Gordon et al v. Dailey et al, No. 1:2014cv07495 - Document 98 (D.N.J. 2016)
Court Description: OPINION. Signed by Judge Joseph H. Rodriguez on 6/20/2016. (TH, )
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Gordon et al v. Dailey et al Doc. 98 UNITED STATES DISTRICT COURT DISTRICT OF NEW J ERSEY BRANDON GORDON, et al., Plaintiffs, v. : Hon. J oseph H. Rodriguez : Civil Action No. 14-7495 : OPINION ZACHARY DAILEY and LAB RAT DATA PROCESSING, LLC, Defendants. : : This m atter is before the Court on Defendants’ Motion to Dism iss Plaintiffs’ Am ended Com plaint in its entirety pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim [Doc. 28 / 82]. The Am ended Com plaint asserts eight counts: (1) violation of 17 C.F.R. § 240 .10 (b)(5) (federal securities fraud); (2) violation of New J ersey Uniform Securities Law; (3) violation of Florida Securities and Investor Protection Act (asserted by Plaintiff Gordon only); (4) com m on law fraud; (5) negligent m isrepresentation; (6) fraudulent inducem ent; (7) breach of contract; and (8) unjust enrichm ent. The Am ended Com plaint asserts that this Court’s jurisdiction rests on 28 U.S.C. §§ 1331 (federal question) and 1332 (diversity of citizenship). Upon review of the Am ended Com plaint, the Court is not satisfied that it has subject m atter jurisdiction. This suit involves Bitcoin transactions. The Am ended Com plaint, however, does not explain what Bitcoins are, beyond the allegations that Bitcoins are som e form of 1 Dockets.Justia.com virtual currency. Extrinsic sources were consulted to understand what Bitcoins are, and how they function. 1 It is alleged that Defen dant Dailey, through his LLC, “operating under the trade nam e LabRatMining”2 “m in[ed] for Bitcoins”-- or at least stated that it m ined, or would m ine, for Bitcoins. (Am end. Com pl. Ex. 1) According to the Am en ded Com plaint, in early J uly, 20 13, LabRatMining form ally announced on the Internet the following, in relevant part: LabRatMining is a com pany that will be operating as a m id to large scale m iner of Bitcoins paying out dividen ds/ returns to bondholders. Each bond in the com pany represents a portion of the overall hashrate 3 owned an d m anaged by LabRatMining. . . . Bond Structure—It is intended 10 0 ,0 0 0 bonds will be sold during the IPO. These bonds represent the hashrate that these m achines produce rather than the hardware them selves. . . . Dividends/ Bond Value—Each bond will receive a m inim um of 10 0 MH/ s* worth of m ining profit in dividends/ returns (all dividends are contractual returns based on investm ents and m ay sim ply be referred to as dividends for future purposes) on a weekly basis. . . . 1 “Bitcoin, one of the m ost known of virtual currencies, is an em erging technology field defined by the European Central Bank as ‘unregulated, digital m oney, which is issued and usually controlled by its developers, and used and accepted am ong m em bers of a specific virtual com m unity.’ Unlike the U.S. dollar, Bitcoins have no physical form , they are sim ply com puter code stored in a digital wallet. Users can send and receive Bitcoins in a few seconds from virtually any electronic device. Bitcoins are not legal tender, nor backed by any governm ent or legal entity. Like the U.S. dollar, Bitcoins have no intrinsic value and are not redeem able for other com m odities. Instead the value of Bitcoins is due to user’s willingness to accept them as a m ethod of paym ent. At the tim e of publication, they are valued at around US $ 40 0 per Bitcoin. They can be subdivided and spent down to one-hundred-m illionth of their total value.” Hon. J effrey Davis, W hat Bitcoins Are and W hy Law y ers Should Care About Them , 40 Alaska Bar Rag 6, J an. / March 20 16. 2 Defendant Lab Rat Data Processing, LLC, has filed for bankruptcy protection and has been adm in istratively term inated as a Defendant to this suit. 3 The Am en ded Com plaint does not define or explain “hashrate.” 2 ... LabRatMining is offering bonds at far less cost to bondholders than alm ost all, if not all[,] bond issuers. Som e are issuing bonds at 7+BTC/ GH/ s whereas these bonds are being offered initially between 1 and 2 BTC/ GH/ s. 4 ... • The bonds discussed above do not represent traditional bonds, but what are com m only known as PMB’s or Perpetual Mining Bonds. Another com m only used term is Mining Contracts. These bonds are not traditional bonds as offered by publicly traded com panies. PMB’s are actually private contracts with anticipated returns based on investm ents into the com pany. ... • This is a privately held, nonpublicly traded com pany. This com pany and the PMB’s being offered are not regulated by any governm ental entities including the SEC or any other agency or board. (Am end. Com pl. Ex. 1) Nine days later, LabRatMining, in another Internet post, elaborated on the price of the bonds: “10 0 ,0 0 0 bonds will be m ade available to the public. The bonds will be tiered in value beginning at 0 .15BTC/ bond with each consecutive 20 ,0 0 0 being 0 .0 1BTC higher. . . . These prices are first com e first serve, and the prices are not guaranteed to any in dividual purchaser.” (Am end. Com pl. Ex. 2) The post further stated: “Bitcoin Disclaim er: These bonds are being purchased in Bitcoin, an d all dividends are paid in Bitcoin. The purchaser understands what Bitcoins are an d that they are n ot guaranteed to m aintain an y future value or even any value at all. LabRatMining does not guarantee any such values, nor does it guarantee the future success or stability of Bitcoins. These bonds are totally depen dent upon the value of 4 The Am ended Com plaint abbreviates Bitcoin as BTC. It is not clear what “BTC/ GH/ s” m eans. 3 Bitcoins and are not otherwise secured by any asset of the com pany or the com pany itself.” (Am end. Com p. Ex. 2) All twelve Plaintiffs are alleged to have “purchased” bonds. Based on the above, the Court presum es all transactions occurred in Bitcoins. The Am en ded Com plaint does not allege the price each Plaintiff paid, only the num ber of bonds purchased: Plaintiff Num ber of Bonds Gordon 1669 5 Green 1581 Vondrak 1124 Lobb 674.333 McDonald 456 Piper 95 Galido 70 1 Boehler 50 0 Fisher-Levine 2862 Flachsbart 114 Kolonusz 20 0 0 Henderson 4427 (Am end. Com pl. ¶¶ 29, 31, 33, 35, 37, 39, 41, 43, 45, 47, 49, 51) The Am en ded Com plaint does not state whether Defendants ever paid any Plaintiff “dividends” as prom ised. 5 Plaintiff Gordon is also alleged to have “pledged” 60 Bitcoins “in return for” 60 0 “bonds in the com pany.” (Am end. Com pl. ¶29, Exs. 5-6) 4 Plaintiffs have dem anded that Defendants “rescind the unlawful transactions at issue an d to return the m onies that Defendants fraudulently obtained from Plaintiffs” (Am end. Com pl. ¶ 56), but Defendants have refused. Subject Matter J urisdiction Standard “[F]ederal courts have an ever-present obligation to satisfy them selves of their subject m atter jurisdiction and to decide the issue sua sponte.” Liberty Mut. Ins. Co. v. Ward Trucking Corp., 48 F.3d 742, 750 (3d Cir. 1995), see also Fed. R. Civ. P. 12(h)(3) (“whenever it appears by suggestion of the parties or otherw ise that the court lacks jurisdiction of the subject m atter, the court shall dism iss the action.”) (em phasis added); Nesbit v. Gears Unlim ited, Inc., 347 F.3d 72, 77 (3d Cir. 20 0 3) (“First, because subject m atter jurisdiction is n on-waivable, courts have an in depen dent obligation to satisfy them selves of jurisdiction if it is in doubt. See Mt. Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U.S. 274, 278 (1977). A necessary corollary is that the court can raise sua sponte subject-m atter jurisdiction concerns.”). “A party who invokes the jurisdiction of the federal courts has the burden of dem onstrating the court’s jurisdiction.” Colum bia Gas Transm ission Corp. v. Tarbuck, 62 F.3d 538, 541 (3d Cir. 1995) (citing McNutt v. General Motors Acceptance Corp., 298 U.S. 178 , 189 (1936)). The lack of clarity of essential facts requires the review of the Am ended Com plaint to determ in e whether the Court has jurisdiction under 28 U.S.C. § 1331 (federal question) and or 28 U.S.C. § 1332 (diversity of citizenship). 5 Federal Question The federal question statute provides, “[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws or treaties of the United States.” 28 U.S.C. § 1331. The issue is whether Count One of the Am en ded Com plaint (the only purported federal claim ) “arise[s] under” the federal securities laws—that is, are the alleged “bonds” in LabRatMining “securities”? In conclusory fashion, Plaintiffs assert that they are, see, e.g., Am ended Com plaint, ¶ 52(c) (“the bonds issued by LRM constituted ‘securities’ as defined by the Securities Act of 1933”), but the facts alleged seem to suggest otherwise. First, Defendants allegedly represented that: (1) the bonds were not regulated by the SEC; and (2) a lawyer had advised Defendants as such. While the Am en ded Com plaint states in conclusory fashion that (1) was false, the Am ended Com plaint does not explain how it was false. That is, the Am ended Com plaint fails to set forth the SEC’s legal authority to regulate the “bonds” Defendants allegedly offered for sale. Moreover, it does not appear that the “bonds” Defendants allegedly sold were “bonds” as that term is traditionally used in the securities laws (i.e., debt obligations). Indeed, Defendants stated, “[t]he bonds . . . do not represent traditional bonds, but what are com m only known as PMB’s or Perpetual Mining Bonds. Another com m only used term is Mining Contracts. These bonds are not traditional bonds as offered by publicly traded com panies. PMB’s are actually private contracts with anticipated returns based on investm ents into the com pany.” (Am end. Com pl. Ex. 1, 2) Thus, it is not at all clear whether the “bonds” Defendants allegedly sold were-- as a legal m atter-- bon ds, stocks, or som ething else entirely. See generally, Rossi v. 6 Quarm ley, 60 4 F. App’x 171, 173 (3d Cir. 20 15) (“Section 2(1) of the Securities Act of 1933 defines ‘security’ and in cludes several catch-all types of securities, including ‘investm ent contract[s].’ . . . An investm ent contract is ‘a contract, transaction or schem e whereby a person invests his m oney in a com m on enterprise and is led to expect profits solely from the efforts of the prom oter or a third party.’ SEC v. W.J . Howey Co., 328 U.S. 293, 298 —99 (1946).”). As a result, the Am ended Com plaint does not adequately plead facts supporting a conclusion that this Court has federal question jurisdiction pursuant to 28 U.S.C. § 1331. Diversity of Citizenship—Am ount in Controversy The diversity statute provides, in relevant part, “[t]he district court shall have original jurisdiction of all civil actions where the m atter in controversy exceeds the sum or value of $ 75,0 0 0 , exclusive of interest and costs.” 28 U.S.C. § 1332. 6 The Court has no way of determ ining whether the m atter in controversy exceeds $ 75,0 0 0 because the Am ended Com plaint does not allege a dollar value associated with a Bitcoin at any given tim e, m uch less during the relevant period(s) of tim e. Basically, the Am ended Com plaint does not allege how m any Bitcoins each Plaintiff paid for the bonds; or whether, consistent with Defendants’ alleged prom ise, Defendants ever paid any Plaintiff weekly “dividends.” Thus, the Am ended Com plaint fails to allege sufficient facts which are essential for this Court to be satisfied that the am ount in controversy requirem ent has been m et. 6 The Am en ded Com plaint sufficiently alleges com plete diversity of citizenship; Defendants are alleged to be New J ersey citizens (Am end. Com pl. ¶¶ 14-15), and none of the Plaintiffs are alleged to be New J ersey citizens (Am en d. Com pl. ¶¶ 2-13). 7 Conclusion For the reasons stated above, the Motion to Dism iss will be dism issed without prejudice, and Plaintiffs will be ordered to show cause why this case should not be dism issed for lack of subject m atter jurisdiction. An Order accom panies this Opin ion. Dated: J une 20 , 20 16 _ s/ J oseph H. Rodriguez _ _ J oseph H. Rodriguez, U.S.D.J . 8
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