BMA LLC v. HDR Global Trading Limited

Background

BMA LLC, which the complaint described as co-owned by multiple individual traders, and individual traders Vitaly Dubinin, Yaroslav Kolchin, Dmitry Dolgov, and Paun Gabriel Razvan brought a consolidated action against HDR Global Trading Limited, ABS Global Trading Limited, and HDR’s co-founders Arthur Hayes, Ben Delo, and Samuel Reed. HDR owns BitMEX, a cryptocurrency derivatives trading platform, and ABS is HDR’s wholly owned subsidiary.

The plaintiffs alleged market manipulation and fraudulent inducement, among other theories. Their second amended consolidated complaint asserted 33 counts under the Commodity Exchange Act, the Racketeer Influenced and Corrupt Organizations Act, common-law fraud and negligent misrepresentation theories, California’s False Advertising Law, Consumers Legal Remedies Act, and Unfair Competition Law, negligence, and other state-law theories.

The court had previously dismissed an earlier consolidated complaint but allowed amendment. The new complaint was 378 pages long and contained 1,035 paragraphs. The court said its length and lack of a short and plain statement independently supported dismissal, and it also examined whether the complaint stated any plausible claim. After the motion to dismiss had been fully briefed and heard, plaintiffs Dubinin, Dolgov, and Razvan voluntarily dismissed their claims without prejudice. The order therefore addressed the claims pursued by BMA and Kolchin.

Legal standard

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which requires dismissal when a complaint does not state a claim for relief. The court explained that a complaint must include enough factual allegations to make liability plausible rather than merely possible. Because the complaint alleged fraud, Federal Rule of Civil Procedure 9(b) also required particular details about the alleged misconduct, including who made the statements, what was said, when and where it was said, and how it was misleading.

Market-manipulation allegations

The court found that the plaintiffs had not materially corrected the defects identified in the earlier order. The plaintiffs copied more than 80 paragraphs from an amended complaint in a different case involving the same defendants. The court declined to consider those copied allegations in evaluating this complaint, stating that the judge in the other case would decide whether the allegations there were plausible. The court also found that the remaining allegations were conclusory and did not plausibly show that the defendants manipulated prices or caused the plaintiffs’ losses.

The court rejected allegations based on social-media posts about a person identified as “Ben Aabtc,” including allegations that he had manipulated the bitcoin market in April and May 2018. The court noted that those events occurred months before the dates when the plaintiffs alleged that they deposited bitcoin or suffered losses. The court also found that allegations concerning the trader account “Quick-Grove-Mind” did not plausibly explain why the account belonged to a defendant or how the defendants caused the alleged losses.

Fraudulent-inducement allegations

The plaintiffs alleged that they were induced to use BitMEX by statements in the Terms of Service about HDR’s trading arm and by a website statement that BitMEX had “1500% More Bitcoin / USD liquidity than any other platform.”

Regarding the Terms of Service, the plaintiffs alleged that the trading arm actually had broad access to customer and trading information and was not subject to certain system restrictions. The court found that the plaintiffs did not plead specific facts showing that the Terms of Service statements were false, because they did not plausibly show that the alleged insider trading desk engaged in market manipulation.

Regarding the liquidity statement, the court found that the plaintiffs relied on an inadequately explained data analysis from another exchange. They did not identify the source or time period of the analysis or show that the statement was false on the dates when BMA and Kolchin allegedly relied on it. The court also said that the plaintiffs could not add new factual material through their opposition brief. It concluded that both fraudulent-inducement theories failed under the basic pleading rule and the stricter fraud-pleading rule.

Standing and causation

The court again found that the plaintiffs had not plausibly connected their claimed losses to the defendants’ alleged conduct. Article III standing requires a plaintiff to allege an injury that is fairly traceable to the challenged conduct. The court said the complaint did not adequately distinguish losses caused by the defendants from losses caused by third parties or ordinary market forces.

The court also rejected the new categories of alleged damages—loss of use of bitcoin and trading commissions—because the plaintiffs had not plausibly alleged false representations or connected those representations to the claimed losses. In addition, the court found that BMA had not identified the accounts through which it allegedly traded or provided information showing that it was asserting its own rights rather than those of unidentified members. The court dismissed BMA’s claims with prejudice for that additional reason.

Federal claims

The court dismissed the Commodity Exchange Act claims in Counts 1 through 8. The market-manipulation claims failed because the complaint did not plausibly allege the necessary manipulation, intent, and causation. The fraudulent-inducement claims failed because the complaint did not plead a false statement, loss causation, and defendant-specific facts supporting fraudulent intent with the required particularity. The principal-agent and aiding-and-abetting theories depended on the inadequately pleaded underlying violations.

The court also dismissed the Racketeer Influenced and Corrupt Organizations Act claims in Counts 9 through 14. The plaintiffs did not plausibly allege that their losses were proximately caused by racketeering, that the alleged enterprise was legally distinct from the defendants’ business, or that the defendants engaged in racketeering activity. The alleged predicate acts depended on the deficient market-manipulation and fraudulent-inducement theories.

State-law claims

The common-law fraud and negligent-misrepresentation claims in Counts 15 through 20 failed because the complaint did not adequately allege falsity and causation. The California False Advertising Law, Consumers Legal Remedies Act, and Unfair Competition Law claims in Counts 21 through 25 also failed because the plaintiffs did not adequately allege reliance, injury, or false representations. The court further held that the Federal Trade Commission Act could not serve as the basis for a private Unfair Competition Law claim.

The negligence claim in Count 26 failed because the plaintiffs repeated inadequate allegations about a special relationship and a duty to maintain a functioning trading marketplace. The court also said the alleged failure to provide trading functionality appeared to concern a contract rather than an independent tort duty, and that causation remained inadequately pleaded.

The remaining claims in Counts 27 through 33—including restitution or quasi-contract, constructive trust, accounting, conversion, replevin, aiding and abetting conversion, and violation of California Penal Code section 496—failed because they depended on the deficient misconduct and causation allegations. The court also stated that bitcoin is intangible property and therefore could not be recovered in a conversion action as specific property.

Other motions and disposition

The court granted plaintiffs’ administrative motion to file a sur-reply, finding that the arguments identified by plaintiffs were responsive rather than new. The court also granted defendants’ request for judicial notice of specified materials.

The court granted the defendants’ motion to dismiss the second amended consolidated complaint with prejudice. It denied plaintiffs’ requests for further leave to amend, concluding that amendment was not warranted after multiple versions of the complaint, the earlier dismissal order, and the continued pleading deficiencies.