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Letitia James, Attorney General of the State of New York, requested a temporary restraining order, preliminary injunction and the appointment of a receiver in the case of Coinseed Inc., a company accused of defrauding customers and locking them from access to their cryptocurrency accounts.
Coinseed, a company that has advertised that consumers can invest their “spare change” (i.e., the change from rounding each purchase up to the nearest dollar) or as little as $5 in cryptocurrencies, has been accused of consumer fraud. During the same time period as Bitcoin saw a sharp spike in value, Coinseed saw an influx of withdrawal requests from investors seeking to realize gains. “Rather than convert virtual currency to fiat currency to honor these requests, Defendants first reduced the daily withdrawal limit from $1,000 a day to $250 a day, and then ultimately disabled withdrawals altogether,”stated the original February 17, 2021 complaint.
The Office of the Attorney General (OAG) provided a memorandum of law asking that the Defendants be stopped “from engaging in continuing fraud and dissipating the assets of investors”. In the original February 17, 2021 complaint filed by the OAG in New York, the State of New York alleged Coinseed was acting as an unregistered commodity broker-dealers in violation of General Business Law (“GBL”) § 359-e(14) and Executive Law § 63(12).
According to the media outlet the Block, the CEO has said that the allegations were “full of false accusations” and that “Coinseed has left NY in 2019 and we haven’t accepted any users from NY since 2018.” According to the OAG’s memo, the defendants have made unauthorized trades, putting all investors’ holdings into virtual currencies that at the time were declining in value, and have prevented the victims from withdrawing any of their funds.
The memo notes the, “OAG has received over 130 complaints from investors who have lost access to and control over years of investments and gains due to the Defendants’ fraudulent conduct. Investors who weeks ago had portfolios worth over $150,000, now cannot withdraw those gains.” Additionally, the memo cites that the Defendants – without authorization – moved every investors’ holdings into Dogecoin.
While concentration in a cryptocurrency like Dogecoin saw a remarkable rise, CoinSeed is accused of not allowing any of its customers to either trade in their accounts, withdraw their funds, or avoid losses. Therefore, it is unclear whether customers would even have access to or be able to cash in on any of the gains in what is already an unauthorized purchase of a cryptocurrency.
Along with the preventative steps of a temporary restraining order and preliminary injunction, the OAG has asked the court to appoint a receiver to prevent any further dissipation of client funds. Michelle Gitlitz, Global Head of Crowell & Moring’s Blockchain and Digital Assets practice, has appointed. Crowell & Moring, LLP is described by the OAG as a “law firm with experience in virtual currency, blockchain technology, and receivership appointment”.
The OAG explains in the complaint that pursuant to GBL § 353-a,“such receiver shall take title to any or all such property and books of account and papers relating to the same and liquidate such property or any part thereof for the benefit of all persons intervening in the said action and establishing an interest in such property.”
The receiver would seek all property derived by the Defendants by means of their fraudulent practices as well as all property that has been commingled with the Defendants’ property. The Defendants would need to provide the receiver with all books of account and papers relating to the same.
Ultimately, it seems clear from this follow-up to the original complaint against CoinSeed in February that New York is a state with an extremely low tolerance for any consumer harm of its residents. Additionally, while mentioning that the OAG office worked in conjunction with the SEC on the matter, New York is clearly taking the lead at the state, rather than federal level, to protect its consumers against harm.
Although the case is still only alleging these actions by CoinSeed, the OAG mentioned it is very confident that there will be an outcome in Court that ultimately finds this crypto exchange to be guilty of the charges.
Note: As the CEO of a non-profit of a 501(c)(3) called Value Technology Foundation, a think tank that focuses on Bitcoin, cryptocurrency, and distributed ledger technology in Washington D.C., donations have been received from Crowell & Moring LLP, the proposed Receiver by the OAG.