top of page

WAIFA Crypto Exchange Mock Complaint Letter

SUPERIOR COURT OF THE STATE OF NEW YORK FOR THE COUNTY OF QUEENS, NORTHEASTERN DISTRICT
 

CLASS ACTION COMPLAINT


JEFFREY LOCKHART, on their own

and on behalf of all others

similarly situated,


Plaintiff,


Vs.


Binance, and Brian Shroder

Defendant.


CLASS ACTION COMPLAINT FOR VIOLATION OF SECURITY, FRAUD, AND NEGLIGENCE


Plaintiff, by their undersigned attorneys, for their Class Action Complaint against defendants, alleges as follows:


INTRODUCTION


1. Binance U.S. is a cryptocurrency exchange that was launched in September 2019. They operate a platform where customers are able to discover, buy, and sell digital assets. Binance U.S’s business model is based on selling cryptocurrency assets in the United States.

2. We believe America should lead in crypto and we’re committed to helping people across the U.S. access the world of digital assets.

3. Unfortunately for the customers of Binance, the company’s commitment did not also include a commitment to abide by the U.S. federal and state securities law.

4. UST is an algorithm-based stablecoin that was created by Terraform Labs (TFL), a digital asset company based in Singapore and run by its founder and CEO Kwon Do-Hyung (Do Kwon). The value of UST depends on and is derivative of its sister asset, LUNA.

5. UST was listed, marketed, and sold to investors as a safe asset that could be used to earn them back substantial amounts, including interest. The prices of UST and LUNA both depended on the success or failure of TFL.

6. As an early investor of TFL, Binance U.S> was already familiar with UST and LUNA. In April 2022, Binance U.S. misled investors by falsely advertising the UST asset as “safe” as seen in the following advertisement: a a

7. Binance U.S. also falsely marketed UST as “fiat-backed” when shown in the following advertisement:




8. Although Binance U.S. gained substantial amounts of profits, they failed to comply with federal and state securities laws. Binance U.S. failed to disclose to their investors that UST is a security and that they are selling these securities even though they have no registration statement in effect for the asset. Binance U.S. also refused to register with the U.S. Securities and Exchange Commission (SEC) either as a securities exchange or as a broker-dealer.



SUMMARY OF THE ACTION


9. This case arises out of Binance’s negligence during a time where they misled investors by listing unregistered securities such as UST, GYEN, and LUNA as stablecoins when they were not.

10. Binance had investors lose millions to even billions in funds due to the result of their negligence.



THE PARTIES


A. The Plaintiffs

11. Plaintiff Jeffrey Lockhart is a resident of Utah. Like the other members of the class action, Lockhart purchased UST on the Binance U.S. exchange platform.

B. The Defendants

12. Binance is a virtual currency trading platform that is headquartered in the Cayman Islands. They were involved in misleading investors on the security of the listed token TerraUSD (UST), and LUNA, its sister token. TerraUSD’s collapse, which had dropped to as low as $0.67 at the time, also extended to its sister token, LUNA. As a result of this, Binance paused cryptocurrency withdrawals for a few hours due to a “stuck on-chain transaction”. Days after the incident, reports came in claiming that Binance had become a hub for fraudsters and drug traffickers that helped launder $2.35 billion in illicit funds.

13. Defendant Brian Shroder is the CEO of Binance U.S. and was at all times relevant, a person of control over Binance U.S. Brian Shrode is also a resident in California.



JURISDICTION AND VENUE


14. This Court has subject matter jurisdiction over this action under 28 U.S.C. 1332(d)(2)(A), because this is a class action in which the aggregate claims of all members of the proposed Classes exceed $5,000,000.00, exclusive of interest and costs, and the Plaintiff and the majority of members of the proposed Classes are citizens of a different state than the Defendants.

15. This Court has subject matter jurisdiction under 28 U.S.C. 1331 because Plaintiff asserts claims under Sections 5 and 12(a)(1) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. 77e, 77l(a)(1), and 77o.

16. Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78aa(a), provides that federal courts have exclusive jurisdiction over violations of the Exchange Act, including Sections 5, 15(a)(1), and 29(b), 15 U.S.C. 78e, 78o(a)(1), 78cc (b).

17. Venue is proper in this District under 28 U.S.C. 1391(b) and (c), as well as 18 U.S.C. 1965, because Defendants transact business in, are found in, and/or have agents in this District, and because some of the actions giving rise to this Complaint occurred in this District.



FACTUAL ALLEGATIONS


I. BACKGROUND OF CRYPTO-ASSETS, CRYPTO-ASSET EXCHANGES AND BINANCE U.S.


A. The Blockchain And Crypto-Assets Generally


18. The case concerns crypto-assets. These assets are digital assets that use cryptographic principles to secure transactions.

19. The world's first significant crypto-asset was bitcoin. Although fully digital assets' potential has previously been acknowledged, Bitcoin's innovative architecture gave it three crucial characteristics that made it successful: It is a decentralized, "mined," and secure kind of trading.

20. Decentralization sets Bitcoin apart from other assets. For instance, regardless of how they are structured, the success of the company issuing the stock or bond determines the value of those instruments. Bonds issued by the government have a value based on its creditworthiness.A currency's worth reflects the country that issues it, taking into account elements including its economy, political stability, and central bank policies. For Bitcoin, none of this is true.

21. Cryptographic keys are the main method for proving ownership of crypto-assets. They convert a string of bits used by an algorithm to transform plain text into cipher text or vice versa. A public key and a private key make up these cryptographic keys. The majority of crypto-assets use the same transfer and exchange procedure in terms of cryptography.

22. In the case of Bitcoin, the public key is used to generate the Bitcoin address. A Bitcoin address, like a conventional bank account's account number, serves as a destination for Bitcoin transfers. Bitcoin addresses are long strings of alphanumeric text that are frequently abbreviated with a small group of numbers and letters, such as 1s5F or R3w9. A private key, similar to a lengthy PIN or password for a traditional bank account, allows the owner of a Bitcoin address to access his or her Bitcoin.

23. Transferring funds to a traditional bank account requires knowing the account number, while transferring Bitcoin requires knowing the recipient's Bitcoin address. A transferor can use his or her private key to authorize the transfer of Bitcoin using the recipient's address, just as one would use a PIN or password to authorize a transfer between traditional bank accounts.


B. Stablecoins


24. With the introduction of Bitcoin in 2009, the promise of a decentralized and programmable form of digital money was introduced. However, the value of many crypto-assets is highly volatile, which can be an unfavorable characteristic for a medium of exchange.

25. As the name implies, a "stablecoin" is a digital asset whose value is expected to be stable rather than volatile. A stablecoin is intended to maintain a consistent value in relation to one or more assets, such as fiat currency or debt obligations. In theory, unlike the underlying asset, the stablecoin can be transferred between parties across borders instantly and with minimal transaction cost.

26. There are now numerous stablecoins in circulation that claim to be backed by various types of assets. The market capitalization of all stablecoins was more than $152 billion at the time of this filing.


C. Crypto-Exchanges and Binance U.S.


27. Decentralized exchanges and centralized exchanges are the two main categories of cryptocurrency exchanges. The blockchain itself may be used by decentralized exchanges to match and carry out trades between traders. A decentralized exchange typically employs blockchain technology called a "smart contract" to automatically facilitate trading; there is typically no intermediary person or company that matches or clears transactions. Although different decentralized exchanges employ various strategies, they all move the crypto-assets that are traded between individual accounts.

28. Binance is an example of a centralized cryptocurrency exchange. A customer must first open an account on Binance US before trading. Binance US then provides the customer with an exchange-managed deposit address. When a customer deposits crypto-assets into the deposit address, Binance U.S. credits the customer's trading account with the corresponding crypto-asset and transfers the crypto-asset to one of Binance U.S.'s internal addresses for storage.


II. THE TERRA ECOSYSTEM


29. TFL lists LUNA as being backed by Binance’s US parent company. The plaintiff called it Binance-Asia. Binance-Asia invested in TFL and received LUNA In exchange for tokens, their value eventually reached $1.6 billion.

30. Do Kwon and several co-authors published the promotional material "Terra whitepaper" in April 2019, which describes the plan to create "Terra Money" in the form of an algorithmic stablecoin that, when pegged to the US dollar, would become UST.

31. Do Kwon announced the launch of UST in September 2020 via the secondary crypto-asset exchange Bittrex Global. UST, according to Do Kwon, is "the first decentralized stablecoin that is scalable, yield bearing, and interchain." Do Kwon compared UST to another Terra stablecoin pegged to the South Korean Won, noting that that stablecoin "has been exploding in growth and adoption in Korea, and is today the most actively adopted stablecoin by usership." Do Kwon described UST as a "yield bearing" asset and promoted the "upcoming launch of Anchor, a savings protocol offering stable yield on Terra stablecoins," claiming that "[UST] will soon be the first censorship-resistant dollar to offer a savings experience competitive with the traditional savings account through Anchor."



CLASS ALLEGATIONS


32. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3).

33. Plaintiff seeks class certification on behalf of a nationwide class defined to include all persons or entities who transacted in UST on Binance U.S. during the Class Period.

34. Plaintiff reserves the right to modify or refine the definitions of the Class based upon discovery of new information and to accommodate any manageability of the Court’s concerns.

35. Excluded from the Class are: (a) any Judge or Magistrate Judge presiding over this action and members of their staff, as well as members of their families; Defendants and any Defendant’s predecessors, parents, successors, heirs, assigns, subsidiaries, and any entity in which any Defendant or its parents have a controlling interest, as well as any Defendant’s current or former employees, agents, officers, and directors; (c) persons who properly execute and file a timely request for exclusion from the Class or Subclasses; (d) persons whose claims in this matter have been finally adjudicated on the merits or otherwise released; (e) counsel for Plaintiff and Defendants; and (f) the legal representatives, successors, and assigns of any such excluded persons.

36. Ascertainability. The proposed Class is easily discernible because it is defined using objective criteria that allow Class members to determine whether or not they belong to a Class. Furthermore, the Class can be easily identified through Defendants' records.

37. Numerosity (Rule 23(a)(1)). The Class is so large that joining individual members is impractical. Although the exact number of members of the Class and Subclasses as identified and described herein is unknown, there are thousands, if not more, of purchasers who transacted on Binance U.S.

38. Commonality (Rule 23(a)(2)). For each cause of action, common questions of fact and law predominate over questions affecting only individual Class members, including the following:

  • whether Binance U.S. offered UST for sale;

  • whether Binance U.S. offered UST for sale that constitute securities under the federal securities laws;

  • whether Binance U.S. knew or should have known that UST it listed for trading were securities;

  • whether Binance U.S. operated as a securities exchange as defined by the federal securities laws;

  • whether Binance U.S. operated as a broker-dealer as defined by the federal securities laws; • whether Binance U.S. violated the federal securities laws;

  • whether Plaintiff and the members of the Class are entitled to damages and the amount and measure thereof; and

  • whether Plaintiff and members of the Class are entitled to declaratory and injunctive relief.

39. Typicality (Rule 23(a)(3)). Plaintiff's claims are typical of those of the other proposed Class members. Plaintiff and Class members were injured as a result of Binance U.S.'s wrongful conduct, which was consistent across the Class.

40. Substantial Benefits. This class action is appropriate for certification because class proceedings are superior to other available methods for resolving this dispute in a fair and efficient manner, and joining all members of the Class is impracticable. Individual members of the Class bringing separate actions would impose heavy burdens on the courts and Defendants, create a risk of inconsistent or varying adjudications of questions of law and fact common to members of the Class, and would be dispositive of the interests of the other members who were not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests. This proposed class action has fewer management challenges than individual litigation and offers the advantages of single adjudication, economies of scale, and comprehensive supervision by a single court. Class treatment will save time, effort, and money while encouraging uniform decision-making.

41. As a result, class certification is appropriate under Fed. R. Civ. P. 23(b)(3) because the aforementioned common questions of law or fact predominate over any questions affecting individual members of the Class, and a class action is superior to other available methods for the fair and efficient adjudication of this controversy.

42. Class certification is also appropriate under Fed. R. Civ. P. 23(b)(2) because Binance U.S. acted or refused to act on grounds that are generally applicable to the Class, so that final injunctive or declaratory relief is appropriate for the Class as a whole.

43. Plaintiff reserves the right to revise these class allegations and definitions in light of new facts and legal developments resulting from additional investigation, discovery, or otherwise.



CAUSES OF ACTION


FIRST CAUSE OF ACTION

Offer and Sale of Unregistered Securities

Sections 5 and 12(a)(1)of the Securities Act

(Against Binance U.S.)


44. Plaintiff alleges the allegations above.

45. Plaintiff brings this claim within three years of the first bona fide public offering of UST.

46. Section 5(a) of the Securities Act states: “Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.” 15 U.S.C. § 77e(a).

47. Section 5(c) of the Securities Act states: “It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h of this title.” Id. § 77e(c).

48. UST is, and at all relevant times has been, a security within the meaning of Section 12(a)(1) of the Securities Act. Id. § 77b(a)(1). No registration statements have been filed with the SEC or have been in effect with respect to UST listed on Binance U.S.

49. Throughout the Class Period, Binance U.S. promoted, solicited, offered, and sold 12(a)(1) securities—UST— to Plaintiff and members of the Class. Customers on Binance U.S. transact with Binance U.S. itself, and Binance U.S. is thus a seller of UST.

50. Furthermore, by offering UST to Plaintiff and Class members, Binance U.S. solicited these purchases, and did so at least in part to serve its own financial interests or the financial interests of UST holders. Binance US received a direct financial benefit from each UST purchase on its exchange in the form of transaction fees. Binance U.S. benefited further from UST purchases on its exchange because such purchases supported a liquid trading market for UST, making Binance U.S.'s exchange more appealing to investors and issuers. Binance U.S. thus used means or instruments of transportation or communication in interstate commerce or the mails, either directly or indirectly, to offer to sell or sell unregistered securities, or to carry or cause such unregistered securities to be carried through the mails or in interstate commerce for the purpose of sale or delivery after sale.

51. Section 12(a)(1) of the Securities Act provides in relevant part: “Any person who offers or sells a security in violation of section 77e of this title … shall be liable … to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.” Id. § 77l(a)(1).

52. Accordingly, Binance U.S violated Sections 5(a), 5(c), and 12(a)(1) of the Securities Act, id. §§ 77e(a), 77e(c), 77l(a)(1).

53. Plaintiff and Class members who purchased UST on Binance US during the Class Period and then sold that UST at a loss seek damages, including transaction fees. Id. at 77l(a) (1). Plaintiff hereby tenders to Binance U.S. the UST or significant equivalent realized upon sale of all UST purchased on Binance U.S. and later sold at a loss. Plaintiff and the Class are entitled to recover the amount of consideration paid to purchase the tendered UST in exchange for such tender.



SECOND CAUSE OF ACTION

Offer and Sale of Unregistered Securities

Control Person Liability for Violations of the Securities Act

Section 15 of the Securities Act

(Against Shroder)


54. Plaintiff realleges the allegations above.

55. This claim is asserted against Shroder for violations of Section 15 of the Securities Act, 15 U.S.C. § 77o.

56. Section 15 of the Securities Act provides: “Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.” Id. § 77o(a).

57. Shroder had the power and authority, as CEO of Binance U.S., to direct the management and activities of Binance U.S. and its employees, and to cause Binance U.S. to engage in the wrongful conduct alleged herein. Shroder, at the time of the alleged wrongs, had the authority to direct or cause the direction of Binance U.S. management and policies

58. Shroder purposefully used his power and influence to cause Binance U.S. to violate the Securities Act as described herein, including by directing Binance U.S. not to register as an exchange or broker-dealer prior to offering and selling securities to Plaintiff and members of the Class in violation of Securities Act sections 5(a), 5(c), and 12(a)(1), id (1). Binance U.S. is liable for Securities Act violations under Section 12(a)(1) of the Securities Act, id. 77l(a)(1).

59. Shroder wielded enough power at the time of the alleged wrongs to prevent Binance U.S. from promoting, soliciting, offering, and selling unregistered securities in violation of the Securities Act. Shroder purposefully chose not to.

60. Shroder knowingly and culpably participated in, and/or aided and abetted, Binance U.S.'s alleged Securities Act violations. Shroder was aware of or had reasonable grounds to believe in the existence of the facts alleged in this complaint, which form the basis for Binance U.S.'s liability under Section 12(a)(1) of the Securities Act.

61. As a result, Shroder is jointly and severally liable for Binance U.S.'s Securities Act violations, and is liable to Plaintiff and the Class for damages, including transaction fees, for each transaction in which any UST purchased during the Class Period was subsequently sold at a loss. Id. at 77l(a) (1).



THIRD CAUSE OF ACTION


Control Person Liability for Violations of the Exchange Act

Section 20 of the Exchange Act

(Against Shroder)


62. Plaintiff realleges the allegations above.

63. This claim is asserted against Shroder for violations of Section 20 of the Exchange Act, 15 U.S.C. § 78t(a).

64. Section 20(a) of the Exchange Act provides: “Every person who, directly or indirectly, controls any person liable under any provision of [the Exchange Act] or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable . . . unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.” 15 U.S.C. § 78t(a).

65. Because Shroder was the CEO of Binance U.S. at the time of the alleged wrongs, Shroder had the power and authority to direct the management and activities of Binance U.S. and its employees, causing it to engage in the wrongful conduct complained of herein. Shroder had the authority to direct or cause the direction of Binance U.S. management and policies at the time of the alleged wrongs. Shroder purposefully used his power and influence to cause Binance U.S. to violate the Exchange Act, including by (1) operating unregistered exchanges and, in the course of operating such exchanges, entering unlawful contracts to sell UST and receiving transaction fees for such sales, in violation of section 5 of the Exchange Act (e), 15 U.S.C. 78e; and (2) operating as an unregistered broker-dealer and, in the course of doing so, entering unlawful contracts to sell UST and receiving transaction fees for UST sales, in violation of Section 15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a) (1).

66. Shroder had sufficient influence at the time of the alleged wrongs to cause Binance U.S. to register as an exchange and broker-dealer or to refrain from acts prohibited by the Exchange Act for persons not registered as an exchange and broker-dealer. Shroder purposefully chose not to.

67. Shroder knowingly and culpably participated in, and/or aided and abetted, Binance U.S.'s alleged Exchange Act violations. As a result, Shroder is jointly and severally liable for Binance U.S.'s violations of the Exchange Act, and is liable to Plaintiff and the Class for rescission and/or damages in connection with all transactions in which Plaintiff and Class members purchased, on Binance U.S., any UST that they later sold at a loss.



PRAYER FOR RELIEF

WHEREFORE, Plaintiffs and the Class Members pray for judgment as follows:


1) For general and special damages in an amount according to proof;

2) For damages in an amount sufficient to punish the Defendant and discourage them from engaging in harmful conduct in the future;

3) For restitution of all money lost in misleading investments and frauds;

4) For attorneys fees and all costs of suit to be incurred;

5) For prejudgment interest;

6) For full accountability to be taken by crypto exchanges for their cooperation in misleading investors and fraud.

7) For the identification of all parties involved in malicious fraud operations, including the fraudsters and names of employees responsible for fraud.

8) For the defendant's full acknowledgement of the frauds and fraudsters to be sufficiently identified and made known to the public.

9) For other relief that is deemed proper and necessary.

10) For prejudgement interest; and

11) For such other and further relief as the court may deem just and proper.



Jury Demand

Plaintiffs and the Class respectfully demand a trial by jury on all claims so triable.

D: August 19, 2022



50 views0 comments

Recent Posts

See All

Comments

Rated 0 out of 5 stars.
No ratings yet

Add a rating
bottom of page