The firm at the heart of the suit, Galaxy Digital, has reached a settlement over allegations that it manipulated the price of the LUNA cryptocurrency.
In a lawsuit filed by the state of New York, it was charged that Galaxy Digital engaged in activities that helped to artificially inflate the price of LUNA in 2020—a boom that helped enrich Novogratz personally, as his firm’s assets were heavily invested in the revelatory altcoin. The state sought $500 million in damages; under the just-announced terms of the settlement, Galaxy will pay $200 million and concede no wrongdoing.
Allegations of Price Manipulation and the October 2020 Deal
Galaxy Digital and its founder, Michael Novogratz, are alleged to have engaged in shady practices surrounding their 2020 purchase of LUNA tokens from the Terra blockchain project, @terra_money. According to court documents, the company bought 18.5 million of the tokens at a substantial discount. Under the terms of the agreement, however, they were to pay just $0.22 per LUNA token — a price that was 30% below the market rate of $0.31 per token at the time. This seemingly anomalous transaction raised eyebrows, to say the least, and has now resulted in a lawsuit.
The complaint suggests that the purchase was not simply a normal investment but rather an effort to influence LUNA’s market price artificially. Galaxy Digital, led by Novogratz, supported the Terra project aggressively in its early days, providing both financial backing and public endorsement. Their backing, combined with the discounted tokens, contributed to the price increase of LUNA over the next year, reaching heights of over $100 per token in 2021.
The Surge and Sudden Sell-off
When LUNA was experiencing a price spike, it is said that Galaxy Digital, and its CEO Novogratz, started to quietly offload their LUNA holdings without telling anyone. The suit alleges that they did this all while first lending support (and seemingly making the thing more secure and valuable) and then, right before the thing completely fell apart, making some nice profits while also looking not too nice doing it and, perhaps, in violation of some SEC rules.
The undisclosed manner in which this sell-off was conducted, and the absence of any proper notification to the public, fueled the allegations of market manipulation that arose when the lawsuit was filed. The firm’s lawyers are now busily trying to refute those allegations. But if the sell-off was not in the communally experienced interest of LUNA investors, and served the profit interest of the firm in a way that also harmed LUNA investors, then is it not also a stretch to say that the firm is acting as a bad community player?
The settlement that Galaxy Digital reached comes after a lengthy legal struggle in which the State of New York accused the firm of breaching securities laws, including ones on market manipulation and insider trading. Seen as a possible way to nip in the bud a situation that might otherwise have ended up in a nasty trial, the $200 million settlement is a shot across the bow for other crypto companies.
The Impact of the Case on the Crypto Industry
This high-profile legal action is almost unprecedented in its basic parameters: a major crypto firm is involved, and it’s accused of directly manipulating a vital market on which many other firms depend to maintain their solvency—a vital market, that is, for maintaining a vital part of the crypto economy.
With the appearance of the digital coin, the challenge for regulators has become even more pressing. Should people who issue, market, or trade them be expected to follow the same rules that apply to those issuing, marketing, or trading more “traditional” financial products? By the way, which rules? Which set of them? And are the regulators even themselves armed with the clarity of prosecutorial authority necessary to feel secure in pursuing cases like this one?
For investors and consumers, the case raises concerns about the crypto market’s integrity. The space’s unclear regulations and oversight have bred fears of similar manipulative practices being common throughout, especially in the more speculative parts of the market—like altcoins. The settlement might prompt regulators to take a closer look at such firms and their operations, with the U.S. Securities and Exchange Commission (SEC) potentially leading the charge.
In addition, the case highlights in public the situation of Galaxy Digital’s founder, Michael Novogratz, who has been an obvious and clear presence in the cryptocurrency industry. He has been a backer of a number of digital asset firms, and now, as he faces the fallout from this action, it forces a conversation over how much he really knows about what goes on at his company and what kind of oversight, if any, he exercises.
Looking Ahead
When Galaxy Digital pays the $200 million settlement and resolves the legal accusations, it will allow the crypto community (not just this one, but, as we know, there’s an important tax haven aspect to these kinds of settlements) to once more peer into the regulatory crystal ball. What we see there is that the case against Galaxy Digital serves as an important reminder about the risks and challenges of operating in the largely unregulated, cryptocurrency market that is “oftentimes evolving and revolutionizing” and in which the pressure to become more “transparent” (and, by extension, more “regulated”) is going to keep mounting.
For Galaxy Digital, the legal history takes a big turn toward the positive. The company must work hard, however, to wipe off the tarnish that its association with the SEC has caused.
In the coming months, the cryptocurrency industry will likely be watching closely to see whether this case serves as a catalyst for tighter scrutiny of other firms in the sector. Regulatory agencies are still trying to find their footing in this dynamic, rapidly evolving landscape. But there is no question that the probes into some high-profile companies have already started to pan out.
Disclosure: This is not trading or investment advice. Always do your research before buying any Metaverse crypto coins.