California Court Dismisses Most Claims in Neo Crypto Loan Lawsuit

News | July 9, 2024 By:

On Tuesday, June 25, 2024, the United States District Court for the Northern District of California issued an order in a lawsuit involving cryptocurrency loans and investments.

John Cress, a resident of San Francisco, had filed a lawsuit against Nexo Financial LLC and several related entities as well as Antoni Trenchev, the CEO of Nexo. Cress alleged that Nexo had fraudulently induced him to take out loans totaling over $12 million in 2021 that were collateralized by millions of dollars worth of bitcoin and ether cryptocurrencies.

According to the court filings, Nexo advertised on its website that customers could use their digital assets like bitcoin and ether as collateral to borrow fiat currencies such as US dollars. Cress decided in March 2021 to transfer his holdings of bitcoin and ether from the cryptocurrency exchange Coinbase to his savings wallet on Nexo in order to earn interest.

Soon after, a Nexo employee told Cress about their VIP client program, which was said to offer benefits like faster customer support response times. Cress then proceeded to take out loans from Nexo totaling $12.4 million that were secured by his cryptocurrency collateral. Issues later arose after the price of cryptocurrencies dropped, resulting in liquidations of Cress’ collateral to maintain the required loan-to-value ratios on his loans.

In his lawsuit, Cress claimed Nexo made misrepresentations about the interest rates on deposited crypto, benefits of the VIP program, and a “liquidation relief program” to recover assets in the event of a market crash. He also alleged Nexo failed to provide notice before liquidating his collateral as required. Cress sued Nexo and Trenchev for fraudulent inducement, violations of California securities laws, and unfair competition laws.

In its latest order, the district court addressed Nexo’s motion to dismiss most of Cress’ amended complaint for lack of jurisdiction over the foreign defendants and failure to state valid claims. The court granted the motion in part, dismissing all claims against the defendants except Nexo Capital Inc. due to lack of personal jurisdiction over the foreign entities.

The court also dismissed several of Cress’ specific legal claims. It found Cress failed to state valid claims under California’s unfair competition laws to the extent they involved alleged misrepresentations about Nexo’s token, interest account, or interest rate policies. The court also dismissed Cress’ claims for unregistered securities violations regarding Nexo’s interest earning accounts and a bundled “leveraged investment instrument” product due to failures to demonstrate statutory harm.

However, the court allowed Cress’ core claim of fraudulent inducement of contract to proceed against Nexo Capital at this early stage. It also permitted one part of Cress’ state securities fraud claim to move forward regarding alleged misrepresentations that Nexo’stoken was properly registered.

Going forward, the case will continue in the Northern District of California, with Nexo Capital as the sole remaining defendant. Cress will have the opportunity to gather evidence and testimony to support his surviving claims of fraudulent inducement and one aspect of securities fraud.

Please contact BlockTribune for access to a copy of this filing.