BitConnect class-action reversal opens can of worms
In April 2020 what was left of the BitConnect class-action was dismissed by a District Court Judge.
The dismissal was appealed, resulting in the Eleventh Circuit overturning the decision on February 18th.
As summarized by the Eleventh Circuit;
After (BitConnect) collapsed, BitConnect buyers sought to hold the promoters liable under section 12 of the Securities Act of 1933 for soliciting the purchase of unregistered securities.
The marketers insist that they cannot be held liable because the Securities Act covers sales pitches to particular people, not communications directed to the public at large.
The District Court sided with the defendants, dismissing the case.
The Eleventh Circuit however called the defendants out on their bluff.
Neither the Securities Act nor our precedent imposes that kind of limitation.
This is similar to the “but cryptocurrency!” arguments scammers routinely trot out. My answer to that has always been “there are no exemptions for cryptocurrency in the Securities and Exchange Act”.
So too is there no exemption of committing securities fraud if you don’t direct promotion of unregistered securities at anyone in particular.
Solicitation has long occurred through mass communications, and online videos are merely a new way of doing an old thing.
Because the Securities Act provides no free pass for online solicitations, we reverse the district court’s dismissal of the section 12 claim.
There are two important considerations here;
Firstly the BitConnect class-action is back on.
We therefore REVERSE the district court’s dismissal of the section 12 claim against Arcaro and Maasen; VACATE its dismissal of the state-law claims against them; AFFIRM its dismissal of any other claims and defendants in the orders appealed.
As I understand it defendants Glenn Arcaro and Ryan Maasen are back on the chopping block.
Arcaro, as the top BitConnect net-winner and promoter in the US, is a juicy target.
Maasen is also being hounded by the SEC, so that’s probably a dead-end too.
The second important consideration is what this appeal means for promoters of scams on YouTube – specifically of the Ponzi variety (pyramid schemes by themselves aren’t securities).
Here we have a US Court of Appeals telling victims of a Ponzi scheme they are free to sue anyone who promoted it.
Arcaro insists that liability follows only when a seller directs a solicitation to a particular prospective buyer.
Mass communications, in his view, are never enough.
That rule would certainly go a long way toward eliminating liability for the promoters here, and for others who champion dicey investments through modern communication channels.
The problem for these promoters is that nothing in the Securities Act makes a distinction between individually targeted sales efforts and broadly disseminated pitches.
The Securities Act prohibits a person from using “any means or instruments of transportation or communication in interstate commerce” to sell an unregistered security.
Nowhere in those definitions does Congress limit solicitations to “personal” or individualized ones as the district court did here.
In fact, the Act suggests the opposite.
If you’re out there promoting Ponzi schemes on social media, including YouTube, you are liable for your victims losses, whether you directly recruited them into the Ponzi scheme or not.
Oh and, although it didn’t come up, I want to point out that “this is not financial advice” is bullshit. The Securities and Exchange Act similarly does not exempt promoters of unregistered securities if they state that phrase (or in fact any phrase).
If it were that simple, walking into a bank and stating “this is not a robbery”, before proceeding to rob the bank, would be defensible in court.
It isn’t. Neither are silly disclaimers on social media.
One secondary consideration related to liability pertains to platforms such as YouTube themselves.
This isn’t something the Eleventh Circuit tackled so I’m branching off on my own here.
In essence, YouTube is the video version of text-based forums like MoneyMakerGroup.
MoneyMakerGroup abruptly shut down in 2017, on the heels of wire fraud accusations.
Those accusations ultimately didn’t go anywhere but MoneyMakerGroup stayed down.
Spiritual successors to MoneyMakerGroup exist, the most prominent of which is probably BeerMoneyForum.
BeerMoneyForum may or may not be similarly abruptly shut down at some point, who’s to say.
It’s been around long enough to constitute a sizeable honeypot. One that will only increase in value to US authorities over time.
Where I think YouTube and other social media platforms differ however is that they don’t exclusively exist to promote fraud.
Where they are vulnerable however, is if victims of Ponzi schemes can demonstrate negligence on YouTube’s behalf.
That introduces a catch 22 however, wherein victims of a Ponzi scheme aren’t going to admit they’re victims until after the fact.
We see this all the time here on BehindMLM. It presents as “bUt I’m GeTtInG pAiD!”.
After the Ponzi collapses, these gullible investors naturally take a loss (getting paid in your backoffice != withdrawals), and disappear.
People reporting fraud to YouTube are unlikely to follow up after a scam collapses, because it doesn’t affect them personally.
One certainly can’t make the argument that YouTube didn’t do anything if nothing was reported. And attempting to hold YouTube accountable after the fact when you didn’t do anything prior to a Ponzi collapsing likely won’t hold up in court.
In an ideal world platforms like YouTube would enforce TOS violations pertaining to promotion of scams. Given the size of the platforms, I don’t see that being tenable.
One possible solution would be for the US to start issuing securities fraud notices, similar to what we see in other countries. That’d require an adjustment to how the US approaches regulation of securities fraud however, as presently US authorities don’t confirm or deny the existence of an investigation until action is publicly taken.
Can’t see that changing anytime soon, so I guess till someone rolls the dice in court with a compelling case, things will stay the same.
That absolutely doesn’t stop you from suing prominent promoters of scams on YouTube as a civilian though.
As of today there have been no subsequent filings on the BitConnect class-action case docket. I’ll continue to monitor it for updates.