Crypto Investment Firm Settles with New York Attorney General for $200 Million to Resolve Market Manipulation

In a recent development, cryptocurrency investment firm Galaxy Digital Holdings (Galaxy) has agreed to settle allegations of market manipulation with New York Attorney General Letitia James. The settlement involves a payment of $200 million to resolve claims that Galaxy engaged in misrepresentations when promoting the failed algorithmic cryptocurrency Luna from 2020 to 2022.

According to the Attorney General, Galaxy began promoting Luna in 2020, a cryptocurrency token issued by Terraform Labs (Terraform) to bolster the stablecoin TerraUSD, and continued its promotional activities until 2022. The firm allegedly engaged in a deal with Terraform to purchase Luna at a discount, subsequently promoting the token to inflate its value. The arrangement involved Galaxy’s owner leveraging social media platforms to hype Luna, promising a tattoo if the token’s price surpassed $100, which it did in December 2021, resulting in the owner getting the promised tattoo.

However, the market took a nosedive in May 2022 when both Luna and TerraUSD plummeted, erasing over $40 billion in market value and significantly impacting the cryptocurrency market. Terraform itself faced a $4.5 billion settlement with the U.S. Securities and Exchange Commission for orchestrating a massive securities fraud scheme, with its owner, Do Kwon, awaiting trial for fraud and securities violations in the U.S.

Attorney General James accused Galaxy of engaging in market manipulation by selling Luna without disclosing its sale or intent to sell, which violated New York’s Martin Act and New York Executive Law Section 63(12). The settlement agreement revealed that Galaxy sold millions of tokens into the market at multiples of its initial cost without revealing its actions, resulting in hundreds of millions of dollars in profits for the firm.

The settlement stipulated that Luna was deemed both a security and commodity, falling under the Martin Act’s purview, which prohibits fraudulent practices related to securities and commodities. Despite Galaxy’s claims of innocence, its purchase, promotion, and sale of Luna without disclosing its transactions violated the Martin Act and Executive Law’s prohibitions against repeated fraudulent or illegal acts.

As part of the settlement, Galaxy agreed to a monetary penalty of $200 million to be paid out over three years. The firm also committed to implementing policy changes to prevent conflicts of interest, especially concerning the promotion and investment in digital assets, and conducting legal assessments on all token transactions. Galaxy neither admitted nor denied the allegations leveled by the Attorney General.

The settlement between Galaxy and the New York Attorney General serves as a stark reminder that state Attorneys General retain significant enforcement powers under existing state laws, highlighting the persistent threats faced by entities involved in cryptocurrency-related activities amid the evolving regulatory landscape. While federal regulation of cryptocurrencies may be easing, AG enforcement actions are still a force to be reckoned with in the industry.