The operators of BitMEX have recently become involved in four separate lawsuits in the US. BitMEX is a cryptocurrency futures trading exchange which offers customers an online peer-to-peer trading platform. (I should say at the outset that the purpose of this post is simply to report on these lawsuits. I don't agree or disagree with any of the claims made by the various Plaintiffs, and I have no personal experience of any kind with BitMEX, positive or negative.)
If you don't know what trading a commodity future is, and how a futures exchange works, then you may want to learn about those things before reading further, because it may help you to understand why certain customers are saying they are unhappy with BitMEX - unhappy enough to bring lawsuits against that exchange's operator. This YouTube video by Kevin from Bitcoin for Beginners is a helpful introduction to cryptocurrency futures trading. BitMEX itself has a guide to how its exchange works, on its website.
HDR Global Trading Limited, the entity named as the first Defendant in these lawsuits, is described in the court papers as the entity behind the BitMEX trading exchange.
(1) MESSIEH & LEE v HDR GLOBAL TRADING LIMITED & OTHERS
BitMEX is a cryptocurrency futures trading exchange. Cryptocurrency has been deemed to be a commodity by the US Commodity Futures Trading Commission, which means that trading in crypto futures in the US is subject to the same regulations as trading in futures for other commodities, like petroleum, coffee or corn.
The Messieh case is a class action brought in the US District Court, SDNY, (Case No 1:20-cv-03232-UA). The facts claimed and allegations made by the plaintiffs are fairly complex and span 43 pages. The main allegations in the Complaint filed with the court are that (in summary):
- BitMEX purposefully manipulated its exchange by freezing its servers at times of high volatility in cryptocurrency prices, causing traders to be locked out of trading and thus lose their positions and collateral during the freezes: see paragraphs 69 to 101 of the Complaint. This tactic is alleged to have directly advantaged BitMEX because its procedure (agreed to by traders) was to take over losing traders' positions, guarantee the counter-party's payment, confiscate the losing trader's collateral, and trade out those positions. The forfeited collateral was placed in an account under its control called the "Insurance Fund", which has grown in size over time, i.e. on the whole less payments have been made from it than have been made into it. The Complaint alleges that in April 2020, 0.19% of all bitcoin in circulation is sitting in this fund: see para 61.
- BitMEX secretly traded against its customers until April 2018. The Plaintiffs claim that the internal trading desk had access to information not available to other traders, and was in a position to manipulate crypto prices on the exchange by making large interventions (purchases or sales), which would trigger losses for other traders by causing their positions to be liquidated.
- The Plaintiffs allege that because BitMEX allows trades to be highly leveraged, up to 100 times, small movements in prices can lead to large losses for traders. Because cyrpto currency prices can be highly volatile, falling or climbing by large percentages in one day, the plaintiffs say that BitMEX profited greatly by its methodologies described above, at the Plaintiffs' expense. The Plaintiffs claim that they were lured into these losses by deceptive and misleading representations made by BitMEX.
- The above negative actions of BitMEX caused losses to the Plaintiffs, who are seeking damages.
Some of the facts presented in their Complaint by the Plaintiffs in the Messieh case are common features of futures trading exchanges, such as maintenance margins, and some are not. When considering these allegations, we need to remember that at this stage the allegations are unproven. If the allegations are true, they portray a disturbing picture.
(2) AMATO, CAPONE & OTHERS v HDR GLOBAL TRADING LIMITED & OTHERS
This case was commenced in the Superior Court of California, and was later transferred to the US District Court, ND California, (Case No 3:20-cv-00086), at the request of the Defendant. The Complaint filed in the California Superior Court makes a number of allegations, including that:
- Amato and Capone were the first two investors in the entity behind BitMEX.
- They made investments of USD $30K and $50K respectively, in June and July 2015, at a time when BitMEX was yet to attract much interest. The Complaint states that BitMEX became popular around December 2015, when it allowed traders to leverage up to 100 times instead of the previous limit of three times: see para 105.
- The investments were made via SAFE agreements (Simple Agreement for Future Equity) which were subject to California law: see paras 73 and 93. These agreements provided that, when HDR engaged in a future preferential share issue to investors, each of Amato and Capone would be issued with shares representing a certain equity of the company : see paras 96 to 105.
- The Complaint alleges that the Company subsequently did in fact issue shares to other holders in return for monetary investments, but hid this fact from the Plaintiffs: see paras 110 to 120, and 138. In other words, the Plaintiffs say their SAFEs were triggered and they should have been issued with shares, but were denied.
- After the Plaintiffs separately made inquiries with BitMEX, each of them was offered money to tear up their contracts, but were not issued with any shares: see paras 130 and 140.
- The Plaintiffs are seeking damages of USD $90 million as well as punitive damages on various grounds, including breach of contract, fraudulent misrepresentation, unjust enrichment, and breach of an implied covenant of good faith and fair dealing.
In this case, much will depend on the terms and effect of the contracts that the Plaintiffs signed, and whether the subsequent share issues did, in fact, trigger the conversion mechanism in those contracts. The Complaint relates that BitMEX advised the Plaintiffs that a conversion did not occur because of the structure of those subsequent transactions. Again, when considering these allegations, we need to remember that at this stage the allegations are unproven. If the allegations are true, they portray a sad story where the two original investors who made BitMEX's success possible were cheated.
(3) WILLIAMS & ZHANG v HDR GLOBAL TRADING LIMITED
This class action case is running (at the time of writing) in the US District Court, SDNY, (Case No 1:20-cv-02805-ALC). The Plaintiffs are represented by the same attorneys as the Plaitiffs in the Messieh case, and the Complaint filed in this case has similarities to the Messieh one. Points worth noting from the Complaint filed in this case include:
- It is alleged that futures contracts based on cryptocurrency are "derivative products", and that by allowing trading of such products based on EOS and TRX tokens on its exchange, BitMEX engaged in illegal activity, namely operating an unregistered securities exchange. Paragraph 20 of the Complaint states: "BitMEX participated in illegal solicitation and sales of security futures products referencing these Tokens for which no registration statement was in effect, and to which no exemption was available". Because the underlying tokens were unregistered securities, so the argument goes, BitMEX could not allow derivatives based on those tokens to be sold on its exchange without itself registering as a securities exchange or a broker-dealer with the relevant US Government authority which it failed to do: see para 66.
- BitMEX does not list bitcoin itself, and so relies on other, spot exchanges to set the bitcoin price: para 85. It relies on exchanges that are thinly traded and illiquid for this pricing. As a result, any large buys or sells on those exchanges will distort the bitcoin price that BitMEX uses. As BitMEX is a large exchange, this in turn ripples out into the entire crypto trading world. The Complaint says that BitMEX claimed in january 2020 that its trading volume is worth more than USD $3.1 billion per day: para 1243. The Plaintiffs in this case allege that BitMEX's trading environment is therefore much riskier than BitMEX presents to traders: see para 89.The Plaintiffs claim that they have suffered losses caused by BitMEX causing unlawful and artificial prices of their crypto-derivative assets: para 217, the unlawful operation of an unregistered securities exchange, acting as an unregistered broker-dealer, and other unlawful actions.
Some of the allegations made by the Plaintiffs may appear to be speculative, but that is common at an early stage in a court case. For example, the suggestion is made by these Plaintiffs that BitMEX could have manipulated the price on the illiquid spot exchanges itself: see paras 124 & 125. It is one thing to make a point that this could have happened, or that BitMEX had an opportunity to do it, and another to have convincing evidence that BitMEX actually did do it.
(4) BMA LLC v HDR GLOBAL TRADING LIMITED
This is a civil lawsuit brought in the US District Court, ND California, (Case No 3:20-cv-03345-AGT). The Complaint filed in the BMA case covers similar ground to the Messieh and Williams lawsuits discussed above, but also adds some new allegations against BitMEX, including:
- BitMEX is here alleged to have engaged in criminal racketeering, money laundering and wire fraud, all of which injured the Plaintiff: see paras 1 and 178 to 185; 213 to 222; and 234 to 249.
- In addition, BitMEX is alleged to have operated an illegal money transmitting business, and to have unlawfully transported interstate stolen funds: see paras 187 to 212; 250 to 258,
- BitMEX is also accused of having violated certain California State laws designed to protect investors, in particular California's "Blue Sky" laws: see paras 332 to 377.
- The Plaintiff lost 10 bitcoin during trading on a certain day, which it alleges was caused by BitMEX's unlawful actions.
- This Complaint goes into a lot of detail about types of price manipulation in crypto trading.
Many of the allegations made in this Complaint depend on each other. For example, if BitMEX is proved by the Plaintiff to have illegally earned funds illegally through price manipulation, then the things it did with those funds, like move them into accounts on onto other exchanges, could also be illegal, as those movements could constitute money laundering, wire fraud, and so on. Again, as in the Williams & Zhang case, showing that BitMEX was in a position to manipulate crypto prices by "pumping and dumping" on the illiquid exchanges from which it derived its cypto prices is not the same thing as proving that such things happened. It remains to be seen what evidence the Plaintiff will be able to produce, or obtain from BitMEX via court processes, that will substantiate this allegation.
Conclusion
As at the time of writing, all of these four lawsuits were active in their respective courts, i.e. not settled or dismissed. As mentioned above, these claims are all in their early stages, and it remains to be seen exactly what factual allegations and legal points will be sustained. It is not unusual for a company to face multiple lawsuits simultaneously, especially if they are based on similar factual allegations. Plus, after the Defendant(s) file their defence statements, their side of these cases will be better understood.
You may be interested in reading some of my other posts for Publish0X
[Photo credit: Frederick Ruckstuhl's Wisdom and windows at the Appellate Division Courthouse of New York State, by Lionel Martinez, a public domain image courtesy of Wikimedia Commons CC BY-SA 3.0. This post is a a basic level, educational and informational discussion of legal concepts. It does not constitute legal advice for any person, nor does it create a lawyer/client relationship with any person. Although care has been taken to ensure that the law is described correctly at the time of publication, no guarantee of accuracy is provided.]
