Luna-Related Lawsuit Could Jeopardize Galaxy Digital's NASDAQ Listing

Galaxy Digital's strategy to procure a NASDAQ listing is being threatened by a looming lawsuit in Canada tied to the Luna cryptocurrency that has since failed. Lawyers privy to the case believe that if the lawsuit proceeds as a class action, it could significantly delay Galaxy's listing plans.

The proposed class action, lodged in Ontario Superior Court last December, seeks approximately CAD $2 billion in damages. The lawsuit contends that Galaxy neglected to fulfill reporting obligations pertaining to its Luna holdings. The plaintiffs also claim that CEO Mike Novogratz misrepresented the company’s exposure to the cryptocurrency prior to Luna's crash in May 2022.

"We vehemently deny these allegations and intend to defend the case rigorously," says Michael Wursthorn, a spokesperson for Galaxy. Regardless, the company has yet to confront the issue of class certification directly.

Unacknowledged Lawsuit

Galaxy initially applied for a move to the NASDAQ with the U.S. Securities and Exchange Commission (SEC) in 2021. Despite the ongoing lawsuit, Galaxy has yet to officially recognize it in their SEC filings or to their shareholders on the Toronto Stock Exchange.

Should the lawsuit gain certification as a class action, either the parties could proceed to court, or Galaxy could seek dismissal. New evidence might emerge during either process. According to Vincent de l’Etoile, a partner at Langlois Lawyers in Montreal, "a material risk such as this large-scale class action should be disclosed by Galaxy to the market."

Impact On US Listing

This legal predicament might dissuade the SEC from approving Galaxy's US listing, notes Sean Masson, a crypto-related class action specialist at Scott & Scott. Law professor Michael Klausner of Stanford University concurs, suggesting that such a lawsuit could indeed attract the SEC's attention if it centers on internal reporting controls.

Besides, Galaxy might need to create a litigation reserve to account for any lawsuit-induced losses. Given the company's current liquid assets, totaling less than $1.4 billion, Galaxy may need to secure loans or raise new equity to cover a potential judgment of CAD $2 billion, roughly equivalent to $1.5 billion.

Further Challenges

Even without the lawsuit, Galaxy's multi-faceted operations, including digital asset management, crypto mining, and trading, might struggle to meet SEC regulations, asserts Masson. Galaxy's US listing application coincides with its shift of incorporation from the Cayman Islands to Delaware, a move Masson interprets as a pursuit of legitimacy.

In a quest for global growth, Galaxy recently partnered with German asset manager DWS to develop digital exchange-traded products in Europe and launched a trading desk in Hong Kong.

Claims Of The Lawsuit

The proposed class action argues that Galaxy failed to adequately inform its investors about the specifics and risks associated with its Luna investment. The plaintiffs claim that the company misleadingly represented stablecoins like Terra as safe investments akin to cash. The lawsuit argues that Galaxy, claiming expertise in digital assets, should have been aware of these risks but failed to disclose them to shareholders.

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