Cryptocurrency Group Sued Over Losses for Misrepresenting Risks

A class-action suit was filed against three foreign companies that run a cryptocurrency platform called The Maker Ecosystem or The Maker Foundation. The complaint alleges that the class was unaware of risks involved in its digital currency, DAI, because of misrepresentation from The Maker Foundation, and they suffered larger losses associated with the COVID-19 economic crisis than they should have. The complaint says the losses on “Black Thursday” could have been avoided and were the result of neglect by The Maker Foundation.

“Despite representing that it manages a decentralized, open, digital currency platform that boasts overcollateralized (and therefore secure) currency and has certain measures in place to prevent significant investor loss, The  Maker Foundation, in fact, has promoted a system that it maintains primary control and ownership over while actively misrepresenting to investors in its platform the risks associated with it,” the complaint states. The Maker Foundation has its primary place of business in California but it is a foreign company organized in the Cayman Islands. DAI operates in Denmark.

DAI was promoted to be “more secure and stable than the others because DAI are ‘over’-collateralized by other digital currency.” The Maker Foundation allegedly claims the currency is unbiased, decentralized, and collateral-backed. The complaint says investors were assured that if the value of the collateral dropped it would trigger a liquidation event where the collateral is auctioned to pay outstanding DAI. On March 12, the value of Ethereum, the primary collateral for DAI, dropped but the suit claims that rather than triggering the collateral auction, The Maker Foundation triggered pseudo auctions. The complaint alleges this is a result of The Maker Foundation minimizing their own losses instead of considering their investors and CDP (collateralized debt position) holders.

“CDP Holders, despite being promised that auction and over-collateralization policies in place would mitigate against dramatic drops in the value of collateral, instead lost 100 percent of the collateral they invested with The Maker Foundation,” the complaint states. It alleges CDP holders lost $8.325 million, in a risk they were not aware of.

The plaintiff, Peter Johnson, is represented by Harris Berne Christensen.  He invested early in Ethereum and Maker. He was “among a handful of early Maker adopters and evangelists,” and began holding CDP in November 2018. On March 12 he was “entirely liquidated” when a bot won his collateral for $0 after the price of Ethereum dropped from $190 to under $90. The complaint claims that if the Maker Foundation had acted as they claimed he would have lost no less than 348 Ethereum collateral of his 1713.7. 348 Ethereum was worth at least $42,000 at the time of liquidation and is now worth more.

The complaint asks for damages of no less than $8.325 million for negligence and intentional misrepresentation of their policies to the class of CDP holders and punitive damages of $20 million.