Duane Morris Class Action Review - 2023 - Report - Page 316
II.
Key Rulings On Settlement Approval Issues In Class Actions
A.
Procedural Defects In Proposed Class-Wide Settlements
Class-wide settlements require that plaintiffs show that all applicable requirements of
Rule 23 are met. Courts will deny approval to a proposed class-wide settlement where
the Rule 23 requirements are not established.
A prime example is the ruling in Williams, et al. v. Block One, 2022 U.S. Dist. LEXIS
171550 (S.D.N.Y. Aug. 15, 2022). There the court denied the motion for approval of a
class-wide settlement on the grounds that the named plaintiff was not an adequate
representative under Rule 23(a)(4). The court found that the named plaintiff had been
incentivized to accept a lower settlement amount than other members of the proposed
class. The case concerned Block One’s initial coin offering, whereby ERC-20 tokens
were sold to investors to fund software development relating to novel EOS blockchain
technologies, with the expectation that those tokens could later be exchanged for
tokens produced on a forthcoming EOS blockchain. Block One never registered its sale
of the ERC-20 tokens with the U.S. Securities Exchange Commission and attempted to
prevent token purchases by U.S. investors, a prohibition that was easily circumvented
by resale on U.S. cryptocurrency exchanges. In its lawsuit, Crypto Assets Opportunity
Fund LLC, the named plaintiff, which did not purchase tokens directly from Block One in
the initial coin offering, alleged that the ERC-20 tokens were securities and Block
One violated the securities laws by failing to register its offering. The named plaintiff
also alleged certain public statements and omissions by Block One and its founders
were materially false and misleading. The parties ultimately reached a proposed classwide settlement on behalf of all purchasers of Block One tokens over an approximate
two-year period, irrespective of whether they were located within the United States. The
court granted an unopposed motion for conditional certification of the proposed class,
but then requested more information due to concerns about the potential inadequacy of
the named plaintiff to serve as the class representative. The court requested production
of information regarding class counsel’s costs in pursuing this case, evidence that the
majority of the proposed class members were foreign-based, and further data that
purchasers of only 25% of the tokens were likely eligible to recover as part of the
settlement. According to the court, whether the named plaintiff will adequately represent
the interests of absent class members “depends upon whether the proportion of the
plaintiff’s purchases that were subject to the federal securities laws is the same as, or
representative of, the proportion of such purchases by absent class members.” Id. at *34. The court reasoned that if the named plaintiff’s “proportion of purchases covered by
the securities laws was lower than the proportion of such purchases by other class
members, plaintiff could have had a financial interest in accepting a settlement at a
price lower than the price that would have been demanded by adequately represented
class members.” Id. Ultimately, the court found that the named plaintiff failed to provide
sufficient information regarding the proportion of its transactions that were domestic as
compared to those of the absent class members and declined to approve the proposed
settlement. The court also noted the “structural conflict” that “has had a detrimental
effect on absent class members,” in that the named plaintiff “already has accepted a
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Duane Morris Class Action Review – 2023
