Barron v. Helbiz Inc.: A Rare Mixture Of An ICO, Morrison, And State Law Claims | Morrison & Foerster LLP

[ad_1]

Pending the Second Circuit is a unique (and apparently sua spontaneous) application of the Supreme Court’s application in Morrison v Nat’l Australia Bank Ltd. announced jurisdiction review.[1] to reject non-securities law claims in connection with an Initial Coin Offering (“ICO”).

In the case of Barron v. Helbiz Inc. alleged plaintiffs that they were deceived into buying cryptocurrency as part of a company’s “pump-and-dump” investment program.[2] Plaintiffs have not made any claims under the Securities Act of 1933 (the “Securities Act”) or the Securities Exchange Act of 1934 (the “Exchange Act”). Nonetheless, Judge Stanton of the Southern District of New York demanded that the parties be briefed on Morrison’s motion, concluded that the Morrison-based ICO was extraterritorial, and then dismissed the case.[3] The case is on appeal to the Second Circuit,[4] and Morrison’s applicability to non-securities claims under state law is paramount. If the answer is in the affirmative, the case could pave the way for Morrison to be used as a tool to dismiss state claims when the underlying asset is a foreign security.

Extraterritorial Application of Federal Securities Laws: Morrison and His Descendants

Section 10 (b) of the Securities Exchange Act of 1934 applies to fraud “in connection with the purchase or sale” of any security.[5] The face of the Stock Exchange Act, however, is unclear as to whether it applies extraterritorial, a question that the appellate courts have been grappling with for decades after the law was passed. In 2010, the Supreme Court resolved the landmark Morrison case, in which the court ruled that Section 10 (b) of the Stock Exchange Act allows a plaintiff to claim (1) dealings in “domestic securities” or (2) entering into “domestic transactions in other securities”.[6] In other words, the Supreme Court concluded that the Stock Exchange Act does not provide a cause for action to plaintiffs suing in connection with a foreign securities transaction.[7]

Although Morrison dealt solely with the Exchange Act, the courts immediately expanded its scope. The Southern District of New York – as confirmed by the Second Circuit – in In re Vivendi Universal, SA, Sec. Litig. That Morrison should apply equally to both securities laws.[8] The Second Circuit expanded Morrison in the Absolute Activist Value Master Fund Ltd. v. Ficeto, where the court interpreted the second Morrison approach, which describes security claims in relation to “domestic transactions in other securities” as transactions in which “irrevocable liability” has arisen or the title is transferred within the United States. “[9] That is, a “domestic transaction” according to Morrison requires evidence that the plaintiff was bound to the deal and lost the right of withdrawal within the United States.[10]

At least one court has moved Morrison to consider whether claims under the Exchange Act that allegedly arose from an ICO should be dismissed.[11] What makes Barron unique, however, is that the claims here do not arise from either of the two securities laws; it is merely a matter of state claims relating to a foreign security. This means that, if confirmed, Barron may cause Morrison to dismiss claims under state law if the underlying item is a foreign security.

Barron v. Helbiz: An extension by Morrison to include state law, non-securities claims

In Barron, a group of plaintiffs sued Helbiz, which claimed they were developing a transportation rental platform after purchasing the cryptocurrency “HelbizCoin” through the company’s ICO.[12] Helbiz marketed the tokens as “native tokens for Helbiz transactions” with the promise that they will become the exclusive payment method for the company’s new rental platform.[13] The HelbizCoin Terms and Conditions stated that the offer was not a United States securities offer and that United States residents were excluded from participation.[14]

Plaintiffs alleged that the ICO was in fact a “pump and dump” fraud.[15] They claimed that Helbiz kept most of the money raised through the ICO to itself, never completed the rental platform and accepted alternative payment methods despite the promise made to the coin buyers.[16] Investors in Barron filed lawsuits under the New York General Business Law for “breach of contract, trespassing and conversion of movable property, constructive trust, silent titles and fraudulent activity”.[17]

Judge Stanton asked for an impromptu briefing as to why the case should not be dismissed for a Morrison analysis. In a letter to the parties, the judge wrote that plaintiffs’ claims appear to allege acts in violation of the Securities Exchange Act, hence “[i]It is important for all of us to know whether discharge can be granted, ”said Morrison.[18]

After Judge Stanton found that HelbizCoin was a security as an “investment contract” under the SEC against WJ Howey Co., he proceeded with a Morrison analysis as if plaintiffs’ claims had arisen under the Exchange Act.[19] The Helbiz coins were not listed on a domestic exchange and were not purchased in the United States.[20] It also didn’t matter that the server for the Helbiz website was in Kansas, as Morrison’s focus is on where investors buy the security.[21] The Barron plaintiffs bought the coins in the United Arab Emirates and the United Kingdom, not Kansas.[22] Since plaintiffs bought the coins outside of the United States, the court dismissed the case, according to Morrison.[23]

Both parties have filed a briefing on the matter and a decision is pending at the Second Circuit. Due to the far-reaching effects on securities law and ICOs, the appeal should be followed closely.

[1] 561 US 247 (2010).

[2] No. 20 CIV. 4703 (LLS), 2021 WL 229609, * 3 (SDNY January 22, 2021).

[3] See id. at 1.

[4] Barron v Helbiz Inc., Case 21-00278 (2d Cir.).

[5] 15 USCA § 78j (b).

[6] 561 US 247,267 (2010).

[7] See id. at 250.

[8] 842 F. Supp. 2d 522, 529 (SDNY 2012).

[9] 677 F.3d 60 (2nd Cir. 2012).

[10] See id. at 70.

[11] See In re Tezos Sec. Litig., No. 17-CV-06779-RS, 2018 WL 4293341 (ND Cal. August 7, 2018) (Denial to dismiss in ICO transactions in the United States).

[12] 2021 WL 229609, at * 1.

[13] See id. at * 1, 3.

[14] I would. at 1.

[15] I would. at 3.

[16] I would. at 1.

[17] I would.

[18] ECF no. 64.

[19] Barron, 2021, WL 229609, * 2-4 (citing SEC v WJ Howey Co., 328 US 293, 298-99 (1946)).

[20] I would. at 5’o clock.

[21] See id. at 6.

[22] I would.

[23] I would.

[View source.]

[ad_2]