Lido DAO voted to fund Dolphin CL, LLC with 200,000 DAI to engage legal counsel, expected to be Brown Rudnick’s Stephen Palley, to address a class-action complaint that alleges LDO is an unregistered security. This comes more than a week after the SEC filed a lawsuit against Consensys, claiming that Lido’s liquid staking token was also an unregistered security.
Posted July 9, 2024 at 1:01 pm EST.
Lido DAO has taken a legal step to defend itself in the US judicial system.
In a vote that passed on Tuesday at 12 p.m. EST, Lido DAO authorized Dolphin CL, LLC (Dolphin) to file a motion to dismiss a class-action lawsuit filed in the US District Court for the Northern District of California that brought forward a number of allegations against the decentralized autonomous organization (DAO) behind the largest DeFi protocol by total locked value, which sits around $30 billion as of press time.
The class-action lawsuit, which was initially filed last year and amended in April, not only claims Lido DAO is a “general partnership governed by large holders of LDO,” but also that its governance token LDO is a security that has not been registered with the US Securities and Exchange Commission (SEC). “Lido rendered itself a statutory seller of unregistered securities and is liable to Plaintiff and members of the proposed class for their losses,” stated the lawsuit.
The plaintiff, Andrew Samuels, purchased roughly 132 LDO tokens in April and May 2023 on US-regulated exchange Gemini and proceeded to sell them at a loss in June of the same year, per the lawsuit. The attorneys representing the plaintiff – Jason Harrow, Charles Gerstein, James Crooks, and Michael Lieberman – did not immediately respond to Unchained’s request for comment.
On June 30, 2023, LDO was trading at $2.05 and by Jan. 1, 2024 the token was worth $2.92, representing a 42% increase. Since the first day of 2024, LDO decreased by more than 46% to $1.57 at the time of writing, data from CoinGecko shows.
Lido’s Regulatory Troubles
Lido’s snapshot vote comes more than a week after the SEC brought forth a lawsuit against Ethereum software provider Consensys that claimed Lido’s liquid staking token, stETH, is an unregistered security.
In an announcement on June 28, the SEC accused Consensys of unlawfully offering and selling unregistered securities, specifically the liquid staking tokens of Lido and Rocket Pool, via Metamask – a crypto wallet facilitating cryptocurrency staking and swapping. Staking service tokens, composed of LDO and RPL, have been the second-worst performing sector in the crypto ecosystem in the past seven days, according to blockchain analytics firm Artemis.
Read More: Lido Takes Initial Step to Decentralize Ethereum Node Operator Set Amid SEC Allegations
As a result of the snapshot vote passing with unanimous support, Lido DAO is to appoint and fund Dolphin with 200,000 DAI ($200,000) to engage legal counsel, “currently expected to be Brown Rudnick, led by partner Stephen Palley,” according to the vote’s initial governance proposal found in Lido’s governance forums. Palley also did not immediately respond to Unchained’s email and LinkedIn message.
While governance authorizes Dolphin to make a limited appearance and file a motion to dismiss the complaint on the grounds that Lido “is not a general partnership or other legal entity [and] is not a proper defendant of this lawsuit,” governance explicitly states what Dolphin is not authorized to do, namely serve as a general representative proxy of Lido DAO or to receive legal notices on behalf of LDO token holders.
Eric Hill was appointed as Lido’s head of legal and general counsel in August 2022. However, when Unchained sought comment from Hill in May of this year, he said he was “not the right person to talk to” and was no longer in that position. He did not confirm when he stepped down from that role or who his replacement was.
Read More: Why ETH Spot ETFs Could Benefit Stakers and Make Ethereum More Resilient
Venture Firms Distance Themselves From Lido DAO
The class-action complaint includes several defendants namely Lido DAO and several venture firms including Paradigm, Andreessen Horowitz (a16z), Dragonfly, and Robot Ventures, which is managed by Tarun Chitra and Robert Leshner, who are co-hosts of Unchained podcast The Chopping Block.
The complaint also specifically names Lido’s marketing lead Kasper Rasmussen, former chief technology officer of validator firm P2P Vasiliy Shapovalov, co-founder of cyber•Fund Konstantin Lomashuk, and Jordan Fish, who goes by “Cobie” on social media, as founders and key collaborators of Lido. Rasmussen declined to comment on the lawsuit and vote.
On June 27, the court held that Lido DAO had been properly served and “has 14 days to respond or risk a default judgment on the plaintiffs’ claims,” according to the snapshot vote. However, none of the venture firms that were named as defendants “are responding as or on behalf of Lido DAO, and in fact they are denying they are part of Lido DAO,” states the now-passed governance proposal.
As a result of the lack of a response to the filed complaint, Lido’s governing body passed the vote to prevent the risk of the court from entering a default judgment against Lido DAO.
While there is difficulty in predicting whether the court would behave similarly to those in the Ooki DAO court case, which led to “successful takedowns of Ooki-DAO-related web2 infra,” the risk of a default judgment is “material,” especially “if the default judgment is weaponized to cause third parties to deny Lido DAO related access to Web2 infrastructure, to delist LDO from trading venues, etc,” according to the snapshot vote.
Addresses identified as belonging to crypto researcher Hasu, trading firm Wintermute’s team dedicated to helping govern crypto protocols, and pseudonymous researcher Banteg had each participated in the governance snapshot vote that ended on Tuesday.
Lawsuit Cites Coinbase and Kraken
The class-action complaint cited the US Securities and Exchange Commission’s enforcement action against centralized exchanges, Coinbase and Kraken, for their staking programs.
Coinbase still enables some of its users in the US to stake through the exchange’s platform, albeit with limitations following the SEC’s lawsuit against Coinbase in June 2023 and state securities agencies in ten states alleging that Coinbase’s retail staking services are securities.
Kraken sunsetted its staking operations in February 2023 for its US customers after the SEC charged the exchange with failing to register the offer and sale of their staking program. The centralized exchange also paid $30 million to settle the SEC’s charges for “disgorgement, prejudgement interest, and civil penalties,” per the SEC’s press release.
According to the April 2024 lawsuit, “Lido’s plan was materially identical to Coinbase’s and Kraken’s illegal staking services. The only difference is that Lido was set up as a DAO, with the explicit goal of avoiding regulatory scrutiny for its fundamentally illegal business.”
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