An Ontario court has granted certification for a class action lawsuit accusing TSX-listed cryptocurrency investor Galaxy Digital Holdings Ltd. of failing to disclose known risks associated with its significant holdings in the Luna cryptocurrency and its algorithmic stablecoin TerraUSD. The decision, released on August 27, 2026, by the Ontario Superior Court of Justice, allows the case, identified as 2026 ONSC 4534 (Court File No. CV-22-00691394-00CP), to proceed on behalf of a retail investor who purchased 11,076 Galaxy shares. The plaintiff contends that Galaxy, along with its Chief Executive Officer Michael Novogratz and Chief Financial Officer Alex Ioffe, misrepresented material risks, thereby violating the Ontario Securities Act’s continuous disclosure obligations.
Genesis of the Allegations: The Luna-TerraUSD Collapse
The crux of the lawsuit stems from the dramatic collapse of the Luna cryptocurrency and the TerraUSD stablecoin in May 2022. Galaxy Digital, headquartered in New York City and publicly traded on the Toronto Stock Exchange, had established a substantial position in Luna starting in October 2020. During this period, Michael Novogratz, a prominent figure in the cryptocurrency space, actively promoted Luna through social media channels and during company earnings calls. He famously described Galaxy’s involvement with Luna as "symbiotic," signaling a close and mutually beneficial relationship.
The plaintiff alleges that despite publicly encouraging investors to maintain their Luna holdings through periods of significant price volatility, Galaxy was engaged in a private strategy of acquiring Luna at discounted prices and systematically divesting its position. This alleged discrepancy between public pronouncements and private actions, if proven, would represent a failure to disclose crucial information that could have influenced investor decisions.
The catastrophic fallout occurred between May 7 and May 12, 2022. During this intense five-day period, the market capitalization of Luna and TerraUSD evaporated by approximately $40 billion. The ripple effect was immediate and severe for Galaxy Digital. The company’s stock price plummeted in the subsequent days, and Galaxy disclosed a substantial quarter-to-date loss of $300 million directly attributable to its exposure to these digital assets. In the aftermath, Novogratz issued a letter to shareholders acknowledging the devastating impact, stating that "both large and small investors saw profits and wealth vanish."
Judicial Scrutiny: Disclosure of Algorithmic Stablecoin Risks
At the heart of Justice E.M. Morgan’s ruling was the question of whether Galaxy’s public disclosures adequately conveyed the specific risks inherent in an algorithmic stablecoin like TerraUSD. The court examined disclosure documents, including annual information forms, Management’s Discussion and Analysis (MD&A) reports, and transcripts of earnings calls, spanning from May 2021 to May 2022.
The plaintiff’s central argument was that while Galaxy may have disclosed general risks associated with digital assets, it failed to articulate the unique and potentially catastrophic vulnerabilities of the Luna-TerraUSD pairing. Specifically, the lawsuit pointed to the absence of disclosure regarding the possibility of a "death spiral"—a scenario where a loss of confidence in a stablecoin’s peg to its underlying asset can trigger a cascading sell-off, leading to a collapse in value.
Justice Morgan’s decision highlighted a critical finding: internal company records indicated that Galaxy’s own executives had assessed these specific risks well before the eventual collapse. This suggests that the knowledge of these particular vulnerabilities existed within the company, yet they were not explicitly communicated to public investors in a manner that reflected their severity.
Furthermore, the court took issue with Galaxy’s classification of stablecoins within its reported net exposure to digital assets during the relevant period. Galaxy had reportedly excluded stablecoins, asserting they were not expected to fluctuate in value. However, the ruling found this characterization to be inconsistent with the reality of an algorithmic stablecoin, which, by its very design, is susceptible to volatility and de-pegging events, unlike fiat-backed stablecoins that are typically collateralized by reserves. This exclusion, the court suggested, may have masked the true risk profile of Galaxy’s digital asset portfolio.
Certification Threshold Met: A Reasonable Prospect of Success
Justice Morgan concluded that there is a "reasonable prospect the claim will succeed at trial." This assessment satisfied the legal threshold for granting leave to proceed under section 138.8 of the Ontario Securities Act. Consequently, the matter was certified as a class proceeding under the Class Proceedings Act.
The certified class encompasses all investors who purchased shares of Galaxy Digital between May 17, 2021, and May 6, 2022. This specific timeframe is significant as it covers the period leading up to the Luna-TerraUSD collapse and encompasses the period during which Galaxy’s disclosures are alleged to have been misleading.
It is important to note that none of the allegations in the lawsuit have been proven in court. Galaxy Digital’s defense, which argued that Luna represented an immaterial portion of its business for most of the class period, was considered and rejected solely for the purpose of certification. This means the court found sufficient grounds to allow the case to proceed to trial, where the merits of this defense, along with all other claims and defenses, will be thoroughly examined.
Broader Implications for Digital Asset Disclosure
The certification of this class action carries significant implications for compliance officers, portfolio managers, and issuers operating within the burgeoning digital asset space, particularly in Canada. The ruling underscores the increasing level of scrutiny that Canadian courts are applying to the disclosure practices of companies involved with cryptocurrencies and other digital assets.
H3: Increased Regulatory and Judicial Scrutiny
The case serves as a potent reminder that regulators and courts are moving beyond general risk disclosures for digital assets. They are now delving deeper into the specific mechanics and unique risks associated with various digital asset classes, such as algorithmic stablecoins. The failure to adequately explain the potential for "death spirals" or the inherent volatility of assets not backed by traditional reserves could be viewed as a material omission.
H3: Classification of Stablecoins and Risk Reporting
The court’s critical examination of how Galaxy excluded stablecoins from its net exposure calculations highlights the importance of accurate and nuanced classification. Issuers must ensure that their risk reporting reflects the actual characteristics and potential vulnerabilities of the assets they hold. Simply categorizing an asset as "stable" without acknowledging the underlying mechanisms that ensure its stability – and the potential points of failure – may no longer be sufficient. This could lead to a reassessment of how companies in the digital asset sector categorize and report on their holdings, particularly those that are not fiat-backed.
H3: Enhanced Due Diligence and Transparency
For investors and their advisors, this case reinforces the need for robust due diligence and a critical approach to public statements made by companies involved in the volatile cryptocurrency market. The alleged discrepancy between Novogratz’s public advocacy for Luna and the company’s alleged private divestment strategy underscores the importance of seeking transparency and understanding the full picture of a company’s involvement with high-risk assets.
The outcome of this class action will likely set a precedent for future litigation and regulatory enforcement in the digital asset sector. It signals a clear directive for greater transparency, more specific risk disclosures, and a more sophisticated understanding of the complex financial instruments that are rapidly becoming integrated into the mainstream financial landscape. Compliance departments will need to ensure their disclosure frameworks are robust enough to address the granular risks associated with novel digital assets, moving beyond generic warnings to provide investors with a clear and comprehensive understanding of potential pitfalls. The case, accessible via CanLII, provides a critical reference point for understanding the evolving legal landscape surrounding cryptocurrency investments.
