California Court Dismisses Class-Action Lawsuit Against Dfinity: A Legal Victory with Open Questions

Tags: icp

Key Takeaways:

• Dfinity was sued in a class-action lawsuit, but a California judge later dismissed the case, ruling that the claims were filed outside the statute of limitations.
• The plaintiffs, who accused Dfinity of market manipulation, were initially represented by Roche Freedman but later replaced the firm with Selendy Gay PLLC.
• Though the case was dismissed, investors have a limited window to amend their complaint.

Recently, the Dfinity Foundation, the creators of the Internet Computer Protocol (ICP), claimed a major legal win. A federal judge in California dismissed a class-action lawsuit that claimed the sale of unregistered securities. The lawsuit, filed in August 2021 on behalf of investors who bought ICP tokens after May 10, 2021, alleged that Dfinity artificially inflated the asset market and token prices following the debut of the digital asset. The court ruled in favor of Dfinity’s argument that the public offering of ICP tokens began in February 2017, making the lawsuit, filed in August 2021, too late under the statute of repose.

Was the Dfinity ICP Lawsuit “Time-Barred”?

The case was “time-barred,” as U.S. District Judge James Donato ruled under the three-year statute of repose set by the Securities Exchange Act. He determined that the lawsuit was filed one year and six months after the allowed timeframe.

The plaintiffs—initially represented by the controversial law firm Roche Freedman (now Freedman Normand Friedland LLP) and later by Selendy Gay PLLC—did not counter Dfinity’s statute of limitations defense. Judge Donato viewed this lack of response as a sufficient reason to dismiss the claims.

Unpacking Dfinity’s ICP Token: Fraud Claims and Investor Allegations

In addition to being barred by the statute of limitations, Judge Donato also found the investors did not adequately prove their claims of fraud. The investors contended that Dfinity founder Dominic Williams “necessarily knew” about token distribution issues by virtue of his position. But the court rejected that argument as well, noting the fact that a company may be found to have committed a wrongdoing does not automatically mean that any of its employees were aware of such wrongdoing.

This section of the decision speaks to the question of accountability that’s an ongoing discussion in the crypto world. The mouthpiece represents investors, including a large-scale investor (a “whale”), and argues that while plunging token values may drive investors to seek recourse, proving that founders and executives acted with direct malfeasance is often a difficult task.

This dismissal brings attention to the high standards needed to prove violations of securities laws, including as it relates to knowledge and intent.

A Fractious Battle in Court and a Chance for Revisions

The decision closes a legal saga that has long been wracked by controversy. The case has been delayed extensively following allegations made against Kyle Roche, a former partner at Roche Freedman. Roche is allegedly heard in a recorded conversation bragging about litigation as a means of acquiring sensitive information about crypto millionaires and billionaires.

While the judge dismissed the case, he granted investors a final opportunity to amend their complaint by April 8. If they fail to meet the deadline, the case may be permanently dismissed under federal civil procedure rules.

This part of the ruling is significant. Dfinity may have won, but the door is not completely closed yet. Investors have not missed their chance to hone their arguments and resurrect the suit.

Broader Implications for ICP and Crypto Lawsuits

The Dfinity case comes amid a wave of regulatory scrutiny and litigation in the cryptocurrency sector. As an example, in September, Ripple Labs reached a settlement with the SEC in which it agreed to pay a $50 million fine to resolve a years-long argument regarding whether its sales of the cryptocurrency XRP were illegal. Stuart Alderoty, Ripple’s chief legal officer, reported this to be the case. This effort fits with a wider trend of regulators chasing crypto firms over alleged securities violations.

Just remember that every case is different. What’s a victory in one fight, a cautionary tale in another. In the Ripple matter and beyond, although the company in question may not have been punished as harshly as it could have been, it will still have to pay a steep price in the end. The fate of Dfinity and related cases might be a harbinger for other lawsuits that may help set the tone for how courts and regulators better define and regulate digital assets in the future.