Cress v. Nexo Financial LLC

Background

John Cress sued Nexo Financial LLC, Nexo Financial Services Ltd., Nexo AG, Nexo Capital, Inc., and Antoni Trenchev. The opinion states that Trenchev was Nexo’s co-founder, managing partner, and chief executive officer. Cress alleged that Nexo fraudulently induced him to take loans secured by millions of dollars in digital assets. He alleged that Nexo’s representations about customer support, a liquidation-relief program, interest on collateral, and the risks associated with NEXO Tokens led him to take out approximately $5.4 million in loans and then $7.45 million more. After the price of NEXO Tokens fell, Nexo allegedly liquidated nearly all of his digital assets without the warnings required by its terms.

Cress’s amended complaint asserted five causes of action: fraudulent inducement of contract; a claim under California’s Unfair Competition Law (UCL); two claims concerning unregistered offers and sales of securities under California Corporations Code sections 25110, 25503, and 25504; and securities fraud under sections 25401 and 25504.1. The court’s earlier order had dismissed claims against all defendants except Nexo Capital for lack of personal jurisdiction, meaning the court concluded it lacked sufficient legal authority over those defendants. That earlier order also dismissed or narrowed several claims but allowed Cress to amend.

Motion to Dismiss

Defendants moved under Federal Rule of Civil Procedure 12(b)(2) and Rule 12(b)(6). Rule 12(b)(2) concerns personal jurisdiction. Rule 12(b)(6) tests whether the complaint alleges enough facts to state a legally sufficient claim. Defendants asked the court to dismiss previously rejected claims and parties, without leave to amend, arguing that Cress had added no material allegations concerning those claims. They did not seek reconsideration of the court’s earlier denial of dismissal for certain claims and reserved the right to challenge those claims at summary judgment.

Personal Jurisdiction

Cress did not address Defendants’ argument concerning personal jurisdiction. The court therefore granted the motion to dismiss all defendants except Nexo Capital for lack of personal jurisdiction. The court stated that this dismissal was without leave to amend.

UCL Claim

The court granted dismissal of Cress’s UCL claim to the extent it was based on alleged deceptive conduct involving the sale of NEXO Tokens or the Nexo Earn Account, advertised interest rates available only to customers maintaining 10 percent of their portfolio in NEXO Tokens, or Nexo’s alleged failure to warn Cress before liquidating his assets. The dismissal was without leave to amend.

Unregistered-Securities Claims

The court granted dismissal of Cress’s claims under California Corporations Code sections 25110 and 25503 to the extent they were based on the Earn Account and the alleged “Leveraged Investment Instrument.” The court had previously concluded that Cress had not alleged a type of loss for which section 25503 provided a remedy concerning the Earn Account, and had rejected his broad theory that all assets used as collateral formed one investment security.

The court denied dismissal of the same unregistered-securities claim to the extent it was based on NEXO Tokens. Defendants argued that the claim was barred by the National Securities Markets Improvement Act because the NEXO Token was a federally covered security. The court explained that federal preemption is a defense that Defendants had to establish. Based on new allegations that Nexo may have sold NEXO Tokens to non-accredited investors, failed to take reasonable steps to verify purchasers’ status, and failed to ensure that purchasers were not statutory underwriters, the court concluded that preemption could not fairly be established from the complaint. The court held that factual questions prevented dismissal at the pleading stage.

Securities-Fraud Claims

The court granted dismissal of Cress’s securities-fraud claims under California Corporations Code sections 25401 and 25504.1, except for the claim based on the alleged statement that the NEXO Token was registered with the Securities and Exchange Commission as a security. The dismissal was without leave to amend.

Disposition

The court granted in part and denied in part Defendants’ motion to dismiss. It dismissed all claims against Nexo Financial LLC, Nexo Financial Services Ltd., Nexo AG, and Antoni Trenchev for lack of personal jurisdiction; dismissed the specified portions of the UCL claim; dismissed the unregistered-securities claims concerning the Earn Account and Leveraged Investment Instrument but denied dismissal of the NEXO Token portion; and dismissed the securities-fraud claims except for the alleged registration statement. The dismissed claims were dismissed without leave to amend. Judge Thomas S. Hixson signed the order.