Apparently first of all, Connecticut class action jury concludes crypto products are not securities

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The exchange rates and logos for Bitcoin, Ether, Litecoin and Monero can be seen on the screen of a cryptocurrency ATM of blockchain payment service provider Bity.REUTERS / Arnd Wiegmann

(Reuters) – Hughes Hubbard & Reed’s Daniel Weiner and Amina Hassan didn’t even want the jury to decide whether cryptocurrency products at the heart of a class action lawsuit against their client, former Cantor Vice President Fitzgerald Stuart Fraser, were titles.

At the close of the plaintiffs accusing Fraser of state and federal securities fraud, Weiner and Hassan asked U.S. District Judge Michael Shea of ​​Hartford, Connecticut, to rule that the products no were not securities under the United States Supreme Court Act of 1946. Howey’s test. The judge said he would let the jury decide.

It turned out to be a boon for Weiner, Hassan and Fraser. Late Monday afternoon, after a day and a half of deliberation, the nine-member jury concluded that none of the four crypto products at issue in the case was a title, so Fraser could not be held responsible. securities fraud. The jury also dismissed the group’s common law fraud allegation, offering the former Wall Street executive a complete victory in defense.

The verdict, Weiner said, marks the first time a jury has been asked to decide whether cryptocurrency products, including a purported digital token called Paycoin, should be subject to securities laws.

As you know, this has been the subject of much controversy in the United States Securities and Exchange Commission cases against high profile cryptocurrency defendants such as Ripple Labs Inc, Telegram Group Inc and Kik. Interactive Inc. At least two federal judges – including U.S. District Judge Alvin Hellerstein of Manhattan in the SEC case accusing Kik of selling an unregistered security in an initial coin offering – have ruled that digital assets are securities according to the Howey test.

The jury’s verdict in the Fraser case blatantly contradicts the SEC’s assessment of one of the class-action crypto products.

In 2015, the commission sued a Fraser protégé, Homero Joshua Garza, and two companies founded by Garza for securities fraud, alleging that Garza had sold a fraudulent investment he called “Hashlets” to more than 10,000 investors. in 2014 and 2015. Investment contracts Hashlet, according to the SEC, promised investors a share of the returns from an allegedly powerful bitcoin mining operation – but Garza actually didn’t have as much computing power as he did. ‘he had told investors. The SEC alleged the Hashlets met the definition of a security and that by lying about the offer Garza defrauded investors of nearly $ 20 million.

Garza, who was also criminally charged, pleaded guilty to wire fraud in 2017. He was sentenced to 21 months in prison and ordered to pay back $ 9.1 million to investors. Fraser was not a defendant in the SEC or Justice Department cases against Garza.

A class of defrauded investors nevertheless alleged that Garza would not have been able to complete his project without Fraser’s financial support and mentorship. The class, represented by Susman Godfrey, initially named Garza as a co-defendant in their fraud lawsuit, but ditched him as a defendant after reaching a cooperation agreement to testify for Fraser’s role. (Susman Godfrey ended up playing parts of Garza’s testimony in front of the jury rather than calling him as a live witness.)

In his final argument, Susman’s Jacob Buchdahl pointed out that Fraser even owned the mortgage on Garza’s house. “What the evidence has shown is that everything Josh Garza had in his life, his job, his financial security, even his home, was provided by [Fraser]”Buchdahl said.” It’s control. “

Hughes Hubbard’s defense of Fraser, as one would expect, mainly focused on Garza’s guilt for the fraud. Weiner told jurors the class was targeting Fraser only because he had the money and not Garza. “Sir. Buchdahl told you… there may be a bunch of screening people,” Weiner argued. “Don’t be fooled by this. When you went to the courthouse today, how many people were screening your car? How many people were driving your car? Mr. Garza drove businesses. He drove their every decision.

But Weiner also told jurors that the fraudulent crypto products – including Hashlets that the SEC defined as securities – were not, in fact, securities under the jury instructions they received from the judge. One of the products, he said, was just a digital currency wallet. Another was simply store credit. The token, Paycoin, was a currency, Weiner said. And Hashlets, he argued, did not meet the criteria specified in the jury’s instructions.

Weiner told me that the key to his Hashlets argument was the testimony of two of the named plaintiffs, who said their individual decisions could affect daily profits in different crypto mining pools. Weiner argued to jurors that because “the choice and direction remained with the customer,” the Hashlets were not a routine business, as Howey demanded. He added that the product also did not meet Howey’s requirement that profits come only from the efforts of others, since individual investors’ decisions affected their profits.

In rebuttal, counsel for the Buchdahl group pointed out that the US government has concluded that Hashlets are securities, and that his side would be happy if jurors follow the government’s lead.

“It seemed crazy to us that a jury should decide this,” Weiner told me. But in the end, he said, it wasn’t enough for the class to rely on the SEC and DOJ characterizations of crypto offerings.

“The jury didn’t buy it,” Weiner said.

Buchdahl of Susman said in an emailed statement that the main complainants are considering their options. “We are disappointed with the jury’s verdict that the hashlets were not securities, a finding contrary not only to the official position of the SEC but to the overwhelming weight of evidence,” Buchdahl’s statement said.

We don’t know exactly why the Fraser jury decided that Hashlets, Paycoin, and the other crypto products in the case were not securities. So future crypto defendants should probably not rush to conclude that they will have better luck with jurors than with regulators or judges. .

But the Fraser verdict will surely give them food for thought. Nine regular people looked at the same facts as the SEC and DOJ and came to the opposite conclusion as to whether crypto products were securities. It is a milestone.

Read more:

In discovery litigation, Ripple forces SEC to play defense

Previous Crypto: New York Judge Decides Kik’s Digital Currency Was Security, Grants SEC Victory

SEC Secures Injunction Against Telegram Blockchain Launch In Key ICO Case

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Alison frankel

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A graduate of Dartmouth University, she worked as a reporter in New York covering the legal and law industry for more than three decades. Prior to joining Reuters, she was a writer and editor for The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.

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