bZx DAO is a general partnership under California law, so any participant in the organization bears liability for user losses resulting from the hack. This follows from the court ruling in San Diego (California, USA).
District Judge Larry Burns did not agree with the defendants’ arguments. They claimed that DAO fundamentally differs from a general partnership, which implies unlimited personal liability for its partners.
According to representatives for the defense, the court’s interpretation would “radically expand the long-standing principles of the applicable law”. Holders of utility tokens never agreed to share profits and losses, which aligns with this form of business organization.
The judge backed the plaintiffs, who pointed to the possibility that token holders could vote on the distribution of the DAO’s assets in the same way that company shareholders can initiate dividend payments.
Burns cited California law, under which commercial organizations cannot structure partnerships in an attempt to exploit “commercial relationships” and evade corresponding liability.
The judge dismissed the claims against three of the four defendants. In one case on procedural grounds, in the other two due to lack of evidence of utility-token holdings at the time of the incident.
His decision came three months after Reuters reported that U.S. District Judge William Orrick of San Francisco ruled Ooki DAO (the renamed bZx DAO) as an “association without corporate status”.
He considered the CFTC’s suit against the organization. The agency accused the defendants of illegally offering leveraged exchange-traded products and violating the Bank Secrecy Act due to the absence of KYC.
Interest in the DAO and its participants emerged for the Commission at the same time as settlements of claims against bZeroX and its founders — Kyle Kusner and Tom Bean — who developed and maintained the bZx protocol until the decision on how its governance would be allocated.
The developers paid a $250,000 fine but neither admitted nor disputed the CFTC’s findings.
In Reuters it was stressed that Burns’s verdict is bad news for any DAO defendants who hoped that decentralized control would be a way to dodge liability.
The ruling implies that every holder of a utility token at the time of the 2021 hack could be held liable for user losses.
Many questions remain unanswered. In particular, the possibility of holding all token owners liable and their identification by platform users. In the class action, only a limited number of them are named as defendants. According to Burns, they did not hold “significant stakes” in the DAO’s governance.
Earlier, bZx gained notoriety for four hacks in 2020-2021, with total losses of nearly $64 million.
Earlier, Sushi DAO head Jared Grey proposed that Sushi DAO establish a legal defense fund of $3 million after receiving summonses from the SEC.