Balestra v. ATBCOIN LLC

380 F.Supp.3d 340

Raymond BALESTRA, individually and on behalf of all others similarly situated, Plaintiff,

v.ATBCOIN LLC, Edward Ng, and Herbert W. Hoover, Defendants.

17-CV-10001 (VSB)

United States District Court, S.D. New York.

Signed March 31, 2019

Donald J. Enright (Washington, DC), Christopher James Kupka (New York, NY), Levi & Korsinsky, LLP, Counsel for Plaintiff.

Brian D. Caplan, Brett Van Benthysen, Edward Peter Grosz, Reitler Kailas & Rosenblatt, L.L.C., New York, NY, Counsel for Defendants.

OPINION & ORDER

Vernon S. Broderick, United States District Judge

Plaintiff Raymond Balestra, individually and on behalf of all others similarly situated, brings this putative class action against Defendants ATBCOIN LLC, Edward Ng, and Herbert W. Hoover, alleging that Defendants violated the Securities Act of 1933 (the "Securities Act" or the "Act"), 15 U.S.C. §§ 77a, et seq., by selling unregistered securities through an initial coin offering of the digital asset ATB Coin. Before me is Defendants' motion to dismiss Plaintiff's Complaint for lack of personal jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(2), and for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Because I find both that Plaintiff has established a prima facie case of personal jurisdiction over all Defendants, and that the Complaint plausibly alleges violations of §§ 12(a) and 15(a) of the Securities Act, Defendants' motion to dismiss is DENIED in its entirety. Plaintiff's unopposed motion for appointment as Lead Plaintiff and the appointment of Levi & Korsinsky, LLP as Lead Counsel is GRANTED.

I. Background ¹

Defendants Edward Ng and Herbert W. Hoover are co-founders and officers of Defendant ATBCOIN LLC ("ATB"), a technology start-up company aimed at facilitating rapid, low-cost digital financial transactions through revolutionary blockchain technology. (Compl. ¶¶ 3, 15–16.) From June 12, 2017 through September 15, 2017, ATB conducted an initial coin offering, or "ICO,"² through which ATB offered digital "ATB Coins" to the general public in exchange for other digital assets (the "ATB ICO"). (Id. ¶ 2.) Defendants promoted the ATB Coin as "an innovative decentralized cryptocurrency incorporating the advanced technologies that tailor the needs of primary market players—users, investors, and business owners." (4/27/18 Kupka Decl. Ex. 1, at 2.)³ The ATB Coin was "designed to overcome well-known inefficiencies within government central banks and other crypto currencies [and to] induce[ ] transactions that are fully secure, private and anonymous." (Id. )

The primary purpose of the ATB ICO was to raise capital to enable Defendants to create and launch a new blockchain (the "ATB Blockchain") on which the ATB Coins would operate. (Compl. ¶ 3.) According to Defendants, the ATB Blockchain would be "the fastest blockchain-based cryptographic network in the Milky Way galaxy," capable of delivering "blazing fast, secure and near-zero cost payments to anyone in the world." (Id. ) During the ICO, Defendants issued a range of promotional materials touting the ATB ICO as an investment opportunity. (Id. ¶ 33; see also id. ¶ 4 ("Only 3 days left before the launch of ATB Coin! Invest in the cryptocurrency of the future, while the project offers the most favorable terms!"); id. ¶ 28 ("Now every investor has the opportunity to become apart [sic] of the world technological evolution!"); id. ¶ 38 ("Grab the chance to invest in a very prospective project and change your life by filling it with new financial opportunities!").) Based on Defendants' statements in these materials, participants in the ICO expected the value of the ATB Coins they purchased to increase as more users adopted the ATB Blockchain. (Id. ¶ 42.)

When the ATB ICO launched in June 2017, Defendants offered one ATB Coin for $ 1, payable in the cryptocurrencies Bitcoin, Ether ("ETH"), or Litecoin. (Id. ¶ 5.) The terms of the offer varied throughout the ICO period, and by September 2017, the price of one ATB Coin had risen to $ 2.50, again payable in Bitcoin, ETH, or Litecoin. (Id. ¶¶ 5, 37.) All participants in the ICO also received a certain number of additional ATB Coins as a bonus. (Id. ¶ 37.) On August 21, 2017, Plaintiff Raymond Balestra ("Plaintiff" or "Balestra") participated in the ATB ICO, purchasing 388.5 ATB Coins in exchange for 2.100441 ETH. (Id. ¶ 13; id. Ex. 1.) In total, the ATB ICO raised over $ 20 million from thousands of investors. (Compl. ¶ 2.)

Defendants launched the ATB Blockchain on September 14, 2017 at the close of the ICO; however, the blockchain is not capable of the technological feats Defendants advertised. A review of the ATB ICO commented that it had "yielded nothing but a cheap reskinned [Bitcoin] wallet which is still in beta" and noted that the ATB Coin software failed to deliver many of the features Defendants had promised. (Id. ¶ 36 (commenting that there was "[n]o indication of development on a public blockchain testnet ... even though it was previously promised on [ATB's] roadmap").) As a result of the subpar performance of the ATB Blockchain, "adoption of ATB Coin and the ATB Blockchain has been essentially nonexistent, and the value of ATB Coins has continuously fallen." (Id. ¶¶ 3, 42.) As of March 11, 2018, the value of Plaintiff's ATB Coins had decreased by more than 85% from the price at which he purchased them. (Id. Ex. 1; Lead Pl. Br. 5.)⁴

Defendants did not file a registration statement for the ATB ICO with the SEC at any point, either before, during, or after the ICO. (Compl. ¶¶ 1, 9, 55–57.)

II. Procedural History

Plaintiff filed his Complaint on December 21, 2017, (Doc. 1), alleging two claims against Defendants under the Securities Act: (1) a violation of § 12(a) for offering and selling unregistered securities in the form of ATB Coins, and (2) a violation of § 15(a) against Ng and Hoover as "control persons" of ATB. On January 9, 2018, counsel for Plaintiff published a notice over Business Wire , a nationally-circulated business-oriented wire service, announcing the initiation of this securities class action (the "Notice"). (3/12/18 Kupka Decl. Ex. 2.)⁵ The Notice was targeted at and informed all persons who purchased ATB Coins pursuant to the ATB ICO that they would have until March 12, 2018 to file a motion to be appointed lead plaintiff. (Id. ) On March 12, 2018, the date specified in the Notice, Balestra filed his Motion for Appointment as Lead Plaintiff and Approval of Selection of Counsel, (Doc. 22), along with a supporting memorandum and declaration, (Docs. 23–24). No other member of the putative class has filed a motion seeking to be appointed lead plaintiff or opposing Balestra's motion. (See Doc. 26.)

On April 13, 2018, Defendants filed a motion to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction over Defendants Ng and Hoover, and pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. (Doc. 27.) On that same date, Defendants also submitted a memorandum of law, (Doc. 31), and several supporting declarations, (Docs. 28–30). On April 27, 2018, Plaintiff filed his opposition to Defendants' motion to dismiss, (Doc. 33), along with a declaration in support, (Doc. 34). Defendants filed their reply, and an accompanying declaration, on May 4, 2018. (Docs. 37–38.)

III. Discussion

Defendants Ng and Hoover move to dismiss the Complaint for lack of personal jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(2), and all Defendants move to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Because I find both that Plaintiff has established a prima facie case of personal jurisdiction over Defendants Ng and Hoover, and that the Complaint plausibly alleges violations of §§ 12(a) and 15(a) of the Securities Act, Defendants' motion to dismiss the Complaint is denied. Plaintiff's unopposed motion for appointment as Lead Plaintiff and the appointment of Levi & Korsinsky, LLP as Lead Counsel is granted.

A. Rule 12(b)(2)

1. Applicable Law

When a defendant moves for dismissal for lack of personal jurisdiction pursuant to Rule 12(b)(2), the plaintiff bears the burden of demonstrating that the court has jurisdiction over the defendant. Kernan v. Kurz–Hastings, Inc. , 175 F.3d 236, 240 (2d Cir. 1999). On a motion under Rule 12(b)(2), when the issue of personal jurisdiction "is decided initially on the pleadings and without discovery, the plaintiff need show only a prima facie case." Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp. , 751 F.2d 117, 120 (2d Cir. 1984). Under this standard, a plaintiff "must plead facts which, if true, are sufficient in themselves to establish jurisdiction as to each defendant." S.E.C. v. Straub , 921 F.Supp.2d 244, 251 (S.D.N.Y. 2013) (internal quotation marks omitted). A plaintiff "can make this showing through his own affidavits and supporting materials, containing an averment of facts that, if credited, would suffice to establish jurisdiction over the defendant." Whitaker v. Am. Telecasting Inc. , 261 F.3d 196, 208 (2d Cir. 2001) (internal quotation marks omitted). Thus, a court may consider materials outside the pleadings when deciding a motion to dismiss for lack of personal jurisdiction. Hsin Ten Enter. USA, Inc. v. Clark Enters. , 138 F.Supp.2d 449, 452 (S.D.N.Y. 2000).

The exercise of specific jurisdiction⁶ —which focuses on the "relationship among the defendant, the forum, and the litigation," Walden v. Fiore , 571 U.S. 277, 283–84, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014) —requires a two-step analysis, see, e.g., Licci ex rel. Licci v. Lebanese Canadian Bank, SAL , 732 F.3d 161, 170 (2d Cir. 2013). First, courts "evaluate the quality and nature of the defendant's contacts with the forum ... under a totality of the circumstances test." Id. (internal quotation marks omitted). To determine whether sufficient minimum contacts exist, "[t]he crucial...