Bin Lu v. Enigma Mpc, Inc.
| Docket Number | 23-cv-02152-LB |
| Decision Date | 01 December 2023 |
| Parties | BIN LU, Plaintiff, v. ENIGMA MPC, INC., et al., Defendants. |
| Court | U.S. District Court — Northern District of California |
ORDER GRANTING MOTION TO DISMISS RE: ECF NO 19
Defendants Can Kisagun and Guy Zyskind founded a company called Enigma (also a defendant) to develop two products for sharing and analyzing encrypted data. They funded the development with an initial coin offering (ICO) of a cryptocurrency called ENG tokens. Plaintiff Bin Lu, a Singapore resident, bought 280,000 ENG tokens for $1.4 million on Binance, a secondary market for digital-currency exchanges. Three years after the ICO, the SEC ordered that it violated the Securities Act of 1933 because it was a sale of unregistered securities. The plaintiff alleges that the defendants replaced Enigma with a new project called the Secret Network (created by their new company SCRT Labs) and allowed buyers of ENG tokens to swap their tokens for a new cryptocurrency called Secret tokens. The plaintiff did not know about this opportunity. The swap rendered his ENG tokens worthless. He claims that this was conversion and a violation of California's Consumer Legal Remedies Act (CLRA).[1]
Enigma and Mr. Kisagun moved to dismiss the complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6), mainly on the grounds that (1) the CLRA does not apply to sales of cryptocurrencies or to events occurring after a transaction and (2) there was no conversion because the defendants never exercised dominion over the plaintiff's ENG tokens.[2] The court grants the motion.
The plaintiff resides in Singapore.[3] The defendants are Enigma (a corporation with a principal place of business in San Francisco), Mr. Zyskind (Enigma's Chief Executive Officer, Chief Technology Officer, President, and Director), and Mr. Kisagun (Enigma's Chief Product Officer).[4]Messieurs Zyskind and Kisagun founded Enigma in 2015 “with an initial focus [on] developing technologies dedicated to securely sharing and analyzing encrypted data.”[5] In 2017, they published whitepapers on the Enigma Protocol, “a privacy-focused, decentralized computation platform,” and Catalyst, “a cryptocurrency investment platform to be deployed on the Enigma Protocol.”[6]
To raise funds for the Enigma Protocol and Catalyst, the defendants conducted an ICO from June 2017 through September 11, 2017 for a “proprietary digital currency,” ENG tokens.[7] During this period, they promoted the ICO on Enigma's website and social-media channels. They “boasted Enigma's founders' and advisors' connections to institutions such as the MIT Media Lab in an effort to generate interest and participation.” They paid third parties in ENG tokens to promote the ICO in a “so-called ‘bounty campaign'” to “create the appearance” that ENG tokens were a good investment. The defendants raised “approximately $45 million [during the ICO] through the sale of approximately 75 million ENG [t]okens to nearly 6,000 people.”[8]
The ICO buyers sold ENG tokens on the secondary market through digital-currency exchanges such as Binance. In September 2017, the plaintiff purchased “approximately 280,000” ENG tokens on Binance for “approximately $1.4 million.”[9]
After the ICO, the SEC “instituted cease-and-desist proceedings against Enigma pursuant to Section 8 of the Securities Act of 1933.”[10] In February 2020, the SEC found that through the ICO, Enigma had offered to sell and sold unregistered securities, in violation of the '33 Act. The SEC ordered Enigma to pay a $500,000 civil penalty and reimburse those who purchased ENG tokens and submitted claims to Enigma “within a given time period.”[11]
Mr. Zyskind and Mr. Kisagun then allegedly “abandoned Enigma in favor of the Secret Network, a cryptocurrency project that Enigma characterized as ‘the successor of the Enigma Protocol.'”[12] “[M]any of the same individuals who were involved with Enigma are now involved in some capacity with the Secret Network.”[13] Mr. Zyskind is the Chief Executive Officer and Founder of Gamma Research and Development Ltd. d/b/a SCRT Labs, which “characterizes itself as ‘the driving force and the founding core development team behind Secret Network.'”[14] Enigma's online presence has been rebranded “under the guise of the Secret Network.”[15]
From February 2020 until early 2021, the Secret Network allegedly allowed ENG token holders to exchange those tokens for “Secret” tokens, which the plaintiff characterizes as the “Secret Swap.” The defendants “never publicly announced the Secret Swap or otherwise informed ENG [t]oken holders of the Secret Swap.” The plaintiff did not receive notice of the swap opportunity.[16]
After the defendants “abandoned” Enigma because of the SEC cease-and-desist action, there was no longer an active market for ENG tokens, which rendered the tokens valueless.[17]
The defendants provide more context about the transition to the Secret Network, citing Enigma's SEC filings (accessible on EDGAR, the SEC's online database) and the SEC's cease-and-desist order about the '33 Act violations.[18] The SEC's order required Enigma to link to the order in a press release on its website and file a Form 10 to register the ENG tokens as a class of securities.[19] In its initial Form 10 filed on September 18, 2020, Enigma discussed the “Secret Network,” described it as “the successor of the Enigma Protocol,” and identified Secret's “SCRT” cryptocurrency coins.[20] It also disclosed the ENG-SCRT swap: “Holders of SCRT coins have voted to enable the Secret Network to generate additional SCRT coins to be granted to holders of ENG Tokens in exchange for burning such tokens, or the Community Swap.”[21] Between September 2020 and January 2021, Enigma referenced the swap in ten more public filings on its EDGAR page and in an announcement on Binance.[22] The plaintiff owns his tokens still.[23]
The complaint has two claims: (1) a violation of the CLRA, Cal. Civ. Code § 1770(a)(10) (), and (2) conversion (the defendants “wrongfully interfered with [the plaintiff]'s lawful right to possess the [ENG tokens] by deliberately destroying their value by abandoning Enigma”).[24] The court has diversity jurisdiction. 28 U.S.C. § 1332. All parties (including the non-appearing defendant Mr. Zyskind, who has not yet been served) consented to magistrate-judge jurisdiction.[25] Id. § 636(c). Enigma and Mr. Kisagun moved to dismiss the complaint.[26] The court held a hearing on November 30, 2023.
A complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief” to give the defendant “fair notice” of (1) what the claims are and (2) the grounds upon which they rest. Fed.R.Civ.P. 8(a)(2); Bell Atl. Corp. v Twombly, 550 U.S. 544, 555 (2007). Thus, “[a] complaint may fail to show a right to relief either by lacking a cognizable legal theory or by lacking sufficient facts alleged under a cognizable legal theory.” Woods v. U.S. Bank N.A., 831 F.3d 1159, 1162 (9th Cir. 2016).
A complaint does not need detailed factual allegations, but Twombly, 550 U.S. at 555 (cleaned up). A complaint must contain factual allegations that, when accepted as true, are sufficient to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); NorthBay Healthcare Grp., Inc. v. Kaiser Found. Health Plan, Inc., 838 Fed.Appx. 231, 234 (9th Cir. 2020).
“[O]nly the claim needs to be plausible, and not the facts themselves....” NorthBay, 838 Fed.Appx. at 234 (citing Iqbal, 556 U.S. at 696); see Interpipe Contracting, Inc. v. Becerra, 898 F.3d 879, 886-87 (9th Cir. 2018) () (cleaned up).
Put another way, “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “The plausibility standard is not akin to a ‘probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. “Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of ‘entitlement to relief.'” Id. (cleaned up).
Fraud allegations elicit a more demanding standard. Fed.R.Civ.P. 9(b). This means that “[a]verments of fraud must be accompanied by the ‘who, what, when, where, and how' of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). “The plaintiff must [also] set forth what is false or misleading about a statement, and why it is false.” Id. (cleaned up). Like the basic “notice pleading” demands of Rule 8, a driving concern behind Rule 9(b) is that defendants be given fair notice of the charges against them. In re Lui, 646 Fed.Appx. 571, 573 (9th Cir. 2016) (...
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