Crypto plaintiff firms pin hopes on key decision in governments’ Ooki case

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(Reuters) – It’s been just two weeks since a California federal judge handed down a groundbreaking ruling that a crypto collective called Ooki DAO is not immune from prosecution simply for operating as a decentralized blockchain protocol — but a pair of plaintiffs’ companies representing crypto plaintiffs have already rushed to notify other courts of the decision.

U.S. District Judge William Orrick of San Francisco resolved a thorny issue last month when he ruled that the U.S. Commodity Futures Trading Commission had met notification requirements in his lawsuit accusing the Ooki DAO of operating as an unregistered derivatives exchange.

As you probably remember, the DAO itself did not appear in the CFTC’s first case of its kind, but an array of crypto and decentralized finance friends argued on behalf of Ookis that the regulators initially planned to serve his complaint via a chat box on a website Ooki DAO highlighted the central flaw in the governments theory.

Ooki’s amici generally insisted that the DAOs are not unincorporated associations, as the CFTC had asserted. The inherently decentralized structure of DAOs, these amici argued, precludes attempts to hold entire collectives accountable for alleged wrongdoing.

Orricks’ Dec. 20 ruling found that the Ooki DAO could be sued as a collective because it met California’s definition of an unincorporated association. The DAO, he ruled, consists of token holders who share the goal of operating the protocol that allows users to trade crypto derivatives.

The judge warned that he was not ruling on the merits of the CFTC’s allegations, including its fundamental assertion that the DAO can be held liable under the Commodities Exchange Act as an unincorporated association in society, but concluded that the government had sufficiently established a threshold for the right to sue the collective.

Plaintiffs’ firms Gerstein Harrow and Fairmark Partners hope Orricks’ reasoning in the CFTC’s Ooki case will help their clients survive motions to dismiss in two potential class action lawsuits brought by DAO users.

One case, in federal court in San Diego, is on behalf of Ooki DAO investors who lost approximately $50 million in a protocol hack in 2021. (These allegations are separate from the CFTC’s more sweeping allegations regarding operations of Ooki.) The second class action, in federal court in Brooklyn, alleges that a DAO called PoolTogether operated as an illegal lottery under New York law by pooling interest on crypto holdings users and periodically disburse money from the pool to randomly selected users.

Just two days after Orrick’s Ooki decision in the CFTC case, Gerstein Harrow told U.S. District Judge Larry Burns of San Diego, who is presiding over the Ooki DAO piracy private class action, about the decision. of the judge that the collective is subject to the CFTC prosecution as an association without legal personality. And on Tuesday, Gerstein and Fairmark filed a similar notice in the PoolTogether case, which is being overseen by U.S. District Judge Frederic Block of Brooklyn.

The reasoning of the CFTC and now the District Court is correct, and the same conclusion regarding the nature of a DAO is appropriate here, plaintiffs’ companies told Block in Tuesday’s filing.

Defendants in both class action lawsuits have argued, among other things, that DAOs cannot be sued as a general partnership because plaintiffs cannot prove that users (or token holders) were engaged in a joint effort to generate profits and share losses.

Gerstein Harrow and Fairmark argue that the December 21 Orricks decision in the CFTC case contradicts this assertion. PoolTogether’s position in our litigation appears to be that because the DAO is decentralized and autonomous, no one can be held liable, Fairmark’s Jamie Crooks said via email. But working together on blockchain to run a business that breaks the law is neither a useful technological advancement nor a viable legal defense.

Defendants in the Ooki DAO private case told Burns that the Orricks decision in the CFTC litigation was irrelevant because it only addressed the issue of how regulators might affect service on the DAO, not the substantive issues in the motions to dismiss pending in the class action.

Attorneys for the PoolTogether defendants, including the company that operates the DAOs website and several individuals and investment funds that allegedly control the DAO through governance tokens known as POOLs, declined to comment or comment. did not answer my question about the relevance of the Orricks decision that the Ooki DAO was sued as an unincorporated association.

But in October, after Gerstein Harrow and Fairmark initially alerted the Brooklyn court to the CFTC’s theory that the DAOs are unincorporated associations, Morrison Cohen’s defense attorney argued that regardless regardless of the CFTC Ooki DAO claims, PoolTogether is still not a general partnership under New York law. .

The CFTC, for example, alleged that the Ooki DAO generated revenue, but the lead plaintiff in the PoolTogether class action lawsuit did not assert such a claim, Morrison Cohen said. Additionally, according to the letter, the CFTC defined Ooki DAO members as token holders who had voted on corporate governance matters. The amended PoolTogether class action complaint, the letter states, does not allege that most of the defendants actually voted POOL tokens to govern the DAO PoolTogether, and does not allege that other defendants ever even held POOL tokens. .

Fairmarks Crooks told me that these arguments defy common sense because the sophisticated investors who created the PoolTogether DAO surely didn’t do it out of the goodness of their hearts, Crooks said. Whether the people controlling the DAO are called users or token holders makes no legal difference: those who control it are general partners, as the Ooki decision demonstrates, he added.

As I mentioned, the PoolTogether defendants have all sorts of alternative grounds to dismiss the class action, including a mandatory arbitration clause in the platforms’ terms of use and an argument that lead plaintiff has no suffered no prejudice because he was free to withdraw his money. of the swimming pool. The motions to dismiss in the Ooki class action make similar technical arguments unrelated to the unique structure of DAOs. It’s entirely possible that the judges deciding these motions won’t even address the question of whether the DAOs can be sued as a collective.

The plaintiffs’ attorneys hope otherwise, of course, and are doing everything they can to get Orricks Ooki’s decision into the analysis.

Read more:

Famed venture capital firm is latest criticism in regulators case against crypto collective Ooki

You cannot serve notice to a crypto collective, say crypto groups in Ooki lawsuit

How can insiders sue an amorphous crypto collective? They can’t, say defendants bZx

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

Alison Frankel

Thomson Reuters

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

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