in Newswire Published on April 6, 2022

‘Scam Tokens’: Class Action Alleges Uniswap Labs Has Done Nothing to Stop ‘Rampant Fraud’ On Crypto Exchange [DISMISSED]

Last Updated on October 3, 2023

Risley v. Universal Navigation Inc. et al.

Filed: April 4, 2022 ◆§ 1:22-cv-02780

Uniswap Labs is among the defendants in a proposed class action that alleges the crypto exchange is besieged by “rampant fraud.”

Defendant(s)

AH Capital Management, LLC Union Square Ventures, LLC Universal Navigation Inc. Uniswap Labs Hayden Z. Adams Paradigm Operations LP Andreessen Horowitz

Law(s)

The Securities Exchange Act of 1934

State(s)

New York

October 3, 2023 – Plaintiffs Appeal Dismissal of ‘Scam Tokens’ Lawsuit to Second Circuit

The plaintiffs have told the court that they are appealing the dismissal of the lawsuit detailed on this page to the Second Circuit Court of Appeals.

The one-page appeal notice, submitted to the court on September 27, can be found here.

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September 25, 2023 – Uniswap Labs ‘Scam Tokens’ Lawsuit Dismissed

The proposed class action detailed on this page was dismissed on August 29, 2023.

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In a 51-page opinion and order granting Uniswap Labs’ motion to dismiss, U.S. District Judge Katherine Polk Failla found that the defendants cannot be held legally responsible for fraud that third parties commit on their platform. In the eyes of the court, it would have been more appropriate for the plaintiffs to have taken legal action against the individuals who issued them the so-called scam tokens, Judge Failla relayed.

“Unable to do so given the [Uniswap Protocol trading platform’s] anonymization function, Plaintiffs sue the creators of the Protocol,” the judge wrote. “This they simply cannot do, at least under the current law.”

Although the plaintiffs argued that each trade on the platform constitutes a separate contract that should be voided because the defendants failed to file registration statements for each token as required under federal law, the token contracts relevant to the plaintiffs’ claims were actually drafted by the individual issuers, Judge Failla stated.

The judge also found that federal securities laws don’t apply to the defendants because they did not sell unregistered securities. Rather, they merely provided a platform to facilitate these trades, the judge noted.

“Indeed, if those whose role is solely to execute the trades could be held liable under Section 12 [of the Securities Exchange Act], shareholders would regularly sue the NASDAQ and/or New York Stock Exchange as a facilitator of any stock purchase that went awry,” Judge Failla wrote.

Ultimately, Judge Failla stated that the plaintiffs’ concerns are better addressed to Congress than to the court. Although the defendants cannot currently be held liable under federal law for fraud that occurs on their platform, the ability to issue tokens anonymously on decentralized cryptocurrency exchanges may present an issue “troublesome enough to merit regulation” as the law around these exchanges continues to develop, the judge said.

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Uniswap Labs is among the defendants in a proposed class action that alleges the cryptocurrency exchange is besieged by “rampant fraud” due to a lack of identity verification and the platform’s fee structure.

The 68-page lawsuit against Universal Navigation Inc., parent Paradigm Operations LP, and equity owners Andreessen Horowitz and Union Square Ventures alleges the companies are “well aware” of the fraud happening on the Ethereum blockchain-based exchange yet have done nothing to stop the activity. In fact, the case claims Uniswap has even “encouraged” fraud on the platform by ensuring that token issuers are guaranteed fees on every trade.

The filing alleges many Uniswap users are unaware that the platform collects on every transaction fees that generate “vast profits” for the defendants, who the case says have issued tokens on the exchange themselves while serving as the architects of the fee structure at issue. Per the lawsuit, Uniswap, who reportedly averages around $1.5 billion in trading volume each day, allows for the issuance of “thousands of scam tokens,” many of which are linked to “rug pulls,” “pump-and-dump” and Ponzi schemes, and other fraudulent conduct.

“To date, Uniswap has siphoned over $1 billion in fees from its users so that issuers of tokens may continue to profit from their conduct—no matter how fraudulent,” the case, filed in Manhattan federal court on April 4, alleges.

According to the complaint, the tokens traded on the Uniswap exchange are, in truth, unregistered securities, and the defendants, the lawsuit claims, have failed to disclose their control over the tokens issued on the exchange—including EthereumMax, Bezoge Earth, Matrix Samurai, AlphaWolf Finance, Rocket Bunny and BoomBaby.io—in a transparent manner.

“This is precisely the type of conduct that the securities laws, which Uniswap has continually flouted, are designed to prevent,” the suit states.

According to the lawsuit, the tokens traded on Uniswap are “investment contracts” and therefore securities under federal law, and their issuers are thus required to file registration statements for each token. Had the digital assets been properly registered, proposed class members would have received meaningful disclosures that would have enabled them to reliably assess the token issuers’ representations and the riskiness of their investments, the suit argues.

“Without these disclosures, they were left to fend for themselves,” the case relays.

As the lawsuit tells it, the issuers of the tokens highlighted on this page were welcomed with open arms by Uniswap, who stood and currently stands to collect millions in transaction fees. Uniswap nevertheless failed to register as an exchange or broker-dealer, the case alleges.

“Defendants have profited handsomely from this unlawful activity, as have the Issuers to whom Uniswap paid hidden and exorbitant fees,” the complaint states. “Meanwhile, unsuspecting users on the other side of these fraudulent transactions were left holding the bag.”

The lawsuit looks to represent all persons who bought any of the tokens listed on this page on the Uniswap exchange between April 5, 2021 and the present and were harmed thereby.

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