New Binance class action likely clears one hurdle but faces plenty of others

Binance logo and stock graph are displayed in this illustration taken, June 28, 2021. REUTERS/Dado Ruvic

(Reuters) - A new, high-profile class action against the cryptocurrency trading platform Binance U.S. probably will not meet exactly the same fate as a now-dismissed 2020 class action asserting similar allegations of federal securities law violations against Binance U.S.’s parent.

But that doesn’t mean investors in the new Binance U.S. class action, which claims the company violated U.S. securities laws when it facilitated trades in the collapsed stablecoin Terra USD, will have an easy time making their case.

Last March, U.S. District Judge Andrew Carter of Manhattan disposed of the earlier Binance case in a tight, 10-page ruling — quite a feat considering that the amended complaint was a whopping 339 pages, claiming Binance improperly facilitated trading in nine cryptocurrencies. The judge concluded that all of the allegedly improper trades cited in the complaint were too old. U.S. securities laws require investors to act quickly to assert claims. The Binance plaintiffs waited too long, Carter said, so their claims were time-barred.

Even more broadly — and of more importance for future Binance plaintiffs — the judge held that Binance trades were not even covered by federal securities laws. Under a 2010 U.S. Supreme Court decision, Morrison v. National Australia Bank Ltd, U.S. securities laws generally do not apply beyond U.S. borders. Investors, in the main, can only sue when they traded securities on U.S. exchanges or, in rarer instances, when they engaged in crucial trading activities inside the U.S.

The Binance trades at issue in the New York case, Carter held, met neither test. Binance is decentralized, with a headquarters in Malta and a CEO who lives in Taiwan. It relies on computer servers in the U.S., but the New York judge said the company's technological infrastructure did not make Binance a U.S. exchange. And investors could not show their Binance trades were otherwise U.S. transactions, Carter said, merely by asserting that they placed orders from the U.S. to purchase securities on a non-U.S. exchange.

After Carter's ruling, any investor who tried to sue Binance would likely face the same crippling problem: U.S. securities laws simply don’t apply to trading on a foreign exchange when the only link to the U.S. is a buy order placed within U.S. borders.

If anyone understands that hard reality, it’s the lawyers at Roche Freedman, which was co-counsel in the class action Carter dismissed. (Investors, I should mention, are appealing the dismissal decision.)

So it's particularly notable that Roche Freedman is also co-counsel in the new Binance class action. Why did the firm decide to file a new case alleging improper trading on Binance’s platform only two months after the dismissal of a suit asserting very similar claims?

Because the new case is not actually against the Malta-headquartered Binance parent company. It’s against Binance U.S., a 2019-established subsidiary that is incorporated in Delaware and based in California.

The new complaint alleges that Binance U.S. is, in fact, operating as a U.S. exchange or broker-dealer, receiving buy and sell orders from account holders and acting as the counterparty in every transaction. Despite meeting the criteria for an exchange under federal securities laws, the complaint said, Binance U.S. has flouted its refusal to register as such with the U.S. Securities and Exchange Commission.

That assertion is central to the new case: Five of investors’ seven claims for federal securities law violations are based on Binance’s allegedly improper failure to register as an exchange. (The other two federal securities claims allege that Terra is an unregistered security and that Binance U.S. is liable for selling it.)

Transactions on a U.S. exchange, said plaintiffs lawyer Kyle Roche of Roche Freedman, are, without question, covered by U.S. securities laws. “This is a U.S. entity,” Roche told me. “I don’t think extraterritoriality will be an issue.”

Rest assured, however, that Binance U.S. has plenty of other defenses. You can expect a huge fight, for instance, about whether the company is, as investors allege, operating as a de facto U.S. exchange subject to regulation by the SEC. Spokespeople for Binance and Binance U.S. did not respond to my email query, but told my Reuters colleague Luc Cohen on Monday that Binance U.S. is registered with the U.S. Treasury Department’s Financial Crimes Enforcement Network and complies with all FinCEN regulations. Binance also said that the assertions in the new class action are meritless and that it will defend itself vigorously.

It’s worth pointing out that if investors are right about Binance U.S.’s exposure for failing to register as an exchange or a broker-dealer, the company’s liability for Terra USD trades is only the beginning of its problems. I asked Roche by email if investors who have lost money in Binance U.S. trades involving different cryptocurrencies could assert the same claims as Terra USD investors. Roche said yes, but didn’t respond to my follow-up email asking if he’s working on additional lawsuits.

Even if investors can establish that Binance U.S. was required to register with the SEC as an exchange or a broker-dealer, I anticipate that the company will argue that federal securities laws don’t give investors a right to recover damages based on those violations. Binance took that position in the class action before Carter, the Manhattan judge, arguing in its dismissal motion that no court has permitted private plaintiffs to assert such claims. The judge did not rule on that argument because he dismissed the case on other grounds.

Finally, Binance U.S. will probably contend that investors are contractually required to arbitrate their claims. The class action complaint anticipated that argument, which Binance also asserted in the New York case, and pre-emptively alleged that the arbitration clause cannot be enforced because the provision allows Binance U.S. to sue customers in court while denying investors the same right.

So even without the silver bullet “domestic transaction” argument that doomed the class action against Binance, Binance U.S. can offer all kinds of rationales for tossing the new suit. It had better hope that one of them does the trick — or else get ready for a litigation avalanche.

Read more:

Binance U.S. exchange sued by crypto investor over stablecoin collapse

Crypto exchange Binance wins dismissal of U.S. lawsuit over digital token sales

1st Circuit adopts ‘irrevocable liability’ test – and why ‘Morrison’ matters in the crypto age

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Alison 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.