Digital currency exchange Coinbase has agreed to pay former Cryptsy account holders nearly $1 million in only the second cryptocurrency class action settlement.
Cryptsy account holders claimed founder Paul Vernon shut down the Delray Beach, Florida-based business and fled to China in 2015 after stealing from them and converting their bitcoins to dollars at Coinbase.
“The theory of the case was that Coinbase knew or should have known about the fraud that Vernon was engaged in,” said class co-counsel Marc Wites of the Wites Law Firm in Lighthouse Point, Florida.
U.S. District Judge Kenneth Marra in West Palm Beach gave preliminary approval to the $962,500 settlement, the deadline for objections is set March 13, and a final fairness hearing is set April 17.
San Francisco-based Coinbase lost a federal appeal trying to shift the cryptocurrency class action to private arbitration, and discovery ended up producing 125,000 pages of documents, 16 depositions and expert witness reports.
The 681 claims found valid under the 2016 Cryptsy settlement valued at $1.5 million — the first cryptocurrency class action and first settlement — will be treated as valid in the Coinbase case, eliminating a step to recovery.
A 2014 internal email with a state-by-state list of Cryptsy account holders listed a total of 55,303, and both sides agreed there were at least a few thousand active accounts during the class period.
“The settlement amounts here in the context of the cases are extraordinary,” Wites said. “No other lawyer in the entire country touched these cases because they were so difficult on the facts and so difficult to collect any money.”
Co-counsel David Miller of Silver Miller in Coral Springs, Florida sees the settlement as “a resolution that was positive for all parties.” He sees a long-term impact as well, saying, “These early cases are going to make it a better, safer investing environment for everybody in the future.”
A large chunk of money remains unpaid. Cryptsy account holders won a default judgment from Marra in 2017 requiring Vernon to release 11,000 bitcoins valued then at about $30 million and estimated by Wites to be worth $90 million now based on the overall rise in the bitcoin market.
Wites and Miller contend Vernon destroyed all Cryptsy records remotely on the same day Marra appointed Boca Raton securities litigator James Sallah of Sallah Astarita & Cox as Cryptsy’s receiver.
But the bitcoin still exists.
“It’s possible to see on the blockchain where the bitcoin are that is subject to the judgment, and my assumption is that Mr. Vernon is afraid of trying to access that money that’s subject to the judgment, both in fear of violating the court order and perhaps doing something that might give away his physical whereabouts,” Wites said.
Wites has a vague but educated guess as to Vernon’s location.
“As far as we know, he has remained in China. He has not been back to the U.S.,” Wites said. “There are a lot of Cryptsy investors and traders who would certainly like to know where he is.”
Coinbase is represented by Goodwin Procter partner Laura Stoll and associate Galen Phillips in Los Angeles and James Liebler and Andrew Kemp-Gerstel of Liebler, Gonzalez & Portuondo in Miami. Stoll and Liebler had no comment by deadline.
Former Broward Circuit Judge Howard Tescher of Tescher Mediation Group Inc. in Fort Lauderdale mediated the settlement.
Read the motion for preliminary approval: