Did GMO-Z.com Trust Company, Inc. (a Japanese GMO Internet Group entity) mislead investors regarding GYEN being pegged to the Japanese Yen? Did GMO and Coinbase mislead GYEN purchasers about its stability and guaranteed failure? Was the failure known since the beginning?
This post is open for investors to gather facts, and findings and track their exposure to related lawsuits. We invite investors and shareholders to contribute to this investigation for their own benefit, add events to the factual timeline below and vote on events’ pertinence.
A lawsuit was subsequently filed. We will update this post as it unfolds.
Coinbase publishes a blog post explaining its decision to suspend GYEN trading.
On November 19 at approximately 4:00 p.m. EST: Coinbase “updated an internal data source related to POWR and GYEN precision. The update was tested through our standard automated testing and deployment monitoring procedures. However, the testing didn’t detect that the update would propagate at various speeds through a number of internal systems and would result in customers being credited either 100x or 1/100th the amount of GYEN or POWR they purchased. The data rollout error was identified through our position risk monitoring systems shortly after the November 19 4:00 p.m. EST update.”
At 5:35 p.m. EST, Coinbase “disabled transacting in GYEN and POWR pending resolution of the underlying issue.“
At 7:26 p.m. EST, Coinbase “identified accounts that transacted in GYEN or POWR during the data rollout, and temporarily restricted these accounts pending further investigation. By November 21, restrictions were removed for 98.8% of these accounts and, by December 13, Coinbase restored full trading for GYEN and POWR.”See more on Factual Timeline
A “GYEN” Coinbase investor filed a class-action lawsuit on behalf of all persons who purchased or acquired GYEN in the United States or its territories at a time when the GYEN was unpegged from the Japanese yen, and lost money thereby, and all members whose transactions of GYEN were conducted through Coinbase.
According to the complaint, defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations, and prospects. Specifically, defendants allegedly failed to disclose to investors that:
Plaintiffs allege that GYEN is a security under the federal securities laws and that defendants are liable for failing to register it as such. Plaintiffs further allege that defendants made materially false and misleading statements in connection with GYEN, including in a whitepaper and in other communications to investors, by offering GYEN as pegged to the Japanese yen at a one-to-one ratio, 100% collateralized by fiat currency, and therefore a safe investment protected from volatility. On at least two occasions since GYEN was introduced-in May 2021 and again in November 2021-the peg broke and GYEN experienced wild volatility, causing harm to investors.
In Depth -Long Quotations
“GMO Trust’s materials omitted facts that were critically important and would be material to any potential GYEN purchaser. GMO Trust omitted from its whitepaper, marketing, disclosures, and publicly-filed documents, that the asset’s value was liable to fall out-of-line with the one-to-one peg to the Japanese yen. Purchasers seeing GMO Trust’s marketing would believe the value of a GYEN token was necessarily equal to the value of one Japanese yen. In truth, the value of GYEN depended on the liquidity of GYEN itself and had little connection at all to the value of the yen. This general fact was true because of a litany of other facts, similarly omitted from GMO Trust’s disclosures, including:
• The value of GYEN was subject to fluctuations completely independent of the Japanese yen when traded on third-party exchange platforms;
• An insufficient supply of minted GYEN to meet demand for the asset subjected the asset to low liquidity, particularly when it was first made available for purchase on third-party exchanges;
• When the asset’s low liquidity coincided with a period of high demand, such as when it was initially promoted and introduced on a third-party exchange, its value was prone to rise relative to the Japanese yen such that it became “unpegged;”
• Investors could place buy orders for GYEN at a time when the asset’s value appeared pegged to the Japanese yen, but delays in filling the order could cause the price they actually paid for the asset to be higher than the value of the yen;
• Purchasers of GYEN who entered into purchase contracts when the asset was unpegged were purchasing an asset that was not, in fact, valued at a ratio of one GYEN-to-one Japanese yen;
• Purchasers whose orders for GYEN were filled at times when the asset was unpegged from the Japanese yen had no right to redeem the asset, which they had been misled to believe was valued at a one-to-one ratio with the Japanese yen when they purchased it, at a one-to-one value when it later returned to the peg.
As a consequence of GMO Trust’s false claims of the GYEN’s one-to-one peg to the yen, Coinbase’s adoption of those false claims, both entities’ omission of the fact that GYEN was not designed to hold a value pegged to the yen, and Coinbase’s restriction prohibiting investors from liquidating their GYEN as it plummeted, several hundred purchasers lost vast sums, some losing hundreds of thousands of dollars in just hours, causing them grief, anxiety, stress, and outrage.”
The court issued an order appointing the lead plaintiff and lead counsel.
A securities class action lawsuit is a lawsuit on behalf of investors considered in a similar position, who purchased or sold securities of a company during a certain period and suffered losses because of an alleged wrongdoing. Security is often broadly defined to include bonds, stocks, options, derivatives, and other instruments.
Section 10b of the Securities Exchange Act of 1934 makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). It is therefore forbidden to: employ any device, scheme, or artifice to defraud; make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading; or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Generally, to be successful, the plaintiff must plead the following:
We invite you to read this article from the American Bar Association which, although from 2014, provide ample information to explore the world of class actions brought under section 10b of Securities Exchange Act of 1934.
Section 11 of the Securities Act of 1933 provides “an express right of action for damages . . . when a registration statement contains untrue statements of material fact or omissions of material fact.” (Thomas Lee Hazen, Treatise on the Law of Securities Regulation, §7.3 at 581 (4th ed. 2002)). Practically, buyers in an initial public offering (IPO), relying on the registration statement and prospectus, are given the right to file a complaint against the company and other signatories for losses sustained as a result of the deficient registration statement and prospectus.
Generally, at least four elements must be plead for the claim to survive:
A shareholder derivative lawsuit is a lawsuit brought by a shareholder of a company, on behalf of the company, against an insider (director, board of directors, executives) or a third-party to redress wrongs and harms to the company. Simply speaking, this mechanism exists because one cannot expect directors and insiders to sue themselves for harms they have done to the company.
The Private Securities Litigation Reform Act (PSLRA) of 1995 was enacted to tighten requirements for securities class actions to be brought in the United States. One of the mechanism put in place was a 60-day period, following the filing of the initial securities class action, for any shareholder considered in similar position to the one filing the initial class action complaint, to ask to be named lead plaintiff. Practically, any time a securities class action falling under the PSLRA is filed with a court, law firms advertise their willingness to pursue the case and invite other investors similarly situated to contact them.
The lead plaintiff in a securities class action is a shareholder who suffered losses related to the purchase or sale of a company’s security during a certain period of time, that is appointed with its choice of counsel to represent the rest of the similarly situated shareholders. To be appointed lead plaintiff, you need to contact a law firm, have them examine your losses and agree to be represented by them and ask to make a motion with the court to be appointed lead. The court will then look at all the motions from the different shareholders and make its decision based on a certain set of criteria. Your inability to be lead plaintiff shall not prevent you from any potential recovery in the event of a settlement.
A class period is a set period of time during which the purchasers or sellers of a company’s security claim in a class action lawsuit to have suffered losses. Class periods are based on the merits of the case and may evolve with the litigation.
A class action complaint will define the initial class of investors: the class period and the persons included in the class. You should look at the definition of the class to determine whether you are included or not. However, the class definition will evolve with the litigation. Its definition is very likely to change between the initial complaint filed and the possible settlement. Generally speaking, you should rely on the definitions of the class stated in a stipulation of settlement to determine whether or not you will be entitled to any recovery (see below about the opting-out mechanism).
You may. The mechanism is called opting-out of class. A lead plaintiff will agree on the potential recovery ratio in a settlement. You may have an interest in opting-out of a class if you have sustained large losses and believe bringing a separate lawsuit would entitle you to a larger ratio of recovery.
You may be able to bring a claim to arbitration in certain scenarios. We encourage you to contact a law firm of your choice to inquire about such alternative dispute resolution mechanism.