JD Anderson v. Binance

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JD ANDERSON ET AL., Plaintiffs, v. BINANCE ET AL., Defendants.

No. 1:20-cv-2803 (ALC)

United States District Court, S.D. New York

March 31, 2022

OPINION & ORDER

ANDREW L. CARTER, JR., United States District Judge

Before the Court is Defendants' motion to dismiss Plaintiffs' putative class action. ECF No. 58. For the reasons that follow, Defendants' motion to dismiss is granted.

BACKGROUND

The following facts are taken from allegations contained in Plaintiffs' Second Amended Class Action Complaint (“SAC”) and are presumed to be true for purposes of resolving Defendants' motion to dismiss. See Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007).

Plaintiffs are investors who bought certain digital tokens-EOS, QSP KNC, TRX, FUN, ICX, OMG, LEND, and ELF-on Defendant Binance a digital exchange.^[1] Digital tokens may operate as “utility tokens, ” which permit the holder of the token to participate in projects associated with the token or as “security tokens, ” which function similarly to a traditional security and are classified as securities under federal and state law. Accordingly, issuers of security tokens must file registration statements with the U.S. Securities and Exchange Commission (“SEC”) and a platform where security tokens are traded must register with the SEC as an exchange.

Plaintiffs allege that, beginning on July 1, 2017, Defendants promoted offered, and sold in the United States the above-referenced digital tokens through Binance. Issuers would sell tokens to investors in an initial coin offering (“ICO”), listing the token on Binance. Binance would then promote the sale of the tokens. Issuers compensated Binance for listing their tokens and Binance received a percentage of each trade.

According to Plaintiffs, Binance's representations did not make clear to investors upon purchase that the tokens were securities. Investors were only apprised of the tokens' status as securities on April 3, 2019, when the SEC issued a report, “The Framework for ‘Investment Contract' Analysis of Digital Assets” (“Framework”), which categorized the tokens as securities under Section 2 of the Securities Act of 1933 (“Securities Act”) and Section 3 of the Securities Exchange Act of 1934 (“Exchange Act”).

PROCEDURAL HISTORY

Plaintiffs initiated this Action on April 3, 2020. ECF No. 1. On August 26, 2020, the Court appointed lead plaintiffs and designated co-lead counsel. ECF No. 40. On September 11, 2020, Plaintiffs filed an Amended Class Action Complaint. ECF No. 43. On December 15, 2020, Plaintiffs filed a Second Amended Class Action Complaint. ECF No. 55. The complaint contains 327 pages and includes 154 causes of action, five of which allege violations of federal laws. Plaintiffs allege that, in violation of the Securities Act, the Exchange Act and state Blue Sky protections, Defendants did not register Binance as an exchange or a broker dealer and Binance did not file a registration statement for the securities it sold. Thus, investors were not afforded the protections of securities laws and were not made aware of the risks of their investments.

On February 16, 2021, Defendants filed the instant motion to dismiss. ECF No. 58. After Defendants filed their motion to dismiss, Plaintiffs voluntarily dismissed individual defendants Yi He and Roger Wang. ECF No. 63. Plaintiffs filed their opposition on April 19, 2021. ECF No. 64. In their opposition, Plaintiffs abandoned their claims related to the BNT, CVC, and SNT tokens. Id. at 3 n.3. On June 3, 2021, Defendants filed their reply in support of their motion to dismiss. ECF No. 66.

STANDARD OF REVIEW

When resolving a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a court should “draw all reasonable inferences in [the plaintiff's] favor, assume all well-pleaded factual allegations to be true, and determine whether they plausibly give rise to an entitlement to relief.” Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks and citations omitted). Thus, “[t]o survive a motion to dismiss [under Rule 12(b)(6)], a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). However, the court need not credit “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Ashcroft, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555). The Court's function on a motion to dismiss is “not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Additionally, “[a]lthough the statute of limitations is ordinarily an affirmative defense that must be raised in the answer, a statute of limitations defense may be decided on a Rule 12(b)(6) motion if the defense appears on the face of the complaint.” Thea v. Kleinhandler, 807 F.3d 492, 501 (2d Cir. 2015) (internal quotation marks and citations omitted).

DISCUSSION

Plaintiffs bring federal claims against Defendants pursuant to Section 12(a)(1) of the Securities Act and Section 29(b) of the Exchange Act. Second Am. Compl., ECF No. 55 ¶¶ 362404; 15 U.S.C. §§ 77l(a)(1), 78cc. Plaintiffs also bring state Blue Sky claims under 28 U.S.C § 1367(a) and 28 U.S.C. § 1332. As discussed below, Plaintiffs' claims are dismissed because the relevant securities laws do not apply extraterritorially and because they are barred by the statute of limitations.

I. Statute of Limitations

a. Securities Act Claims

Claims brought under Section 12(a)(1) of the Securities Act must be brought “within one year after the violation upon which it is based.” 15 U.S.C. § 77m. The parties agree that seven of the nine tokens at issue-QSP, KNC, FUN, ICX, OMG, LEND, and ELF-were last purchased in 2018, more than a year before this action was brought. Plaintiffs argue that the Court should apply the equitable doctrines of injury evading discovery or the fraud-based discovery rule and accordingly hold that the limitations period was not triggered until April 3, 2019, when the Framework was published. Pls.' Br., ECF No. 64 at 19. Until the Framework was issued, Plaintiffs argue, investors did not have the requisite information to determine whether the tokens were securities or whether Defendants' statements about the tokens' status were fraudulent. Id.

Plaintiffs' arguments fail. As Plaintiff acknowledges, Section 12(a)(1) does not include a statutory discovery rule. Id. The Supreme Court has warned against adopting an “expansive approach to the discovery rule, ” and applying an “[a]textual judicial supplementation [which] is particularly inappropriate when, as here, Congress has shown that it knows how to adopt the omitted language or provision.” Rotkiske v. Klemm, 140 S.Ct. 355, 361 (2019). Section 12(a)(1) explicitly states that the limitations period runs upon the occurrence of the violation, not the discovery of the violation, and “[i]t is not [the courts'] role to second-guess Congress' decision to include a ‘violation occurs' provision, rather than a discovery provision.” Id. Indeed, Courts in this District have dismissed as untimely similar claims brought by Plaintiffs' counsel, rejecting the plaintiffs' argument for applying a discovery rule. See In re Bibox Grp. Holdings Ltd. Sec. Litig., 534 F.Supp.3d 326, 338-39 (S.D.N.Y. 2021); see also Holsworth v. BProtocolFound., No. 20-cv-2810 (AKH), 2021 WL 706549, at *3 (S.D.N.Y. Feb. 22, 2021).

The claims related to the sales of the two tokens-EOS and TRX-which Plaintiffs allege were bought within one year of initiating this case are also time barred. Under Section 12(a)(1), Plaintiffs may only bring claims against a defendant who is a statutory seller, which is defined as a defendant who “(1) passed title or other interest in a security to a buyer for value, or (2) successfully solicit[ed] the purchase.” In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010) (quoting Pinter v. Dahl, 486 U.S. 622, 642, 647 (1988)). Plaintiffs contend that Defendants are statutory sellers because they are “entities and individuals that solicited the sale of securities.” Pls.' Br. at 2.^[2] Defendants' latest act of solicitation with respect to these two tokens is Binance's republication of investor reports in November 2018 and February 2019, more than a year before Plaintiffs initiated this Action. SAC ¶¶ 100(d), (1). The statute of limitations runs for one year “after the violation upon which it was based, ” and the violation alleged for the Section 12(a)(1) claim is solicitation, which occurred earlier than one year of filing. 15 U.S.C. § 77(m) Thus, the claims related to EOS and TRX are also untimely.

b. Exchange Act

Section 29(b) has a one-year statute of limitations, however, unlike Section 12(A)(1), the statute of limitations has a discovery rule by which the limitations periods only begins to run within one year after the “discovery that [the] sale or purchase involves [a] violation.” 15 U.S.C. § 78cc. See also Alpha Cap. Anstalt v. Oxysure Sys., Inc., 216 F.Supp.3d 403, 408 (S.D.N.Y. 2016) (“[The] one-year statute of limitations for any implied cause of action under Section 29(b) of the Exchange Act. . . . runs from the time when an individual could have, through the exercise of reasonable diligence, discovered the fraud at issue.” (internal quotation marks and citations omitted)).

Under Section 29(b), “[e]very contract made in violation of any provision of this chapter” and “every contract (including any contract for listing a security on an exchange) . . . the performance of...