A lawsuit targeting McCarter & English over failed exchange Voyager Digital Holdings Inc. shows the risk firms face when giving advice in the fast-changing—and sometimes dizzying—world of crypto.
The New Jersey-based law firm gave a “bogus legal opinion” that Voyager’s native VGX token was not an unregistered security, investors allege in a lawsuit filed Feb. 6 in Miami. The opinion played an integral role in a fraud that led to over $4 billion in investor losses, the suit claims.
Lawyers found themselves in “uncharted territory” as crypto’s popularity led corporate firms to launch practices, said James Cox, a Duke University law professor. Opinions on whether a crypto asset is an investment contract under federal law demand a “very big caveat” because “it’s not a settled question,” he said.
Voyager, a crypto trading platform founded in 2018, was one of many digital assets firms to go bust and file for Chapter 11 bankruptcy amid a crash in crypto prices in 2022. The exchange gained court approval last May to wind down operations and pay back customers a portion of what they’re owed. Voyager co-founder Stephen Ehrlich has faced claims of breaking derivatives rules and the Securities and Exchange Commission has alleged <-bsp-bb-link state="{"cms.site.owner":{"_ref":"00000166-e5a9-d785-a767-fffdcac50000","_type":"00000151-acf5-d1ce-a159-bff728d6001e"},"cms.content.publishDate":1707430180393,"cms.content.publishUser":{"_ref":"00000181-86f3-d253-a9fb-e6fbd03b0000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"cms.content.updateDate":1707430180393,"cms.content.updateUser":{"_ref":"00000181-86f3-d253-a9fb-e6fbd03b0000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"bbHref":"https://www.bloomberg.com/news/articles/2023-06-13/these-are-the-19-cryptocurrencies-are-securities-the-sec-says","_id":"0000018d-8ac4-d203-a3df-cfcde7ec0000","_type":"0000016b-944a-dc2b-ab6b-d57ba1cc0000"}">VGX is a security. -bsp-bb-link>
McCarter & English, in a statement Wednesday, said it intends to “vigorously defend the firm, which provided clear and competent advice to our clients.” The complaint includes “many factual inaccuracies that we intend to address,” the firm said Thursday.
Two McCarter & English lawyers mentioned in suit—chairman Joseph Lubertazzi Jr. and Theodore Grannatt, chair of the firm’s corporate practice—did not immediately respond to comment requests on Thursday.
The proposed class action against McCarter & English, led by the Moskowitz Law Firm, represents at least the second complaint targeting a law firm that advised a failed crypto exchange.
Fenwick & West last year faced an investor complaint alleging its work for FTX was “central” to the crypto firm’s fraud. Fenwick & West has sought to dismiss the suit, arguing it’s being targeted for routine legal services.
McCarter’s Role
McCarter & English, based in Newark, New Jersey, represented Voyager and a subsidiary trading operation from March 2021 until September 2022, according to the investor complaint. The representation allegedly included advising Voyager on a due diligence questionnaire from the NBA in which the league questioned whether a Voyager interest program was subject to scrutiny by the Securities and Exchange Commission.
The firm in May 2021 issued a legal opinion finding Voyager’s VGX token was not a security under federal law, the complaint said. The opinion lent credibility to Voyager as it sought new investors and partnerships with organizations such as the NBA’s Dallas Mavericks, the complaint, which also names the NBA as a defendant, alleges.
The McCarter & Ennglish memo, according to the complaint, relied on a 2018 speech a former SEC official gave in which he said cryptocurrencies such as Ethereum were not securities transactions, as well as two no-action letters related to utility tokens provided by the SEC.
The plaintiffs, however, allege the opinion ignored several other SEC enforcement actions, court decisions and speeches, while failing to scrutinize “absurd facts” provided by Voyager about the VGX token.
Crypto Question
The question at the heart of the suit—whether a crypto token is a security under federal law— is a hotly contested issue. A New York federal judge last year ruled that Ripple’s XRP token is not a security when sold to the general public, which the industry touted as a major victory.
A judge in a separate SEC action against Terraform Labs Pte, however, said crypto sales to the public can be securities. The SEC has moved to appeal the Ripple decision and is litigating a similar action against Coinbase, the largest exchange in the US.
Investors are pursuing claims of gross negligence and violations of the Racketeer Influenced and Corrupt Organizations Act against McCarter & English, which is likely to be a stiff test. Pursuing a law firm for RICO violations relating to its legal opinions is a “significant challenge,” said Farshad Ghodoosi, an assistant professor at Cal State University, Northridge.
“That’s even more difficult if it involves a murky area of law,” Ghodoosi said. “Recall that the crypto industry had some major wins recently in the action against Ripple.”
The case is , S.D. Fla., No. 1:24-cv-20480, 2/6/24
