No IN THE SUPREME COURT OF THE UNITED STATES. THE CHARDIN NETWORK, et al., HUNTER FOSS, ON WRIT OF CERTIORARI TO THE

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1 No IN THE SUPREME COURT OF THE UNITED STATES THE CHARDIN NETWORK, et al., Petitioner, v. HUNTER FOSS, Respondent. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTEENTH CIRCUIT BRIEF FOR THE RESPONDENT Team R10 Counsel of Record for Respondent

2 QUESTIONS PRESENTED 1. Whether the Chardin Network tokens, that were advertised as available on secondary markets, are securities under the test set forth in SEC v. W.J. Howey Co.? 2. Whether Francoise Bouvier and the Chardin Network were sufficiently involved in the domestic transaction when they knew their securities would be sold in the United States, and are therefore liable under Section 10(b) s antifraud provision? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF CONTENTS... ii TABLE OF AUTHORITIES... iv STATEMENT OF THE CASE... 1 STATEMENT OF FACTS... 2 SUMMARY OF THE ARGUMENT... 4 ARGUMENT... 6 I. Petitioners' Chard Tokens Were Investment Contracts and Thus Securities, Despite their Concurrent Consumptive Purpose A. The Four-Prong Howey Test determines that Chard Tokens are an. Investment Contract Mr. Foss Invested Money by Purchasing Chard Tokens Mr. Foss Investment in the Chardin Network Created a Horizontal and Vertical Common Enterprise Mr. Foss had a Reasonable Expectation of Profits from his Purchase of Chard Tokens Mr. Foss Expectation of Profits Derived from the Entrepreneurial or Managerial Efforts of the Custodians The Sale of Chard Tokens Created an Investment Contract under the Four-Prong Howey Test II. Section 10(b) s Anti-fraud Provision Extends to Petitioners Because Petitioners Were Sufficiently Involved in the Domestic Transaction A. Under Morrison, a Domestic Transaction Is Sufficient to Permit a Domestic Purchaser to Bring a Securities Claim Against Petitioners The Court Should Adopt the Second Circuit s Irrevocable Liability Test to Analyze Morrison s Second Prong a. The Irrevocable Liability Test Is Supported by the Text of Section 10(b) and Rule 10b ii

4 b. Toshiba s Intent-Based Approach Is Inconsistent with Morrison Because It Reenacts the Very Uncertainty Morrison Sought to Correct Mr. Foss Prevails under the Irrevocable Liability Test Because the Fraudulent Securities Transaction Took Place in the U.S. and Was Not Predominantly Foreign B. Even under the Toshiba standard, Petitioners Were Sufficiently Involved with Chard Tokens to Warrant Section 10(b) Liability Unlisted Foreign Securities are Subject to Section 10(b) Liability Where the Issuer Is Involved in the Domestic Transaction Petitioners Control over Chard Tokens is Akin to Sponsored ADRs.28 CONCLUSION iii

5 TABLE OF AUTHORITIES CASES Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012)... passim Albanese v. Fla. Nat'l Bank, 823 F.2d 408 (11th Cir.1987) Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir. 1975) Brodt v. Bache & Co., Inc., 595 F.2d 459 (9th Cir. 1978) Curran v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 622 F.2d 216 (6th Cir. 1980)... 9, 10 Eberhardt v. Waters, 901 F.2d 1578 (11th Cir. 1990) Fargo Partners v. Dain Corp., 540 F.2d 912 (8th Cir. 1976) Hart v. Pulte Homes of Mich. Corp., 735 F.2d 1001 (6th Cir. 1984) Hector v. Wiens, 533 F.2d 429 (9th Cir. 1976) Hirsch v. DuPont, 396 F. Supp (S.D.N.Y. 1975) In re Societe Generale Securities Litigation, No. 08-Civ. 2495, 2010 WL (S.D.N.Y. Sept. 29, 2010) In re Volkswagen Clean Diesel Marketing, Sales Practices and Products Liability Litigation, No. 3:15-md-02672, 2017 WL (N.D. Cal, Jan. 4, 2017)... 19, 27, 28 Int l Broth. Of Teamsters, Chauffeurs, Warehousemen and Helpers of America v. Daniel, 439 U.S. 551 (1979)... 9 Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985)... 8 Long v. Shultz Cattle Co., Inc., 881 F.2d 129 (5th Cir. 1989) Marine Bank v. Weaver, 455 U.S. 551 (1982)... 8 Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir. 1972) cert denied, 409 U.S. 887 (1972) Morrison v. Nat l Austl. Bank Ltd., 561 U.S. 247 (2010)... passim iv

6 Parkcentral Global Hub Ltd. v. Porsche Auto Holdings SE, 763 F.3d 198 (2d Cir. 2014)... passim Pinker v. Roche Holdings Ltd., 292 F.3d 361 (3d Cir. 2002) Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011) Radiation Dynamics, Inc. v. Goldmuntz, 646 F.2d 876 (2d Cir. 1972) Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994)... 10, 11 Reves v. Ernst & Young, 494 U.S. 56 (1990)... 7, 8 Savino v. E.F. Hutton & Co., Inc., 507 F. Supp (S.D.N.Y. 1981) SEC v. Berger, 322 F.3d 187 (2d Cir. 2003) SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) SEC v. ETS Payphones, Inc., 300 F.3d 1281 (11th Cir. 2002) SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), cert denied, 414 U.S. 821 (1973) SEC v. Int l Heritage, Inc., 4 F. Supp. 2d 1378 (N.D. Ga. 1998)... 9 SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974)... 10, 11 SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001)... 13, 14 SEC v. Shavers, No. 4:13-CV-416, 2014 WL (E.D. Tex. Aug. 26, 2014)... 9 SEC v. W.J. Howey Co., 328 U.S. 293 (1946)... 6, 8, 15 Stoyas v. Toshiba Corp., 191 F. Supp. 3d 1080 (C.D. Cal. 2016)... passim Tcherepnin v. Knight, 389 U.S. 332 (1967)... 8 United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975)... passim United States v. Georgiou, 777 F.3d 125 (3d Cir. 2015) United States v. United States Gypsum Co., 333 U.S. 364 (1948)... 1 Uselton v. Commercial Lovelace Motor Freight, Inc., 940 F.2d 564 (10th Cir. 1991)... 8 v

7 Vancouver Alumni Asset Holding Inc. v. Daimler AG, No. CV , 2017 WL , at *8 (C.D. Cal. May 31, 2017) Villeneuve v. Advanced Business Concepts Corp., 698 F.2d 1121 (11th Cir. 1983), aff d en banc, 730 F.2d 1403 (1984) Williamson v. Tucker, 645 F.2d 404 (5th Cir.1981) STATUTES 15 U.S.C. 77a et seq U.S.C. 77b(a)(1) U.S.C. 78a et seq U.S.C. 78(a)(13) U.S.C. 78(a)(14) U.S.C. 78c(a)(10) U.S.C. 78j(b)... 1, 17, 21, 22 REGULATIONS 17 C.F.R b-5 (2012)... 17, 22, 25 OTHER AUTHORITIES 2017 SEC REPORT OF INVESTIGATION PURSUANT TO SECTION 21(A) OF THE SECURITIES EXCHANGE ACT OF 1934: THE DAO vi

8 STATEMENT OF THE CASE On September 1, 2017, Respondent Hunter Foss filed a civil action against the Chardin Network and Francoise Bouvier (collectively the Petitioners ) in the United States District Court for the District of Fordham (R. at 8). The complaint alleged that Petitioners sought to defraud Mr. Foss through fraudulent and misleading statements made about the value of Chard tokens. (R. at 8). Mr. Foss alleges that Chard tokens are securities under Section 10(b) of the Securities Exchange Act of See 15 U.S.C. 78(j) (2012). (R. at 8). Additionally, the complaint argues that fraudulent and misleading statements made by Petitioners about Chard tokens violated Section 10(b). (R. at 8). Mr. Foss sought redress for the $1.5 million in Chard tokens he purchased in reliance on statements made by Petitioners. (R. at 8). The District Court granted Petitioners motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. (R. at 9). In that ruling, the District Court found that the Chard tokens were not securities as defined in Section 10(b). (R. at 9). Further, the District Court held that even if the tokens were securities, Mr. Foss had not overcome the presumption against extraterritoriality because Petitioners were not sufficiently involved in the transaction for their statements to evoke liability under Section 10(b). (R. at 9). The Fourteenth Circuit reversed on both issues on January 12, (R. at 17, 25). This court granted certiorari on February 7, (R. at 36). This court reviews a grant of summary judgment de novo. United States v. United States Gypsum Co., 333 U.S. 364 (1948). 1

9 STATEMENT OF FACTS The Chardin Network is a French-based cryptocurrency business founded by Francoise Bouvier in 2015 (R. at 1). The network developed a blockchain through which users could buy, sell, earn, or use tokens, known as Chards. (R. at 1). The tokens granted users the right to vote on major expansions of the network and could also be used on social media websites that integrated the Chardin Network. (R. at 1). The original social media website was InforMe, used predominantly in France. (R. at 1). Bouvier sought 2 million in initial financing from his friend, venture capitalist Marcel Lagadere. (R. at 2). Lagadere also developed a plan for an Initial Coin Offering ( ICO ) to garner additional financing. (R. at 2). The Chardin Network sold 1 percent of all available to tokens to each of 10 early investors in a private offering on October 15, (R. at 2-3). The ICO was held on January 15, 2017 during which 51 percent of Chard tokens were sold to the public for a total of 150 million. (R. at 3, 6). Prior to the ICO, Lagadere and Bouvier wrote a white paper detailing the features of the Chardin Network. (R. at 3). This included a description of the corporate governance structure which is composed of Bouvier and six people chosen by Early Investors ( the Custodians ). (R. at 3). An annual token holder meeting is held, where token holders elect a slate of six Investors Custodians. (R. at 3). The white paper also detailed the functionality of the tokens which serve various purposes on social media platforms as a utility token, and will create a vibrant digital economy to be bought and sold through secondary 2

10 market cryptocurrency exchanges. (R. at 4). Rules for future expansion were also laid out in the white paper. (R. at 4). It stated any contract proposals with an offer price below 5 million ( Small Bid Contracts ) will be submitted to the Custodians for review to determine if it will be put up for token holder vote at the annual meeting. (R. at 4). Alternatively, any contract proposal with an offer price above 5 million ( Large Bid Contracts ) will go directly to token holder vote. (R. at 5). Lastly, the white paper established a requirement that if a member of the Chardin Security Group discovers a security breach, all Custodians must be immediately notified. (R. at 5). On the morning of the ICO, the head of the Chardin Security Group, Alexis Sarte, discovered that 5 million worth of coins had been stolen and placed into an unknown digital wallet. (R. at 5). Mr. Sarte informed Bouvier. (R. at 5). While Sarte and Bouvier quickly recovered the stolen Chards, they did not follow proper protocol by notifying the other Custodians. (R. at 5-6). On June 8, 2017 Lagadere met with Madeline Mauriac, the Chief Executive Officer of Pyrenees, LLC ( Pyrenees ) in Pebble Beach, Fordham. (R. at 6-7). Pyrenees was a cryptocurrency brokerage firm based in Fordham. (R. at 6-7). Lagadere promoted the early success of the Chardin Network, including his belief that the network had never experienced a security breach. (R. at 7). He discussed his desire to integrate the Chardin blockchain into United States social media websites, but noted that the Custodians of the Chardin Network were hesitant to do so because they did not want to risk involvement with United States securities laws if Chards would be sold in the United States. (R. 3

11 at 6). Mauriac proposed to buy Chards on the market and then resell them through Pyrenees to individual investors in the United States. (R. at 7). The next day, Lagadere conferred with Bouvier who said that he would not stop Pyrenees from buying Chards. (R. at 7). Lagadere and Mauriac posted Chardin Network marketing materials and the promotional white paper to the Pyrenees brokerage website to publicize the availability of Chards. (R. at 7). On July 29, 2017 Pyrenees purchased 8 million worth of Chard tokens from a French cryptocurrency exchange. (R. at 8). Three days later, Mr. Foss purchased $1.5 million in Chard tokens in an over the counter transaction from Pyrenees. (R. at 8). On August 21, 2017, the Fordham Observer received an anonymous package containing the s between Bouvier and Sarte in which they discussed the January 15 security breach. (R. at 8). After releasing the details of the security breach, which were not mentioned in the quarterly filings as required, the value of Chard tokens dropped 85 percent. (R. at 8). SUMMARY OF THE ARGUMENT Securities laws were created to ensure transparency in financial statements, thus enabling investors to make informed decisions and avoid fraud by promoters. To accomplish this goal, the Securities and Exchange Commission ( SEC ) broadly defined security by listing over twenty different types of investments. The SEC was concerned that if it defined securities too narrowly, United States citizens would lack necessary protections which would not only jeopardize their finances, but would negatively affect the market due 4

12 to their skepticism of investing. As such, the SEC included investment contracts within the reach of the 1934 Exchange Act. In SEC v. S.J. Howey Co., the Supreme Court established a four-part test to determine if an investment contract exists. Applied here, the Court should hold that the Chardin Network s sale of Chards satisfies that test. The Chardin Network did not absolve itself from regulation by stating Chards are a utility token, while continuing to market their potential for capital appreciation to investors. In addition, Chard token purchasers cannot be considered active investors when the Chardin network: (i) advertised to the public at large (regardless of blockchain knowledge), (ii) delegated insignificant duties to investors, and (iii) withheld relevant information regarding security breaches. Since Petitioners created an investment contract by selling Chard tokens, fraudulent statements made regarding the tokens are subject to liability in the U.S. under Section 10(b) of the 1934 Exchange Act. The Court has established a two-prong test to determine whether securities of a foreign issuer are subject to U.S. securities laws. The second prong of the test is satisfied where title passes in a domestic transaction. Even though Petitioners did not directly sell the security in the U.S., the transaction falls within the reach of Section 10(b). Irrevocable liability will attach to the transaction if it was not predominantly foreign, even if the foreign issuer is not directly involved in the transaction. Even supposing the Court adopts the intent-based test urged by Petitioners and rejected by the Fourteenth Circuit, Petitioners are still be liable 5

13 under Section 10(b). Under the intent-based test, foreign issuers are subject to Section 10(b) liability if they were sufficiently involved in the domestic securities transaction. Petitioners were aware the broker purchased Chard tokens and intended to sell them in the U.S. To ensure successful sales, Petitioners posted Chardin Network marketing materials to the brokerage website. Due to involvement with the broker in the domestic transaction, Petitioners are liable under Section 10(b) for the fraudulently misleading statements made regarding Chardin Network security. Accordingly, the Court should affirm the decision of the Fourteenth Circuit. ARGUMENT I. Petitioners Chard Tokens Were Investment Contracts and Thus Securities, Despite their Concurrent Consumptive Purpose. Petitioners have violated federal securities laws. The appropriate test to determine whether a profit-raising scheme is an investment contract, subject to Federal Securities Laws, was established in this Court s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The test specifically looks to whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. Id. at 301. This description 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. Id. at 299. Notably, the SEC has already found that tokens offered by virtual organizations can be securities 6

14 thus subject to the federal securities laws SEC REPORT OF INVESTIGATION PURSUANT TO SECTION 21(A) OF THE SECURITIES EXCHANGE ACT OF 1934: THE DAO. Petitioners raised capital for their cryptocurrency business by holding an ICO. (R. at 3). In connection with the ICO, Petitioners adopted a corporate governance structure led by the Custodians. (R. at 3). The Custodians are responsible for reviewing any Small Bid Contracts. Therefore, token holders are only permitted to vote on Large Bid Contracts, which have not yet occurred. (R. at 5). Petitioners promoted the sale of Chards as a utility token to perform various functions on social media platforms, and as a tool to create a vibrant digital economy, creating a secondary market to buy and sell Chard tokens through cryptocurrency exchanges. (R. at 4). The ICO agreements between Petitioners and public investors, who financed the Chardin Network, are exactly the type of arrangements Congress sought to regulate as Securities under the Securities Act of 1933, 15 U.S.C. 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq. The arrangements fall within the category investment contract, which is included within the definition of security in both Acts. 15 U.S.C. 77b(a)(1), 78c(a)(10). Security is broadly defined to include such terms because Congress intended to encompass virtually any instrument that might be sold as an investment. Reves v. Ernst & Young, 494 U.S. 56, 61 (1990); see also 15 U.S.C. 77b(a)(1). The Court has repeatedly emphasized the scope and flexibility of the investment contract definition. See Marine Bank v. Weaver, 455 U.S. 551, 7

15 (1982); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, (1975); Tcherepnin v. Knight, 389 U.S. 332, 338 (1967). The Court additionally stresses the importance of economic reality and substance over form. See Marine Bank, 455 U.S. at 556; Forman, 421 U.S. at 848; Tcherepnin, 389 U.S. at 336. And lastly, the Court continues to look to the promoter s representations in characterizing an investment instrument. See Reves, 494 U.S. at (relying on the fact that advertisements for notes characterized them as investments in holding that the notes were securities); Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985) (relying on purchaser s expectations in concluding that an instrument that is called stock and bears the usual characteristics of stock is a security); Marine Bank, 455 U.S. at 556; Forman, 421 U.S. at The repeated considerations made by the Court reinforce that investment in Petitioners Chard tokens are an investment contract constituting a security. A. The Four-Prong Howey Test determines that Chard Tokens are an Investment Contract. 1. Mr. Foss Invested Money by Purchasing Chard Tokens. Chard token holders invested their own capital into the Chardin Network. The first prong of the Howey Test asks whether the scheme involves an investment of money. Howey, 328 U.S. at 301. Courts have expanded this prong to include an investment of goods, services, or some other exchange of value. Uselton v. Commercial Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991); SEC v. Int l Heritage, Inc., 4 F. Supp. 2d 1378, (N.D. 8

16 Ga. 1998) (labor can satisfy the investment requirement). The controlling element here is whether an investor chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security. Int l Broth. Of Teamsters, Chauffeurs, Warehousemen and Helpers of America v. Daniel, 439 U.S. 551, 559 (1979). Therefore, the investment of money prong need not be satisfied by an investment of cash or a currency amounting to a legal tender, but can also be a digital currency. See Id.; SEC v. Shavers, No. 4:13-CV-416, 2014 WL , at *6 (E.D. Tex. Aug. 26, 2014). Chard token holders purchased tokens with either fiat currency or another form of digital currency, and Hunter Foss specifically invested his own $1.5 million into Chard tokens. Fiat currency is clearly an investment of money that satisfies prong one and digital currency has also been held to be an investment of money due to the value it holds. Therefore, prong one is met. 2. Mr. Foss Investment in the Chardin Network Created a Horizontal and Vertical Common Enterprise. Chard token holders invested in a common enterprise regardless of whether horizontal or vertical commonality is applied. Forman described the touchstone of the Howey test as the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. 421 U.S. at 852. There is currently a circuit split on whether a horizontal or a vertical relationship satisfies the common enterprise language of Howey. Curran v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 622 F.2d 216, 221 (6 th Cir. 1980). 9

17 The Third, Sixth, and Seventh Circuits hold that horizontal commonality requires one investor be similarly situated to the pool of all other investors. Id.; see also SEC v. ETS Payphones, Inc., 300 F.3d 1281, 1284 (11 th Cir. 2002) (holding horizontal commonality exists when the individual investors share all the risks and benefits of the business enterprise ), rev d on other grounds, 540 U.S. 389 (2004). The expectation of profits must come from the sale of a unit in a larger investment enterprise. See Milnarik v. M-S Commodities, Inc., 457 F.2d 274, (7th Cir. 1972) cert denied, 409 U.S. 887 (1972). Courts who use this method, therefore, look to whether the funds of a group of investors are pooled and often require that returns are pro rata (everyone contributes, and collects based on their contribution). Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994); See Hart v. Pulte Homes of Mich. Corp., 735 F.2d 1001, 1004 (6th Cir. 1984). Other circuits hold a common enterprise exists instead through vertical commonality, which emphasizes the relationship between investors and the promoter. Savino v. E.F. Hutton & Co., Inc., 507 F. Supp. 1225, 1237 (S.D.N.Y. 1981). The court finds a common enterprise when the activities of the promoter are interwoven-with and, therefore, the controlling factor in the success or failure of the investment. Villeneuve v. Advanced Business Concepts Corp., 698 F.2d 1121, 1124 (11th Cir. 1983), aff d en banc, 730 F.2d 1403 (1984); see SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 479 (5th Cir. 1974); SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n. 7 (9th Cir. 1973), cert denied, 414 U.S. 821 (1973). Courts applying the vertical commonality standard vary 10

18 in the expansiveness of their interpretations, therefore two distinct classes of vertical commonality have been identified: broad vertical commonality and strict vertical commonality. Revak, 18 F.3d at 87. Broad vertical commonality looks to uniformity of the impact of the promoter and requires only a connection between the efforts of the promoter and the investors collective success or losses. Id. at 88 (citing Long v. Shultz Cattle Co., Inc., 881 F.2d 129, (5th Cir. 1989)). This standard requires interdependence between investors and the promoter through reliance on the promoter s expertise, regardless of whether the promoter shares in the profits of the venture. Id. at Strict vertical commonality requires that the fortunes of investors be tied to the fortunes of the promoter. See Brodt v. Bache & Co., Inc., 595 F.2d 459, 461 (9th Cir. 1978); Hector v. Wiens, 533 F.2d 429, 433 (9th Cir. 1976). Thus, no vertical commonality exists if the success or failure of (the investment manager) does not correlate with individual investor profit or loss. Brodt, 595 F.2d at 461. The principal factor of vertical commonality generally is that the investors have no desire to perform the chores necessary for a return, and are attracted to the investment solely by the prospects of a return. Eberhardt v. Waters, 901 F.2d 1578, (11th Cir. 1990) (citing Koscot, 497 F.2d at 478). This lack of desire can be inferred when an investor does not have experience in the investment field, that would otherwise require some form of expertise. See Eberhardt, 901 F.2d at

19 Here, horizontal and vertical commonality are both present to satisfy that investment in Chard tokens created an expectation of profits from a common enterprise. Horizontal commonality is more restrictive because it emphasizes the common enterprise among investors, but it is satisfied because all Chard token holders are similarly situated. Chard token ownership carries identical voting rights and token holder s individual profits rise or fall with the success or failure of the enterprise. Also, token holders are exposed to identical risks, such as a security breach in the Chardin Network or the fluctuating value of Chards on the secondary market. Broad vertical commonality is satisfied because investors depended on the expertise of Chardin Network promoters. Foss, a 78-year-old almond farmer, has never previously been involved in a cryptocurrency business. He could not possess the necessary expertise to make Chardin network decisions. Finally, strict vertical commonality is also present because the value of Chard tokens decreased by 85%. This affected not only individual investors, such as Mr. Foss, but Francoise Bouvier as the promoter as well. Bouvier held 9% of Chards, therefore an 85% decrease in their value affects his success. Thus, Chard token holders, such as Mr. Foss, invested in a common enterprise. 3. Mr. Foss had a Reasonable Expectation of Profits from his Purchase of Chard Tokens. Investors purchased Chard tokens with a reasonable expectation of profits because the white paper highlighted secondary market options. Howey s third prong requires investors to be attracted due to (1) financial returns on 12

20 their investments, or (2) participation in future earnings deriving from the use of their investments. See Forman, 421 U.S. at 2061; SEC v. SG Ltd., 265 F.3d 42, 53 (1st Cir. 2001). To determine reasonable expectations of profits by investors, courts focus on the economic realities underlying a transaction, and not on the name appended thereto. Forman, 421 U.S. at 849. Thus, the court will assess if shares have any characteristics that fall within the ordinary concept of a security, such as voting rights or appreciation in value. Id. at 851. A reasonable expectation of profits does not exist if investors are merely paying to personally consume what is being sold. See SG, 265 F.3d at 53. It is therefore necessary to determine the principal attraction for prospective buyers. Id. at 54. If an investment derives most of its appeal from the potential of profits, and personal consumption is merely an incidental consideration, investors have a reasonable expectation of profits creating an investment contract. Id. (citing SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 349 (1943) (holding exploratory oil drilling was woven into leaseholds and gave them the bulk of their value and lure). However, if the principal attraction to buyers is personal consumption, and a potential for profits is merely incidental, the combination does not create a reasonable expectation of profits resulting in an investment contract. SG Ltd., 265 F.3d at 54. (citing Forman, 421 U.S. at 853 (holding buyers were attracted to purchasing an apartment, and shares of stock in the cooperative housing project were merely incidental)). The court looks to promoters emphasizing profit potential in advertisements as indicative 13

21 that the principal attraction was an expectation of profits. SG Ltd., 265 F.3d at 54. Here, investors anticipated capital appreciation based on fluctuations in the secondary market because Petitioners made these representations to investors in its white paper. It stated that Chard token holders can sell tokens on secondary markets, specifically emphasizing the profit potential. This profit potential was quickly recognized because in the week following the ICO, Chards sold on the secondary market at 23 percent premium over the initial ICO price. Therefore, ordinary aspects of securities are present in Chards because they appreciate in addition to token holders having voting rights. It is also significant that after the ICO, only fifteen percent of all outstanding Chard tokens were spent on InforMe for their underlying utility. Most tokens were held by purchasers rather than spent, and only sixty percent of Chard ICO participants were registered users of InforMe. Just as in Joiner, the promoters advertised the economic benefits to purchasing Chards, thus transforming the proposition from personal consumption of Chards to an investment contract with a reasonable expectation of profits. A 78-year-old almond farmer would have no alternative reason to buy $1.5 million in Chards solely to use on a French social media website. 4. Mr. Foss Expectation of Profits Derived from the Entrepreneurial or Managerial Efforts of the Custodians. Chardin network investors had an expectation of profits due to the entrepreneurial and managerial efforts of the Custodians. The final prong of the Howey test asks whether the investors expectation of profits derived from the 14

22 entrepreneurial or managerial efforts of others. Forman, 421 U.S. at 852. To create an investment contract, investors must rely on third parties to produce the profits for them. Id. at 863. Therefore, the crucial inquiry is the amount of control that the investors retain under their written agreements. Albanese v. Fla. Nat'l Bank, 823 F.2d 408, 410 (11th Cir.1987) (citing Williamson v. Tucker, 645 F.2d 404, (5th Cir.1981)). If an investor s duties are nominal or insignificant, they lack true control over the operation of the enterprise (thus satisfying the fourth prong). Id., at (citing Fargo Partners v. Dain Corp., 540 F.2d 912, (8th Cir. 1976)). When investors lack significant duties in the enterprise, and merely rely on the entrepreneurial or managerial efforts of others, they may also lack sufficient access to information about the issuer and thus need the protection of the securities laws. See Williamson, 645 F.2d at (citing Hirsch v. DuPont, 396 F. Supp. 1214, 1222 (S.D.N.Y. 1975)). This protection is also necessary when the investment is promoted to people who lack the necessary education and experience to understand and make decisions about said business operations. See Howey, 328 U.S. at ; Fargo Partners, 540 F.2d at 915. Those investors have no desire to run daily operations or develop the investment themselves, and are therefore attracted solely by the prospects of a return on their investment derived from the entrepreneurial or managerial efforts of others. Howey, 328 U.S. at Here, investors held insufficient control over the Chardin network due to their nominal duties. Token holder had voting rights that could be exercised at 15

23 the annual meeting for Investors Custodians and when Large Bid Contracts were submitted. To date, only Small Bid Contracts have been submitted, which are only subject to Custodian review and approval. Therefore, investors were given a right that may never actually mature. Additionally, Custodians controlled day-to-day operations of the Chardin Network without input from token holders. Investors lacked sufficient education and experience to assist with daily operations regardless, demonstrating their need for entrepreneurial or managerial efforts of others. Nominal investor duties resulted in insufficient access to information about the issuer, therefore investors were left unaware of large issues, such as security breaches. These uninformed investors, such as Mr. Foss, are the exact type of persons intended to be protected by the securities laws because they required entrepreneurial and managerial efforts by the Custodians. 5. The Sale of Chard Tokens Created an Investment Contract under the Four-Prong Howey Test. The white paper claimed that token holders are an essential part of the growth of the Chardin Network. The Howey test instructs the court to look at the economic reality of the investment scheme in addition to the statements of the promoter. See Forman, 421 U.S. at 848. Tokens were sold to the public at large, inviting capital investments by people without education or experience in the field of cryptocurrency. Therefore, investors reasonably expected profits to come from the entrepreneurial or managerial efforts of Petitioners. All four prongs of the Howey test are met, designating this profit-raising scheme as an investment contract, intended to be protected by the securities laws. 16

24 II. Section 10(b) s anti-fraud provision extends to Petitioners because Petitioners were sufficiently involved in the domestic transaction. Section 10(b) of the Exchange Act outlaws the use of any manipulative or deceptive device in connection with the purchase or sale of a security. 15 U.S.C. 78j(b) (2012). Rule 10b-5 further bars fraudulent practices in connection with the purchase or sale of a security. 17 C.F.R b-5 (2012). In this case, Petitioners intentional failure to disclose security vulnerabilities prior to the ICO violates Section 10(b). (R. at 20). The issue before the Court is whether Section 10(b) s anti-fraud provision applies to the Petitioners domestic sale of foreign securities to Mr. Foss. The Court should extend liability because Petitioners were sufficiently involved in the domestic transaction of fraudulent securities from a domestic broker. The Court laid the foundation for the analysis of Section 10(b) and Rule 10b-5 s application to foreign-born securities via a two-prong test in Morrison v. Nat l Austl. Bank Ltd., 561 U.S. 247 (2010). The second prong which is the only prong is at issue in this case extends securities fraud liability in transactions involving the purchase or sale of any other security in the United States. United States v. Georgiou, 777 F.3d 125, 134 (3d Cir. 2015) (quoting Morrison, 561 U.S. at 273) (emphasis added). Under Morrison s second prong, the domestic transaction between Mr. Foss and a domestic broker is sufficient to permit a Mr. Foss to bring a securities claim against foreign issuer, even if the foreign issuers did not directly sell the fraudulent security in the U.S. 17

25 A. Under Morrison, a domestic transaction is sufficient to permit a domestic purchaser to bring a securities claim against Petitioners. Even though the fraudulent securities purchased by Mr. Foss were not listed on a domestic exchange, Section 10(b) still applies because Mr. Foss nonetheless purchased the fraudulent securities in a domestic transaction. Where, such is the case here, transactions involving securities that are not traded on a domestic exchange, satisfy Morrison s domesticity requirement if irrevocable liability is incurred or title passes within the United States. Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012). 1. The Court should adopt the Second Circuit s irrevocable liability test to analyze Morrison s second prong. Morrison triggers Section 10(b) liability in the case of a domestic purchase or sale of a foreign security. In announcing the two-prong test in Morrison, the Court sought to develop a more consistent and predictable test for transnational Section 10(b) cases than the conducts and effects test. Morrison, 561 U.S. at 260. Morrison held that Section 10(b) applies to domestic purchases or sales, but offers little guidance as to what constitutes such a domestic transaction. Absolute Activist Value Master Fund Ltd., 677 F.3d at 67. As a result, Morrison s two-prong test has proven difficult to apply in the complex arena of global capital markets. On one hand, a common theme running through the cases decided post- Morrison is the level of involvement of the security issuer is a key factor in 18

26 determining the whether to extend Section 10(b) liability. While the Court sought to clearly demarcate the outer bounds of Section 10(b) in Morrison, lower courts are increasingly willing to conduct a thorough fact-based analysis of foreign issuers in U.S securities cases. See e.g., Stoyas v. Toshiba Corp., 191 F. Supp. 3d 1080 (C.D. Cal. 2016); In re Volkswagen Clean Diesel Marketing, Sales Practices and Products Liability Litigation, No. 3:15-md-02672, 2017 WL 66281, at *5 (N.D. Cal, Jan. 4, 2017). On the other hand, the Second Circuit subsequently offered clarity on the Exchange Act s text by developing the irrevocable liability test. Absolute Activist Value Master Fund Ltd., 677 F.3d at Under the irrevocable liability test, domestic purchases and sales of securities take place when the parties become bound to effectuate the transaction in the U.S. Id. at 67 (citing 15 U.S.C. 78(a)(13) and (14)); see also Radiation Dynamics, Inc. v. Goldmuntz, 646 F.2d 876, 891 (2d Cir. 1972) ( [T]he time of a purchase or sale of securities within the meaning of Rule 10b-5 is to be determined as the time when the parties to the transaction are committed to one another. ). A domestic transaction also occurs when title is transferred in the U.S. Absolute Activist Value Master Fund Ltd., 677 F.3d at 68 (citing Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307, (11th Cir. 2011) ( Morrison deliberately established a bright-line test based exclusively on the location of the purchase or sale of the security, [thus] we cannot say at [the motion to dismiss] state in the proceedings that the alleged 19

27 transfer of title to the shares in the United States lies beyond 10(b) s territorial reach. )). Additionally, irrevocable liability does not apply if the domestic transaction is predominantly foreign. Parkcentral Global Hub Ltd. v. Porsche Auto Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014). The practical effect of the irrevocable liability test is that proper focus in Section 10(b) cases is now on the location of the securities transaction not on the location of the fraud. See id. at 211 ( [T]he statute s exclusive focus [is] on domestic purchases and sales. (quoting Morrison, 561 U.S. at 268)). The Court should adopt the Second Circuit s bright-line irrevocable liability rule for circumstances like this case, where the securities sold in the United States are the same fraudulent securities that were purchased abroad for resale in the United States. Prior cases interpreting the second prong of the Morrison test dealt with derivatives, and other financial instruments whose value depended on the underlying fraudulent security. See e.g., Parkcentral Global Hub Ltd., 763 F.3d at 206 ( [S]ecurities-based swap agreements are, in the ways just discussed, different from transactions in other, less exotic securities[.] ); Toshiba Corp., 191 F. Supp. 3d at 1095 (dismissing 10b-5 claim related to unsponsored American Depository Receipts). As Parkcentral Global Hub and Toshiba suggest, a more thorough factsand-circumstances analysis may be appropriate in complex derivative cases; however, the irrevocable liability test offers certainty in transactions involving less exotic securities. See Parkcentral Global Hub Ltd., 763 F.3d at 206. The 20

28 Court should adopt a clear rule for basic securities transactions because this case does not involve a domestic derivative security. The fraudulent security was purchased on a foreign exchange by a U.S. dealer with business connections to Petitioners and those fraudulent securities were resold in the United States. (R. at 8). Accordingly, this transaction satisfies the domestic transaction requirement of Morrison s second prong. a. The irrevocable liability test is supported by the text of Section 10(b) and Rule 10b-5. The Morrison Court promulgated its two-part test, in part, out of concern for the textual language and legislative history of the Exchange Act and Rule 10b-5. See Morrison, 561 U.S. at 258 ( The Second Circuit never put forward a textual or even extratextual basis for [the conduct and effect] tests.... [I]t confessed that if we were asked to point to language in the statutes, or even in the legislative history, that compelled these conclusions, we would be unable to respond. (quoting Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 993 (2d Cir. 1975)). Unlike the conducts and effects test, the irrevocable liability test is grounded in statutory and administrative text. See 15 U.S.C. 78j(b) (2012). The plain text does not exempt foreign securities from Section 10(b) s grasp. Rather, the text simply restricts Section 10(b) s application to domestic transactions involving both registered and non-registered foreign securities. See Absolute Activist Value Master Fund Ltd., 677 F.3d at 67 (citing Morrison, 561 U.S. at 267). Section 10(b) states that it shall be unlawful: 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 21

29 manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe U.S.C. 78j(b) (2012) (emphasis added). Similarly, Rule 10b-5 states that it shall be unlawful for any person: To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R b-5 (2012) (emphasis added). The irrevocable liability test comports with the textual requirements by triggering Section 10(b) liability in domestic transactions such as the domestic transaction in this case. See Parkcentral Global Hub Ltd., 763 F.3d at 211. b. Toshiba s intent-based approach is inconsistent with Morrison because it reenacts the very uncertainty Morrison sought to correct. The Court should adopt the Second Circuit s irrevocable liability test because that approach creates a stable background against which Congress can legislate with predictable effects. Morrison, 561 U.S. at 261. In setting forth a two-prong transactional test, Morrison rejected the so-called conduct and effects test, which focused on (1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens. Absolute Activist Value Master Fund Ltd., 677 at 65 (quoting SEC v. Berger, 322 F.3d 187, (2d Cir. 2003)). The intent-based test proposed by Petitioners would essentially overrule Morrison, and return to a conduct and effects regime. Compare Parkcentral Global Hub Ltd., 763 F.3d at 210 (noting the Morrison 22

30 Court s criticism of the conduct and effects tests as unpredictable and difficult to administer) with Toshiba Corp., 191 F. Supp. 3d at 1095 (considering the affirmative actions of the defendant corporation to sell securities in the U.S. in determining the reach of Section 10(b) liability). Further, the intent-based test urged by Petitioners and considered in Toshiba is not judicially manageable. The intent-based test harkens back to the conducts and effects test, which required the judiciary to weigh the involvement of foreign issuers without offering an analytical framework. Under the intent-based test, Morrison s second prong is satisfied if the securities occurred domestically and the issuer was sufficiently involved in the transaction. See Toshiba Corp., 191 F. Supp. 3d at Like the uncertainty created by requiring courts to determine when the degree of effect on a U.S. citizen warrants Section 10(b) liability, asking courts to determine when a foreign issuer crosses the threshold of sufficient involvement creates instability. Just as the Morrison Court rejected the conducts and effects test because it lacked predictability, this Court should reject Toshiba s intent-based test which similarly requires courts to analyze a defendant s level of involvement in a domestic transaction. 2. Mr. Foss prevails under the irrevocable liability test because the fraudulent securities transaction took place in the U.S. and was not predominantly foreign. Mr. Foss prevails under the irrevocable liability test because he purchased the fraudulent securities in the U.S. and the transaction was not predominantly foreign. It does not matter whether each individual Petitioner 23

31 engaged in at least some conduct in the U.S. For example, the defendant in Absolute Activist Value Master Fund Ltd. argued even if the [securities] transactions occurred in the United States, it would still be impermissible to apply 10(b) to him since he did not personally engage in any conduct in the United States. 677 F.3d at 69. However, Morrison s transactional test does not require that each defendant alleged to be involved in a fraudulent scheme engage in conduct in the United States. Id; see also Morison, 251 U.S. at 266 ( [T]he focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. ); Parkcentral Global Hub Ltd., 763 F.3d at 212 ( We also rejected proposed tests that would have looked to the identity of the buyer and seller... or whether, in addition to a domestic transaction, some fraudulent acts occurred in the United States[.] ). The transaction between Mr. Foss and the domestic broker was an undisputed domestic transaction. (R. at 8). Thus, for Petitioners to prevail they must show that this domestic transaction was predominantly foreign. See Parkcentral Global Hub Ltd., 763 F.3d at 216. Petitioners cannot meet this burden because of the substantial role they played in influencing the domestic sale to Mr. Foss. Fatal to Petitioners argument is the extent of their involvement in the domestic transaction. Cf. id. at Petitioners are no strangers to the United States Bouvier has a second home in Pebble Beach, Fordham, where he worked when developing the Chardin Network. (R. at 6). Petitioners via 24

32 their initial venture capital investor, Lagadere met with Pyrenees CEO in the U.S. (R. at 7). Lagadere shared Petitioners desire to contract with US-based social media platforms to increase the value of Chard tokens. (R. at 7). In response, the Pyrenees CEO proposed that his firm purchase a large amount of Chard tokens from a foreign exchange for private resale in the United States. (R. at 7). Petitioners did not object to this proposal, and Lagadere posted Petitioners marketing materials on the Pyrenees website. (R. at 7). Pyrenees then purchased 8 million worth of Chard tokens from a French cryptocurrency exchange and resold $1.5 million worth to Mr. Foss. (R. at 8). On these facts, Petitioners have sufficiently subjected themselves to Section 10(b) and Rule 10b-5 because they engaged in an act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R b-5 (2012) (emphasis added). Accordingly, Mr. Foss should prevail under the irrevocable liability test because the domestic transaction at issue satisfies Morrison s second prong. B. Even under the Toshiba standard, Petitioners were sufficiently involved with Chard tokens to warrant Section 10(b) liability. Even if this Court declines to adopt the Second Circuit s irrevocable liability test, the Court should still find the anti-fraud provisions of Section 10(b) encompass Mr. Foss domestic purchase of Chard tokens. Under Toshiba, transactions with evidence of sufficient affirmative acts related to the purchase or sale of securities in the United States are included in Section 10(b) liability. 25

33 See Toshiba Corp., 191 F. Supp. at 1095 (dismissing plaintiff in Section 10(b) action because it did not allege sufficient affirmative act[s] ). While Toshiba did not find sufficient evidence of involvement between the issuer and sales of ADRs in the United States, the holding opened the door for the right set of facts to do so. Here, Petitioners involvement in the transaction with Pyrenees was such that the mere adoption of the Toshiba analysis does not automatically absolve it of liability. Rather, analyzing the facts under Toshiba shows that Petitioners were sufficiently involved in the sale of Chard tokens to warrant Section 10(b) liability. 1. Unlisted foreign securities are subject to Section 10(b) liability where the issuer is involved in the domestic transaction. Under the Morrison framework, federal courts have ruled that U.S. investors may pursue Section 10(b) claims against foreign issuers if the defendant is sufficiently involved in a securities transaction occurring within the U.S. After the Morrison decision, courts were initially hesitant to extend the reach of Section 10(b). See In re Societe Generale Securities Litigation, No. 08- Civ. 2495, 2010 WL , at *6 (S.D.N.Y. Sept. 29, 2010) (announcing a broad rule that U.S. plaintiffs could not pursue 10(b) claims against foreign issuers for ADRs purchased on U.S exchanges). However, rather than follow this expansive holding, subsequent courts have conducted a more thorough analysis of the type of security and involvement of the foreign issuer, and in some cases found that Section 10(b) liability was justified. When ensuing courts have ruled against investors seeking redress from foreign issuers, they 26

34 have limited their holdings to specific facts rather than applying bright-line tests. The Toshiba court rejected the bright-line rule announced by In re Societe Generale Litigation and instead conducted an intent-based inquiry into the involvement of the foreign issuer. Toshiba Corp., 191 F. Supp. 3d at This two-part test requires that the transaction is domestic and the that the foreign issuer is sufficiently involved in the transaction. Id. That court ultimately found that unsponsored ADRs do not meet the threshold for requisite involvement by a foreign issuer to fall under Section 10(b) liability. Id. Therefore, to satisfy the second part of the Toshiba test, an investor must show affirmative acts by the foreign issuer. Where foreign issuers take direct, affirmative steps to make their securities available in the U.S., the actions are subject to Section 10(b) liability. In re Volkswagen Clean Diesel Marketing, Sales Practices and Products Liability Litigation, No. 3:15-md-02672, 2017 WL 66281, at *5 (N.D. Cal, Jan. 4, 2017); see also Vancouver Alumni Asset Holding Inc. v. Daimler AG, No. CV , 2017 WL , at *8 (C.D. Cal. May 31, 2017) (finding that entering into a deposit agreement with an American bank constituted affirmative steps to make securities available in the United States). The Volkswagen court found that sponsored ADRs established direct involvement in U.S. securities markets and therefore constituted sufficient affirmative action. Id. Volkswagen held that the sponsored ADRs were distinguishable from the unsponsored ADRs in 27