Winklevoss Capital Fund, LLC v. Shrem

351 F.Supp.3d 710

WINKLEVOSS CAPITAL FUND, LLC, Plaintiff,

v.Charles SHREM, Defendant.

18-cv-8250(JSR)

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

Signed January 7, 2019

Seena Forouzan, Pro Hac Vice, Tyler Roberts Meade, Sam Ferguson, The Meade Firm P.C., San Francisco, CA, for Plaintiff.

Donald R. Pepperman, Pro Hac Vice, Brian Edward Klein, Baker Marquart LLP, Los Angeles, CA, for Defendant.

MEMORANDUM

JED S. RAKOFF, U.S.D.J.

The Court previously issued a bottom-line order denying defendant's motions to dismiss and to strike. Dkt. 78. The reasons for these decisions are set forth below.

Background

Familiarity with all prior proceedings is here assumed. The pertinent factual allegations, drawn from the complaint, are as follows:

The principals of Winklevaus Capital Fund, LLC ("WCF"), Cameron and Tyler Winklevaus (collectively, "the Winklevaus brothers"), met Charles Shrem in 2012, shortly after Shrem had launched Bitlnstant, an online platform for buying and selling Bitcoin, a virtual currency. Compl., Dkt. 20, ¶¶ 8, 11, 12. At that point, WCF had begun investigating investing in virtual currency, and Shrem offered to help WCF purchase Bitcoin, which was at that time difficult to purchase in the amount that WCF wanted. Id. ¶¶ 8, 13-15. Shrem told WCF that he could accomplish their desired purchases by buying at several different venues and spreading the purchases so as not to move the market. Id. ¶ 15. He offered to purchase Bitcoin for WCF "at the best price" without charging any fees for his services because his goal was to court an investment from WCF in Bitlnstant and use WCF's interest in Bitcoin to raise its public profile. Id. ¶ 16.

In reliance on Shrem's representations, WCF sent Shrem a total of $750,000 between September 2012 and February 2013. Id. ¶ 20. Shrem had promised WCF an overall report once the Bitcoin were purchased, but did not share any accounting figures until January 31, 2013, and then only included half of the Bitcoin he had sent WCF in the summary. Id. ¶¶ 22-24. WCF received 39,876.34 Bitcoin in exchange, at an average cost basis of $18.81 per Bitcoin, but suspected that the accounting for these purchases was inadequate and ceased working with Shrem to purchase Bitcoin. Id. ¶ 21. At WCF's request, Shrem provided additional details and updates, but never provided a full accounting. Id. ¶¶ 27-31. A friend of the Winklevoss brothers, who they had introduced to Shrem, also reported that he had noticed a shortfall when Shrem purchased Bitcoin for him. Id. ¶ 37.

WCF hired an accountant in February 2013 to perform an audit, and the auditor found that Shrem could not account for $61,000 sent to him, which was the equivalent of about 5,000 Bitcoin at the time based on the average price of $12.15 per Bitcoin. Id. ¶¶ 32-36. Shrem disputed this, but never provided additional information. Id. ¶¶ 38-39. Another company hired by WCF identified that Shrem's Bitcoin address received 5,000 Bitcoin on December 31, 2012, almost exactly the amount of the shortfall identified by WCF's accountant. Id. ¶¶ 41-44.¹

Analysis

Shrem moves to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction and pursuant to Rule 12(b) (6) for failure to state a claim. See Defendant Charles Shrem's Motions to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6), Dkt. 62 ("MTD"); Defendant Charles Shrem's Reply in Support of Fed. R. Civ. P. 12(b)(1) and 12(b)(6) Motion to Dismiss, Dkt. 76 ("MTD Reply"). Shrem also moves to strike certain paragraphs from the complaint. See Defendant Charles Shrem's Fed. R. Civ. P. 12(f) Motion to Strike, Dkt. 65 ("MTS"); Defendant Charles Shrem's Reply in Support of Fed. R. Civ. P. 12(f) Motion to Strike, Dkt. 65 ("MTS Reply"). WCF opposes these motions. See Memorandum of Law in Opposition to Defendant Charles Shrem's Motions to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6), Dkt. 73 ("MTD Opp"); Memorandum of Law in Opposition to Defendant Charles Shrem's Fed. R. Civ. P. 12(f) Motion to Strike, Dkt. 74 ("MTS Opp.").

I. Motion to Dismiss under Rule 12(b) (1)

"A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it." Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) (citing Fed R. Civ. P. 12(b)(1) ).² Federal courts have original jurisdiction over state law claims pursuant to 28 U.S.C. § 1332 (a) where a dispute is between citizens of different states and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332 (a). When a defendant challenges the factual basis for § 1332(a) jurisdiction, the party invoking jurisdiction bears the burden of proving that "it appears to a reasonable probability that the claim is in excess of the statutory jurisdictional amount." Scherer v. Equitable Life Assurance Soc'y of the U.S., 347 F.3d 394, 397 (2d Cir. 2003).

However, "[t]his burden is hardly onerous" because courts "recognize a rebuttable presumption that the face of the complaint is a good faith representation of the actual amount in controversy." Id."To overcome the face-of-the-complaint presumption, the party opposing jurisdiction must show to a legal certainty that the amount recoverable does not meet the jurisdictional threshold." Id. (emphasis added). "Even where the allegations leave grave doubt about the likelihood of a recovery of the requisite amount, dismissal is not warranted." Id. (citing Tongkook Am., Inc. v. Shipton Sportswear Co., 14 F.3d 781, 784 (2d Cir. 1994) ("Where the damages sought are uncertain, the doubt should be resolved in favor of the plaintiff's pleadings.") ).

Shrem argues that the Court lacks subject matter jurisdiction because WCF has not plausibly alleged that the amount in controversy meets the statutory requirement of $75,000 under § 1332. MTD at 5. The complaint seeks an award of compensatory damages calculated as the highest intermediate value of 5,000 Bitcoin between the time of wrongdoing and the time of trial, punitive damages in an amount to be proven at trial, disgorgement of all things of value improperly obtained by Shrem to prevent unjust enrichment, attorneys' fees and costs, and pre-judgment and post-judgment interest. Compl. at 15-16. WCF alleges that at the time of filing, the 5,000 Bitcoin claimed were worth $31,362,500. Id. ¶ 3.

Shrem argues in principal that this is insufficient to meet the claim threshold as, pursuant to WCF's fraud claim, WCF is not entitled to the value of the 5,000 Bitcoin that Shrem allegedly purchased with WCF's money and kept for himself, but only to the $61,000 that WCF invested with Shrem for purchasing those Bitcoin.³ MTD at 6; Reply at 2. WCF disputes this account. MTD Opp. at 11-13.

But it is unnecessary for the Court at this juncture to resolve what specific remedies are available on WCF's fraud claim as, even if WCF could recover only $61,000 on that claim, Shrem fails to show to a "legal certainty" that the total of all four of WCF's claims cannot exceed $75,000. In addition to its claim for fraud, WCF brings claims for breach of fiduciary duty, constructive trust, and accounting - claims for which broad equitable remedies are available that include monetary relief.⁴ For instance, constructive trust remedies are "measured by the defendant's gain rather than the plaintiff's loss." Design Strategies, Inc. v. Davis, 367 F.Supp.2d 630, 645 (S.D.N.Y. 2005). Similarly, claims for accounting are "equitable in nature," as they are "based on allegations that the defendant...has profited by using something which in good conscience belongs to the plaintiff and that the defendant ought to disgorge his profits." Id. at 644. Breach of fiduciary duty claims are also intended "to prevent [breach of fiduciary duty] by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others." Diamond v. Oreamuno, 24 N.Y.2d 494, 498, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969) (emphasis added); see also Birnbaum v. Birnbaum, 157 A.D.2d 177, 188, 555 N.Y.S.2d 982 (1990) ("[I]f the defendant has made a profit through the violation of a duty to the plaintiff to whom he is in a fiduciary relation, he can be compelled to surrender the profit to the plaintiff."). Therefore, even if more than $61,000 were not recoverable under the fraud claim, broader damages might be recoverable under WCF's other claims to disgorge Shrem's profits from the alleged theft.

Moreover, breach of fiduciary duty claims can also be grounds for punitive damages, as can fraud claims. See Riddell Sports v. Brooks, No. 92-cv-7851, 1997 U.S. Dist. LEXIS 4394, at *43 (S.D.N.Y. Jan. 7, 1997)("New York law also recognizes breach of fiduciary duty as an exception to the general rule that punitive damages are not recoverable for breach of contract claims"); Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 489, 836 N.Y.S.2d 509, 868 N.E.2d 189 (2007) (punitive damages recoverable for fraud where "defendant's wrongdoing is not simply intentional but evinces a high degree of moral turpitude").⁵

As Shrem cannot show to a legal certainty that the amount in controversy does not exceed $75,000, the motion to dismiss under Rule 12(b)(1) is denied.

II. Motion to Dismiss under Rule 12(b)(6)

To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is plausible if it supported by "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In analyzing a complaint, the court "accepts all factual allegations as true and draws all reasonable inferences in favor of the plaintiff." Trs. of Upstate N.Y. Eng'rs...