Digilytic International FZE v. Alchemy Finance, Inc.

Background

Digilytic International FZE and Rishan Bhagowat sued Alchemy Finance, Inc.; Alchemy Company, Limited; Alchemy Coin Technology, Limited; Alchemyze Capital, LLC; Sheng-Wen Cheng; Jahril Tafari Bell; and Does 1–20. The plaintiffs alleged that the defendants made fraudulent statements about a cryptocurrency token offering, including a purported $30 million investment by Staxx Solutions Capital and the existence of a functioning blockchain lending platform. The plaintiffs said they transferred $250,000 under a Token Purchase Agreement and provided marketing and advisory services under two additional agreements, but did not receive the promised tokens or payments.

The First Amended Complaint asserted federal securities claims, a claim under the Racketeer Influenced and Corrupt Organizations Act, and state-law claims including fraudulent inducement, breach of contract, unjust enrichment, aiding and abetting fraud, and account stated. Cheng, proceeding without a lawyer, moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(5), and 12(b)(6). He also moved for reconsideration of the court’s earlier denial of his request for sanctions against the plaintiffs’ lawyers under Rule 11.

Motion to Dismiss

The court denied Cheng’s Rule 12(b)(1) motion. The complaint alleged federal claims under the Securities Exchange Act, the Securities Act, and the Racketeer Influenced and Corrupt Organizations Act, and the court found those claims were not wholly insubstantial or frivolous. The court therefore had federal-question jurisdiction.

The court also denied Cheng’s Rule 12(b)(5) motion based on allegedly inadequate service of process. An August 10, 2020 order had expressly waived defenses based on improper service for Cheng and the Alchemy defendants. Because Cheng did not dispute that his former lawyer had authority to make that waiver, the court held that he was barred from asserting the service objection.

Under Rule 12(b)(6), the court granted the motion as to the account-stated, unjust-enrichment, and Securities Act Section 17(a) claims. The court treated those claims as abandoned because the plaintiffs did not respond to Cheng’s arguments seeking their dismissal. In its conclusion, the court stated that these claims were dismissed with prejudice.

The court denied dismissal of the fraudulent-inducement claim. It held that the plaintiffs adequately alleged false statements, Cheng’s intent to deceive, reasonable reliance, and financial loss, including allegations identifying the statements, their speaker, when and where they were made, and why they were false.

The court denied dismissal of the common-law aiding-and-abetting-fraud claim because Cheng’s challenge depended on the alleged failure of the underlying fraudulent-inducement claim, which the court found adequately pleaded.

The court denied dismissal of the breach-of-contract claims concerning the Token Purchase Agreement, the Master Services Agreement, and the Advisory Agreement. The plaintiffs adequately alleged the agreements, their own performance, Cheng’s alleged breaches, and damages. The alleged damages included $250,000 for the undelivered tokens, $85,000 in unpaid marketing invoices, and $230,000 in unpaid advisory fees.

The court denied dismissal of the Securities Exchange Act Section 10(b) and Rule 10b-5 claim. It rejected Cheng’s argument that the plaintiffs should have discovered the alleged fraud by checking whether a regulatory Form D had been filed. The court also rejected the argument that the securities claim duplicated the state-law claims, finding that the claims involved distinct legal theories and damages.

The court denied dismissal of the Securities Act Section 12(a)(2) claim. It rejected Cheng’s statute-of-limitations argument at the pleading stage and found that the claim was not shown to be duplicative. The court noted that the allegations appeared to concern a private securities sale, which could create a problem under Section 12(a)(2), but declined to dismiss on that basis because Cheng raised the argument for the first time in his reply and the plaintiffs had not been given an opportunity to respond.

The court denied dismissal of the RICO claim. It held that the plaintiffs adequately alleged an enterprise, Cheng’s participation in that enterprise, and a pattern of racketeering activity based on wire fraud and securities fraud. The court rejected the plaintiffs’ reliance on Cheng’s alleged marriage and passport fraud as related predicate acts because those allegations were not plausibly connected to the enterprise. But it held that the RICO securities-fraud exception did not bar the claim because Cheng had pleaded guilty to securities fraud involving the specific misconduct against these plaintiffs. The court also found that the plaintiffs adequately alleged a domestic injury because much of the alleged racketeering activity occurred in the United States.

Reconsideration and Rule 11 Sanctions

The court granted Cheng’s motion for reconsideration of its earlier order denying Rule 11 sanctions. Cheng submitted an affidavit and certified-mail receipt showing that he had sent a draft sanctions motion to the plaintiffs’ counsel more than 21 days before filing it, satisfying Rule 11’s notice, or “safe harbor,” requirement. The plaintiffs did not dispute that he had complied with that requirement.

After reconsidering the issue, the court denied Cheng’s underlying motion for Rule 11 sanctions. Cheng argued that the RICO claim was frivolous and brought to harass him, but the court found that he largely repeated his arguments for dismissing the RICO claim. Because the court had found that the RICO claim was adequately pleaded, it concluded that the claim was not so unsupported or frivolous as to justify sanctions.

Disposition

Cheng’s motion to dismiss was granted in part and denied in part. The account-stated, unjust-enrichment, and Section 17(a) claims were dismissed with prejudice. The motion for reconsideration was granted, but the underlying request for Rule 11 sanctions was denied. The court directed the parties to appear for a telephonic status conference on October 1, 2024.