A group of cryptocurrency traders who claim they lost millions of dollars due to Binance’s negligence have won a major victory in their legal battle against the exchange. On Friday, the U.S. Court of Appeals for the Second Circuit reversed a lower court’s decision that dismissed their case for lack of jurisdiction.
The plaintiffs, led by Aaron Leibowitz, allege that Binance failed to protect them from a “flash crash” that occurred on April 18, 2018, when the price of a digital token called Viacoin (VIA) spiked by more than 10,000% in minutes on Binance’s platform. The plaintiffs claim that the flash crash was caused by a hacker who manipulated Binance’s trading system and placed fraudulent orders for VIA at inflated prices.
According to the complaint, the hacker also used phishing attacks to gain access to the accounts of some Binance users and sold their holdings of other cryptocurrencies to buy VIA, driving up the demand and price of VIA. The hacker then sold his VIA tokens at artificially high prices and withdrew the proceeds from Binance.
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The plaintiffs claim that they were victimized by the hacker’s scheme because they had placed stop-loss orders for their cryptocurrencies on Binance. A stop-loss order is a type of order that automatically sells an asset when it reaches a certain price, to limit the potential loss in case of a market downturn. However, because of the flash crash, the plaintiffs’ stop-loss orders were triggered at much lower prices than they had set, resulting in huge losses for them.
The plaintiffs accuse Binance of breaching its fiduciary duty and violating various federal and state laws by failing to prevent or stop the flash crash, failing to investigate or remedy the situation, failing to safeguard their funds and personal information, and failing to provide adequate customer service. They seek to represent a class of all U.S. residents who suffered losses due to the flash crash and demand compensatory and punitive damages, as well as injunctive relief.
Binance, which is incorporated in the Cayman Islands and has no physical presence in the U.S., moved to dismiss the case for lack of personal jurisdiction, arguing that it did not have sufficient contacts with New York, where the case was filed. Binance also argued that its terms of service, which all users had to agree to, contained a clause that required any disputes to be resolved by arbitration in Hong Kong.
In March 2020, U.S. District Judge Denise Cote granted Binance’s motion and dismissed the case, finding that Binance did not have enough ties to New York to justify haling it into court there. Judge Cote also found that the arbitration clause in Binance’s terms of service was valid and enforceable, and that the plaintiffs had waived their right to sue Binance in court.
However, on appeal, a three-judge panel of the Second Circuit disagreed with Judge Cote and revived the case. The panel held that Binance had purposefully availed itself of conducting business in New York by allowing New York residents to access and use its platform, by operating servers in New York, and by promoting its services through online and offline media in New York.
The panel also held that the arbitration clause in Binance’s terms of service was unconscionable and unenforceable because it was “hidden in a footnote” and “buried in fine print” on Binance’s website, and because it imposed excessive costs and fees on the plaintiffs that would deter them from pursuing their claims. The panel noted that Binance’s terms of service were “a classic example of an adhesive contract” that gave users no opportunity to negotiate or reject its terms.
The panel concluded that exercising jurisdiction over Binance would not violate due process and that the case should proceed in New York. The panel vacated Judge Cote’s order and remanded the case for further proceedings.
The plaintiffs’ lawyer, David Silver of Silver Miller Law, hailed the decision as “a huge win” for his clients and for “all Americans who trade cryptocurrency on offshore exchanges.” He said that he looked forward to pursuing discovery and moving for class certification.
Binance’s lawyer, Peter Pizzi of Walsh Pizzi O’Reilly Falanga LLP, is yet to comment on the recent court developments.