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Second Circuit Reverses Dismissal Of Putative Securities Class Action By Crypto Investors, Addressing Extraterritoriality And Timeliness Arguments
03/26/2024On March 8, 2024, the United States Court of Appeals for the Second Circuit reversed a trial court decision dismissing a putative securities class action brought by purchasers of crypto assets against an international crypto exchange company (the “Company”) and certain of its officers, alleging violations of Section 12(a)(1) of the Securities Act of 1933 (the “Securities Act”), as well as various state securities laws (“Blue Sky” laws), and also seeking recission of the contracts they entered into with the Company, under Section 29(b) of the Securities Exchange Act (the “Exchange Act”). Williams v. Binance, No. 22-972 (2d Cir. Mar. 8, 2024). Plaintiffs alleged that the Company unlawfully promoted, offered, and sold billions of dollars’ worth of crypto-assets without registering these as securities and without registering themselves as a securities exchange or broker-dealer. The United States District Court for the Southern District of New York granted the Company’s motion to dismiss, holding that (1) plaintiffs’ claims constitute an impermissible extraterritorial application of securities law and (2) plaintiffs’ federal claims were untimely under the applicable statute of the limitations. On appeal, the Second Circuit reversed on both counts and remanded for further proceedings.
According to the complaint, the Company runs an online platform where a variety of crypto-assets are bought and sold. According to plaintiffs, the company was founded in 2017 in China with its “titular headquarters” in Malta, and the Company takes the position that it does not have any physical headquarters or geographic jurisdiction. Plaintiffs alleged, however, that the Company has servers, employees, and customers throughout the United States and that it directly targeted the U.S. market with advertising and customer support. Plaintiffs further alleged that class members purchased tokens on the Company’s exchange and paid the Company fees for use of its exchange from their respective U.S. states or territories of residence. Plaintiffs alleged that by 2020, most of the tokens they purchased on the Company’s exchange were trading at a tiny fraction of their prior value.
Plaintiffs filed their operative complaint in the Southern District of New York on December 15, 2020. Plaintiffs brought claims under Section 12(a)(1) of the Securities Act, alleging that the Company sold securities without registering them as such; under various Blue Sky statutes of 49 different states, the District of Columbia, and Puerto Rico; and under Section 29(b) of the Exchange Act, seeking recission of their contracts with the Company on the alleged grounds that the Company was an unregistered securities exchange or broker-dealer. On March 31, 2022, the district court granted the motion to dismiss brought by the Company and individual defendants, on all claims, holding that applying U.S. state and federal securities laws to the Company would violate the long-standing presumption against the extraterritorial application of domestic law. The district court further held that plaintiffs’ federal claims under the Securities Act and the Exchange Act were brought after tolling of the applicable one-year statute of limitations. Finally, the district court dismissed the Blue Sky law claims for the states and territories where none of the named plaintiffs resided, on the grounds that there was an “insufficient nexus” between those jurisdictions and the relevant allegations.
The Second Circuit reversed on all counts. First, the Court held that plaintiffs adequately alleged that the claims involved domestic transactions and were therefore subject to U.S. federal and state securities laws, reasoning that plaintiffs satisfied the requirements of the Second Circuit’s standard—applying Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010)—for evaluating claims of extraterritoriality in the securities context, which requires that plaintiffs allege facts indicating that “irrevocable liability” was incurred or that title was transferred within the United States. Specifically, the Court found that plaintiffs had plausibly alleged facts showing that two transactional steps giving rise to irrevocable liability both occurred within the United States: (1) individual plaintiffs transacted on the Company’s exchange from the United States and, under the Company’s terms of use, their buy orders became irrevocable when sent; and (2) the matching of plaintiffs’ buy offers with prospective sellers was done on U.S.-based servers.
Second, the Court reversed the dismissal of plaintiffs’ federal claims arising from purchases individual plaintiffs made during the year before they filed suit. The Court found that each of plaintiffs’ claims did not accrue until they could have filed suit, and that plaintiffs could not have filed suit until they had purchased the relevant tokens. In so holding, the Court rejected the Company’s argument that plaintiffs’ claims accrued when the Company published third-party reports about the tokens and thereby solicited their purchase (for purposes of the Section 12(a) claims) or once plaintiffs consented to the Company’s Terms of Use (for purposes of the Section 29(b) claims).
Third, the Court vacated the district court’s dismissal of the claims asserted on behalf of absent class members under the Blue Sky statutes of states other than the states where the named plaintiffs reside. The Court held that, as long as the named plaintiffs have standing, concerns about the propriety of including out-of-state, non-party class members represent a Rule 23(b)(3) question of predominance to be decided after the motion to dismiss stage, and that dismissal on such basis would therefore be premature.
