On April 30, 2020, the court in Takata v. Riot Blockchain, Inc., et al., No. 18-02293 (D. N.J.), dismissed a securities class action against Riot Blockchain and certain investors.  Riot Blockchain, previously known as Bioptix, transitioned its business in 2017 into building and operating blockchain technologies.  The Complaint alleged that the investor defendants, acting as a group, amassed a controlling interest in the company.  Plaintiff claimed that the investors engaged in manipulative trading to artificially inflate the Company’s stock price.  Plaintiff further alleged that Riot Blockchain violated securities laws by issuing allegedly false and misleading registration statements and proxy statements with the SEC to facilitate the investor group’s trading and to obscure that the Company was engaging in related-party transactions. 

As part of their securities claims against the Company, Plaintiff also alleged that Riot misled the public and investors by changing its name from Bioptix to Riot Blockchain and then touting Riot’s “strategic investments” and transactions.  Plaintiff claimed that “in reality the Company had limited meaningful investments in cryptocurrency products and did not have a meaningful cryptocurrency business plan.”  Quoting SEC Chairman Jay Clayton, Plaintiff alleged that “Nobody should think it is OK to change your name to something that involves blockchain when you have no real underlying blockchain business plan and try to sell securities based on the hype around blockchain.”

The Complaint’s allegations implicated the statutory and regulatory framework involving Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and the pleading standards required by the Private Securities Litigation Reform Act (the “PSLRA”).  Plaintiff alleged that the alleged investor group violated Rule 10b-5(a) and (c).  To state a valid claim under those provisions, the plaintiff must allege, among other things, that the defendant “committed a deceptive or manipulative act.”  Plaintiff alleged that Riot Blockchain’s purportedly false filings with the SEC violated Rule 10b(5), which makes it unlawful to issue false representations or omissions.

U.S. District Judge Freda Linsenbaum Wolfson held that the Complaint failed to plausibly allege a deceptive or manipulative act by the investors or Riot Blockchain and dismissed the lawsuit.  In particular, the Court found that the Complaint failed to plead that Defendants engaged in “manipulative” trading, a term that “refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity.”  The Court further found that the Plaintiff failed to allege any specific acts of “deceptive” trading by most of the defendants.  Indeed, as one defendant argued in its moving papers, “[t]he trading activity described by Plaintiff – of seeking to sell Riot shares to the public, and selling those shares, over the course of nearly a year as Riot’s stock declined with the crash of Bitcoin – is entirely unremarkable.”  The Court also denied Plaintiff’s request for leave to amend, and instead ordered Plaintiff to file a motion seeking leave to amend, should Plaintiff still seek to do so. 

Furthermore, Judge Wolfson rejected Plaintiff’s claims that Riot had made material misrepresentations, either in its SEC filings or in touting its pivot to blockchain technologies.  Plaintiff alleged that the registration statements misrepresented the Company’s relationship with the investor group, and by doing so, allowed the group to dump millions of shares on unsuspecting retail investors.  Plaintiff further alleged that the Company failed to disclose purported “related-party” transactions.  The Court carefully examined the SEC filings in detail and rejected both assertions, finding that the Company had made no misrepresentations.  The Court likewise easily disposed of Plaintiff’s theory that the Company’s conduct and statements in transitioning to blockchain technologies violated securities laws.  The Court found that the challenged conduct to be nonactionable puffery and would be “understood by reasonable investors as such.” This is a significant decision for investors and companies alike in the blockchain space, who may face lawyer-driven lawsuits following a market collapse in cryptocurrencies.  Even with the heightened pleading standards of the PSLRA, market manipulation claims under Rule 10b-5 have often proven difficult to defeat at the pleading stage.  Many courts take a broad view of “deceptive” conduct, and such claims can expose investors to extensive liability based on even facially legitimate open market transactions.  As the dismissal here demonstrates, it is critically important that investors facing such claims carefully parse the allegations of the complaint to determine whether the plaintiff has adequately pled concrete allegations of wrongful trading activity.  If not, a motion to dismiss should be brought.  There is nothing inherently deceptive or manipulative in purchasing and selling common stock in the open market.  With respect to Riot’s transition to blockchain technologies, Judge Wolfson’s order reaffirms that, to state a viable claim for securities fraud, plaintiffs must allege far more than a simple name change and expressions of strategic planning by management.


Ben Turner is Counsel in Baker McKenzie's Los Angeles office and is a member of the Firm's North American Litigation and Government Enforcement Practice Group. Ben is a trial and appellate litigator handling an array of complex disputes for both plaintiffs and defendants, including class actions, regulatory investigations, insurance, and securities litigation. He also frequently works with trial teams to write dispositive motions, develop trial strategies, and handle post-trial proceedings.