The risk firms face when advising in the rapidly evolving and occasionally perplexing realm of cryptocurrency is brought to the fore in a lawsuit targeting McCarter & English over the collapsed exchange, Voyager Digital Holdings Inc. The case represents the precarious nature of legal advice given to fledgling sectors with ample room for regulatory ambiguity.
A brainchild of plaintiffs at the Moskowitz Law Firm, the proposed class action alleges that McCarter & English supplied a “bogus legal opinion”, stating the Voyager native VGX token was not an unregistered security. The report contends that this advice played a pivotal role in a fraud leading to over $4 billion in investor losses. The lawsuit was filed in Miami, Feb. 6.
The areas of risk extend to law firms who stand by their clients in uncertain times. McCarter & English, having represented Voyager from March 2021 until September 2022, states that despite the gravity of the allegations, it remains undeterred in its plan to “vigorously defend the firm, which provided clear and competent advice to our clients.”
The lawsuit bears striking similarities to an investor complaint last year targeting Fenwick & West over claims centred on its client, FTX, suggesting that this could be a growing trend for law firms operating in the crypto space. Fenwick & West has put forward a motion to dismiss the case, arguing it is being unfairly targeted for customary legal services.
The issue at hand is whether a cryptocurrency token is a security under federal law, a query destined for the courts. Federal judges have recently issued contrasting rulings on the matter, further muddying the legal waters. A New York federal judge ruled that Ripple’s XRP token is not a security, but this was contradicted in a separate SEC action against Terraform Labs Pte.
Where the lawsuit against McCarter & English will end up is uncertain. It’s claimed that pursuing a legal firm for RICO violations relating to its legal opinions could pose a “significant challenge”, particularly when the case involves an area as murky as cryptocurrency law.
The case is Karnas et al v. McCarter & English, S.D. Fla., No. 1:24-cv-20480, 2/6/24