Anderson v. BinanceAnderson v. Binance
- Reporters:
- ,
- Before:
- Andrew L. Carter Jr.
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 purрoses 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 tokеn, 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 thе SEC as an exchange.
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 Exсhange 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 dismissеd individual defendants
STANDARD OF REVIEW
When resolving a motion to dismiss under
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 ¶¶ 362–404;
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.”
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)
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(а)(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 “entitiеs 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), (l). The statute of limitations runs for onе 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.
b. Exchange Act
Under Section 29(b), “[e]very contract made in violation of any provision of this chapter” and “every contraсt (including any contract for listing a security on an exchange) . . . the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter . . . shall be void.”
Here, the plaintiff does not allege that he only learned on April 3, 2019 of “critical facts” regarding [the tokens]. Rather, he claims that he did not learn of his potential legal rights under § [29 (b)] until the SEC released the Framework on April 3, 2019. Ignorance of legal rights does not delay the accrual of a claim under a discovery rule. In any event, the Framework is merely a non-binding agency interpretation of the longstanding [S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946)] test and did not create new rights.
Id.; see also id. at 341 (“The plaintiff did not learn of any ‘critical facts’ regarding his injury when the SEC issued the Framework on April 3, 2019 . . . but rather learned only of the SEC‘s nonbinding interpretation of Howey.“). Thе issuance of the Framework does not toll the accrual of Plaintiffs’ claims.
II. Extraterritoriality
The federal securities laws apply to those “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” Morrison v. Nat‘l Austl. Bank Ltd., 561 U.S. 247, 267 (2010) (discussing Exchange Act); see also id. at 268 (“The same focus on domestic transactions is evident in the Securities Act of 1933.“); In re Smart Techs., Inc. S‘holder Litig., 295 F.R.D. 50, 55–56 (S.D.N.Y. 2013) (”Morrison‘s prohibition on extraterritoriality applies to Securities Act claims.“). An exchange is considered “domestic” if it registers as a “national securities exchange.” See Morrison, 561 U.S. at 266–67. An exchange need only register if a
First, although Plaintiffs allege thаt much of Binance‘s infrastructure is based in the U.S., they only identify as U.S.-based infrastructure Amazon Web Services computer servers, which host Binance, and the Ethereum blockchain computers, which facilitate certain transactions on Binance. Such third-party servers and third parties’ choices оf location are insufficient to deem Binance a national securities exchange. See, e.g., Sonterra Capital Master Fund v. Credit Suisse Grp. AG, 277 F. Supp. 3d 521, 582 (S.D.N.Y. 2017) (stating in the RICO context that, “being routed through computer servers into New York . . . . do[es] not . . . render plaintiffs’ RICO claims domestic in nature“); see also Holsworth, 2021 WL 706549, at *3. Plaintiffs provide no caselaw to support the claim that Binancе‘s other alleged U.S. contacts—inclusion of English language on the Binance website, several employees located in California, and job postings in the U.S.—are sufficient to constitute a domestic exchange.
Additionally, the transactions themselves, as alleged, cannot qualify as domestic. A transaction is domestic if “irrevocable liability is incurred or title passes within the United States.” Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 66, 67 (2d Cir. 2012). Plaintiffs must allege more than stating that Plaintiffs bought tokens while located in the U.S and that title “passed in whole or in part over servers located in California that host Binance‘s website.” SAC ¶¶ 17, 19, 20, 22; see City of Pontiac Policemen‘s & Firemen‘s Ret. Sys. v. UBS AG, 752 F.3d 173, 187 (2d Cir. 2014) (trade not considered domestic on the basis that the purchaser “places a buy order in the United States for the purchase of foreign securities on a foreign exchange“).
Plaintiffs’ Blue Sky claims also fail for the same reason. Plaintiffs bring claims under the Blue Sky laws of the following five jurisdictions where the named plaintiffs allegedly placed their
Second, the claims brought under California, Florida, Nevada, Puerto Rico, and Texas are also dismissed on account of the extraterritorial nature of the transactions at issue. Courts often analyze Blue Sky laws in relation to their federal countеrparts. See, e.g., Nat‘l Credit Union Admin. Bd. v. Morgan Stanley & Co., No. 13-cv-6705 (DLC), 2014 WL 241739, at *12–13 (S.D.N.Y. Jan. 22, 2014) (citing Texas cases holding that Texas courts look toward federal court decisions when interpreting the Texas Securities Act because of the similarities between Texas and federal securities laws); Rushing v. Wells Fargo Bank, N.A., 752 F. Supp. 2d 1254, 1260 (M.D. Fla. 2010) (stating that “Florida courts look to [federal securities] laws whеn interpreting [Florida Blue Sky laws]“); SDM Holdings, Inc. v. UBS Fin. Servs., Inc. of Puerto Rico, No. 12-cv-1663, 2016 WL 9461324, at *6 (D.P.R. Mar. 1, 2016) (noting that a Puerto Rico Blue Sky claim is “for all practical 3
CONCLUSION
For the reasons above, Defendants’ motion to dismiss is GRANTED and the Second Amended Complaint is DISMISSED. The parties’ requests for oral argument are DENIED. The Clerk of Court is respectfully directed to terminate the motions at ECF Nos. 58, 68, 69.
SO ORDERED.
Dated: March 31, 2022
New York, New York
ANDREW L. CARTER, JR.
United States District Judge