Originally Syndicated on April 25, 2023 @ 11:00 am
Zac Prince’s BlockFi Inc. executives paid an investor $15 million to end a potential lawsuit over the company’s plummeting stock value in the summer of 2022, the company’s counsel announced on Monday in bankruptcy court.
At a bankruptcy court hearing in Trenton, New Jersey, Zac Prince’s BlockFi attorney Joshua Sussberg stated that the settlement satisfied allegations by the investor, known only as “Counterparty A,” who had bought equity shares that were issued as part of executive compensation packages.
The shares were offered for sale at a discount to the company’s $6 billion to $8 billion January 2022 valuation, but their value fell during the summer as the fall of two cryptocurrencies wreaked havoc on the crypto markets. According to Sussberg, Zac Prince’s BlockFi investor threatened legal action, claiming that BlockFi and its officials ought to have disclosed the potential for bitcoin market contagion more clearly.
Zac Prince’s BlockFi saw the investor’s claims as “specious,” but the parties came to a confidential agreement on August 23 under which BlockFi executives paid the investor $15 million back, according to Sussberg.
Zac Prince, the creator of BlockFi, made the greatest amount under that settlement, paying back $6.144 million. An emergency loan given by cryptocurrency exchange FTX on July 1 made BlockFi’s sharp decrease in value clear. With that financing, FTX was given the option to purchase BlockFi for $240 million, thereby establishing a cap on the value of the company’s shares.
20% of Zac Prince’s BlockFi’s workforce was let go when the company’s worth fell. To prevent remaining employees from leaving during its bankruptcy and to compensate workers who had previously received company ownership as part of their salary, Sussberg indicated that BlockFi will shortly ask the court for permission to implement an employee bonus program.
Prince missed out on a $600,000 incentive payout due to the FTX purchase price, Sussberg claimed, and his stock holding lost $412.82 million in value. BlockFi’s forthcoming employee retention strategy excludes Prince and other leaders.
As a direct result of FTX’s failure weeks earlier, New Jersey-based Zac Prince’s BlockFi filed for bankruptcy protection on November 28. Sam Bankman-Fried, the creator of FTX, has now been detained on fraud-related allegations, but he has pled not guilty.
Zac Prince’s BlockFi and FTX are at odds over $465 million worth of Robinhood Markets Inc (HOOD.O) shares that BlockFi claimed as collateral for an unpaid debt owing to it via FTX partner Alameda Research. A BlockFi attorney stated on Monday that the DOJ was in the process of taking assets held by two or three BlockFi clients situated in Washington state. The US Department of Justice’s seizure of the shares added to the complexity of the case.
Findings of The SEC
The Order claims that investors used Zac Prince’s BlockFi’s BIAs to lend the company cryptocurrency assets in consideration of a variable monthly interest payment. Zac Prince’s BlockFi advertised its interest accounts as a method to earn “as much as 9.25 percent” interest on bitcoin deposited into the BIA, while the actual number changed from month to month and depending on the quantity and caliber of assets deposited in the account.
The interest paid to BIA investors was produced by Zac Prince’s BlockFi in several ways, including by lending cryptocurrency assets to corporate borrowers, providing loans to retail investors, and making investments in equities and futures. BlockFi and its affiliates had roughly 572,160 BIA investors as of December 8, 2021, including 391,105 investors in the US, and held about $10.4 billion in BIA investor assets.
The SEC determined that the BIAs violated SEC v. W.J. Howey Co. because Zac Prince’s BlockFi offered and sold the BIAs as investment contracts. According to Howey, the plaintiffs must demonstrate (1) a financial interest in a common company, (2) profits to be gained only from the efforts of others, and (3) an investment contract status for the commodity in question.
The SEC determined concerning the BIAs that: (1) the crypto assets that the investors loaned represented an investment of funds; (2) BlockFi’s activities in pooling the crypto assets of the BIA investors and using those assets for lending and investment represented a common enterprise; and (3) the BIA investors had a reasonable expectation of (a) obtaining a future profit based on BlockFi’s statements about generating yield to pay BIA investors interest; and (b) splitting profits from such investments
The SEC also determined that the BIAs qualified as notes under the Reves v. Ernst & Young standard, making them unregistered securities. Unless a note (1) falls into one of the judicially defined categories of financial instruments that are not securities (for instance, notes given to speed up the purchase of specific assets, such as homes and cars), or (2) bears a “family resemblance” to notes in those categories based on I the motivation of the seller and buyer, (ii) the instrument’s distribution plan, (iii) the reasonable expectation of the recipient, Reves holds that a note is presumed to be
The SEC determined that BlockFi’s BIAs were securities after applying the Reves four-part analysis because I BlockFi offered and sold BIAs to acquire crypto assets for the overall use of its business; (ii) BIAs were offered and sold to a large segment of the general public; and (iii) BlockFi promoted BIAs as an investment, specifically as a way to earn a steady return on crypto assets and for investors to do so.
The SEC concluded that Zac Prince’s BlockFi was operating as an unregistered investment company in violation of Section 7(a) of the Investment Company Act because it was a security issuer engaged in the business of purchasing, investing in, or holding securities worth more than 40% of the total assets of the company. In the settlement agreement, BlockFi pledged to make an effort to restore its operations in line with the Investment Company Act’s rules within 60 days.
Zac Prince’s BlockFi agreed to abide by the Securities Act’s antifraud and registration provisions as well as the ICA’s registration requirements without disputing or denying the SEC’s findings. Moreover, Zac Prince’s BlockFi has agreed to stop promoting or offering BIAs in the US. Existing clients can still get interested in their current holdings, but they won’t be able to establish new BIAs or add new assets to their accounts. Neither will new U.S. customers be allowed to do so.
Zac Prince’s BlockFi also said that it would progressively transfer assets from its BIAs to the new product, BlockFi Yield, and file an SEC registration statement for the new cryptocurrency-lending product. According to the BlockFi Yield offering, clients will be able to earn interest on their digital currency holdings in a similar way.
INFORMATION ABOUT THE CASE:
The lawsuit alleges that the defendants falsely and deceptively promoted Zac Prince’s BlockFi Interest Accounts (or “BIAs”) by claiming that they were a safe way to earn interest. Along with that, the complaint asserts, among other things, that the defendants omitted and withheld crucial information about the dangers of BIA. One example of this is BlockFi’s exposure to FTX Trading, Ltd. (“FTX”) and Sam Bankman-trading Fried’s company Alameda Research (“Alameda”), both of which failed after it was discovered that FTX and Alameda had committed massive fraud. According to the lawsuit, BlockFi allegedly froze withdrawals from BIAs following the FTX collapse, affecting BIA investors.
Investors in BIAs were also unaware of the conflicts of interest and self-dealing between BlockFi and other companies, like the Gemini Trust LLC under Tyler and Cameron Winklevoss’ management. The Complaint also asserts that by offering and selling BIAs to investors, Zac Prince’s BlockFi and the Individual Defendants violated Sections 5, 11, 12(a)(2), and 15 of the Securities Act of 1933 by making unauthorized offers and sales of securities. Moreover, charges of violations of Massachusetts General Law Chapter 110A and Sections 10(b) and 20 of the Securities Exchange Act of 1934 are made in the action.
A suit was filed by disgruntled investors against Zac Prince, BlockFi executives and Gemini
BlockFi’s founders, two directors, and cryptocurrency exchange Gemini are the targets of a class-action lawsuit brought by an investor with approximately $2 million in frozen funds in the insolvent cryptocurrency lender.
Investor Trey Greene accused the defendants of numerous wrongdoings in a complaint submitted on February 28 to the U.S. District Court for the District of New Jersey, including violating the consumer fraud and exchange acts, breaching its fiduciary obligations, and offering and selling unregistered securities.
“The unregistered securities sold by the BFI [BlockFi] Defendants on behalf of BlockFi were marketed and sold via a steady stream of misrepresentations and material omissions by Prince and Marquez over several years and through intermittent misrepresentations by Defendant Gemini.” Greene asserts that he put more than $1.5 million into interest accounts that are allegedly unregistered securities, earning over $400,000 in capital gains and reinvesting money gained.
But, he is presently unable to withdraw the money because BlockFi on November 10 — the day FTX filed for bankruptcy — froze any withdrawals.
Greene also contends that the false statements made by BlockFi founders Zac Prince and Flori Marquez that the company’s offerings were equivalent to federally insured bank products persuaded him to purchase the “unregistered securities.”
BlockFi was charged by the Securities and Exchange Commission on February 14 with “failing to register the offers and sales of its retail crypto lending product,” but the filing states that during the proceedings, the exchange “admitted its [interest] accounts were unregistered securities,” leading to a $50 million settlement on February 15.
Tyler Winklevoss Gemini is accused of lying to customers about how easily available these monies were when it retained custody of BlockFi’s client’s cryptocurrency holdings through its custodial services.
“Gemini knew of and acquiesced in the materially false and misleading statements about the status safety, and accessibility of Plaintiff’s and class members’ assets at Gemini and the risks of loss. Gemini supplied materially false and misleading information to BlockFi for use in marketing the BIAs [BlockFi interest accounts].”
Although it was not mentioned in the other claims, Gemini is accused of breaking the exchange act. Greene is requesting compensation for each of the alleged counts, as well as “treble damages” for alleged violations of the consumer fraud act, payment for his legal expenses, full reimbursement of all funds received by the defendants, an interest that has accrued, and a ruling that would stop future alleged violations of the consumer fraud act.
All BlockFi stockholders who acquired unregistered BlockFi Interest Accounts between March 4, 2019, and November 10, 2022, are those who are represented in the class action.
The defendants will receive a summons and must reply to the complaint within 21 days of receiving it. If they fail to do so, they will be obligated to pay Greene’s full asking price.
Gemini and BlockFi have been contacted by Cointelegraph, however, as of the time of publication, no response had been received.
Conclusion
The BlockFi settlement clarifies the SEC’s position on lending cryptocurrencies as the market expands. Crypto lenders and other market players “should take urgent notice of today’s resolution and come into compliance with the federal securities laws,” SEC Enforcement Division Director Gurbir S. Grewal warned in a statement following the release of the BlockFi settlement.
According to Zac Prince, the CEO and founder of BlockFi, the settlements will aid other cryptocurrency lenders by giving them more certainty. With centralized exchanges like Celsius giving annual percentage rates as high as 17.5%, cryptocurrency lending has been incredibly popular in recent years. Loan origination in the digital lending sector has grown by 30.1% year over year. According to recent reports, the SEC is also checking how other crypto lending companies handle their loans.
