Digital Capital Management Sues Former Attorneys Over “Erroneous” Counsel

Faegre Baker Daniels, a legal firm based out of Indianapolis, has been sued by Digital Capital Management, a cryptocurrency asset management firm.

According to the complaint filed on December 31, Digital Capital Management is suing its former law firm for legal malpractice, alleging that the law firm had provided “erroneous”: legal services to it while it launched a new crypto fund.

The complaint alleged that Faegre Baker provided inaccurate advice and analysis to Crypto Asset Management LP, a predecessor to Digital Capital Management, regarding the best way to register a fund under the Investment Advisers Acts of 1940. As a result of the terrible filing advice, Crypto Asset Management and its founder Timothy Enneking were charged by the Securities and Exchange Commission (SEC) in 2018.

Faegre Baker is Responsible for a Botched Crypto Fund

In the indictment action, the financial watchdog revealed that the company had raised over $3 million for Crypto Asset Fund LLC, a crypto fund that Crypto Asset Management had dubbed the first regulated crypto asset fund and had opened to make cryptocurrency investments on behalf of its clients. However, the cease and desist order revealed that contrary to the company’s claims, it hadn’t registered the fund with the financial regulator.

The Investment Company Act posits that an investment company is an issuer that “is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities.” In its suit, Digital Capital Management explained that Faegre Baker had advised the firm that crypto assets aren’t securities, and thus, won’t need to be registered with the SEC.

Both Enneking and Crypto Asset Management reached an agreement with the SEC for $200,000 in civil penalty payments. Now, Digital Capital Management is seeking damages from Faegre Baker, including restitution for all fees incurred, lost profits, reputational harm, and other consequential damages.

Regulatory Obscurity in the Limelight Again

The lawsuit is not how Faegre Baker would have imagined starting the new year. The company announced last month that it would be merging with Drinker Biddle & Reath LLP., another law firm based out of Philadelphia. The merger is expected to be completed by February 1, and it will see the creation of a new law firm that has out 44 equity partners and up to 1,200 lawyers.

However, the bone of contention here seems to stem from the fact that there’s still much uncertainty concerning crypto-assets and their classification in the American financial ecosystem. Lately, the SEC has been on a crusade to bring assets developed by social networks under its jurisdiction. It has cases against both mobile messaging giant Telegram and social media platform Kik over their tokens, named the GRAM, and KIN token, respectively.

Don’t you think the SEC would have cracked down and actually done their job of protecting the investing public from ‘unregistered securities’ by now? There are also countries other than the US and many of them have made clear that XRP is not a security token- e.g. the UK.

— Andrew (@andrewrh) December 29, 2019

Both cases are eerily similar; the SEC believes that the companies issued unregistered securities when they completed Initial Coin Offerings (ICOs) for their tokens without informing it, thus violating the Securities Act of 1933. However, the firms believe otherwise, and maintain that their tokens aren’t securities.