Rostami v. Open Props, Inc.

Background

Romein Rostami sued Open Props, Inc., Adi Sideman, Yonatan Sela, Eran Kalmanson, and Ben Perper. He alleged claims for fraudulent inducement, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and alter ego liability. The dispute arose from Rostami’s 2018 purchase of Props Tokens through a Simple Agreement for Future Tokens. Rostami alleged that Defendants represented that the Props Network would become a decentralized blockchain network and would be integrated with YouNow.com.

The court had previously granted Defendants’ motion to dismiss the original complaint for failure to state a claim, while allowing Rostami one opportunity to amend if he had a good-faith basis. Rostami filed an amended complaint, and Defendants moved to dismiss it under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court considered the amended complaint, incorporated materials, and public filings with the Securities and Exchange Commission as permitted under the governing standards.

Fraudulent Inducement

Applying New York law, the court explained that fraudulent inducement requires a material misrepresentation or omission, knowledge that it was false, an intent to induce reliance, reasonable reliance, and resulting injury. Fraud claims must also satisfy Rule 9(b), which requires the plaintiff to identify the alleged fraudulent statements, their speaker, when and where they were made, and why they were fraudulent. The plaintiff must also plead facts creating a strong inference of fraudulent intent.

The court held that many of the alleged statements about decentralization were nonactionable opinions, expectations, or forward-looking statements. Statements describing a “road to decentralization,” a “decentralized future,” or a “decentralized” vision did not establish that the network was already decentralized. The court assumed for purposes of its analysis that some statements implying existing decentralization could be actionable, but noted that Rostami alleged reliance on statements that Defendants would develop a decentralized network rather than on statements that the network was already decentralized.

The court also found that Rostami did not adequately allege an independent misrepresentation concerning integration with YouNow.com. His allegations generally linked integration to decentralization, and he did not allege that the Props Tokens could not be used on the platform or were not integrated with YouNow.com. The court further determined that a statement about the token having utility and being integrated into the experience was a vague statement about future performance.

Even assuming some statements were actionable, the court held that Rostami’s reliance was not reasonable. Documents available before he entered the agreement warned that some elements of the platform might remain centralized until decentralized options became feasible or desirable. The court also relied on Rostami’s allegation that he was a blockchain and token creator with relevant industry knowledge. In the court’s view, these warnings and his claimed sophistication made his reliance on representations that the network would become decentralized unreasonable.

The court separately held that Rostami did not plausibly allege fraudulent intent. His allegations that Defendants planned to exploit the cryptocurrency trend, sell tokens without creating the promised platform, abandon the project, or use regulatory scrutiny as a pretext were conclusory. The general allegation that many initial coin offerings were scams did not create a strong inference that these Defendants intended to defraud Rostami. The court therefore dismissed the fraudulent-inducement claim.

Remaining Claims

The court dismissed Rostami’s unjust-enrichment claim because he had not adequately protected himself against publicly disclosed investment risks, and the circumstances did not favor returning his investment under principles of fairness. It dismissed the claim for breach of the implied covenant of good faith and fair dealing because Rostami did not plausibly allege a violation of an obligation within the parties’ reasonable expectations. The alter ego theory also failed because Rostami had not stated a viable underlying legal claim.

Disposition

Judge Ronnie Abrams granted Defendants’ motion to dismiss. The court dismissed the claims for fraudulent inducement, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and alter ego liability. The court directed the Clerk of Court to terminate the pending motion at ECF No. 57 and close the case. The opinion does not state that the dismissals were with or without prejudice.