James Sues Crypto Company Nexo Under Investor Protection Law
“Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms,” she said.
In a lawsuit filed in Manhattan Supreme Court Monday, state Attorney General Letitia James accused the cryptocurrency company Nexo of violating New York law by acting as an unregistered broker of securities and commodities. James sued Nexo under the Martin Act, New York’s “blue sky” law aimed at protecting investors from fraud, and another state law dealing with “repeated and persistent fraud.”
The lawsuit was filed the same day that state securities regulators in California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont each filed their own administrative actions against Nexo.
The New York complaint accused Nexo of making repeated “material misstatements and omissions” about its legal compliance in marketing materials, including making what the New York AG’s office described as a false denial that it was dealing in securities and commodities in New York.
In October 2021, the office sent a cease-and-desist letter to Nexo, warning that the company was offering securities for sale without registration, and noting that “certain virtual currencies have been recognized by courts in New York as commodities under the Martin Act.”
A Nexo tweet responding to the letter denied that the company was offering the products at issue for sale in New York, according to the complaint.
In discussions with counsel, Nexo later “acknowledged that—contrary to its public statements— [it] in fact had thousands of active New York-based accounts that had purchased or sold virtual currencies on the exchange or invested in [Nexo’s Earn Interest Product, or EIP, accounts],” according to the complaint.
In a series of emails sent in the weeks after the cease-and-desist letter, Nexo represented that it was disabling its services in New York, but those representations were “inaccurate,” according to the complaint.
In August, Nexo disclosed to state securities regulators that “there were thousands of active New York–based EIP accounts earning interest well into this year,” with more than 5,500 active accounts funded by New York investors containing $11.6 million in aggregate as of the end of January, according to the complaint.
“Upon information and belief, Nexo continued to automatically renew and pay interest on New York–based fixed-term EIP accounts through at least March 2022,” the New York AG wrote.
In a statement, a Nexo spokesperson said the company is “committed to finding a clear path forward for the regulated provision of products and services in the U.S., ideally on a federal level.
“We have been working with U.S. federal and state regulators and understand their urge, given the current market turmoil and bankruptcies of companies offering similar products, to fulfill their mandates of investor protection by examining past behavior of providers of earn interest products,” the statement said.
The statement also noted that Nexo voluntarily ceased onboarding new clients in the United States for its EIP after the U.S. Securities and Exchange Commission (SEC) released guidance on the products in February.
James called on Nexo to “stop its unlawful operations and take necessary action to protect its investors”: “Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms,” she said. “Nexo violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform.”
From: New York Law Journal