Securities Snapshot June 05, 2018

New Jersey Attorney General Issues Cease-and-Desist Orders Against Three Online Cryptocurrency-Related Investment Organizations

Summary

New Jersey Attorney General issues cease-and-desist orders against three online cryptocurrency-related investment organizations; Southern District of New York dismisses shareholder derivative suit against JPMorgan executive on claim preclusion grounds; Southern District of New York dismisses investor suit against Express Scripts with prejudice; Delaware Supreme Court upholds dismissal of shareholder derivative suit against Viacom and its directors; Southern District of New York grand jury indicts founders of cryptocurrency company Centra Tech for securities and wire fraud; and Securities and Exchange Commission files complaint against “blockchain evangelist” in alleged $21 million initial coin offering scam.

NEW JERSEY ATTORNEY GENERAL ISSUES CEASE-AND-DESIST ORDERS AGAINST THREE ONLINE CRYPTOCURRENCY-RELATED INVESTMENTS ORGANIZATIONS

On May 21, the New Jersey Bureau of Securities, a part of the New Jersey Attorney General’s Office, issued summary cease-and-desist orders against three online cryptocurrency-related investment organizations—Bullcoin FoundationTrident and Springcrytpoinvest—to stop offerings of unregistered securities in New Jersey. The action was directed at Bullcoin’s offering of Bullcoin Gold tokens, Trident’s offering of investments in Trident Crypto Index Fund and TDC Coins, and Springcryptoinvest’s offering of various investment packages. The orders alleged that all three offerings constituted unregistered sales of securities in violation of the Uniform Securities Law and certain regulations thereunder. Notably, none of the organizations registered with the New Jersey Bureau of Securities. Further, the orders found that all three entities made false statements and failed to disclose material information to prospective investors on their websites, including providing inaccurate or incomplete information concerning: (i) the offering entities’ assets and liabilities; (ii) the risks associated with the offerings; and (iii) the companies’ operations. The New Jersey Attorney’s General’s orders come as part of a nationwide crackdown on fraudulent initial coin offerings and cryptocurrency-related investment products. The North American Securities Association has stated that more than 40 jurisdictions have participated in the crackdown, with nearly 70 inquiries and investigations and 35 enforcement actions taking place in May alone.

SOUTHERN DISTRICT OF NEW YORK DISMISSES SHAREHOLDER DERIVATIVE SUIT AGAINST JPMORGAN EXECUTIVES ON CLAIM PRECLUSION GROUNDS

On May 22, 2018, the U.S. District Court for the Southern District of New York in In re JPMorgan Chase Derivative Litigation dismissed a shareholder derivative suit against JPMorgan’s chief executive officer Jamie Dimon and a dozen of the bank’s current and former directors, which alleged federal and state law claims stemming from the Board’s alleged improper oversight of the bank’s subprime residential mortgage-backed securities in the run-up to the 2008 financial crisis. In particular, the plaintiffs alleged that the defendants failed to implement policies and procedures to ensure that JPMorgan conducted its subprime mortgage business in a lawful and appropriate manner, with no or inadequate risk management policies, in order to maximize profits from the subprime mortgage loan and securitization business. After extensive motion practice in the Eastern District of California, the plaintiff’s suit was transferred to the Southern District of New York, where Judge John F. Keenan, ruling on the defendants’ third motion to dismiss, held that the plaintiff’s claims were precluded by the 2014 dismissal of another derivative suit in the Southern District of New York asserting claims stemming from the same basic allegations. The 2014 lawsuit, initiated by shareholder Chaile Steinberg, was dismissed for inadequately pleading demand futility under Federal Rule of Civil Procedure 23.1. “Under New York law,” Judge Keenan wrote, “res judicata, or claim preclusion, ‘bars successive litigation based on the same transaction or series of connected transactions’ if there is a ‘judgment on the merits’ and ‘the party against whom the doctrine is invoked was a party to the previous action, or in privity with a party who was.’” Judge Keenan held that the dismissal of the Steinberg suit for failure to adequately plead demand futility was a “decision on the merits for purposes of res judicata,” and while each case named slightly different sets of director defendants, that was insufficient to avoid claim preclusion dismissal. The dismissal, if sustained on appeal, will bring to a close a long-running dispute over JPMorgan’s actions leading up to the 2008 financial crisis.

SOUTHERN DISTRICT OF NEW YORK DISMISSES INVESTOR SUIT AGAINST EXPRESS SCRIPTS WITH PREJUDICE

On May 22, 2018, the U.S. District Court for the Southern District of New York in In re: Express Scripts Holdings Co. Securities Litigation dismissed an investor suit against Express Scripts concerning its relationship with health insurance giant Anthem Inc. The suit, which asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleged that a breakdown in Express Script’s relationship with the healthcare company caused a multibillion-dollar drop in Express Script’s share value, and that Express Scripts and its executives actively misled investors about the Anthem relationship. In particular, Express Scripts allegedly told investors that it expected its business relationship with Anthem would extend through 2024, when, in fact, price negotiations between the companies were extremely contentious for more than a year, culminating in a lawsuit filed by Anthem in 2016. After Judge Edgardo Ramos dismissed an earlier complaint in the case last year, the plaintiffs filed an amended complaint, which the defendants again moved to dismiss. Judge Ramos ruled that the amended complaint “failed to allege new facts” to support the plaintiffs’ argument that Express Scripts and its executives had misled investors about the Anthem relationship and negotiations, and that its allegations did not adequately plead scienter by Express Scripts executives or that public statements about renewal of its agreement with Anthem were false when made. The court also denied the plaintiffs a further opportunity to amend their complaint. Judge Ramos also dismissed a similar shareholder derivative action a few months earlier for failing to show why a demand for legal action by Express Scripts’ board was futile. These decisions underscore that expressions of optimism and other soft, generalized statements are not actionable under the federal securities laws.

DELAWARE SUPREME COURT UPHOLDS DISMISSAL OF SHAREHOLDER DERIVATIVE SUIT AGAINST VIACOM AND ITS DIRECTORS

On May 18, 2018, the Delaware Supreme Court upheld the dismissal of a shareholder derivative suit in Feuer v. Dauman, et. al., which accused Viacom directors of self-dealing in conjunction with payments made to board member Sumner Redstone, a controlling shareholder of CBS Corp. and Viacom, who had served as the executive chairman of both companies until February 4, 2016. The plaintiffs alleged that Mr. Redstone was awarded unearned compensation while he was sick, incapacitated, and no longer involved with the company. In the Court of Chancery below, Chancellor Andre G. Bouchard ruled that a self-dealing liability release covered the board’s $13 million in payments to Mr. Redstone. On appeal, plaintiffs claimed that the liability releases–voted on by the Viacom board as part of an unrelated litigation–were also self-dealing transactions aimed at absolving the board’s liability for fiduciary duty claims stemming from the award of salary and bonuses to Mr. Redstone. The defendants countered that $10 million of the $13 million targeted by the suit was a bonus for Mr. Redstone’s long service to the company and for the fiscal year ending on September 30, 2014, only three months of which covered the incapacity allegations. The lower court held that the plaintiffs failed to put forward a challenge to the enforceability of the release, regardless of whether it was arguably a self-dealing transaction. The Delaware Supreme Court upheld the Chancery Court’s ruling. This was just one of several lawsuits filed across the country targeting Viacom, its directors and Mr. Redstone’s interests in connection with Mr. Redstone’s declining health, and more litigation regarding control of CBS and Viacom was recently commenced.

SOUTHERN DISTRICT OF NEW YORK GRAND JURY INDICTS FOUNDERS OF CRYPTOCURRENCY COMPANY CENTRA TECH FOR SECURITIES AND WIRE FRAUD

On May 14, 2018, a grand jury in the Southern District of New York indicted the three co-founders of Centra Tech, Inc., a startup company that claimed to offer cryptocurrency-related financial products. The Centra Tech co-founders Sohrab Sharma, Raymond Trapani and Robert Farkas were charged with securities fraud, wire fraud, and related conspiracy charges in connection with their sale of digital tokens. The defendants were arrested in a series of criminal complaints filed in April. The indictment and complaints allege that the defendants induced token purchasers to invest millions of dollars through material misrepresentations and omissions. In particular, the government charges that Centra Tech created a debit card–the “Centra Card”–which it claimed could be used to spend various types of cryptocurrency at establishments that accept Visa or Mastercard payments. In 2017, the defendants solicited investors to purchase tokens through an unregistered initial coin offering, while representing that the company had, among other things: (i) an experienced executive team; (ii) partnerships with organizations like Visa and Mastercard; and (iii) obtained money transmitter licenses in 38 states. The government alleges these representations were false: the executives were fictitious; the company had no partnerships with major credit card companies; and it had obtained no such licenses. After the arrests, the United States Attorney’s Office and Federal Bureau of Investigation seized 91,000 ETH (a form of digital currency), worth more than $60 million USD. The U.S. Securities and Exchange Commission filed civil charges against Defendants, alleging similar facts. This case provides another recent example of a coordinated effort between the Department of Justice and the SEC to combat fraud in the burgeoning cryptocurrency market.

SECURITIES AND EXCHANGE COMMISSION FILES COMPLAINT AGAINST “BLOCKCHAIN EVANGELIST” IN ALLEGED $21 MILLION INITIAL COIN OFFERING SCAM

On May 22, 2018, the U.S. Securities and Exchange Commission filed a complaint in the Central District of California against Titanium Blockchain Infrastructure Services Inc., its president Michael Alan Stollery (also known as Michael Stollaire), and EHI Internetwork and Systems Management Inc. for violations of the antifraud and registration provisions of federal security laws. The complaint alleges that Titanium’s initial coin offering of its digital token constituted a social media marketing blitz aimed at deceiving investors with fictional claims of business prospects. In particular, Stollaire allegedly lied to investors about having business relationships with the Federal Reserve and companies such as PayPal, Verizon, eBay, Boeing and the Walt Disney Company. Defendants allegedly similarly included fabricated testimonials from approximately thirty established corporate customers on its website. Stollaire described himself in various interviews as a “blockchain evangelist” and compared investments in Titanium with investments in Google or Intel. The allegedly fraudulent ICO resulted in token purchases of $21 million in fiat and digital currencies between November 2017 and January 2018. Among other relief, the SEC seeks disgorgement from Stollaire of his ill-gotten gains. In connection with its complaint, the SEC also obtained an emergency freeze of Titanium’s assets. This case exemplifies the SEC’s active involvement in pursuing claims against blockchain companies that it deems to be engaging in “old-fashioned fraud dressed in a new-fashioned label.” It also demonstrates its position that misstatements and omissions may take many forms–including statements made on websites or social media.