Crypto plaintiffs’ firms pin hopes on key ruling in government’s Ooki case

Crypto plaintiffs’ firms pin hopes on key ruling in government’s Ooki case

(Reuters) – It’s been scarcely two weeks since a California federal judge issued a groundbreaking decision that said a crypto collective called the Ooki DAO is not immune from being sued simply because it operates as a decentralized blockchain protocol — but a pair of plaintiffs’ firms that represent crypto plaintiffs have already rushed to notify other courts of the ruling.

U.S. District Judge William Orrick of San Francisco resolved a vexing question last month when he ruled that the U.S. Commodity Futures Trading Commission had satisfied notice requirements in its lawsuit accusing the Ooki DAO of operating as an unregistered derivatives exchange.

As you probably recall, the DAO itself has not appeared in the CFTC’s first-of-its-kind case, but an array of crypto and decentralized finance amici argued on Ooki’s behalf that the regulator’s original plan to serve its complaint via a chat box on an Ooki DAO website highlighted the central flaw in the government’s theory.

Ooki’s amici, broadly speaking, insisted that DAOs are not unincorporated associations, as the CFTC had asserted. DAOs’ inherently decentralized structure, these amici argued, preclude attempts to hold entire collectives responsible for alleged wrongdoing.

Orrick’s Dec. 20 decision concluded that the Ooki DAO was capable of being sued as a collective because it met California’s definition of an unincorporated association. The DAO, he ruled, consists of token holders who share the goal of operating the protocol that allows users to trade crypto derivatives.

The judge cautioned that he was not ruling on the merits of the CFTC’s allegations – including its fundamental contention that the DAO can be held liable under the Commodity Exchange Act as an unincorporated association – but held that the government had adequately established a threshold right to sue the collective.

The plaintiffs’ firms Gerstein Harrow and Fairmark Partners are hoping that Orrick’s reasoning in the CFTC’s Ooki case helps their clients survive dismissal motions in two prospective class actions brought by DAO users.

One case, in federal court in San Diego, is on behalf of Ooki DAO investors who lost about $50 million in a 2021 hack of the protocol. (Those allegations are distinct from the CFTC’s more sweeping allegations about Ooki’s operations.) The second class action, in Brooklyn federal court, alleges that a DAO called PoolTogether operated as an illegal lottery under New York law by pooling interest on users’ crypto holdings and periodically disbursing money from the pool to randomly selected users.

Just two days after Orrick’s Ooki ruling in the CFTC case, Gerstein Harrow told U.S. District Judge Larry Burns of San Diego, who is presiding over the private Ooki DAO hack class action, about the judge’s holding that the collective is subject to the CFTC’s suit as an unincorporated association. And on Tuesday, Gerstein and Fairmark filed a similar notification in the PoolTogether case, which is overseen by U.S. District Judge Frederic Block of Brooklyn.

“The reasoning of both the CFTC and now the District Court is correct, and the same conclusion regarding the nature of a DAO is appropriate here,” the plaintiffs’ firms told Block in Tuesday’s filing.

Defendants in both class actions have argued, among many other points, that the DAOs cannot be sued as general partnerships because plaintiffs cannot show that users (or token holders) were engaged in a joint effort to generate profits and share losses.

Gerstein Harrow and Fairmark contend that Orrick’s Dec. 21 decision in the CFTC case contradicts that assertion. “PoolTogether’s position in our litigation appears to be that, because the DAO is decentralized and autonomous, nobody can be held accountable,” said Jamie Crooks of Fairmark via email. “But working together on the blockchain to run a business that violates the law is neither a useful technological advance nor a viable legal defense.”

Defendants in the private Ooki DAO case told Burns that Orrick’s decision in the CFTC litigation is irrelevant because it addressed only the question of how regulators could affect service on the DAO, not the merits questions at issue in pending dismissal motions in the class action.

Lawyers for the PoolTogether defendants, including the corporation that runs the DAO’s website and several individuals and investment funds that allegedly control the DAO through governance tokens known as POOL, either declined to comment or did not respond to my query on the relevance of Orrick’s ruling that the Ooki DAO was subject to suit as an unincorporated association.

But in October, after Gerstein Harrow and Fairmark initially alerted the Brooklyn court about the CFTC’s theory that DAOs are unincorporated associations, defense counsel from Morrison Cohen argued that regardless of the CFTC’s Ooki DAO allegations, PoolTogether still is not a general partnership under New York law.

The CFTC, for instance, alleged that the Ooki DAO generated revenue, but the lead plaintiff in the PoolTogether class action asserted no such claim, Morrison Cohen said. Moreover, the letter argued, the CFTC defined Ooki DAO members as token-holders who had voted on corporate governance matters. The amended PoolTogether class action complaint, the letter said, “does not allege that most defendants actually voted any POOL tokens to govern the PoolTogether DAO, and does not allege that other defendants even ever held POOL tokens.”

Fairmark’s Crooks told me those arguments defy common sense, since the sophisticated investors who created the PoolTogether DAO surely did not do so “out of the goodness of their hearts,” Crooks said. “Whether the people controlling the DAO are called ‘users’ or ‘tokenholders’ makes no legal difference: Those controlling it are general partners, as the Ooki decision demonstrates,” he added.

As I mentioned, the PoolTogether defendants have all kinds of alternative grounds for dismissal of the class action, including a mandatory arbitration clause in the platform’s terms of service and an argument that the lead plaintiff suffered no injury because he was free to pull his money out of the pool. Dismissal motions in the Ooki class action assert similar technical arguments unrelated to the unique structure of DAOs. It’s quite possible that the judges who rule on these motions won’t even reached the question of whether DAOs can be sued as collectives.

Plaintiffs’ lawyers are hoping otherwise, of course – and doing whatever they can to get Orrick’s Ooki ruling into the analysis.

Read more:

Famed venture capital firm is latest critic in regulator’s case against Ooki crypto collective

You can’t serve notice to a crypto collective, say crypto groups in Ooki lawsuit

How can insiders sue an amorphous crypto collective? They can’t, say bZx defendants

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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 Frankel

Thomson Reuters

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.

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