United States District Court Dismisses Class Action Against Blockchain Company
August 25, 2023
Background
Judge Georgette Castner of the United States District Court for the District of New Jersey has dismissed a putative class action against a company that supports and operates blockchain technologies and certain executives and investors. This is the third amended complaint filed by the plaintiff, and the Court has determined that the plaintiff failed to adequately allege misrepresentations or scienter, resulting in the dismissal of the action with prejudice.
Allegations
The plaintiff alleged that the company, at the urging of an investor group, transitioned from being a biomedical company to a blockchain and cryptocurrency company in order to inflate the price of its shares. The plaintiff claimed that certain investors were acting as a group and that the company failed to disclose this information, violating the Securities Exchange Act.
Court’s Decision
The Court rejected the plaintiff’s argument that the alleged failure to disclose the investor group’s actions violated the Exchange Act. The Court stated that a failure to adhere to disclosure requirements does not necessarily constitute a material misstatement or omission. Additionally, the Court found that the plaintiff failed to provide evidence that the individual defendants were acting as a group for the purpose of acquiring, holding, or disposing of securities.
The Court also noted that a failure to disclose pursuant to regulations did not automatically give rise to liability under the Exchange Act. The plaintiff’s alleged omissions suffered from other pleading deficiencies and failed to demonstrate why the information would have significantly altered the total mix of available information.
The Court found that separate statements in the company’s registration statements were not false or misleading. The statements accurately disclosed the status of the individual defendants’ investments and were considered puffery, as they expressed confidence in their compliance with reporting obligations and denied engaging in stock manipulation.
Furthermore, the Court reiterated that the plaintiff’s scheme liability claim failed as it repackaged previously dismissed allegations and failed to correct prior deficiencies.
Conclusion
The Court’s decision to dismiss the class action with prejudice highlights the importance of adequately alleging misrepresentations and scienter in securities fraud claims. The plaintiff’s failure to provide sufficient evidence and address previous deficiencies led to the dismissal of the action.
