A settlement class that Judge Lewis A. Kaplan (S.D.N.Y.) was likely to approve circa June 2021 was rejected “on further reflection” last week, due to a lack of information about how the lead plaintiff stacked up against a class of largely “anonymous” crypto investors.
The lead plaintiff, Crypto Assets Opportunity Fund LLC (“CAOF”), purchased digital tokens from the Defendant, Block.one, during an initial coin offering intended to finance new blockchain software. CAOF later sued Block.one on behalf of itself and other investors, contending that Block.one unlawfully failed to register its coin offering with the U.S. Securities and Exchange Commission and made false promises about the “decentralized” nature of the software.
CAOF and Block.one reached a $27.5 million settlement and asked Judge Kaplan to certify conditionally a proposed settlement class. But Kaplan ultimately declined, reasoning that he lacked insight into how CAOF’s purchases compared to investors in the putative class on a crucial dimension: the percentage of purchases properly considered “domestic” (and hence subject to U.S. securities laws) as opposed to “foreign” (and thus not subject to them, and effectively rendering any claims based on those transactions meritless). Judge Kaplan credited CAOF’s representation that “less than 50 percent” of its transactions were domestic and hence eligible for recovery. But that posed a problem, he explained, because other investors might have engaged in predominantly or even exclusively domestic transactions, and the record failed to reveal how CAOF’s foreign/domestic transaction mix compared to that of other members of the largely “anonymous” putative class—in part because Block.one had not kept purchase records.
This lack of information, Kapan reasoned, meant CAOF could not carry its burden to show that it was an adequate class representative—since a hypothetical investor that (unlike CAOF) engaged in predominantly domestic transactions would have less of an incentive to accept a large “haircut” on an aggregate settlement amount to discount the value of foreign transactions. Although Kaplan took care not to accuse CAOF or its lawyers of any specific “misfeasance,” he noted that the $27.5 million settlement was premised on an assumption that a mere 25% of the investors’ coin purchases were domestic transactions—without any evidence in the record backing up that percentage—and would also allow claimants to divide the settlement funds in a manner that did not account for each claimant’s domestic/foreign purchase mix.
The law, concluded Kaplan, has “a special place in its metaphorical heart for settlements of complicated cases.” But any tug on those heartstrings must be resisted absent an adequate class representative “lest an individual class action become an instrument of inequity.”
The court’s decision, Williams v. Block One, 20-cv-2809 (S.D.N.Y. Aug 13, 2022), ECF No. 146, is available here.