Alec Otto v. Nano f/k/a Raiblocks f/k/a Hieusys LLC

Background

The court had ordered Nano f/k/a RaiBlocks f/k/a Hieusys, LLC, Colin LeMahieu, Mica Busch, Zack Shapiro, and Troy Retzer to brief whether sanctions should be imposed against Alec Otto or his counsel under Section 27(c)(1) of the Securities Act of 1933. That provision requires a court handling a private action under that section to make specific findings about each party’s and attorney’s compliance with Rule 11(b) of the Federal Rules of Civil Procedure for complaints, responsive pleadings, and dispositive motions. Rule 11 generally requires filings to have a proper purpose, factual support, and a nonfrivolous legal basis.

The defendants identified at least seven filings: the original complaint, the amended complaint, the supplemental pleading, the motion to strike the defendants’ affirmative defenses, and three opposition briefs to dispositive motions.

Court’s analysis

For the original complaint, the defendants argued that Otto’s Section 12 claims were facially outside the one-year limitations period and that the tolling argument was foreclosed by controlling authority. The court disagreed. Although the argument ultimately failed, the court found that counsel reasonably presented a novel question about whether Section 12 class claims could be equitably tolled, relying on existing authority and noting that the Ninth Circuit had not previously addressed the issue. The court also found that Otto’s state-law claims, which were later dismissed in their entirety from the original complaint, were not frivolous.

The court rejected the sanctions request concerning the amended complaint for the same reasons.

For the supplemental pleading, the defendants challenged factual allegations about Otto’s XRB cryptocurrency transactions. The court recognized that many allegations later proved untrue, but found that counsel and Otto had conducted a good-faith investigation using Otto’s investment records, publicly known cryptocurrency wallet addresses, exchange rates, and transaction information. The court therefore found the allegations nonfrivolous.

The defendants also argued that sanctions were warranted because Otto’s motion to strike all of the defendants’ affirmative defenses had previously been described as frivolous. The court had warned about the motion’s failure to meet basic standards, but had also warned the defendants against including affirmative defenses without a legitimate legal basis. Considering the conduct on both sides, the court was not inclined to impose sanctions, while cautioning counsel against repeating the conduct in future cases.

Finally, the defendants challenged counsel’s opposition to three dispositive motions: motions to dismiss the original and amended complaints and a motion concerning whether the case should proceed in the chosen forum rather than Italy. The court found that Otto and his counsel complied with Rule 11. It found the tolling and state-law arguments legally supported, even though some claims were dismissed and the arguments were unsuccessful. It also found the argument that Italy was not an adequate alternative forum neither baseless nor frivolous. The court noted that it had denied the forum motion because the relevant factors favored Otto’s choice of forum.

Disposition

The court denied the motion for sanctions. It found that sanctions were not warranted against either side and that the parties and their counsel sufficiently complied with their Rule 11 obligations. The court also stated that Otto had previously dismissed the action, ordered that the order terminate the action, and directed the clerk to close the case.