BlockFi Founders and Gemini Sued in Class Action Lawsuit: Investor Alleges Fraud and Unregistered Securities

The cryptocurrency world is no stranger to turbulence, and the latest ripple comes in the form of a class action lawsuit targeting prominent players BlockFi and Gemini. Imagine locking away your hard-earned money with the promise of returns, only to find yourself locked out when things go south. That’s the situation facing investors of the now-bankrupt crypto lender BlockFi, and one disgruntled investor is taking action.

What’s Brewing? Investor Files Class Action Against BlockFi and Gemini

An investor, Trey Greene, has initiated a class action lawsuit against BlockFi’s founders, Zac Prince and Flori Marquez, cryptocurrency exchange Gemini, and BlockFi directors. This legal action stems from the aftermath of BlockFi’s collapse and the freezing of user funds following the FTX debacle. Greene, who reportedly has around $2 million stuck in BlockFi, filed the complaint on February 28th in the U.S. District Court for the District of New Jersey. But what exactly are the allegations?

The Core Accusations: A Breakdown

The lawsuit throws a barrage of accusations at the defendants, alleging a series of serious wrongdoings. Here’s a simplified look at the key charges:

• Violation of Consumer Fraud Act: Accusing BlockFi of deceptive practices that misled investors.
• Breach of Exchange Act: Alleging violations related to securities exchange regulations.
• Breach of Fiduciary Duty: Claiming BlockFi failed to act in the best interests of its investors.
• Offering and Selling Unregistered Securities: This is a major point. The lawsuit argues that BlockFi’s interest accounts (BIAs) were essentially unregistered securities, meaning they weren’t properly vetted or regulated.

According to the lawsuit, Greene invested over $1.5 million in BlockFi Interest Accounts (BIAs), anticipating returns and growth. He claims to have reinvested over $400,000 in capital gains, further deepening his financial entanglement with BlockFi. The crux of his argument is that BlockFi, spearheaded by Prince and Marquez, misrepresented these BIAs as safe, bank-like products, akin to federally insured accounts. This, he argues, led him and other investors to purchase what were, in reality, “unregistered securities.”

Gemini’s Role: Custodial Services and Alleged Misrepresentation

Cryptocurrency exchange Gemini, founded by the Winklevoss twins, isn’t spared in this legal battle. Gemini provided custodial services for BlockFi’s clients, holding their cryptocurrency assets. The lawsuit alleges that Gemini was aware of and even contributed to the misrepresentations surrounding the safety and accessibility of these funds.

The complaint states that:

“Gemini knew about and consented to the materially false and misleading claims about the status, the safety and accessibility of Plaintiff’s and class members’ funds at Gemini and of the risks of loss… Gemini provided BlockFi with information that was both materially false and misleading in order to promote the BIAs (BlockFi interest accounts).”

Essentially, the lawsuit suggests Gemini played a role in creating a false sense of security around BlockFi’s offerings, potentially misleading investors about the risks involved.

Unregistered Securities: The Heart of the Matter

The allegation of selling unregistered securities is a critical aspect of this lawsuit. Why does it matter if something is an “unregistered security”?

• Regulatory Oversight: Securities are subject to stringent regulations designed to protect investors. Registration ensures transparency and accountability.
• Investor Protection: Unregistered securities often lack the same level of investor protection as registered ones.
• SEC Scrutiny: The Securities and Exchange Commission (SEC) has been actively cracking down on crypto firms offering unregistered securities.

Interestingly, the lawsuit points out that BlockFi had already settled with the SEC in February, agreeing to a $50 million penalty for “failing to register the offers and sales of its retail crypto lending product.” The filing highlights that during these proceedings, BlockFi allegedly “admitted its [interest] accounts were unregistered securities.” This prior SEC action could strengthen the investor’s case in the class action lawsuit.

What are the Demands? Investor Seeks Justice

Trey Greene isn’t just seeking to recoup his losses. The lawsuit outlines a series of demands, aiming to hold the defendants accountable and prevent future occurrences. These include:

• Damages: Compensation for financial losses incurred by investors.
• Treble Damages: Under the Consumer Fraud Act, Greene is seeking triple the amount of damages.
• Legal Fees: Reimbursement for the legal costs associated with pursuing the lawsuit.
• Full Refund: Complete return of all funds invested by affected individuals.
• Accrued Interest: Payment of interest that should have been earned on the invested funds.
• Injunction: A court order to prevent future violations of the Consumer Fraud Act.

Who Can Join the Class Action?

This isn’t just about Trey Greene. The class action seeks to represent all BlockFi investors who purchased these BlockFi Interest Accounts between March 4, 2019, and November 10, 2022 – a significant period in BlockFi’s operation. If you invested in BIAs during this timeframe, you might be part of this class action.

What’s Next? The Legal Road Ahead

The defendants now face a summons and have 21 days to respond to the complaint. They can choose to answer the allegations or potentially settle the case. The legal process is likely to be lengthy and complex, involving discovery, motions, and potentially a trial if no settlement is reached.

Cointelegraph reached out to both Gemini and BlockFi for comment, but as of writing, no response has been received. The silence from these companies speaks volumes in the face of such serious allegations.

The Bigger Picture: Implications for Crypto Investors

This lawsuit serves as a stark reminder of the risks inherent in the cryptocurrency space, particularly with unregulated or ambiguously regulated products. It underscores several crucial points for crypto investors:

• Due Diligence is Key: Thoroughly research any crypto platform or investment product before committing funds.
• Understand the Risks: Be aware that promises of high returns often come with significant risks. “If it sounds too good to be true, it probably is.”
• Regulatory Landscape: Pay attention to the regulatory environment and whether crypto platforms are operating within legal frameworks.
• Diversification: Don’t put all your eggs in one basket. Diversify your investments to mitigate risk.

In Conclusion: A Case with Wide-Ranging Implications

The class action lawsuit against BlockFi founders and Gemini is more than just a legal dispute; it’s a reflection of the growing pains within the cryptocurrency industry. It highlights the critical need for clearer regulations, greater transparency, and stronger investor protection. As this case unfolds, it will undoubtedly be closely watched by the crypto community, regulators, and investors alike, potentially setting precedents for future legal battles in this evolving financial landscape. Will this lawsuit bring justice for BlockFi investors? Only time will tell, but it certainly amplifies the urgent need for accountability and responsible practices in the world of cryptocurrency lending.