Galaxy’s U.S. Move Risks New Delay From Lawsuit Linked To Luna

Forbes Money Galaxy’s U.S. Move Risks New Delay From Lawsuit Linked To Luna William Bennett Contributor Opinions expressed by Forbes Contributors are their own. Markets Reporter Following Aug 2, 2023, 08:00am EDT | Press play to listen to this article! Got it! Share to Facebook Share to Twitter Share to Linkedin Galaxy CEO Mike Novogratz liked luna so much he got a tattoo. Mike Novogratz Galaxy Digital faces potential new delays in its plan to gain a Nasdaq listing if a pending suit in Canada is certified as a class action, according to lawyers familiar with the case, which is linked to the failed luna cryptocurrency. The proposed class action, filed in Ontario Superior Court in December, seeks approximately CAD $2 billion in damages, alleging that Galaxy failed to comply with reporting requirements on its holdings of luna and that CEO Mike Novogratz, made misrepresentations regarding the company’s exposure to the cryptocurrency prior to the token’s collapse in May 2022. Galaxy plans to fight the charges. “We strongly believe these allegations are without merit, and we intend to defend the case vigorously,” says Michael Wursthorn, a spokesperson for Galaxy. The company did not specifically address the issue of class certification. The digital-asset manager initially filed with the U.S. Securities and Exchange Commission to move its listing to Nasdaq in 2021. Galaxy has so far chosen not to officially acknowledge the suit to holders of its shares on the Toronto Stock Exchange or in its SEC filings for a Nasdaq registration. Certification as a class action would mean the parties could then go to court or Galaxy could seek dismissal. It's possible that new evidence could be presented as part of either process. “A material risk such as a class action of this size would need to be disclosed by Galaxy to the market,” according to Vincent de l’Etoile, a partner at Langlois Lawyers in Montreal Quebec. In the U.S., “certification would likely require Galaxy’s application to be updated purely because the size of the claim is material to the business,” he adds. MORE FOR YOU 2024 Toyota Land Cruise First Look: Toyota’s Iconic Off Roader Returns Pence Reacts To Trump Indictment: Anyone Putting Self Over Constitution ‘Should Never Be’ President Trump Indicted: Ex-President Charged With These Crimes In DOJ Jan. 6 Probe—And They All Could Include Prison Time That could have repercussions, says Sean Masson , a lawyer who specializes in crypto-related class actions at Scott & Scott in New York. “These revelations would certainly get the attention of the SEC and may stymie any effort by Galaxy Digital to list in the U.S.,” he says. Michael Klausner, a law professor at Stanford University, concurs. “If the litigation revolves around internal controls over reporting it would certainly get the SEC interested,” he says. Along with disclosing the class action, Galaxy would likely also have to create a litigation reserve to account for any losses arising from the suit, Masson says. At the end of March, the company had $400 million of cash, $854 million of cryptocurrencies and $90 million of derivative holdings among current assets that could be easily liquidated, a total of less than $1.4 billion. That indicates it would probably have to borrow money or raise new equity to satisfy a judgment of CAD $2 billion, which is about $1.5 billion at the current exchange rate. The SEC itself would not discuss the ramifications of the suit. The agency “does not comment on specific entities,” a spokesman tells Forbes . Masson says, however, that as a practical matter, the agency “is going to be looking at every suit involving crypto.” Galaxy Digital year-to-date stock price chart. YCharts Timing may be an issue in Galaxy’s favor. People familiar with the case say it might take a year or more for certification as a class action to be decided. If the SEC lacks other objections, it could approve the listing before the certification is decided. In 2020, Canadian law involving class actions was amended as part of the Smarter and Stronger Justice Act, which increased the burden on plaintiffs. That means lawyers tend to bring such suits only if they think they have a good chance of being certified, according to Masson. Canadian law also has the advantage for plaintiffs of not requiring a showing of “reliance” by the investors on the misrepresentations. “The rule of thumb is that a fair share of class actions get certified or authorized, if you show you have good potential for success,” says de l’Etoile. Galaxy’s complex business includes digital asset management, crypto mining, and trading, and it might have trouble passing muster with the SEC even without complications from the suit, says Masson. “I don’t think all of their business is going to fly with the SEC, especially the trading business,” he tells Forbes . Galaxy’s filing for a U.S. listing comes in conjunction with a move of its place of incorporation to Delaware from the Cayman Islands, and it has faced questions from the SEC about its business, leading it to amend its registration statement in February. "It's a good thing they are moving from the Caymans, it shows their intent for legitimacy,” adds Masson. The company’s headquarters is in New York. In April, Galaxy entered a partnership with German asset manager DWS to develop exchange-traded products for digital in Europe as part of the company’s increased focus and expansion internationally due to what Novogratz described in a May 9 earnings call as a “stasis” in crypto regulation in the United States. It also recently added a trading desk in Hong Kong. “This is a global business, and our intention is to continue to grow outside of the U.S., at a much quicker pace than we were growing in the United States,” Novogratz said. The proposed class action claims that the specifics and risks of Galaxy’s’ investment in luna, a cryptocurrency associated with the failed terra stablecoin, did not appear in any of the company’s disclosures to shareholders before the token’s price collapsed. The plaintiff also claims that the company described stablecoins such as terra as safe investments akin to cash. “The Defendants, which claimed expertise in the field of digital assets, and closely followed the Terra LUNA ecosystem, were aware, or ought to have been aware, of these risks but failed to disclose them to Galaxy shareholders.” Companies that invest in digital assets “are expected to abide by the same standards” of “appropriate disclosure” as any business that sells stock to the public, says Soheil Karkhanechi, founder of SMK Law, the firm representing the plaintiffs. The suit also alleges that Novogratz may have influenced holders to buy more Galaxy shares. “As a result of Novogratz’s extensive promotional activities, the value of Galaxy’s stock became heavily associated with TerraLuna in the investment community,” the claim goes on. “Novogratz used his influential media presence to promote TerraLuna. He tweeted about TerraLuna dozens of times, telling his nearly half a million followers that it was “a horse to ride.” Follow me on LinkedIn . William Bennett Editorial Standards Print Reprints & Permissions