A lawsuit targeting McCarter & English over a failed exchange involving Voyager Digital Holdings Inc. highlights the risks firms face when providing advice in the fast-changing and sometimes confusing world of cryptocurrency.
The New Jersey-based law firm is accused by investors of providing a “bogus legal opinion” that Voyager’s VGX token was not an unregistered security, according to a lawsuit filed on Feb. 6 in Miami. The lawsuit alleges that this opinion was central to a fraud that led to over $4 billion in investor losses.
Crypto’s popularity led corporate firms to venture into uncharted territory as they launched practices involving cryptocurrency, according to James Cox, a law professor at Duke University. Determining whether a crypto asset is an investment contract under federal law is still an unsettled question and opinions on the matter require a “very big caveat,” he said.
Voyager, a crypto trading platform founded in 2018, was one of many digital asset firms that went bankrupt amid a crash in crypto prices in 2022. McCarter & English stated that it intends to “vigorously defend the firm, which provided clear and competent advice to our clients,” according to a statement issued Wednesday. However, the complaint contains “many factual inaccuracies that we intend to address,” the firm said Thursday.
The lawsuit filed by the Moskowitz Law Firm represents at least the second complaint targeting a law firm that advised a failed crypto exchange. Fenwick & West also faced an investor complaint last year regarding its work for FTX. McCarter & English had represented Voyager and a subsidiary trading operation from March 2021 until September 2022, according to the investor complaint. This representation allegedly included advising Voyager on a due diligence questionnaire from the NBA and issuing a legal opinion that found Voyager’s VGX token was not a security under federal law.
The lawsuit raises the question of whether a crypto token is a security under federal law, which is a highly contested issue. A New York federal judge last year ruled that Ripple’s XRP token is not a security when sold to the general public. However, a judge in a separate SEC action against Terraform Labs Pte said that crypto sales to the public can be securities.
Investors are pursuing claims of gross negligence and violations of the Racketeer Influenced and Corrupt Organizations Act against McCarter & English. Pursuing a law firm for RICO violations relating to its legal opinions is considered a significant challenge. The case is Karnas et al v. McCarter & English, S.D. Fla., No. 1:24-cv-20480, 2/6/24