Maker Foundation faces possible lawsuit over ‘Black Thursday’

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The Maker Foundation, a non-profit blockchain-centered organization that developed the MakerDao decentralized finance (DeFi) protocol, is facing a possible class-action lawsuit as a result of its development. The entity had attracted a number of investors when it rolled out the protocol, but, if the lawsuit is correct, did so under false pretenses that could amount to fraud.

Maker Foundation is being accused of misrepresentation and negligence, and is expected to pay over $28 million of the lawsuit stands up in court. 

The Block reported on the lawsuit, which asserts that the individuals behind Maker DAO didn’t do enough to protect investors’ interests. They also engaged in “intentional” and “negligent” misrepresentation as a result of the massive losses incurred by investors. The suit adds, “While misrepresenting to CDP Holders the actual risks they faced, The Maker Foundation neglected its responsibilities to its investors by either fostering or, at the very least, allowing the conditions that led to Black Thursday, all after actively soliciting millions of dollars of investment into its ecosystem.”

Black Thursday references March 12, when the digital currency markets took a nosedive and a major price in ETH saw massive liquidations on the Open Finance space. MakerDao suffered extensively, as well, with a number of zero-bid auctions suddenly appearing. This led to undercollaterized debt in the ecosystem of around $2 million. 

The lawsuit is led by Peter Johnson, who incurred losses over the Maker Foundation’s mismanagement. He argues that he lost a considerable amount of profit that should have been protected by Maker, and the suit claims, “Had the zero-bid auctions not occurred and had Maker made fair compensation on its 13% penalty, Mr. Johnson would have lost no less than 348 ETH of collateral (worth at least $42,000 at the time of the liquidation, or $54,600 today).” Johnson is still drumming up support from other investors, and he personally wants restitution of $8.325 for each of three claims, as well as another $20 million in punitive damages.

The case, which was reportedly to be filed in the District Court for the Northern District of California on April 14, still has to be certified by the courts as a class-action suit. Johnson is said to currently be involved in recruiting efforts to find other investors that might be willing to join the cause. 

It shouldn’t have been too much of a surprise that something like this would happen. For more than a year, there have been concerns about the platform’s functionality, with some viewing it as nothing more than a sophisticated loan-sharking program. One user said at the time, “I believe that MakerDao was aware that in order to defend the stability of their coin the interest rates would have to vary wildly and as such it would be impossible for them to support real use cases. It was their responsibility to warn users that their loans are NOT suited for real-world use cases, and they might end up trapping users in the rates we see now.”