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 unidentified defendants. The plaintiffs alleged securities fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), and common-law claims arising from the defendants’ sale of cryptocurrency tokens and alleged breaches of service agreements.

The amended complaint alleged that Bell and Cheng created a fraudulent cryptocurrency business, used a false white paper and business summary to solicit plaintiffs’ investment, falsely claimed that Alchemy had received a $30 million investment, and represented that Alchemy had a functioning blockchain-based lending platform and registered securities. Plaintiffs alleged that they transferred $250,000 for tokens that were never provided and supplied marketing and consulting services under agreements for which they were not paid.

Bell, who was proceeding without a lawyer, moved to dismiss the First Amended Complaint under Federal Rules of Civil Procedure 8 and 12(b)(6), arguing that it did not adequately state claims and did not plead fraud with enough detail. On a motion to dismiss, the court generally accepts the complaint’s factual allegations as true and asks whether they plausibly show an entitlement to relief.

Rule 8 and pleading detail

The court rejected Bell’s arguments that the amended complaint was too vague, improperly combined allegations, or failed to identify Bell’s personal involvement. The court found that the complaint identified relevant names, dates, agreements, communications, locations, amounts, and alleged conduct. It also found that the complaint was not an impermissible “shotgun” or “puzzle” pleading and denied the motion to dismiss on those grounds.

Claims allowed to proceed

The court treated the allegations against the Alchemy entities as allegations against Bell for purposes of the motion because the plaintiffs adequately alleged facts supporting a possible alter-ego or veil-piercing theory. The allegations included Bell’s control of Alchemy Finance, disregard of corporate formalities, commingling of funds, and use of the entities to induce plaintiffs to transfer funds and to shield defendants from liability.

The court denied dismissal of the breach-of-contract claim. It found that the plaintiffs adequately alleged three agreements—the Token Purchase Agreement, Master Services Agreement, and Advisory Agreement—along with their own performance, alleged breaches, and claimed damages.

The court also denied dismissal of the fraudulent-inducement claim. It concluded that the alleged statements about the lending platform and the purported $30 million investment were statements made before the agreements and were distinct from a mere promise to perform those agreements. The plaintiffs also sufficiently alleged that Bell made material false statements knowingly, intended to induce their conduct, and caused claimed losses totaling $565,000.

The court denied dismissal of the account-stated claim. Although the court noted that the claim might duplicate another claim, Bell had not made that argument in his motion, so the court did not dismiss the claim on that basis without first giving plaintiffs an opportunity to respond. The court instead found sufficient allegations that defendants received invoices, did not dispute them, and acknowledged that payment was still owed.

The court denied dismissal of the Securities Exchange Act Section 10(b) and Rule 10b-5 claims. It found that the complaint adequately alleged Bell’s personal role in preparing the false white paper and business summary, that the alleged misrepresentations concerned the sale of securities, and that Bell acted with the required wrongful state of mind. The court also found sufficient allegations that the cryptocurrency tokens were investment contracts under the test it discussed for determining whether an asset is a security.

The court denied dismissal of the Securities Act Section 12(a) claim. It found that the complaint adequately alleged that Bell was a seller of the tokens, that the tokens were not registered, and that emails and wire transfers used interstate commerce in connection with the alleged sale.

The court denied dismissal of the aiding-and-abetting-fraud claim. It found that the plaintiffs adequately alleged an underlying fraud, Bell’s actual knowledge of it, and substantial assistance through his preparation of the allegedly false white paper and business summary.

The court also declined to dismiss the RICO Section 1962(c) claim. It found that the plaintiffs alleged Bell’s participation in Alchemy’s affairs and at least two alleged predicate acts—securities fraud and wire fraud—along with a continuing scheme spanning 2018 into 2019. The court stated that it could not determine the claim’s ultimate merit at that stage, but found Bell’s dismissal arguments insufficient.

Claims dismissed and final ruling

The court granted the motion to dismiss the unjust-enrichment claim because it repeated the fraudulent-inducement allegations and sought the same $565,000 based on the same agreements, services, and transactions.

The court also dismissed the Securities Act Section 17(a) claim because the plaintiffs did not respond to Bell’s argument for dismissal, which the court treated as abandonment of that claim. The court denied the plaintiffs’ request for leave to amend these claims, finding amendment would be futile because the unjust-enrichment claim was duplicative and the Section 17(a) claim had been abandoned.

Judge Ramos therefore granted Bell’s motion to dismiss as to the unjust-enrichment and Section 17(a) claims, and denied it as to the breach-of-contract, fraudulent-inducement, account-stated, Securities Exchange Act Section 10(b) and Rule 10b-5, Securities Act Section 12(a), aiding-and-abetting-fraud, and RICO Section 1962(c) claims.