- Crypto investors have lost billions of dollars in the tumbling market. Some say they were deceived.
- Over 200 cases have been filed. Some have settled for millions, some have lost, and some are ongoing.
- Insider spoke to 7 lawyers and investigators about what investors are doing to get their money back.
Crypto investing has never been easy, whether its timing trades, filing taxes or trying to keep “FOMO” and “FUD” in check. Now, with prices tanking and some companies filing for bankruptcy, more crypto investors are also taking on the challenge of going to court.
Over 200 crypto-related lawsuits have been filed by private parties in US courts since 2014, according to the law firm Morrison Cohen. Even more cases have been brought into closed-door arbitrations. And there are signs that the latest crypto crash is spurring additional disputes.
Twelve securities class actions have been filed involving crypto since March, according to a Stanford database, more than the 11 filed in all of 2021. And since companies like Celsius and Voyager Digital have filed for bankruptcy in July, dozens more investors have taken legal action , and creditors have lawyered up.
Insider spoke to seven lawyers and investigators about the legal avenues that upset crypto investors are pursuing in an effort to get their money back, from taking part in class actions with lawyers working on contingency to shelling out for a confidential high-stakes arbitration. They said it’s generally best to talk to a professional before taking any concrete action, but investors have options.
“It really comes down to two points,” said Kyle Roche, a lawyer at the firm Roche Freedman who has represented crypto investors. “One, can we identify a defendant who committed some form of wrongdoing, and two, is that wrongdoing at odds with some fundamental duty that exists with other types of assets that issuers or marketplace participants owe to investors?”
Some investors say they were misled.
Lawyers say they are more likely to take on a case if they feel someone has been deceived.
Halston Thayer, a Nevada NFT purchaser, claims that a Pepe the Frog-related token that he bought using over $500,000 worth of Ether lost most of its value after the people auctioned it as a “rare” and “unique asset” sold more copies. The defendants have said that Thayer indicated he was happy with his purchase and didn’t rely on any of the statements about the NFT’s rarity that he’s now claiming are false.
Other investors have brought cases because they say they weren’t given all the information they needed to properly assess their risks. A proposed class action filed in New Jersey by two people who deposited their crypto with BlockFi to generate a return claims the interest rates BlockFi paid weren’t high enough to cover for undisclosed risks, like the company’s loan to failed fund Three Arrows Capital. The case is at an early stage, and BlockFi hasn’t filed a formal response.
Jason Harrow, a lawyer at the firm Gerstein Harrow, recently sued a decentralized autonomous organization, or DAO, and his backers for what he claims were false promises that crypto would be securely stored.
“They think they’re being clever with these DAOs, not using LLCs and not using corporations, being anonymous on the blockchain,” he said. “What we’re trying to do is say no. At least in some cases, there are people who can be held accountable.”
What if no one song?
The law has its limits. If you made a speculative investment on your own initiative in a popular token like Bitcoin, Dogecoin, or Ether, and the price fell, there’s probably not much you can do, lawyers say.
But if there’s a case to be made that a token should have been a registered security, then the token’s issuers could be south under the US Securities Act, which generally prohibits unregistered securities offerings. In theory, they could be forced to buy back the tokens.
Companies that issue securities sold under the Securities Act of 1933 are required to disclose information about their business. Some detractors have said the law is a poor fit for crypto. But Roche, who has brought several Securities Act cases, said the law’s drafters recognized that “finding the fraud can be very difficult” when investors don’t have the same information as insiders.
Some crypto-related securities cases are ongoing, and some have been dismissed. others have settled; companies involved in the Tezos project agreed to pay $25 million, and others involved in the Block.one offering of EOS paid $27.5 million.
Roche said Securities Act cases are one of four general types that get filed in crypto. Others involve claims of market manipulation, consumer protection law violations, and breach of contract.
What if you can’t afford a lawyer?
Just because you can’t pay a lawyer’s high hourly rates doesn’t mean you can’t seek justice. Some crypto investors have filed suits against major exchanges like Coinbase on their own initiative in small-claims court. Court fees and the maximum amount you can sue vary by state, but it’s generally cheaper than filing in another court.
On July 8, Joshua Browder, the CEO of DoNotPay, which helps consumers file disputes without a lawyer, told Insider that more than 1,600 people had used the platform to send demand letters to Celsius, which had frozen its users’ crypto accounts. Dozens of them went a step further and filed their own actions in small-claims court, Browder said.
It’s not clear whether any of those cases were resolved before Celsius filed for bankruptcy on July 13, however. Bankruptcy generally results in lawsuits against a debtor being halted and resolved in bankruptcy court, where the timeline is uncertain and creditors who negotiated for special protections typically get paid first.
If you have major losses, or if you’re part of a larger group of investors who might have been wronged, a lawyer might also be willing to take your case on contingency. Lawyers working on contingency take their fee as a percentage of any settlement, typically from 25% to 40%.
Litigation finance — where an investor pays legal fees and costs in exchange for a cut of any potential recovery — is another option. A Swiss firm called Liti Capital says it has advanced $5 million to a group of Binance users who banded together to bring actions against the company in Hong Kong.
What about arbitration?
Lawsuits can be slow. Some cases have dragged on for years, ping-ponging between lower courts and appellate courts. Some cases filed under consumer protection laws tend to move faster than securities cases, attorneys say.
Outside of public view, many cases are being resolved in arbitration. Arbitration can be faster and, in simple cases, cheaper than going to court, but detractors often say arbitration is stacked in favor of big companies. Whereas judges are government employees, arbitrators are paid by the parties, and the process usually provides fewer chances to dig up a defendant’s internal records.
“It’s much quicker, but it’s more expensive,” said Peter Cane, an attorney in New York who has represented crypto investors in complex disputes with a lot of money at stake. “You’re saving time, but you’re not saving money.”
Insider found more than a dozen claims against exchanges like Kraken, Coinbase, and Bittrex on file with JAMS and AAA, two major arbitration providers. And the Binance arbitration being funded by Liti Capital reportedly involves hundreds of aggrieved traders.
Alex Farzan, who runs his own law firm in Los Angeles, said he’s brought about 10 claims in arbitration against Coinbase and other online exchanges, often on behalf of clients who have lost assets through “SIM swap” attacks. He said he has had success in some of the cases.
“They have a bunch of preemptive terms and conditions in their user agreements that most consumers don’t bother to read,” Farzan said.
How the government can help
Investors don’t always need to lawyer up to get relief. In some cases, the government will try to seize — and eventually, return — digital assets that have been tainted by lawbreaking.
Last month, the Justice Department revealed that it managed to seize about $500,000 in crypto ransomware payments and would be returning the money to the victims. The SEC also creates “Fair Funds” to reimburse harmed investors in some cases, as it did in its enforcement action against BitClave in 2020.
But the feds can’t handle all the tips they get. “People are getting taken for 20, 25 thousand every single day,” said Chris Tarbell, a former FBI agent whose consulting firm Naxo advises people who have had crypto stolen. Even in cases where the government is interested, he said, bureaucratic hang-ups and secrecy can leave investors in the dark.
“They can be working up an entire case and they don’t have to tell you,” he said.
Even when the feds can’t take action, regulators can issue warnings. Reports filed at IC3.gov allow law enforcement to spot patterns. And the Federal Trade Commission said in June that it’s gotten more than 46,000 reports of fraud, with $1 billion lost, since January 2021.
State regulators are also investigating crypto businesses and appealing for tips. The New York Attorney General sued Tether and BitFinex over alleged misrepresentations, a case that was settled in 2021, and has sent cease-and-desist letters to other major players.
One top regulator is the Texas State Securities Board, which has brought 150 crypto-related actions since 2017, according to Joe Rotunda, who leads its enforcement arm. He told Insider in an email that a survey of state regulators at the end of 2021 revealed that they viewed crypto and digital asset schemes as “the top threat to retail investors, beating all other products.”