A class-action lawsuit has been filed against the Maker Foundation on behalf of investors who lost funds following a protocol failure on March 12, or Black Thursday.
The suit, which could represent up to 3,000 investors, was filed in the Northern District Court of California by lead plaintiff Peter Johnson represented by Harris Berne Christensen LLP of Portland, Ore.
The suit alleges the Maker Foundation and associated parties – including the Maker Ecosystem Growth Foundation, the Dai Foundation and the Maker Foundation – “intentionally misrepresented the risks associated with CDP ownership” resulting in the loss of $8.325 million in investors’ money on Black Thursday. Johnson has filed three counts including negligence, intentional misrepresentation and negligent misrepresentation.Last Thursday, the Maker Foundation told CoinDesk it was aware of the lawsuit and “would address all questions as directly as possible.”
In a statement Tuesday, the firm said, “The Maker Foundation has no comment with respect to any planned or pending legal actions.” After a discovery period, Johnson expects to have 1,000 members join the suit seeking payments equivalent to each investor's lost funds of no less than $8.325 million, plus the cost of punitive damages weighed at $20 million, interest and additional costs.
As reported by CoinDesk, a sharp drop in the price of ether – the primary digital asset used as collateral in the MakerDAO protocol for collateralizing loans of the dollar-pegged dai stablecoin – created underlying congestion on the Ethereum blockchain while also liquidating thousands of collateralized debt positions (CDPs) held by investors.
Johnson claims auctioned collateral was advertised to be returned to users after a 13 percent haircut. Instead, many positions were fully or nearly fully liquidated.
That 13 percent is not a hard line but dependent on internal conditions in the ecosystem, according to the project’s white paper. Johnson claims various Maker products, including the commonly used decentralized application (dapp) Oasis, claims a 13 percent penalty is the highest strike for liquidation. The suit also specifically cites Maker’s recent education efforts with cryptocurrency exchange Coinbase to attract CDP holders.
“The Maker Foundation and other third-party user interfaces informed users that, because their CDPs would be significantly overcollateralized, liquidation events would only result in a 13 [percent] liquidation penalty applied against the remaining collateral, after which the remaining collateral would be returned to the user,” the suit alleges.
Johnson claims the Maker Foundation’s actions were “intentional and fraudulent,” leading to the personal loss of $200,000 in ETH after investing in a product that falsely advertised the risks of opening a CDP position.
Meanwhile, the Maker community itself is collaborating on partial compensation for users who suffered from MakerDAO’s architectural flaws.
A governance poll among holders of the MKR governance token passed an initial vote on April 13 to refund investors who were liquidated unfairly in mid-March.
The dynamics of the refund, such as what currency the investors will be paid back in and to what amount, are being constructed in another governance poll that has yet to go live. If successful, that poll will lead to a final executive governance vote.
One part was readily agreed on before other details, however: an indemnity clause protecting the Maker Foundation.
“To withdraw, vault holders will need to browse to a web page where they agree to indemnify Maker and affiliates against any potential legal claims for their loss,” the poll states.
How a decentralized community of investors can create a legal document on behalf of a Foundation supporting their protocol remains unclear, even to the Maker Foundation.
“What team has validated the legalities of an indemnTESTity clause? For what jurisdictions will it be valid?” Maker Foundation community manager Rich Brown said in a governance poll forum.
Preston Byrne, attorney at Anderson Kill LLP, told CoinDesk in an email the language “is not certain enough to constitute a binding contract” and that a “CDP holder who suffered losses, did not vote on the poll, and did not accept the proposed haircut would almost certainly not be bound by that indemnity term.”
Johnson said he was aware of the compensation vote before filing, but said he was skeptical of an outcome that truly compensated victims. In a public message on Telegram, he said the Foundation is “trying to avoid a lawsuit by backpedaling” and that “there's already so much evidence that they committed gross negligence, and possibly fraud.”