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Crazy Crypto Lawsuits! Tether Lawsuit and XRP Lawsuit.

By January 18, 2021No Comments

Transcript from vlog:

Hello this is attorney Jeremy Hogan and welcome to another edition of Legal Briefs – crypto edition.  Today we get a little crazy American crypto style.

Got a busy vlog today so hang onto your hats – first we are going to discuss the Tether lawsuit and then seque into what I see as the  true danger to the crypto market and the true savior, and then saving the best for last we’ll finish with XRP lawsuit analysis which was very interesting for me and then a surprise at the very end – to keep you hanging on.

Quick disclaimer: I am a lawyer on Youtube with an  American Psycho thumbnail– for all that is good in the world do NOT take this as legal or financial advice.  You are crypto-rich now, go spend some money on a local lawyer… the Lincoln needs new tires.

Okay, let’s get going and I have been asked a lot of questions about the Tether lawsuit and spent some time yesterday to dig into it a little.  If you are interested in crypto legal issues I would urge  you to sign up for a Pacer account which gives you access to the actual pleadings filed – at a small charge..it’s like 3cents a page.  And try to stay away from media reports.  Reporters get it wrong or are slanted in their reporting.  So let’s take a look at the June 2020 Amended Complaint I pulled up and see what this lawsuit is about.

https://www.courtlistener.com/docket/16298999/110/in-re-tether-and-bitfinex-crypto-asset-litigation/

Here it is and right away we see it’s filed in New York which is probably a good venue for a complicated technical class action lawsuit. Now I suggested in my last video to always go the bottom of a lawsuit and look for what damages the Plaintiff is asking for but that’s not going to work here because it’s a class action there are numerous Plaintiffs and each one’s damages will differ so that’s not going to help us here.

But I do like how the Plaintiffs throw it all on the table in paragraph 1 and tell us what this lawsuit is about.  Plaintiff alleges, in short, that the Defendants engaged in a sophisticated pump and dump scheme.  Paragraph 2 alleges that Defendant’s misconduct was “staggering in its scope and audacity” I’m not sure I like that paragraph – too dramatic.

I want to caution you in reading any lawsuit that these are just allegations and it’s easy to allege things and make it sound horrible.  For example, to illustrate, listen to this “… on December 31, 2020 John Smith did conspire with Co-Defendant Jane Smith to obtain and convey items regulated by the State Health Commission  by utilizing a draft item governed by the Uniform Commercial Code in Interstate Commerce.  What did I just say?  I just alleged that John and Jane ordered food for delivery and paid with a check.  Point being, you have to learn to look beyond the strange legal language and get to the real issue – it’s easy to make things sound horrible.

And right away in this Tether lawsuit I can cut through the fluff and tell you what the issue is – there are actually two of them.  First, going down to paragraph 12, Plaintiff alleges that Defendant’s “market manipulation” caused the price of Bitcoin to increase 25 times.  And by the way, Ether and Litecoin also spiked.  That’s a BIG allegation and although I haven’t had the time to read the original lawsuit I am guessing that the Judge was not happy with this allegation, it was probably too barebone in the original lawsuit which is why the Judge required them to file an Amended.  Just an educated guess because if we go down into paragraphs 260-290, let’s look specifically at paragraph 272 we see the Plaintiff trying to show the Court how exactly Bitfinex pumped up the price of Bitcoin using Tether and there’s lots of well-done charts and graphs and diagrams for example in 272 the correlation is being made between the dollar transfer by Bitfinex which are the blue lines and the green line which is the price of Bitcoin.

The Plaintiffs in this lawsuit are in a difficult place with this because it’s easy to allege a pump and dump, but it’s mush harder to PROVE it by facts and evidence that are admissible in a Court of law.  And this case will come down to a battle of experts – economics guys trying argue really complicated market forces and pin them on the actions of one company.

The other issue will probably be damages. It’s possible that certain Plaintiffs bought at the allegedly inflated prices and sold at a loss.  But it’s also possible that some Plaintiffs held onto some or all of their Bitcoin and are now UP in their positions since Bitcoin recently topped it’s 2018 value.  That means no damages for the long term holders.

In any case, the lawsuit certainly has teeth but it’s going to be difficult to meet the burden of evidence to prove that the Defendants actions specifically caused the spike in price.  As the Defendant says “coincidence does not equal causation” and that is absolutely true.  But there does come a point where even a circumstantial case can be proven and there are some allegations in the Complaint which seem relatively damming but, like I said, it’s easy to allege and hard to prove.  This case will not be resolved quickly is my guess.

But really what came to my mind finishing a review of the Tether lawsuit is a bigger picture issue because the allegations are pretty bad and make for good soundbites “Fraud, RICO violations, collusion”) and all of these things get to the ears of regulators and legislatures.  And trust me, they are chomping at the bit to regulate and get a piece of the growing crypto market – the SEC, FinCen, the Treasury Department.

Which leads me to my next topic – the coming regulation battle against crypto in general.  The SEC v. Ripple lawsuit is just the beginning of this.  Crypto is getting too large to ignore and making too many headlines to be ignored. 

I did a fun video last Saturday (which only like 3 people watched but that’s ok)  where I talked about how money has taken over the political process the last 40 years (in the context of a kids cartoon).  And it got me to thinking – where are the crypto lobbyists and PACs?  Look at this graph showing some recent lobbying activities:

Infographic: Lobbying: The Biggest Spenders in the United States | Statista

See the U.S. Chamber of Commerce at 77million and the Business Roundtable at 20 million dollars?  That money includes bank lobbies – hell, Amazon and Facebook spent 16 million each.  WHERE ARE THE CRYPTO LOBBYISTS?  The battle has begun and crypto is not even on the field!  Ripple spent a grand total of like 200 thousand dollars last year on lobbying efforts – that’s it! There is a crypto association called The Blockchain Association and  all of you watching should get involved because this is where the war will be won or lost – mark my words.  I’ve seen it happen with workers compensation in California and insurance law here in Florida – the insurance lobby got the laws changed and won the war even when they were losing the battles in Court.

Anyways, final topic and a Surprise at the end– I want to talk about XRP and once again the Ripple litigation briefly – I found something gamechanging for me this weekend.

A couple days ago in bed -drifting to sleep listening to a crypto Youtubechannel (does anyone else fall asleep to Youtube Vlogs?) and I heard the vlogger  talking about an SEC lawsuit against KIT Interactive except I was half asleep so I didn’t remember which channel it was and  I heard KitKat coin and then I fell asleep so the next day at work I was searching for a KitKat Coin lawsuit but apparently it was Kik Interactive and it involved the Kin Token. And I eventually found the lawsuit and final judgment and I pulled one VERY interesting little nuance from it that I had previously missed relating to the large amount of XRP held in escrow.  A VITAL point.

So let’s start with the Final Judgment against Kik and take a look.

https://www.courtlistener.com/recap/gov.uscourts.nysd.516941/gov.uscourts.nysd.516941.90.0.pdf

This pleading is different than anything we’ve looked at before.  This is a final judgment meaning the case was litigated to a finish.  This was NOT a settlement.  Kik was sued by the SEC in 2019 for its ICO and the allegations were that its sale of the Kin token was the sale of an unregistered security. 

In the 2nd paragraph you see the procedural stance of the case – the court granted “summary judgment” for the SEC.   Summary judgment means it’s a slam dunk case.  It means that there was no issues of fact to be determined.  It didn’t even make it to trial – the Judge just looked at everything in the court file and made a determination that as a matter of law the Kin tokens sold during the ICO were securities.  Why is that important?  Because the winner drafts the final judgment – always.  So I know that this Final Judgment was written by the SEC and let’s see what it says.

Skipping down to paragraph III – it penalizes Kik $5 million.  Ouch.  But Kik paid it.

And actually, after this Final Judgment was entered the Kin coin price spiked – I think it more than doubled.  But that’s not my focus today.

Here’s what caught my eye instead:  Roman Numeral II says that with respect to the tokens already issued and any new issuances of the tokens, the Defendant must provide notice to the SEC 45 days before any sales.  It doesn’t say that it CANNOT sell the coins just that it must give notice.  I thought that was interesting so I went back up to Section I and there I saw that the Defendant was being enjoined from violating Securities laws IN THE ABSENCE OF AN EXEMPTION.  Remember, the SEC could have drafted this any way they wanted and they decided to allow for sale under exemptions.

Interesting. So I went down that road a little further and here is what I found.  Going to the SEC website I found   the SEC Rule 501 Regulation D

https://www.sec.gov/Archives/edgar/data/1574601/000157460117000001/xslFormDX01/primary_doc.xml

which allows for sale of unregistered securities to “Accredited Investors.”  You just have to file something called Form D with the SEC and it’s just something saying what is being sold and to whom and then you CAN sell securities to accredited investors.

And here are what accredited investors are:   https://www.sec.gov/smallbusiness/exemptofferings/faq#faq2

Basically what you are seeing is that the SEC is supposed to protect the small investor where there is a large imbalance of power between the Seller of securities and the buyer.  However, if the buyer is a sophisticated investor or a company they are an accredited investor and you can sell securities to them by filing a simplified Form D with the SEC.   I knew about this before I just didn’t know that the SEC would allow it even after a successful litigation like in the Kik Interactive case.

So, allow me to take off my lawyer hat for a minute and do some now semi-educated speculation.  My last video ended with a question as to what would happen to the XRP in escrow if Ripple was not allowed to sell it.  Some people said that the price would go up – I think some of the more sophisticated responses were that the coin sales  were needed in order for Ripple to continue work on XRP coin usage cases and to finance operations and that without sales of XRP, even if the price spiked initially, it was not beneficial long-term because of the disastrous effects on Ripple.

But now we have a new twist on this because in the case where the SEC actually wrote the judgment against the company, its desired effect was to allow sales of the coins to other companies and large investors but only not to regular old Joe Smith on the street.  This solution, as applied in the SEC v. Ripple litigation would allow the sale of XRP but AT A SLOWER RATE than previously planned by the escrow.  This solution would allow Ripple to continue its operations while STILL decreasing supply thus increasing demand.  And that price action showing increased demand is EXACTLY what we see in the price action following the KIK Interactive litigation – the price went up drastically and stayed up as Kik sustained its business operations.

Now I understand that this is just one possibility, but the fact that the SEC’s desired out come leads to what I speculate to be a boon, not specifically to Ripple, but to the holders of XRP – I see a setup for a win-win situation for XRP holders at the end of this litigation.

And to end on a personal note, as I mentioned before, I had only owned Etherium because I was only really very interested in smart contracts and only took the time to understand Etherium.  But the last 2 weeks I have learned more and more about XRP in prepping these vlogs and what it makes possible is just really exciting and gamechanging and when I finished looking at all the things I went over today with you – well, I decided to jump into ownership of ANOTHER crypto.  Have a great day.

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