The US District Court for the Southern District of New York has rejected a collective lawsuit against Uniswap Labs, its CEO, foundation, and venture capital supporters, filed by complainants alleging monetary losses due to fraudulent tokens on the decentralized crypto exchange. The dismissal was issued by Judge Katherine Polk Failla, who is also presiding over the Securities and Exchange Commission’s proceedings against Coinbase.
The legal action was initiated by six persons who purchased tokens on Uniswap from December 2020 to March 2022. They represented a “nationwide class of users,” arguing that Uniswap Labs had control over the liquidity pools in the protocol, including those established by the fraudsters to whom they lost funds.
The lawsuit was lodged in April 2022. The accused were seeking the annulment of the (smart) contracts they had signed to acquire the fraudulent tokens, along with damages, pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934.
The complainants asserted that their case was supported by the fact that Uniswap managed “liquidity provider funds and freshly minted tokens in Uniswap’s own core contracts,” utilized its controlled routers to handle transactions on the protocol, and issued liquidity tokens upon the creation of pools.
Moreover, the complainants contended that the defendants “probably” possessed a minimum of 88% of the Uniswap UNI governance tokens, despite lacking actual knowledge of token ownership. The judge noted in her ruling that neither party was aware of the scammers’ identities, and instead of pursuing legal action against the scammers for illegal solicitation, the complainants were suing the defendants based on social media statements:
“Undeterred, they are now taking legal action against the Uniswap Defendants and the VC [venture capital] Defendants, hoping that this Court might ignore the reality that the existing state of cryptocurrency regulation leaves them without a remedy, at least concerning the specific allegations made in this lawsuit.” The court did not ignore this reality:
“The Court refuses to extend the federal securities laws to encompass the alleged conduct and determines that the Plaintiffs’ issues are more appropriately addressed to Congress rather than this Court.”
The judge also made broader observations. Discussing the complainants’ claims about the core and router contracts, she stated:
“[I]t is illogical to assume that a creator of computer code underlying a specific software platform could be held accountable under Section 29(b) [of the Exchange Act] for a third party’s misuse of that platform.”
The judge referenced the unsuccessful collective lawsuit against Coinbase in 2022 for unregulated securities sales in her rationale. She dismissed the case with prejudice, indicating that the case cannot be re-litigated.
Community commentators expressed satisfaction that the verdict demonstrated a substantial understanding of decentralized finance.
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