Preview
1 Michael E. Liftik (CA Bar No. 232430)
Sarah Heaton Concannon (pro hac vice)
2 QUINN EMANUEL URQUHART & SULLIVAN, LLP
1300 I Street, Suite 900
3
Washington, D.C. 20005
4 Telephone: (202) 538-8000
michaelliftik@quinnemanuel.com
5 sarahconcannon@quinnemanuel.com
6 Emily C. Kapur (CA Bar No. 306724)
555 Twin Dolphin Dr., 5th Fl.
7
Redwood Shores, California 94065
8 Telephone: (650) 801-5000
emilykapur@quinnemanuel.com
9
Brenna Nelinson (pro hac vice)
10 51 Madison Avenue, 22nd Fl.
11 New York, New York 10010
Telephone: (212) 849-7000
12 brennanelinson@quinnemanuel.com
13 [Additional Counsel on Signature Page]
14
Attorneys for Defendant Dfinity USA Research, LLC
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SUPERIOR COURT OF THE STATE OF CALIFORNIA
16
COUNTY OF SAN MATEO
17
DANIEL OCAMPO, Individually and on Case No. 21-CIV-03843
18 Behalf of All Others Similarly Situated,
CLASS ACTION
19 Plaintiff,
DEFENDANT DFINITY USA
20 RESEARCH, LLC’S
v. SUPPLEMENTAL BRIEF IN
21 SUPPORT OF MOTION TO STAY
DFINITY USA RESEARCH LLC, DFINITY
22 STIFTUNG, AH CAPITAL MANAGEMENT,
L.L.C., POLYCHAIN CAPITAL, DOMINIC Hon. Danny Y. Chou
23 WILLIAMS, and JOHN DOES 1-20,
Dept. 22 – Ctrm. K
24 Defendants.
Date Action Filed: July 15, 2021
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Date: February 18, 2022
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Case No. 21-CIV-03843
DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY
1 TABLE OF CONTENTS
2 I. QUESTION PRESENTED.............................................................................................. 1
3 II. BRIEF ANSWER ............................................................................................................ 1
4 III. ARGUMENT .................................................................................................................. 3
5 A. A Ruling in Defendants’ Favor on the Statutory Seller Element At Any
6 Stage of the State Action Would Have No Impact on the Federal Exchange
Act Claims. .......................................................................................................... 3
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B. The Scope of the Potential Class for the Securities Act Claims Is Narrower
8 Than for the Exchange Act Claims, Due to the Statutory Seller
Requirement. ....................................................................................................... 5
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C. The “What If?” Question: What Happens After Class Certification? ................... 6
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IV. CONCLUSION ............................................................................................................... 7
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1 TABLE OF AUTHORITIES
2 Page
3 Cases
4 In re All. Equip. Lease Program Sec. Litig.,
No. 98-cv-2150-J(NLS), 2002 WL 34451621 (S.D. Cal. Oct. 15, 2002) .................................. 5
5
Blue Chip Stamps v. Manor Drug Stores,
6 421 U.S. 723 (1975) ................................................................................................................ 4
7 Caiafa Prof’l Law Corp. v. State Farm Fire & Cas. Co.,
15 Cal. App. 4th 800 (1993) ............................................................................................ 2, 3, 6
8
Fed. Housing Fin. Agency v. Nomura Holding Am., Inc.,
9 No. 11cv6201(DLC), 2015 WL 629336 (S.D.N.Y. Feb. 13, 2015)........................................... 5
10 Feiner v. SS&C Techs., Inc.,
47 F. Supp. 2d 250 (D. Conn. 1999) .................................................................................... 5, 6
11
Glosser v. Cellcor Inc.,
12 No. 12725, 1995 WL 106527 (Del. Ch. Mar. 10, 1995) ........................................................... 5
13 Grisham v. Philip Morris, Inc.,
670 F. Supp. 2d 1014 (C.D. Cal. 2009) .................................................................................... 7
14
Jensen v. iShares Tr.,
15 44 Cal. App. 5th 618 (2020) ................................................................................................ 3, 5
16 Johnson v. Aljian,
490 F.3d 778 (9th Cir. 2007) ................................................................................................... 4
17
Mabon, Nugent & Co. v. Borey,
18 127 B.R. 727 (S.D.N.Y. 1991)............................................................................................. 4, 6
19 Noel v. Thrifty Payless, Inc.,
7 Cal. 5th 955 (2019)............................................................................................................... 5
20
Pino v. Cardone Cap., LLC,
21 No. 20-cv-8499-JFW(KSx), 2021 WL 3502493 (C.D. Cal. Apr. 27, 2021) .............................. 3
22 Pinter v. Dahl,
486 U.S. 622 (1988) ........................................................................................................ 1, 3, 4
23
ScripsAmerica, Inc. v. Ironridge Global LLC,
24 119 F. Supp. 3d 1213 (C.D. Cal. 2015) .................................................................................... 4
25 Valenti v. DFINITY USA Research LLC,
No. 21-cv-6118 (N.D. Cal. Feb. 3, 2022) ................................................................................. 2
26
White v. City of Pasadena,
27 671 F.3d 918 (9th Cir. 2012) ................................................................................................... 7
28
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1 Statutory Authorities
2 15 U.S.C. § 77l(a)(1)..................................................................................................................... 3
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1 I. QUESTION PRESENTED
2 “[W]hether the resolution of the claims under the Securities [] Act of 1933 asserted in this
3 action and the related federal action would, as a matter of law or as a practical matter, obviate the
4 need to resolve or render moot the claims under the Securities Exchange Act of 1934 asserted solely
5 in the federal action.” Case Management Order #2, ¶ 1 (Jan. 27, 2022).
6 II. BRIEF ANSWER
7 Unless this Court rules for Defendants at summary judgment or trial that ICP is not a
8 security, resolution of the claims brought under the Securities Act of 1933 (the “Securities Act”) in
9 this Action likely would not, as a matter of law or as a practical matter, obviate the need to resolve
10 the claims brought under the Securities Exchange Act of 1934 (the “Exchange Act”) in the action
11 pending in the Northern District of California (the “Federal Action”).
12 The answer to the Court’s question can be resolved by focusing on a single key difference
13 that merits a stay of this Action: the statutory seller requirement, which is particular to claims under
14 Section 12 of the Securities Act and has no relevance to the Exchange Act claims unique to the
15 Federal Action. Specifically, to succeed on a Securities Act Section 12 claim, a plaintiff must prove
16 that each defendant was a “statutory seller”—i.e. that the defendant either directly sold him
17 unregistered securities or solicited his sale of unregistered securities, motivated at least in part by a
18 desire to serve its own financial interests or those of the securities owner. Pinter v. Dahl, 486 U.S.
19 622, 647 (1988). The statutory seller requirement does not apply to the Exchange Act claims.
20 Plaintiff here has failed to allege how or why he purchased ICP tokens, which should result
21 in the dismissal of his Securities Act claims on demurrer, because he does not satisfy the statutory
22 seller requirement. But that dismissal would have no impact on the Exchange Act claims in the
23 Federal Action. Even if Plaintiff could amend his Complaint to satisfy the statutory seller
24 requirement at the pleading stage, that would still not resolve the issue, as this Court could determine
25 at a later stage—even after trial—that the evidence showed that Defendants were not statutory
26 sellers.
27 Conversely, if the Court decides the statutory seller issue in Plaintiff’s favor on demurrer,
28 and even if Plaintiff ultimately prevailed on all of his claims, that would still not resolve the Federal
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1 Action, because the scope of the potential class for the Securities Act claims is narrower than for
2 the Exchange Act claims. To the extent class certification is proper in either action, any class that
3 could be certified in this Action would be a limited class, comprising only those who can satisfy
4 Section 12’s statutory seller requirement. In contrast, any class that may be certified in the Federal
5 Action on the Exchange Act claims would be without any such limitation. Even a judgment in
6 Plaintiff’s favor in this Action that allowed each class member to recover fully for all potential
7 damages could therefore resolve only the claims of those who satisfy the statutory seller
8 requirement. It would leave unresolved the claims of those who fail to satisfy this requirement, but
9 who could nevertheless assert Exchange Act claims in the Federal Action, and thus the matter would
10 proceed in any event.
11 Moreover, as discussed in Defendants’ memorandum in support of their Motion to Stay, see
12 Def. Dfinity USA Research, LLC’s Mem. of P. & A. in Supp. of Mot. to Stay (Oct. 27, 2021),
13 proceeding with this Action—an action that cannot fully resolve all claims brought in the Federal
14 Action—would do precisely what Caiafa counsels against: raise the specter of “unseemly conflicts”
15 and inconsistent judgments. Caiafa Prof’l Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App.
16 4th 800, 804 (1993). As this Court recognized during the stay hearing, one relevant consideration
17 for this Court and the federal court—applicable to all claims asserted in both actions—is whether
18 ICP tokens are securities. This is not, however, the only—or first—potentially dispositive question
19 that will be presented to both courts for decision. Absent a stay, both courts would need to decide
20 a number of other identical issues on a nearly identical timeline for the Securities Act claims,
21 including whether the purchases are domestic and therefore subject to U.S. securities laws, whether
22 each plaintiff adequately alleges that each Defendant is a statutory seller, and whether California
23 courts can exercise jurisdiction over Dfinity Foundation consistent with due process.1 The existence
24 of these identical issues heavily favors a stay. Furthermore, to the extent any class is certified as to
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26 1
The Federal Action is continuing to proceed apace. On February 3, 2022, Lead Plaintiff in the
Federal Action filed his Amended Class Action Complaint. See Am. Class Action Compl.,
27
Valenti v. DFINITY USA Research LLC, No. 21-cv-6118 (N.D. Cal. Feb. 3, 2022), Dkt. No. 45
28 (Liftik Decl. Ex. 1).
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1 the Securities Act claims in either action, the classes would be identical as between both actions,
2 reinforcing the likelihood of conflicting judgments.
3 Given the waste of judicial and party resources, and the real risk of inconsistent rulings
4 presented by having identical Securities Act claims proceed in parallel, the question is not whether
5 a stay should be granted, but rather which court should proceed. The Northern District of California
6 is the only forum in which both the Securities Act and the Exchange Act claims may be resolved.
7 Therefore, this Court should exercise its discretion to stay this Action in its entirety.
8 III. ARGUMENT
9 It is impossible to redress the imbalance of equities that results from the application of the
10 Caiafa factors to the facts and circumstances of this case in any way other than a stay of this Action.
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A. A Ruling in Defendants’ Favor on the Statutory Seller Element At Any Stage of
12 the State Action Would Have No Impact on the Federal Exchange Act Claims.
13 Liability under Section 12(a)(1) of the Securities Act is confined to the narrow set of
14 defendants termed “statutory sellers.” This is because Section 12(a)(1) imposes liability only on
15 “[a]ny person who ... offers or sells a security” in violation of the registration requirement in
16 Section 5 of the Securities Act. 15 U.S.C. § 77l(a)(1). The Supreme Court has construed this
17 provision to reach only (i) those who pass title of a security to the plaintiff and (ii) those “who
18 successfully solicit[] the purchase, motivated at least in part by a desire to serve [their] own financial
19 interests or those of the securities owner.” Pinter, 486 U.S. at 643-47 & n.21.
20 Where a plaintiff fails to plead that each defendant is a statutory seller as to him, any Section
21 12 claims must be dismissed as a matter of law. See, e.g., Pino v. Cardone Cap., LLC, No. 20-cv-
22 8499-JFW (KSx), 2021 WL 3502493, at *16 (C.D. Cal. Apr. 27, 2021) (dismissing Section 12 claim
23 for failure to satisfy first prong of Pinter where plaintiff “d[id] not allege in the FAC or argue in his
24 Opposition that either [defendant] passed title to the securities to the plaintiff”); Jensen v. iShares
25 Tr., 44 Cal. App. 5th 618, 647 (2020), review denied (May 27, 2020) (dismissing Section 12 claim
26 for failure to allege “direct and active participation in the solicitation of the immediate sale”
27 necessary to state a claim under the solicitation prong, “without which a defendant is simply not a
28 statutory seller”). Here, Plaintiff’s Complaint is devoid of any allegation that Defendants passed
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1 title directly to Plaintiff, and fails to specify even the most basic facts concerning when, why, or
2 how Plaintiff acquired ICP tokens. See Compl. ¶ 14 (alleging solely that “Plaintiff made purchases
3 of ICP between May 10, 2021 and June 25, 2021, and suffered losses on those investments”). If
4 this case is not stayed and proceeds to the demurrer stage, then Dfinity USA Research, LLC
5 (“Dfinity USA”) intends to argue that Plaintiff has failed to satisfy the requirements of Pinter.
6 By contrast, claims brought under the Exchange Act are not subject to any statutory seller
7 requirement. To prevail on the Exchange Act claims under Section 10(b) of the Exchange Act and
8 associated SEC Rule 10b-5, federal plaintiffs must plead—and prove—separate elements: (1) use
9 or employment of a manipulative or deceptive device or contrivance; (2) scienter; (3) a connection
10 with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.
11 ScripsAmerica, Inc. v. Ironridge Global LLC, 119 F. Supp. 3d 1213, 1235 (C.D. Cal. 2015) (internal
12 citations omitted). The other Exchange Act claims are derivative of these violations.2 The only
13 requirement is that the plaintiff be a purchaser or seller of securities. Blue Chip Stamps v. Manor
14 Drug Stores, 421 U.S. 723, 731-32 (1975). Anyone who purchased the alleged securities may bring
15 Exchange Act claims, regardless of whom the plaintiff purchased from.
16 Accordingly, a dismissal of the claims in this Action for failing to plead that Defendants
17 were statutory sellers would have no impact on the Exchange Act claims in the Federal Action.
18 Simply put, the statutory seller inquiry is irrelevant to those claims, and resolution of this Action on
19 such grounds would thus have no impact whatsoever on the Exchange Act claims pending in the
20 Federal Action. See, e.g., Mabon, Nugent & Co. v. Borey, 127 B.R. 727, 734-35 (S.D.N.Y. 1991)
21 (dismissing Section 12 Securities Act claim for failure to plead that defendants were statutory
22 sellers, and denying motion to dismiss Section 10(b) Exchange Act claims, which lacked a statutory
23 seller requirement).
24 Even if Plaintiff were able to amend his Complaint to satisfy the statutory seller requirement
25 at the pleading stage, that would still not resolve the issue, as this Court could determine at a later
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Section 20(a) and Section 20A both require an independent violation of Section 10(b) and are
27 properly dismissed where there is no predicate claim for liability. See, e.g., Johnson v. Aljian, 490
28 F.3d 778, 781 (9th Cir. 2007) (“Claims under Section 20A are derivative and therefore require an
independent violation of the Exchange Act.”).
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1 stage—even after trial—that the evidence showed that Defendants were not statutory sellers. See
2 In re All. Equip. Lease Program Sec. Litig., No. 98-cv-2150-J (NLS), 2002 WL 34451621, at *6-11
3 (S.D. Cal. Oct. 15, 2002) (granting summary judgment on statutory seller grounds); Fed. Housing
4 Fin. Agency v. Nomura Holding Am., Inc., No. 11cv6201 (DLC), 2015 WL 629336, at *1 (S.D.N.Y.
5 Feb. 13, 2015) (recognizing that statutory seller element of Section 12 claim must be proved at
6 trial).3 Thus, even after potentially years of costly litigation in this Action, the parties could still be
7 required to fully litigate the Exchange Act claims in the Federal Action.
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B. The Scope of the Potential Class for the Securities Act Claims Is Narrower Than
9 for the Exchange Act Claims, Due to the Statutory Seller Requirement.
10 If this Action and/or the Federal Action survive Dfinity USA’s demurrer and motion to
11 dismiss, then one or both courts will need to decide whether or not to certify a class, including
12 whether common questions of law and fact predominate. Noel v. Thrifty Payless, Inc., 7 Cal. 5th
13 955, 968-69 (2019). Any class that may be certified with respect to the Securities Act claims in
14 either this Action or in the Federal Action would need to be a limited class, comprising only those
15 who can satisfy Section 12’s statutory seller requirement. 4 Feiner v. SS&C Techs., Inc., 47 F. Supp.
16 2d 250, 254-55 (D. Conn. 1999) (certifying only limited subclass for plaintiffs bringing Section
17 12(a)(2) claim, consisting of those plaintiffs who had purchased directly from defendants). It is
18 probable that there are members of the proposed class who cannot meet the statutory seller element
19 because, as recognized in Feiner, “proposed class members who purchased shares [from an indirect
20 seller without direct solicitation] have no standing to sue [defendants] under § 12(a)(2).” Id. at 254.
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The statutory seller analysis applies equally to claims brought under Sections 12(a)(1) and
24 12(a)(2) “because of the identical language used in the two sections.” Jensen, 44 Cal. App. 5th at
646, n.19.
4
25 Plaintiff’s Securities Act claims may not meet the requirements for class certification, as such
claims require individualized determinations that each plaintiff was either directly sold ICP tokens
26 by Defendants or was directly solicited by Defendants to purchase tokens. See Glosser v. Cellcor
Inc., No. 12725, 1995 WL 106527, at *3 (Del. Ch. Mar. 10, 1995) (denying class certification as
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to Section 12 claims because statutory seller requirement is an individualized determination
28 weighing against finding a class action to be the superior method of adjudication).
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1 And, unlike in Feiner, this Action does not include any other predicate claim upon which a broader
2 class could be certified.
3 Meanwhile, the Federal Action includes Exchange Act claims under Section 10(b) and Rule
4 10b-5, for which a broader possible class could be certified. As recognized in Mabon, Nugent &
5 Co., Section 10(b) claims can be broader than Section 12 claims, permitting recovery even when the
6 defendant is not a statutory seller. 127 B.R. at 739. The scope of the potential class for the Exchange
7 Act claims could encompass all persons who purchased ICP tokens—including Plaintiff in this
8 Action—rather than solely those who can prove that Defendants were statutory sellers.
9 Given the different scope of the two potential classes in the two Actions, even a full
10 resolution of this Action in Plaintiff’s favor would not eliminate the need to resolve the Exchange
11 Act claims for the broader class. This strongly counsels in favor of granting a stay.
12 C. The “What If?” Question: What Happens After Class Certification?
13 If this Action survives Dfinity USA’s demurrer and if this Court finds sufficient
14 commonality of issues to certify a class in this Action, then the parties will proceed to lengthy and
15 costly discovery, during which the Federal Action would continue to proceed in parallel. Following
16 fact and expert discovery, motions for summary judgment will likely be filed that present the
17 question whether there is a genuine issue of material fact for trialas to whether ICP tokens are
18 securities. This Court would be asked to decide that question based on the Complaint and the entire
19 evidentiary record.
20 This gives rise to hypothetical scenarios, which do not avoid the need for a stay under Caiafa.
21 First, if this Court were to find that ICP tokens are not securities, and there were either no appeal
22 or the appellate court affirmed, then that finding would completely resolve the Securities Act claims,
23 requiring judgment in Defendants’ favor. In the Federal Action, Dfinity USA would move the court
24 to adopt this Court’s ruling for the Exchange Act claims as well. If the federal court did so (likewise
25 finding that ICP tokens are not securities as to all plaintiffs there represented), then that finding
26 would completely resolve the claims, requiring judgment in Defendants’ favor. If, however, the
27 federal court did not adopt this Court’s ruling, then that would necessitate further proceedings in the
28 Federal Action and would also create inconsistent rulings as to whether ICP tokens are securities.
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1 Second, if this Court were to find that ICP tokens are securities and the appellate court were
2 to affirm, then the federal court would apply principles of preclusion to decide that issue. See, e.g.,
3 White v. City of Pasadena, 671 F.3d 918, 926-28 (9th Cir. 2012) (discussing framework for
4 analyzing when state court decision has preclusive effect on federal proceeding and reviewing
5 California’s preclusion principles); see also Grisham v. Philip Morris, Inc., 670 F. Supp. 2d 1014,
6 1029 (C.D. Cal. 2009) (district courts exercise broad discretion in determining whether to apply
7 issue preclusion). But even if the federal court were also to find that ICP tokens are securities, it
8 would not obviate plaintiff’s burden to prove the other elements of its claims by a preponderance of
9 evidence at trial. Nor would this Court’s order determine claims or appropriate relief, if any, for the
10 potentially broader class on the Exchange Act claims in the Federal Action, including those who are
11 not members of any Securities Act class. Accordingly, it is only through a stay of this Action that
12 these issues can be fully resolved in one courthouse in California.
13 IV. CONCLUSION
14 Put simply, if this Court does not stay this Action, then this Action and the Federal Action
15 will proceed—in parallel—through time consuming, expensive, and largely duplicative litigation,
16 and resolution of the Securities Act claims likely will not resolve the Exchange Act claims. For the
17 foregoing reasons and those set forth in Dfinity USA’s prior briefing and argument, this Court
18 should stay this Action in its entirety pending resolution of the Federal Action.
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1 Date: February 9, 2022 CRAVATH, SWAINE & MOORE LLP
2 /s/ Kevin J. Orsini
Antony L. Ryan (admitted pro hac vice)
3 Kevin J. Orsini (admitted pro hac vice)
Lauren M. Rosenberg (admitted pro hac vice)
4
Worldwide Plaza
5 825 Eighth Avenue
New York, New York 10019
6 Tel.: (212) 474-1000
Fax: (212) 474-3700
7 aryan@cravath.com
8 korsini@cravath.com
lrosenberg@cravath.com
9
Counsel for Defendant Dfinity USA Research, LLC
10
QUINN EMANUEL URQUHART & SULLIVAN LLP
11
/s/ Michael E. Liftik
12
Michael E. Liftik (CA Bar No. 232430)
13 Sarah Heaton Concannon (admitted pro hac vice)
1300 I Street, Suite 900
14 Washington, D.C. 20005
Telephone: (202) 538-8000
15
michaelliftik@quinnemanuel.com
16
Emily C. Kapur (CA Bar No. 306724)
17 555 Twin Dolphin Dr., 5th Fl.
Redwood Shores, California 94065
18 Telephone: (650) 801-5000
19 emilykapur@quinnemanuel.com
20 Brenna Nelinson (admitted pro hac vice)
51 Madison Avenue, 22nd Fl.
21 New York, New York 10010
Telephone: (212) 849-7000
22 brennanelinson@quinnemanuel.com
23
Counsel for Defendant Dfinity USA Research, LLC
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Preview
1 Michael E. Liftik (CA Bar No. 232430) Sarah Heaton Concannon (pro hac vice) 2 QUINN EMANUEL URQUHART & SULLIVAN, LLP 1300 I Street, Suite 900 3 Washington, D.C. 20005 4 Telephone: (202) 538-8000 michaelliftik@quinnemanuel.com 5 sarahconcannon@quinnemanuel.com 6 Emily C. Kapur (CA Bar No. 306724) 555 Twin Dolphin Dr., 5th Fl. 7 Redwood Shores, California 94065 8 Telephone: (650) 801-5000 emilykapur@quinnemanuel.com 9 Brenna Nelinson (pro hac vice) 10 51 Madison Avenue, 22nd Fl. 11 New York, New York 10010 Telephone: (212) 849-7000 12 brennanelinson@quinnemanuel.com 13 [Additional Counsel on Signature Page] 14 Attorneys for Defendant Dfinity USA Research, LLC 15 SUPERIOR COURT OF THE STATE OF CALIFORNIA 16 COUNTY OF SAN MATEO 17 DANIEL OCAMPO, Individually and on Case No. 21-CIV-03843 18 Behalf of All Others Similarly Situated, CLASS ACTION 19 Plaintiff, DEFENDANT DFINITY USA 20 RESEARCH, LLC’S v. SUPPLEMENTAL BRIEF IN 21 SUPPORT OF MOTION TO STAY DFINITY USA RESEARCH LLC, DFINITY 22 STIFTUNG, AH CAPITAL MANAGEMENT, L.L.C., POLYCHAIN CAPITAL, DOMINIC Hon. Danny Y. Chou 23 WILLIAMS, and JOHN DOES 1-20, Dept. 22 – Ctrm. K 24 Defendants. Date Action Filed: July 15, 2021 25 Date: February 18, 2022 26 27 28 Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 TABLE OF CONTENTS 2 I. QUESTION PRESENTED.............................................................................................. 1 3 II. BRIEF ANSWER ............................................................................................................ 1 4 III. ARGUMENT .................................................................................................................. 3 5 A. A Ruling in Defendants’ Favor on the Statutory Seller Element At Any 6 Stage of the State Action Would Have No Impact on the Federal Exchange Act Claims. .......................................................................................................... 3 7 B. The Scope of the Potential Class for the Securities Act Claims Is Narrower 8 Than for the Exchange Act Claims, Due to the Statutory Seller Requirement. ....................................................................................................... 5 9 C. The “What If?” Question: What Happens After Class Certification? ................... 6 10 IV. CONCLUSION ............................................................................................................... 7 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -i- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 TABLE OF AUTHORITIES 2 Page 3 Cases 4 In re All. Equip. Lease Program Sec. Litig., No. 98-cv-2150-J(NLS), 2002 WL 34451621 (S.D. Cal. Oct. 15, 2002) .................................. 5 5 Blue Chip Stamps v. Manor Drug Stores, 6 421 U.S. 723 (1975) ................................................................................................................ 4 7 Caiafa Prof’l Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App. 4th 800 (1993) ............................................................................................ 2, 3, 6 8 Fed. Housing Fin. Agency v. Nomura Holding Am., Inc., 9 No. 11cv6201(DLC), 2015 WL 629336 (S.D.N.Y. Feb. 13, 2015)........................................... 5 10 Feiner v. SS&C Techs., Inc., 47 F. Supp. 2d 250 (D. Conn. 1999) .................................................................................... 5, 6 11 Glosser v. Cellcor Inc., 12 No. 12725, 1995 WL 106527 (Del. Ch. Mar. 10, 1995) ........................................................... 5 13 Grisham v. Philip Morris, Inc., 670 F. Supp. 2d 1014 (C.D. Cal. 2009) .................................................................................... 7 14 Jensen v. iShares Tr., 15 44 Cal. App. 5th 618 (2020) ................................................................................................ 3, 5 16 Johnson v. Aljian, 490 F.3d 778 (9th Cir. 2007) ................................................................................................... 4 17 Mabon, Nugent & Co. v. Borey, 18 127 B.R. 727 (S.D.N.Y. 1991)............................................................................................. 4, 6 19 Noel v. Thrifty Payless, Inc., 7 Cal. 5th 955 (2019)............................................................................................................... 5 20 Pino v. Cardone Cap., LLC, 21 No. 20-cv-8499-JFW(KSx), 2021 WL 3502493 (C.D. Cal. Apr. 27, 2021) .............................. 3 22 Pinter v. Dahl, 486 U.S. 622 (1988) ........................................................................................................ 1, 3, 4 23 ScripsAmerica, Inc. v. Ironridge Global LLC, 24 119 F. Supp. 3d 1213 (C.D. Cal. 2015) .................................................................................... 4 25 Valenti v. DFINITY USA Research LLC, No. 21-cv-6118 (N.D. Cal. Feb. 3, 2022) ................................................................................. 2 26 White v. City of Pasadena, 27 671 F.3d 918 (9th Cir. 2012) ................................................................................................... 7 28 -ii- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 Statutory Authorities 2 15 U.S.C. § 77l(a)(1)..................................................................................................................... 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -iii- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 I. QUESTION PRESENTED 2 “[W]hether the resolution of the claims under the Securities [] Act of 1933 asserted in this 3 action and the related federal action would, as a matter of law or as a practical matter, obviate the 4 need to resolve or render moot the claims under the Securities Exchange Act of 1934 asserted solely 5 in the federal action.” Case Management Order #2, ¶ 1 (Jan. 27, 2022). 6 II. BRIEF ANSWER 7 Unless this Court rules for Defendants at summary judgment or trial that ICP is not a 8 security, resolution of the claims brought under the Securities Act of 1933 (the “Securities Act”) in 9 this Action likely would not, as a matter of law or as a practical matter, obviate the need to resolve 10 the claims brought under the Securities Exchange Act of 1934 (the “Exchange Act”) in the action 11 pending in the Northern District of California (the “Federal Action”). 12 The answer to the Court’s question can be resolved by focusing on a single key difference 13 that merits a stay of this Action: the statutory seller requirement, which is particular to claims under 14 Section 12 of the Securities Act and has no relevance to the Exchange Act claims unique to the 15 Federal Action. Specifically, to succeed on a Securities Act Section 12 claim, a plaintiff must prove 16 that each defendant was a “statutory seller”—i.e. that the defendant either directly sold him 17 unregistered securities or solicited his sale of unregistered securities, motivated at least in part by a 18 desire to serve its own financial interests or those of the securities owner. Pinter v. Dahl, 486 U.S. 19 622, 647 (1988). The statutory seller requirement does not apply to the Exchange Act claims. 20 Plaintiff here has failed to allege how or why he purchased ICP tokens, which should result 21 in the dismissal of his Securities Act claims on demurrer, because he does not satisfy the statutory 22 seller requirement. But that dismissal would have no impact on the Exchange Act claims in the 23 Federal Action. Even if Plaintiff could amend his Complaint to satisfy the statutory seller 24 requirement at the pleading stage, that would still not resolve the issue, as this Court could determine 25 at a later stage—even after trial—that the evidence showed that Defendants were not statutory 26 sellers. 27 Conversely, if the Court decides the statutory seller issue in Plaintiff’s favor on demurrer, 28 and even if Plaintiff ultimately prevailed on all of his claims, that would still not resolve the Federal -1- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 Action, because the scope of the potential class for the Securities Act claims is narrower than for 2 the Exchange Act claims. To the extent class certification is proper in either action, any class that 3 could be certified in this Action would be a limited class, comprising only those who can satisfy 4 Section 12’s statutory seller requirement. In contrast, any class that may be certified in the Federal 5 Action on the Exchange Act claims would be without any such limitation. Even a judgment in 6 Plaintiff’s favor in this Action that allowed each class member to recover fully for all potential 7 damages could therefore resolve only the claims of those who satisfy the statutory seller 8 requirement. It would leave unresolved the claims of those who fail to satisfy this requirement, but 9 who could nevertheless assert Exchange Act claims in the Federal Action, and thus the matter would 10 proceed in any event. 11 Moreover, as discussed in Defendants’ memorandum in support of their Motion to Stay, see 12 Def. Dfinity USA Research, LLC’s Mem. of P. & A. in Supp. of Mot. to Stay (Oct. 27, 2021), 13 proceeding with this Action—an action that cannot fully resolve all claims brought in the Federal 14 Action—would do precisely what Caiafa counsels against: raise the specter of “unseemly conflicts” 15 and inconsistent judgments. Caiafa Prof’l Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App. 16 4th 800, 804 (1993). As this Court recognized during the stay hearing, one relevant consideration 17 for this Court and the federal court—applicable to all claims asserted in both actions—is whether 18 ICP tokens are securities. This is not, however, the only—or first—potentially dispositive question 19 that will be presented to both courts for decision. Absent a stay, both courts would need to decide 20 a number of other identical issues on a nearly identical timeline for the Securities Act claims, 21 including whether the purchases are domestic and therefore subject to U.S. securities laws, whether 22 each plaintiff adequately alleges that each Defendant is a statutory seller, and whether California 23 courts can exercise jurisdiction over Dfinity Foundation consistent with due process.1 The existence 24 of these identical issues heavily favors a stay. Furthermore, to the extent any class is certified as to 25 26 1 The Federal Action is continuing to proceed apace. On February 3, 2022, Lead Plaintiff in the Federal Action filed his Amended Class Action Complaint. See Am. Class Action Compl., 27 Valenti v. DFINITY USA Research LLC, No. 21-cv-6118 (N.D. Cal. Feb. 3, 2022), Dkt. No. 45 28 (Liftik Decl. Ex. 1). -2- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 the Securities Act claims in either action, the classes would be identical as between both actions, 2 reinforcing the likelihood of conflicting judgments. 3 Given the waste of judicial and party resources, and the real risk of inconsistent rulings 4 presented by having identical Securities Act claims proceed in parallel, the question is not whether 5 a stay should be granted, but rather which court should proceed. The Northern District of California 6 is the only forum in which both the Securities Act and the Exchange Act claims may be resolved. 7 Therefore, this Court should exercise its discretion to stay this Action in its entirety. 8 III. ARGUMENT 9 It is impossible to redress the imbalance of equities that results from the application of the 10 Caiafa factors to the facts and circumstances of this case in any way other than a stay of this Action. 11 A. A Ruling in Defendants’ Favor on the Statutory Seller Element At Any Stage of 12 the State Action Would Have No Impact on the Federal Exchange Act Claims. 13 Liability under Section 12(a)(1) of the Securities Act is confined to the narrow set of 14 defendants termed “statutory sellers.” This is because Section 12(a)(1) imposes liability only on 15 “[a]ny person who ... offers or sells a security” in violation of the registration requirement in 16 Section 5 of the Securities Act. 15 U.S.C. § 77l(a)(1). The Supreme Court has construed this 17 provision to reach only (i) those who pass title of a security to the plaintiff and (ii) those “who 18 successfully solicit[] the purchase, motivated at least in part by a desire to serve [their] own financial 19 interests or those of the securities owner.” Pinter, 486 U.S. at 643-47 & n.21. 20 Where a plaintiff fails to plead that each defendant is a statutory seller as to him, any Section 21 12 claims must be dismissed as a matter of law. See, e.g., Pino v. Cardone Cap., LLC, No. 20-cv- 22 8499-JFW (KSx), 2021 WL 3502493, at *16 (C.D. Cal. Apr. 27, 2021) (dismissing Section 12 claim 23 for failure to satisfy first prong of Pinter where plaintiff “d[id] not allege in the FAC or argue in his 24 Opposition that either [defendant] passed title to the securities to the plaintiff”); Jensen v. iShares 25 Tr., 44 Cal. App. 5th 618, 647 (2020), review denied (May 27, 2020) (dismissing Section 12 claim 26 for failure to allege “direct and active participation in the solicitation of the immediate sale” 27 necessary to state a claim under the solicitation prong, “without which a defendant is simply not a 28 statutory seller”). Here, Plaintiff’s Complaint is devoid of any allegation that Defendants passed -3- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 title directly to Plaintiff, and fails to specify even the most basic facts concerning when, why, or 2 how Plaintiff acquired ICP tokens. See Compl. ¶ 14 (alleging solely that “Plaintiff made purchases 3 of ICP between May 10, 2021 and June 25, 2021, and suffered losses on those investments”). If 4 this case is not stayed and proceeds to the demurrer stage, then Dfinity USA Research, LLC 5 (“Dfinity USA”) intends to argue that Plaintiff has failed to satisfy the requirements of Pinter. 6 By contrast, claims brought under the Exchange Act are not subject to any statutory seller 7 requirement. To prevail on the Exchange Act claims under Section 10(b) of the Exchange Act and 8 associated SEC Rule 10b-5, federal plaintiffs must plead—and prove—separate elements: (1) use 9 or employment of a manipulative or deceptive device or contrivance; (2) scienter; (3) a connection 10 with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. 11 ScripsAmerica, Inc. v. Ironridge Global LLC, 119 F. Supp. 3d 1213, 1235 (C.D. Cal. 2015) (internal 12 citations omitted). The other Exchange Act claims are derivative of these violations.2 The only 13 requirement is that the plaintiff be a purchaser or seller of securities. Blue Chip Stamps v. Manor 14 Drug Stores, 421 U.S. 723, 731-32 (1975). Anyone who purchased the alleged securities may bring 15 Exchange Act claims, regardless of whom the plaintiff purchased from. 16 Accordingly, a dismissal of the claims in this Action for failing to plead that Defendants 17 were statutory sellers would have no impact on the Exchange Act claims in the Federal Action. 18 Simply put, the statutory seller inquiry is irrelevant to those claims, and resolution of this Action on 19 such grounds would thus have no impact whatsoever on the Exchange Act claims pending in the 20 Federal Action. See, e.g., Mabon, Nugent & Co. v. Borey, 127 B.R. 727, 734-35 (S.D.N.Y. 1991) 21 (dismissing Section 12 Securities Act claim for failure to plead that defendants were statutory 22 sellers, and denying motion to dismiss Section 10(b) Exchange Act claims, which lacked a statutory 23 seller requirement). 24 Even if Plaintiff were able to amend his Complaint to satisfy the statutory seller requirement 25 at the pleading stage, that would still not resolve the issue, as this Court could determine at a later 26 2 Section 20(a) and Section 20A both require an independent violation of Section 10(b) and are 27 properly dismissed where there is no predicate claim for liability. See, e.g., Johnson v. Aljian, 490 28 F.3d 778, 781 (9th Cir. 2007) (“Claims under Section 20A are derivative and therefore require an independent violation of the Exchange Act.”). -4- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 stage—even after trial—that the evidence showed that Defendants were not statutory sellers. See 2 In re All. Equip. Lease Program Sec. Litig., No. 98-cv-2150-J (NLS), 2002 WL 34451621, at *6-11 3 (S.D. Cal. Oct. 15, 2002) (granting summary judgment on statutory seller grounds); Fed. Housing 4 Fin. Agency v. Nomura Holding Am., Inc., No. 11cv6201 (DLC), 2015 WL 629336, at *1 (S.D.N.Y. 5 Feb. 13, 2015) (recognizing that statutory seller element of Section 12 claim must be proved at 6 trial).3 Thus, even after potentially years of costly litigation in this Action, the parties could still be 7 required to fully litigate the Exchange Act claims in the Federal Action. 8 B. The Scope of the Potential Class for the Securities Act Claims Is Narrower Than 9 for the Exchange Act Claims, Due to the Statutory Seller Requirement. 10 If this Action and/or the Federal Action survive Dfinity USA’s demurrer and motion to 11 dismiss, then one or both courts will need to decide whether or not to certify a class, including 12 whether common questions of law and fact predominate. Noel v. Thrifty Payless, Inc., 7 Cal. 5th 13 955, 968-69 (2019). Any class that may be certified with respect to the Securities Act claims in 14 either this Action or in the Federal Action would need to be a limited class, comprising only those 15 who can satisfy Section 12’s statutory seller requirement. 4 Feiner v. SS&C Techs., Inc., 47 F. Supp. 16 2d 250, 254-55 (D. Conn. 1999) (certifying only limited subclass for plaintiffs bringing Section 17 12(a)(2) claim, consisting of those plaintiffs who had purchased directly from defendants). It is 18 probable that there are members of the proposed class who cannot meet the statutory seller element 19 because, as recognized in Feiner, “proposed class members who purchased shares [from an indirect 20 seller without direct solicitation] have no standing to sue [defendants] under § 12(a)(2).” Id. at 254. 21 22 23 3 The statutory seller analysis applies equally to claims brought under Sections 12(a)(1) and 24 12(a)(2) “because of the identical language used in the two sections.” Jensen, 44 Cal. App. 5th at 646, n.19. 4 25 Plaintiff’s Securities Act claims may not meet the requirements for class certification, as such claims require individualized determinations that each plaintiff was either directly sold ICP tokens 26 by Defendants or was directly solicited by Defendants to purchase tokens. See Glosser v. Cellcor Inc., No. 12725, 1995 WL 106527, at *3 (Del. Ch. Mar. 10, 1995) (denying class certification as 27 to Section 12 claims because statutory seller requirement is an individualized determination 28 weighing against finding a class action to be the superior method of adjudication). -5- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 And, unlike in Feiner, this Action does not include any other predicate claim upon which a broader 2 class could be certified. 3 Meanwhile, the Federal Action includes Exchange Act claims under Section 10(b) and Rule 4 10b-5, for which a broader possible class could be certified. As recognized in Mabon, Nugent & 5 Co., Section 10(b) claims can be broader than Section 12 claims, permitting recovery even when the 6 defendant is not a statutory seller. 127 B.R. at 739. The scope of the potential class for the Exchange 7 Act claims could encompass all persons who purchased ICP tokens—including Plaintiff in this 8 Action—rather than solely those who can prove that Defendants were statutory sellers. 9 Given the different scope of the two potential classes in the two Actions, even a full 10 resolution of this Action in Plaintiff’s favor would not eliminate the need to resolve the Exchange 11 Act claims for the broader class. This strongly counsels in favor of granting a stay. 12 C. The “What If?” Question: What Happens After Class Certification? 13 If this Action survives Dfinity USA’s demurrer and if this Court finds sufficient 14 commonality of issues to certify a class in this Action, then the parties will proceed to lengthy and 15 costly discovery, during which the Federal Action would continue to proceed in parallel. Following 16 fact and expert discovery, motions for summary judgment will likely be filed that present the 17 question whether there is a genuine issue of material fact for trialas to whether ICP tokens are 18 securities. This Court would be asked to decide that question based on the Complaint and the entire 19 evidentiary record. 20 This gives rise to hypothetical scenarios, which do not avoid the need for a stay under Caiafa. 21 First, if this Court were to find that ICP tokens are not securities, and there were either no appeal 22 or the appellate court affirmed, then that finding would completely resolve the Securities Act claims, 23 requiring judgment in Defendants’ favor. In the Federal Action, Dfinity USA would move the court 24 to adopt this Court’s ruling for the Exchange Act claims as well. If the federal court did so (likewise 25 finding that ICP tokens are not securities as to all plaintiffs there represented), then that finding 26 would completely resolve the claims, requiring judgment in Defendants’ favor. If, however, the 27 federal court did not adopt this Court’s ruling, then that would necessitate further proceedings in the 28 Federal Action and would also create inconsistent rulings as to whether ICP tokens are securities. -6- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 Second, if this Court were to find that ICP tokens are securities and the appellate court were 2 to affirm, then the federal court would apply principles of preclusion to decide that issue. See, e.g., 3 White v. City of Pasadena, 671 F.3d 918, 926-28 (9th Cir. 2012) (discussing framework for 4 analyzing when state court decision has preclusive effect on federal proceeding and reviewing 5 California’s preclusion principles); see also Grisham v. Philip Morris, Inc., 670 F. Supp. 2d 1014, 6 1029 (C.D. Cal. 2009) (district courts exercise broad discretion in determining whether to apply 7 issue preclusion). But even if the federal court were also to find that ICP tokens are securities, it 8 would not obviate plaintiff’s burden to prove the other elements of its claims by a preponderance of 9 evidence at trial. Nor would this Court’s order determine claims or appropriate relief, if any, for the 10 potentially broader class on the Exchange Act claims in the Federal Action, including those who are 11 not members of any Securities Act class. Accordingly, it is only through a stay of this Action that 12 these issues can be fully resolved in one courthouse in California. 13 IV. CONCLUSION 14 Put simply, if this Court does not stay this Action, then this Action and the Federal Action 15 will proceed—in parallel—through time consuming, expensive, and largely duplicative litigation, 16 and resolution of the Securities Act claims likely will not resolve the Exchange Act claims. For the 17 foregoing reasons and those set forth in Dfinity USA’s prior briefing and argument, this Court 18 should stay this Action in its entirety pending resolution of the Federal Action. 19 20 21 22 23 24 25 26 27 28 -7- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY 1 Date: February 9, 2022 CRAVATH, SWAINE & MOORE LLP 2 /s/ Kevin J. Orsini Antony L. Ryan (admitted pro hac vice) 3 Kevin J. Orsini (admitted pro hac vice) Lauren M. Rosenberg (admitted pro hac vice) 4 Worldwide Plaza 5 825 Eighth Avenue New York, New York 10019 6 Tel.: (212) 474-1000 Fax: (212) 474-3700 7 aryan@cravath.com 8 korsini@cravath.com lrosenberg@cravath.com 9 Counsel for Defendant Dfinity USA Research, LLC 10 QUINN EMANUEL URQUHART & SULLIVAN LLP 11 /s/ Michael E. Liftik 12 Michael E. Liftik (CA Bar No. 232430) 13 Sarah Heaton Concannon (admitted pro hac vice) 1300 I Street, Suite 900 14 Washington, D.C. 20005 Telephone: (202) 538-8000 15 michaelliftik@quinnemanuel.com 16 Emily C. Kapur (CA Bar No. 306724) 17 555 Twin Dolphin Dr., 5th Fl. Redwood Shores, California 94065 18 Telephone: (650) 801-5000 19 emilykapur@quinnemanuel.com 20 Brenna Nelinson (admitted pro hac vice) 51 Madison Avenue, 22nd Fl. 21 New York, New York 10010 Telephone: (212) 849-7000 22 brennanelinson@quinnemanuel.com 23 Counsel for Defendant Dfinity USA Research, LLC 24 25 26 27 28 -8- Case No. 21-CIV-03843 DFINITY USA’S SUPPLEMENTAL BRIEF ISO MOTION TO STAY