Williams v. Block One

1

CHASE WILLIAMS, et al., Plaintiffs, v. BLOCK ONE, et al., Defendants.

CRYPTO ASSETS OPPORTUNITY FUND, LLC, et al, Plaintiffs, v. BLOCK ONE, et al, Defendants.

Nos. 20-CV-2809 (LAK), 20-cv-3829 (LAK)

United States District Court, S.D. New York

August 13, 2022

Daniel Lawrence Berger

Grant & Etsenhofer P.A.

Lead Counsel for Lead Plaintiff Crypto Assets Opportunity Fund LLC

Ievgeniia Vatrenko

Jack Samuel Tenenbaum

Northwestern Pritzker University School of Law

James Koutoulas Koutoulas Law, LLC

Attorneys for Plaintiff Crypto Assets Opportunity Fund LLC

Greg Donald Andres Edmund Polubinski III Gabriel Jaime-Bettan Neal Alan Potischman Davis Polk & Wardwell LLP

Brian Edward Klein

Scott M. Malzahn (pro hac vice)

Teresa L. Huggins

Jose R. Nuno (pro hac vice)

Waymaker LLP

Attorneys for Defendants Block, one, Daniel Larimer, and Brock Pierce

MEMORANDUM OPINION

LEWIS A. KAPLAN, UNITED STATES DISTRICT JUDGE

This case is before the court on Lead Plaintiff Crypto Assets Opportunity Fund LLC's ("CAOF" or "Lead Plaintiff) motions for final approval of a class action settlement^[1] and attorneys' fees.^[2] Lead Plaintiff moves the Court to appoint Lead Plaintiff as class representative and Grant & Eisenhofer P.A. as class counsel,^[3] to certify the proposed class, to approve a $27.5 million settlement and the proposed plan of allocation, and to award fees in the amount of approximately $5.5 million plus costs to Grant & Eisenhofer P.A. and costs to Lead Plaintiff.^[4] For the reasons stated below, both motions are denied.

Facts

Background

This class action is at the intersection of the federal securities laws and blockchain technology. We begin with some essential background.

The SEC has described blockchain technology as "an electronic distributed ledger list of entries - much like a stock ledger - that is maintained by various participants in a network of computers . . . ."^[5] Each of these computers is a node in the network which "use[s] cryptography to process and verify transactions on the ledger . . .,"^[6] In general, the first node to identify the cryptographic hash^[7] corresponding with a proposed transaction verifies that transaction and adds it to the public ledger, i.e., as a block on the virtual chain. Once one or more nodes has validated a transaction, the original parties to that transaction no longer may rescind their deal. But it is not until the other nodes on the network have accepted the verified transaction and added their own new blocks on top of it that the transaction becomes part of the blockchain's ledger. Blockchain technology thus allows investors to buy and sell so-called crypto assets, cryptocurrencies, in an anonymous, decentralized environment.^[8] And the problem before the Court is a product of the anonymity of that environment.

Lead Plaintiff represents a conditionally certified class of persons who purchased ERC-20 and EOS tokens - two related digital assets - over a period of about two years. Some of those class members are in the United States. Others are not. Some of those transactions were subject to the securities laws of the United States. Others were not. Yet Lead Plaintiff- whose purchases fell into both categories - has entered into an agreement to settle the case on behalf of the entire class, with every class member to receive the same consideration per unit purchased, regardless of whether the purchase was subject to the securities laws of the United States. The question now presented is whether the Court should approve the settlement, which ultimately turns on whether plaintiff has established that it adequately represented the interests of absent class members. This in turn depends upon whether the proportion of the plaintiffs purchases that were subject to the federal securities laws is the same as, or representative of, the proportion of such purchases by absent class members. For if Lead Plaintiffs propoition of purchases covered by the securities laws was lower than the proportion of such purchases by other class members, plaintiff could have had a financial interest in accepting a settlement at a price lower than the price that would have been demanded by adequately represented absent class members.

Lead Plaintiff's Allegations

The story told in the Consolidated Amended Complaint (the "CAC") begins with Block.one's effort to finance its development of software called EOS.10 which ultimately came to support the EOS Blockchain,^[9]

BrockPierce, Brendan Blumer, and Daniel Larimer founded Block.one in early 2017.^[10]In public statements including a white paper published June 5, 2017, Block.one and its founders promised to develop a software program called EOS.IO which would enable the creation of novel EOS blockchain technologies.^[11] Like the better known Bitcoin and Ethereum blockchains, the proposed EOS blockchains would record cryptographically-verified digital transactions on a public ledger. Block.one represented that any EOS blockchain would be especially decentralized; whereas the Bitcoin and Ethereum networks "were dominated by fewer than ten large mining entities,"^[12]Block.one's white paper stated that any EOS blockchain would be governed by 21 mining entities -called producers - elected by the token holders and 15 of 21 producers would be required to confirm each of the network's transactions.^[13] This framework, according to Block.one, would enable EOS "ultimately [to] scale to millions of transactions per second, eliminate[] user fees, and allow[] for quick and easy deployment and maintenance of decentralized applications[] in the context of a governed blockchain."^[14]

Block.one commenced a so-called initial coin offering ("ICO") to fund the project. From June 26, 2017 to June 1, 2018, it sold ERC-20 tokens^[15]to investors with the expectation that they later could be exchanged for EOS tokens produced on the forthcoming EOS blockchain or blockchains.^[16] Block.one accepted approximately 7.12 million ether^[17] worth $4.1 billion in exchange for 900 million ERC-20 tokens in the ICO.^[18] These sales were made through an automated process called a "smart contact."^[19]

The Amended Complaint describes efforts by Block.one to keep its ICO sales beyond the reach of the federal securities laws. Investors were required to enter into a token purchase agreement ("TPA") which inter alia declared that

"[s]ales of EOS [t]okens and EOS [t]okens themselves are not securities . . . [and purchases and sales of EOS [t]okens are not subject to the protections of any laws governing those types of financial instruments. This [a]greement and all other documents referred to in this [a]greement including the [w]hite [p]aper do not constitute a prospectus or offering document, and are not an offer to sell, nor the solicitation of an offer to buy an investment."^[20]

Block.one never registered its sale of ERC-20 tokens with the SEC.^[21]

Block.one attempted also to prevent purchases by investors in the United States. The TPA purportedly barred direct purchases of ERC-20 by U.S. persons in the ICO.^[22] But this prohibition was easily circumvented. Indeed, in 2019 the SEC found that "a portion" of the capital acquired by Block.one in the ICO "was raised from U.S. persons."^[23] This perhaps is unsurprising given Block.one's efforts to promote EOS in the U.S. market, which included appearances at blockchain conferences in U.S. cities, the display of an EOS advertisement on a billboard in Times Square, and various posts on social media and in fora popular with U.S. cryptocurrency investors.^[24] Moreover, the ERC-20 tokens were available for resale without restriction immediately following the ICO, including on crypto currency exchanges based in the United States including Coinbase, Poloniex, and Kraken.^[25]

The ICO closed on June 1,2018 at which point the ERC-20 tokens became "fixed and nontransferable."^[26] When the EOS Blockchain - the first blockchain built on the EOS.IO platform - was launched by third parties, ERC-20 tokens purchased in the ICO or on the secondary market became eligible to be traded in for EOS tokens via a smart contract.^[27]

Lead Plaintiff asserts that the ERC-20 tokens were securities. If true, and if the ICO was not subject to an exception, Block.one violated the law by failing to register its ICO. Lead Plaintiff alleges also that certain public statements and omissions by Defendants were materially false and misleading. Principal among these were promises by Defendants that the EOS blockchain would be decentralized.^[28] Lead Plaintiff claims also that the individual defendants inappropriately pocketed money raised in the ICO for themselves.^[29]

The CAC alleges that Block.one and Brendan Blumer, Daniel Larimer, Ian Grigg, and Brock Pierce (the "Individual Defendants" and, together with Block.one, "Defendants") violated the securities laws by failing to register securities with the Securities and Exchange Commission ("SEC") as required by Sections 5 and 12(a)(1) of the Securities Act of 1933 and making false and misleading statements to investors prohibited by Section 12(a)(2) of the Securities Act, Section 10(b)(5) of the Exchange Act, and Rule 10b-5.^[30]

The Motion to Dismiss and the Proposed Settlement

Defendants Biock.one, Larimer, and Pierce moved to dismiss the Amended Complaint on November 2, 2020.^[31] While the motion was pending Lead Plaintiff and settling defendants Biock.one, Blumer Larimer, and Pierce informed the Court of a proposed class action settlement and moved the Court to certify conditionally the proposed class, approve the manner and form of giving notice of the proposed settlement to the proposed class, and set a hearing date for its approval.^[32] The proposed settlement provides for...