On February 22, 2023, a federal judge in the Southern District of New York issued a first-of-its-kind order allowing a securities class action lawsuit to proceed against the issuer of non-fungible tokens (“NFTs”) on the grounds that the NFTs are securities for purposes of federal securities laws. Friel v. Dapper Labs, Inc. et. al., Case No. 1:21-cv-05837-VM (S.D.N.Y). NFTs are digital tokens, frequently associated with digital content, for which ownership of the tokens is recorded on a blockchain. The order was issued in the context of a lawsuit against Dapper Labs, the creator and issuer of NBA Top Shot “Moments.” Moments are digital video clips of NBA game highlights and their associated NFTs minted by Dapper Labs. Moments are offered and sold on Dapper Labs’ proprietary digital platform, validated on Dapper Labs’ private blockchain (the “Flow Blockchain”) and trade on a secondary marketplace controlled by Dapper Labs. The lawsuit claims that Moments are securities and Dapper Labs offered and sold those securities in violation of the registration requirements of the federal securities laws. Dapper Labs filed a motion to dismiss the lawsuit, and the court rejected the motion, concluding that Moments are securities.
Financial Services
Lawsuit Accuses Bank of America of Misleading Companies About PPP Loans
A group of small businesses recently sued Bank of America in the Central District of California, alleging that it misled them about the terms of Paycheck Protection Program (PPP) loans. This marks yet another putative class action accusing lenders of misconduct in connection with the PPP.…
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Court Dismisses Class Action Seeking to Hold Cryptocurrency Exchange Coinbase Liable for Sale of Unregistered Securities
A federal district court recently dismissed with prejudice a putative class action against the cryptocurrency exchange Coinbase, where the plaintiffs sought to hold the exchange liable for the sale of unregistered securities on behalf a nationwide class. The court held that Coinbase neither directly sold the accused tokens to plaintiffs nor actively solicited their sale, and thus plaintiffs’ federal claims must be dismissed. This decision has important implications for digital asset exchanges, which have faced a significant increase in class actions alleging the exchanges are themselves liable for the sale of unregistered securities.…
SCOTUS Set to Resolve Circuit Split over Stays Pending Arbitration Appeal
The Supreme Court recently granted certiorari in a case to resolve a circuit split that has serious implications for companies who are unsuccessful in their efforts to enforce arbitration provisions in federal district courts.
In Coinbase, Inc. v. Bielski, No. 22-105, the defendant moved to compel arbitration in two putative class actions. The motions to compel were denied, and the defendant sought stays while it appealed the denials—which the Federal Arbitration Act gives defendants an automatic right to do. See 9 U.S.C. § 16. Both motions to stay were denied, and the Ninth Circuit affirmed both decisions.…
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S.E.C. Wins Summary Judgment Determination That Cryptocurrency Token Qualifies as a Security
In a recent decision, a federal judge granted summary judgment for the Securities and Exchange Commission (SEC) finding that the LBC cryptocurrency token qualifies as a security. While the ruling is confined to this specific token, it represents a victory for the SEC’s assertions that many cryptocurrencies, including so called “utility tokens,” represent securities that need to be registered with the agency. The Court also held that the makers of the LBC token, LBRY, Inc., had fair notice that the token was subject to the securities laws. Considering the ongoing class actions and enforcement proceedings litigating this issue across several cases, companies operating in the cryptocurrency space, including cryptocurrency exchanges, should follow this development to assess any possible impact on their businesses.…
California Court Applies “Substance Over Form,” Allows True Lender Claim to Proceed
May courts look beyond the face of a loan transaction to identify the “true lender”? In a lawsuit filed by California’s financial regulator, a California state court recently answered yes, finding that a fact-intensive inquiry into the “substance” of a loan transaction was necessary to determine who the “true lender” is and declining to dismiss a lawsuit. See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Sept. 30, 2022).…
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Eleventh Circuit, Sitting En Banc, Reverses Panel Decision And Holds FDCPA Plaintiff Lacks Standing
The Eleventh Circuit, sitting en banc, recently applied TransUnion to hold that a plaintiff lacked Article III standing to bring claims under the Fair Debt Collection Practices Act. Hunstein v. Preferred Collection & Mgmt. Servs., Inc., No. 19-14434, 2022 WL 4102824 (11th Cir. Sept. 8, 2022)(en banc). The en banc decision reversed a controversial panel decision allowing a plaintiff to sue a collection agency for disclosing information about his debt to the agency’s mail vendor.…
Third Circuit Adopts “Reasonable Reader” Standard to Evaluate FCRA Claims.
Banks, lenders, and other financial institutions who submit information to credit reporting agencies should take note of a recent Third Circuit decision adopting a “reasonable reader” standard for evaluating whether a credit report was inaccurate or misleading under Fair Credit Reporting Act (“FCRA”).…
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Fifth Circuit Applies TransUnion To Conclude Plaintiff Lacked Standing To Assert FDCPA Claims.
The Fifth Circuit reversed a class certification order for claims under the Fair Debt Collection Practices Act (“FDCPA”) because the plaintiff lacked Article III standing. Perez v. McCreary, Veselka, Bragg & Allen, P.C., No. 21-50958, 2022 WL 3355249 (5th Cir. Aug. 15, 2022). The Court held that merely sending a letter to collect a time-barred debt, although a violation of the FDCPA, does not satisfy Article III’s injury-in-fact requirement.…
Update: Ninth Circuit Might Backtrack on When an Arbitrability-Related Question May be Delegated to an Arbitrator
Last September, we reported on a 2-1 Ninth Circuit decision holding that even if an arbitration clause appears to be unenforceable under the prospective waiver doctrine, a delegation provision requiring the arbitrator to decide that issue in the first instance is still enforceable. Brice v. Haynes Invs., LLC, 13 F.4th 823 (9th Cir. 2021). This decision reversed the district court’s order denying defendants’ motion to compel arbitration. Because the district court action was not stayed pending the appeal, it proceeded through class certification and pretrial motions. The Ninth Circuit now has vacated the panel decision and decided to rehear the case en banc.…