Rostami v. Open Props, Inc.

Background

Romein Rostami invested in Props Tokens offered by Open Props, Inc., formerly known as YouNow, Inc. Open Props promoted the tokens as part of a decentralized digital-media ecosystem. Rostami entered into a Simple Agreement for Future Tokens in January 2018 and signed an amended agreement in April 2018. He received Props Tokens by March 4, 2019.

Rostami alleged that Open Props later changed the network from a decentralized blockchain to a permissioned blockchain controlled by Open Props. He also alleged that Open Props pursued a public offering under Regulation A and later announced that it was ending its issuance of Props Tokens. According to Rostami, the tokens became worthless because a platform no longer existed on which they could be used or traded.

Rostami sued Open Props, Adi Sideman, Yonatan Sela, Eran Kalmanson, and Ben Perper. He asserted claims for fraudulent inducement, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and alter ego liability. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim.

Fraudulent Inducement

The court held that Rostami did not adequately plead fraudulent inducement under New York law. A fraudulent-inducement claim requires a material misrepresentation or omission, knowledge that it was false, an intent to induce reliance, reasonable reliance, and injury. Fraud claims also must identify the alleged false statements, their speaker, where and when they were made, why they were false, and facts supporting a strong inference of fraudulent intent.

The court found that many of the promotional statements were promises about future conduct or general praise that could not support a fraud claim. The court treated the statements about decentralization as potentially actionable because whether a network is decentralized could be an objective, provable fact. But even assuming those statements were actionable, the court found that Rostami had not plausibly alleged reasonable reliance. The whitepapers disclosed regulatory and other risks, stated that some parts of the platform might remain centralized, and the SAFT warned that the investment could be completely lost and might have to be held for an indefinite period.

The court also found that Rostami did not adequately plead fraudulent intent. His allegation that the defendants never intended to create a functioning decentralized network was conclusory. The court held that the Regulation A offering, by itself, did not support an inference that the defendants intended to mislead investors, particularly because the SAFT had stated that the Props Tokens were securities and the defendants’ regulatory efforts were consistent with that disclosure. The court dismissed the fraudulent-inducement claim.

Unjust Enrichment

The court dismissed the unjust-enrichment claim. It reasoned that Rostami had not plausibly alleged fraudulent conduct and that the investment’s risks had been disclosed. The court found that the realization of those risks did not, on the allegations presented, make it unjust for the defendants to retain the investment.

Implied Covenant of Good Faith and Fair Dealing

The court dismissed the claim that the defendants breached the implied promise of good faith and fair dealing. It held that the SAFT was fully performed when Open Props delivered the Props Tokens. Rostami did not have a justified expectation that his investment would retain value because the venture’s risks had been publicly disclosed. The defendants’ alleged failure to generate a return therefore did not support this claim.

Alter Ego Liability

The court dismissed the alter ego theory as well. Because Rostami had not stated a viable claim for an underlying legal wrong, the court held that his attempt to hold the individual defendants responsible through an alter ego theory also failed.

Disposition

Judge Ronnie Abrams granted the defendants’ motion to dismiss. The court dismissed all claims and gave Rostami one opportunity to amend the complaint within 30 days, provided he had a good-faith basis to do so. The opinion does not add a prejudice qualifier to the dismissal.