In the Supreme Court of the. United States

Transcription

1 No In the Supreme Court of the United States THE CHARDIN NETWORK, AND FRANCOISE BOUVIER, v. HUNTER FOSS, Petitioner, Petitioner, Respondent. On Writ of Certiorari to the United States Court of Appeals For the Fourteenth Circuit BRIEF FOR THE RESPONDENT Team R11 Counsel for Respondent i

2 ii

3 QUESTIONS PRESENTED 1. Whether a digital token that operates on a blockchain protocol meets the statutory definition of a security under 15 U.S.C. 78j (2012) when investors parted with value, shared risks and benefits, and reasonably expected profits derived from the issuer s managerial efforts. 2. Whether involvement by a foreign issuer in a domestic transaction where the issuer knew the sale would occur in the United States may subject the issuer to liability under 15 U.S.C. 78j (2012) when fraudulent and misleading statements were made in connection to the transaction. i

4 TABLE OF CONTENTS Page QUESTIONS PRESENTED... i TABLE OF AUTHORITIES... iv STATEMENT OF THE CASE... 1 A. Factual Background Formation Of The Chardin Network ICO, White Paper, And First Unreported Cyber Attack The Chardin Network s Fraudulent U.S. Scheme With Pyrenees Sale Of Chards To Mr. Foss And Leaked Cyber Attack s... 4 B. Procedural History... 5 SUMMARY OF THE ARGUMENT... 5 ARGUMENT... 7 I. THE UNDERLYING POLICIES OF FEDERAL SECURITIES LAW REQUIRE THAT CHARDS BE TREATED AS A SECURITY UNDER THE SECURITIES ACT OF A. Chards Are Securities Because All Four Prongs Of Howey s Investment Contract Test Are Met In This Case The Chard Security Scheme Involved An Investment Of Money The Chardin Network Is A Common Enterprise Chard Investors Had A Reasonable Expectation Of Profits When They Purchased Chards ii

5 TABLE OF CONTENTS (Continued) 4. Chard Investors Expectations Of Profits Derived From The Entrepreneurial Or Managerial Efforts Of Others B. The Securities Act of 1933 Governs Chards Because Of The Act s Underlying Policy Of Curing Informational Asymmetry II. PETITIONERS ARE SUBJECT TO THE ANTI-FRAUD PROVISION OF THE SECURITIES EXCHANGE ACT OF 1934 BECAUSE THE SALE OF CHARDS WAS A DOMESTIC TRANSACTION A. The Sale Of Chards On A Domestic Over-The-Counter Market Is A Domestic Transaction Because The Market Is An American Stock Exchange B. Petitioners Incurred Irrevocable Liability In The United States To Deliver Chards To American Investors C. Petitioners Involvement In The Sale Of Chards To Mr.Foss Cannot Be Compared To The Role Of An Underlying Issuer In An American Depository Receipt Transaction CONCLUSION iii

6 TABLE OF AUTHORITIES CASES Page Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012)... passim Fargo Partners v. Dain Corp., 540 F.2d 912 (8th Cir. 1976) In re Volkswagen Clean Diesel Mktg., Sales Practices, & Prod. Liab. Litig., 2017 WL (N.D. Cal. Jan. 4, 2017)... 20, 29, 30 Int l Brotherhood of Teamsters v. Daniel, 439 U.S. 551 (1979) Long v. Schultz Cattle Co., Inc., 881 F.2d 129 (5th Cir. 1989)... 9 Marine Bank v. Weaver, 455 U.S. 551 (1982) Miller v. Cent. Chinchilla Group, Inc., 494 F.2d 414 (8th Cir. 1974)... 8 Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010)... passim Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2d Cir. 2014)... 26, 27 Pinker v. Roche Holdings, Ltd., 292 F.3d 361 (3d Cir. 2002)... 20, 28 Plumbers Union Local No. 12 Pension Fund v. Swiss Reinsurance Company, 753 F. Supp. 2d 166 (S.D.N.Y. 2010) Quail Cruises Ship Management Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011)... 24, 25, 26 Reves v. Ernst & Young, 494 U.S. 56 (1990)... 7, 8, 16 SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344 (1943)... 8, 11, 12, 13 SEC v. Edwards, 540 U.S. 389 (2004)... 8 SEC v. ETS Payphones, Inc., 300 F.3d 128 (11th Cir. 2002) SEC v. Ficeto, 839 F. Supp. 2d 1101 (C.D. Cal. 2011)... 19, 20, 21, 22 SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973)... 13, 14 iv

7 TABLE OF AUTHORITIES (Continued) SEC v. Merchant Cap., LLC, 483 F.3d 747 (11th Cir. 2007)... 14, 15 SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001)... 11, 12, 13 SEC v. Shavers, 2014 WL (E.D. Tex. Sept. 18, 2014)... 9, 18 SEC v. W.J. Howey Co., 328 U.S. 293 (1946)... passim Smith v. Gross, 604 F.2d 639 (9th Cir. 1979)... 8 State v. Hawaii Mkt. Ctr. Inc., 52 Haw. 642 (Haw. 1971) Stoyas v. Toshiba Corp., 191 F. Supp. 3d 1080 (C.D. Cal. 2016)... 27, 28, 29 Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971) United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975)... passim United States v. Bowman, 260 U.S. 94 (1922) United States v. Georgiou, 777 F.3d 125 (3d Cir. 2015)... 23, 25, 29 United States v. Mandell, 2011 WL (S.D.N.Y. Mar. 16, 2011) United States v. Vilar, 729 F.3d 62 (2d Cir. 2013)... 23, 25 Uselton v. Comm. Lovelace Motor Fright, Inc., 940 F.2d 564 (10th Cir. 1991)... 9 Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) STATUTES Page 15 U.S.C. 77b(a)(1) (2012) U.S.C. 78j(b) (2012) REGULATIONS 17 C.F.R , C.F.R g3-2(b) (2008)... 27, 28, 29, 30 v

8 TABLE OF AUTHORITIES (Continued) OTHER AUTHORITIES H.R. Rep No rd Cong., 1st Sess., at 11 (1933) S. Rep. No (1934) Securities Act Release No (Nov. 30, 1971), reported in Transfer Binder C.C.H. Fed. Sec. L. Rep. No Securities Act of 1933, 48 Stat. 74 (1933)... 7 Securities Exchange Act of 1934, 48 Stat. 881 (1934)... 7, 21 The DAO, Exchange Act Release No (July 25, 2017)... 17, 18 vi

9 STATEMENT OF THE CASE A. Factual Background 1. Formation Of The Chardin Network The Chardin Network, founded in 2015 by Francoise Bouvier ( Bouvier ), is a French business that offers a cryptocurrency ( Chards or Chard tokens ) issued and maintained on a blockchain. R.1. Before forming the Chardin Network, Bouvier reached out to Sabrina Bernard ( Bernard ), the founder and CEO of InforMe, which is a social media platform that allows users to share content. R Bernard told Bouvier that Chards could serve a valuable function on InforMe by allowing users to access premium content and skip advertisements. R. 2. Bouvier s wealthy friend and venture capitalist, Marcel Lagadere ( Lagadere ), provided 2 million euros for the Chardin Network s startup costs. Id. Lagadere also created a plan to raise additional capital by conducting an Initial Coin Offering ( ICO ). Id. Bouvier agreed to this plan. Id. After the ICO, Lagadere would hold 5 percent of Chards, Bouvier would hold 9 percent, a group of early investors (the Early Investors ) would hold 10 percent, the Chardin Network would retain 25 percent, and the remaining 51 percent would be sold to the public at large. Id. After Lagadere gathered ten wealthy Early Investors, the Chardin Network sold 10 percent of Chard tokens to the Early Investors on October 15, 2016 in a private token offering. R ICO, White Paper, And First Unreported Cyber Attack The Chardin Network scheduled an ICO for January 15, R. 3. To promote and market the Chardin Network to potential purchasers, Bouvier and 1

10 Lagadere drafted a white paper, which was posted on the Chardin Network website on November 20, Id. The white paper stated the Chardin Network will be composed of a seven-person leadership group (the Custodians ) that is responsible for managing day-to-day operations. R. 3. Six Custodians will be selected by the Early Investors, and Bouvier will be the final Custodian. Id. Token holders will elect a slate of six Investors Custodians at an annual token holder meeting. Id. The white paper s token utility provision provided that there will be a finite number of Chards, and after the ICO, a secondary market will allow anyone to buy and sell Chards through cryptocurrency exchanges. R. 4. The provision also provided that contract proposals from other social media platforms must be approved or rejected by a majority vote of the token holders. R Lastly, the security features provision of the white paper charges a Chardin Security Group ( Security Group ) with investigating any breaches in the Chardin Network. R. 5. In the event of a breach, the Security Group must immediately notify the Custodians. Id. The Custodians will then publicize the breach to the token holders in a detailed quarterly report made available on the Chardin website and distributed to all token holders. Id. On the morning of the ICO, Bouvier received an from Alixis Sarte ( Sarte ), head of the Security Group, before trading began. Id. The alerted Bouvier that 5 million euros worth of Chards were moved to an unknown digital wallet. Id. Bouvier and Sarte were able to recover the stolen Chards and transfer them back to the blockchain. R Bouvier failed to reveal the cyber attack to the public, Lagadere, or the other Custodians. R. 6. 2

11 Despite the unreported cyber attack, the ICO was a success. Id. Investors purchased 150 million euros worth of Chards. Id. Over the following week, Chards sold on the secondary market at a 23 percent premium over the initial ICO price. Id. In the month following the ICO, the Chardin Network received eight contract proposals. Id. At the first token holder meeting, token holders voted by a majority to approve the contract proposal submitted by MyBook, a rapidly growing South Asian social media platform. Id. Further, Chard prices soared on secondary markets after the first annual meeting. Id. 3. The Chardin Network s Fraudulent U.S Scheme With Pyrenees On June 7, 2017, Lagadere visited Bouvier s second home located in Pebble Beach, Fordham. Id. While in the United States, Lagadere met Madeline Mauriac ( Mauriac ), the CEO of Pyrenees, LLC ( Pyreness ), a cryptocurrency brokerage firm located in Fordham. R Lagadere and Mauriac discussed the achievements of the Chardin Network, and Lagadere attributed much of its success to the fact that the network had never experienced a cyber attack. R. 7. After Lagadere shared that he wanted the Chardin Network to contract with United States-based social media platforms, Mauriac proposed that Pyrenees could buy a large amount of Chards off of a cryptocurrency exchange, and then re-sell them in a private token sale to individuals in the United States. Id. Lagadere told Bouvier about his conversation with Mauriac. Id. Bouvier stated that he would not stop Pyrenees from purchasing Chards, but maintained that neither he nor the Chardin Network should be involved in the Pyrenees scheme. Id. Lagadere then informed Mauriac that Bouvier did not object to her 3

12 proposal. Id. In an effort to attract American investors, Lagadere and Mauriac posted Chardin Network marketing materials, including the white paper, to the Pyrenees website. Id. Neither Bouvier, Mauriac, Lagadere, nor anyone else from the Chardin Network communicated with the United States Securities and Exchange Commission ( SEC ) at any point regarding this scheme. Id. 4. Sale Of Chards To Mr. Foss And Leaked Cyber Attack s On July 29, 2017, Pyrenees purchased 8 million euros worth of Chard tokens off of a French cryptocurrency exchange. R. 8. On August 1, 2017, Hunter Foss, a seventy-eight-year-old farmer from Fordham, purchased 1.5 million euros worth of Chards from Pyrenees in an over-the-counter market transaction. Id. On August 21, 2017, the Fordham Observer, a major American newspaper, anonymously received a package containing printed copies of exchanges between Bouvier and Sarte. Id. The s revealed their discussions of the cyber attack that occurred on the morning of the ICO, as well as other cyber attacks that occurred subsequent to the ICO. Id. The quarterly reports posted to the Chardin website failed to mention any of the cyber attacks. Id. Within forty-eight hours, the value of Chard tokens decreased by 85 percent. Id. B. Procedural History 4

13 Hunter Foss ( Respondent ) filed a civil action against the Chardin Network and Francoise Bouvier (collectively the Petitioners ) in the District of Fordham. R. 8. The claim asserted that Chards are securities as the term is used in Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act ), and that Petitioners violated Section 10(b) when fraudulent and misleading statements were made in connection to the transaction at issue. Id. The District Court granted Petitioners motion to dismiss. R.9. Respondent timely appealed, and the Fourteenth Circuit reversed the District Court s decision. Id. The Fourteenth Circuit held that Chard tokens meet the statutory definition of a security under Section 10(b), and the transaction at issue satisfies Section 10(b) s domesticity requirement. SUMMARY OF THE ARGUMENT This case is about a foreign issuer involved in a domestic transaction in which fraudulent and misleading statements were made in connection to the sale of cryptocurrency securities. Thus, the issuer must be subject to liability under Section 10(b) s anti-fraud provision in the Exchange Act. I. Petitioners Chard tokens meet the statutory definition of a security under the Exchange Act because Petitioners investment scheme satisfies all four prongs of Howey s flexible investment contract test. The first prong is met because Chard token holders invested money in the Chardin Network. The second prong is met because Chardin Network is a common enterprise as defined under the horizontal commonality standard. The third prong is met because Chard investors purchased tokens with a reasonable 5

14 expectation of profits. Lastly, the fourth prong is met because Chard token holders expectation of profits derived from the entrepreneurial or managerial efforts of the Chardin Network. Further, there is no presence of comprehensive legislation governing cryptocurrencies. Thus, the Exchange Act s underlying policy of curing informational asymmetry requires that Chard tokens are governed by the Act. II. The domesticity requirement established in Morrison provides that Section 10(b) applies to fraudulent conduct that occurred outside of the United States when the security at issue is listed on an American stock exchange, or when the transaction involves the purchase or sale of any other security in the United States. The transaction here is domestic because the purchase occurred on a domestic over-the-counter market, satisfying the American stock exchange requirement. The transaction involved a purchase and sale in the United States. Further, the seller and purchaser both incurred irrevocable liability in the United States, and the title to the Chards passed in the United States. Moreover, the transaction satisfies the predominately foreign requirement of Parkcentral. Lastly, Petitioners involvement in the transaction cannot be compared to the role of an underlying issuer in an ADR transaction. Accordingly, because Chard tokens meet the statutory definition of a security, and because the transaction at issue is a domestic transaction that satisfies Morrison s domesticity requirement, the Fourteenth Circuit should be upheld, and Petitioners must be subject to liability under the anti-fraud provision of the Exchange Act. 6

15 ARGUMENT The Securities Act of 1933 ( Securities Act ) requires full and fair disclosures to prevent frauds in the sale of securities. Securities Act of 1933, 48 Stat. 74 (1933). The Securities Exchange Act of 1934 ( Exchange Act ) was enacted to prevent inequitable and unfair practices by regulating securities exchanges and over-the-counter markets. Securities Exchange Act of 1934, 48 Stat. 881 (1934). These Acts were designed to protect investors from fraudulent investment schemes, such as the scheme at issue here. Because this case involves a domestic over-the-counter transaction of securities, Petitioners must be found in violation of the Exchange Act s anti-fraud provision. I. THE UNDERLYING POLICIES OF FEDERAL SECURITIES LAW REQUIRE THAT CHARDS BE TREATED AS A SECURITY UNDER THE SECURITIES ACT OF A. Chards Are Securities Because All Four Prongs of Howey s Investment Contract Test Are Met In This Case Chard tokens are securities because they meet the four prongs of the flexible investment contract test delineated in SEC v. W.J. Howey Co. 328 U.S. 293, (1946). Section 2(1) of the Securities Act defines the term security. 15 U.S.C. 77b(a)(1). Congress purpose in enacting the securities laws was to regulate investments, in whatever form they are made and in whatever name they are called. Reves v. Ernst & Young, 494 U.S. 56, 61 (1990) (emphasis in original). The term security encompass[es] virtually any instrument that might be sold as an investment including investment 7

16 contracts. Id. at 61. An investment contract is a term without a definite character and encompasses [n]ovel, uncommon, or irregular devices. 1 In Howey, this Court determined that an investment contract exists where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of some one other than themselves. 328 U.S. at 298. The form of the alleged security must be disregarded for substance, and in determining whether an investment contract exists, there must be an emphasis on the economic reality of the scheme as a whole. Id. To constitute an investment contract, the alleged security must meet Howey s four prongs: (1) whether the scheme involves an investment of money ; (2) whether the investment of money was in a common enterprise ; (3) whether the investors purchased the alleged securities with a reasonable expectation of profits; and (4) whether investors expectation of profits derived from the entrepreneurial or managerial efforts of others. United Housing Found., Inc. v. Forman, 421 U.S. 837, 852 (1975). 1. The Chard Security Scheme Involved An Investment Of Money The first prong of Howey s investment contract test is met if the scheme involves an investment of money. 328 U.S. at 301. An investment of money 1 See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943); see e.g., Howey, 328 U.S. at 299 (finding that the offering of units of an orange grove was an investment contract and subject to Section 10(b) s anti-fraud provision); SEC v. Edwards, 540 U.S. 389, 397 (2004) (finding that payphone sale and leaseback arrangements were investment contracts and subject to Section 10(b) s anti-fraud provision); Smith v. Gross 604 F.2d 639, 643 (9th Cir. 1979) (finding that earthworm sale and buyback arrangements were investment contracts and subject to the federal securities laws); Miller v. Cent. Chinchilla Group, Inc., 494 F.2d 414, 418 (8th Cir. 1974) (finding that chinchilla sale and buyback arrangements were investment contracts and subject to Section 10(b) s anti-fraud provision). 8

17 does not have to take the form of cash when determining whether an investment contract exists, but it only has to take the form of some type of exchange of value. See Uselton v. Comm. Lovelace Motor Fright, Inc., 940 F.2d 564, 574 (10th Cir. 1991). For example, in the case of SEC v. Shavers, the court held that an investment of the virtual currency bitcoin met the first prong of Howey WL , at *1 (E.D. Tex. Sept. 18, 2014). In this case, the first prong is satisfied because the Chardin Network investors parted with value when they purchased Chard tokens. Similar to the bitcoin investors in Shavers, investors in the Chardin Network provided fiat currency or bitcoin in exchange for Chard tokens. Additionally, when Mr. Foss purchased Chard tokens on August 1, 2017, he paid 1.5 million dollars to Pyrenees. 2. The Chardin Network Is A Common Enterprise The second prong of Howey s investment contract test is met if the investment of money was in a common enterprise. 328 U.S. at 301. There is a split between the circuit courts on the definition of a common enterprise. Long v. Schultz Cattle Co., Inc., 881 F.2d 129, 140 (5th Cir. 1989). The Fifth, Ninth and Eleventh Circuits have focused on the vertical commonality between investors and the promoter. Id. However, the Third, Sixth, Seventh and Fourteenth Circuits have held that a showing of horizontal commonality a pooling of investors is necessary to meet the common enterprise requirement. Id. The horizontal commonality approach requires that the investors fortunes to be tied to each other and the overall success of the investment. Id. 9

18 Horizontal commonality focuses on the relationship among investors and is present when the individual investors share all the risks and benefits of the business enterprise. SEC v. ETS Payphones, Inc., 300 F.3d 128, 1284 (11th Cir. 2002), rev d on other grounds, 540 U.S. 389 (2004). In this case, the second prong is satisfied under the horizontal commonality standard because all Chard token investors shared in the pooling of the risks and benefits of the Chardin Network. Each investor, including Mr. Foss, shared the risks that would result from failure of the Chardin Network enterprise. All investors were exposed to the risk of the various security breaches that occurred in the Chardin Network. Investors were also exposed to the fluctuating value of Chards on the secondary market. This risk became an actual cost to all investors when the value of Chard tokens decreased by 85 percent after the exchanges regarding the cyber attacks on the enterprise were leaked. Additionally, each investor, including Mr. Foss, shared the benefits and profits of the enterprise because they all had equal voting rights that gave them control over the future direction of the Chardin Network. 3. Chard Investors Had A Reasonable Expectation Of Profits When They Purchased Chards The third prong of Howey s investment contract test is met if the investors purchased the alleged securities with a reasonable expectation of profits. See 328 U.S. at 301; Forman, 421 U.S. at 852. This court has recognized two situations that result in an expectation of profits : (1) anticipation in capital appreciation from the original investment, and (2) participation in future earnings resulting from the use of investors funds. 10

19 Forman, 421 U.S. at 852. An expectation of profits is not present in transactions where the investor purchases a commodity for consumption or personal use. Id. at 858. However, there are situations involving a mix of profit expectations and consumption motives. See e.g., id. at 853 (where the apartment sold by the cooperative enterprise was the main allure for prospective buyers, and the purchase of shares in the enterprise was no more than a secondary consideration); Joiner, 320 U.S. at 349 (finding that the prospect of exploratory drilling gave the investments most of their value and all of their lure, the leasehold interests were merely an incidental consideration in the purchase, and the combination resulted in an investment contract). In these cases, what must be determined is whether the purchasers main attraction was an expectation of profit or a consumption motive. See SEC v. SG Ltd., 265 F.3d 42, 53 (1st Cir. 2001). In determining the investors expectations, courts tend to review the information sellers give to potential purchasers before the transaction is executed and how the seller sought to attract those purchasers. See Forman, 421 U.S. at For example, in Forman, this Court reviewed the Information Bulletin distributed to potential purchasers, which stressed the nonprofit nature of the cooperative housing enterprise. Id. at 854. This Court concluded that the Information Bulletin did not seek to attract investors through possible future profits resulting from an investment in the enterprise because purchasers were merely seeking a place to live. Id. at

20 On the other hand, in Joiner, this Court concluded that the economic inducements made by promoters along with the assignment of leases of oil wells formed an investment contract. 320 U.S. at 348. This Court found the definitive factor was that the promoters circulated advertisements emphasizing the economic benefits to be gained from the investment. Id. However, the Court noted that if the economic inducement had been omitted, this factor would not be definitive. Id. Similarly, in SEC v. SG Ltd., the First Circuit found that the enterprise s representations of substantial economic gains fueled the investors expectations for profit. 265 F.3d at 54. This Court compared that case to Joiner, explaining that the enterprise s profit guarantees of monthly and annual returns were economic inducements. Id. In this case, the third prong is satisfied because investors purchased Chard tokens with a reasonable expectation of profits in anticipation of capital appreciation based on fluctuations of their original investments in the secondary market. When purchasing Chards, investors were mainly attracted to the investment scheme by a profit motive because they were able to sell Chards at a premium in a secondary market. Although Chard investors had somewhat of a consumptive motive to purchase tokens for use on InforMe or other social media platforms, this was merely an incidental consideration. To determine the Chard investors expectations of future profits, the Fourteenth Circuit examined the representations that the Chardin Network made in its white paper. Like the promoters economic inducements made in Joiner and SG Ltd., the Chardin Network made economic inducements by 12

21 guaranteeing that after the ICO, a secondary market will allow anyone to buy and sell Chard tokens through cryptocurrency exchanges. One week after the ICO, Chards were sold at a 23 percent premium over the initial ICO price on the secondary market. Additionally, Chard prices soared on secondary markets after the first annual meeting. The value of Chards continued to grow on the secondary market because Chard token investors expected the value of Chards to grow, and thus, expected a future profit. That the main attraction to Chards was a profit motive, not a consumptive motive is not changed by the fact that the white paper stated that Chards were utility tokens. The vast majority of information on the white paper explained to investors how they would be able to buy and sell Chard tokens through cryptocurrency exchanges, as well as the rights they would have as investors. The investors profit motive is further displayed by the fact that only a mere fifteen percent of all outstanding Chard tokens were spent on social media platforms two months after the ICO. A great majority of Chards were held by purchasers, rather than spent on social media platforms. 4. Chard Investors Expectations Of Profits Derived From The Entrepreneurial Or Managerial Efforts Of Others The fourth prong of Howey s investment contract test is met if the investors expectation of profits derived from the entrepreneurial or managerial efforts of others. See 328 U.S. at 301; Forman, 421 U.S. at 852. An investment contract is present when [t]he efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise. SEC v. Glenn W. Turner 13

22 Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973). The SEC itself has previously explained that the assignment of nominal or limited responsibilities to the participant does not negat[e] the existence of an investment contract. Securities Act Release No (Nov. 30, 1971), reported in Transfer Binder C.C.H. Fed. Sec. L. Rep. No The SEC further noted that where the duties assigned are so narrowly circumscribed as to involve little real choice of action or where the duties assigned would in any event have little direct effect upon receipt by the participant of the benefits promised by the promoters, a security may be found to exist. Id. An investment contract exists where the investor does not make significant efforts in the operation of an enterprise. State v. Hawaii Mkt. Ctr. Inc., 52 Haw. 642, 647 (Haw. 1971). A scheme which sells investments to inexperienced and unknowledgeable members of the general public cannot escape the reach of the securities laws merely because it advertised itself as aiming to attract investors who are knowledgeable about blockchain technology. See Williamson v. Tucker, 645 F.2d 404, 423 (5th Cir. 1981). The Fourteenth Circuit was correct in holding that [w]here investors are uniformed about the investment scheme that indicates to us that those investors do not have sufficient managerial control over the enterprise. R. 16 (citing Howey, 328 U.S. at 296; Fargo Partners v. Dain Corp., 540 F.2d 912, 915 (8th Cir. 1976)). Investors are said to obtain significant control over an enterprise if the investors are given information to make an informed decision. SEC v. Merchant Cap., LLC, 483 F.3d 747, (11th Cir. 2007) (holding the large amount of information 14

23 provided to investors was insufficient and much more data is necessary to make an informed decision ). However, the information must be significant. Id. The Chard token investors expectations of profits were derived from the entrepreneurial and managerial efforts of those in charge of the Chardin Network. The efforts of the Custodians and other officers of the Chardin Network, such as the Security Group, are undeniably significant because their managerial efforts affect the failure and success of the Chardin Network. The voting rights granted to Chard token investors are nominal and limited responsibilities, and thus, do not negate the existence of an investment contract. Chard token investors were not assigned duties, and their voting rights were optional. Even if this Court were to consider the investors voting rights as duties, such duties have little effect or choice of action that would benefit the investors. Chard token investors did not make significant efforts in the operation of the Chardin Network, and thus, an investment contract existed. The investors who were attracted to invest in Chard tokens were not knowledgeable about blockchain technology, even though the Chardin Network claimed to attract such investors. In this case, the investors did not have sufficient managerial control over the enterprise because they were not informed about the investment scheme. The Chardin Network did not require any investor to have knowledge about cyber securities, blockchain technology in general, or the Chardin Network. Investors did not obtain significant control over the Chardin Network because they were not given sufficient information to 15

24 make an informed decision. Had they received sufficient information, they would have been aware of the cyber attacks against the Chardin Network and would not have invested in the Chardin Network at all. The Chardin Network website never mentioned any of the cyber attacks in the quarterly reports, and none of the investors found out about them until the s were leaked in August Accordingly, the Chard token investors did not have sufficient information to make an informed decision. B. The Securities Act Of 1933 Governs Chards Because Of The Act s Underlying Policy Of Curing Informational Asymmetry The vital purpose of the Exchange Act is to eliminate serious abuses in a largely unregulated securities market. Forman, 412 U.S. at 849. In defining the scope of the market that it wished to regulate, Congress painted with a broad brush... recogniz[ing] the virtually limitless scope of human ingenuity. Reves, 494 U.S. at Howey s investment contract definition embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits. 328 U.S. at 299. The test permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of the many types of instruments that in our commercial world fall within the ordinary concept of a security. Id. (citing H.R. Rep No. 85, 73rd Cong., 1st Sess., at 11 (1933)). The definition of a security and its interpretation reflect a policy concern of informational asymmetry. See id. 16

25 There is no presence of comprehensive legislation governing cryptocurrencies, and thus, Chards cannot be regulated on any other market except for the securities markets. 2 The Chardin Network s abuses of its investors are those of the kind the Securities Act sought to prohibit. The Chardin Network s ingenuity in devising its scheme sought to use the money of others on the promise of profits and is the type of scheme Congress intended for the SEC to regulate. Howey s flexible mandate encompasses securities such as Chards. In fact, the SEC itself has determined that cryptocurrencies, like Chards, satisfy the investment contract test. See, e.g., The DAO, Exchange Act Release No (July 25, 2017). Chard investors need protection by federal securities law because, as noted by the Fourteenth Circuit, they constitute a large group of unknowledgeable investors. There is a great informational asymmetry problem in this case. This is illustrated by the fact that Bouvier and other officers of the Chardin Network were aware of the various cyber attacks the Chardin Network was exposed to, but Chard token investors were not aware of them. Although there is no other body of legislation governing cryptocurrencies, the SEC, as well as other courts, has ruled that cryptocurrencies such as Chards are governed by the federal securities laws and satisfy the investment contract test. See, e.g., The DAO, Exchange Act Release No (July 25, 2017) (where the SEC 2 See Int l. Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 569 (1979) (where employees of the enterprise were able to derive benefits from ERISA in a more definite form than from the Securities Act); see, e.g., Marine Bank v. Weaver, 455 U.S. 551, 558 (1982) (where the certificate of deposit at issue was issued by a federally regulated bank which [was] subject to the comprehensive set of regulations governing the banking industry, and thus, not subject to the Securities Act). 17

26 concluded that purchasers of DAO tokens in the cryptocurrency Ethereum purchased securities because DAO tokens met Howey s investment contract test and were thus securities); Shavers, 2013 WL at *2 (E.D. Tex. Aug. 6, 2013) (holding that the cryptocurrency Bitcoin is a security because it met Howey s definition of investment contract). Because Howey s investment contract test has been met here and because of the Exchange Act s policy of curing informational asymmetry, Chards meet the statutory definition of a security under the Exchange Act. II. PETITIONERS ARE SUBJECT TO THE ANTI-FRAUD PROVISION OF THE SECURITIES EXCHANGE ACT OF 1934 BECAUSE THE SALE OF CHARDS WAS A DOMESTIC TRANSACTION. The United States is free to protect American citizens from fraud, even where some of the fraudulent conduct occurred overseas. United States v. Mandell, 2011 WL , at *5 (S.D.N.Y. Mar. 16, 2011). This Court is obligated to apply its laws and punish those who commit fraud against American citizens. See generally United States v. Bowman, 260 U.S. 94, 102 (1922). Section 10(b) of the Exchange Act protects Americans from securities fraud. 15 U.S.C. 78j(b) (2012). It states, Id. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange-- (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe

27 Historically, this Court has construed Section 10(b) broadly. See Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (1971) ( Since there was a sale of a security and since fraud was used in connection with it, there is redress under [ ] 10(b). ). Section 10(b) must be read flexibly, not technically and restrictively to effectively guard against fraudulent conduct. Id. Keeping with that tradition, this Court held in Morrison v. National Australia Bank Ltd. to determine whether Section 10(b) applies to fraudulent conduct that occurred outside of the United States, a transactional test must be applied. 561 U.S. 247, (2010). Section 10(b) applies when the security at issue is listed on an American stock exchange or the transaction involves the purchase or sale of any other security in the United States. Id. at 273. The Morrison transactional test advanced this Court s long-standing principle of reading Section 10(b) flexibly, effectuating its remedial purpose. See generally id. The transaction here is domestic because Mr. Foss purchased the Chards on a domestic over-the-counter ( OTC ) market, satisfying the American stock exchange requirement. SEC v. Ficeto, 839 F. Supp. 2d 1101, (C.D. Cal. 2011). Furthermore, the transaction involved the purchase and sale of Chards in the United States. The transaction is domestic because both Mr. Foss and Petitioners incurred irrevocable liability in the United States, and title to the Chards passed in the United States. See Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, (2d Cir. 2012). Mr. Foss incurred irrevocable liability to take and pay for the Chards in the United 19

28 States, and Petitioners incurred irrevocable liability to deliver the Chards in the United States. See Id. at 68. As the Fourteenth Circuit held below, the sale of Chards cannot be compared to a sale of American Depository Receipts ( ADR). In a sale of ADRs, the depository bank holds the underlying security at all relevant times, not the purchaser. Pinker v. Roche Holdings, Ltd., 292 F.3d 361, 367 (3d Cir. 2002). Here, Pyrenees facilitated the transfer of Chards from Petitioners to Mr. Foss. Pyrenees did not continue to hold the Chards, but rather, Mr. Foss owned the Chards outright. However, if this Court chooses to compare the current transaction to a transaction involving ADRs, Section 10(b) applies regardless. In re Volkswagen "Clean Diesel" Mktg., Sales Practices, & Prod. Liab. Litig., 2017 WL 66281, at *3 (N.D. Cal. Jan. 4, 2017). A. The Sale Of Chards On A Domestic Over-The-Counter Market Is A Domestic Transaction Because The Market Is An American Stock Exchange Section 10(b) is applied whenever fraudulent conduct occurs in conjunction with the purchase or sale of a security listed on an American stock exchange. Morrison, 561 U.S. at 273. A domestic OTC market is a domestic exchange for the purposes of Section 10(b) liability. SEC v. Ficeto, 839 F. Supp. 2d at A security traded on a domestic OTC market should be analyzed in the same manner as a security traded on a national exchange because transactions on the domestic over-the-counter market are as inherently imbued with our national interest as trades on national exchanges. Id. at

29 Congress intent could not have been clearer where the stated purpose of the Exchange Act is, [t]o provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets. Securities Exchange Act of 1934, 48 Stat. 881 (1934) (emphasis added). The accompanying Senate Report addressed the unorganized nature of the OTC markets and noted the absolute necessity of imbuing the Securities and Exchange Commission with the authority to regulate the OTC market in the same manner prescribed for transactions on listed exchanges. S. Rep. No , at 6 (1934). The Exchange Act itself draws no distinction between listed exchanges and OTC markets, and for that matter, neither did Morrison. SEC v. Ficeto, 839 F. Supp. at (holding that the Supreme Court in Morrison intentionally drew no distinction between transactions on a domestic OTC market and a listed exchange). The Court s main concern in Morrison, applying United States securities law to foreign markets, is not present when the transaction occurred on a domestic OTC market. Id. at Applying domestic regulatory laws to domestic transactions does not create any conflict of law issue. Id. at Applying Section 10(b) equally to transactions that occur on listed exchanges and domestic OTC markets effectuates the exact purpose envisioned by Congress when the Exchange Act was enacted. Id. at To find otherwise would contravene the plain text of the statute itself. Id. 21

30 The analysis is rather simple in this case. Petitioners participated in a fraudulent scheme to defraud every investor who purchased Chards. Mr. Foss purchased 1.5 million dollars of Chards on a domestic OTC market. A transaction on a domestic OTC market satisfies the transactional requirements of Morrison. SEC v. Ficeto, 839 F. Supp. at Thus, the Fourteenth Circuit properly extended Section 10(b) to Petitioners. B. Petitioners Incurred Irrevocable Liability In The United States To Deliver Chards To American Investors Section 10(b) also applies to any defendant who engages in fraudulent conduct in connection with the purchase or sale of any other security in the United States. Morrison, 561 U.S. at 273. A transaction is domestic where the parties incur irrevocable liability in the United States or where title passes within the United States. Absolute Activist, 677 F.3d at 67. To determine the point of irrevocable liability, the focus of the inquiry is on the locus of the sale. Id. at 68. A party may adequately allege the existence of a domestic transaction when the purchaser incurred irrevocable liability within the United States to take and pay for the security, or the seller incurred irrevocable liability within the United States to deliver the security. Id. at 68. Here, both parties incurred irrevocable liability. A transaction is domestic where the parties commit to each other within the confines of the United States, rather than some foreign location. Absolute Activist, 677 F.3d at 68. The point at which the parties obligate themselves to perform, in the classic contractual sense, marks the point where the parties are committed. Id. The point of commitment can then be used to determine the 22

31 point of irrevocable liability. Id. The analysis remains the same, even where one of the parties is foreign. Plumbers Union Local No. 12 Pension Fund v. Swiss Reinsurance Company, 753 F. Supp. 2d 166, 178 (S.D.N.Y. 2010) (holding that nothing in Morrison points to an identity-based test). Further, the location of the fraudulent conduct itself is irrelevant in determining liability under Section 10(b). Id. Irrevocable liability incurs where, physically, the purchaser or seller committed him or herself to pay for or deliver a security. United States v. Vilar, 729 F.3d 62, 77 n.11 (2d Cir. 2013) (holding that a transaction was domestic where the perpetrator of securities fraud committed to deliver securities in Puerto Rico). Furthermore, irrevocable liability is incurred where an American market maker acts as an intermediary for a foreign entity to purchase and sell securities in the United States. United States v. Georgiou, 777 F.3d 125, 130 (3d Cir. 2015) (holding that a foreign defendant incurred irrevocable liability in the United States when it used an American market maker to facilitate delivery of securities to American purchasers). The Second Circuit has discussed several supporting factors that further indicate when a defendant has incurred irrevocable liability in the United States. Absolute Activist, 677 F.3d at The location of a broker in the United States is evidence that the parties incurred irrevocable liability in the United States. Id. at 68. It is also more likely that a transaction is domestic where the transaction involves parties residing in the United States. Cf. Morrison, 561 U.S. at 251 (holding that a foreign cubed transaction, a foreign 23

32 plaintiff, a foreign defendant, and a foreign issuer, is not a domestic transaction). A transaction is also domestic where title to the security passes within the confines of the United States. Absolute Activist, 677 F.3d at 67 ( transactions... are domestic... [where] title passes within the United States ). In Quail Cruises Ship Management Ltd. v. Agencia de Viagens CVC Tur Limitada, the court held that Morrison adopted a bright-line test based exclusively on the location of the purchase or sale of the security. 645 F.3d 1307, (11th Cir. 2011). Any transaction in which the closing actually occurred in the United States and title was transferred is a domestic transaction under the location-based test of Morrison, thus lying within the reach of Section 10(b). Id. Here, Mr. Foss incurred irrevocable liability to take and purchase Chards in the United States. Absolute Activist, 677 F.3d at 68. Mr. Foss, a resident of Fordham, bought 1.5 million dollars of Chards from Pyrenees, a cryptocurrency brokerage firm also located in Fordham, in a domestic OTC transaction in the United States. The sale of Chards from Pyrenees to Mr. Foss involved a domestic seller, a domestic purchaser, and a contract executed in the United States. These facts are more than enough to establish that Mr. Foss incurred irrevocable liability to take and pay for the Chards in the United States. Thus, the sale of Chards from Pyrenees to Mr. Foss is as a domestic transaction. Petitioners additionally incurred irrevocable liability to deliver Chards in the United States. The sale of Chards by Petitioners is remarkably similar to 24

33 the domestic transaction that occurred in Georgiou. 777 F.3d 125 (3d Cir. 2015). The only difference is in Georgiou, an American market maker acted as an intermediary, while in the case at hand, an American cryptocurrency broker acted as the intermediary. Id. at 130. Lagadere, at the direction of Bouvier, brokered a deal with Pyrenees to sell and deliver Chards in the United States. Pyrenees was simply the facilitator used by Petitioners to funnel Chards into the United States, intended solely as a shield against United States securities law. Every supporting factor from Absolute Activist points towards treating the sale of Chards as a domestic transaction. 377 F.3d at Pyrenees is a broker located within the United States that agreed to sell Chards in the United States for Petitioners. Mr. Foss is a resident of Fordham, located within the United States, who contracted with an American broker, again indicating the presence of a domestic transaction. Lagadere and Mauriac physically met in Fordham to discuss their plans to sell Chards to American investors, further indicating Petitioners incurred irrevocable liability in the United States. Vilar, 729 F.3d at 77 n.11. The sale of Chards is also a domestic transaction because title to the Chards passed within the confines of the United States. See Quail Cruises, 645 F.3d at Mr. Foss purchased Chards from Petitioners American broker within the United States on a domestic OTC market. Once Mr. Foss purchased the Chards, Pyrenees transferred actual title to Mr. Foss in the United States. The moment the sale closed and title was transferred in the United States, the 25

34 transaction was domestic for purposes of satisfying Morrison. See Quail Cruises, 645 F.3d at 1310; see also Absolute Activist, 677 F.3d at 68. Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE does not compel a contrary conclusion. 763 F.3d 198 (2d Cir. 2014). Parkcentral ostensibly created a further requirement to the irrevocable liability test. Id. at 214. The Second Circuit held that even when irrevocable liability has been established, if that transaction is predominately foreign, liability will not attach. Id. However, the facts in Parkcentral are so specific that it cannot be applied to the current case. Id. at 217. However, if this Court is to apply the predominately foreign requirement from Parkcentral, the current transaction is sufficiently domestic to pass muster. The Second Circuit did not believe that the conclusion in Parkcentral could be perfunctorily applied to other cases based on the similarity of a few facts. Id. at 217. In fact, the court [did] not purport to proffer a test that will reliably determine when a particular invocation of 10(b) will be deemed appropriately domestic or impermissibly extraterritorial. Id. Parkcentral dealt with the sale of security-based-swaps, transactions that do not even involve the transfer of the underlying security, nor require the issuer s involvement. Id. at 201. Standing alone, that fact is sufficient to distinguish Parkcentral from the current transaction. The transaction here involved the transfer of ownership of the Chards themselves in connection with Petitioners involvement. 26

35 Moreover, the transaction between Mr. Foss and Petitioners was sufficiently domestic to attach liability under Section 10(b) and satisfy the predominately foreign requirement of Parkcentral. In Parkcentral, the relevant actions occurred primarily in Germany with respect to a stock in a German company traded only on exchanges in Europe. Id. at 216. Here, Petitioners posted marketing materials on their website in English, specifically to attract American investors. Petitioners further brokered a deal with an American broker to facilitate the sale of Chards to American investors. A domestic purchaser, a domestic seller, and a contract executed in the United States are more than sufficient to attribute this transaction with the necessary indicia of domesticity. C. Petitioners Involvement In The Sale Of Chards To Mr. Foss Cannot Be Compared To The Role Of An Underlying Issuer In An American Depository Receipt Transaction Petitioners contend that their involvement in this sale is similar to that of a foreign issuer s involvement in a sale of American Depository Receipts ( ADR ) to American investors. And ADR is a receipt issued by an American depository bank that represents a specific amount of a foreign security. Stoyas v. Toshiba Corp., 191 F. Supp. 3d 1080, 1091 (C.D. Cal. 2016). An ADR can be sponsored or unsponsored. Id at The only difference between a sponsored ADR and an unsponsored ADR is the amount of administrative support the issuer of the underlying security provides American investors. See generally 17 C.F.R and g3-2. Moreover, when an investor purchases an ADR, the depository bank, not the purchaser, continues to own the underlying security. 27