Consumers and investors burned in recent crypto bankruptcies and failures are taking a page from the Bernie Madoff trial book in opting for civil suits to try to get more assets back.
If certain crypto tokens are deemed securities, it opens a new area of liability with respect to state laws, James Vivenzio, senior counsel at Perkins Coie, said during a webinar Wednesday.
When Madoff was arrested, many of his victims opted for civil litigation to recover losses. Creditors successfully clawed back more than $14 billion of the estimated $18 billion to $20 billion stolen, according to Marc Powers, a former securities law practice leader at Baker & Hostetler — a firm that worked to recover funds for victims of Madoff’s Ponzi scheme.
A similar situation is playing out in crypto, Vivenzio said. One class action lawsuit in Florida in November 2022 against former FTX influencers cites the state’s Blue Skies law.
“Blue skies laws are just a state securities fraud law that requires registration and requires that you speak truthfully in connection with a security,” Vivenzio said. “[They are] designed to protect investors from ventures that have no more basis than so many feet of blue sky, as the old saying goes.”
But crypto claims are different from a typical fraud claim, according to Vivenzio, because the asset class is not traded on a national exchange. The FTX lawsuit in Florida alleges that FTT, FTX’s native exchange token, is a security — and that anyone who aids the sale of that security is responsible for any ensuing damage that may be caused.
It’s not a common argument because these issues can usually only be charged on a state level, Vivenzio said.
“The state ‘Blue Sky’ theory seen here doesn’t arise in a lot of other cases when you’re dealing with nationally exchange-traded securities, because there’s a federal statute that says you can’t bring a class action for those times,” he said.
A so-called Blue Sky theory is generally a state-level protection put in place in an effort to protect investors from securities fraud.
“But crypto is not traded on a national exchange,” Vivenzio said. “If it is a security, it opens up a new area of liability with respect to state or state laws.”
For the most part, celebrities have been targeted with these types of allegations, Vivenzio said, but the law is not limited to public figures.
“If the theory that is articulated in this lawsuit is upheld, it really would provide for a very broad civil liability on a variety of claims, not just for promoters, not just for celebrities or YouTube influences, but for any agent or employee or officer of the entity that’s issuing the securities,” he said.
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