US Court Refuses To Dismiss Proposed Class Action Against BitMEX Founders

BitMEX is a cryptocurrency exchange and derivative trading platform.  It is owned and operated by HDR Global Trading Limited, which is registered in the Seychelles.  HDR is an acronym of the last names of its founders, Arthur Hayes, Ben Delo, and Sam Reed. 

In 2020, Plaintiffs brought a putative class action against the founders and HDR alleging multiple violations of the Commodity Exchange Act (“CEA”), including price manipulation.  The Defendants moved to dismiss the case for, among other things, failure to state a cause of action.  The motion was decided on April 3, 2024. 

For purposes of deciding a motion to dismiss, a court generally assumes as true the allegations in the Complaint.  Those allegations included the following:  BitMEX automatically liquidates customer’s contracts when their values fall at or below a level specified by BitMEX.  When BitMEX liquidates a contract, BitMEX seizes all of the investor’s remaining collateral for the contract. BitMEX routinely profits from these liquidations, placing these profits in an Insurance Fund. BitMEX may withdraw the money in the Insurance Fund for any reason it chooses, at any time.  BitMEX had an Insider Trading Desk, staffed by at least three employees with “God Access” to customer accounts.  BitMEX lied to customers, inducing them to believe that certain information was private, but BitMEX used this information, allowing BitMEX to determine which market movements would liquidate the highest number of customers, subsequently making strategic trades to produce those movements.  BitMEX hid the Insider Trading Desk from customers until April 30, 2018, under pressure from an independent analyst. After revealing the existence of this desk, BitMex’s general counsel and outside counsel resigned. BitMEX claimed that it would serve a neutral market-making role, but continued to trade secretly against its customers, using burner accounts.  In addition, BitMEX frequently blocked customers from trading in their accounts, blaming it on technical glitches and limitations, but insider trading accounts created by the Insider Trading Desk were immune from lockouts that plagued regular customers, giving BitMex a trading advantage it used against its customers.

Section 22 of the CEA, the section allowing a plaintiff a private right of action, does not apply in an extraterritorial fashion.  Thus, a private litigant must allege a domestic transaction. To do so, plaintiffs must allege facts indicating that title was transferred, or irrevocable liability was incurred, in the United States.  Here, a key question on motion to dismiss was whether irrevocable liability was incurred in the United States.

To answer this question, the court relied on the Second Circuit’s recent decision in Williams v. Binance, No. 22- 972, (2d. Cir. March 8, 2024).  The court there said that irrevocable liability is not something that must happen only once; it may occur in more than one transactional step and in multiple locations.  Binance involved a defendant disclaiming any physical location.  The court noted the similarity to this case because BitMex was  not registered anywhere.  Under Binance, at the pleading stage, irrevocable liability is plausibly pleaded when (i) the securities (or commodities) are matched in the United States, (i) terms of use were entered into in the United States, or (iii) customers residing in the United States placed purchase orders from the United States.

Here, Plaintiffs alleged that U.S. customers not only entered into terms of use agreements from within the United States, but also purchased the tokens from the United States.  And, Plaintiffs alleged that the Insider Trading Desk, the desk that caused liquidations of Plaintiffs’ holdings, operated from Manhattan. Therefore, Plaintiffs plausibly alleged for purposes of surviving a motion to dismiss that one of the steps where irrevocable liability was incurred happened in the United States.

The court also rejected the request to dismiss on statute of limitations grounds.  There is a two-year statute of limitations under the CEA, measured from when the cause of action accrues, which the court said is when a plaintiff discovers her CEA injury.  The focus is on the discovery of the harm itself.  “A plaintiff has discovered an injury under the CEA when ‘circumstances would have suggested to a person of ordinary intelligence the probability that he had been defrauded.’” The court held that Plaintiff Lee did not know he was defrauded when he suffered an initial set of  losses because he legitimately blamed that on natural market forces.  According to the court, Lee lacked actual or constructive notice that  he had been defrauded until less than two years before he filed suit and, thus, the suit was timely.

Finally, the court rejected the argument that Plaintiffs failed to plead material misstatements or omissions with sufficient particularity.  The court pointed to the following examples of specific misstatements by BitMEX: Falsely assuring customers that certain trading information could be “hidden” when traders don’t want to inform the market of their trading intentions.  Falsely claiming that it does not give “preferential treatment” to any “customers,” when, in fact, BitMEX gave the Insider Trader desk access to the purportedly hidden information.  And, falsely placing blame for BitMEX’s manipulative server lockouts on exogenous technical causes.  Plaintiffs also alleged omissions, such as failure to disclose that BitMEX insiders had “God Access,” failure to disclose the Insider Trading Desk, and failure to disclose that BitMEX intended to use customer lockouts during large market moves in order to increase liquidations.

The court explained that Defendants’ undisclosed “God Access” to customer information made their disclosures materially misleading because customers reasonably understood that “Hidden Orders” would be hidden from other market participants, rather than from other market participants except BitMEX, which would take advantage of that information to profit at its customers’ expense.  In addition,   BitMEX’s omission regarding the Insider Trading Desk misled customers into believing that BitMEX was not operating against their interests.  There was sufficient specificity to survive a motion to dismiss because, as the court said, “there is no requirement that they be pleaded with subatomic specificity, particularly prior to discovery.”

The case will now go forward as against all Defendants.