As the cryptocurrency market corrects itself from the bubble high last year, people will lose money because they bought them at the peak of the bubble. Alternatively, there is a subset of people who purchased a cryptocurrency at an introductory price from a promoter with the expectation that the currency’s value will increase in the foreseeable future. However, for one reason or another, the value of the currency did not increase and in some cases, has lost value.
Aggrieved investors have filed lawsuits against some of these cryptocurrency promoters alleging breach of contract, securities fraud, and violations of state fraudulent misrepresentation laws.
While I am sympathetic to those who lost money from the cryptocurrency bust, I question whether these people are really the victims of fraudulent misrepresentation. When the smoke clears, did they simply make a bad investment decision? Let’s look at this from a common law fraudulent misrepresentation angle.
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To succeed in a common law fraudulent misrepresentation case, the plaintiff must show that he suffered damages because he entered into a contract by justifiably relying on the defendant’s materially false representations. In the case of cryptocurrency promotions, there are two issues to consider.
The first is whether the defendant made a false representation. Of course, that depends. If the defendant promoter says something like “Purchase our coins now because its value will increase exponentially when they hit the market”, that would be considered sales puffery and not a false representation. In my opinion, it could still be puffery even if the promoter gave more specific number projections (example: “the value of the coins will triple in six months”) if the promoter does not have a credible basis for making that claim.
But let’s assume the promoters’ statements are materially false. The second issue is whether the plaintiff’s reliance on the promoters’ statements was justifiable or reasonable based on other information available at the time. Back in 2017, even as the value of Bitcoin skyrocketed and the 1000+ copycat coins followed suit, there were numerous articles warning readers that the value of cryptocurrencies are very volatile and the value may one day go down. Dogecoin was started as a joke currency but somehow became a valuable currency with a market cap exceeding $60 million. One notable statement came from Jamie Dimon, the CEO of JPMorgan Chase where he called Bitcoin a fraud.
I look back at Judge Melvin Schweitzer’s infamous and heavily criticized opinion in Gomez-Jimenez v. New York Law School. As most longtime readers know, he dismissed a class action lawsuit brought by recent law school graduates (some with over $150,000 in student loan debt) against their alma mater claiming that they matriculated because they relied on the school’s post-graduate employment and salary figures. These figures were later found to be misleading.
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However, Judge Schweitzer called college graduates a “sophisticated subset of education consumers” capable of sifting through data and weighing alternatives before considering going to law school. Based on the fact that other information was available that debunked the law school’s numbers, he believed that the students’ reliance on the law school’s self-reported employment numbers were unreasonable.
Again, while I sympathize with those investors who lost a large chunk of their savings or earnings, we should be honest. Generally, relying on a promoter’s projected profits is unreasonable. A quick internet search would have shown many articles warning crypto investors about the risk of loss of investment. They bought these coins hoping that someone else would purchase them at a higher price and thus realize a profit. They knew what they were getting into and that there was a potential for loss.
Now it would be a different story if the crypto promoters suddenly disappeared with the investors’ money while not doing anything. Or if there was evidence that the promoters did not intend use the investors’ money for cryptocurrency purposes.
While the bad actors in the crypto business will have to face multiple causes of action, I am unsure whether the fraud angle will succeed. While some promoters made lofty promises with a picture of their Lambo, this may be unactionable puffing. Also, there were many articles warning people to be careful when investing in Bitcoins and other cryptocurrencies, even during the crypto boom. With all of this information out there, these investors may be considered a “special subset of cryptocurrency consumers” and their reliance on a promoter’s words alone might not be reasonable.
Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at [email protected] and via Twitter: @ShanonAchimalbe.