Valenti v. Dfinity USA Research LLC

Background

This was a putative securities-fraud class action against Dfinity USA Research LLC, Dfinity Foundation, and Dominic Williams. The operative complaint alleged that the defendants failed to register Dfinity’s ICP cryptocurrency tokens as securities with the Securities and Exchange Commission and profited by selling, promoting, and trading the tokens. The complaint asserted claims under Sections 5, 12(a)(1), and 15 of the Securities Act; Section 10(b) and Rule 10b-5 of the Exchange Act; and Sections 20A and 20(a) of the Exchange Act.

Under the Private Securities Litigation Reform Act, the court appointed Henry Rodriguez as lead plaintiff and approved Roche Freedman LLP as lead counsel for the putative class. After defendants filed a motion to dismiss, they also moved to disqualify Roche Freedman. By then, attorney Kyle Roche had withdrawn from the case, and Roche Freedman had been reconstituted as Freedman Normand Friedland LLP (FNF). FNF had not formally sought appointment as lead counsel, but the parties treated it as continuing in that role.

Defendants relied in part on a report and videos released by Crypto Leaks concerning Roche’s alleged ties to Ava Labs, his financial interest in that company, and statements about using litigation against Ava Labs’ competitors. FNF responded that the videos might have been manipulated, while also stating earlier that Roche’s statements were inappropriate and that he had left the firm. The court ordered a focused deposition of FNF and supplemental briefing concerning the firm’s ties to Roche and Ava Labs and its ability to represent the class.

Lead Counsel Ruling

The court evaluated the issue under the Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 23, rather than primarily under California professional-conduct rules. The law requires class counsel to fairly and adequately represent the class, and the court stated that it has an independent duty to protect absent class members. The court also concluded that it had authority to reconsider its earlier interlocutory appointment order and issue further orders concerning class counsel.

The court found that FNF was not as independent of Roche or Ava Labs as FNF had suggested. The record showed that AVAX tokens connected to prior dealings with Ava Labs remained in a public address controlled by Freedman or Roche, that Roche retained contractual interests in some of the tokens, that FNF and Roche remained co-counsel in active matters, and that Freedman remained in regular contact with Roche.

The court also found serious doubt about FNF’s ability to litigate in the class’s best interests. It cited FNF’s focus on protecting itself and Roche, its filings concerning alleged threats against Roche, its accusations about defendants, and its change from acknowledging that Roche’s statements were inappropriate to arguing that the videos might be fake. The court concluded that FNF’s litigation decisions could be influenced by its hostility toward defendants and that FNF was unable to fairly and adequately represent the class.

The court withdrew the prior appointment of Roche Freedman LLP and dissolved the earlier order with respect to counsel, to the extent that appointment was a basis for treating FNF as lead counsel. Henry Rodriguez remained lead plaintiff. The court stated that defendants’ disqualification motion was terminated in all other respects. Rodriguez was permitted to propose alternate lead counsel for the court’s consideration and approval.

Other Motions and Case Status

The court granted FNF’s request for a protective order designating its Rule 30(b)(6) deposition transcript “Attorneys’ Eyes Only.” The court stated that FNF’s allegations about threats against Roche played no role in the lead-counsel analysis and found that the transcript could otherwise be used to cause annoyance or embarrassment to FNF, which was not a party to the underlying action.

The court granted defendants’ motion to seal to the extent requested by FNF and also granted FNF’s motion to seal. The court granted defendants’ motion to strike FNF’s statements about alleged threats against Roche. The court denied FNF’s motion for leave to file a notice of supplemental evidence.

The case was stayed and administratively closed while Rodriguez proposed alternate counsel. The court set a status conference for August 17, 2023, and directed defendants’ counsel to provide a courtesy copy of the order to plaintiffs’ counsel in a related state-court action that the court said significantly overlapped with this case.