a third party to steal more than $200,000 from his account. Coinbase moved to compel arbitration pursuant to a mandatory arbitration clause in its user agreement.”

When Plaintiff signed up on the website he clicked a check box that included next to it the statement “I certify that I am 18 years of age or older, and I agree to the User Agreement and Privacy Policy.” User Agreement and Privacy Policy were underlined and links that connected to the referenced docs. The User Agreement had an arbitration clause with bold-font words in it.

The Court said that the “explicit acceptance here” was a clear signal that use of the site would be subject to the referenced terms and “an even stronger prompt to a reasonably prudent user to click on the link to see what those terms and conditions were before agreeing.” Thus, the plaintiff was on “inquiry notice” of the terms. Although he didn’t remember clicking the “I certify etc” box, the website layout was clear enough to give him notice that his use was conditioned on acceptance of the User Agreement, with its arbitration clause.

From a design standpoint, the case is instructive because it describes layout that in the Court’s view makes acceptance of the terms as a condition of creating an account easier to understand: “The account creation screen contains only five fields and two checkboxes. As in Meyer [a similar case], the “entire screen is visible at once,” id., with a minimalist layout and no distractions. The request to agree to the user agreement and privacy policy appears to be in a slightly smaller font than other text on the screen, but it is immediately above the “Create Account” button and “provided simultaneously to enrollment.” Furthermore, account creation required explicit acceptance of the terms by clicking the checkbox.

In short, the case was stayed, and arbitration compelled. (As a closing aside: whether or not arbitration is better or worse is a matter of opinion. In some cases, plaintiffs who have weaker arguments can actually do better in private arbitration. So this is not necessarily a loss for the plaintiff in the long run. It … depends : )

Garrison and Garrison v. Ringgold et al., ‘19CV0244 CAB RBB (S.D. Cal., February 4, 2019) [NRM]

Let me be the first to say that I’m a Grandparent Maximalist. Grandparents are superheros. You don’t mess with grandparents. It’s a bad idea, and a bad look. The same should be said about the elderly in general. It’s unclear whether this newly filed lawsuit deals with someone’s grandparents, but it does deal with allegedly messing with the elderly, which is a bad look.

This case is an action brought under three counts: violation of federal securities laws, violation of California’s securities laws, and financial abuse of a senior citizen. Ultimately though, this case is about misrepresentations, which is a common theme we cover on this blog.

Tommy and Christine Garrison are residents and citizens of the State of California. In this lawsuit they allege that the defendant, Reginald Buddy Ringgold III aka Rasool Abdul Rahem El, fraudulently induced them to invest their money with him in a variety of crypto ventures. What is somewhat striking about the allegations is the sheer amount of contact that Ringgold supposedly had with the Garrisons. Over the course of the interactions the Garrisons allegedly invested $819,784 with Ringgold. That number is pretty shocking, but what is really shocking is what Ringgold allegedly did with the money, and the lengths he went to to get it.

It’s hard to figure out where to even begin with this case. Perhaps, the best place to start is with how Ringgold held himself out to the public. As we’ve discussed in the past, you can’t just lie about your credentials/business and then take people’s money. Supposedly, that is what happened here. Ringgold claims to have 17 years of experience in the financial industry, and according to this LinkedIn profile is the principal of five different entities one of which is allegedly incorporated in Wyoming. He also claimed to be a credentialed with multiple financial authorities in a variety of capacities. This turned out to be false.

The first contact between the parties was at an investment seminar run by Ringgold in September 2016. Then in mid-2017, allegedly, Ringgold began pressuring the Garrisons to give him their money by doing such things as following them into their bank, crying when his requests were not endorsed, and yelling and screaming at the Plaintiffs. Now, one would think such behavior would deter the Garrisons from ever speaking to this person again, but that is not what happened. Instead they started to give Ringgold money.

Allegedly, Ringgold managed to get the Garrisons to put their retirement funds into cash, and then, somehow, instructed them to use localbitcoins.com to convert the cash into bitcoin. Why would Ringgold allegedly do this? Well, turns out he wanted their money in bitcoin, so that he could invest in…. Bitconnect. Yep. As if putting the money into Bitconnect was not bad enough, but Ringgold also convinced the Garrisons to invest in some ICOs, which leads to one of the greatest lines I’ve seen in an ICO related lawsuit. The Plaintiff’s counsel states “Ringgold misleadingly failed to disclose that ICO tokens are the crypto-version of penny stocks, but worse.” Rekt.

There are tons of allegations in the lawsuit. The elderly can be very sympathetic plaintiffs, so unless there is a ton more to this story not in the lawsuit Ringgold and the other defendants are in a bad position.