Edition No. 5 - LexNews+ Weekly
More Tornado Cash News; SBF only wants to go to prison on the weekends; Genesis & FTX settle; BAYC Litigation.
Hi anon :)
Welcome back to LexNews+ Weekly! This letter is meant to provide LexDAO members and subscribers easy-to-digest summaries of the biggest stories in cryptolaw each week, as well as internal updates of LexDAO operations and projects. Let’s get started!
Authors: Kyler Wandler, Nick Corso, Kris Jones, @TxBlokChainLaw
Sections:
1. Headlines (The top stories in cryptolaw this week)
2. Podcasts
3. LexDAO weekly loadout (agenda, events, publications, and more!)
4. Closing Statements
Headlines
Five things you might have missed this week:
Judge in Tornado Cash case sides with US Treasury 🌪️
Um. Your honor, wtf?
Bad news for Tornado Cash supporters this week, as Judge Robert Pitman sided with the U.S. Treasury Department finding the actions taken by OFAC were within its authority and Tornado Cash constitutes an entity that may be designated.
A refresher on the arguments being made in this case:
Plaintiffs argue the OFAC designation of Tornado Cash exceeded the department’s statutory authority over foreign nationals’ interests in property and violates the Free Speech Clause.
The government argues Tornado Cash is an entity that may be designated and it has a property interest in the smart contracts.
Judge Pitman denied the plaintiffs’ motion for partial summary judgment and their motion for oral arguments but granted the defendant’s motion for summary judgment. The arguments made by the plaintiffs were dismissed, as the judge ruled Tornado Cash was an entity capable of being designated as a person under the International Emergency Economic Powers Act (IEEPA) and OFAC was within its authority in adding Tornado Cash to its sanctioned entities list.
The court reasoned “Tornado Cash is an association within [the] ordinary definition” and is an “entity…composed of its founders, its developers, and its DAO.” The court further found “[s]ubstantial evidence” supports the argument the founders, developers, and DAO constitute “[a] body of persons who have combined to execute [the] common purpose” of developing, promoting, and governing Tornado Cash.
The ruling stated developers could analyze and teach the code behind the mixer but not “execute it and use it to conduct cryptocurrency transactions.” The judge also noted the structure of DAOs closely resembles and behaves like a corporate structure with some shareholders voting on corporate matters and others simply holding the shares. The idea that the Tornado Cash software was not owned or controlled by the DAO did not protect the DAO from legal jeopardy or consequences.
The group of plaintiffs had been funded by Coinbase, whose Chief Legal Officer, Paul Grewal, took to X (formerly Twitter) following the ruling. Grewal stated they still believe the challenge to OFAC’s action against Tornado cash was justified and Coinbase would continue to support the group of plaintiffs in their appeal to the Fifth Circuit, where they hope to obtain a reversal of the district court’s decision.
SBF Attorneys Request Five Days Per Week to Prepare Defense⚖️
“Don’t worry Sammy, it’s just weekend jail! At least now you’ll like Mondays!”
Less than two weeks after U.S. District Judge Lewis Kaplan revoked Sam Bankman-Fried’s bail, attorneys for the former FTX CEO are requesting more time and opportunity for their client to adequately prepare for his upcoming fraud trail. Specifically, counselors for Bankman-Fried are requesting to meet with their client five days a week at the Manhattan federal courthouse—time they argue is needed to review an “extraordinary volume” of evidence. Failure to provide such an opportunity, they assert, denies Bankman-Fried a meaningful opportunity to participate in his defense in violation of his Sixth Amendment right to counsel.
Attorneys for the defendant has blasted the two days a week Bankman-Fried is currently allowed as “entirely inadequate” and noted the lack of a dedicated computer and his inability to share materials via Google Docs or email undercuts Judge Kaplan’s expectation the defense receive at least nine hours a day to prepare for trial.
Bankman-Fried is presently being held in Brooklyn’s Metropolitan Detention Center. The court revoked his bail package after finding probable cause he attempted to engage in witness tampering, for example by leaking former friend and colleague Caroline Ellison’s personal diary entries to the press.
Prosecutors responded to defense counsels’ letter by assuring the court Bankman-Fried has been offered “extraordinary accommodations” for trial preparation commensurate with the volume of documents and trial schedule.
Bankman-Fried’s trial is scheduled to begin in October. The 31-year-old disgraced founder has pled not guilty to numerous charges alleging fraud and conspiracy.
Genesis and FTX Settle for $176m 💸
Surely this means retail investors will be made whole soon as well, right? …right?
The cryptocurrency exchange FTX and current CEO, John J. Ray III, have reached a $176 million settlement agreement with Genesis entities—a collapsed crypto lender with ties to FTX—pursuant to a $4 billion claim on behalf of FTX’s now-defunct sister company Alameda Research. Genesis agreed to pay the sum after it was accused of being “one of the main feeder funds for FTX and instrumental to its fraudulent business model.”
According to court documents, Ray III asserts the settlement is “fair and equitable” and the $176 million figure is “well within the range of reasonableness.” FTX creditors, however, seem to disagree—a post on X (formerly Twitter) from the FTX 2.0 Coalition says of the deal “this must be the worst to date, especially in light of the new DCG <> Genesis DOJ investigation.” Such creditors are calling on the Official Committee of Unsecured Creditors of FTX (“the Committee”) to reject the settlement. Unhappy with the settlement amount, these creditors argue $176 million is only a fraction of the original $3.9 billion dollar claim. This is especially frustrating to creditors because Alameda used billions of FTX customer funds to repay Genesis in 2022—funds they argue were owed to creditors.
FTX for its part calls the deal “optimal” pointing to the unpredictable nature of recoveries. It remains unclear if the Committee or judges presiding over each bankruptcy case will accept the settlement agreement.
Bored Apes turn Litigious - Yuga, Celebs, and Sotheby’s Served 🙉
Can you be bored during freefall?
With floor prices rapidly falling across all strata of PFP NFT collections, several purchasers of the popular Bored Ape Yacht Club (BAYC) collection have turned to litigation seeking restitution for allegedly being duped into purchasing an inflated asset that has not retained its value. Defendants are accused of violating the California Unfair Competition Law, the California Corporate Securities Law, the U.S. Securities Exchange Act, and the California Corporations Code.
While the original suit was filed back in December, it was recently amended in early August to include famed auction house Sotheby’s as a defendant. In September of 2021, Sotheby’s sold over 100 BAYC NFTs via online auction for over $24 million. The auction house joins a star-studded cast of defendants including Justin Bieber, Snoop Dogg, Serena Williams, Madonna, The Weeknd, Paris Hilton, Jimmy Fallon, Steph Curry, and more.
Plaintiffs claim BAYC developer and creator, Yuga Labs, colluded with Sotheby’s to inflate the price of the digital cartoon ape collectibles. They further assert communications around the auction were deceptive and a thinly veiled attempt to lend an aura of false legitimacy to the NFT collection and generate broad, yet inorganic, hype for the brand.
Sotheby’s issued a statement calling the allegations baseless and saying it is prepared to defend itself. A spokesperson for Yuga Labs likewise said the allegations are "completely without merit or factual basis.” The celebrities named in the suit have yet to issue comments.
Podcasts
Too tired to read, anon? We feel that. Try these instead:
LexDAO weekly loadout:
Updates and agendas for all things LexDAO can be found here at the Governance Agenda Document
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Closing Statements
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Quote of the Week:
“The law is an ass.” - Charles Dickens