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In first ever cryptocurrency securities class action, appointment of lead plaintiff is business as usualJeremy N. Nash

The Court presiding over In re Tezos Securities Litigation, No. 17-cv-6779-RS (N.D. Cal.), the first ever class action alleging violations of U.S. federal securities laws arising from an initial coin offering (“ICO”), recently appointed an individual investor to serve as lead plaintiff.

The plaintiffs in this case contributed bitcoin or ethereum directly to the Tezos blockchain ICO and are suing its organizers and several related parties for failing to register the ICO with the Securities and Exchange Commission or seeking an appropriate exemption. The lawsuit alleges that Tezos tokens, also known as tezzies, are “securities” under the Securities Act of 1933, and therefore the offering was subject to U.S. securities laws. The lead plaintiff is seeking to represent all other similarly-situated investors from around the world.

The case is expected to produce groundbreaking legal decisions concerning the intersection of federal securities laws and cryptocurrencies, but for now it shares much in common with many other securities class actions, as illustrated by the recent appointment of lead plaintiff.

The appointment of lead plaintiff is an important preliminary milestone in any securities class action. The lead plaintiff has the right to control the litigation by choosing which law firm will serve as class counsel and by taking part in settlement negotiations, and thus has decisional muscle that other members of the class lack.

In class actions alleging violations of securities laws, there is a statutory priority given to the plaintiff with the greatest financial interest in the outcome of the litigation. In the Ninth Circuit, which is where the Tezos case is proceeding, district courts are not required to use any particular set of metrics to identify the lead plaintiff with the largest financial interest. All that is required is that the court choose a method that is both rational and applied consistently to all movants.

Rather than articulating a novel means of accounting for financial losses specific to cryptocurrencies, the court overseeing the Tezos litigation took a tried-and-true approach.

The Court took a snapshot of the value of each of the plaintiffs’ investments at a particular time (at ICO close) and as reported by an established index (CoinDesk):

Here, given the volatility of cryptocurrency assets, the most rational and consistent way to estimate the financial interest of the potential plaintiffs is by assessing the value of their contributions at the time the Tezos ICO concluded.
 
In securities class actions, courts routinely take the same or a similar approach to measuring financial losses in cases involving volatile securities.

By resisting the temptation to set forth a new means of measuring cryptocurrency losses, the Court provided a measure of continuity and predictability to this area of law. That is arguably a good thing, both for litigants and the courts. Like all good things, however, that too must end.

As noted at the outset, this case involves novel questions of federal securities laws. When the Court finally squares up to the questions about how federal securities laws should apply to cryptocurrency assets, which will likely happen on the defendants’ motion to dismiss, it will only be the first in a long line of jurists to do so.