In apparent first, Conn. class action jury finds crypto products are not securities



The exchange rates and logos of Bitcoin, Ether, Litecoin and Monero are seen on the display of a cryptocurrency ATM of blockchain payment service provider Bity.REUTERS/Arnd Wiegmann(Reuters) – Daniel Weiner and Amina Hassan of Hughes Hubbard & Reed didn’t even want the jury to decide whether the crypto currency products at the heart of a class action against their client, former Cantor Fitzgerald vice-chair Stuart Fraser, were securities.At the close of the plaintiffs’ case accusing Fraser of state and federal securities fraud, Weiner and Hassan asked U.S. District Judge Michael Shea of Hartford, Connecticut, to rule that the products were not securities as a matter of law under the U.S. Supreme Court’s 1946 Howey test. The judge said he’d let the jury decide.That turned out to be a boon for Weiner, Hassan and Fraser. Late Monday afternoon, after a day and a half of deliberations, the nine-member jury found that none of the four crypto products at issue in the case was a security, so Fraser could not be liable for securities fraud. The jury also rejected the class’ common law fraud claim, delivering a complete defense win for the former Wall Street executive.The verdict, Weiner said, marks the first time that a jury has been asked to decide whether cryptocurrency products, including a purported digital token called Paycoin, should be subject to securities laws.As you know, that’s been a matter of hot controversy in the U.S. Securities and Exchange Commission’s cases against high-profile cryptocurrency defendants such Ripple Labs Inc, Telegram Group Inc and Kik Interactive Inc. At least two federal judges – including U.S. District Judge Alvin Hellerstein of Manhattan in the SEC case accusing Kik of selling an unregistered security in an initial coin offering – have ruled that digital assets are securities under the Howey test.The jury verdict in Fraser’s case is a stark contradiction of the SEC’s assessment of one of the crypto products in the class action.In 2015, the commission sued a Fraser protégé, Homero Joshua Garza, and two companies Garza founded for securities fraud, alleging that Garza sold a fraudulent investment he called “Hashlets” to more than 10,000 investors in 2014 and 2015. The Hashlet investment contracts, according to the SEC, promised investors a share of the returns from a purportedly high-powered bitcoin mining operation – but Garza didn’t actually have anywhere near as much computing power as he told investors. The SEC alleged that Hashlets fit the definition of a security, and that by lying about the offering, Garza had defrauded investors of nearly $20 million.Garza, who was also charged criminally, pleaded guilty to wire fraud in 2017. He was sentenced to 21 months in prison and ordered to repay investors $9.1 million. Fraser was not a defendant in either the SEC or Justice Department cases against Garza.A class of defrauded investors nevertheless alleged that Garza would not have been able to conduct his scheme if it hadn’t been for Fraser’s financial backing and mentorship. The class, represented by Susman Godfrey, initially named Garza as a co-defendant in its fraud suit but dropped him as a defendant after reaching a cooperation deal for him to testify about Fraser’s role. (Susman Godfrey ended up playing parts of Garza’s deposition for the jury rather than calling him as a live witness.)In his closing argument, Susman’s Jacob Buchdahl pointed out that Fraser even owned the mortgage on Garza’s house. “What the evidence proved is that everything Josh Garza had in his life, his job, his financial security, even his house, was provided by [Fraser],” Buchdahl said. “That is control.”Hughes Hubbard’s defense of Fraser, as you would expect, focused primarily on Garza’s culpability for the fraud. Weiner told jurors that the class was targeting Fraser only because he has money and Garza doesn’t. “Mr. Buchdahl told you … there can be a bunch of control people,” Weiner argued. “Don’t be fooled by that. When you drove to the courthouse today, how many people were controlling your car? How many people were at the wheel driving your car? Mr. Garza drove the companies. He drove their every decision.”But Weiner also told jurors that the fraudulent crypto products – including the Hashlets that the SEC defined as securities – were not, in fact, securities under the jury instructions they received from the judge. One of the products, he said, was just a digital currency wallet. Another was merely an in-store credit. The token, Paycoin, was a currency, Weiner said. And Hashlets, he argued, didn’t meet the criteria specified in the jury instructions.Weiner told me that the key to his Hashlets argument was testimony from two of the name plaintiffs, who said that their individual decisions could affect daily profits in different crypto mining pools. Weiner argued to jurors that because “choice and direction remained with the customer,” Hashlets were not a common enterprise, as required under Howey. Nor, he said, did the product meet the Howey requirement that profits be derived solely from the efforts of others, since investors’ individual decisions affected their profits.In rebuttal, class counsel Buchdahl emphasized that the U.S. government had concluded that Hashlets were securities, and that his side would be happy for jurors to follow the government’s lead.“It seemed crazy to us that a jury should have to decide this,” Weiner told me. But ultimately, he said, it wasn’t enough for the class to rely on the SEC and DOJ characterizations of the crypto offerings.“The jury didn’t buy it,” Weiner said.Buchdahl of Susman said in an email statement that the lead plaintiffs are considering their options. “We are disappointed in the jury’s verdict that hashlets were not securities, a finding contrary not only to the SEC’s official position but to the overwhelming weight of the evidence,” Buchdahl’s statement said.We don’t know exactly why the Fraser jury decided Hashlets, Paycoin and the other crypto products in the case weren’t securities so future crypto defendants probably should not rush to conclude that they’ll have better luck with jurors than with regulators or judges.But the Fraser verdict will surely give them something to think about. Nine regular people looked at the same facts as the SEC and the DOJ and reached a contrary conclusion about whether crypto products were securities. That’s a milestone.Read more:In discovery disputes, Ripple forces SEC to play defenseCrypto precedent: N.Y. judge rules Kik’s digital currency was a security, grants win to SECSEC wins injunction against Telegram blockchain launch in key ICO caseOur Standards: The Thomson Reuters Trust Principles.Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.Alison FrankelAlison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.



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