Basic v. BProtocol FoundationBasic v. BProtocol Foundation
TO THE HONORABLE ROBERT PITMAN UNITED STATES DISTRICT JUDGE:
Before the court are Defendants BProtocol Foundation, LocalCoin, Ltd., Galia Benartzi, Guy Ben-Artzi, Eyal Hertzog, and Yehuda Levi‘s Motion to Dismiss Plaintiffs’ First Amended Class Action Complaint (Dkt. 54) and all related briefing.1 After reviewing the pleadings, the relevant case law, and the parties’ oral arguments, the undersigned submits the following Report and Recommendation to the District Court.
I. BACKGROUND2
Generally, Plaintiffs allege they lost money in an online crypto asset exchange run by Defendants, who promised their exchange was an investment that was free from certain risks.
To facilitate trades in crypto assets—and to be competitive among online crypto exchanges—Bancor must maintain sufficient liquidity in these assets. FAC ¶ 4. To attract such investments, Defendants offered a series of investment products described as “versions” of Bancor. Bancor Version 1 (“v1“) launched in 2017, followed by Version 2 (“v2“) in April 2020, Version 2.1 (“v2.1“) in October 2020, and Version 3 (“v3“)—at issue in this action—on May 11, 2022. FAC ¶ 5. In v2 and v2.1, Defendants first introduced so-called “impermanent loss protection” (“IL Protection“), which they described as insurance against a certain type of loss endemic to crypto asset exchanges, specifically losses incurred by investing crypto assets in an exchange rather than simply holding them. Defendants touted IL Protection to investors as a flagship feature of Bancor, and it successfully attracted investors to the Protocol. FAC ¶ 6. v2.1 gradually insured an investment against impermanent loss over time. FAC ¶ 11. However, v2.1 also generated serious deficits because the fees generated by the Protocol were insufficient to cover their obligations to investors. FAC ¶ 7. If a sufficiently large number of investors withdrew their investments at the same time, the Protocol would crumble, much like a run on the bank. FAC ¶ 7.3
Inevitably, on June 19, 2022, Bancor‘s luck ran out: a spike in withdrawals triggered significant payment obligations to investors. FAC ¶ 13. Instead of making those payments, Defendants unilaterally purported to “suspend” IL Protection, which meant that withdrawing investors incurred 100% of the very losses that v3 had promised to “100% protect” against. FAC ¶ 10. Defendants also imposed additional severe haircuts on withdrawing investors, initially without disclosing them. FAC ¶ 10. Investors lost millions of dollars. FAC ¶ 10.
Plaintiffs assert nine causes of action against all Defendants: unregistered offer and sale of securities in violation of
The Foundation is private corporation formed under Swiss law, with offices in Switzerland. FAC ¶ 20. LocalCoin, Ltd. is a private corporation formed under Israeli law and
Bancor DAO has not responded to the Amended Complaint. The Individual Defendants and the Entity Defendants (the Foundation and LocalCoin) have moved to dismiss the Amended Complaint for the lack of personal jurisdiction and on the basis of forum non conveniens. Dkt. 54. They also argue the federal claims should be dismissed because the U.S. securities laws do not apply to their extraterritorial conduct and Plaintiffs have failed to state a viable federal claim for relief. Finally, they argue the state claims should be dismissed for lack of supplemental jurisdiction.
II. PERSONAL JURISDICTION
Defendants argue Plaintiffs’ allegations fail to provide a basis for asserting jurisdiction over the Individual Defendants or the Entity Defendants.
When the court rules on personal jurisdiction without conducting an evidentiary hearing, the plaintiff bears the burden of establishing only a prima facie case of personal jurisdiction.7 Sangha v. Navig8 ShipManagement Private Ltd., 882 F.3d 96 at *3 (5th Cir. Feb. 5, 2018); Trois v. Apple Tree Auction Ctr., Inc., 882 F.3d 485, 488 (5th Cir. Feb. 5, 2018); Cent. Freight Lines Inc. v. APA Transport Corp., 322 F.3d 376, 380 (5th Cir. 2003). “The district court is not obligated to consult only the assertions in the plaintiff‘s complaint in determining whether a prima facie case for jurisdiction has been made. Rather, the district court may consider the contents of the record at the time of the motion . . . .” Sangha, 882 F.3d 96 at *3. The court shall accept as true the non-conclusory uncontroverted allegations of the party seeking to assert
When a federal court attempts to “exercise personal jurisdiction over a defendant in a suit based upon a federal statute providing for nationwide service of process, the relevant inquiry is whether the defendant has had minimum contacts with the United States.” Cambria Cnty. Employees’ Ret. Sys. v. Venator Materials PLC, 532 F. Supp. 3d 440, 446 (S.D. Tex. 2021) (citing Busch v Buchman, Buchman & O‘Brien, Law Firm, 11 F.3d 1255, 1258 (5th Cir 1994)). This means that the relevant forum is the United States as a whole—not any particular state. Id. “Even though a defendant‘s contacts with the entire United States in such cases are determinative of the ‘minimum contacts’ inquiry, because the language of the Fifth Amendment‘s due process clause is identical to that of the Fourteenth Amendment‘s due process clause, the same general principles guide the minimum contacts analysis.” Id. Federal due process permits the exercise of personal jurisdiction over a non-resident defendant to where the defendant has (1) purposefully availed himself of the benefits and protections of the forum state by establishing minimum contacts with the forum state and (2) the exercise of jurisdiction would not offend traditional notions of fair play and substantial justice. Mink v. AAAA Dev. LLC, 190 F.3d 333, 336 (5th Cir. 1999).
A. Relevant Contacts
The touchstone of the court‘s inquiry is “whether the defendant‘s conduct shows that it reasonably anticipates being haled into” the forum. McFadin v. Gerber, 587 F.3d 753, 759 (5th Cir. 2009). Specific jurisdiction is a claim-specific inquiry, and it exists when the defendant‘s
B. Analysis
1. Who is Bancor?
The first issue before the court is: to which Defendants should “Bancor‘s” acts be attributed? Plaintiffs argue the contacts of “Bancor“—which it uses to collectively refer to the
LocalCoin is the direct employer of all “Bancor” personnel, including non-parties Richardson and Hindman, who promoted Bancor and v3 at various conferences throughout the United States. FAC ¶ 21. Accordingly, Plaintiffs have sufficiently alleged that the alleged contacts with the forum should be attributed to LocalCoin.
Plaintiffs allege that before the 2022 crash, the Foundation consistently identified itself as “Bancor” its public email address was contact@bancor.network; its website featured Bancor logos and referred to itself as the “Bancor Foundation“; it published press releases on Bancor‘s investment products; and it copyrighted Bancor‘s publications. FAC ¶ 156. It claimed “all rights in” the Bancor “Token Liquidity Network” and purports to “maintain[] the right to select its markets and jurisdictions to operate.” FAC ¶ 156. The Foundation controls the Bancor Treasury. FAC ¶ 164. A Bancor “admin” admitted that the Foundation uses its money to “promote adoption of the protocol and pay salaries of full-time [Bancor] contributors.” FAC ¶ 168. The Foundation admitted that it “provides on average $10M a year in grants and expenditures to support development on the Bancor protocol, including open-source code, research, audits, bug bounties, analytics, education and legal.” FAC ¶ 177. Live interviews at a Palm Beach conference with non-defendants Richardson and Hindman were “made possible by the BProtocol Foundation.” FAC ¶ 104, n.2. Additionally, “since the Foundation has retained exclusive control over Bancor‘s Treasury, it has presumptively funded every ‘Bancor’ activity alleged [in the Complaint].” FAC n.2. Finally, the Foundation is responsible for engaging and funding
Next, the court turns to the Individual Defendants. There is no allegation that any Individual Defendant had a direct contact with the United States related to v3. Plaintiffs allege each of the Individual Defendants founded “Bancor” and the Foundation and that some Individual Defendants also founded and control LocalCoin. FAC ¶¶ 23-25. However, Plaintiffs also allege LocalCoin “is owned and operated by Defendants Galia Ben-Artzi, Guy Ben-Artzi, Eyal Hertzog, and several others, including non-party Draper Associates, . . ., and [another] nonparty.” FAC ¶ 21. Plaintiffs allege Defendants Guy Ben-Artzi and Hertzog have served continuously on the Foundation‘s corporate board since its formation in 2017. FAC ¶ 20. Plaintiffs also allege the Individual Defendants have identified themselves with Bancor by either using the pronoun “we” to describe Bancor or referring to themselves as the “Bancor team.” FAC ¶¶ 173-75. But Plaintiffs’ allegation that the Individual Defendants “have effective day-to-day control over Bancor” is conclusory. See FAC ¶ 176. Generic and conclusory allegations of control over a company are insufficient as a matter of law to plead specific jurisdiction. Cambria Cnty. Employees’ Ret. Sys. v. Venator Materials PLC, 532 F. Supp. 3d 440, 451 (S.D. Tex. 2021). Plaintiffs have not sufficiently convinced the court that corporate formalities should be disregarded and the Foundation‘s and LocalCoin‘s contacts with the forum should be imputed to the Individual Plaintiffs.
Nor does the Individual Defendants’ status as alleged control persons materially change this analysis. An individual‘s status as a control person of a corporation that has jurisdictional contacts with the United States, standing alone, is insufficient to establish personal jurisdiction. In re Royal Ahold N.V. Sec. & ERISA Litig., 351 F. Supp. 2d 334, 351 (D. Md. 2004). Equating
Plaintiffs argue neither alter ego nor agency relationships are necessary to impute any contacts to the Individual Defendants because they allege Defendants jointly controlled and directed a scheme that targeted the forum. However, in both cases Plaintiffs rely on for this point—Commodity Futures Trading Commission v. Cartu, No. 1:20-CV-908-RP, 2023 WL 5246360 (W.D. Tex. Aug. 15, 2023), and Federal Trade Commission v. Educare Center Services, Inc., 414 F. Supp. 3d 960, 964 (W.D. Tex. 2019)—the deciding courts recited specific alleged acts by the individual defendants directed toward the forum.
In Cartu, Cartu partnered in the scheme with forum residents. Cartu, 2023 WL 5246360, at *2. Additionally, although Cartu was a Canadian citizen residing in Israel, the scheme “primarily targeted individuals located in the United States or Canada.” Id. at *1. Cartu used websites, emails, telephone calls, and other communications to entice individuals in the United States to invest in his scheme. Id. Cartu approved a request from an employee to send out tablets as incentive rewards for customers in Alabama and California. Id. at *2. Cartu directed his employees in an email to “PICK UP THE PHONE AND CALL” a list of high-priority “USA and
In Educare, the FTC alleged the defendants operated a deceptive telemarketing scheme that would allegedly lower customers’ credit card interest rates. Educare, 414 F. Supp. 3d at 964. Defendant Souheil was a Canadian citizen and co-owner and president of three entities involved in the scheme. Id. The entity defendants partnered with a forum-resident entity defendant to process fees collected from consumers. Id. at 966. Souheil allegedly “formulated, directed, controlled, had the authority to control, or participated in” the “deceptive telemarketing to U.S. consumers,” “initiating, or causing others to initiate, unsolicited telephone calls,” and “unlawful use of RCPOs in connection with telemarketing sales. Id. The court found the FTC sufficiently alleged Souheil purposefully availed himself of the forum such that he was subject to suit there. Id. 970. Whether or not Souheil initiated any single phone call, he was alleged, at minimum, to have directed many deceptive phone calls be made to U.S. consumers, such that he is “akin to an initiator” of the calls and it is his intentional conduct “that led to this litigation.” Id. at 971. Moreover, Souheil‘s alleged contacts were not limited to the communications alone; he allegedly designed and implemented a telemarketing scheme that purposefully targeted the United States. Id. He also allegedly operated one of his company‘s telemarketing activities and received emails and text messages concerning individual consumer inquiries about unauthorized bank charges.
Accordingly, the undersigned finds Plaintiffs have not sufficiently pleaded specific facts that support attributing Bancor‘s contacts with the United States to the Individual Defendants. The court will next determine whether Bancor‘s contacts are sufficient to exercise personal jurisdiction over LocalCoin and the Foundation.
2. Bancor‘s Contacts with the United States
Plaintiffs’ alleged injuries stem from their investments in v3. Accordingly, the court only considers Defendants’ contacts with the United States as they relate to v3. v3 was launched on May 11, 2022, after a long marketing campaign. FAC ¶ 77. On December 1, 2021, shortly after v3 was announced, “Bancor” hosted an afterparty at an industry conference in Miami, Florida. FAC ¶ 99. Non-defendant Nate Hindman promoted the event, and non-defendant Mark Richardson presented at the conference.8 FAC ¶ 99, 101. In February 2022, “Defendants” sponsored a “community pub crawl” in Denver following a week-long industry conference there. FAC ¶ 102. That same month, they also sponsored a DeFi & Fashion event in New York City. FAC ¶ 102. On social media, Bancor promoted that v3 would be unveiled at a May 2022 conference in Palm Beach, during which Bancor expected to onboard new users. FAC ¶ 103. During that conference, non-defendants Richardson and Hindman sat for a 25-minute in-person interview. In June 2022, Plaintiff Gruber spoke to non-defendants Richardson, Hindman, and Joshua Schone at a conference in Austin, after he had already invested in v3. FAC ¶ 105. During
In contrast to both Cartu and Educare, no Plaintiff here specifically alleges they were injured by Defendants’ contacts with the United States. No Plaintiff alleges they moved their investment from v2.1 to v3 after attending a conference where Bancor spoke or after an event Bancor hosted. There is no allegation any Plaintiff invested in v3 because of Bancor‘s presence at any U.S. conference.
In Ford Motor Co. v. Montana Eighth Judicial District Court, the Supreme Court reiterated that it does not require a “strict causal relationship between the defendant‘s in-state activity and the litigation.” 592 U.S. 351, 362 (2021). The Court‘s most common formulation of the rule demands that the suit “arise out of or relate to the defendant‘s contacts with the forum.” Id. In Ford, the plaintiffs alleged they were injured in crashes because their Ford vehicles were defective. Id. at 356. Although the plaintiffs brought suit in their home states where the crashes occurred, Ford argued the courts lacked specific jurisdiction over it because neither of the vehicles had been designed, manufactured, or originally sold in those states. Id. at 356-57. The Court disagreed and held Montana and Minnesota courts had specific jurisdiction over Ford because the plaintiffs’ claims related to Ford‘s extensive activities in those states. Id. at 361-69.
But unlike Ford, Bancor‘s presence in the United States is far from systematic. Ford continuously urged forum residents to buy its vehicles—including the two models that had
In contrast, Plaintiffs allege Bancor attended four industry conferences in the United States between November 2021 and June 2022 and promoted its presence there on social media. FAC ¶ 97, n.10. Plaintiffs do not allege that they invested in v3 because of statements Bancor made specifically at those conferences. In fact, Plaintiffs only specifically allege Plaintiff Gruber attended the Austin conference where he spoke with non-parties Richardson, Hindman, and Schone after he already had investments in v3. FAC ¶ 105. There is no allegation that Bancor specifically targeted United States citizens through email, telephone calls, or even mass mailings in the United States. Besides the conferences, all of Bancor‘s communications described in the First Amended Compliant consist of social media posts, available to nearly the entire world. Attendance at a handful of conferences in a far cry from Ford‘s systematic contacts with the forums that created a strong relationship among the defendant, the forum, and the litigation. See Ford, 592 U.S. at 365.
Alternatively, Plaintiffs argue Bancor‘s website was sufficiently interactive (one-click acceptance without geoblocking or other safeguards) to establish Defendants’ purposeful
Accordingly, the court finds Bancor did not purposefully avail itself of the forum such that it could reasonably anticipate being haled into court in the United States. As such, the court lacks personal jurisdiction over all Defendants.
III. APPLICABILITY OF U.S. SECURITIES LAWS
“It is a longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.” Morrison v. Nat‘l Australia Bank Ltd., 561 U.S. 247, 255 (2010) (internal quotation marks omitted). Therefore, “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.” Id. In Morrison, the Supreme Court invoked the presumption against extraterritoriality to interpret the Exchange Act as applying only to “[1] securities listed on domestic exchanges, and [2] domestic transactions in other securities.” Id. at 267. The Court reached this conclusion as a matter of statutory interpretation and by considering international comity and the need to avoid “[t]he probability of incompatibility with the applicable laws of other countries.” Id. at 269. Although Morrison involved the Exchange Act, courts have applied
Defendants argue investments in v3 are not domestic transactions subject to the Securities Act or the Exchange Act and therefore Plaintiffs’ federal claims should be dismissed. In so arguing, Defendants use a standard for domestic transactions adopted by the Second Circuit—where “irrevocable liability is incurred” and whether “title passes within the United States.” See Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 66–67 (2d Cir. 2012) (citation omitted); Lykuong Eng v. Akra Agric. Partners, Inc., No. 16-cv-00994, 2017 WL 5473481, at *2 (W.D. Tex. Aug. 9, 2017) (Lamberth, J.) (applying the “irrevocable liability” test).
Plaintiffs argue that to the extent the Fifth Circuit has interpreted Morrison‘s “domestic transaction” language, it has done so expansively, without hinging its analysis on where the purchase took place. See Jiao v. Xu, 28 F.4th 591, 597 (5th Cir. 2022). Alternatively, Plaintiffs argue that, even under the Second Circuit standard, the investments are domestic transactions because they are contracts that were entered into in the United States.
Jiao is not sufficiently analogous to provide guidance here. In Jiao, the Fifth Circuit rejected the defendant‘s argument that the alleged securities fraud transaction had not occurred in the United States because “the complaint makes clear that the purchase involved a Texas limited liability company‘s member units, and the exhibits attached to the complaint demonstrate . . . Plaintiffs paid U.S. currency for domestic LLC member units.” Jiao, 28 F. 4th at 597. With no better guidance from the Fifth Circuit, the court will use the Second Circuit standard, like another court in this district has done. See Lykuong Eng, 2017 WL 5473481, at *2.
More recently, the Second Circuit decided Williams v. Binance, 96 F.4th 129 (2nd Cir. 2024). That case, like this one, involved the purchase of crypto-asset “tokens” by Americans on an international electronic exchange. Id. at 133. Applying Morrison, the Second Circuit found plaintiffs had plausibly alleged facts that gave rise to an inference of irrevocable liability that occurred in the United States. Id. at 137. “First, the transactions at issue were matched, and therefore became irrevocable, on servers located in the United States.” Id. Specifically, “the complaint plausibly alleges that matching occurred on the infrastructure Binance relies on to operate its exchange” and “much of that infrastructure is located in the United States.” Id. at 138. “Second, Plaintiffs transacted on Binance from the United States, and pursuant to Binance‘s Terms of Use, their buy orders became irrevocable when they were sent.” Id. at 137. The court distinguished City of Pontiac‘s holding that the mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange was not, standing alone,
Defendants argue that Plaintiffs do not allege any facts showing that irrevocable liability or title passed within the United States. Plaintiffs argue the transactions at issue were executed in the United States, and they seek to differentiate the cases Defendants rely on by arguing those cases addressed trading activity not a “liquidity provision.”9
Here, Plaintiffs allege they invested in v3 from the United States. FAC ¶ 130. They argue that when they clicked the “accept” button on their computer screens, they entered into investment contracts. Dkt. 56 at 25. But this rationale would turn any online transaction into a domestic transaction. Plaintiffs also allege the transactions relevant to this suit are recorded on the Ethereum blockchain, and the nodes that validate transactions are clustered more densely in the United States that in any other country. Dkt. 54 at 23 (citing FAC ¶ 40). Similar arguments were enough for the Binance court to find those transactions were domestic transactions, but the Binance court noted it might not always be appropriate to determine whether a transaction was domestic based solely on server location. The Binance court also noted the conclusion might be
Unlike Binance, Defendants have not run away from the authority of all jurisdictions. The Individual Defendants are Israeli citizens, LocalCoin is an Israeli corporation, and the Foundation is a Swiss entity. As an alternative to their personal jurisdiction arguments, Defendants asked the court to dismiss this suit under the doctrine of forum non conveniens and argued the case should be heard in Israel rather than here. Unlike Binance, there is no indication that Israel has disavowed itself of any legal authority over Defendants. Because of that, Morrison‘s comity concerns, which were not an issue in Binance, are an issue here. Given the lack of law on this issue, the undersigned is reluctant to create new law when Plaintiffs do in fact have another forum in which they can likely pursue their grievances.
IV. CONCLUSION
This is not an easy case. Cases of first impression never are. Both the personal jurisdiction and the extraterritoriality issues are close calls,10 and other courts, on similar facts, could justifiably reach opposite conclusions. These are not easy issues because U.S. law has not yet caught up to online, global crypto asset exchanges. The court agrees with Risley‘s summation of the law surrounding decentralized cryptocurrency exchanges: “the law is currently developing around these exchanges, such that Defendants cannot currently be held liable under a traditional Section 29(b) theory.” Risley v. Universal Navigation Inc., 690 F. Supp. 3d 195, 218 (S.D.N.Y. 2023)(dismissing claims brought against creators of online crypto liquidity pool and protocols
While the court has little patience for foreign entities that cause American investors to lose money, that does not give the court authority to extend American law to cover foreign defendants who operate an unregulated, global, decentralized, online crypto asset exchange. That role belongs to the legislature. If American investors want the certain protections of the United States’ laws and courts, they should limit their investments to those that are clearly within the scope of those laws.
V. RECOMMENDATION
For the reasons given above, the court RECOMMENDS that Defendants BProtocol Foundation, LocalCoin, Ltd., Galia Benartzi, Guy Ben-Artzi, Eyal Hertzog, and Yehuda Levi‘s Motion to Dismiss Plaintiffs’ First Amended Class Action Complaint (Dkt. 54) be GRANTED and the case be dismissed without prejudice.
VI. OBJECTIONS
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm‘n, 834 F.2d 419, 421 (5th Cir. 1987).
A party‘s failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen (14) days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted
SIGNED July 31, 2024,
MARK LANE
UNITED STATES MAGISTRATE JUDGE