Imagine you have an expensive watch. Someone steals the watch, and sells it to a pawn shop. This pawn shop is kind of notorious in town for its chain-smoking owner with his un-ironic mullet and his "no questions asked" policy, and petty thieves often go there to cash in their loot. Eventually, the watch turns up on the wrist of someone who bought it from the pawn shop. Can you sue the shop and its owner?
Binance runs the world's largest cryptocurrency exchange. In November 2023, Binance and its founder Changpeng Zhao ("CZ") pled guilty to federal criminal charges of violating the Bank Secrecy Act by failing to maintain an effective anti-money laundering program, conducting and conspiring to conduct an unlicensed money transmitting business, and violating U.S. economic sanctions law. The gist of the charges was that Binance created a platform that allowed various evil-doers--criminals, terrorists, people trying to evade U.S. sanctions--to move cryptocurrency around in ways that made it easier to hide funds that came from illegal activity, but CZ did not put in place the required compliance processes to catch and stop such money laundering. As part of the plea, Binance and CZ admitted as much.
On August 16, 2024, a group of plaintiffs filed what they hope will be a class action lawsuit against Binance and CZ, asserting claims under the RICO statute. In essence, the plaintiffs claim that they were ripped off by criminals who defrauded them or hacked their accounts and stole their cryptocurrency. According to the plaintiffs, the criminals then moved the stolen crypto into Binance and used the exchange to conduct transactions to hide the money. Like the Justice Department--and the defendants themselves--the plaintiffs say that the company's Bank Secrecy Act violations allowed this to happen. Thus, the plaintiffs argue, both Binance and CZ are liable for the plaintiffs' losses under RICO, which applies to such violations.
This is not the first such suit against Mr. Z and his creation. In February, a 75-year-old Texan victimized in a "pig-butchering" scheme by a Cambodian online gang brought a similar--though much smaller--RICO case against both Binance and its founder based on essentially the same theory, and citing the same plea agreement.
A slam dunk, right? Easy money, fish in a barrel, a no-brainer, no? Well, no. It's actually kind of a brainer, at least as the RICO claims go.
Causation in RICO Cases
While the federal government can enforce any RICO violation, private plaintiffs have less leeway. To pursue civil RICO claims against a defendant, a plaintiff must first allege and then prove both that it has suffered harm to its "business or property" and that the harm occurred "by reason of" the defendant's racketeering activity. "By reason of" means the plaintiff must show two kinds of causation. First, it must show that the harm would not have occurred "but for" the racketeering. Second, it must show that the racketeering was the "proximate"--or direct--cause of the harm.
Proximate causation is a famously fuzzy concept that first-year law students learn about through a case that involves a train, a lady, and an explosion. Judges sometimes use it to eighty-six cases that they find just a bit too squirrely. In the Binance cases, the plaintiffs' task is to explain how the company's failure to follow certain rules for scrutinizing customers led directly to the plaintiffs losing their property.
The leading RICO causation case is Hemi Group v. City of New York. A New Mexico company sold cigarettes online to New Yorkers, but failed to disclose certain information on its customers as required by law, which prevented the city from collecting sales taxes from those customers. The city claimed the company's actions amounted to a pattern of fraud and brought a RICO case for the loss of the tax revenue. The Supreme Court held that the connection between the company's actions and the city's loss of tax revenue was too "remote" and "indirect" to meet the proximate causation requirement; the harm was actually caused by the customers who didn't pay the tax, rather than the company that failed to give the city the means to enforce it.
The issue was addressed in a recent decision involving a RICO claim against a different crypto-trade facilitator. A group of plaintiffs filed a putative class action in Delaware against a group of companies that built and maintained the Nomad Bridge, a blockchain system that allowed users to exchange different types of digital assets. A flaw in the system enabled hackers to drain $186 million in such assets from Nomad Bridge's users. As in the Binance case, the alleged racketeering activity involved, in part, operating an unlicensed money transmitting business. In April 2024, however, the court dismissed the RICO claim, finding that the losses were "too remote" from the mere act of operating without a proper license.
Causation and Binance
In the Binance case, the fight will be similar, and perhaps harder for the plaintiffs. The complaint does not allege that Binance or CZ were part of the fraud or theft that originally deprived the victims of their crypto assets, and thus the racketeering conduct is not mail or wire fraud, as in most civil RICO cases. Instead, the plaintiffs assert two basic theories as to how Binance had caused their losses:
The availability of Binance as a platform to launder stolen crypto, where anti-money laundering laws were not followed, encouraged the thieves to steal the victims' crypto in the first place.
2. By enabling the laundering, Binance prevented the victims or law enforcement from tracking down and recovering the stolen crypto.
The flaws in these theories are apparent. As to the first, it requires a fair amount of speculation to conclude that the criminals would not have stolen the crypto if Binance had complied with the Bank Secrecy Act. Other crypto exchanges, and other mechanisms for moving and concealing crypto, are and would continue to be available even if Binance did not exist. The second theory requires one to assume that the stolen assets would have been found and recovered if Binance had followed the rules--again, notwithstanding the availability of other means to hide the assets. It is thus not clear that the claims would even clear the "but for" causation test.
Even if they could, the proximate causation requirement would loom large. As in Hemi Group and the Nomad Bridge case, the court may conclude that because someone other than the defendants--here, the thieves themselves--is the actual, direct cause of the losses, the downstream effect of Binance's exchange is too indirect or remote to satisfy RICO's "by reason of" standard. As the Supreme Court put it, “[t]he general tendency of the law, in regard to damages at least, is not to go beyond the first step.”
Too Clever by Half, or Not Clever Enough?
I give credit where credit is due: the recent complaints' use of Bank Secrecy Act violations as a basis for a RICO claim is somewhat novel, makes good use of the tailwinds that the Binance/CZ guilty pleas provide, and avoids the limitations of a racketeering theory based on mail or wire fraud, which is becoming harder to plead and prove as the Supreme Court has narrowed the scope of those statutes. But it may also show the limitations of using RICO to pursue the supporting cast of the criminal world, rather than the star players.
One more thing: Query whether there would be a viable claim under California Penal Code § 496(c), which allows victims of theft to bring lawsuits for RICO-style treble damages against "every person who . . . receives any property that has been stolen . . . knowing the property to be so stolen, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen . . . " Fights over knowledge aside, both our apocryphal pawn shop owner and the crypo champions at Binance might be reasonable targets for such a claim.
Either way, those considering similar claims against crypto exchanges--and those who might be on the receiving end of them--may want to keep an eye on the forthcoming motion to dismiss in this one.
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