Thursday, October 07, 2021

Appeals court reinstates lawsuit alleging crypto pump-and-dump

By Anne Sherry, J.D.

The Second Circuit reinstated a fraud lawsuit against a cryptocurrency issuer by vacating a district court’s dismissal of the complaint. The appeals court concluded that the Southern District of New York erred by relying on the defendants’ evidence that the ICO occurred entirely overseas as grounds to dismiss the complaint under Morrison. The court should have assessed the state-law claims under New York’s own laws for extraterritoriality. Furthermore, the court should have allowed the plaintiffs to amend the complaint even though they did not file a formal motion. The decision was issued by summary order, without precedential effect (Barron v. Helbiz, Inc., October 4, 2021, per curiam).

The plaintiffs bought HelbizCoin, a cryptocurrency issued by Helbiz, Inc., and its CEO. Their lawsuit alleges that Helbiz and its CEO represented that Helbiz would use proceeds of the coin’s ICO to build a smartphone-based transportation rental platform and market it to potential users. HelbizCoin would be the exclusive currency by which customers could pay for vehicle rentals, causing its value to rise as more users bought the coin to access the platform. After the ICO, the plaintiffs allege, Helbiz and the CEO reneged on these promises and kept the money raised in the offering for themselves, causing the price of HelbizCoin to plummet. As Helbiz prepared to go public in 2020, the company announced that the coin would be destroyed and delisted from cryptocurrency exchanges and that holders would receive Ethereum for their coins. According to the plaintiffs, though, this offer was hollow because most of the people who had bought HelbizCoins in the ICO had already sold to cut their losses.

The plaintiffs brought common law claims as well as claims under New York statutes. The district court, sua sponte, requested briefing on whether the complaint was subject to dismissal under Morrison v. National Australia Bank Ltd. (U.S. 2010), and the defendants provided evidence that HelbizCoin was created and issued abroad by an unaffiliated Singaporean party, and that U.S. citizens were barred from purchasing the cryptocurrency under the terms and conditions of the offering. The district court the district court concluded that the case involved neither securities listed on a domestic exchange nor domestic purchases of securities and dismissed the complaint under Morrison. It also denied leave to amend the complaint to plead additional facts about domestic sales and purchases of HelbizCoin.

On appeal, the Second Circuit concluded that the district court erred by applying Morrison to the plaintiffs’ state law claims. Morrison concerned federal securities claims and did not assert that its analysis applies to claims not brought under Exchange Act Section 10(b). While Helbiz and the other defendants argued that the plaintiffs’ claims were substantively Section 10(b) claims, this was not a fair reading of the complaint, the circuit court wrote. Any determination that the claims lack adequate domesticity must be made under a tailored approach that, in addition to analyzing any Section 10(b) claims under Morrison, separately analyzes any state law claims under New York’s rules for extraterritoriality.

The Second Circuit also held that the district court abused its discretion by not granting the plaintiffs leave to amend the complaint to add allegations regarding the citizenship of a purported U.S. citizen who bought HelbizCoin domestically, to clarify the domesticity of the ICO and purchases of the coin, and to make a separate claim under Section 10(b). Although the plaintiffs did not formally move to amend, their briefing to the district court repeatedly stated that they were willing to amend to avoid dismissal. Leave to amend should be freely granted, even in the absence of a formal motion. Amendment would not be clearly futile, as the allegations the plaintiffs wanted to add could cure jurisdictional defects or extraterritoriality concerns.

Finally, the district court should not have considered the defendants’ affidavit and the ICO’s terms and conditions in dismissing the complaint. These exhibits were not “integral” to the complaint, which did not mention the documents. The plaintiffs also asserted that at least one plaintiff was never asked to consent to the terms and conditions when purchasing HelbizCoin. The district court erred in relying on these documents and construing them most favorably to the defendants.

The case is No. 21-278.