Faegre Baker Daniels, a Chicago-based law partnership, is being accused of legal negligence and “erroneous advice” by Digital Capital Management LLC, formerlly known as Crypto Asset Fund LLC. According to legal documents, Faegre Baker Daniels told the investment fund to structure their company in a particular way, citing that crypto assets are not securities. This move invited an investigation and $200,000 penalty by the SEC, prompting the plaintiffs to seek legal remedy, January 3, 2019.
Tango with Securities Law
Considering today’s regulatory climate with cryptocurrency, it is best not to deal in any form of absolutes when setting a corporate structure in place for a crypto asset investment fund – especially in the United States. Going ahead with an explicit understanding that “crypto-assets aren’t securities” was a recipe for disaster in itself.
What ensued was a notice from the SEC to Digital Capital Management LLC. As the inquiry progressed, DCM’s Managing Director, Timothy Enneking, told the SEC they had only done what their legal counsel asked them to do in written and oral communication to the fund.
As per Enneking, the SEC was “trying to make a point” by fining his company, as the September 2018 settlement represented the SEC’s first enforcement action against a cryptocurrency hedge fund.
Digital Capital Management is now seeking compensatory damages for reputational harm and lost profits, other consequential damages, reimbursement of legal expenses and attorney fees, and any other damages the court deems fair.
Dealing With Ambiguous Laws
There is a case to be made but neither Faegre Baker Daniels or Digital Capital Management did anything illegal given the lack of detailed legal directives. But whether what they did was illegal or not, it is fairly obvious that there was no deliberate intent to defraud investors or regulators.
Congress is contemplating a rigid cryptocurrency law to define what entities are required to do and how they are required to do them. The clarity such a law would bring to the industry would definitely help more shaky feet enter the ring and expose themselves to this market. A majority of institutional investors who are waiting on the sidelines are held back by the regulatory uncertainty and would be willing to, at the least, dip their toes in the small pond of capital that is the cryptocurrency market.