Binance.US faces class-action lawsuit over UST, LUNA promotion and sale

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Another day, another lawsuit against Binance. This time, the exchange is being pursued by investors who lost their entire portfolios when the house of cards that was Terra’s LUNA and UST coins crashed spectacularly to the ground. The investors believe that Binance actively misled them about the stability of the tokens, and according to sources with knowledge of the matter, Coinbase (NASDAQ: COIN) and several other exchanges will be next in the firing line.

The lawsuit was filed by Jeffrey Lockhart individually on behalf of over 2,000 other investors who had purchased the UST stablecoin at Binance.US, the American subsidiary of the global exchange. It names BAM Trading Services, which does business as Binance.US, and its CEO Brian Shroder as the defendants.

The lawsuit alleges that starting on April 13, 2022, Binance.US bought and sold UST to its users. The investors say that the exchange advertised and sold UST “as a safe asset that could be used to earn substantial returns, including in the form of interest.” 

This was illegal for two reasons, according to the suit. The first, and most glaringly obvious is that UST wasn’t a safe asset. The ‘unstable’ coin began crashing in early May, and a few days later, it had shed over 80% of its value. Terraform Labs (TFL), the blockchain project that created UST, tried pulling all manner of maneuvers to save the token to no avail. Today, the project has almost crashed to zero.

But this wasn’t all that Binance.US did wrong. The lawsuit accuses the exchange of selling an unregistered security in UST. “Although unregistered, UST is a security because it is an investment contract, or, in the alternative, because it is a derivative product of LUNA,” it says.

Binance failed to disclose that UST is a security and was selling it despite having no license for such a product from the U.S. Securities and Exchange Commission (SEC).

“Binance U.S.’s failure to comply with the securities laws, and its false advertisements of UST, have led to disastrous consequences for Binance U.S.’s customers,” it added.

“We won’t do it again,” Binance says as it delists UST

Binance is no stranger to lawsuits or regulatory actions. For the past two years, regulators in dozens of jurisdictions have gone after the exchange, which hasn’t had a physical location for years, for flouting all manner of financial laws.

And despite the many actions against it, Binance hasn’t changed a bit. In fact, in its response to the latest legal action, the exchange brushed all accusations aside, with a spokesperson for Binance.US stating, “Binance.US is registered by FinCEN and adheres to all applicable regulations. These assertions are without merit and we will defend ourselves vigorously.”

Despite denying any wrongful actions, Binance knows it messed up. This is clear because when pressed for comments by the media, the exchange defended itself by revealing that it had delisted UST on June 12. But this was too little too late as UST had already crashed by then, and investors had lost billions of dollars.

In yet another indication that Binance knows it acted unlawfully, it has taken down advertisements that it ran touting UST as a safe asset. On its website, the exchange described UST not just as safe, but as a “fiat-backed stablecoin.” This, the lawsuit says, shows that Binance effectively concedes that UST was none of those things.

The investors believe Binance’s involvement with UST and Luna isn’t an anomaly. The exchange is based on this very model of chasing the profits at all costs, caring little about who gets “rekt” in the process. 

“In fact, Binance U.S.’s business model is premised on enabling these bad actors: Binance U.S. profits from every trade, and therefore has a stark incentive to sell crypto-assets irrespective of their compliance with the securities laws,” the lawsuit alleges.

“From Binance U.S.’s perspective, the less disclosure, the better, as more disclosure about the riskiness of crypto-assets will predictably lead investors to trade certain assets less and reduce transaction volume and Binance U.S.’s astonishing profits.”

And while Binance is the first target, it won’t be the last for the aggrieved investors. A source at New York-based Roche Freedman and Dontzin Nagy & Fleissig, the law firm representing the investors, revealed to one outlet that Coinbase and others who sold UST and/or LUNA are next in line.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.