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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
Civil Action No. ________________________________
BRANDON LEIDEL, individually,
and on behalf of All Others Similarly Situated; and
JAMES D. SALLAH, ESQ., as Receiver/Corporate Monitor of
Project Investors, Inc. d/b/a Cryptsy,
Plaintiffs,
v.
COINBASE, INC., a Delaware corporation
d/b/a Global Digital Asset Exchange (GDAX);
Defendant.
________________________________________________/
CLASS ACTION COMPLAINT
Plaintiffs, BRANDON LEIDEL (“LEIDEL”), individually and on behalf of all other
persons similarly situated (“Class Plaintiffs”), and JAMES D. SALLAH, ESQ., as
Receiver/Corporate Monitor (the “Receiver”) of Project Investors, Inc. d/b/a Cryptsy (collectively
the “Plaintiffs”), by and through undersigned counsel, hereby sue Defendant, COINBASE, INC.,
a Delaware corporation d/b/a Global Digital Asset Exchange (GDAX), for damages and for
equitable relief. In support thereof, Plaintiffs state as follows:
PRELIMINARY STATEMENT
1.
This nationwide class action is brought by Plaintiff LEIDEL, individually and on
behalf of a class of similarly situated users (the “Class Members”) of Project Investors, Inc. d/b/a
Cryptsy (“CRYPTSY”), a cryptocurrency exchange and Money Services Business based in South
Florida that served clients located both in the United States and abroad.
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2.
Additionally, this action is brought by the Receiver, who on April 4, 2016 was
appointed by the United States District Court for the Southern District of Florida to serve as the
Receiver/Corporate Monitor over the affairs and operations of CRYPTSY and to, inter alia,
“administer and manage the business affairs, funds, assets, choses in action and any other property
of [CRYPTSY]; marshal and safeguard all of CRYPTSY’s assets; and take whatever actions are
necessary for the protection of CRYPTSY investors and customers.”
1
3.
At all material times, COINBASE operated an online business for general
consumers and the public to exchange, invest, and trade in digital cryptocurrencies. Plaintiffs seek
damages based upon the unlawful conduct of COINBASE in failing to properly monitor customer
accounts that held investors’ money and ignoring its duty to investigate suspicious activities under
U.S. anti-money laundering rules.
4.
CRYPTSY and COINBASE should have been shining examples of the
fundamental tenet of cryptocurrency: that without governmental regulation, a community of users
can create and self-regulate a form of currency that serves as a viable – if not preferred -- alternative
to traditional, government-backed currency.
5.
Furthermore, CRYPTSY should have been a validation of COINBASE’s proof of
concept: that a digital currency exchange is a legitimate business operation and that COINBASE
could act as its liquidator. However, CRYPTSY instead proved that the loosely regulated, if not
unregulated, cryptocurrency industry is still a haven for criminal activity and that those inside the
industry oftentimes protect their fellow insiders.
1
See, Exhibit “A” hereto (April 4, 2016 “Order Granting Plaintiffs’ Renewed Motion for
Appointment of James D. Sallah, Esq. as Receiver/Corporate Monitor over Defendant, Project
Investors, Inc. d/b/a Cryptsy”). [Leidel, et al. v. Project Investors, Inc. d/b/a Cryptsy, Paul Vernon,
and Lorie Ann Nettles, U.S. District Court - Southern District of Florida - Case No. 9:16-cv-80060-
MARRA at Docket Entry No. (“DE”) 33] (the “Receivership Order”).
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6.
As the facts demonstrate, an unregulated community is ripe for abuses; and even
the purportedly upstanding members of that community – no matter how right-minded and
honorable they appear to be on the surface – are prone to engage in criminal activity when they
think they won’t be caught.
7.
Plaintiffs and Class Members, and the Receiver, seek compensatory damages,
exemplary and punitive damages where appropriate and allowed, and an injunction enjoining the
continuation of Defendant’s unlawful conduct.
GENERAL ALLEGATIONS
T
HE
P
ARTIES
Plaintiffs
8.
Plaintiff LEIDEL is an individual domiciled in Miami, Florida and is sui juris.
9.
The Receiver is an attorney approved and appointed by the District Court to serve
as the Receiver for CRYPTSY and its subsidiaries, successors, and assigns. As set forth in the
Receivership Order, the Receiver is empowered to, inter alia:
Initiate, defend, compromise, adjust, intervene in, dispose of, or become a
party to any lawsuits or arbitrations in state, federal or foreign jurisdictions
necessary to preserve or increase the assets of Cryptsy and/or on behalf of
Cryptsy and for the benefit of its investors and customers against: (1) those
individuals and/or entities which the Receiver may claim have wrongfully,
illegally or otherwise improperly misappropriated, transferred or received
any assets, properties, monies, proceeds or other items of value directly or
indirectly traceable from Cryptsy, including Cryptsy and its officers,
directors, employees, agents or any persons acting in concert or participation
with them; or (2) any transfers of assets, properties, monies, proceeds or other
items of value directly or indirectly traceable from Cryptsy investors or
customers. Such actions may include, but not be limited to, seeking
imposition of constructive trusts, seeking imposition of equitable liens,
disgorgement of profits, recovery and/or avoidance of fraudulent transfers
under Florida Statute § 726.101, et. seq. or otherwise, rescission and
restitution, the collection of debts, and such Orders or other relief supported
in law or equity from this Court as may be necessary to enforce this Order.
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Defendant
10.
Defendant COINBASE is a Delaware corporation with its principal place of
business in San Francisco, California. COINBASE holds itself out as a digital currency wallet and
secure online platform where merchants and consumers can transact with new digital currencies
like Bitcoin and Ethereum and where users can buy, sell, transfer, and store their digital currency.
11.
COINBASE also holds itself out as a regulated and fully compliant entity,
registered with the United States Department of the Treasury’s Financial Crimes Enforcement
Network (“FinCEN”) as a Money Services Business, as that term is defined by FinCEN.
12.
Since May 2016, COINBASE has been operating as Global Digital Asset Exchange
(GDAX). GDAX is not registered with FinCEN.
13.
According to published reports, COINBASE operates digital Bitcoin wallets for
over 3 million people across the globe, including but not limited to wallet-holders in this District.
J
URISDICTION AND
V
ENUE
Subject Matter Jurisdiction
14.
This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. § 1332, as amended by the Class Action Fairness Act of 2005, because the matter in
controversy exceeds Five Million Dollars ($5,000,000.00), exclusive of interest and costs, and is
a class action in which some members of the Class are citizens of different states than Defendant.
See, 28 U.S.C. § 1332(a) and 1332(d)(2)(A). This Court also has supplemental jurisdiction over
the state law claims pursuant to 28 U.S.C. § 1367.
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Personal Jurisdiction
15.
This Court has personal jurisdiction over Defendant because: (a) Defendant is
operating, present, and/or doing business within this District, (b) Defendant resides within this
jurisdiction, and (c) Defendant’s breaches and tortious activity occurred within this District.
16.
Defendant is licensed by the Florida Office of Financial Regulation to conduct
business as a Money Transmitter (Part II) in this state, and indeed conducts such business in the
state of Florida. Moreover, according to FinCEN’s records, Florida is one of the states in which
Defendant conducts business as a Money Services Business.
17.
Additionally, Defendant entered into a contract with Florida residents CRYPTSY
and Paul Vernon (CRYPTSY’s CEO) when CRYPTSY and Mr. Vernon resided in this District.
Traditional monies and cryptocurrencies were routinely transferred by and between
CRYPTSY/Mr. Vernon and Defendant -- including deposits by Defendant into CRYPTSY’s and
Mr. Vernon’s bank accounts in Florida -- and Defendant was aware that CRYPTSY/Mr. Vernon
were located here and did business here.
18.
In light of the foregoing, Defendant has purposefully availed itself of the benefits
of operating in this jurisdiction; and this Court may exercise personal jurisdiction over Defendant.
Venue
19.
Venue is proper pursuant to 28 U.S.C. § 1391 in that: (a) Defendant resides in this
judicial district, and (b) a substantial part of the events or omissions giving rise to the claims set
forth herein occurred in this judicial district.
20.
As noted above, Defendant “resides” in this judicial district as a Money Services
Business that willfully and knowingly transacts business here.
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21.
Furthermore, as described in greater detail herein, the theft of CRYPTSY customer
funds and a substantial portion of Defendant’s assistance in laundering those stolen funds occurred
in this judicial district, including Defendant’s transmittal of purloined funds to CRYPTSY’s and
Mr. Vernon’s bank accounts in Florida.
22.
In light of the foregoing, this District is a proper venue in which to adjudicate this
dispute.
F
ACTUAL
A
LLEGATIONS
A
PPLICABLE TO
A
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OUNTS
Paul Vernon and Cryptsy
23.
Bitcoin is a virtual currency that may be traded on online exchanges for
conventional currencies, including the U.S. Dollar, or used to purchase goods and services online.
Bitcoin has no single administrator or central authority or repository.
24.
On or about January 31, 2013, Paul Vernon (a/k/a Paul “Big Vern” Vernon)
(“VERNON”) registered CRYPTSY as a “for profit” corporation in the State of Florida; and
VERNON, by and through the corporation, began operating a website at the following web
25.
At all times material hereto, VERNON resided in, operated, and directed
CRYPTSY from, and interacted with COINBASE from, this District.
26.
Also at all times material hereto, CRYPTSY, like COINBASE, has been registered
with FinCEN as a Money Services Business.
27.
CRYPTSY, as a Money Services Business, is obligated, inter alia, to keep certain
financial records and allow free and unfettered access to consumer accounts. As demonstrated
below, CRYPTSY has failed to do that.
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28.
CRYPTSY solicited members of the public to register new accounts, deposit
Bitcoin or other cryptocurrency with CRYPTSY, and thereafter actively engage in the exchange
and trade of Bitcoin as well as other (alternate) cryptocurrencies.
29.
After a new user created an account, the user was provided a unique digital address
(known as a “cryptocurrency wallet address”). Each new user funded his or her account by
transferring cryptocurrency assets to his or her unique address provided by CRYPTSY.
30.
A user’s account, once populated with a cryptocurrency balance, could buy, sell, or
trade in alternative cryptocurrencies. All denominations of account balances for a user were listed
in Bitcoin denominations, commonly styled as “BTC.”
Coinbase is Licensed as a Money Transmitter
31.
As noted above, COINBASE purports to provide cryptocurrency users a secure
online location at which users can buy, sell, transfer, and store their digital currency.
32.
COINBASE is licensed as a Money Transmitter in multiple states and territories
across the United States (including, inter alia, Florida), but it is not a bank.
33.
A Money Transmitter is required to maintain federal registration as a Money
Services Business and comply with federal recordkeeping and reporting requirements under the
auspices of FinCEN.
34.
As a Money Transmitter in the State of Florida, for example, COINBASE is
authorized to transmit currency, monetary value, or payment instruments, either by wire, facsimile,
electronic transfer, courier, the internet, or through bill payment services or other businesses that
facilitate such transfer, within this country or to or from locations outside this country.
35.
Among the federal regulatory statutes, standards, and requirements with which a
Money Services Business must comply is the Bank Secrecy Act.
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36.
Notwithstanding the foregoing, a Money Services Business (defined in 31 CFR
1010.100(ff)) is a materially different thing from a bank, which is defined in 31 CFR 1010.100(d).
In fact, the Code of Federal Regulations (31 CFR 1010.100(ff)(8)(i)) specifically notes that the
term “Money Services Business” shall not include a bank.
Coinbase Purports to be a Champion of Consumer Protection
37.
In February 2014, Tokyo-based Mt. Gox -- one of the world’s leading Bitcoin
exchanges -- halted its operations, blaming the disruption on technical issues and cyber-attacks.
Mt. Gox later abruptly shuttered its business and filed for bankruptcy, claiming debts (including
those owed to its customers) exceeding $64,000,000.00. Mt. Gox’s precipitous tumble caused the
value of Bitcoin to plunge overnight and shook users’ confidence in the future stability of Bitcoin
as a viable alternative currency.
38.
In the wake of Mt. Gox’s collapse, COINBASE released a public statement
pledging to “lead the way” in coming up with consumer-protection measures after the “tragic
violation of the trust of users of Mt. Gox.” According to the statement:
responsible Bitcoin exchanges are working together and are committed to
the future of Bitcoin and the security of all customer funds.
Bitcoin operators play a critical role over the Bitcoin they hold as assets
for their customers. Acting as a custodian should require a high bar,
including appropriate security safeguards that are independently audited
and tested on a regular basis.
COINBASE touted and positioned itself to be one of those “responsible Bitcoin exchanges.”
39.
As set forth herein, COINBASE -- by such statements and its conduct in general --
assumed a duty to protect and safeguard the Bitcoin of its exchange customers, such as CRYPTSY.
Cryptsy’s Rise to Prominence
40.
With Mt. Gox defunct, thousands of cryptocurrency users turned to CRYPTSY as
their new, trusted cryptocurrency exchange.
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41.
Barely one year after it was founded, CRYPTSY experienced significant growth in
both its customer base and total online trades. According to published reports, CRYPTSY’s
customer base in mid-2014 swelled to approximately 230,000 registered users; its trades per day
exceeded 300,000; and it made available 150 different types of digital currencies for its users to
trade.
42.
CRYPTSY’s expansion, however, had its limits. CRYPTSY did not deal with fiat
money (i.e., government-backed money such as the U.S. Dollar), and it needed a way to process
fiat transactions for its users.
43.
As VERNON was quoted in a 2014 news report: “Our concern is, and the
government’s concern is, money laundering. So we need to kind of be the poster children of how
to do [compliance] correctly. So I’m not going to launch [a fiat currency option] until I’m ready
to be on the poster.”
44.
Instead of having CRYPTSY launch its own fiat currency option, VERNON turned
to COINBASE.
Cryptsy and Vernon’s Accounts at Coinbase Were Vehicles of Theft
45.
CRYPTSY had an account in its name at COINBASE. Likewise, VERNON had
an account in his own name at COINBASE.
46.
CRYPTSY and VERNON informed COINBASE in or about July 2014 that instead
of instituting a fiat currency option for CRYPTSY’s customers, CRYPTSY would continue to
operate its crypto-to-crypto exchanges where its fees would be collected in Bitcoin and that
CRYPTSY would use COINBASE to liquidate those Bitcoin (representing a portion of
CRYPTSY’s revenues) into U.S. Dollars. COINBASE knew it was the only service provider that
VERNON and CRYPTSY used for such purposes.
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47.
From 2014 through 2016, CRYPTSY and VERNON transferred enough Bitcoin
through COINBASE (approximately $8,300,000.00 USD) to rank among COINBASE’s top
liquidators of Bitcoin.
48.
COINBASE failed to perform adequate “anti-money laundering” and “know your
client” (combined as “AML/KYC”) procedures, as those procedures are commonly known under
FinCEN guidelines and enforcement rules.
49.
From 2014 through 2016, CRYPTSY and VERNON liquidated Bitcoin through
COINBASE for U.S. Dollars; however, the liquidated Bitcoin were not legitimately generated
revenues. Instead, those Bitcoin were stolen from CRYPTSY users in a long-running fraudulent
scheme that since collapsed under the weight of its own ill-conceived structure.
50.
Unbeknownst to CRYPTSY users, CRYPTSY and VERNON were stealing Bitcoin
from user accounts and liquidating those Bitcoin through both CRYPTSY’s and VERNON’s
accounts at COINBASE.
51.
Typically, CRYPTSY and VERNON would remove Bitcoin from individual
CRYPTSY customer wallets, transfer those Bitcoin to a CRYPTSY “hot wallet”
2
which VERNON
controlled, send those purloined Bitcoin to either CRYPTSY’s COINBASE account or
VERNON’s own COINBASE account, liquidate those Bitcoin within the respective COINBASE
accounts, and then send the liquidated funds to a personal bank account at TD Bank that VERNON
maintained jointly with his then-wife, Lorie Ann Nettles.
52.
Shown graphically, the following is the path CRYPTSY and VERNON typically
followed to steal CRYPTSY customer assets:
2
In the cryptocurrency world, a “hot wallet” is known as a bitcoin wallet that is connected to the
Internet that allows for the instant payout of withdrawals on cryptocurrency exchanges.
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