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Crypto Buyers Deserve Cert. In Illicit Tokens Suit, Judge Says

August 16, 2022

Law360 (October 22, 2021, 7:07 PM EDT) — A New York federal magistrate judge has recommended that certification be granted to a narrowed class of investors in a suit against online crypto-asset exchange KuCoin, which has been accused of not registering as a securities exchange and broker-dealer and transacting unregistered securities.

On Thursday, U.S. Magistrate Judge Robert W. Lehrburger recommended in a report that Chase Williams be named class representative and the firms Roche Freedman LLP and Selendy & Gay PLLC be named class counsel.

However, the judge also recommended a narrowed definition of the class be adopted to only those who purchased and sold TOMO digital tokens through KuCoin, similar to plaintiff Chase Williams.

Williams had proposed a class that included those who purchased any of the tokens available on the KuCoin exchange between Sept. 15, 2017, and July 2, 2021, but Judge Lehrburger said Williams lacked standing to bring claims on behalf of purchasers of tokens that Williams himself did not purchase.

Williams sued KuCoin and its co-founders, CEO and president in 2020, alleging they failed to make the required disclosures of securities and misled investors to conclude that the tokens were not securities.

Williams claims he incurred losses of approximately $4,000 and is seeking rescission and recovery for the amount paid for the tokens, along with interest and attorneys fees.

Judge Lehrburger said in his report that Williams does not have standing to bring claims on behalf of purchasers of all the tokens because each token was “originated” by a different issuer, and therefore a plaintiff’s right to recovery becomes based on the “individualized circumstances of each” token.

There will need to be a separate analysis of whether each token qualified as a security at the time it was issued, and “the fact analysis required for each token is an intensive one,” the judge said, and Williams only has genuine interest in the questions surrounding the tokens he purchased.

“Williams can obtain full recovery for his injury by demonstrating that TOMO Tokens are securities; he need not introduce evidence with respect to any other tokens to establish that fact or any other material fact,” the report states. “Williams’ incentives thus are not ‘sufficiently aligned’ with those of absent class members who purchased the tokens that he did not.”

When considering the narrowed class, however, all the requirements for class certification are met, according to the report.

Judge Lehrburger pointed out that the narrowed class only consists of 26 members, which normally wouldn’t satisfy the numerosity requirement, but he stated that “judicial economy will be served by proceeding in one action rather than 26 individual actions, and there is no reason to believe that the TOMO Token purchasers are geographically concentrated in a manner that would aid joinder to alleviate that concern.”

There is also a potential issue with whether class members are ascertainable, since Williams has run into problems with discovery, according to the report.

Not only has KuCoin failed to make an appearance thus far in the action, but Singapore authorities have not permitted Williams to obtain records from KuCoin that can identify class members.

Judge Lehrburger said absent discovery, class members would have to self-identify through public notice, and for now, “that is sufficient.”

In recommending Williams as the class representative, Judge Lehrburger said Williams’ interests align with other class members and that the attorneys representing him are from “two sophisticated and qualified law firms.”

“Both Roche Freedman LLP and Selendy & Gay, PLLC have extensive experience in successfully prosecuting complex financial class actions and have ably prosecuted this action over the course of the past fifteen months,” the report states.

Williams’ proposed class action is one of several that were launched against four crypto-asset exchanges and seven digital token issuers in 2020 for allegedly offering and selling billions of dollars worth of unregistered tokens.

While there have been several one-off cases in the past against coin issuers and exchanges over the unregistered sale of tokens as securities, the suits were the first coordinated effort to push major crypto firms to follow federal and state securities laws, a source familiar with the matter previously told Law360.

Williams and the other investor plaintiffs are all represented by Selendy & Gay and Roche Freedman, and they seek to redress manipulative behavior by exchanges and issuers taking advantage of market enthusiasm for crypto assets following the success of bitcoin and ethereum, according to the firms.

The suits target crypto-asset exchanges Binance, Bibox, KuCoin and HDR Global Trading Ltd. (which operates BitMEX) and token issuers Tron Foundation,, BProtocol Foundation (also known as Bancor), Civic Technologies Inc., KayDex Pte. Ltd. (also known as Kyber Network), Quantstamp Inc. and Status Research & Development GmbH, along with several of their executives.

All of the defendants face strict liability claims that they offered and sold unregistered securities. The exchanges also face unregistered broker-dealer claims, and BitMex faces additional allegations of market manipulation in violation of the Commodity Exchange Act, court records show.

Williams and other individual investors Alexander Clifford, William Zhang and Eric Lee, on behalf of the proposed investor classes, allege that the companies took advantage of the “Wild West” atmosphere of initial coin offerings in 2017 and 2018 before the U.S. Securities and Exchange Commission issued its April 2019 guidance deeming digital tokens securities.

According to the suits, the only ICO information available to investors considering buying tokens were “whitepapers” published by the coin issuers. These white papers described the purported utility of a token in highly technical terms, “preying on” the investors’ lack of familiarity with the underlying technology, the investors said.

Other required disclosures missing from the white papers include a list of key risk factors, warnings about relying on forward-looking statements and an explanation of how the funds from the ICO would be used, the investors claim.

The investors said that token issuers would launch an ICO and then quickly move to list their coins on exchanges like Binance to reach a wider investing audience. Once the exchanges agreed to list a particular token, they would then take over promotion for that token and make millions of dollars in profits, according to the suits.

Issuers and exchanges both took care to convince investors that the tokens were not securities by stating that plainly in their white papers, refusing to register with the SEC, or misleadingly comparing their tokens with bitcoin, a cryptocurrency that the SEC considers to be a commodity and therefore does not have to be registered with the regulator as a security, the investors said.

KuCoin and counsel for Williams did not immediately respond to requests for comment Friday.

Williams and the certified class are represented by Devin Freedman, Edward John Normand, Kyle William Roche and Jordana Lauren Haviv of Roche Freedman LLP and by Jordan Ari Goldstein, Philippe Zuard Selendy, David Coon and Oscar Shine of Selendy & Gay PLLC.

Counsel information for the defendants was not immediately available.

The case is Williams v. KuCoin et al., case number 1:20-cv-02806, in the U.S. District Court for the Southern District of New York.

–Editing by Andrew Cohen.