Williams v. Block.One

Background

The opinion addresses proposed settlements in two actions involving Block.one’s sale and trading of ERC-20 and EOS tokens. The complaints alleged that the tokens were securities and that Block.one and individual defendants violated the federal securities laws by failing to register the initial coin offering and by making false or misleading statements. The court had conditionally certified a settlement class, approved notice, and scheduled a fairness hearing. The proposed settlement required Block.one to pay $27.5 million in exchange for a broad release of claims.

The proposed class included people and entities that purchased or acquired ERC-20 or EOS tokens between June 26, 2017, and May 18, 2020, with specified exclusions. The proposed plan would distribute the settlement based on the number of tokens purchased, without distinguishing between purchases covered by U.S. securities laws and purchases that were not. Some class members were in the United States, some were elsewhere, and the lead plaintiff’s own purchases fell into both categories.

Court’s Analysis

The court explained that, under the Supreme Court’s decision in Morrison v. National Australia Bank Ltd. and later decisions, U.S. securities laws generally cover securities listed on domestic exchanges and domestic transactions in other securities. For non-exchange transactions, the Second Circuit’s test asks where irrevocable liability was incurred or title passed. The court said that applying this framework to blockchain transactions is a novel question.

The court discussed possible ways to identify where a blockchain transaction occurred. It stated that a transaction generally becomes binding when at least one blockchain node verifies it and expressed the view that the location of the node verifying the particular transaction might control. But the court expressly said it did not need to decide which test applied because the lead plaintiff had provided little information about the proportion of its own domestic transactions compared with the proportion for absent class members.

For class certification, the court found that numerosity, commonality, and typicality were satisfied. It found that the problem concerned adequacy of representation, which requires that the class representative’s interests not conflict with those of absent class members and that class counsel be qualified and capable. The court found the counsel-related requirement satisfied but was not persuaded that the lead plaintiff adequately represented the absent class members.

The lead plaintiff had relied substantially on an estimate that 36 percent of cryptocurrency traders were located in the United States and had assumed that only about 25 percent of the tokens were eligible for recovery. The court found that this estimate did not establish how many relevant purchases were domestic because it did not account for all purchase methods, distinguish domestic from foreign exchanges, or show where the transactions became irrevocable. At the fairness hearing, lead counsel could say only that less than 50 percent but more than 25 percent of the lead plaintiff’s purchases were made on a domestic exchange. The court had no comparable information about absent class members.

The court reasoned that the lead plaintiff may have been willing to accept a larger reduction in the overall settlement because it would receive compensation for both its domestic and foreign purchases. Class members who made only domestic purchases, or who made a greater proportion of domestic purchases, might have preferred a higher settlement. The court also found that allowing foreign-purchase claimants to share equally in the settlement would further reduce the amount available to class members with domestic purchases.

Disposition

Judge Kaplan denied the lead plaintiff’s motions for (1) final approval of the proposed settlement, certification of the proposed settlement class, appointment of the lead plaintiff as class representative, and appointment of Grant & Eisenhofer P.A. as class counsel, and (2) an award of fees and costs to lead counsel and costs to the lead plaintiff. The court stated that it was not criticizing or finding misconduct by the lead plaintiff or its counsel; it characterized the problem as a structural one arising from the market involved.