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Law360 (November 2, 2021, 6:03 PM EDT) -- A series of digital-asset products linked to a cryptocurrency mining operation do not count as securities, a Connecticut jury found Monday in what a defense lawyer called a first-of-its-kind verdict.
The jury on Monday cleared Stuart Fraser of liability for GAW Miners LLC's alleged misconduct and found the products in question, which included a virtual currency and a digital wallet, were not investment contracts. Whether certain crypto-related products are securities has been a hot-button question among regulators and in the cryptocurrency industry.
"It's the first case that we know of where a jury addressed whether cryptocurrency products were securities," Daniel Weiner of Hughes Hubbard & Reed LLP told Law360 on Tuesday. Weiner helped represent Fraser.
The case, which dates back to 2016, centers around cryptocurrency mining operations, which refers to the use of computing power to verify cryptocurrency transactions.
GAW Miners LLC initially sold physical mining equipment to customers but, along with a company called ZenMiner LLC, began offering remote management software that purportedly allowed customers to control their mining hardware online, according to the class of customers bringing the action.
The customers alleged GAW and ZenMiner never actually had as much equipment as they claimed. GAW Miners and ZenMiner were found in default earlier in the case, court filings show.
Faced with potential demands to send customers equipment they didn't have, the companies turned to selling "hashlets," which gave purchasers a portion of the computing power the companies purportedly owned without receiving the physical hardware, according to the suit.
The plaintiffs alleged that even with the "hashlets," the companies did not have as much computing power as claimed and instead used the money from new customers to pay off older customers.
GAW Miners and ZenMiner also sold so-called "Hashpoints," which the purchasers described as promissory notes that could be converted into the companies' virtual currency, Paycoin. "Hashstakers" were virtual wallets for storing Paycoin.
Homero Joshua Garza, the companies' co-founder, pled guilty to wire fraud in a related criminal action in 2017 and agreed to pay damages in a case brought by the U.S. Securities and Exchange Commission. He was dropped from the customers' case in 2016.
That left Fraser, a 41% investor in GAW Miners, as the sole remaining defendant in the trial.
The customers alleged all four of the products — Hashlets, Hashpoints, Paycoin and HashStakers — were unregistered securities, and that Fraser was liable for the sales because his role at the companies was comparable to that of a partner or director.
But the jury disagreed, finding none of the products were securities, not even Hashlets, which the SEC described as a security in its case against Garza. Weiner said the defense had argued, apparently convincingly, that Hashlets were not a passive investment and that customers actively controlled their investment.
The jury also found Fraser didn't aid in any common law fraud that may have been committed by GAW Miners. Fraser had argued he too had been a victim of the scheme, losing roughly $12 million, and that he didn't have decision-making power over the operations.
"It's pretty clear there was a fraud — the main guy who did it went to jail for 21 months," Weiner said, referring to Garza. "But what kind of criminal mastermind has a scheme where he's behind the scenes controlling everything and he loses $12 million?"
Counsel for the plaintiffs did not immediately respond to a request for comment on Tuesday.
Fraser is represented by Daniel H. Weiner, Marc A. Weinstein, Amina Hassan and Hannah Miller of Hughes Hubbard & Reed LLP and David R. Schaefer, Sean M. Fisher and Rowena Moffett of Brenner Saltzman & Wallman LLP.
The customers are represented by Jacob Buchdahl, Seth Ard, Geng Chen, Russell F. Rennie and Marc Seltzer of Susman Godfrey LLP and Mark P. Kindall and Robert A. Izard of Izard Kindall & Raabe LLP.
--Additional reporting by Cara Salvatore, Rick Archer and Stewart Bishop. Editing by Philip Shea.
For a reprint of this article, please contact reprints@law360.com.
