Winter v. Stronghold Digital Mining, Inc.

Background

Plaintiffs Gulzar Ahmed and Allegheny County Employees Retirement System brought a proposed federal class action against Stronghold Digital Mining, Inc., three company officers or directors, and the underwriters for Stronghold’s October 2021 initial public offering. They alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 based on statements and omissions in Stronghold’s registration statement and prospectus.

The claims focused primarily on 15,000 cryptocurrency-mining machines that MinerVa Semiconductor Corp. had agreed to supply. Stronghold’s offering documents described an anticipated delivery schedule and projected computing capacity. After the offering, Stronghold disclosed that far fewer machines had arrived than expected and that the machines’ performance was below expectations. Plaintiffs alleged that the delivery schedule and computing-capacity statements were materially misleading when the offering documents were issued.

Stronghold and its officers moved to dismiss, and the underwriters filed a separate motion to dismiss. The court considered the factual allegations true for purposes of those motions.

Misleading statements

The court held that the plaintiffs plausibly alleged at least one actionable material misstatement or omission. The complaint alleged that Stronghold had not made the remaining payment for the MinerVa machines even though payment was due one month before shipment, that power outages had affected MinerVa’s facilities before and during the offering, and that MinerVa lacked necessary parts to build the ordered machines. These allegations plausibly suggested that Stronghold could not have reasonably anticipated receiving the machines according to the schedule described in the offering documents.

The court rejected the defendants’ argument that the plaintiffs had to plead that the defendants knew, or should have known, that the statements were false. The court explained that Sections 11 and 12(a)(2) do not require plaintiffs to plead intent to mislead or knowledge of falsity. Instead, defendants other than the issuer may later assert statutory defenses based on due diligence or reasonable care. The court also rejected the argument that cautionary warnings about possible delivery delays defeated the claims because the complaint alleged that the relevant problems had already occurred.

The court expressed skepticism about the plaintiffs’ separate theory concerning the machines’ projected computing capacity. It noted that the offering documents said MinerVa had agreed to deliver a total amount of computing power, but did not state that each machine would operate at a particular rate. The court nevertheless allowed the complaint to proceed because the delivery-schedule allegations were sufficient.

Loss causation

The defendants argued that the plaintiffs’ losses could not have been caused by the alleged misstatements. The court rejected dismissal on that ground. The complaint alleged that Stronghold’s stock price fell 35 percent after the company disclosed the extent of the delivery shortfall, with trading volume nearly ten times higher than on the earlier date identified in the complaint. The court found those allegations sufficient to plausibly connect the disclosures to the stock-price decline at the motion-to-dismiss stage.

The court also rejected the argument that earlier disclosures had already revealed the delivery problems, explaining that Stronghold had continued to say that it expected to receive all 15,000 machines by early 2022. The court noted that the effect of Bitcoin’s price decline and other unrelated factors on the stock-price drop could not be resolved from the complaint.

Ahmed’s Section 12(a)(2) claims

The court granted the defendants’ standing argument as to Ahmed. Section 12(a)(2) permits claims by a person who purchased a security directly from the defendant. The complaint alleged that Ahmed purchased shares “pursuant and/or traceable” to the offering documents, but did not allege that he purchased shares in the offering. The court held that this allegation was insufficient to establish standing under Section 12(a)(2). The court also noted that the plaintiffs did not address the standing argument in their opposition briefs and therefore treated the point as conceded.

Disposition

The court’s conclusion states that the defendants’ motions were denied, except with respect to Ahmed’s Section 12(a)(2) claims, which were dismissed. The court therefore granted the motions in part and denied them in part. It ordered the parties to file a letter proposing next steps within 30 days and directed the Clerk of Court to terminate the pending motions.