Crypto Caselaw Minute #50: 8/23/2019
This week’s Crypto Caselaw Minute is lorem as heck. We cover the ICO that promised to open up all markets for all money ever in existence across the space-time contiuum, BigTech flexing it’s brand muscles, and another criminal case that isn’t as surprising as it should be.
Disclaimer: Crypto Caselaw Minute is provided for educational purposes only by Nelson Rosario and Stephen Palley. These summaries are not legal advice. They 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.
(As always, Rosario summaries are “NMR” and Palley summaries are “SDP”. Our Image credit: https://pixabay.com/photos/beer-mug-krug-beer-stein-beaker-2728945/ (Pixabay license).
Securities and Exchange Commission v. Reggie Middleton and Veritaseum., Case №19-cv-04265 E.D.N.Y., 8/19/19, Defendants’ “Memorandum of Law in Opposition to Plaintiff’s Application for a Preliminary Injunction” [SDP]
Apparently PR firms read Crypto Caselaw Minute, because earlier in this week I received an email from a PR firm that works for Veritaseum and Reggie Middleton, attaching a 30-page brief responding to the SEC’s successful motion for a Temporary Restraining Order that included an asset freeze, which we covered last week on the Block.
Here’s the nutshell: in response to the SEC’s allegations and what appeared to be a mountain of evidence, defendants argue that the Veritaseum tokens weren’t actually securities but are in fact “digital utility tokens” that “immediately enabled token holders to” buy Veritaseum research reports and would eventually given holders access to the Veritaseum platform.
Per the defendants’ brief, the tokens “do not represent an ownership interest in Veritaseum or its assets; do not give holders any right to share in the company’s profits; do not confer voting rights; and do not pay dividends or interest. Numerous token holders have used their tokens to avail themselves of the Veritaseum’s unique products and services, which the company has continually expanded and improved.”
The SEC investigation that preceded this lawsuit began in 2017 and lasted for almost two years. SEC investigations are confidential so it was only the filing of this lawsuit that made its existence publicly known. These things can take a long time. It is certainly possible that other ongoing investigations that commenced during or soon after the ICO boom are also coming to an end, either to be resolved by negotiation or (as in this case) in litigation.
And about the litigation — One of the SEC’s stated reasons for asking a Court for emergency relief was that after asking Veritaseum to stop spending ICO funds $2 million in ICO funds held in Ether was transferred. Basically, the SEC said stop spending and the defendants did exactly what they were asked not to do.
According to this brief, counsel for Veritaseum had “demonstrated to the SEC that the asset transfer in question was nothing more than the routine funding of Veritaseum’s ongoing lawful business operations and was consistent with the company’s prior funding practices. The SEC did not disclose this information to the Court in its asset freeze application and incorrectly represented to the Court that Mr. Middleton had transferred a portion of the assets to a personal account. In fact, all of the assets remained in the company’s control.”
While of course I am not the judge and this is only my subjective opinion, the argument that “BUT WE TOLD YOU WE WERE GONNA DO THIS MAN” doesn’t sound all that persuasive to me, and I doubt that the Court will be swayed.
Basically, the defendant is saying “we told you we were going to do this so you shouldn’t have objected when did the thing you told us not to do because it was really OK.” The SEC’s Complaint alleges that Veritaseum and Middleton violated a ranged of securities laws and, among other things, committed securities fraud. Telling the SEC in advance that they planned to spend assets that the SEC believes is the subject of securities fraud seems like rather weak tea. The rest of the brief proceeds in a similar manner and while I certainly can’t predict how the court will rule, it doesn’t do much for me, despite the very high quality of the lawyers who wrote it.
Oracle Corporation et al. v. Crypto Oracle LLC, et al., Case № 3:19-cv-04900 (N.D. Cal. filed August 15, 2019)[NMR]
Brands, brands, brands. We’ve talked about the importance of brands here at the Crypto Caselaw Minute many times now. This new case is a lawsuit alleging federal trademark infringement; federal trademark dilution; unfair competition; cybersquatting; and state trademark infringement and dilution, that was filed by a small company you may have heard of… Oracle. Okay, not that small of a company. Before we discuss the particulars of this case it is worth talking a little bit about famous marks.
In the United States, the Lanham Act states that a trademark “ is famous if it is widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark’s owner.” The key part there is “widely recognized.” How do you determine if a trademark fits this profile? Well, per the Lanham Act, a court would consider the following when determining if a trademark is famous:
1) The duration, extent, and geographic reach of advertising and publicity of the mark, whether advertised or publicized by the owner or third parties. 2) The amount, volume, and geographic extent of sales of goods or services offered under the mark. 3) The extent of actual recognition of the mark. 4) Whether the mark was registered under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register.
Some example famous marks would be: Google, Microsoft, IBM, Exxon Mobil, Apple, you get the picture. Mega companies marks are treated differently than other marks. The plaintiff in this case is the company Oracle. A mega company with lots of trademarks. This is relevant to this case, because you can only bring a trademark dilution claim, which is one of the claims in this lawsuit, under federal law if your mark is famous. Given this fact the complaint contains a cornucopia of information to convince anyone reading that Oracle’s marks are famous. Okay, so who is Oracle suing, and why?
The defendants in this case are a Delaware based company, Crypto Oracle LLC, and its founder Louis Kearn. Crypto Oracle was founded in 2017 as a VC firm "focused on supporting and advising companies building distributed ledger technologies.” The complaint has examples of the websites that Crypto Oracle used with oracle in the domain name, as well as an ample supply of screenshots from social media postings showing Crypto Oracle using the word oracle, ie the name of the company. Okay, fine, but what does that have to do with Oracle? Well, Oracle is in the blockchain biz.
As the complaint says “[a]s a worldwide leader in technology solutions, Oracle’s resources, infrastructure, technology, and expertise allowed Oracle to become an early adopter and provider of blockchain solutions and products to its customers.” In addition, attached to the complaint are copies of Oracle’s blockchain platform, and advertising material related to their blockchain platform.
When Oracle found out about Crypto Oracle they proceeded to send cease and desist letters to Crypto Oracle asking them to change their name. How did Crypto Oracle respond? The complaint alleges, “[d]efendants’ response –including Mr. Kerner’s application to register CRYPTOORACLE despite actual notice of Oracle’s registered and common law trademark rights — necessitated this action.” As a general rule, you really shouldn’t file for a trademark that seems similar to trademarks that you received a cease and desist letter for.
It will be interesting to see the defendant’s response to the complaint, but this doesn’t look great for Crypto Oracle. One open question that may trip up Oracle Corporation down the road is the prevalence of oracles, the concept, in the blockchain space. Given the potential of oracles, the concept, and the inevitability of the word “oracle” showing up in company names and products, we may be seeing lots more suits from Oracle the company in the future.
US v. Galarza, № 18-mj-146(RMM) (D.D.C. decided May 8, 2019)[NMR]
Link to Opinion: https://scholar.google.com/scholar_case?case=10497185473718134108
Many proponents of the blockchain space repeatedly stress that the technology is morally agnostic. The reason for this, good or bad, is that cryptocurrency is used for nefarious purposes every single day. So, are dollars by the way. If you build a technology that helps people hide things they will hide things. That’s not a value judgment on the tech it’s the cold hard reality. This opinion from back in May of 2019 in a dark and disturbing criminal case is worth looking at, because of the story it tells of how people are using bitcoin for nefarious purposes.
The defendant in this case, Vincent Galarza, has not yet faced trial. The charges that Galarza is facing relate to the distribution of child pornography. On the day that Galarza was arrested on December 11, 2018, the government sought his pretrial detention. That motion was denied and Galarza was released under certain conditions. After his release, the government continued its investigation.
The investigation included analyzing a server that was seized by South Korean law enforcement that hosted a child pornography website, as well as a computer that the defendant built, which was seized as part of a lawfully executed search warrant. The examination of both the South Korean server, and defendant computer uncovered alleged additional criminal conduct. In light of this new information, the government again sought pretrial detention of the defendant, and was again denied by a magistrate judge. This opinion, from a district court judge, overruled that denial.
Generally speaking, in determining whether to detain someone before trial a judge must find probable cause that the defendant committed the offense, and the judge must also take into consideration four factors: the nature and circumstances of the charged offense, the weight of the evidence, the history and characteristics of the defendant, and whether the defendant is a danger to the community. Given the above considerations, and based on the digital evidence, which we’ll discuss shortly, as well as testimony from witnesses that are victims of the defendant’s alleged conduct the judge determined the defendant should be detained while he awaits trial. The digital evidence tells a grim story with broader implications about the nature of the dark web, and cryptocurrency’s role in it.
When investigators searched the seized server and the defendant’s computer they were able to map out how the defendant was allegedly obtaining and distributing child pornography. Based on analysis of the server that was seized in South Korea, users accessed the website (the site is known to authorities, but not named in the opinion so as to not make its users aware of other pending investigations) via Tor, and then had to pay in “points” to access the content on the website. A user could earn points by uploading videos, or by buying them with bitcoin. Here the government has evidence that a user, that the government believes to be the defendant, uploaded 500 videos in 2016, and downloaded 174 videos between May 2017 and February 2018. Additionally, the website allowed users to purchase a VIP account with bitcoin, which the government believes the defendant did.
How did the government trace the defendant to the website? “After law enforcement seized the website’s server in South Korea, they were able to pull back the veil of anonymity in which the website’s users had hidden their activities.” Investigators analyzing an image of the server “revealed a transfer of approximately 0.00228809 BTC (worth about $1.80 at the time of transaction) on December 17, 2016 from a BTC address to [the CP] Website’s BTC address starting with 1Hrb.” Law enforcement then subpoenaed a US-based crypto exchange “and learned that the BTC transfer starting with 1Hrb was from a BTC Exchange Account number starting with 5855, which was created on or about December 17, 2016 and registered in the name of the defendant, using the defendant’s confirmed phone number and email address.” Additionally, when investigators analyzed the defendant’s computer they found at least two videos that were uploaded by the same user that uploaded the 500 videos.
There is no great moral to this story. If you give a man a tool you can’t be sure if he will use it for good or evil. Such is the nature of technology. It is simply reality that bad people will do bad things with whatever they can get their hands on. Here, the traceability of bitcoin, as we’ve seen in other cases, aided investigators in taking down a heinous website, and presumably will aid investigators in the future as they attempt to track down other users of the site.
