Crypto civ pro, small potato ICO, and the crown prince says no

Today’s column is 100 percent backed by the proceeds of a $63,000 ICO that was supported by the Crown Prince of Dubai. Really. I pinky-promise. 

1. A fully backed civil procedure lesson

I am pretty sure that civil procedure is a required course in every law school in the United States. These are the rules that govern practice in civil litigation and trial practice. (On appeal we refer to appellate procedure, which has different rules but I am going to lump this in for purposes of this explanatory rant). 

It's not rocket science but the details of how courts work isn't something you can pick up quickly by using google. So it's no surprise that reporting about legal developments, both in crypto and otherwise, frequently gets the fine details wrong in a way that is like fingernails on a chalkboard to litigators or their law school civil procedure professors. 

Given this, let me try to explain in very simple terms what is going on in the Bitfinex litigation, which may be slightly different than what you've read elsewhere. 

First of all, this case isn't a typical lawsuit. What happened is that the New York Attorney General's office (NYOAG) sent an investigative subpoena to Bitfinex and Tether (actually to a bunch of companies that use the Bitfinex and Tether names). The power to issue the subpoena arises under a law called the Martin Act, which gives the NYOAG broad authority to investigate state law securities related violations. Those companies balked at producing everything that was requested in the subpoena, so the NYOAG filed a lawsuit to compel compliance with the subpoena, under a New York state statute that gives them the power to do this. It's not actually a Martin Act lawsuit -- it's a discovery compliance lawsuit.

After months of fighting back and forth, the Motion court ordered Bitfinex/Tether to fully comply with the subpoena. They asked the court to delay this requirement while they appealed the ruling. The motion court said no so they appealed and asked the appellate court and the appellate court said OK. Basically, Bitfinex/Tether argued that requiring them to comply with order while an appeal was pending wasn't fair because if they won the appeal they would have already complied with the order they were appealing, and what's the problem with waiting a few more months? The appellate court agreed and said as long as they perfect their appeal by Nov. 4, they can hold off on further document production.

I don't actually think this tells us anything about how the appellate court will ultimately rule. It's a reasonable response to a well-briefed argument. But, to be clear, the appeal was not granted and hasn't been decided yet and the motion court’s order was pretty thorough and by a judge who spent decades in private practice before becoming judge and who doesn’t want to be reversed. 

This is simply a reprieve/stay of any obligation to provide further documents while the appeal is decided. I hate making predictions about litigation, particularly from the outside, because courts are fickle beasts, but my prediction is that the motion court's order is affirmed and that at the end of this appeal Bitfinex/Tether has to respond. Frankly, this is how litigation works and it is not at all uncommon for Courts to rule in favor of parties they ultimately rule against.

2. The SEC and the $63,000 ICO

A couple of days ago the SEC filed a lawsuit in federal court in New York against a fella named Jonathan Lucas. According to the Complaint, a copy of which you can read in all its glory here"[b]eginning in late 2017, Lucas raised approximately $63,000 in cryptocurrency from more than 100 investors through the fraudulent offer and sale of unregistered securities of Fantasy Market ("FM") a purported online marketplace that he created and controlled." 

The Complaint says that Lucas violated securities laws because he didn't register his ICO tokens and also violated the anti-fraud provisions of the securities act and the exchange act.  Pretty standard almost boilerplate stuff at this point. Here's a chart from the requisite whitepaper, cited by the SEC in the Complaint:

One of the things that jumped out at me in the Complaint is that it says that Lucas has already paid back his investors and if you look at the court docket you will see that he has agreed to a consent judgment in which he agrees to pay a civil penalty in the amount of $15,000 to the SEC (in three installments of $5,000).

SEC consent orders can be entered a couple of ways. One is an administrative proceeding where at the end of an investigation that is resolved by consent the SEC enters an order in an administrative proceeding instituting proceedings and simultaneously resolving them, with agreed upon terms. This is done in an SEC administrative proceeding, not in federal court, and while it's public it's not a judgment in the same way and no lawsuit is filed. 

One advantage to a court judgment is that it is easier to seize assets in the event that a payment isn't made as agreed, as you do have a judgment that can be levied and executed upon. It also signals a level of gravity (though it's not a like an SEC administrative settlement isn't a big deal).

Anyway, I don't have SEC telepathy so I can't tell you exactly why the SEC decided to file suit over a small dollar settled ICO investigation but it seems to suggest that we are moving into a new stage of the ICO investigation process. We're likely to see many more of these, in an almost templated fashion, with the SEC taking judgments in court that can be easily enforced in the event of a failure to pay. I've heard informally (from people outside of the commission, so take it for what it's worth) that there are more than 1,000 open ICO-related investigations. So we are likely to see many, many more of these over the next 2 to 3 years.

It's also notable that even though the guy paid all of the money back he's still gotta pay a civil penalty, which may be a harbinger for future settlements, and a message that -- if you violated the laws -- fighting the inevitable will be expensive. 

3. Crypto meets the prince of Dubai

Link to complaint

According to the interwebs, Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum is the current "Crown Prince of Dubai." If you read a lot of securities fraud lawsuits for a living, you see what are in hindsight some pretty hilarious (or tragic, as the case may be) claims. In that vein, here's a snorter from a recent lawsuit that crossed my virtual desk because it involves the supposed development of software that would (among other things) facilitate "market making across crypto ecosystem[s]":

The gist of the lawsuit seems to be that plaintiff was told that if he made an initial investment of $350,000 a bunch of rich people (including the Prince of Dubai) would provide follow-on investment, but that they wanted a lead. 

Now ... I'm not here to tell you who is right or wrong in this lawsuit (which contains a bunch of irritating typos, by the way, which is never a good sign). But I will submit that it doesn't really make any sense for the Prince of Dubai to be waiting for some rando to be a lead investor before he'll drop in his cash.

Things apparently unraveled quickly but only after they put $350,000 cash into an investment in an entity whose physical address turned out to be a "mail service drop-box."

I don't know that there's any great wisdom here, other than the promise of stupid returns seems to continue to nab suckers.  Old tech, new schemes. Beware of people promising high profits and princes.