Judge throws out Uniswap's class-action lawsuit alleging token fraud losses

By: Henry Felix

Judge throws out Uniswap's class-action lawsuit alleging token fraud losses

August 31, 2023 8:05 AM

The judge's uncommon knowledge of DeFi technology allowed him to advise the defendants to take their concerns to Congress.

A class action lawsuit brought by users who suffered losses on the decentralized cryptocurrency exchange Uniswap Labs and its CEO, foundation, and VC investors was rejected by the U.S. District Court for the Southern District of New York. The dismissal was issued by Judge Katharine Polk Failla, who also oversees the SEC's complaint against Coinbase.

The six plaintiffs claim to have made token purchases on Uniswap between the month of December 2020 and March 2022. They claimed on behalf of a "nationwide class of users" that the scammers they lost money to had built liquidity pools on the protocol, and that Uniswap Labs controlled those pools.

In April of 2022, the lawsuit was initiated. Under the Securities Act of 1933 and the Securities Exchange Act of 1934, the defendants sought rescission of the (smart) contracts they signed into to purchase the scam tokens, along with compensation.



The decision to drop the case against Uniswap. Source: 
Southern District of New York U.S. District Court

The plaintiffs asserted that Uniswap was liable because it stored "liquidity provider funds and newly created tokens in Uniswap's proprietary core contracts," processed protocol transactions through routers under its control, and distributed liquidity tokens when pools were created. In addition, without any evidence to the contrary, the plaintiffs concluded that the defendants "likely" held a minimum of 88% of the total Uniswap (UNI) governance tokens.

According→ to the judge's order, since the scammers' names were unknown to either party, the plaintiffs were suing the defendants for defamatory claims posted on social media rather than the scammers for unlawful solicitation.

"Unfazed, they now file a lawsuit against Uniswap and the VC [venture capital] Defendants in the hopes that this Court will disregard the fact that the existing status of cryptocurrency legislation renders them helpless, at least with regard to the precise claims made in this lawsuit."

The court was not blind to that detail:

"The Court declines to extend the federal securities laws to include the alleged conduct, and concludes that Plaintiffs' concerns should be directed to Congress rather than this Court."

The judge also made some broader observations. Concerning the plaintiffs' claims regarding the router and core contracts, she wrote:

"It is illogical to hold the developer of a software platform responsible for the actions of unauthorized users under Section 29(b) of the Exchange Act."

In her ruling, the judge referred to a failed class action lawsuit filed against Coinbase in 2022 for unlicensed sales of securities. She threw out the case permanently, so it can't be brought back to court.

Many applauded the decision, noting that it demonstrated a profound familiarity with the principles of decentralized finance.