Tezos Founders Sued for Securities Fraud in Potential Class Action

A lawsuit seeking class action status has been filed in California against the founders and promoters of the controversial Tezos blockchain project.

The lawsuit represents the latest twist in the ongoing spat between Tezos founders Kathleen and Arthur Breitman and Johann Gevers, the head of the Tezos Foundation, a non-profit created to promote and support development of the project. The Breitmans accused Gevers of self-dealing, with Gevers alleging in turn that the Breitmans were seeking to assassinate his character and attempting to usurp control of the foundation.

That internal power struggle broke into public view earlier this month, stoking criticism of the project and raising questions about when the Tezos network would go live. It came months after the project raised a record $232 million in a token sale – the proceeds of which are now part of the dispute. The tokens have yet to be issued.

Submitted on Oct. 25 in the San Francisco branch of the Superior Court of California, the lawsuit names multiple defendants, including the Breitmans and Gevers.

Dynamic Ledger Solutions, Inc., a Delaware-based company owned by the Breitmans, the Tezos Foundation, and Strange Brew Strategies, a public relations firm that promoted the project ahead of its ICO, are also named as defendants.

The suit, filed by San Diego-based law firm Taylor-Copeland Law on behalf of plaintiff and Tezos ICO contributor Andrew Baker, alleges that the defendants violated U.S. securities law through the token sale. Specifically, the defendants are being accused of selling unregistered securities, committing securities fraud, false advertising and unfair competition ("by making material misrepresentations and omissions").

When reached for comment, Baker Marquart attorney Brian Klein, who is representing the Breitmans, said that that his clients planned to “aggressively” fight the lawsuit.

"This lawsuit is without merit for a host of reasons. Kathleen and Arthur Breitman, who are brilliant entrepreneurs and visionaries, are going to aggressively defend themselves. They should never have been sued," Klein told CoinDesk.

"As a general matter, the Foundation does not comment on potential litigation," Gevers said when contacted by email.

Strange Brew Strategies declined to comment when reached.

'Mess' ahead?

How the lawsuit shakes out – including whether it receives a class-action certification – remains to be seen, given the early stages of the case.

Even still, observers like Anderson Kill lawyer Stephen Palley say that the lawsuit could drag on regardless of the long-term fortunes of the Tezos network itself. The allegation that state securities laws (not just federal ones) were violated represents "a significant area of risk for ICO promoters" in general, Palley said.

Palley also suggested that the lawsuit may not be the only one filed in relation to the controversy, speculating that "copycat" litigation could emerge as time goes on.

"In short, it's a complicated mess. I doubt that it will be resolved quickly, even if tokens are issued quickly. It is unclear what impact that this will have on Tezos' development," Palley told CoinDesk, adding:

"It's definitely not a great development for a new venture."

The full court filing can be found below:

Tezo s Filing by CoinDesk on Scribd

Justice scales image via Shutterstock