SAN FRANCISCO Jan 20 (Reuters) – Elon Musk, Tesla Inc’s (TSLA.O) chief executive, is likely to be called to testify on Friday in a jury trial over his 2018 Twitter post that he had “funding secured” to take the electric carmaker private, which shareholders allege cost them millions in trading losses.
The class action trial in San Francisco federal court resumed with investor Timothy Fries telling the jury how he lost $5,000 buying Tesla stock after Musk sent the tweet at the center of the lawsuit.
Musk, known for combative testimony, is expected to address why he has insisted he had Saudi investor backing for the deal, which never came together, and whether he knowingly made a materially misleading statement with his tweet.
The case is a rare securities class action trial and the plaintiffs have already cleared high legal hurdles, with U.S. Judge Edward Chen ruling last year that Musk’s post was untruthful and reckless.
Shareholders alleged that Musk lied when he sent the tweet, costing investors.
Fries told the jury that funding secured meant to him that “there had been some vetting, some critical review of those funding sources.”
Musk’s attorney, Alex Spiro, told the jury in his opening statement Wednesday that Musk believed he had financing from Saudi backers and was taking steps to make the deal happen. Fearing leaks to the media, Musk tried to protect the “everyday shareholder” by sending the tweet, which contained “technical inaccuracies,” Spiro said.
Guhan Subramanian, a Harvard Law School professor, told the jury that Musk’s behavior in 2018 lacked the hallmarks of traditional corporate dealmaking by tweeting his interest in Tesla without proper financial or legal analysis.
“Compared to the standard template it’s an extreme outlier,” said Subramanian, who called Musk’s approach “unprecedented” and “incoherent.”
A jury of nine will decide whether the tweet artificially inflated Tesla’s share price by playing up the status of funding for the deal, and if so, by how much.
The defendants include current and former Tesla directors, whom Spiro said had “pure” motives in their response to Musk’s plan.
Reporting by Tom Hals in Wilmington, Del., and Jody Godoy in San Francisco; Editing by Noeleen Walder, Peter Henderson, Matthew Lewis and Daniel Wallis
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Jody Godoy
Thomson Reuters
Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com
NEW YORK, Jan 13 (Reuters) – Donald Trump on Friday will learn how the company that bears the former U.S. president’s name will be punished after being found guilty of scheming to defraud tax authorities for 15 years.
A New York state judge will impose the sentence after jurors in Manhattan found two Trump Organization affiliates guilty of 17 criminal charges last month.
The sentencing comes three days after Justice Juan Merchan of the Manhattan criminal court ordered Allen Weisselberg, who worked for Trump’s family for a half-century and was the company’s former chief financial officer, to jail for five months after he testified as the prosecution’s star witness.
Trump’s company faces only a maximum $1.6 million penalty, but has said it plans to appeal. No one else was charged or faces jail time in the case.
Manhattan District Attorney Alvin Bragg’s office, which brought the case, is still conducting a criminal probe into Trump’s business practices.
Bill Black, a professor at the University of Missouri-Kansas City School of Law specializing in white-collar crime, called the expected penalty a “rounding error” that offers “zero deterrence” to others, including Trump.
“This is a farce,” he said. “No one will stop committing these kinds of crimes because of this sentence.”
The case has long been a thorn in the side of the Republican former president, who calls it part of a witch hunt by Democrats who dislike him and his politics.
Trump also faces a $250 million civil lawsuit by state Attorney General Letitia James accusing him and his adult children Donald Trump Jr., Ivanka Trump and Eric Trump of inflating his net worth and the value of his company’s assets to save money on loans and insurance.
Bragg and James are Democrats, as is Bragg’s predecessor Cyrus Vance, who brought the criminal case. Trump is seeking the presidency in 2024, after losing his re-election bid in 2020.
At a four-week trial, prosecutors offered evidence that Trump’s company covered personal expenses such as rent and car leases for executives without reporting them as income, and pretended that Christmas bonuses were non-employee compensation.
Trump himself signed bonus checks, prosecutors said, as well as the lease on Weisselberg’s luxury Manhattan apartment and private school tuition for the CFO’s grandchildren.
“The whole narrative that Donald Trump was blissfully ignorant is just not real,” Assistant District Attorney Joshua Steinglass told jurors in his closing argument.
Weisselberg’s testimony helped convict the company, though he said Trump was not part of the fraud scheme. He also refused to help Bragg in his broader investigation into Trump.
The Trump Organization had put Weisselberg on paid leave until they severed ties this week. His lawyer said the split, announced on Tuesday, was amicable.
Weisselberg, 75, is serving his sentence in New York City’s notorious Rikers Island jail.
State law limits the penalties that Justice Merchan can impose on Trump’s company. A corporation can be fined up to $250,000 for each tax-related count and $10,000 for each non-tax count.
Trump faces several other legal woes, including probes related to the Jan. 6, 2021, attack on the U.S. Capitol, his retention of classified documents after leaving the White House, and efforts to overturn his 2020 election loss in Georgia.
Reporting by Karen Freifeld and Jonathan Stempel; editing by Jonathan Oatis
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NEW YORK, Jan 10 (Reuters) – A longtime executive for Donald Trump is expected to be sent to New York’s notorious Rikers Island jail after being sentenced on Tuesday for helping engineer a 15-year tax fraud scheme at the former president’s real estate company.
Allen Weisselberg, the Trump Organization’s former chief financial officer, pleaded guilty in August, admitting that from 2005 to 2017 he and other executives received bonuses and perks that saved the company and themselves money.
Weisselberg is expected to be sentenced to five months behind bars, after paying nearly $2 million in taxes, penalties and interest and testifying at the criminal trial of the Trump Organization, which was convicted on all counts it faced.
The sentence will be imposed by Justice Juan Merchan, who oversaw the trial in a New York state court in Manhattan. Weisselberg would likely serve 100 days with time off for good behavior.
Those days will probably not be easy for Weisselberg, 75, at a jail known for violence, drugs and corruption. Nineteen inmates there died last year.
“You’re going into a byzantine black hole,” said Craig Rothfeld, a prison consultant helping Weisselberg prepare for lockup.
50-YEAR RELATIONSHIP
Many convicts in New York City facing one year or less behind bars head to Rikers Island, which lies between the New York City boroughs of Queens and the Bronx and houses more than 5,900 inmates.
Rothfeld spent more than five weeks at Rikers in 2015 and 2016 as part of an 18-month sentence for defrauding investors and tax authorities when he was chief executive of the now-defunct WJB Capital Group Inc.
He now runs Inside Outside Ltd, which advises people facing incarceration. Another client is Harvey Weinstein, the former Hollywood movie producer convicted twice of rape.
After being sentenced, Weisselberg will likely be driven to Rikers and trade his street clothes for a uniform and sneakers with velcro straps.
Rothfeld said he hopes Weisselberg will be segregated from the general population, and not placed in a dorm with inmates who may not know him but will know his boss, who is seeking the presidency in 2024.
“Certainly Mr. Weisselberg’s 50-year relationship with the former president is on all our minds,” Rothfeld said.
A spokesman for the city’s Department of Correction said the agency’s mission is “to create a safe and supportive environment for everyone who enters our custody.”
Rikers is scheduled to close in 2027.
STAR WITNESS
Weisselberg was the star government witness against his employer.
He told jurors that Trump signed bonus and tuition checks, and other documents at the heart of prosecutors’ case, but was not in on the tax fraud scheme.
Though no longer CFO, Weisselberg remains on paid leave from the Trump Organization. He testified in November that he hoped to get a $500,000 bonus this month.
Weisselberg testified that the company is paying his lawyers. It is paying Rothfeld as well, a person familiar with the matter said. Rothfeld declined to comment.
Trump was not charged and has denied wrongdoing. The Manhattan District Attorney’s office is still investigating his business practices.
Merchan will also sentence the Trump Organization on Friday. Penalties are limited to $1.6 million.
Weisselberg remains a defendant in New York Attorney General Letitia James’ $250 million civil lawsuit alleging that Trump and his company inflated asset values and Trump’s net worth.
Rothfeld said he advised Weisselberg not to go outside at Rikers because of the risk of violence in courtyards, and not to interject himself into conversations between other inmates.
“The goal is to keep to yourself,” Rothfeld said.
Reporting by Karen Freifeld; Editing by Richard Chang
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NASSAU, Dec 13 (Reuters) – Cordoned-off roads, a sweltering courtroom and numerous delays marked Sam Bankman-Fried’s first in-person public appearance since his crypto company collapsed.
The Bahamas courtroom hearing, conducted over the course of six hours, saw Bankman-Fried, dressed in a suit rather than his typical t-shirt attire, seeking bail to dispute his extradition to the U.S. He was ultimately refused and faces possible extradition to the United States.
It was a stunning fall from grace for the crypto boss, once estimated by Forbes as worth as much as $26.5 billion.
“I’m not waiving,” Bankman-Fried said when asked if he would seek to waive his right to an extradition hearing.
It was a rare comment in a hearing that was largely taken up with lawyers discussing process. In another comment, Bankman-Fried referred to the night of his arrest as “hectic.”
There was high anticipation ahead of the appearance by Bankman-Fried, who has done numerous media interviews since his firm collapsed but not been widely seen in public.
The day started with Bankman-Fried ushered into court away from the main entrance and photographers and reporters who crowded to get a shot.
Bahamas Chief Magistrate JoyAnn Ferguson-Pratt contributed witty asides that often left the courtroom chuckling, once quipping “I wasn’t born yesterday” at the defense counsel’s interpretation of the law.
Ferguson-Pratt’s repeatedly forgetting the defendant’s last name led to laughter.
“Samuel,” she said before trailing off, with the once-billionaire crypto magnate reminding her of his name: “Bankman-Fried.”
People in the courtroom fanned themselves to keep cool in the tropical heat as sun shone through the windows.
The hearing was adjourned twice, once to consult about the court’s jurisdiction to grant bail, and again in the afternoon.
It also included an extensive discussion of Bankman-Fried’s medication, which his lawyer said was for conditions including depression, insomnia and attention deficit disorder.
At the start of the proceedings, Bankman-Fried asked to change an Emsam patch, a medical strip applied to the skin that is used to treat adult depression. He asked to briefly leave the court room to take the medication.
Bankman-Fried acknowledged that he had not taken his medications with him when he was arrested, which he attributed to having had a “hectic night”.
His parents, Joseph Bankman and Barbara Fried, at times seemed frustrated with the arguments made by the prosecution, which described him as a flight risk.
Bankman-Fried’s defense counsel pointed out that Bankman-Fried had spent weeks in The Bahamas after his business collapsed without attempting to leave the country.
At the end of the hearing, his head lowered, he hugged his parents. A van outside the court waited to take him away.
Reporting by Jared Higgs in Nassau and Brian Ellsworth in Miami; editing by Megan Davies, Noeleen Walder and Sam Holmes
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NEW YORK, Nov 22 (Reuters) – A New York judge has scheduled an October 2023 trial for former U.S. President Donald Trump, three of his adult children and the Trump Organization in a lawsuit brought by New York Attorney General Letitia James accusing them of fraudulently overvaluing the real estate company’s assets and Trump’s net worth.
Justice Arthur Engoron of the state Supreme Court in Manhattan set the trial date during a contentious hearing on Tuesday following motions by the Trumps the night before to have the civil lawsuit dismissed.
“I ruled on all these issues. It seems to me the facts are the same. The law is the same. Parties are the same,” Engoron told Alina Habba, Trump’s lawyer. “You can’t keep making the same argument after you’ve already lost.”
Habba had accused the judge of bias. Trump, a Republican, has accused James, a Democrat, of suing him because she dislikes him and his politics.
In her lawsuit filed on Sept. 21, James accused Trump, his company, his children Donald Jr, Eric and Ivanka and others of inflating Trump’s assets by billions of dollars in a decade of lies to banks and insurers. James called the fraud “staggering.”
The complaint seeks $250 million in damages. It also seeks to stop the Trumps from running businesses in the state and ban Trump and his company from acquiring New York real estate for five years.
Engoron is expected to rule on the motions to dismiss by early January. Trump is already appealing Engoron’s order requiring an independent watchdog to monitor his company.
The trial, scheduled for Oct. 2, 2023, and other legal issues could complicate Trump’s campaign, announced last week, for the presidency in 2024.
The Trump Organization is now on trial in another Manhattan courtroom on criminal tax fraud charges.
In addition, U.S. Attorney General Merrick Garland last week named a special counsel to oversee two criminal investigations, one related to the FBI’s seizure of government documents from Trump’s Florida home and the other examining Trump’s role in efforts to overturn the 2020 presidential election.
Trump also faces a criminal investigation in Georgia into whether he interfered with the 2020 election results in that state.
He has called these cases and investigations politically motivated, and has labeled Engoron a “puppet judge” for James.
In seeking to dismiss the case filed by James, Trump maintained that the attorney general lacked authority to pursue a lawsuit designed to “get” him when neither the public nor the marketplace was harmed.
“Who stands to gain from this highly-politicized farse [sic], aside from the politically-compromised Attorney General of the State of New York?” Trump’s filing said.
Other defendants also urged dismissals.
Lawyers for Trump’s sons called the lawsuit a “textbook example of throwing everything at the wall to see what sticks.” Ivanka Trump’s lawyers said there were no allegations that she lied to or defrauded anyone.
The Trump Organization’s former longtime Chief Financial Officer Allen Weisselberg and its Controller Jeffrey McConney also sought dismissals of claims against them. Both testified as prosecution witnesses in the Manhattan criminal trial in which prosecutors accused the company of engaging in tax fraud spanning 15 years.
Reporting by Karen Freifeld and Jonathan Stempel in New York; Editing by Will Dunham
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SAN FRANCISCO, Nov 16 (Reuters) – James Murdoch, a Tesla Inc (TSLA.O) director, testified in court on Wednesday that CEO Elon Musk has in the last few months identified someone as a potential successor to head the electric carmaker.
Murdoch, who did not name the potential successor, was testifying in a trial over Musk’s 2018 Tesla pay package.
When a plaintiff’s lawyer asked him to confirm that Musk has never identified someone as a potential successor CEO, Murdoch said, “He actually has,” adding that happened in the “last few months.”
Some Tesla investors are worried about whether Musk can focus adequately on his role as CEO of the world’s most valuable carmaker now that he has been running Twitter Inc after a protracted buyout that at one point he tried to scrap. Murdoch testified that Musk has had some Tesla engineers work at Twitter, a situation the board is monitoring.
Murdoch’s testimony did not make it clear how specific the conversation about the successor was. Antonio Gracias, a longtime friend of Musk who was also a Tesla board member from 2007 to 2021, testified that there were conversations of finding an “administrative CEO” who oversees sales, finance and human resources “so Musk can focus his time as chief product officer which is his most vital function.” But he added they could not find one, without elaborating on the timing of the discussions.
Musk, who is CEO of Twitter and rocket company Space X, among others said, “Frankly I don’t want to be CEO of any company.”
Musk testified that he expected to reduce his time at Twitter and eventually find a new leader to run the social media company.
On Monday, Musk said he had worked through the night at Twitter’s San Francisco headquarters and would keep “working & sleeping here” until the social media platform – which he recently acquired for $44 billion – was fixed.
“AS LONG AS I CAN BE USEFUL”
“It’s worth noting there’s a light year gap between identifying someone and having that someone take the job,” Tesla investor Gene Muster tweeted after the news.
At Tesla’s shareholders meeting in August, Musk was asked about succession plan and replied: “I intend to stay with Tesla as long as I can be useful.”
At the time, Musk also said, “We do have a very talented team here. So I think Tesla would continue to do very well even if I was kidnapped by aliens or went back to my home planet maybe.”
Murdoch testified that Tesla’s audit committee is monitoring the Twitter situation, saying that the committee had discussions about having some Tesla engineers do work at Twitter.
“Most of the work my understanding is has been done. It was a short-term deployment,” he said, adding the work is “paid for.”
“The audit committee has said that, if it is taking away from Tesla work, that’s something we also have to be very aware of and that we don’t want it to be that way.”
He also said Musk asked a few team heads to see if they were people interested in helping Twitter.
Musk acknowledged in his testimony that some Tesla engineers were assisting in evaluating Twitter’s engineering teams, but he said it was on a “voluntary basis” and done “after hours.”
Reporting by Hyunjoo Jin, Paresh Dave and Tom Hals; editing by Jonathan Oatis, Deepa Babington and David Gregorio
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Paresh Dave
Thomson Reuters
San Francisco Bay Area-based tech reporter covering Google and the rest of Alphabet Inc. Joined Reuters in 2017 after four years at the Los Angeles Times focused on the local tech industry.
Nov 16 (Reuters) – Elon Musk said on Wednesday he expected to reduce his time at Twitter and eventually find a new leader to run the social media company, adding that he hoped to complete an organizational restructuring this week.
Musk made the remarks while testifying in a Delaware court to defend against claims that his $56 billion pay package at Tesla Inc (TSLA.O) was based on easy to achieve performance targets and was approved by a compliant board of directors. read more
Tesla investors have been increasingly concerned about the time that Musk is devoting to turning around Twitter.
Shares of Tesla fell 3% at midday.
“There’s an initial burst of activity needed post-acquisition to reorganize the company,” Musk said in his testimony. “But then I expect to reduce my time at Twitter.”
Musk also admitted that some Tesla engineers were assisting in evaluating Twitter’s engineering teams, but he said it was on a “voluntary basis” and “after hours.”
The billionaire’ s first two weeks as Twitter’s owner has been marked by rapid change and chaos. He quickly fired Twitter’s previous chief executive and other senior leaders and then laid off half of Twitter’s staff earlier this month.
Musk sent an email to Twitter employees early Wednesday, telling them they needed to decide by Thursday whether they wanted to stay on at the company to work “long hours at high intensity” or take a severance package of three months of pay.
Reporting by Hyunjoo Jin and Tom Hals; Writing by Sheila Dang; Editing by Chizu Nomiyama and Richard Chang
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Tom Hals
Thomson Reuters
Award-winning reporter with more than two decades of experience in international news, focusing on high-stakes legal battles over everything from government policy to corporate dealmaking.
WILMINGTON, Del, Nov 14 (Reuters) – A trial opened Monday over shareholder allegations that Tesla Inc Chief Executive Elon Musk’s $56 billion pay package was rigged with easy performance targets and that investors were duped into approving it, with Musk slated to take the stand later this week.
A Tesla (TSLA.O) shareholder hopes to prove during the five-day trial that Musk used his dominance over the electric vehicle maker’s board to dictate terms of the 2018 package, which did not even require him to work at Tesla full-time.
Musk, the world’s richest person, will testify Wednesday, Greg Varallo, an attorney for shareholder Richard Tornetta, told a court in Wilmington, Delaware, on Monday.
The trial began with Ira Ehrenpreis, a Tesla board member since 2007, taking the stand to describe the early years of the company and Musk’s role.
“I was very impressed with his vision for this endeavor,” said Ehrenpreis.
Tornetta has asked the court to rescind the pay package, which is six times larger than the top 200 CEO salaries combined in 2021, according to Amit Batish of research firm Equilar.
Musk and Tesla’s directors, who are also defendants, have denied the allegations. They argued the pay package did what it aimed to do — ensure that the entrepreneur successfully guided Tesla through a critical period, which helped drive the stock tenfold higher.
The case will be decided by Chancellor Kathaleen McCormick of Delaware’s Court of Chancery. She oversaw the legal dispute between Twitter Inc (TWTR.MX) and Musk that ended with his purchase of the social media platform for $44 billion last month.
The Tesla shareholder lawsuit argues that the pay package should have required Musk to work full-time at Tesla. The company’s shareholders have become concerned that Musk is distracted by Twitter, which he has warned might not survive an economic downturn.
Musk told a business conference on the sidelines of the G20 summit in Bali, Indonesia, on Monday that he had too much on his plate at the moment.
Legal experts said Musk is in a better legal position in the pay case than he was in Twitter’s lawsuit, which prevented him from walking away from the takeover.
Boards have wide latitude to set executive compensation, according to legal experts.
However, directors must meet more stringent legal tests if the pay package involves a controlling shareholder, and part of this trial is likely to focus on whether that description fits Musk. While he owned only 21.9% of Tesla in 2018, plaintiffs are likely to cite what is seen as his domineering personality and ties to directors.
In all, 19 witnesses are scheduled to testify, including directors and executives from 2018, compensation experts, and advisors who helped craft the pay package.
The disputed package allows Musk to buy 1% of Tesla’s stock at a deep discount each time escalating performance and financial targets are met. Otherwise, Musk gets nothing.
Tesla has hit 11 of the 12 targets as its value ballooned briefly to more than $1 trillion from $50 billion, according to court papers.
A decision will likely take around three months after the trial and could be appealed to the Delaware Supreme Court.
Reporting by Tom Hals in Wilmington, Delaware; Editing by David Gregorio and Jonathan Oatis
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Tom Hals
Thomson Reuters
Award-winning reporter with more than two decades of experience in international news, focusing on high-stakes legal battles over everything from government policy to corporate dealmaking.
NEW YORK, Oct 10 (Reuters) – The blank-check acquisition firm that agreed to merge with former U.S. President Donald Trump’s social media company postponed on Monday its shareholder vote to Nov. 3 after failing to garner enough support to win a 12-month extension.
At least 65% of the shareholders of Digital World Acquisition Corp (DWAC.O) needed to agree to the extension. The special purpose acquisition company (SPAC) opted to push back the deadline to try to find more votes.
Digital World, which had already pushed back the deadline for its shareholders to vote on the 12-month extension several times over the past month, fell short of that threshold on Monday.
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At stake is an over $1 billion private investment in public equity (PIPE) financing that Trump Media & Technology Group (TMTG) stands to receive from Digital World, which inked a go-public deal with the social media company in October 2021.
Digital World last month said it had received termination notices from PIPE investors who were pulling out about $139 million of the total financing commitment.
The transaction with TMTG has been on hold amid civil and criminal investigations into the circumstances around the deal. Digital World has not yet received approval from the U.S. Securities and Exchange Commission (SEC), which is reviewing its disclosures on the deal.
Digital World is set to liquidate on Dec. 8, after managing to extend its life by three months in September.
Reuters reported last month that executives behind Digital World had failed to pay Saratoga Proxy Consulting, their proxy solicitors, for its work rallying shareholders for the vote.
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Reporting by Echo Wang in New York, additional reporting by Svea Herbst-Bayliss; Editing by Will Dunham
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September 30, 2022 – The decentralized autonomous organization (DAO) is a relatively novel structure gaining popularity in the blockchain community. DAOs are community-led entities with no central leadership built on a blockchain using smart contracts, and with no restriction on the geographic location of its members, potentially resulting in an international organization.
DAOs are seen as transparent and their lack of central leadership is attractive to many. What DAO members often do not realize, however, is that they may be unknowingly exposing themselves to personal liability, simply by virtue of their membership in a DAO.
Unlike shareholders or members of more traditional legal entities, DAO members do not enjoy protections against personal liability for the DAO’s actions unless there is a state law that offers such protection.
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In this article, the authors examine recent case examples that illustrate the risks of DAO membership and the urgent need for federal and state rulemaking that is public and transparent, in contrast to regulation by enforcement.
bZerox DAO | Ooki DAO
Earlier this month, the Commodity Futures Trading Commission (CFTC) issued a settlement order imposing a $250,000 civil penalty on the bZerox (bZx) DAO, which unlawfully offered to its members leveraged and margined retail commodity transactions in digital assets in violation of the Commodity Exchange Act (CEA) and CFTC regulations. These margined retail commodity transactions were required to take place on a designated contract market, but did not.
CFTC also commenced a federal civil enforcement action in California based on the violations of the same laws against Ooki DAO (Ooki), a successor in interest of bZx, which has the same members and operates the same software protocol.
Importantly, CFTC’s settlement order also held personally liable Tom Bean and Kyle Kistner, co-founders of bZx who transferred control of bZx’s software protocol to Ooki. While the DAO’s conduct was found to be illegal, the finding of personal liability of the owners based solely on their status as voting token holders of the Ooki DAO should cause concern among DAO members.
CFTC’s approach to deciding who is responsible for the violations was the subject of internal debate within the CFTC. CFTC’s Commissioner, Summer K. Mersinger, issued a dissenting statement, calling the decision to impose liability on bZx’s co-founders “arbitrary” and “based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing.”
As she noted, there are three bases on which the CFTC can rely to support charging a person with violations of the CEA and CFTC rules committed by another person or entity: (1) principal-agent liability, (2) aiding-and-abetting liability, and (3) control person liability.
Yet, CFTC based their decision on California precedents from contract and tort law that hold that individual members of a for-profit unincorporated association are personally liable for the debts of the association. Commissioner Mersinger stressed that the CFTC seemingly acted outside the scope of its authority in acting in a manner not intended by Congress.
She noted that the CFTC engaged in regulation by enforcement that will have far-reaching policy implications. Specifically, the Commission’s settlement order and complaint arbitrarily define the Ooki DAO unincorporated association as comprising those who vote on proposals with their Ooki tokens.
This definition creates an unequitable division between token holders based on the happenstance of voting or not voting with their token. Under the CFTC definition, a token holder that voted on any issue becomes a member subject to personal liability and a token holder who failed to vote for any reason is not considered a member and is exempt from liability. This definition discourages voting participation in the DAO governance.
Commissioner Mersinger explained that the CFTC had better paths available in initiating a public notice-and-comment rulemaking on the issues of how DAO members should be defined and who CFTC may hold personally liable for a DAO’s violations. This process would have allowed public input from interested parties and would highlight possible consequences of the Commission’s approach to DAOs.
Furthermore, Commissioner Mersinger expressed an opinion that the CFTC could have achieved the same result by using the aiding-and-abetting standard when finding Bean and Kistner personally liable rather than relying on novel legal theories that are likely to have far-reaching implications on DAOs.
Sarcuni v. bZx
bZx’s civil troubles began earlier this year when, in Sarcuni v. bZerox et al., members of bZx filed a class action against the DAO, its founders and investors following a successful “phishing” attack that resulted in a theft of $55 million in funds from the platform. The plaintiffs alleged the theft was possible due to the lack of security features on the platform.
Defendant-founders filed motions to dismiss, claiming that it is improper to hold them liable as the stolen funds belonged to the DAO. The motions argued that since bZx was owned and managed by the DAO itself, only the DAO can be liable. While the plaintiffs were members of the DAO, they claimed that they were not “meaningful” members and lacked sufficient control for any liability to be imposed.
The court’s decision in Sarcuni is expected to establish the standards for founder and manager liability for the actions or omissions of a DAO. Unlike many other DAOs, the bZx DAO is a limited liability company under the laws of Delaware.
In addition, there is a holding company, bZx Holding Corp., incorporated in the State of Wyoming. The court will need to take into consideration the LLC status and whether Delaware’s laws afford the founders protection.
Regulation of DAOs
bZx’s misadventures and their ramifications highlight the fact that the status of DAO members is uncertain, regulation and enforcement are not uniform, and there is dire need for clarity as to the status and risk of personal liability for DAO members.
Most DAOs lack the legal safeguards afforded to limited liability companies. Members could find themselves facing personal liability merely because they used their token for a simple vote, possibly unrelated to any DAO actions that may later result in liability.
A few states, such as Vermont, Wyoming and Tennessee, have enacted legislation providing some protections to DAOs and their members. While these laws have not yet been tested by the judicial branch, and while they have been criticized as being out of touch with the realities of DAOs, at least it’s a start.
Wyoming enacted legislation in 2022 to protect DAO members from personal liability by allowing DAOs to obtain legal status as limited liability companies. The statute defines DAO voting and quorum requirements and allows DAOs to define their own quorum (prior statutory requirement of 50% of the membership quorum was difficult to achieve with DAOs having fluid membership and possibly thousands of owners). No member has a fiduciary duty under the statute.
Vermont also passed its own blockchain-based statute. The Vermont legislation does not specifically address DAOs but authorizes creation of a new type of business entity — the Blockchain-Based LLC (BBLLC). A BBLLC is allowed to customize its governance structure. The operating agreement must define the rights and obligations of each participant group within the BBLLC.
Tennessee is another state that has afforded DAOs protection within its laws. Under Tennessee’s bill, unless stated otherwise in the articles or operating agreement, the management of the DAO can be member-managed, or contract managed.
There is no requirement that the DAO have a centralized governance or managers. Furthermore, the law does not even require that the person forming the DAO be a member. The DAO specifically states that members do not owe a fiduciary duty to the DAO.
The biggest criticism of existing DAO legislation is that they place additional burdens on DAOs without conferring real benefits in exchange. This stems from a lack of understanding of how DAOs function. The CFTC order also highlights the need to define exactly who is a member or control person in a DAO.
Analysis and conclusion
bZx DAO was established in 2019 before two of these laws were in effect. They incorporated in Delaware, traditionally the most corporate-friendly state. CFTC’s Complaint alleges that bZx’s rebrand to Ooki was undertaken solely to escape regulatory enforcement, but the new organizational form exposed the members of the unincorporated association to personal liability.
Most DAOs are unincorporated associations and many have not registered in Wyoming, Tennessee or Vermont, and thus their members are similarly at risk of personal liability for the actions of the DAO.
DAOs usually comprise thousands of members. Each member has the opportunity to vote on the governance of the DAO. While the CFTC has acknowledged that DAOs can be used for good governance, the CFTC order is a warning to DAOs and their members that good actors can be punished without fault for the actions of bad actors within the DAO.
DAOs have the potential to change how entities govern themselves — how companies operate — and allow members to have a voice is decisions that impact their companies. Companies will employ blockchain technology to enhance themselves and their relationships with their customers.
The CFTC is the federal agency responsible for the oversight of digital assets including cryptocurrencies such as Ethereum, Solana, Polygon and many more. Most DAOs use these tokens for members to gain access to the community and participate in its governance. Members of DAOs not incorporated in the appropriate jurisdiction, or without a governance structure protecting members, are leaving themselves open to personal liability.
Considering the CFTC decision, DAOs will do well to revisit their governance structure and consider how best to insulate members from unintended personal liability. Furthermore, DAO members should review their insurance coverage as they may find they lack coverage under their personal and business policies for DAO liability exposure.
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Jana S. Farmer
Jana S. Farmer, a partner at Wilson ElserMoskowitz Edelman & Dicker LLP’s White Plains, New York office, chairs the firm’s art law practice and is a member of the firm’s intellectual property and technology practice. She advises clients on emerging legal issues in the technology space, including those involving non-fungible tokens and blockchain technology. She can be reached at jana.farmer@wilsonelser.com.
John Cahill
John Cahill is an associate at Wilson ElserMoskowitz Edelman & Dicker LLP with a focus on general casualty and liability. Based in White Plains, New York, he assists clients with risk and crisis management at the prelitigation phase of potential claims and specializes in the burgeoning field of cryptocurrencies. He can be reached at john.cahill@wilsonelser.com.