$170 million 'lost' on Italian crypto exchange results in lawsuit

Quick Take

  • Fabian v. Nano f/k/a Raiblocks f/k/a Hieusys LLC et al.
  • Second plaintiff files complaint against Nano for alleged violation of federal securities laws
  •  The defendants allegedly used a “Nano Faucet” to maintain high “sell pressure.”

Government shutdown or not, plaintiffs' lawyers haven’t stopped filing new crypto lawsuits. This week we look at three new complaints, one involving lost crypto and a demand for a fork (the software kind), another that says that pre-sold mining hardware contracts were actually securities, and last but not least artificial intelligence on the blockchain (but not so much, it turns out). [As always, Rosario summaries are “NMR” and Palley summaries are “SDP”]

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. They are not legal advice. These 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. 

[related id=1]Fabian v. Nano f/k/a Raiblocks f/k/a Hieusys LLC et al., 4:19-cv-00054 (D.N.D.Cal., January 3, 2019) [SDP]

This is version two of a (putative) class action initially filed in federal court in Brooklyn in the fall of 2018 in the name of a different plaintiff (Alex Brola). That lawsuit was dismissed and was just refiled by the same lawyers against the same defendants, but with a different plaintiff. Why would the lawyers dismiss a lawsuit and then refile it somewhere else with a different plaintiff? Gather 'round children and I’ll tell you a tale.

The new lawsuit. The case involves a cryptocurrency called Nano, a whole bunch of which was stored on an Italian crypto-exchange called BitGrail. Both Nano and BitGrail are defendants, as are a bunch of natural persons. (That is lawyer speak for flesh and blood people, not corporations)

Per the complaint, on February 8, 2018 “over 15 million XRB, bearing a market value of approximately $170 million, supposedly safely stored on BitGrail were ‘lost’.” (Side note, 15 Million XRB are today worth $13,335,000, using a market price of $0.8893, which I found on coinmarketcap.com. The truth is it’s probably less than that, as trying to sell that much of this particular magic bean would probably collapse the market for it.)

Plaintiff says that he had 23,033 XRB worth $260,000 (on February 8) frozen by defendants and seeks to represent a class of people who used BitGrail to “purchase, invest in, or stake XRB” between January 1, 2015 to March 31, 2018.

The lawsuit contains a long section of factual allegations with a by now predictable collection of in hindsight really regrettable statements on social media by developers and promoters. Plaintiffs use this evidence along with allegations regarding voting power to say that XRB is not a decentralized crypto-currency and that, in fact, “the Nano Defendants wield absolute control over essentially every aspect of XRB and its value[.]” The defendants allegedly used a “Nano Faucet” to maintain high “sell pressure.” When the faucet was turned off, “the price of XRB briefly doubled to nearly $0.17, [but] it was trading on an exchange known as BitGrail that drove the price of XRB up to nearly twelve dollars ($12.00) as of the February 8, 2018 loss.”

According to the lawsuit, “the Nano Defendants created the XRB currency, they directed XRB investors to place their assets at BitGrail (an exchange that they essentially controlled” and when XRB held at BitGrail disappeared they claimed they had no responsibility for the loss. Not so, says the plaintiff, who alleges that they could “create a ‘rescue fork’ to protect Plaintiff’s and the Class’ property rights” but refused to do so because it’ll hurt the value of their own XRB.

Plaintiff says that XRB are unregistered securities under the securities act of 1933 and the Howey Test. The lawsuit also includes a pile of common law claims, from breach of contract to breach of fiduciary duty and some equitable claims.

So, what’s the deal with the dismissed and refiled lawsuit? I have to speculate a little bit here. The first version of this case was filed in federal court in Brooklyn on April 6, 2018 in the name of Alex Brola. The defendants filed a Motion to Dismiss on September 21 and the plaintiff filed a notice of voluntary dismissal on September 28. The case was dismissed by the Court a month later.

This new lawsuit is filed in the name of a different class representative, James Fabian, on the other side of the country, in California federal court. It also names some new defendants, including an Italian BitGrail entity, and has five new causes of action. My guess is that the plaintiff’s lawyers read the motion to dismiss, decided that it contained some decent arguments and decided to find a new class rep and tighten the allegations in their complaint. The motion to dismiss focused on threshold questions about the XRB being a security and whether or not personal jurisdiction could be asserted over a non-US entity. I’ve run a red-line of the two complaints, and it appears that some work was done to try to deal with these arguments in the new lawsuit.

What happens next? It’s reasonable to assume that the next move by defendants will be to dust off that last motion to dismiss and try again in this Court. When that happens, you’ll read about it here!

The Block is delighted to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part III of this week's analysis, Crypto Caselaw Minute, is above.

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