Davy v. Paragon Coin, Inc. et al

REPLY

N.D. Cal.March 15, 2019

ALLEN ATTORNEY GROUP 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW Kevin R. Allen (CSB No. 237994) Email: kevin@allenattorneygroup.com ALLEN ATTORNEY GROUP 2121 N. California Blvd, Suite 290 Walnut Creek, CA 94596 Telephone: 925.695.4913 Facsimile: 925.334.7477 Howard Schiffman (pro hac vice) Email: Howard.Schiffman@srz.com Charles J. Clark (pro hac vice) Email: Charles.Clark@srz.com SCHULTE ROTH & ZABEL LLP 901 15th Street, NW, Suite 800 Washington, DC 20005 Telephone: 202.729.7470 Facsimile: 202.730.4520 Attorneys for Defendants PARAGON COIN, INC., JESSICA VERSTEEG, EGOR LAVROV, DAVID KALUSTOV, EUGENE BOGORAD, ALEX EMELICHEV, and GARETH RHODES UNITED STATES DISTRICT COURT OAKLAND DIVISION NORTHERN DISTRICT OF CALIFORNIA JON HOLLAND and ASTLEY DAVY, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. PARAGON COIN, INC., JESSICA VERSTEEG, EGOR LAVROV, EUGENE “CHUCK” BOGORAD, ALEX EMELICHEV, GARETH RHODES, DAVID KALUSTOV, JAYCEON TERRELL TAYLOR A/K/A “THE GAME,” Defendants. Case No. 4:18-cv-00671-JSW DEFENDANTS EUGENE BOGORAD, ALEX EMELICHEV, AND GARETH RHODES’ REPLY MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS; JOINDER TO DOCKET NOS. 51-51.7, 62-62.6, 75-75.1, 78. Date: April 5, 2019 Time: 9:00 AM Judge: The Honorable Jeffrey S. White Courtroom: 5, 2nd Floor Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 1 of 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW DEFS’ REPLY IN SUPPORT OF MOTION TO COMPEL ARBITRATION OR DISMISS; CASE NO.: 4:18-CV-00671-JSW PRELIMINARY STATEMENT1 Plaintiffs’ Opposition (“Opposition” or “Opp.”) (Dkt. No. 88) to the Moving Defendants’ Motion to Dismiss attempts to mash together pieces of two different statutes to support facially insufficient claims that the Moving Defendants were “statutory sellers” of PRG. Plaintiffs’ arguments should be rejected, as the Ninth Circuit and other courts have recognized. Specifically, Plaintiffs argue that the Court should ignore the plain language of Section 12(a)(1)2 requiring that the buyer “purchas[e] such security from” the Moving Defendants and instead apply the language of Section 5 of the Securities Act,3 which prohibits a person from selling unregistered securities “directly or indirectly.” But Plaintiffs’ cherry-picked quotes from cases analyzing Section 5 claims are inapplicable to the cause of action at issue in this case. As courts have repeatedly recognized, the Section 5 analysis is distinct from that of Section 12 because “[t]he ‘purchase from’ requirement of § 12 focuses on the defendant’s relationship with the plaintiff-purchaser . . .” See SEC v. CMKM Diamonds, Inc., 729 F.3d 1248, 1256 n.5 (9th Cir. 2013) (internal citations omitted). Plaintiffs’ efforts to supplant the substantial body of law analyzing Section 12 claims and replace it with that of Section 5 is a transparent attempt to expand the definition of seller to meet their needs by using the much broader “substantial factor” test applied in Section 5 cases, a test which Courts have consistently rejected for purposes of Section 12 analysis. Furthermore, Plaintiffs’ other arguments, namely that Defendants conflated the definition of seller in 12(a)(1) and 12(a)(2) and have applied a heightened standard to otherwise sufficient allegations, merely 1 Defined terms used herein shall have the same meaning as in Eugene Bogorad, Alex Emelichev, and Gareth Rhodes’ Motion to Dismiss First Amended Complaint (“MTD”) (Dkt. No. 86). 2 Section 12(a)(1) provides in relevant part that: “Any person who— (1) offers or sells a security in violation of section 77e of this title . . . shall be liable, . . . to the person purchasing such security from him . . .” 15 U.S. Code § 77l (a)(1). 3 Section 5 provides in relevant part that: “Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly— (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.” 15 U.S. Code § 77e (a)(1)-(2). Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 2 of 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 2 - DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW DEFS’ REPLY IN SUPPORT OF MOTION TO COMPEL ARBITRATION OR DISMISS; CASE NO.: 4:18-CV-00671-JSW rehash arguments that the Defendants in this action have already rebutted in response to Plaintiffs’ prior submissions. ARGUMENT Plaintiffs assert that courts have “long concluded that” the “directly or indirectly” language in Section 5 somehow expands the definition of “seller” in Section 12(a)(1) to include individuals “indirect[ly]” involved in the solicitation of securities (See Opp. at 5-6.), but Plaintiffs’ argument has been outright rejected by the Supreme Court and the Ninth Circuit, among other courts. First, Plaintiffs inappropriately rely on cases analyzing the term “sell” under Section 5 rather than the substantial body of cases analyzing Section 12 and which are cited throughout Defendants’ briefs. (See Opp. at 5-6 (quoting SEC v. Rosen, No. 01-0369-CIV, 2002 WL 34421029, at *4 (S.D. Fla. Feb. 22, 2002), aff’d in part sub nom. SEC v. Calvo, 378 F.3d 1211 (11th Cir. 2004), and aff’d in part sub nom.; SEC v. Diversified Corp. Consulting Grp., 378 F.3d 1219 (11th Cir. 2004) (an individual “may be liable under Section 5 ‘if it can be shown that he was a ‘necessary participant’ or a ‘substantial factor’ in the offering or selling of the unregistered securities’”); SEC v. Friendly Power Co, LLC, 49 F. Supp. 2d 1363, 1371-72 (S.D. Fla. 1999) (applying the “substantial factor” test in its analysis of the sale of unregistered securities under Section 5)). As this Circuit has recognized, the Section 5 analysis of the term “sell” is not applicable to Section 12 claims because courts apply different tests in analyzing the different statutes. See SEC v. Phan, 500 F.3d 895, 906 n.13 (9th Cir. 2007) (recognizing the that the Section 5 analysis of “sell” was “too lax” for purposes of interpreting Section 12 because the “from him” language in Section 12 requires a narrower standard whereas “Section 5 contains no language similar to the ‘from him’ language of Section 12”). While Section 5 cases apply the “substantial factor” test in analyzing the term “seller,” the Supreme Court has explicitly rejected the use of that test for potential liability under Section 12 because the test expands liability beyond the plain meaning of the statute. See Pinter v. Dahl, 486 U.S. 622, 653–54, 108 S. Ct. 2063, 2082, 100 L. Ed. 2d 658 (1988) (“The substantial-factor test reaches participants in sales transactions who do not even arguably fit within the definitions set Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 3 of 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 3 - DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW DEFS’ REPLY IN SUPPORT OF MOTION TO COMPEL ARBITRATION OR DISMISS; CASE NO.: 4:18-CV-00671-JSW out in § 2(3); it would add a gloss to the operative language of § 12(1) quite different from its commonly accepted meaning. . . . Being merely a substantial factor in causing the sale of unregistered securities is not sufficient in itself to render a defendant liable under § 12(1)”) (internal citations omitted). In light of Pinter, numerous federal circuits, including the Ninth Circuit, have followed Pinter and rejected the application of the “substantial factor” test to Section 12 claims. See SEC v. CMKM Diamonds, Inc., 729 F.3d 1248, 1256 n.5 (9th Cir. 2013) (“In Pinter, the Supreme Court overruled the use of the ‘substantial factor’ test for purposes of imposing liability under Section 12 of the Securities Act . . . [because] ‘[t]he ‘purchase from’ requirement of § 12 focuses on the defendant’s relationship with the plaintiff-purchaser. The substantial-factor test, on the other hand, focuses on the defendant’s degree of involvement in the securities transaction and its surrounding circumstances . . . Section 5 does not contain a similar ‘purchase from’ requirement); see also Ryder Int’l Corp. v. First Am. Nat. Bank, 943 F.2d 1521, 1528 (11th Cir. 1991) (rejecting the “substantial factor” test in its Section 12 analysis because “the Pinter Court took great pains to emphasize that the substantial factor test . . . is a departure from the scope of the statutory language of section 12(1); that conclusion applies to the identical operative language in section 12(2))”). The “substantial factor” test thus cannot be used to expand the definition of “seller” to cover Moving Defendants as Plaintiffs have attempted to do. Plaintiffs’ equally baseless legal argument regarding the relationship between Sections 12(a)(1) and 12(a)(2) should also be rejected. Plaintiffs assert—despite Defendants citing directly contradictory legal authority in their prior papers—that Moving Defendants have “conflate[d]” the definition of “seller” in Section 12(a)(1) from the “vastly different” Section 12(a)(2). (Opp. at 7.) Citing no authority, Plaintiffs assert that the term “seller” should be analyzed differently in cases involving Section 12(a)(1) and 12(a)(2) because “the right of action provided for by Section 12(a)(2) is so vastly different than that provided by Section 12(a)(1) that an analysis under the former could not possibly be instructive as to the latter.” Id. Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 4 of 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 4 - DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW DEFS’ REPLY IN SUPPORT OF MOTION TO COMPEL ARBITRATION OR DISMISS; CASE NO.: 4:18-CV-00671-JSW As in their prior submissions to the Court, Plaintiffs misstate this area of the law. Controlling precedent holds that the definitions of “sell” and “offer” as used in Section 12(a)(1) has the same meaning in Section 12(a)(2): Pinter’s analysis of section 12(1) was based on the language of the statute [and] . . . that pertinent language which is present in and applicable to section 12(2)— ‘offers or sells’ and ‘purchasing such security from him’—appears by identical language which is present in and applicable to section 12(1). . . . while section 12(1) creates liability for the sale of unregistered securities, and section 12(2) creates liability for omissions or misrepresentations in a prospectus or oral communication, the purpose of both sections is to promote full and fair disclosure of information to potential buyers of securities. . . . The shared purpose of these sections strengthens our conclusion that Pinter’s reasoning applies equally to both sections. Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 536 (9th Cir. 1989) (internal citations omitted); see also In re Harmonic, Inc., Sec. Litig., No. C 00-2287 PJH, 2006 WL 3591148, at *9 n.5 (N.D. Cal. Dec. 11, 2006) (applying Pinter to analysis of Section 12(a)(2) claim and holding that that directors were not “sellers” of securities because “[a]lthough [Pinter] limited its ruling to §12(a)(1) claims, the Court also noted that most courts treat the ‘offers or sells’ language in §12(a)(2) as having basically the same meaning as the ‘offers or sells’ language in § 12(a)(1)”); Nesbeth v. Wachovia Bank, No. 09-62042-CIV-ZLOCH, 2010 WL 11601016, at *4 (S.D. Fla. July 19, 2010) (“While the instant case involves a challenge under Section 5, which, in turn, relies on Section 12(1) to create civil liability, the Eleventh Circuit’s construction of the term ‘seller’ from Section 12(2) is, nonetheless, binding here because the Eleventh Circuit has recognized that the term as used in Sections 12(1) and 12(2) should have the same meaning.”) (internal citations omitted). Finally, Plaintiffs’ attempt to overcome the deficiencies of their FAC by restating their allegations as block-quotes throughout their Opposition does nothing to address their failures to state a claim under Section 12(a)(1). Plaintiffs’ quotes from the FAC are simply enlargements of Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 5 of 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 5 - DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW DEFS’ REPLY IN SUPPORT OF MOTION TO COMPEL ARBITRATION OR DISMISS; CASE NO.: 4:18-CV-00671-JSW the same paragraphs that Moving Defendants demonstrated were insufficient in their MTD. (Compare Opp. at 8-10 with MTD at 4-6.) As set forth therein, Plaintiffs have failed to allege that the Moving Defendants actively or directly solicited investments from any actual investors— much less the named Plaintiffs Davy or Holland—or that any of their actions rose above the level of “mere participation” in the sale of PRG. (See MTD at 3-6); see also Wade v. Skipper’s, Inc., 915 F.2d 1324, 1328 (9th Cir. 1990) (affirming district court’s holding that Pinter analysis, not “substantial factor” test, was applicable to 12(1) claim, and therefore consideration of “direct, personal contact . . . in its discussion of seller liability under section 12(1) of the federal act” was appropriate). Accordingly, Plaintiffs’ Section 12(a)(1) claims against the Moving Defendants must be dismissed pursuant to Rule 12(b)(6). CONCLUSION For the reasons set forth herein the Moving Defendants respectfully request that the Court dismiss Plaintiffs’ allegations against them for failure to state a claim. In the alternative, the Moving Defendants request that, for the reasons set forth in the MTCA and other Prior Motion Papers, the Court compel Plaintiffs to arbitrate their claims and either dismiss this action or stay these proceedings pending the completion of arbitration. Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 6 of 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 6 - DEFS’ REPLY ISO MOTION TO DISMISS, AND JOINDER; CASE NO.: 4:18-CV-00671-JSW DEFS’ REPLY IN SUPPORT OF MOTION TO COMPEL ARBITRATION OR DISMISS; CASE NO.: 4:18-CV-00671-JSW Dated: March 15, 2019 ALLEN ATTORNEY GROUP By: /s/ Kevin Allen Kevin R. Allen (CSB No. 237994) 2121 N. California Blvd, Suite 290 Walnut Creek, CA 94596 Telephone: 925.695.4913 Facsimile: 925.334.7477 SCHULTE ROTH & ZABEL LLP By: /s/ Howard Schiffman Howard Schiffman (pro hac vice) Charles J. Clark (pro hac vice) 901 15th Street, NW, Suite 800 Washington, DC 20005 Telephone: 202.729.7470 Facsimile: 202.730.4520 Attorneys for Defendants Paragon Coin, Inc., Jessica VerSteeg, Egor Lavrov, Eugene Bogorad, Alex Emelichev, Gareth Rhodes and David Kalustov Case 4:18-cv-00671-JSW Document 89 Filed 03/15/19 Page 7 of 7