Crypto Caselaw Minute #51: 8/29/2019
This week’s CCM has its usual share of conflict, including corporate veil piercing and alleged breach of contract related to the delivery of mining equipment. It also includes a follow-up report on a kerfuffle that has settled, creating as part of that settlement a marijuana utility token DAO which is certainly a new one for me. Someday when marijuana DAOs are yesterday’s news, when you’re sitting in your fainting chair drinking pink rabbits and thinking about the past, you’ll remember that you read about it here first in Crypto Caselaw Minute.
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/illustrations/jimi-hendrix-hippie-peace-love-2265370/ (Pixabay license).
Ferrie v. Woodford Research LLC, et al., 3:19-cv-05798(W.D. Wash. filed August 28, 2019)[NMR]
This newly filed lawsuit from Washington state has about twelve thousand defendants, which is a lot. The complaint also has this quote allegedly from Richard Branson, “People have made fortunes off Bitcoin. Some have lost money. It is volatile, but people make money off of volatility too.” The reason that quote is in this lawsuit is because the plaintiff engaged the defendants too take advantage of an arbitrage scheme that apparently went south.
The plaintiff here is Douglas Ferrie a resident of Washington and someone who for several years followed something called “Hubert Senters Daily Video Update.” The daily video programming covered price trends of stonks and commodities.
Allegedly, on November 30, 2018, two of the defendants, that allegedly control Woodford Research, published a presentation online regarding “The 1% Club” that “described a new investment opportunity involving arbitraging cryptocurrencies.” Mkay, that’s fine, pretty typical investment marketing in this space. The idea was that a trading bot would capture arbitrage opportunities across crypto exchanges around the world. Allegedly, in that presentation the defendants made the following statements:
“ Defendant ARBITRAGING consistently received an average rate of return of 0.73 percent within the seven-month period preceding December 2018. In other words, an investor’s money doubled every three months”
“An initial investment of $100,000 would have a value of over $1.4 million dollars in one year if no funds are withdrawn”
“The only risk is the setup procedure; if it is followed cautiously and precisely according to the procedure he provides, then risk is eliminated”
Something, something, about things seeming to be too good to be true. The pièce de résistance though of this marketing puffery was the following line “[t]his opportunity only arises once in a generation.” Naturally, seeking to capitalize on the opportunity of a lifetime the plaintiff contacted the defendants allegedly in charge of Woodford Research on December 1, 2018. The sign up process to take part in the investment was as follows:
“Account setup required an investor to first purchase Ether (ETH), then use ETH to purchase ARBs on Defendant ARBITRAGING’s website, at which point, the daily account value, rate of return, and earnings would be denominated in US dollars on an investors’ account on Defendant ARBITRAGING’s website.”
To recap, the plaintiff allegedly on the advice of the people running Woodford Research invested money into another company that promised arbitrage opportunities if you bought their token, ARBs, which would somehow power their advanced arbitrage bot, I guess? You can guess where this is heading.
The plaintiff, allegedly with the help of the defendants, went through the account setup process, and then almost immediately problems started popping up. Despite difficulties with the process the plaintiff made three separate investments into the arbitrage company. Over the course of many months there was back and forth communications between the plaintiff and the defendants about difficulties using their website and why the plaintiff was being charged so much in fees, and why wasn’t his investment taking off, etc. “In total, Plaintiff invested $166,000 of his retirement, health savings account (HSA), and personal funds at Defendant ARBITRAGING.” Ouch.
In essence, the plaintiff is alleging here that all the people that run the defendant companies, the investment research firm and the arbitrage bot company, are all in cahoots and no such bot exists. The alleged counts include securities fraud, breach of contract, fraudulent misrepresentation, negligent misrepresentation, fraudulent concealment, unjust enrichment, alter ego liability (a CCM first?), and civil conspiracy.
A wise man once said to me “the real hero of the crypto space is Charles Ponzi.” Perhaps, that take is too cynical and irreverent, but we’ve seen so many lawsuits that look and feel like this lawsuit. The defendants will likely deny the allegations, and perhaps be able to shed some light on why the plaintiff had these alleged difficulties and where his money may have gone, but we’ll have to wait and see. Don’t hold your breath.
Ethereum Ventures, LLC vs Chet Mining Co, LLC and Chet Stojanovich, S.D.N.Y., 8/26/2019, Case 1:19-cv-07949 [SDP]
Corporate entities have a bunch of advantages. They can help from a tax standpoint and they can also protect you from personal liability. In the eyes of the law, a corporation is a person — not a biological person, of course, but a corporate person. It can sue and be sued, own property, hold bank accounts, enter into contracts — just like you and me and Bob and Sue. Kinda cool, really. And because it’s a separate person you’re not liable for things that corporation does or doesn’t do as a general rule unless you both things in a couple of particular ways.
One catch to the whole corporation being a sperate person thing is that if you want your corporation to be treated as a separate person, you have to … act like it is. That means you need to maintain corporate formalities, keep separate books and records, not commingle personal funds with corporate funds — there’s a long list. The bottom line is that if you blur the lines and there is a problem that ends up in litigation, the other side will argue that you are for all intents and purposes the corporation. This is called “piercing the corporate veil” and, well, it’s Not a Good Thing if you are the defendant. It means that all of those contracts you signed in the corporation’s name with a personal guarantee may end up being your own personal obligation, among other things.
Anyway, this brings us to a new lawsuit filed by Ethereum Ventures LLC against Chet Mining and Chet Stojanovich, who is allegedly the “sole member and manager of Chet Mining.” While there is nothing wrong with naming a company after yourself, the Plaintiff says that Mr. Stojanovich didn’t maintain corporate formalities, commingled his finances with the LLC, allowed the company to become undercapitalized and basically did all things that you are not supposed to do if you want your LLC to be treated as someone other than you.
At issue (allegedly) was the proposed sale in April 2019 by the defendants to plaintiff of a bunch of Antminer S9 miners, to be sued for bitcoin mining. Pretty simple allegation here — plaintiff says they paid for equipment that wasn’t delivered, demanded a refund, and haven’t received it.
In addition to actual damages in the amount of their payment (less a partial refund), plaintiffs demand damages “due to lost profits caused by the absence of the purchased Bitcoin mining equipment in the amount of $277,000.” I’m not going to give a primer on recoverability of lost profits, but this is not the first case in which it has come up in connection with mining equipment. And depending on contract documents and choice of law these damages might be recoverable if within the reasonable contemplation of the parties at the time of the contract and provable with something other than wishful thinking evidence.
Patterson, v. Budbo, Inc., et al., 1:18-cv-00998 (W.D. Tex., 11/20/2018) (Settlement Agreement) [SDP]
People file lawsuits for lots of reasons. Sometimes they’ve been wronged, sometimes they think they have but it’s not actually true. From the outside, though, it’s usually hard to know the precise motives behind a lawsuit. People are complicated. Deals go bad, and fingers have to be pointed. Or deals go well, and people’s expectations about who gets how much money get kerfuffled. In any event, a half decent lawsuit will make the other side sound bad but the allegations are just that — claims that remain unproven and that can be controverted by the other side.
Just as it’s really hard to understand motives behind a lawsuit, precisely predicting outcomes is hard unless you happen to have an oracle that can see the future. I like to think that I am pretty good at guessing what will happen next in a lawsuit but it’s as much an art as a scient — litigation, like people, is mostly non-deterministic. But see how I hedged there? There are some things that are totally and absolutely predictable? Every lawsuit has a beginning and an end (also, they all cost money).
This extended rumination brings me to an update on a case that we covered earlier this year in CCM. That case is Patterson, v. Budbo, Inc., et al., and our summary was covered in the Block on March 1, 2019, here.
As we explained in the original summary, the case was a shareholder derivative lawsuit that arose out of a business relationship that went bad. The lawsuit ended up in CCM because it involved a blockchain/utility token thing for the marijuana business (“Bud bo” — get it?).
One of the claims plaintiffs made was that Budbo’s CEO, Rick Burnett, diverted seven figures of funds from a so-called utitlity token sale that raised $4.75 million. Burnett denied doing this and filed motion papers saying the same.
Settlement Agreements are usually private, kept between the parties, and not publicly filed, so we don’t get to write about them in CCM. In this case, however, the defendants are eager to let the world know that the case settled and that the allegation about misappropriation of funds has been released.
I was contacted by Burnett’s litigation counsel who provided a copy of the settlement agreement, a copy of which you can read here. The highlights (including really big asterisks are from the lawyer).
He also sent an explanatory email:
(The plaintiffs’ lawyer, when contacted via email, said that he thought it would be best for his clients not to comment).
Anyhow … congratulations to the litigants for working out their difference. That said, I read this and wondered a couple of things — First of all, what exactly is a Budbo DAO? What is the purpose of combining marijuana, blockchain and DAO software is and what could possibly go wrong? Second, I’m also surprised that the parties are interested in publicizing the fact that they ran a multi-million dollar token sale, which the settlement agreement describes in detail on page 2, in Section 3. But they really, really, really wanted the world to know all about this. So now you do.
If the Weed DAO turns into litigation or anything else we will do our best to report on it here. For now, it appears that the parties have buried the hatchet and released any claim that Burnet transferred $1.76 million to himself for any improper purpose.
