unregistered securities

BlockFi execs, Gemini named in lawsuit by disgruntled investor

Gemini is accused of providing BlockFi with custodial services and misleading information to help BlockFi market its alleged unregistered securities.

An investor with nearly $2 million worth of funds frozen in bankrupt cryptocurrency lender BlockFi has filed a class-action complaint against its founders, two directors and crypto exchange Gemini.

In a Feb. 28 complaint filed in the U.S. District Court for the District of New Jersey, investor Trey Greene accused the defendants of numerous wrongdoings, including violating the consumer fraud and exchange acts and breaching its fiduciary duties, as well as 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 claims he invested over $1.5 million in interest accounts that are alleged to be unregistered securities, accruing over $400,000 in capital gains and earned interest that was re-invested.

He is currently unable to withdraw the funds, however, after BlockFi froze all withdrawals on Nov. 10 — the same day that FTX filed for bankruptcy.

*Filing of the proposed class-action lawsuit. Source: Bloomberg Law*

Greene further claims that he was induced into buying the “unregistered securities” by misrepresentations from BlockFi founders Zac Prince and Flori Marquez that the offerings were comparable to federally-insured bank products.

While the Securities and Exchange Commission charged BlockFi with “failing to register the offers and sales of its retail crypto lending product” on Feb. 14, the filing claims the exchange “admitted its [interest] accounts were unregistered securities” during the proceedings, which resulted in a $50 million settlement on Feb. 15.

Tyler Winkevoss’ Gemini previously held custody over BlockFi’s clients’ crypto holdings through its custodial services, and is alleged to have misrepresented how accessible these funds were to customers.

“Gemini knew of, and acquiesced in, the materially false and misleading statements about the status the safety and accessibility of Plaintiff’s and class members’ assets at Gemini and about the risks of loss. Gemini supplied materially false and misleading information to BlockFi for use in marketing the BIAs [BlockFi interest accounts].”

Gemini is alleged to have breached the exchange act but was not included in the other allegations.

Greene is seeking damages for each of the alleged counts, including “treble damages” for violations of the consumer fraud act, the costs of his lawyers to be covered, a full refund of all funds acquired by the defendants and accrued interest, as well as a judgment preventing similar violations of the consumer fraud act.

Those represented in the class action are any stockholders of BlockFi that purchased their BlockFi unregistered BlockFi Interest Accounts between March 4, 2019 and Nov. 10, 2022

The defendants will be served with a summons, and must respond to the complaint within 21 days of receiving it or be required to pay the full amount demanded by Greene.

Cointelegraph has reached out to Gemini and BlockFi but did not receive a response by the time of publication.

Bankman-Fried on the hook in Texas, called to appear at Feb. hearing

The Texas Securities Board has asked the judge to consider leveling a cease-and-desist order, administrative fines and forced refunds against SBF and FTX.US.

Former FTX CEO Sam Bankman-Fried has been called to a Feb. 2 hearing by the Texan securities regulator as part of an investigation into whether he and FTX.US have violated Texas securities laws.

In a Notice of Hearing signed off by Texas State Securities Board’s (SSB’s) director of enforcement Joe Rotunda and served to Bankman Fried on Nov. 29, the regulator alleges that FTX US offered unregistered securities to Texans through its “EARN” accounts.

The investigation was first announced on Oct. 14, before the dramatic collapse and bankruptcy of FTX’s global operations. The regulator announced at the time it was investigating FTX Trading and FTX.US and its principals including Sam Bankman-Fried for offering unregistered securities through its yield-bearing products.

On Nov. 18, Rotunda used Twitter to appeal to the public to reach out to him if they were a previous client of FTX and based in Texas.

If you’re a client if @FTX_Official and you live in Texas, please reach out to me. We want to hear your story. My Texas State Securities Board email address is jrotunda@ssb.texas.gov.

— Joe Rotunda (@joe_rotunda) November 18, 2022

In the latest notice, the SSB alleged that Sam Bankman-Fried violated a section of the Securities Act during his role as the then-CEO of FTX.

“Respondent [Sam Bankman-Fried] violated Section 4003.001 of the Securities Act by offering and selling securities in Texas that were not registered or permitted for sale in Texas,” said Rotunda, adding it also didn’t register as a dealer or agent in Texas.

The regulator said it hoped that the hearing will lead to a Cease and Desist order to prevent FTX from “engaging in fraud in connection with the offer or sale of securities in Texas.”

It was also “praying” for the judge to order Bankman-Fried to return money to Texan customers that had invested in its “unregistered EARN accounts.”

The regulator also wants consideration of an “administrative fine” to be issued to Bankman-Fried should he have gained any economic benefit from the securities law violations. This amount wouldn’t exceed $20,000 per violation but could go to $250,000 for every “illegal or fraudulent act” that was perpetrated against Texans over the age of 65.

Rotunda said the hearing will commence at 9:00 am local time on Feb. 2, 2023, and Bankman-Fried can attend the hearing using Zoom.

Bankman-Fried is understood to currently be in the Bahamas.

In a recently published interview between crypto blogger Tiffany Fong and Bankman-Fried, the former FTX CEO expressed remorse over his handling of FTX and the bankruptcy filing.

“You don’t get into the situation we got in if you, like, make all the right decisions,” he said in the recently released Nov. 16 interview.