Kim Kardashian, Floyd Mayweather, Jr. and Paul Pierce are among the defendants being sued for their role in promoting EthereumMax (“EMAX”), a cryptocurrency project centered around the EthereumMax tokens, a blockchain-based digital asset. The Defendants moved to dismiss the lawsuit.
In the decision granting the motion, the Court first noted that Private Securities Litigation Reform Act (“PSLRA”) likely barred the claim based on its excluding RICO claims. To his surprise, however, Defendants did not seek to dismiss on those grounds. Because the issue was not briefed, the Court decided not to dismiss the RICO claim based solely on the PSLRA bar.
The Court next addressed the argument that there was no standing. Although Plaintiffs framed their injury as having paid an “artificially high price,” the Court’s view was that the essence of Plaintiff’s RICO claim was that the Tokens became worthless at the time of the pleading, months after being purchased. However, Plaintiffs’ disappointment with the fact that they did not sell their Tokens before the market plummeted was an inherent risk of the bargain. In other words, Plaintiffs’ “disappointment at not winning [their] bets does not constitute an ‘injury to property’ sufficient to confer RICO standing.” Thus, the Court concluded that Plaintiffs lacked standing to bring their RICO claim.
Next was the issue of whether there was a RICO “enterprise.” In the Court’s view, Plaintiffs were asking the Court to make huge leaps of logic to string together disconnected acts that, when read together, supposedly evinced a premeditated and well-orchestrated pump and dump scheme in violation of the RICO statute. But “a hodgepodge of conclusory and disparate allegations does not a RICO claim make. The allegations more plausibly suggest that each Defendant (especially the Promoter Defendants) acted in furtherance of their own personal advantage, regardless of the interests of the alleged enterprise.”
The Court also believed that Plaintiffs were really arguing that the Promoters should have more sufficiently vetted the product before endorsing it. While the Court did not disagree with that proposition, and noted that perhaps such reckless endorsements would undermine their credibility going forward, a celebrity’s self-interested recklessness did not evince a common scheme or purpose sufficient to establish a RICO claim.
Although the Court was skeptical that Plaintiffs could cure the standing deficiency given that the Court’s holding turned on a question of law, it gave Plaintiffs one (and it stressed only one) chance to amend the RICO claim to adequately allege standing and an enterprise.
As to the claim under the Consumer Legal Remedies Act, that statute prohibits certain “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer.” The Court said that the Tokens at issue in the case (i.e., cryptocurrency) cannot be described as anything but an intangible, most akin to investment securities. The motion to dismiss this claim was therefore granted without leave to amend.
Plaintiffs also brought claims under the consumer protection statutes in California, Florida, New York, and New Jersey. The Court explained that, although each state law claim is substantively governed by state law, because they were grounded in fraud and brought in federal court, the heightened pleading standard under Federal Rule of Civil Procedure 9(b) applied.
Plaintiffs failed on this claim as well. “Fatal to each of Plaintiffs’ state statutory claims is the fact that Plaintiffs neither allege which statements they viewed nor precisely when each Plaintiff purchased EMAX Tokens. Each of the state statutory claims require that Plaintiffs plead with specificity actual reliance or causation. The elements of actual reliance and causation both necessarily demand that Plaintiffs plead actual exposure to the allegedly fraudulent statements to impose liability. Instead, each Plaintiff broadly alleges that he or she “view[ed] numerous celebrity endorsements.” This was insufficient. As a specific example, the court said that Plaintiffs repeatedly emphasized the impact of a Kim Kardashian post, which was published on June 14, 2021; but Plaintiffs who purchased their EMAX Tokens on the front-end of the period covered in the complaint clearly could not have relied on her then non-existent post to make those purchases. The Court granted the motion to dismiss this claim, though, again, with leave to amend.
The Court then addressed the conspiracy claim. It failed for much of the same reasons that the RICO claims failed. Plaintiffs did not plausibly allege that the Defendants came to any mutual agreement to defraud investors. Rather the allegations were equally, if not more, consistent with the Defendants each acting in their own self-interest. Because the complaint failed to adequately allege an agreement and/or knowledge by each of the Defendants, the motion to dismiss was granted with leave to amend as to the claim for civil conspiracy,