Patterson v. TerraForm Labs Pte Ltd.

Background

This putative securities class action concerns Jump Trading LLC’s alleged involvement in the promotion and sale of Terra cryptocurrency tokens, including UST and LUNA. The plaintiffs alleged that Jump colluded with Terraform Labs Pte. Ltd. and others in a scheme involving the tokens and concealed Jump’s role in supporting UST’s dollar peg. The tokens’ prices allegedly fell sharply between May 7 and May 12, 2022. The plaintiffs alleged federal securities-law claims and alternative claims under the Racketeer Influenced and Corrupt Organizations Act and California law for aiding and abetting, conspiracy, and unjust enrichment.

The lead plaintiff, Michael Tobias, had agreed with Terraform Labs to use the Anchor Protocol Interface under terms that included arbitration in Singapore under Singapore law. Jump was not a party to that agreement and had not entered into a separate arbitration agreement with Tobias. Jump nevertheless sought to compel arbitration of Tobias’s claims against Jump and moved to dismiss the second amended complaint for failure to state a claim.

Arbitration

The court denied Jump’s motion to compel arbitration. It held that the court, rather than an arbitrator, would decide whether Jump could enforce Tobias’s agreement with Terraform Labs. Although the agreement assigned at least some arbitrability questions to an arbitrator, it did not clearly and unmistakably assign to the arbitrator the question whether a third-party nonsignatory such as Jump could enforce the agreement.

The court then held that Jump could not enforce the agreement under equitable estoppel, a doctrine that can sometimes allow a nonparty to enforce an arbitration clause. Because the case involved an international arbitration agreement, the court applied federal substantive law and ordinary contract and agency principles. The court concluded that Tobias’s claims against Jump were securities-fraud claims based on Jump’s alleged conduct and statements surrounding the May 2021 UST re-peg, not claims based on the Anchor Interface or the terms of Tobias’s agreement with Terraform Labs. The claims therefore were not sufficiently intertwined with that agreement.

Motion to Dismiss

The court granted Jump’s motion to dismiss with leave to amend. It first held that the plaintiffs adequately pleaded that the Terra tokens were securities. Applying the investment-contract test, the court found sufficient allegations that investors invested money, participated in a common enterprise, and expected profits from the managerial and entrepreneurial efforts of Terraform Labs, its founder, and the Luna Foundation Guard.

The court nevertheless found that the plaintiffs had not adequately pleaded a material misrepresentation or omission under Section 10(b) of the Securities Exchange Act and Rule 10b-5(b). The complaint challenged several Jump statements, including an October 2021 blog post, a January 2022 social-media post by Jump’s president, statements in a February 2022 Luna Foundation Guard press release and related post, comments during a March 2022 appearance, and a March 2022 article about earning rewards from staking LUNA. The court concluded that the complaint did not specify with the required particularity why the challenged statements were false or misleading, did not identify specific statements for the March appearance, and did not adequately explain why statements made by the Luna Foundation Guard could be attributed to Jump. The court also stated that some challenged statements appeared to be opinions rather than objectively verifiable factual statements.

The court also granted dismissal with leave to amend as to the claims that Jump engaged in a manipulative or deceptive act under Rule 10b-5(a) and Rule 10b-5(c). The complaint alleged that Jump purchased large quantities of UST during the May 2021 re-peg, but it did not adequately allege that Jump acted with a deceptive purpose or that Jump’s conduct itself furthered a deceptive scheme. The complaint also did not specifically allege that Jump had a duty to disclose its role in the re-peg and improperly relied on group allegations concerning multiple defendants.

The court did not decide Jump’s additional arguments concerning scienter, control-person liability, reliance, or loss causation because it dismissed the claims on other grounds. The court dismissed the alternative RICO and California-law claims without prejudice to their reassertion if the court later revisited and changed its conclusion that Terra tokens are securities.

Disposition

The order denied the motion to compel arbitration and granted the motion to dismiss with leave to amend. Any amended complaint was required to be filed within 21 days and to include a numbered chart identifying each allegedly false or misleading statement, its speaker and date, and the supporting allegations concerning falsity and scienter.