On March 20, 2020, the defendants, Tezos Foundation et. al., entered into a settlement agreement that just needs the signature from Judge Seeborg to sign off on this settlement to conclude case #3:17-cv-06779-RS. This has been the case I’ve been writing about since the beginning and now we’re one- foot from the finish line. This was the litigation in Federal Court and they were litigating over a few issues, but most importantly, whether Tezos was considered a security at the time of the fundraiser. This was the major litigation that has plagued the Tezos Community since December of 2017 and the long arduous journey is almost over. If Judge Seeborg approves this settlement(which based off my experience, I’m 99% sure he will), the Tezos Community can move forward and not be bothered by some unsavory characters.

[The lead plaintiff, Trigon Trading Party of Australia operated by James G. Salerno (the son), his father, James Salerno Sr., was convicted by an Australian Court in 2019 and sentenced to 10 years for sexual abuse of minors. See, https://www.abc.net.au/news/2019-07-29/cult-leader-james-salerno-sentenced-to-10-years-in-jail/11287110, see also https://www.cryptoliveleak.org/tezos-lawsuit-update/, see also https://medium.com/tezoscommons/movement-in-tezos-litigation-in-re-tezos-securities-litigation-717f34576084 (For background on the Plaintiffs)]

So what all does this mean?

What does this settlement mean? It means that the plaintiffs in this potential class-action litigation came to a compromise and resolved all issues. This was a case where a group of people (Trigon Trading Party, Pumaro LLC, Atriom Frunze, Hayden Hsiung, and Gijis Master also known as the putative class plaintiffs or plaintiffs wanting to be certified as a class for a class action lawsuit in federal court along with Andrew Baker who sued in State Court for the same claims.) that sued the Tezos Foundation, the Breitmans (Arthur and Kathleen), and Digital Ledger Solutions Inc. This was NOT a case where the federal government / U.S. Security Exchange Commission (“SEC”)sued the Tezos Foundation. I debunked that f.u.d (“Fear, Uncertainty, Doubt”) that claimed otherwise. (See here)

This means that the settlement of this case gets paid out to the above Plaintiffs, their lawyers, and people who fall into the potential “class” of plaintiffs. None of it goes to the SEC because the SEC was NOT involved here.

Ok, so what claims does this settle? Let’s go back to the amended complaint document number 108, specifically page 40, under “Causes of Action”. This is where if you are suing someone, you have to specifically state your claims concisely with the law that supports your claim. We can also look at the settlement document for the same direction.

Settlement Document: look at line 1–4.

Count 1: VIOLATION OF SECTIONS 5 AND 12(a)(1) OF THE SECURITIES ACT

Document 108 of the amended complaint.

Count 2: VIOLATION OF SECTION 15 OF THE SECURITIES ACT

Document 108 of the amended complaint

So what does Section 5 and Section 15 of the Securities Act mean? Section 5 claims under the Securities Act of 1933, in layman terms means that you sold a “security” without registering with the SEC nor did you qualify for an exemption from registration with the SEC. Remember, if you’re selling a security in the U.S., you need to register with the SEC unless you fall under an exemption. (refer back to my earlier articles and the Howey Test)

Section 15 claims under the Securities Act in layman terms means that you are engaged in the act of selling a security without having a broker/dealer license. In other words, you were a seller of securities without a broker/dealer license that allows you to sell/deal with securities. You can check if someone has a broker/dealer license with FINRA.

Among these causes of actions, you have claims that are associated with these actions which are: fundraising participants who sold their Tezos at a loss and fundraising participants who lost their passwords and were unable to access their fundraising contribution, but keep in mind that they are associated with those 2 causes of actions stated above, namely the first cause of action. Also, keep in mind that if the settlement goes through, this means that all of these causes of action and claims are resolved, done, finished.

Does this settlement mean that Tezos was a security at the time of the fundraiser? No. This settlement makes it clear that the Defendants deny and continue to deny/assert that they have done nothing wrong including that Tezos is not a security. Part of this settlement was done in consideration of the uncertainty for both sides, i.e.; either side could lose at trial, and so it was in the best interest for both sides to come to a compromise or settlement to resolve this matter and move on with their lives. Settlement document 246–1 covers this fact stating:

“Defendants have denied, and continue to deny, that they have committed any act or omission giving rise to any liability or violation of the law. Specifically, Defendants have denied, and continue to deny, each and every one of the claims and contentions alleged by the plaintiffs in the Litigations. Defendants have expressly denied and continue to deny all charges of wrongdoing

or liability against them arising out of any of the conduct, statements, acts or omissions alleged, or that could have been alleged, in the Litigations. Defendants further have denied, and continue to deny, that Federal Plaintiffs and State Plaintiff suffered any damages or were harmed by the conduct alleged in the Litigation. Defendants have asserted, and continue to assert, that their conduct was at all times proper and in compliance with all applicable provisions of law. Nonetheless, Defendants have concluded that further defense of the Litigations in two separate forums could be protracted and expensive.” (See In re Tezos Securities Litigation, 3:17-cv-06779-RS Document 236–1)

Document 236–1

What does this mean about the future of Tezos and whether it’s a security, especially in the eyes of the SEC?

Well, that’s to be determined, but as of right now, we know the SEC isn’t investigating Tezos, see above. (But that doesn’t mean they aren’t watching, as they are watching the entire crypto-currency industry, as demonstrated by the Kik and Telegram litigation. As I’ve stated in the past, I am working on an academic piece that’s almost finished and will talk more about this at a later date.)

Remember, this settlement has nothing to do with the SEC as the SEC was never involved in this case.

Let’s move on to more details.

What is the total amount of the proposed settlement? The proposed settlement amount is for $25,000,000 U.S.D. That means for $25,000,000, if approved by Judge Seeborg, this case will be settled. Further, that $25,000,000 will resolve all claims for the potential 30,000+ fundraiser participants, which means that $25,000,000 is shared by everyone who might have a claim. A good portion of that will go towards the Plaintiffs legal team, however, the amounts that will be out will be up to the administrator of claims. What’s important to keep in mind is that this resolves all claims in this lawsuit.

Further, this would mean that all claims as expressed above, would be dismissed with prejudice. Why is that important? Very generally, when a case is dismissed with prejudice, that means it cannot be re-litigated or brought back up.

In consideration of the $25,000,000 settlement, all claims will be dismissed with prejudice.

I don’t want you guys to get lost in the weeds or to bore you with more details (this article is already over 6 minutes of length and don’t want to lose your attention spans)of the settlement since there’s a lot more I should cover, but I wanted to get the important details out in a timely fashion.

I will just go over a few questions that I have received since I’ve been trying to get this article out. I am probably going to have another article where I answer questions that people might have, especially those who cannot get on Telegram or Riot and ask me in live chat.

If you want to see the full documents, please visit:

https://www.tezosfoundationsettlement.com/

[You can find me hanging out in https://t.me/tezosplatform, https://riot.tzchat.org, and tezosagora.org]

Why would Tezos Foundation settle especially if things were going so well in the litigation?

Well, this is a tough question and I cannot give you an exact reason as I was not involved in any of the litigation or privy to any of those settlement discussions. What I can tell you is that from my experience as a litigator, when you take a case to trial, especially a jury trial, anything goes. Yes, the litigation, especially during discovery phase was returning favorable decisions for the Defendants, but that was just the discovery phase, and trial is something completely different because you typically have 11 people that make up a jury of your peers, and when you put 11 different people in the verdict making position, whether they reach the right verdict or not based on what is presented to them doesn’t really matter besides the verdict they reach. That’s 11 different personalities put together in a room and unless you can read their minds, anything goes. The American judicial system is about finality and protects the decision of the jury with the utmost importance, even if their decision is right or wrong. For example, the O.J. Simpson criminal trial decision. The jurors could have reached their decision based on how their cat interacted with them the morning of or how the barista at Starbucks treated them that day, and it doesn’t really matter besides the fact that they reached a decision. Unless their decision is egregious or shocks-the-conscience, the Judge will not intervene and let whatever verdict reached be final.

This was also a “safer” play. What do I mean by that? Well, part of a competent lawyer’s duty is to be risk averse and try to assess all the possible outcomes including the worse possible outcome. Let’s go with the worse possible outcome, which would ultimately be, if Tezos Foundation went to trial, and the jury returned a verdict that Tezos was a security at the fundraising period. What that would mean would be that the Tezos Foundation would be on the hook for the entire fundraising amount or over $250 million + damages that have accrued from it. By entering into this settlement for $25 million, you’re cutting all that risk off. We know this litigation has been on-going since December 2017, so defense counsel also needs to also get paid and they’re paid more than likely on an hourly basis. (Yes, lawyers are expensive including me, but remember, I am not involved in any of this and have been doing this out of my spare time) So, let’s do some rough back of the napkin calculations to assess this risk some more. Let’s hypothetically say the defense attorneys were charging $1 million a month for legal fees for defending the Tezos Foundation. That’s about 26 months worth of defense, which is about $26 million dollars in legal fees, then you add in the settlement of $25 million and you get a total of $51 million dollars. You’re decision calculus would be the following: $51million v. $250million, certainty versus uncertainty:

A. If we settle now, it will cost us $51 million dollars. (This number is certain)

B. If we decide to go to trial and lose, it will cost us at a minimum of potentially $250 million dollars +. (This number is uncertain and whether we win or lose is uncertain)

C. If we go to trial and win, we pay $0 to the plaintiffs, but we incur more legal fees. (The legal fees are uncertain as we don’t know how long it would take to get a trial date and how long the trial would last.)

Yes, option C would be great since you pay the Plaintiffs $0, but getting there is uncertain and the time it would take to get there is also uncertain. I know this isn’t what Tezos Community wants to really hear because the Tezos Community are fighters till the end, but it’s also about keeping these decisions in perspective. Lastly, to put this in another perspective, we can look at the EOS/Block.One settlement with the SEC where they settled the same type of Section 5 claims as the Plaintiffs in the Tezos litigation without admitting or denying liability for $24,000,000 U.S.D. (See https://www.sec.gov/news/press-release/2019-202) I think you get the picture by now. Regardless of the merits of the case, this decision brings certainty, some peace of mind to the Breitmans, and allows the project to move on to bigger things.

2. Will Judge Seeborg sign off on this settlement?

Based on my experience, more than likely yes. The U.S. judicial system encourages and likes it when parties are able to resolve their disputes through settlement and compromises. As long as the settlement is fair to the potential class plaintiffs, the Judge will approve it. Based on the settlement documents, this case has been through two different mediation, including reports by experts from the plaintiffs that believe the settlement is fair. There is always that 1% chance the judge might not sign off on this, but it is very unlikely at this point.

In the essence of keeping this short and getting this analysis out, I will stop right here. If you have any questions, leave them below, or find me in one of the platforms indicated above and in my next article I will try to answer as many questions as I can.

Stay safe, be healthy, and support folding@home. I will have more to come at a later date.

By: Alexander Liu, Esq., licensed to practice law in the State of Louisiana (Civil Law) and the State of Missouri (Common Law)