Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 1 of 46 PageID: 297
`
`UNITED STATES DISTRICT COURT
`DISTRICT OF NEW JERSEY
`
`JOHN MANGANO and MICHAEL
`LEIFMAN, individually and on behalf of all
`others similarly situated,
`
`
`Case No. 2:22-cv-01112-KM-CLW
`
`FIRST AMENDED CLASS ACTION
`COMPLAINT AND DEMAND FOR
`JURY TRIAL
`
`
`
`
`v.
`
`
`
`BLOCKFI, BLOCKFI, INC., BLOCKFI
`TRADING, LLC, BLOCKFI LENDING,
`LLC,
`
`
`Plaintiffs,
`
`
`Defendants.
`
`Plaintiffs John Mangano and John Leifman (“Plaintiffs”) bring this action on behalf of
`
`themselves and all others similarly situated against Defendants BlockFi, BlockFi, Inc. (“BFI”),
`
`BlockFi Trading, LLC (“Trading”), and BlockFi Lending, LLC (“Lending”) (collectively, the
`
`“BlockFi Enities” or “Defendants”). Plaintiffs make the following allegations pursuant to the
`
`investigation of their counsel and based upon information and belief, except as to the allegations
`
`specifically pertaining to themselves, which are based on personal knowledge. Plaintiffs believe
`
`that substantial additional evidence will be adduced through discovery in support of these claims.
`
`NATURE OF THE ACTION AND FACTS COMMON TO ALL CLAIMS
`
`1.
`
`This is a class action lawsuit on behalf of all people in the United States who
`
`enrolled in a BlockFi Interest Account/Crypto Interest Account, which is an unregistered security
`
`under state and federal law. Since March 4, 2019, BFI, through its affiliates Lending and
`
`Trading has been, at least in part, funding its lending operations, proprietary trading and other
`
`revenue generating activities. through the sale of unregistered securities in the form of
`
`cryptocurrency interest-earning accounts. BlockFi refers to these unregistered securities as its
`
`
`
`1
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`

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`“Crypto Interest Account” or the “BlockFi Interest Account” (collectively, the “BIAs”).
`
`2.
`
`Defendants did not register the BIAs with the United States Securities and
`
`Exchange Commission (“SEC”) or with the California Commissioner of Corporations
`
`(“Commissioner”) or any other state.
`
`3.
`
`BFI is a financial services company that generates revenue through
`
`cryptocurrency trading, lending, and borrowing, as well as engaging in proprietary trading.
`
`4.
`
`From March 4, 2019 to the present, BlockFi, a New Jersey-based financial
`
`services company and wholly owned subsidiary of BFI, has (directly or indirectly through other
`
`BFI subsidiaries) offered and sold BlockFi BIAs to investors, through which investors lend
`
`crypto assets to BlockFi in exchange for BlockFi’s promise to provide a variable monthly
`
`interest payment. BlockFi generated the interest paid out to BIA investors by deploying its
`
`assets in various ways, including loans of investors’ crypto assets made to institutional,
`
`corporate and other borrowers, lending U.S. dollars to retail investors, and by investing in
`
`equities and futures. As of March 31, 2021, BlockFi and its affiliates held approximately $14.7
`
`billion in BIA investor assets. As of December 8, 2021, BlockFi and its affiliates held
`
`approximately $10.4 billion in BIA investor assets, and had approximately 572,160 BIA
`
`investors, including 391,105 investors in the United States.
`
`5.
`
`BlockFi allows investors to purchase the BIAs by depositing certain eligible
`
`cryptocurrencies into accounts at BlockFi. BlockFi then pools these cryptocurrencies together to
`
`fund its lending operations and proprietary trading. In exchange for investing in the BIAs,
`
`investors are promised a rate of return paid monthly in cryptocurrency that is does not adequately
`
`account for the true risks being undertaken. The BIAs are not protected by Securities Investor
`
`Protection Corporation (the “SIPC”) or insured by the Federal Deposit Insurance Corporation
`
`
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`2
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`(the “FDIC”). The BIAs are subject to additional risk, compared to assets held at SIPC member
`
`broker-dealers, or assets held at banks and savings associations, almost all of which carry FDIC
`
`insurance. Nor are they registered with the SEC, the Commissioner or any other securities
`
`regulatory authority, or exempt from registration. The BIAs are subject to other risks described
`
`herein. Despite these additional risks, and lack of disclosures and safeguards and regulatory
`
`oversight, as of March 31, 2021, BlockFi held the equivalent of $14.7 billion from the sale of
`
`these unregistered securities in violation of federal and state securities laws.
`
`6.
`
`Based on the facts and circumstances set forth herein, the BIAs were securities
`
`because they were notes under Reves v. Ernst & Young, 494 U.S. 56, 64–66 (1990) and its
`
`progeny, and also because BlockFi offered and sold the BIAs as investment contracts, under SEC
`
`v. W.J. Howey Co., 328 U.S. 293, 301 (1946) and its progeny, including the cases discussed by
`
`the SEC in its Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act
`
`of 1934: The DAO.1 BlockFi promised BIA investors a variable interest rate, determined solely
`
`by BlockFi on a periodic basis, in exchange for crypto assets loaned by the investors, who were
`
`told in public statements that they could demand their loaned assets at any time, even though the
`
`fine print in documents appear to give BlockFi the right to deny withdrawals or sales of the
`
`BIAs. BlockFi thus borrowed the crypto assets in exchange for a promise to repay with interest.
`
`Investors in the BIAs had a reasonable expectation of obtaining a future profit from BlockFi’s
`
`efforts in managing the BIAs based on BlockFi’s statements about how it would generate the
`
`yield to pay BIA investors interest. Investors also had a reasonable expectation that BlockFi
`
`would use the invested crypto assets in BlockFi’s lending and principal investing activity, and
`
`that investors would share profits in the form of interest payments resulting from BlockFi’s
`
`
`1 https://www.sec.gov/litigation/investreport/34-81207.pdf (last visited 2/24/22).
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`3
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`efforts. BlockFi offered and sold the BIAs to the general public to obtain crypto assets for the
`
`general use of its business, namely to run its lending and investment activities to pay interest to
`
`BIA investors, and promoted the BIAs as an investment. BlockFi offered and sold securities
`
`without a registration statement filed or in effect with the Commission or any states and without
`
`qualifying for an exemption from registration; as a result, BlockFi violated Sections 5(a) and 5(c)
`
`of the Securities Act of 1933 (“Securities Act”) and state regulators.
`
`7.
`
`Because of Defendants’ unregistered offers and sales of securities, the New Jersey
`
`Bureau of Securities, on or around July 20, 2021, issued a cease and desist order to BlockFi, Inc.,
`
`Blockfi Lending, LLC, and BlockFi Trading, LLC requiring that said Defendants “halt[] the
`
`offer and sale of these unregistered securities.”2 The cease and desist order did not preclude said
`
`Defendants “from paying interest on the existing BIAs or refunding principal to the BIA
`
`Investors.”
`
`8.
`
`Later, on or around February 14, 2022, the SEC “charged BlockFi Lending LLC
`
`(BlockFi) with, inter alia, failing to register the offers and sales of its retail crypto lending
`
`product.”3 Further, “[t]o settle the SEC’s charges, BlockFi agreed to pay a $50 million penalty,
`
`cease its unregistered offers and sales of the lending product, BlockFi Interest Accounts (BIAs),
`
`and attempt to bring its business within the provisions of the Investment Company Act within 60
`
`days. BlockFi’s parent company also announced that it intends to register under the Securities
`
`Act of 1933 the offer and sale of a new lending product. In parallel actions announced today,
`
`BlockFi agreed to pay an additional $50 million in fines to 32 states to settle similar charges.” In
`
`connection with that announcement, BlockFi’s CEO publicly promised that the BIAs would be
`
`registered with the SEC.
`
`
`2 https://www.nj.gov/oag/newsreleases21/BlockFi-Cease-and-Desist-Order.pdf (last visited 2/24/22).
`3 https://www.sec.gov/news/press-release/2022-26 (last visited 2/24/22).
`
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`4
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`9.
`
`In the Arizona state settlement, the Arizona Corporation Commission ordered
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`BlockFi Lending, LLC to pay a $943,396 administrative penalty for offering and selling
`
`unregistered securities in the form of interest-bearing digital asset deposit accounts to Arizona
`
`investors.
`
`10.
`
`The Arizona Commission found BlockFi failed to comply with Arizona’s
`
`securities registration requirements and, as a result, investors were sold unregistered securities in
`
`violation of state law and deprived of critical information and disclosure necessary to understand
`
`the potential risks regarding the BIAs.4 The Commission found that a statement on BlockFi’s
`
`website also materially overstated the degree to which BlockFi’s collateral practices protected its
`
`ability to pay investors.
`
`11.
`
`According to the Iowa consent order, BlockFi employees thought that the
`
`institutional investors would be willing to provide security on the loans, meaning they would
`
`guarantee other assets to BlockFi if they couldn’t pay their loans.5 “But it quickly became
`
`apparent that large institutional investors were frequently not willing to post large amounts of
`
`collateral to secure their loans.” “About 24% of loans were overcollateralized in 2019. About
`
`16% were overcollateralized in 2020.”
`
`12.
`
`The Iowa consent order also stated “(BlockFi Interest Accounts) investors did not
`
`have complete and accurate information with which to evaluate the risk that ... BlockFi would be
`
`unable to comply with its obligation to pay.”
`
`13.
`
`Based on materials on BlockFi’s website, financial statements, and publicly
`
`available materials, defendants knew, or should have known that BlockFi’s guiding investment
`
`
`4 https://azcc.gov/azinvestor/news/2022/06/30/corporation-commission-joins-with-other-state-securities-regulators-
`and-the-s.e.c.-to-settle-with-a-digital-asset-lending-platform-for-unlawful-securities-sales (last visited 7/28/22).
`5 https://www.desmoinesregister.com/story/money/business/2022/06/14/sec-settlement-crypto-firm-blockfi-provide-
`iowa-943-000/7629947001/ (last visited 7/28/22).
`
`
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`5
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`objective for customer portfolios was supposed to be preservation of capital and liquidity in even
`
`the most turbulent of market conditions.
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`14.
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`Defendants had a duty to properly keep investor or class member funds in a
`
`segregated account and have adequate capitalization so that investors could redeem, withdraw, or
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`close accounts in full on demand and failed to do so.
`
`15.
`
`As a result, it would be impossible for all investors or class members to redeem or
`
`withdraw their funds in full or close their accounts at once on any given time.
`
`16.
`
`Defendants improperly pledged class members’ securities that should have been
`
`segregated. The funds generated by class members’ securities were used by Defendants to fund
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`speculative and risky loans to companies with liquidity problems like a $1 billion loan to venture
`
`firm Three Arrows Capital, which was not properly disclosed to BlockFi customers.6
`
`17.
`
`Furthermore, BlockFi did not warn or provide notice to class members that
`
`BlockFi may need to register its offers and sales of BIAs. Nor did BlockFi warn customers that
`
`it may be violating securities laws, subject to enforcement actions, cease-and desist orders,
`
`penalties, and lawsuits from every state in the country.
`
`18.
`
`Such disclosures would have given account holders the information necessary to
`
`properly evaluate and formulate the requisite return or interest on their accounts with BlockFi.
`
`Because these disclosures were never made, BlockFi account holders were not given sufficient
`
`information to evaluate the relevant risks, and they did not receive a return on their investments
`
`commensurate with those risks.
`
`19.
`
`Had investors and class members known or even been warned about their
`
`exposure to unregistered securities, SEC fines, state fines, lawsuits, judgments, consent orders,
`
`
`6 https://coingeek.com/three-arrows-capital-sinks-sucking-down-cash-and-investors-alike/ (last visited 7/28/22).
`
`
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`6
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`increased bankruptcy risk, account redemption freezes and asset loss, they would have required a
`
`higher rate of return or greater interest payments on their investments with BlockFi before
`
`investing.
`
`20.
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`Leaving account holders in the dark of these known and substantial risks, BlockFi
`
`capitalized on account holder ignorance of these substantial and debilitating risks to profit from
`
`paying artificially low interest payments to class members.
`
`21.
`
`Defendants participated in this conduct in order to realize unjust returns in form
`
`of income, commissions, compensation, and profits associated with these loans at the risk of
`
`bankruptcy and losing customer investment.
`
`22.
`
`As a result of the above, Plaintiffs and class members are entitled to rescission,
`
`disgorgement, disgorgement of all income, profits, commissions, and compensation received by
`
`defendants, compensatory damages, and punitive damages.
`
`PARTIES
`
`23.
`
`Plaintiff John Mangano is a citizen of the State of California and resides in
`
`Mountain View, California. Mr. Mangano opened a BIA account from Defendants in the State
`
`of California and while residing in California. Mr. Mangano therefore purchased an unregistered
`
`security from BlockFi in the form of the BIA account. Mr. Mangano opened an account with
`
`BlockFi on or around August 31, 2021. On August 31, 2021, Mr. Mangano made a Crypto
`
`Transfer of 7.00943484 Ethereum (ETH) cryptocurrency to the BlockFi platform to enroll in a
`
`BIA account. On October 8, 2021, Mr. Mangano made a Crypto Transfer of 1.8050846 Litecoin
`
`(LTC) cryptocurrency to the BlockFi platform to enroll in a BIA account. On October 20, 2021,
`
`Mr. Mangano made a Crypto Transfer of 0.16943697 ETH to enroll in a BIA account. In
`
`December 2021, Mr. Mangano deposited U.S. dollars to his BlockFi account to purchase Bitcoin
`
`(BTC) cryptocurrency for deposit in a BIA account. Mr. Mangano purchased the BIA
`
`
`
`7
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`unregistered securities in the State of California and took delivery of the unregistered securities
`
`in California.
`
`24.
`
`Plaintiff Michael Leifman is a citizen of the State of New Jersey and resides in
`
`Newark, New Jersey. Mr. Leifman opened a BIA account from Defendants in the State of New
`
`Jersey and while residing in New Jersey. Mr. Leifman therefore purchased an unregistered
`
`security from BlockFi in the form of the BIA account. Mr. Leifman opened an account with
`
`BlockFi on or around April 5, 2021. On January 28, 2022, Mr. Leifman made a BIA deposit of
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`0.00443915 Bitcoin (BTC) cryptocurrency using the BlockFi platform. On January 28, 2022,
`
`Mr. Leifman made a BIA deposit of 1.00636137 Ethereum (ETH) cryptocurrency using the
`
`BlockFi platform. On January 28, 2022, Mr. Leifman made a BIA deposit of 2.36822116
`
`Chainlink (LINK) cryptocurrency using the BlockFi platform. On January 28, 2022, Mr.
`
`Leifman made a BIA deposit of 0.39144462 Litecoin (LTC) cryptocurrency using the BlockFi
`
`platform. On January 29, 2022, Mr. Leifman made a BIA deposit of 0.4 ETH cryptocurrency
`
`using the BlockFi platform. On January 29, 2022, Mr. Leifman made a BIA deposit of 0.01784
`
`BTC cryptocurrency using the BlockFi platform. On January 31, 2022, Mr. Leifman made a
`
`BIA deposit of 8.3727371 Uniswap (UNI) cryptocurrency using the BlockFi platform. On
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`January 31, 2022, Mr. Leifman made a BIA deposit of 56.96568409 Basic Attention Token
`
`(BAT) cryptocurrency using the BlockFi platform. On January 31, 2022, Mr. Leifman made a
`
`BIA deposit of 0.44578034 LTC cryptocurrency using the BlockFi platform. On February 11,
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`2022, Mr. Leifman made a BIA deposit of 0.00149712 ETH cryptocurrency using the BlockFi
`
`platform. Mr. Leifman purchased the BIA unregistered securities in the State of New Jersey and
`
`took delivery of the unregistered securities in New Jersey.
`
`25.
`
`BlockFi, Inc. (“BFI”) is a Delaware corporation, incorporated on August 1, 2017,
`
`
`
`8
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`with offices at 201 Montgomery Street, Suite 263, Jersey City, New Jersey. BlockFi and
`
`Trading are wholly-owned subsidiaries of BFI.
`
`26.
`
`BlockFi is a Delaware limited liability company formed on January 11, 2018,
`
`with offices at 201 Montgomery Street, Suite 263, Jersey City, New Jersey. On March 4, 2019,
`
`BlockFi began publicly offering and selling BIAs.
`
`27.
`
`BlockFi Trading, LLC (“Trading”) is a Delaware limited liability company
`
`formed on May 28, 2019, with offices at 201 Montgomery Street, Suite 263, Jersey City, New
`
`Jersey. Trading is a wholly owned subsidiary of BFI.
`
`28.
`
`BlockFi Lending, LLC (“Lending”) is a Delaware limited liability company
`
`formed on January 11, 2018, with offices at 201 Montgomery Street, Suite 263, Jersey City, New
`
`Jersey.
`
`29.
`
`BFI conducts its business on the internet, through a website accessible to the
`
`general public at https://www.blockfi.com/ (the “BFI Website”), which is also accessible through
`
`BFI’s own proprietary app via smartphone.
`
`JURISDICTION AND VENUE
`
`30.
`
`This Court has subject matter jurisdiction over claims under the Securities Act
`
`pursuant to 15 U.S.C. § 78aa and 28 U.S.C. § 1331, and supplemental jurisdiction over the entire
`
`action under 28 U.S.C. § 1367.
`
`31.
`
`Venue is proper under 28 U.S.C. § 1391 because Defendants have their principal
`
`place of business in this District and therefore reside in this District. Venue is further proper
`
`pursuant to 15 U.S.C. § 78aa.
`
`32.
`
`This Court has personal jurisdiction over Defendants because they are subject to
`
`general jurisdiction in this District because Defendants’ principal place of business is in this
`
`
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`District.
`
`A.
`
`33.
`
`FACTS COMMON TO ALL CLAIMS
`
`BlockFi Offered and Sold BIAs as Investment Opportunities
`
`On March 4, 2019, BlockFi publicly announced the launch of the BIA, through
`
`which investors could lend crypto assets to BlockFi and in exchange, receive interest, “paid
`
`monthly in cryptocurrency.” Interest began accruing the day after assets were transmitted to
`
`BlockFi and compounded monthly, with interest payments made to accounts associated with
`
`each BIA investor, in crypto assets, on or about the first business day of each month.
`
`34.
`
`BlockFi only accepts certain types of cryptocurrencies for deposit in a BIA.
`
`According to the BFI Website, BIAs can be opened by depositing eligible cryptocurrency with
`
`BlockFi’s affiliate, Trading, who then transfers the deposited cryptocurrency to BlockFi, or by
`
`sending a wire transfer to Trading to purchase eligible cryptocurrency, which Trading then
`
`immediately transfers to BlockFi.
`
`35.
`
`BlockFi offered and sold BIAs to obtain crypto assets for the general use of its
`
`business, namely to use the assets in its lending and investment activities, which generated
`
`income both for BlockFi and to pay interest to BIA investors. BlockFi pooled the loaned assets,
`
`and exercised full discretion over how much to hold, lend, and invest. BlockFi had complete
`
`legal ownership and control over the loaned crypto assets, and advertised that it managed the
`
`risks involved.
`
`36.
`
`According to the BFI Website, BlockFi uses Gemini Trust Company, LLC,
`
`(“GTC”) a New York trust company, and BitGo, an institutional digital asset custodian, as its
`
`primary digital asset custodians for the BIAs. GTC was recently sued by the CFTC for making
`
`misleading misrepresentations in connection with certain self-certifications. The major
`
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`10
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`investors/owners of GTC are also major investors/owners of BlockFi, namely Winklevoss
`
`Capital. GTC is a custodian which also lends assets to third parties to generate fees, including
`
`assets for which it acts as a custodian. Thus, the common ownership of GTC and BlockFi, which
`
`was undisclosed to investors, created a risk of conflicts to BlockFi arising out of the fact that
`
`GTC and its owners could use their control over BlockFi to have BlockFi pay unfairly low
`
`interest rates so that GTC could maximize its profits when it lent out the BlockFi assets
`
`custodied with GTC to third parties at higher rates.
`
`37.
`
`The BlockFi BIA Terms provide that a BlockFi BIA Investor relinquishes control
`
`over the deposited cryptocurrency to BlockFi and BlockFi is free to use those assets as it sees fit,
`
`including commingling cryptocurrency with those of other BIA Investors, investing those assets
`
`in the market, and lending those assets to institutional and corporate borrowers. Without any
`
`control over the investments once deposited, the BIA Investors are passive investors.
`
`38.
`
`In purchasing an unregistered BIA, investors:
`
`[G]rant BlockFi the right, without further notice to [the investor],
`to hold the cryptocurrency held in [the] account in BlockFi’s name
`or in another name, and to pledge, repledge, hypothecate,
`rehypothecate, sell, lend, or otherwise transfer, invest or use any
`amount of such cryptocurrency, separately or together with other
`property, with all attendant rights of ownership, and for any period
`of time and without retaining in BlockFi’s possession and/or
`control a like amount of cryptocurrency, and to use or invest such
`cryptocurrency at its own risk.
`
`BlockFi then pools these cryptocurrencies together, where according to BlockFi,
`
`39.
`
`it (1) reserves a portion of the cryptocurrencies to meet investor withdrawal demands, (2) lends
`
`some or all of the balance to third parties, or (3) purchases equities, options, and futures for its
`
`own account. BlockFi uses the revenue from those activities to pay the BIA Investors the
`
`agreed-upon interest rate, and keeps the remainder for itself as profit.
`
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`11
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`40.
`
`BlockFi does not disclose to investors: (a) the amount of money devoted to each
`
`of these investment activities; (b) the nature and creditworthiness of the borrowers, as well as the
`
`identity of any borrowers to whom BlockFi has lent material amounts of cryptocurrency; (c) the
`
`terms and duration of the loans; (d) the types of equities, options, and futures it trades; or (e) the
`
`profits or losses derived from these activities.
`
`41.
`
`According to the BlockFi Interest Account Agreement for business accounts,
`
`corporate BIA Investors are offered a fixed interest rate on a certain minimum amount of digital
`
`currency deposits and then for any cryptocurrency deposited in the BIA in excess of the
`
`minimum amount, interest accrues at the interest rate “announced” by BlockFi pursuant to the
`
`BIA Terms. Despite the BIA Terms indicating that BlockFi does not require a minimum amount
`
`of cryptocurrency for deposit in the BIA, the BlockFi Interest Account Agreement for corporate
`
`accounts requires a certain minimum amount of digital currency deposits to be maintained in the
`
`account at all times until a stated maturity date.
`
`42.
`
`At all relevant times, BlockFi represented that it earned interest on the assets that
`
`it borrowed from BIA investors by lending those crypto assets to institutional borrowers.
`
`Beginning in September 2020, BlockFi disclosed on its website that it also purchased “SEC-
`
`regulated equities and predominantly CFTC-regulated futures” using BIA assets.
`
`43.
`
`To begin investing in a BIA, an investor could transfer crypto assets to the digital
`
`wallet address assigned by BlockFi to the investor, or purchase crypto assets with fiat currency
`
`from BlockFi Trading for the purpose of investing in a BIA. BlockFi Trading accepted the
`
`crypto asset or fiat from the investor, and then transferred the asset or fiat to BlockFi. BlockFi
`
`did not hold private keys for the investors’ wallet addresses; rather, investors’ crypto assets were
`
`sent to BlockFi’s wallet addresses at third-party custodians.
`
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`
`
`44.
`
`BIA investors were permitted to withdraw the equivalent to the crypto assets they
`
`loaned to BlockFi at any time, with some limitations, and could borrow money in U.S. dollars
`
`against the amount of crypto assets deposited in BIAs.
`
`45.
`
`BlockFi adjusted the interest rates payable on BIAs for particular crypto assets
`
`periodically, and typically at the start of each month. BlockFi set the rates based, in part, on “the
`
`yield that [BlockFi] can generate from lending,” to institutional borrowers, and thus it was
`
`correlated with the efforts that BlockFi put in to generate that yield. BlockFi periodically
`
`adjusted its interest rates payable on the BIAs in part after analysis of current yield on its
`
`investment and lending activity. BIA investors could demand that BlockFi repay the loaned
`
`crypto assets at any time, but BlockFi had retained for itself the discretion to refuse to honor
`
`requests for sales or withdrawals.
`
`46.
`
`BlockFi regularly touted the profits investors may earn by investing in a BIA.
`
`When announcing the BIA, BlockFi promoted the interest earned, promising “an industry-
`
`leading 6.2% [annual percentage yield],” compounded monthly. BlockFi described it as “an easy
`
`
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`13
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`way for crypto investors to earn Bitcoin as they HODL.”7
`
`47.
`
`The BFI Website advertises that the BIA “provides market-leading yields to
`
`crypto investors” and currently advertises an annual return of up to 7.5% on certain digital assets
`
`deposited in a BIA:
`
`48.
`
`The BFI website contains a page with a detailed presentation of the
`
`cryptocurrencies it accepts for investment into the BIAs and the corresponding interest rates
`
`offered for each type of cryptocurrency deposit:
`
`
`
`
`7 “HODL” is a purposeful misspelling of “hold” and an acronym for “hold on for dear life,” denoting buy-
`and-hold strategies in the context of crypto assets.
`
`
`
`14
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`

`

`Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 15 of 46 PageID: 311
`Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 15 of 46 PagelD: 311
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`Interest Rates
`
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`tet.eethcrawal brrets.andtees aresubpect tochange
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`BlockFi Interest Account (BIA)
`Anriaal DescenteWebkd (APY) Birih: interegtAccountChant)can ceptthee
`Cfypts and earrontenedt Fuad out of thebegenmengof everymonthfhe onterest
`earned By account holderscompounds. uncrawung theannualyeetor our chert.
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`GTC (Tees Th
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`BTC (Teer 2
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`TC (Tear 5
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`ETH [Tage
`
`ETH (Tier 2)
`
`ETH (Tier 3
`
`LAE [Tae 1
`
`LTC (Ta 2)
`
`(ohana (Tape 1)
`
`Lona [Tame 2)
`
`Sa [Tia 7)
`
`LAE [Teer 2}
`
`0-O2338TC
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`074-387
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`+S eTC
`
`O- SETH
`
`5-3 TH
`
`= SETH
`
`O-1OLTE
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`0-730 LINE
`
`= "Te LIN
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`0-000 USDC
`
`= 80.000 USDC
`
`15
`15
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`
`
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`
`
`
`
`
`
`
`
`
`

`

`Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 16 of 46 PageID: 312
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`
`
`49. Within the first few weeks of launching the BIA, BlockFi again touted investors’
`
`
`
`potential for profit. On March 20, 2019, BlockFi announced that BIAs experienced significant
`
`growth, including from large firms who participated in BIAs “as a way to bolster their returns.”
`
`BlockFi asserted that it “provide[d] the average crypto investor with the tools to build their
`
`wealth,” and that it “look[ed] forward to giving even more investors a chance to earn a yield on
`
`their crypto.”
`
`50.
`
`The BFI Website advertises the BIAs as part of a long-term investment strategy
`
`for investors, claiming that a BIA “provides clients with the ability to earn more crypto while
`
`
`
`16
`
`

`

`Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 17 of 46 PageID: 313
`
`holding for long-term investments. Interest is paid monthly and compounds. This significantly
`
`increases the potential earnings of long-term account holders.”
`
`51.
`
`The BFI Website includes a chart stating “BlockFi’s Interest Account works
`
`hardest for you as a long-term investment,” which claims to illustrate the projected effect of
`
`holding a BIA as a long-term investment:
`
`
`
`52.
`
`On April 1, 2019, BlockFi began to “tier” the interest rates that investors received,
`
`initially announcing that “BIA balances of up to and including 25 [Bitcoin] or 500 [Ether]
`
`(equivalent to roughly $100,000 and $70,000 respectively) will earn the 6.2% APY interest rate.
`
`
`
`17
`
`

`

`Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 18 of 46 PageID: 314
`
`All balances over that limit will earn a tiered rate of 2% interest.” Even when changing the
`
`interest rates customers receive, BlockFi touted the yields to investors. On August 27, 2021,
`
`BlockFi stated that the adjustments to interest rates are done “with the goal of maintaining great
`
`rates for the maximum number of clients.”
`
`53.
`
`On January 1, 2021, BlockFi advertised that it had “distributed more than $50
`
`million in monthly interest payments to [its] clients.” Since BlockFi paid interest in Bitcoin
`
`rather than dollars this statement was materially misleading.
`
`54.
`
`As of November 1, 2021, the interest rates BlockFi paid investors ranged from
`
`0.1% to 9.5%, depending on the type of crypto asset and the size of the investment. For
`
`example, investors could receive 9.5% in interest for up to 40,000 Tether (“USDT”) and 8.5%
`
`for anything over 40,000 USDT, as well as 4.5% interest for up to 0.1 Bitcoin (“BTC”), 1% for
`
`0.1 to 0.35 BTC, and 0.1% for anything over 0.35 BTC.
`
`55.
`
`BlockFi offered and sold the BIA securities to investors, including retail
`
`investors, through advertising and general solicitations on its website, www.blockfi.com.
`
`BlockFi also promoted distribution of the BIA offering through its social media accounts,
`
`including YouTube, Twitter, and Facebook. In addition, through its “Partner” program, an
`
`affiliate marketing program in which participants could “earn passive income by introducing
`
`your audience to financial tools for crypto investors,” BlockFi extended its distribution of the
`
`BIA securities to retail investors through certain offers and promotions.
`
`56.
`
`BlockFi did not have a Securities Act registration statement filed or in effect with
`
`the SEC or the Commissioner for the offer and sale of the BIAs, nor did the offer and sale of
`
`BIAs qualify for an exemption from registration under the Securities Act.
`
`
`
`
`
`
`
`18
`
`

`

`Case 2:22-cv-01112-KM-CLW Document 31 Filed 07/28/22 Page 19 of 46 PageID: 315
`
`B.
`
`The BIAs Were Unregistered Securities Sold To Investors In Violation of the
`Securities Act, California Law, and New Jersey Law
`
`57.
`
`The BFI Website claims that BFI is a “US regulated” entity, and that “[BlockFi]
`
`play[s] by the rules, to the benefit of [BlockFi] and [its] clients.” While certain of BlockFi’s loan
`
`products appear to be licensed under various state licensing requirements for money services
`
`businesses or money transmitters, the BlockFi BIAs are not currently registered with any federal
`
`or state securities regulator, or exempt from registration – as required by law, even though the
`
`BIAs are “securities” and subject to such requirements.
`
`58.
`
`BlockFi fails to disclose to BIA Investors that its BIA product is not currently
`
`registered by federal or state securities regulatory authorities, even though the BIA is a
`
`“security” and should be registered as such. Nor does BlockFi disclose that it is an “ investment
`
`company” under the Investment Company Act of 1940. (“1940 Act”)
`
`59.
`
`The Securities Act and the