An Ontario court has certified a proposed class action against crypto firm, Galaxy Digital Holdings Ltd., alleging that the company and a couple of executives misled investors about the risks of its business and a stablecoin that collapsed in 2022, resulting in massive investor losses.
The Ontario Superior Court of Justice granted leave to an investor pursuing legal action against Galaxy Digital and a couple of executives — CEO, Michael Novogratz and former CFO Alex Ioffe — alleging that they made misrepresentations in the secondary market about the crypto asset, TerraLuna, which collapsed in 2022.
The alleged misrepresentations were contained in financial releases and regulatory filings and various public statements by the company and its executives, the court noted in its decision on whether the case could proceed.
The company voluntarily delisted from the TSX earlier this year, and is now listed solely on Nasdaq in the U.S.
The proposed case, which argues that the alleged misrepresentations amounted to violations of Ontario securities law, has been certified as a class action too.
The allegations have not been proven.
In granting leave to pursue a case for alleged secondary market misrepresentation, the court said that the test is that the case has been brought in good faith, and has a “reasonable” prospect of success.
In this case, the court found that the proposed case is being pursued in good faith by the plaintiff — a retail investor.
And, it found that there’s also sufficient evidence of potentially misleading statements to support a case that has a reasonable prospect of success — including claims that investors were misled about the risks of stablecoins, particularly algorithmic stablecoins, the company’s exposure to the Luna token, the company’s strategy and its compliance with evolving regulatory guidance, among other things.
The court said that, while the defendants oppose the allegations, “the conclusion that Galaxy’s disclosure materials and overall presentation of its dealings with respect to Luna were misleading is hard to deny.”
It also noted that the defendants argued that Luna was not material to Galaxy during most of the proposed class period, as it was a small part of the company’s portfolio at the time.
However, the court rejected that argument, saying, “To single out Luna as representing a small portion of Galaxy is to lose perspective on the market’s response to Galaxy. It is akin to singling out donuts as representing a small portion of the sales revenue for the international investment company that owns Tim Hortons.”
While donuts represent less than 10% of the company’s revenue, “one can imagine the owner’s financial doom if Timmy’s were to suffer a ‘death spiral’ from a toxic dose of maple glaze,” the court said. “The public, and the market, overwhelmingly associates the company with the impugned product/brand.”
Ultimately, the court concluded that, “there is ample evidence in the record supporting the claim that the defendants made misrepresentations, both actively and by omission, of material facts, and that these were followed by a form of public corrections.”
As a result, it concluded that an action alleging secondary market misrepresentation has a reasonable prospect of success.
It certified the proposed case as a class action, covering investors who purchased Galaxy’s stock between May 17, 2021 and May 6, 2022.
This article has been updated.