A company operating what analysts said was a "pump and dump" cryptocurrency mining scheme settled a securities class action brought on behalf of investors for $5 million.

Senior U.S. District Judge Robert Kugler. Photo: Carmen Natale/ALM

Senior U.S. District Judge Robert Kugler on Friday adopted a report by U.S. Magistrate Judge Elizabeth Pascal recommending approval of the settlement with SOS Ltd. of Qingdao City, China. The report called for allocation of $1.7 million from the settlement fund for legal fees and costs.

The settlement represents a recovery of 6.5% of $76 million, which is the best-case scenario for recovery of damages by the class. But Pascal wrote that the $5 million settlement was reasonable for several reasons. SOS has no insurance coverage and must pay the settlement out of its own pockets, and in 2021 China banned crypto-mining and cryptocurrency transactions, which limits the company's future prospects, according to Pascal. The defendants are located in China, and enforcing a judgment in China is "very, very difficult," the magistrate wrote.

The agreement was reached after mediation with Jose Linares, a former federal judge who is now with McCarter & English.

21% Price Drop

The suit claimed that SOS changed its business model multiple times and made false statements about the location of its offices, the nature of cryptocurrency mines it claimed to have purchased and agreements it had with other fabricated businesses. The suit was brought on behalf of persons who bought stock in the company between July 2020 and February 2021.

No potential class members objected to the settlement terms, even after more than 125,000 notices of the settlement terms were sent out by various means.

According to the suit, SOS purports to be a technology company that provides marketing data, technology and solutions for emergency rescue services. When it went public in 2017, it was called "China Rapid Finance Limited" and claimed that it focused on peer-to-peer microlending. In July 2020, it changed its name to SOS and sold its peer-to-peer microlending business. At that time it claimed to rebrand itself as an emergency services business, but less than a year later, it again shifted its focus, this time to cryptocurrency mining, the suit claimed.

Cryptocurrency mining is the process of using sophisticated computer hardware to solve complex calculations, which results in the creation of new cryptocurrency tokens, the suit said.

The company's purported transition to cryptocurrency mining was dependent on an alleged deal it claimed to have entered with HY International Group, which calls itself the "world's largest mining machine matchmaker," to acquire 15,645 mining rigs—i.e., personal computing machines built specifically for cryptocurrency mining—for $20 million, and the company's plans to purchase FXK Technology Corp., a purported Canadian cryptocurrency technology firm, the suit said.

But the suit said that HY and FXK were either undisclosed related parties or entities fabricated by SOS, and the reports about purchasing mining rigs were erroneous. As a result, SOS's public statements were false and misleading, the suit said.

Investors suffered losses when the price of SOS's American Depositary shares fell by 21%, or $1.27 per share, in February 2021. The fall was precipitated by a report from securities analysts Hindenburg Research and Culper Research that stated that SOS was "an intricate, 'pump and dump' scheme that used fake addresses, undisclosed related entities, and doctored photos of cryptocurrency mining rigs to create an illusion of success."

Attorneys from Faegre Drinker Biddle & Reath represented SOS and co-defendants Yandai Wang and Eric Yan. That firm's Sandra Grannum declined to comment on the settlement.

Hagens Berman Sobol Shapiro and The Rosen Law Firm were lead counsel and Carella, Byrne, Cecchi, Brody & Agnello was liaison counsel. Kevin Cooper of Carella Byrne declined to comment on the settlement. Attorneys from the other firms did not respond to requests for comment.