Somewhere out there, Nouriel Roubini could be having an “I-told-you-so” moment.

by Edmund Yong

Here is a 5-minute outline on the class action lawsuit filed against BitMEX, the largest crypto derivatives exchange in the world with trillion-dollar volumes.

You can download the full document from this link (Williams et al. v. HDR Global Trading Limited et. al.; case number 1:20-cv-02805 filed on April 3, 2020 at the US District Court for the Southern District of New York). HDR is an abbreviation of the first letters of the individual defendants’ last names: Hayes, Delo and Reed.

A separate lawsuit was filed later at the Northern District of California (next article).

The points below are for the first part of the case on market manipulation. We won’t cover the second part on securities violation (as the Ripple arguments are frankly more interesting).

As alleged by the plaintiffs and quoted verbatim:

  1. On Market Integrity: The complaint starts off on page 3 that “BitMEX acts like a casino with loaded dice, manipulating both its systems and the market its customers use (sic) for its own substantial financial gain”. Later it submits that “the BitMEX platform also has casino features built in. It promotes ‘winners’ with a leaderboard of successful traders… (and) runs promotions for its products to promote gambling” (p22) with extraordinary leverage of 100-to-1 – “about twenty times higher than the common ratio in trading”.

Based on old in-house stats, the majority of traders do not max out leverage in practice e.g. only 20% exceeded 47X for shorts.

  1. On Trading Halts: Under one of its capped headings, “Defendants Weaponize the Deficiencies in Their Servers”, the plaintiffs take issue at the frequent platform outages, “on average between two and three times a day”. It goes on to explain why this is abnormal: “These server issues are not present in other exchanges that regularly handle far more transactions per second… BitMEX has indicated that its peak transactions can reach 30 times the average, for a peak of just under 10,000 trades a second. Binance, another large exchange, can process 1.4 million transactions a second, more than 100 times the peaks that purportedly cause BitMEX’s servers to freeze” (p30).

Black Thursday quickly comes to mind for many (Mar 13, 2020: 25 mins down). And another big one recently (May 19, 2020: 17 mins down).

  1. On Proprietary Trading: “BitMEX employed an undisclosed trading desk with special privileges and insights that allowed BitMEX to take favorable positions opposite its own

customers” (p4). According to the filing, it claims that “an internal BitMEX desk could have a higher trade priority than other traders, allowing its trades to be processed first when the total number of trades exceeds BitMEX’s server capacity” and “potentially view the leverage amounts for previously created positions and the price at which its liquidation will be triggered” (p35).

Nouriel Roubini has made similar accusations (and then some) in a widely circulated opinion but we won’t go there.

  1. On Insurance Fund: Part C argues how “BitMEX’s automatic liquidations are used to profit through the so-called ‘Insurance Fund’” (p26), originally intended to avoid counterparty risk. Main accusation being that “despite its name, the Insurance Fund is almost never drawn upon and instead has grown consistently such that it now contains assets worth hundreds of millions of dollars” (p4). It also presents details (pp. 36f) “on information and belief” that BitMEX also “manipulated the price of the assets underlying the derivatives on the exchange in order to force liquidations into its Insurance Fund.”

Right after Black Thursday, the fund sat on more than 36K BTC or 0.2% of all BTC in circulation (Mar 14, 2020).

  1. On Promotion: “Its founder and CEO, Defendant Hayes, is cryptocurrency’s P.T. Barnum. Describing trading on cryptocurrency as “the entertainment business,” he has embraced a role as showman and promoter for the “degenerate gamblers” he solicits, and encourages speculative trading by flaunting his lavish lifestyle and making bold predictions designed to elicit responses and move the market in a way that is profitable for BitMEX.” (p19). In one instance, it calls out Hayes for denigrating “the digital tokens his own platform “proudly” lists, referring to them as ‘dogshit’ and ‘shitcoins’” (p22).

 

There’s actually an exhibit of Hayes posing with an orange Lambo Huracan on page 21 (reproduced below).

  1. On Personal Liability: The suit goes after the individual defendants for damages, namely Arthur Hayes (CEO and founder), Ben Delo (cofounder), and Samuel Reed (CTO). Each of them “by virtue of his offices, stock ownership, agency, agreements or understandings, and specific acts… had the power and authority to direct the management and activities of BitMEX and its employees, and to cause BitMEX to engage in the wrongful conduct complained of herein” (pp 72-73); and gives rise to the cause of action of aiding and abetting (p65).

          Ouch!

BitMEX has been no stranger to controversy in recent months – with lawsuits by angel investors Frank Amato and RGB Coin (Dec 2019), later joined by Elfio Guido Capone (May 2020); “ongoing” investigations by the U.S. regulator Commodity Futures Trading Commission (since Jul 2019); and a massive leak of customer email addresses (Nov 2019), which Dovey Wan refers to as crypto’s very own “Ashley Madison” scandal! Customers are potentially left exposed to unwanted tax probes like what happened after the Panama Papers broke.

But this one takes the cake as it is part of the famous “Red Wedding” (as OffshoreAlert calls it ala Game of Thrones) when 11 class actions were launched against some of the biggest crypto names on this planet – all on the same day, at the same court, and by the same law firms jointly – Roche Cyrulnik Freedman and Selendy & Gay.

Both firms are also behind the high-stakes suit against Tether and Bitfinex last year, and Civic last month. Prior to this, the lead partners cut their teeth suing Craig Wright who claims to be Bitcoin creator Satoshi Nakomoto.

They’re not afraid to poke the bear and start a PR stunt. Then gun for bear-sized settlement fees so that the bear can avoid further PR stunts.

The next post looks at the new suit against BitMEX filed by BMA, represented by Pavel Pogodin. Hint: It has more graphic details. In case you wondered, BMA are the same mysterious guys taking Ripple to trial for its sensational $1.1 billion sale of XRP tokens.

According to public records discovered by Finance Magnates, Pogodin is actually listed as the residing agent for BMA.

It’s a good time to be a crypto lawyer. Let’s connect!

[Read Part 2]

Important Disclaimer: None of the allegations above have been proven at date of writing. You can follow the court docket as it develops here. The rest are opinions.