Crypto Investor Sues Elon Musk for $258 Billion Alleging Dogecoin ‘Pyramid Scheme’

A cryptocurrency investor has sued Elon Musk for $258 billion, based upon what the Plaintiff calls a “pyramid scheme” to artificially inflate the value of Dogecoin. Keith Johnson of New York calls himself a crypto investor and states that the world’s most successful entrepreneurs “falsely and deceptively [claimed] that Dogecoin is a legitimate investment when it has no value at all.” From The Hill:

According to the lawsuit, “since defendant Musk and his corporations Space X and Tesla, Inc. began purchasing, developing, investing, promoting, supporting and operating Dogecoin in 2019, plaintiff and the class have lost approximately $86 billion” in what it called a “crypto pyramid scheme.”

Clearly, Johnson is using a “crypto” definition of “pyramid scheme” because, while Johnson may have a legitimate cause of action against Musk, the claim is not a traditional pyramid scheme. A classic pyramid scheme involves one holding oneself out as a brilliant financial advisor and using an ever-expanding number of investors to pay off original investors who continue to talk about their success in using the schemer.

At least this attorney doesn’t see any pyramid scheme at play in this situation.

That doesn’t mean that Musk is in the clear or that this isn’t a serious lawsuit. Depending upon Musk’s actions behind the scenes and the evidence of his motivations, Musk could be liable for what investors traditionally called the “pump and dump.” A pump and dump involves using someone  (Or being someone) with a prominent platform to “pump up” a security or position without justification beyond increasing the value of the underlying investment. Meanwhile, the “pumper” dumps (sells off) his original position before legitimate information reaches the public, and the value begins to tumble.

One can be liable for using one’s position to defraud investors. Executives in publicly traded corporations must follow SEC rules in selling shares of stock. Musk may be liable if Johnson can prove that Musk intended to use his position to simply “play” with Dogecoin in order to make money, all the while selling it as the coin rose in value.

According to The Hill:

The lawsuit also details Musk’s tweets and videos on Dogecoin over the years. The lawsuit highlights how Musk referred to himself as the “DogeFather” while promoting his appearance on NBC’s “Saturday Night Live” in April 2021.

The suit fits the “pump” portion of the traditional cause of action. After all, Dogecoin began as a joke by its creators, software engineers Billy Markus and Jackson Palmer, mocking the crypto market. “Doge” was actually a play in words, a vague reference to “Dog” according to Wiki.

The lawsuit’s success will depend upon whether the plaintiff has or can obtain evidence as to whether Musk knew the creators, and/or whether Musk knew the reason they created Dogecoin, whether Musk believed the currency had real potential, and whether Musk believed that his reputation as a visionary would position him to “pump” the value. And, as said, the case will turn on whether Musk was selling off his position as he continued the tweets and sponsorships. If Musk lost all he had in Dogecoin, it’s nearly impossible to prove damages.

Given how much Musk promoted the currency, Musk has significant exposure depending on his intent and actions. It is a serious lawsuit, even though the damages claimed seem absurd. But the damages are based upon the value lost in the currency, calculated to be $86 billion based on the currency’s high of 74 cents in May of 2021, to its value today, 5.8 cents. Johnson adds traditional treble damages (Three times the amount of actual damages) as punitive, based upon fraud, knowingly bilking people out of their money.

Juxtaposed against all of this is the crash in all cryptocurrencies. Johnson will have to establish that Elon played a special role in Dogecoin’s rise and had sold off a significant position before the entirety of crypto crashed generally. It won’t be easy, but there is a chance Johnson can thread the needle. He won’t be able to pin the entire crash in value on Musk. And Johnson can only claim his own damages unless he establishes a “class action” representing everyone who lost value based on Musk’s actions. But if Johnson even establishes a 20% artificial decrease for all Dogecoin investors, Musk would take a significant hit.

Elon has acted increasingly reckless in the last six months and taken a lot of significant hits. The lawsuit’s success will depend on whether Musk’s recklessness goes back even further.

Jason Miciak

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