OPINION
As the cryptocurrency market develops and grows, cryptocurrencies have become the subject of an increasing number of securities lawsuits. This year alone, more than 10 cryptocurrency securities lawsuits have been filed in federal district courts throughout the country.
While regulations and laws governing the cryptocurrency market continue to develop, recent activity involving cryptocurrency has raised a host of questions concerning investor protections. As federal and state regulators and policymakers grapple with how to regulate digital currencies, some investors have sought protection through securities lawsuits.
Based on the number of lawsuits filed to date and the recent decline in the price of cryptocurrencies, such litigation will likely increase in volume in the coming year. Investors should be aware of recent cryptocurrency case law to safeguard their rights and preserve their legal remedies. A selection of recent securities lawsuits against five cryptocurrency companies is highlighted below to illustrate some of the typical cases in which investors have found reason to pursue legal action against cryptocurrency companies.
Longfin Corp., a global cryptocurrency company, was a “pure stock scheme.” On April 9 and April 19, 2018, two classes of investors sued Longfin and its top officers for allegedly violating Sections 10(b) and 20(a) of the Securities Exchange Act. The investors allege that Longfin misrepresented the location of its primary offices and the identity of key employees in its public statements; had numerous material weaknesses in its operations and internal financial reporting controls; and was ineligible for inclusion in certain stock indices.
The investors allege that when this information was made public, Longfin’s stock value declined more than 86 percent in two weeks. The investors are attempting to recover damages associated with the decline in stock value.
Takeaway: This case is an example of a cryptocurrency company’s shares plummeting after company executives disclosed financial information to the public. Prospective investors should be wary of giving too much credibility to unsubstantiated statements made by cryptocurrency companies and should be selective when determining the trustworthiness of sources.
Nano: Danger of Foreign Exchanges and Hacks
Nano, a U.S.-based blockchain developer and cryptocurrency issuer, was involved in a hack scandal. On April 6, 2018, a class action was filed against Nano and its key officials for allegedly violating federal securities laws.
The complaint alleges that Nano engaged in an unregistered offering and sale of securities by issuing cryptocurrencies on BitGrail, an Italian cryptocurrency exchange, in violation of Sections 12(a) and 15(a) of the Securities Act. The complaint also alleges that Nano wrongly encouraged investors to invest assets with BitGrail, which lost $170 million worth of the cryptocurrency “XRB” due to a hack on the exchange platform. The investors are asking for, among other relief, rescission of their investments.
Takeaway: This case is noteworthy because it illustrates the vulnerabilities of cryptocurrency exchanges and their susceptibility to theft. To protect cryptocurrency investments from possible hacks and cyber theft, investors should take a number of precautionary measures, including closely examining where funds are being held and inquiring about the security controls in place to prevent potential hacks.
Giga Watt: Mismanagement Allegations
Giga Watt, a U.S.-based cryptocurrency startup, was a promising venture that was arguably mismanaged by its founder. On , an investor sued Giga…