Investors Edge Closer to Recovery as BlockFi Settlement Gains Court Nod

A U.S. judge has granted preliminary approval to a $13 million settlement involving cryptocurrency lending platform BlockFi, marking a significant step in the resolution of a class-action lawsuit. The ruling by Judge Claire Cecchi in the U.S. District Court for the District of New Jersey comes after months of delays, including a prior objection from one investor, Yacov Baron, who later withdrew his challenge. The settlement, announced in February, aims to compensate approximately 89,000 investors who held interest-bearing accounts between March 2019 and November 2022, when BlockFi filed for bankruptcy [1].

Under the terms of the settlement, BlockFi’s insurers are required to deposit more than $13 million into an escrow account within 30 days [1]. The funds will be distributed as part of the class-action lawsuit resolution, which was initiated following the company’s collapse amid a broader downturn in the cryptocurrency market. The judge has scheduled a final approval hearing for December 11 to address any remaining objections and finalize the settlement plan [1].

The lawsuit, originally filed by investor Trey Greene on behalf of others, alleged that BlockFi sold unregistered securities and engaged in material misrepresentations and omissions. These actions were attributed to former CEO Zac Prince, COO Flori Marquez, and Gemini Trading, which is linked to the Winklevoss twins. The complaint further claimed that Prince ignored risk management recommendations, particularly in lending assets to Alameda Research, which contributed to the firm’s eventual insolvency [1].

BlockFi’s Chapter 11 bankruptcy proceedings, approved in September 2023, have allowed the company to return crypto holdings to users and reach an $875 million settlement with FTX and Alameda Research. The company has stated that it is still working to make final distributions of both USD and crypto assets to users, many of whom still have unclaimed balances [1].

The class-action settlement, however, does not cover all investors. Those who opted out of the class action retain the right to pursue individual claims for specific damages. Legal experts note that this is not uncommon in bankruptcy-related cases, particularly when there are criminal charges against executives, as seen in the case of Celsius Network’s Alex Mashinsky, who received a 12-year prison sentence for fraud [2].

The collapse of BlockFi was part of a larger wave of financial failures in the cryptocurrency sector in 2022, triggered by the collapse of the Terra ecosystem and the subsequent implosion of FTX. These events exposed systemic issues in the industry, including the lack of transparency and the risks of interconnected lending practices. BlockFi’s insolvency highlighted the vulnerability of platforms that allowed customer assets to be used for high-risk third-party loans, particularly with firms like Alameda Research [1].

The settlement, though limited in scope, is seen as a rare opportunity for investors to recover some of their losses. As the industry continues to grapple with the aftermath of the 2022 downturn, the outcome of this case may set a precedent for similar lawsuits and influence how courts handle investor claims in future crypto-related bankruptcies [2].

Source: [1] US Court Signs Off On $13M BlockFi Settlement After ... (https://cointelegraph.com/news/court-blockfi-settlement-investor-withdraws-objection) [2] BlockFi Judge Urged to Approve $13 Million Settlement as ... (https://finance.yahoo.com/news/blockfi-judge-urged-approve-13-105140657.html)