Tezos Class Action Moves Forward After Judge Denies Motion to Dismiss

Arthur and Kathleen Breitman and the Tezos Foundation are being sued by Tezos “contributors.”

On August 7, the United States District Court of the Northern District of California denied in part a motion to dismiss a class action against the Tezos Foundation and Dynamic Ledger Solutions (DLS), the company Arthur and Kathleen Breitman operated out of their California home.

Starting in October, Tezos investors filed a series of class action lawsuits against the two organizations related to their initial coin offering of “Tezzies,” which raised upwards of $230 million. In April, these lawsuits were consolidated into one, with Illinois-based Arman Anvari as lead plaintiff. Anvari “contributed” 250 Ether to the ICO. That class action claims that the:

“Defendants attempted to avoid the reach of the U.S. securities laws by characterizing the Tezos ICO as the solicitation of ‘contributions,’ or ‘donations,’ as opposed to the solicitation of investments in securities … Here, the Tezos ICO, and the promise of tokens offered and sold thereby, had all the hallmarks of a securities offering under the Securities Act and was therefore required to be registered with the SEC.”

It goes on to claim that since Tezzies are an unregistered security, the plaintiffs’ investments should be canceled – and that they should receive damages. That’s because:

“Despite the enormous sums raised in the ICO, Defendants have claimed that they have no obligation to provide Tezos tokens to Lead Plaintiff and the Class. Defendants even claim the right to abandon the project at will and without recourse. It is situations exactly like this that the federal securities laws were enacted to prevent.”

The foundation has pointed out that this was made explicit in the token offering’s “contribution terms.”   

Lawyers for the defendants moved to dismiss the lawsuit on multiple grounds, one of which essentially argued that the case should be heard elsewhere, namely, Switzerland, where the foundation is based. But Judge Richard Seeborg rejected the defendants’ argument:

“(a) the California-based Breitmans were the de facto U.S. marketing arm of the Foundation; (b) the Foundation engaged in little to no marketing of the ICO anywhere other than in the U.S.; and (c) an accordingly significant portion of the some 30,000 contributors to the ICO were in fact U.S. citizens.”

Things went better for two other defendants named in the lawsuit, crypto venture capitalist Tim Draper and Bitcoin Suisse AG. Draper’s financial involvement was enough to give Tezos publicity and, seemingly, legitimacy. But the court didn’t buy Anvari’s suggestions that “Draper is a fast-moving puppet master,” finding instead that Draper didn’t have much control over the company’s actions. He granted Draper’s motion to dismiss, absent an amended complaint filed within 20 days.

As for Bitcoin Suisse, “a cosignatory for the ICO funds,” the court found that “Bitcoin Suisse does not appear to be a key player in this action.” Moreover, the judge ruled that there was not an adequate claim of personal jurisdiction and dismissed the suit against it outright.

Barring the plaintiff’s filing of an amended complaint against Draper, that leaves the Breitmans and the supposedly autonomous Tezos Foundation to face the class action on their own. If Seeborg’s writings are any indication, there’s reason for the defendants to be optimistic. In yesterday’s order, the judge suggested the plaintiff’s arguments of victimhood at the Breitmans’ hands are shaky:

“Significantly, he does not allege pre-contribution awareness of any of the defendant specific promotional or procedural activity recounted above. He does not, in other words, claim to have read the Breitmans’ posts, watched the Foundation’s how-to video, or been aware of Draper’s involvement. Nor, for that matter, does he allege to have engaged in any transactions through Bitcoin Suisse, or to have been ignorant of the purportedly governing Contribution Terms.”

Jeff Benson is Managing Editor of ETHNews. He’s worked as a writer and editor everywhere from Sudan to Reno. He holds a bachelor’s in politics from Willamette University and a master’s in nationalism studies from University of Edinburgh. When he’s not in the newsroom, he trots the globe and writes about it. He holds a bit of value in ETH.

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