Domestic Founders Of Foreign Firm To Face Class Action

A New York Federal District court ruled on April 3rd that the founders of BitMEX, a cryptocurrency exchange and trading platform registered in Seychelles, must go to trial in a class action against both themselves and the company.

Baker McKenzie explains that Section 22 of the Commodity Exchange Act which allows a plaintiff a private right of action does not apply to extraterritorial wrongdoing. A private litigant must allege a domestic transaction based on facts indicating that irrevocable liability was incurred in the United States. BitMEX’s founders’ motion to dismiss disputed the theory that irrevocable liability had been incurred in the United States.

For purposes of deciding a motion to dismiss, a court generally assumes the allegations in the complaint are true. Those were numerous and serious, among them that BitMEX had an Insider Trading Desk, staffed by employees with “God Access” to customer accounts.

BitMEX told customers that certain information was private, but it used that information to determine which market moves would liquidate the highest number of customers and made strategic trades to produce those moves. BitMEX hid the Insider Trading Desk from customers until April 30, 2018, and only under pressure from an independent analyst. BitMex’s general counsel and outside counsel resigned, and the company continued to trade secretly against its customers, using burner accounts.

To answer the question of irrevocable liability, the court, relying on a recent Second Circuit decision in Williams v. Binance, said that irrevocable liability is not something that must happen only once; it may occur in more than one transactional step, and in multiple locations.

Binance and Bitmex were similar because they disclaimed any physical location. In Bitmex, plaintiffs alleged that U.S. customers entered into terms of use agreements and purchased tokens in the United States, and the Insider Trading Desk that caused the liquidations of their holdings operated from Manhattan. The class action will now go forward against all defendants.