On August 25, 2023, Judge Georgette Castner of the United States District Court for the District of New Jersey dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act against a company that supports and operates blockchain technologies and certain of its executives and investors. Takata v. Riot Blockchain, Inc., No. 18-cv-2293, slip op. (D.N.J. Aug. 25, 2023), ECF No. 251. The Court's prior decision dismissing the action with leave to amend was the subject of our prior post. As this was plaintiff's third amended complaint and the Court determined that plaintiff still failed to adequately allege misrepresentations or scienter, the Court dismissed the action with prejudice.

As discussed in our prior post, the crux of plaintiff's allegations was that the company, at the urging of an investor group that allegedly had perpetrated similar schemes previously, transitioned from being a biomedical company under a different name to operating a blockchain and cryptocurrency company in an effort to inflate the price of the company's shares so that certain investors could sell their stakes at inflated prices.

The Court first rejected plaintiff's argument that defendants' alleged failure to disclose that certain investors were acting as a group, as defined by Section 13(d) of the Exchange Act, violated Item 403 of Regulation S-K, giving rise to Rule l0b-5 liability. The Court noted that Item 403(a) requires disclosure of certain identifying information "with respect to any person (including any 'group' as that term is used in section 13(d)(3) of the Exchange act) who is known to the registrant to be the beneficial owner of more than five percent of any class of the registrant's voting securities." Slip op. at 15. Section 13(d) of the Exchange Act defines a "group" as "two or more persons [who] act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer." Id. The Court observed that a failure to adhere to Item 403(a) of Regulation S-K's disclosure requirements did not necessarily constitute a material misstatement or omission under Rule 10b-5. Id. Even if such an alleged failure to disclose were material, the Court also found that plaintiff failed to allege any activity demonstrating that the individual defendants were acting as a group for the purpose of acquiring, holding, or disposing of securities of the company. Id. The Court explained that plaintiff could not establish the individual defendants acted as a Section 13(d) group by pointing to investment activities they undertook at other companies and that plaintiff failed to provide allegations focused on the company at issue that suggested coordinated investment activity. Id. at 16–17.

The Court also noted that a failure to disclose pursuant to Item 404 of Regulation S-K and Item 1.01 of Form 8-K did not automatically give rise to liability under Rule 10b-5, Id. at 19, and found that plaintiff's alleged omissions suffered from other pleading deficiencies. With respect to Item 404, plaintiff argued the company failed to disclose an individual defendant was engaged in a related transaction, but the Court agreed with defendants that disclosure was not actually required pursuant to the SEC's Item 404 instructions with respect to one transaction, and otherwise failed to demonstrate why the fact they were a purchaser in a separate transaction amounted to a material omission that would have been viewed by a reasonable investor as having significantly altered the total mix of information available. Id. at 19–20. With respect to Item 1.01, the Court similarly found that an individual defendant's status as a shareholder in companies involved in related transactions were either not required or otherwise not material. Id. at 21.

The Court also found that separate statements in the company's registration statements, were not false or misleading in the absence of plausible allegations of a Section 13(d) group, accurately disclosed the status of individual defendants' investments in the company, and were otherwise inactionable puffery in as much as they noted they were not "worried" about the SEC and took "reporting obligations seriously and diligently file all reports" or otherwise denied engaging in stock manipulation. Id. at 22–24.

In addition, the Court reiterated that plaintiff's scheme liability claim still failed as it merely repackaged allegations the Court had otherwise found deficient as alleged misstatements and were instead labeled as part of a scheme, or otherwise had been dismissed for failure to allege loss causation and plaintiff still did not correct those prior deficiencies. Id. at 24–25.

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