Williams v. Block.One

Background

These two putative securities class actions concern alleged losses from trading EOS tokens, a type of cryptocurrency. The plaintiffs sought to represent classes of people who allegedly suffered losses. Because substantially similar securities class actions had been filed, competing plaintiffs moved under the Private Securities Litigation Reform Act of 1995 to be appointed lead plaintiff.

The court ruled on two competing motions: Crypto Assets Opportunity Fund LLC’s motion, and the motion filed by JD Anderson, David Muhammad, Rajith Thiagarajan, Chase Williams, and Token Fund I LLC, collectively called the Williams Group.

Lead-plaintiff standard

The court explained that the law generally requires appointment of the “most adequate plaintiff.” That presumption ordinarily favors the applicant that moved for appointment, has the largest financial interest in the requested relief, and otherwise satisfies the relevant requirements of Federal Rule of Civil Procedure 23. The court focused primarily on the applicants’ verifiable financial losses and whether the proposed representatives and counsel could adequately represent the class.

Why the court selected Crypto Assets

The Williams Group reported losses of $537,306.98 for Token Fund I, $64,793.46 for Thiagarajan, $8,100.93 for Williams, $3,630.69 for Anderson, and $1,615.33 for Muhammad. But the court found that the group had not submitted all trading data supporting the two, and possibly three, largest claimed losses. Token Fund I said that at least $300,000 of its claimed loss was based on an estimate because Bitfinex had refused to provide relevant trading information. Thiagarajan’s records appeared incomplete or inaccurate, and Williams’s records contained a smaller discrepancy. The court declined to rely on unsupported claims or guess about the missing information.

Crypto Assets provided a complete accounting of its transactions and claimed a final loss of $36,229.13. The court therefore found that Crypto Assets had the largest loss that it could verify among the applicants and thus the largest verifiable financial interest in the case.

The court also found that Crypto Assets had made a preliminary showing that it would satisfy Rule 23’s requirements relevant to the appointment dispute, including typicality and adequacy. The court had no reason at that stage to believe that Crypto Assets was atypical or would inadequately represent absent class members. It also found that Crypto Assets’s proposed counsel could manage the litigation.

Problems with the Williams Group’s application

The court stated that it would deny the Williams Group’s motion even if it accepted Token Fund I’s and Thiagarajan’s unsupported assertions of larger losses. The five plaintiffs had failed to submit the required sworn certifications listing all transactions in the relevant security during the class period. Although they later submitted certifications under penalty of perjury, they did not correct the missing trading information.

The court also questioned the proposed group’s adequacy under Rule 23. The five plaintiffs apparently had no pre-existing relationship, and the group did not adequately explain why they joined together, how they would divide responsibilities, resolve conflicts, or manage the litigation. The court was concerned that the lawyers, rather than the plaintiffs, might be directing the case.

The court further noted that Token Fund I had been formed on June 6, 2020, two months after other members of the Williams Group filed this lawsuit and two days before Token Fund I moved to become lead plaintiff. The court found that the information provided about Token Fund I’s formation and controlling member raised serious questions about whether the entity had been formed for purposes related to this lawsuit or the appointment motion. The court also questioned how the proposed class would benefit from having five lead plaintiffs, particularly because Anderson, Muhammad, and Williams claimed comparatively small losses. The group’s late request to appoint only Token Fund I or Thiagarajan instead raised additional concerns that the lawyers were driving the application.

Ruling and effect

Judge Lewis A. Kaplan granted Crypto Assets’ motion and denied the Williams Group’s motion. The court consolidated the two cases, appointed Crypto Assets Opportunity Fund LLC as lead plaintiff, and appointed Grant & Eisenhofer P.A. as lead counsel. Unless the court later ordered otherwise, the order also applied to securities actions against Block.One later filed in or transferred to that court. The opinion addressed leadership and consolidation; it did not decide the merits of the alleged securities violations.