Combs v. SafeMoon LLC
2:22-cv-00642
D. Utah
Mar 29, 2024

Background

  • Plaintiffs (Combs, Iacob, Northey) sued SafeMoon entities and various executives/promoters alleging a 2021 pump‑and‑dump scheme around the SafeMoon cryptocurrency, raising 13 claims under federal securities laws, RICO, and multiple state tort/statutory theories.
  • SafeMoon launched a token with novel mechanics (10% transaction tax; half redistributed to holders; half placed into liquidity pools said to be “locked”); Plaintiffs allege liquidity pools were accessible to executives and 50% of tokens were owned by SafeMoon.
  • Plaintiffs allege heavy social‑media promotion (including paid celebrity/influencer promoters), executive sales of tokens at inflated prices, delayed Wallet launch announcements, and a V1→V2 migration during which SafeMoon imposed a 100% transfer fee—confiscating tokens.
  • Case filed in C.D. Cal., transferred to D. Utah; several defendants moved to dismiss the First Amended Complaint under Rules 8, 12(b)(6), and on conflict‑of‑laws grounds. Court treats the token as a security for purposes of the motions.
  • Court grants in part and denies in part motions: sustains/dismisses various federal and state claims (many dismissed without prejudice) and allows some Section 12(a)(1) and related Securities Act control claims to proceed against certain defendants; gives plaintiffs 60 days to seek leave to amend.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Rule 8 — pleading sufficiency Amended Complaint (186 pages) sufficiently alleges claims and complex facts; not unintelligible Wyatt: complaint violates Rule 8(a) for length and lack of short/plain statement Court: complaint lengthy but not unintelligible; decline dismissal under Rule 8; no prejudice shown
Extraterritoriality (Morrison) — domestic transaction requirement Plaintiffs allege U.S. residents, U.S. entities, sales via internet; need not plead precise location SafeMoon/Karony: must plead purchase on U.S. exchange or in U.S.; otherwise Morrison bars Exchange Act claims Court: Morrison is an affirmative defense; allegations suffice to plausibly plead domestic transactions here
Rule 10b‑5(b) — who “made” misstatements (Janus) Plaintiffs: executives and social‑media posts misled investors Defendants (Wyatt, Nagy, Smith): Janus requires ultimate authority over statements; some defendants lacked it Court: Janus bars liability for mere access/authorship; dismiss 10b‑5(b) as to Wyatt (no ultimate authority); Nagy/Smith liability limited to statements they actually authored/adopted
10b‑5(b) — material misrepresentations & PSLRA specificity Plaintiffs identify statements re: locked liquidity pools, purported real‑world ventures, anti‑rug‑pull claims, Wallet timing and some V2 statements Defendants: many statements are puffery or not pleaded with PSLRA particularity Court: statements about locked liquidity, false real‑world ventures, anti‑rug‑pull, and Wallet timing plausibly false/material; some other statements are puffery and not actionable
Scienter & Reliance (10b) Plaintiffs plead scienter by alleging executives controlled liquidity, diverted funds, sold tokens, and lied about ventures; reliance via fraud‑on‑the‑market Defendants: scienter not pleaded with PSLRA particularity; market not efficient so reliance not presumed; reliance not alleged for named plaintiffs Court: scienter adequately pleaded for some defendants (Karony, SafeMoon, Nagy, Smith) with respect to liquidity and ventures, but reliance not plausibly alleged for named plaintiffs and fraud‑on‑market factors not pleaded; therefore 10b claims dismissed as to moving defendants
Scheme liability (10b‑5(a),(c)) Plaintiffs describe promoter scheme, draining pools, V2 fee as schemes to defraud Defendants: plaintiffs fail to allege manipulative acts, scienter, or reliance against specific individuals Court: subsections (a)/(c) may reach disseminators (Lorenzo), but plaintiffs failed to plead reliance; scheme claim dismissed as to moving defendants
Section 12(a)(1) Securities Act — offer/seller via social media Plaintiffs: social posts and whitepapers were offers/solicitations (mass communications) causing purchases Defendants: Section 12 requires direct/active solicitation or immediate seller status; some are mere developers or remote actors Court: social‑media promotion can be an "offer/solicitation" under Section 12; Section 12(a)(1) survives against SafeMoon, Karony, and Smith (who reposted/promoted), but fails as to Wyatt and Nagy (no plausible solicitation or seller role alleged)
Control‑person liability (Sections 15/20) Plaintiffs: executive defendants controlled primary violators Defendants: plaintiffs failed to plead primary violation (10b) or control facts for Nagy/Smith Held: Section 20 (Exchange Act) claims dismissed (no primary 10b); Section 15 (Securities Act) control claims survive as to some executive defendants but dismissed as to Nagy and Smith for lack of pleaded control
RICO claim Plaintiffs: predicate mail/wire fraud through promotions and scheme Defendants: PSLRA bars RICO where conduct is securities fraud; alternative pleading insufficient Court: because SafeMoon token treated as a security and conduct would be actionable as securities fraud, RICO claim barred by PSLRA; dismissed without prejudice
State law claims (FDUTPA, conspiracy, conversion, unjust enrichment) Plaintiffs assert these in various states; urge state laws apply Defendants: choice‑of‑law and applicability issues; FDUTPA doesn't reach securities; elements inadequately pleaded Court: conducted Utah choice‑of‑law analysis (transfer from CA); dismissed FDUTPA (Utah has no equivalent), conspiracy (failure to allege unlawful overt act), conversion (no individual plaintiff alleged deprivation), unjust enrichment (no benefit appreciation pleaded); many state claims dismissed without prejudice

Key Cases Cited

  • Morrison v. National Australia Bank, 561 U.S. 247 (U.S. 2010) (Exchange Act does not apply extraterritorially; covers domestic purchases or securities on U.S. exchanges)
  • Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (U.S. 2011) (only the entity with ultimate authority over a statement is the ‘maker’ for Rule 10b‑5 liability)
  • Lorenzo v. SEC, 139 S. Ct. 1094 (U.S. 2019) (disseminators of false statements can be liable under Rule 10b‑5(a)/(c) even if not the statement’s author)
  • Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (PSLRA scienter pleading: inference of scienter must be cogent and at least as compelling as nonculpable inference)
  • Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (plaintiff must plead loss causation; buying at an inflated price alone is insufficient)
  • Pinter v. Dahl, 486 U.S. 622 (U.S. 1988) (Section 12 liability extends to solicitors who successfully induce purchases)
  • Nakkhumpun v. Taylor, 782 F.3d 1142 (10th Cir. 2015) (loss causation may be shown by materialization of a concealed risk)
  • Wildes v. BitConnect Int’l PLC, 25 F.4th 1341 (11th Cir. 2022) (mass social‑media promotions can constitute solicitation under Section 12)
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