Shift Markets Group, Inc. v. Alkemi AI Inc..

Background

Shift Markets Group, Inc. sued Alkemi AI Inc., Arkana Capital, and Ryan Breen. The amended complaint asserted claims for conversion, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, aiding and abetting fraud, civil conspiracy, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment.

According to the amended complaint, Alkemi solicited Shift Markets’ investment in New York around late 2019 or early 2020. In June 2020, Shift Markets and Alkemi entered into a Simple Agreement for Future Equity under which Shift Markets invested $200,000. The agreement stated that Alkemi would use the investment for general working-capital purposes and gave Shift Markets an option to convert its shares into Alkemi Tokens. Shift Markets alleged that Breen later transferred the investment from Alkemi to Arkana Capital, that work on the Alkemi Protocol stopped, and that the value of the tokens declined. Shift Markets demanded the return of its investment, but the defendants did not refund it.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12. The court considered the factual allegations as true only for purposes of deciding the dismissal motions.

Personal Jurisdiction

The court first addressed personal jurisdiction, meaning the court’s authority to exercise power over a particular defendant. It considered New York’s long-arm statute and constitutional due-process requirements for specific jurisdiction. The court explained that Shift Markets had to make a preliminary factual showing that each defendant had sufficient connections with New York related to each asserted claim.

As to Alkemi and Breen, the court rejected jurisdiction under New York Civil Practice Law and Rules § 302(a)(1). Although Shift Markets alleged that the defendants solicited the investment, negotiated with Shift Markets, and made representations during calls, meetings, presentations, and written communications involving New York, the court found no sufficient connection between the assets at issue and New York. The court also found that the defendants’ website and related token activity did not support jurisdiction because Shift Markets did not allege that it was solicited through or interacted with the website.

The court also rejected jurisdiction under § 302(a)(2). Shift Markets appeared to rely partly on a conspiracy or agency theory, but the amended complaint did not clearly identify which defendant acted for another, what alleged overt acts occurred in New York, or whether an agency relationship existed. The court found that the complaint’s repeated use of collective references to “Defendants” made it unclear which communications and actions were attributable to which party.

The court rejected jurisdiction under § 302(a)(3), which can apply when a defendant commits a tort outside New York that causes injury in New York and additional statutory requirements are met. The court found that the amended complaint did not adequately allege that the defendants regularly did business in New York, had a persistent course of conduct there, or derived substantial revenue from business connected to the state. It also found insufficient allegations showing that the defendants reasonably expected their actions to have consequences in New York together with a purposeful New York connection.

The court further rejected Shift Markets’ argument that Breen’s relationship with Alkemi and Arkana justified jurisdiction by disregarding the companies’ separate identities. Shift Markets alleged that Breen was an executive of both companies, transferred funds from Alkemi to Arkana, and involved both companies in the alleged scheme. The court found those allegations insufficient because Shift Markets did not allege facts about corporate formalities, undercapitalization, commingling of funds, shared offices or telephone numbers, or other facts showing that either company was merely a shell for Breen. The court also noted that Arkana was formed after the initial solicitation and after the alleged termination of work on the Alkemi Protocol.

As to Arkana, the court found that Shift Markets offered only a conclusory assertion that Arkana derived substantial revenue from interstate or international commerce. The court therefore denied jurisdiction under § 302(a)(3)(ii) and also rejected the alternative conspiracy, agency, and corporate-form theories.

Jurisdictional Discovery and Amendment

The court declined to order additional discovery on jurisdiction because Shift Markets had not made the required preliminary showing that its jurisdictional position was not frivolous. However, the court concluded that it was not impossible for Shift Markets to make that showing through further amendment.

Disposition

The court granted the defendants’ motions to dismiss on personal-jurisdiction grounds and declined to address whether Shift Markets had adequately pleaded its underlying claims. The court stated that the defendants’ motion was granted without prejudice and ordered Shift Markets to file an amended complaint within 21 days after entry of the order.