Cullen v. Ryvyl Inc.

Opinion

5 UNITED STATES DISTRICT COURT 6 SOUTHERN DISTRICT OF CALIFORNIA 7 MARK CULLEN, Individually and on Case No. 3:23-cv-0185-GPC-SBC 8 behalf of all others similarly situated, 9 ORDER GRANTING IN PART AND Plaintiff, DENYING IN PART MOTION TO 10 v. DISMISS SECOND AMENDED 11 RYVYL INC. F/K/A GREENBOX POS, COMPLAINT; ORDER GRANTING BEN ERREZ, FREDI NISAN, AND IN PART AND DENYING IN PART 12 BENJAMIN CHUNG, DEFENDANTS’ REQUEST FOR 13 Defendants. JUDICIAL NOTICE

14 [ECF Nos. 85, 85-6] 15 16 Introduction 17 Before the Court is Defendants’ motion to dismiss Plaintiffs’ class action securities 18 fraud second amended complaint (“SAC”) against RYVYL, Inc. (“Ryvyl”) and three of 19 its present and former officers: Ben Errez, Fredi Nisan, and Benjamin Chung.1 The 20 purported class includes those “who purchased or otherwise acquired the Company’s 21 securities between May 13, 2021 and January 20, 2023, inclusive (“Class Period”). SAC 22 ¶ 1. After a previous motion to dismiss was granted in part and denied in part, see ECF 23 No. 71, the Plaintiffs timely filed a two-count SAC, ECF No. 80. Defendants then moved 24 to dismiss both counts. ECF No. 85. 25

26 1 The Court refers to Errez, Nisan, and Chung as the “Individual Defendants.” 27 1 For the reasons set forth below, the Court GRANTS in part and DENIES in part 2 Defendants’ motion to dismiss. The Court GRANTS in part and DENIES in part 3 Defendants’ request for judicial notice. 4 Factual Background 5 Ryvyl is a cryptocurrency company “that develops, markets, and sells blockchain- 6 based payment solutions,” which allow customers to pay businesses with cryptocurrency 7 and businesses to receive cryptocurrency when customers pay with credit or debit cards. 8 SAC ¶¶ 21-22, 29. The company generates revenue from “payment processing services, 9 licensing fees, and equipment sales,” though payment processing, for which Ryvyl gets a 10 percentage of each transaction, is Ryvyl’s primary source of revenue. SAC ¶¶ 24-25. As 11 of late 2022, the company had 110 full-time employees. SAC ¶ 30. 12 Ryvyl released interim quarterly financial reports in 2021 and 2022 on May 13, 13 2021 (for 1Q21), August 12, 2021 (for 2Q21), November 15, 2021 (for 3Q21), May 16, 14 2022 (for 1Q22), August 15, 2022 (for 2Q22), and November 21, 2022 (for 3Q22). SAC 15 ¶¶ 31, 34, 36, 42, 45, 50. It also released an annual report for 2021 on March 31, 2022. 16 SAC ¶ 38. Each of these reports listed Ryvyl’s net revenue, net loss, total assets, and 17 total stockholders’ equity. SAC ¶¶ 33, 35, 37, 39, 43, 46, 51. And accompanying each of 18 these reports, CEO Nisan and CFO Chung certified, pursuant to the Sarbanes-Oxley Act 19 (“SOX Certifications”), that the reports were true and disclosed any “significant 20 deficiencies and material weaknesses” in Ryvyl’s internal financial controls.2 SAC ¶¶ 21 31-32, 34, 36, 38, 42, 45, 50. The 2021 annual report and the interim reports for 2022 22 also explicitly stated that the disclosure controls and procedures were effective and had 23 undergone no changes. SAC ¶¶ 40, 44, 47, 52. 24

25 26 2 The SOX Certification for the 2022 third quarter report was signed by CEO Nisan and CFO Byelick, who had replaced Chung as CFO. SAC ¶ 50. 27 1 On January 20, 2023, Ryvyl announced that, after internal discussions and 2 discussions with a new accounting firm, it had concluded that its previously issued 3 financial statements for the three interim quarters in 2021 and 2022 and the 2021 annual 4 report should not be relied upon and needed to be restated. SAC ¶ 53. It also 5 “reassess[ed] its [prior] conclusions regarding the effectiveness of the Company’s 6 internal control over financial reporting as of December 31, 2021 and . . . determined that 7 one or more material weaknesses exist in the Company’s internal control including a 8 material weakness related to accounting for certain complex business transactions.” Id. 9 Ryvyl’s share price dropped over 14% that day. SAC ¶ 75. 10 On April 22, 2022, amid these events, Ryvyl announced that it had 11 dismissed its previous accounting firm and engaged a new accounting firm in its place. 12 SAC ¶ 41. On August 22, 2022, Ryvyl announced that Chung had resigned as CFO and 13 that J. Drew Byelick had replaced him.3 SAC ¶ 48. Chairman Errez and CEO Nisan 14 remain with the company in their respective positions to this day. SAC ¶¶ 13-14. None 15 of the Individual Defendants—or none of Ryvyl’s senior management, executives, or 16 officers, for that matter—are alleged to have sold the company’s stock during the Class 17 Period. See SAC (absence). 18 Plaintiffs filed their original complaint on February 1, 2023, promptly after 19 Ryvyl’s January 2023 announcement. ECF No. 1. On June 30, 2023, after the Court 20 appointed lead plaintiff and counsel, ECF No. 20, the Plaintiffs filed an amended 21 complaint (“AC”) asserting five causes of action under the Securities Act of 1933 and 22 Securities Exchange Act of 1934. ECF No. 33. Initially, Plaintiffs brought their claims 23 against Ryvyl, several of Ryvyl’s present and former officers, and two underwriters. See 24

25 26 3 Byelick was formerly a defendant in this matter but has since been dismissed without prejudice. See ECF No. 78. 27 1 ECF No. 33. The Defendants, in three separate groups, moved to dismiss the AC. ECF 2 Nos. 40, 41, 53. On March 1, 2024, the Court granted in part and denied in part the 3 motions to dismiss, and granted Plaintiffs leave to amend. Cullen v. RYVYL Inc., 2024 4 WL 898206, at *20 (S.D. Cal. Mar. 1, 2024). The Court dismissed the claims against the 5 underwriters and Byelick. Id. As to Ryvyl and the Individual Defendants, the Court 6 granted the motions to dismiss in part and denied them in part. Id. Plaintiffs timely filed 7 an amended complaint. ECF No. 80. The SAC now asserts only two causes of action 8 against Ryvyl and the remaining Individual Defendants: 9 (I) Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 (“Section 10(b)”) against Ryvyl and the Individual Defendants for making 10 false or misleading material statements in connection with the sale of any 11 security registered on a national exchange, SAC ¶¶ 101-06; and

12 (II) Section 20(a) of the Securities Exchange Act (“Section 20(a)”) against the 13 Individual Defendants for controlling persons who violated Section 10(b), SAC ¶¶ 107-11. 14

Underlying these claims is Plaintiffs’ assertion that Defendants “engaged in a 15 scheme to deceive the market and a course of conduct that artificially inflated the price of 16 the Company’s securities” when they released inaccurate financial data and verified that 17 there were no internal control issues. SAC ¶ 93; see also SAC ¶¶ 53, 59-73, 93-97, 101- 18 06. In addition to the January 2023 announcement, Plaintiffs rely primarily on the 19 statements of confidential witnesses who allege variously that (i) the Individual 20 Defendants misrepresented the Company’s revenue, SAC ¶ 61; (ii) CFO Chung was 21 making up numbers, CEO Nisan learned about it, and CEO Nisan also oversaw many of 22 Ryvyl’s accounting responsibilities, SAC ¶¶ 67-68; (iii) a staff accountant was told to 23 enter inaccurate information and suspected that Chairman Errez was changing numbers 24 without supporting documentation to back it, SAC ¶¶ 70-71; and (iv) the company “was 25 generating fake wires[,] keeping money that was meant to be transferred onward to other 26 27 1 companies,” and that the Individual Defendants were informed of accounting issues and 2 financial inaccuracies at weekly meetings, SAC ¶ 73. 3 Defendants move to dismiss each Count. ECF No. 85. 4 Requests for Judicial Notice 5 Defendants request that the Court take judicial notice of (1) a Form 10-K filed with 6 the SEC, (2) an SEC order instituting proceedings against Ryvyl’s former accounting 7 firm, and (3) an SEC press release regarding the SEC order. ECF No. 85-6; see also ECF 8 Nos. 85-2, 85-3, 85-4, 85-5. Plaintiffs briefly object to the request for judicial notice in a 9 footnote of their opposition brief, arguing that “Defendants are improperly seeking 10 judicial notice of documents . . . for the truth of the matter asserted.” ECF No. 89 at 18 11 n.5. 12 A court may take judicial notice of a fact or document when it “can be accurately 13 and readily determined from sources whose accuracy cannot be reasonably questioned.” 14 Fed. R. Evid. 201(b)(2). 15 I. Exhibit 1: Form 10-K 16 SEC filings are a matter of public record and therefore are the proper subject of 17 judicial notice. See Hammitt v. Lumber Liquidators, Inc., 19 F. Supp. 3d 989, 1004 (S.D. 18 Cal. 2014); Dreiling v. Am. Exp. Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006); Oklahoma 19 Firefighters Pension & Ret. Sys. v. IXIA, 50 F. Supp. 3d 1328, 1349 (C.D. Cal. 2014). 20 The Court therefore GRANTS Defendants’ request for judicial notice as to Exhibit 1. 21 ECF No. 85-3. 22 The Form 10-K is also incorporated by reference because it is discussed 23 extensively and quoted in the SAC. SAC ¶¶ 38-40; see Khoja v. Orexigen Therapeutics, 24 Inc., 899 F.3d 988, 1002 (9th Cir. 2018). 25 26 27 1 II. Exhibit 2: SEC Order 2 Defendants also request judicial notice of an SEC Order Instituting Public 3 Administrative and Cease-and-Desist Proceedings Against BF Borgers. ECF Nos. 85-4, 4 85-6. “Courts can take judicial notice of SEC orders.” ScripsAmerica, Inc. v. Ironridge 5 Glob. LLC, 119 F. Supp. 3d 1213, 1232 (C.D. Cal. 2015) (taking judicial notice of an 6 “SEC order instituting administrative cease and desist proceedings”). 7 Based on Defendants’ reference to this SEC order in its motion to dismiss, it 8 appears that they seek judicial notice for the truth of the order’s contents. See ECF No. 9 85-1 at 5 n.1. This is what Plaintiffs object to in their opposition. ECF No. 89 at 18 n.5. 10 The Court acknowledges that the SEC order is subject to judicial notice but will not 11 consider the order for the truth of the matters therein. See Aaron v. Aguirre, 2007 WL 12 9777870, at *8 (S.D. Cal. June 12, 2007) (“the Court takes judicial notice of the existence 13 of the SEC cease and desist order, but it may not take judicial notice as to the truth of 14 matters recited within the order”); cf. Lee v. City of L.A., 250 F.3d 668, 690 (9th Cir. 15 2001) (“when a court takes judicial notice of another court’s opinion, it may do so not for 16 the truth of the facts recited therein, but for the existence of the opinion, which is not 17 subject to reasonable dispute over its authenticity”) (internal citation and quotation marks 18 omitted); see also Press v. Primavera, 685 F. Supp. 3d 216, 224 (S.D.N.Y. 2023) (“a 19 court may take judicial notice of publicly filed documents, not offered for the truth of the 20 matter asserted, but instead offered for other relevant reasons, such as to show that certain 21 things were said in the press, and that assertions were made in lawsuits and regulatory 22 filings”) (internal quotation marks omitted) (citing Staehr v. Hartford Fin. Servs. Grp., 23 Inc., 547 F.3d 406, 425 (2d Cir. 2008)). 24 The Court thus GRANTS Defendants’ request for judicial notice of the existence 25 of the SEC order, but not for the truth of its contents. 26 27 1 III. Exhibit 3: SEC Press Release 2 Defendants also seek judicial notice of an SEC press release regarding Exhibit 2, 3 the SEC order. ECF Nos. 85-5, 85-6. The press release outlines the charges and the 4 SEC’s findings of law and fact. See ECF No. 85-5. Defendants directly quote the press 5 release’s summary of Exhibit 2 in their motion to dismiss. ECF No. 85-1 at 5 n.1. 6 Plaintiffs object to judicial notice of the press release for the truth of its contents. ECF 7 No. 89 at 18 n.5. 8 Courts routinely take judicial notice of SEC press releases. See Resh v. China 9 Agritech, Inc., 2019 WL 1055240, at *4 (C.D. Cal. Jan. 8, 2019); Mehedi v. View, Inc., 10 2024 WL 3236706, at *5 (N.D. Cal. June 28, 2024); In re Ethereummax Inv., 2023 WL 11 6787827, at *3 (C.D. Cal. June 6, 2023); Whitsitt v. Allen & Assocs., LLC, 2013 WL 12 12071675, at *2 (W.D. Wash. Oct. 4, 2013); see also In re Copper Mountain Sec. Litig., 13 311 F. Supp. 2d 857, 864 (N.D. Cal. 2004) (taking judicial notice of publicly available 14 press releases). The Court thus GRANTS Defendants’ request for judicial notice, but not 15 for the truth of the press release’s contents. See Ethereummax, 2023 WL 6787827, at *3 16 (taking judicial notice of SEC press release but only of the fact that the SEC “made 17 certain statements in the press or took certain actions,” and not for the truth of the matters 18 asserted). 19 Legal Standards 20 Defendants move to dismiss both counts of the SAC pursuant to Federal Rules of 21 Civil Procedure (“Rule”) 9(b) and 12(b)(6) and the Private Securities Litigation Reform 22 Act of 1995 (“PSLRA”). ECF No. 85-1. 23 I. Rule 12(b)(6) 24 To survive a motion to dismiss for failure to state a claim on which relief can be 25 granted under Rule 12(b)(6), the complaint must “state a claim to relief that is plausible 26 on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The plaintiff must 27 1 plead sufficient facts to “raise a right to relief above the speculative level,” id. at 555, and 2 the Court must be able to “draw the reasonable inference that the defendant is liable for 3 the misconduct charged,” Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). On review of a 4 Rule 12(b)(6) motion, the Court accepts all facts alleged in the complaint as true and 5 draws all reasonable inferences in favor of the plaintiff. Newcal Indus., Inc. v. Ikon Off. 6 Sol., 513 F.3d 1038, 1043 n.2 (9th Cir. 2008). 7 II. Rule 9(b) 8 Plaintiffs must also meet the particularity requirements of Rule 9(b) for their 9 Exchange Act Claims, which allege fraud. Zucco Partners, LLC v. Digimarc Corp., 552 10 F.3d 981, 990 (9th Cir. 2009) (“This requirement has long been applied to securities 11 fraud complaints.”). To meet Rule 9(b)’s requirements, Plaintiffs “must state with 12 particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). This 13 means the complaint must set forth “the time, place, and specific content of the false 14 representations as well as the identities of the parties to the misrepresentation,” Odom v. 15 Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007), “what is false or misleading about a 16 statement, and why it is false,” Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156, 1161 (9th 17 Cir. 2009). 18 III. PSLRA 19 The PSLRA independently creates a heightened pleading standard for a Section 20 10(b) claim. Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 313 (2007). 21 Specifically, it requires the complaint to “specify each statement alleged to have been 22 misleading” and the “reasons why the statement is misleading,” and “state with 23 particularity facts giving rise to a strong inference that the defendant acted with the 24 required state of mind.” 15 U.S.C. § 78u-4(b)(1)-(2)(A). 25 26 27 1 IV. What the Court Will Consider 2 Although the general rule prohibits the Court from considering extrinsic evidence 3 in reviewing a motion to dismiss, it may consider matters that are properly subject to 4 judicial notice. Tellabs, 551 U.S. at 322 (“[C]ourts must consider the complaint in its 5 entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) 6 motions to dismiss, in particular, documents incorporated into the complaint by reference, 7 and matters of which a court may take judicial notice.”); Zucco, 552 F.3d at 989 8 (“[R]eview [of a Rule 12(b)(6) motion] is generally limited to the face of the complaint, 9 materials incorporated into the complaint by reference, and matters of which we may take 10 judicial notice.”). Accordingly, the Court will consider the SAC and the SEC filings and 11 historical stock prices of which it has taken judicial notice of through this point. See 12 supra at 5 (Exhibit 1); see also Cullen, 2024 WL 898206, at *3-4 (taking judicial notice 13 of various other SEC filings, as well as historical daily stock prices). The Court will also 14 consider the SEC order (Exhibit 2) and SEC press release (Exhibit 3) attached as exhibits 15 to the Declaration of Sean T. Prosser (“Prosser Declaration”), but not for the truth of the 16 matters asserted therein. See ECF Nos. 85-2, 85-3, 85-4, 85-5. 17 The Court treats the factual allegations in the complaint as true, see Tellabs, 551 18 U.S. at 326, but it is “not required to accept as true conclusory allegations which are 19 contradicted by documents referred to in the complaint.” Steckman v. Hart Brewing Inc., 20 143 F.3d 1293, 1295-96 (9th Cir. 1998). 21 DISCUSSION 22 I. Count I: Section 10(b) and SEC Rule 10b-5 23 Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful for “any 24 person . . . [t]o use or employ, in connection with the purchase or sale of any security 25 registered on a national securities exchange . . . any manipulative or deceptive device or 26 contrivance in contravention of such rules and regulations as the Commission may 27 1 prescribe as necessary or appropriate in the public interest or for the protection of 2 investors.” 15 U.S.C. § 78j(b). SEC Rule 10b-5, which is promulgated under Section 3 10(b), makes it “unlawful for any person . . . [t]o engage in any act, practice, or course of 4 business which operates or would operate as a fraud or deceit upon any person, in 5 connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(c); Zucco, 6 552 F.3d at 989-90. 7 To plead a primary violation of SEC Rule 10b-5, a plaintiff must allege “(1) a 8 material misrepresentation or omission of fact, (2) scienter, (3) a connection with the 9 purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.” 10 Zucco, 552 F.3d at 990 (internal quotation marks and citation omitted). In the Court’s 11 March 1, 2024 order on the motion to dismiss Plaintiffs’ first amended complaint, it 12 concluded that the remaining statements at issue in the SAC—the 2021 and 2022 13 financial reports—were false.4 ECF No. 71 at 21-25. And here, Defendants only 14 challenge whether Plaintiffs have adequately pled scienter. See ECF No. 85-1. Thus, the 15 only remaining issue for the Court to resolve is whether Plaintiffs’ allegations, as 16 amended, are sufficient to plead scienter. 17 To be liable under Section 10(b) and SEC Rule 10b-5, a defendant must act with 18 scienter, which “not only covers intent to deceive, manipulate, or defraud, but also 19 deliberate recklessness.” City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. 20 Align Tech., Inc., 856 F.3d 605, 619 (9th Cir. 2017). “Deliberate recklessness is an 21 extreme departure from the standards of ordinary care[,] which presents a danger of 22 misleading buyers or sellers that is either known to the defendant or is so obvious that the 23 actor must have been aware of it.” Id. (cleaned up). 24 25

26 4 Defendants do not challenge this finding in their instant motion to dismiss. 27 1 Under the PSLRA, the complaint must “state with particularity facts giving rise to 2 a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 3 78u–4(b)(2). To determine whether a “strong inference” exists, “a court must consider 4 plausible, nonculpable explanations for the defendant’s conduct, as well as inferences 5 favoring the plaintiff.” Tellabs, 551 U.S. at 323-24. A strong inference exists if “a 6 reasonable person would deem the inference of scienter cogent and at least as compelling 7 as any opposing inference.” Id. at 324. Courts conduct a two-part inquiry when making 8 this determination. First, a court must “determine whether any of the plaintiff’s 9 allegations, standing alone, are sufficient to create a strong inference of scienter. Zucco, 10 552 F.3d at 992. Second, if no allegations are sufficient on their own, a court must 11 conduct a holistic review and decide “whether all of the facts, taken collectively, give rise 12 to a strong inference of scienter.” Tellabs, 551 U.S. at 322-23 (emphasis in original). As 13 such, “a series of less precise allegations [can] be read together to meet the PSLRA 14 requirement.” S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008). 15 Plaintiffs largely rely on the statements of four confidential witnesses, which they 16 claim support a strong inference of scienter. ECF No. 89 at 7-12. Plaintiffs also contend 17 that the severity of the internal control problems, the Individual Defendants’ SOX 18 certifications, the Individual Defendants’ “hands-on management style,” CFO Chung’s 19 resignation, that the fraud related to Ryvyl’s core operations, and the small size of the 20 company support a strong inference of scienter when viewed holistically with the 21 confidential witnesses’ statements. Id. at 15-20. Defendants primarily respond by 22 emphasizing their lack of motive to commit fraud and arguing that Plaintiffs’ confidential 23 witnesses are not credible or reliable, but Defendants also contend that Plaintiffs’ other 24 allegations are insufficient as well. ECF 85-1 at 12-21. In Defendants’ view, the alleged 25 facts support a more plausible and non-culpable explanation for the Company’s 26 27 1 restatement—that the Defendants learned of previously unknown accounting issues and 2 worked swiftly to remediate them. Id. at 15. 3 A. Confidential Witnesses 4 For a complaint to rely on confidential witnesses, the witnesses must first “be 5 described with sufficient particularity to establish their reliability and personal 6 knowledge.” Zucco, 552 F.3d at 995. This requires plaintiff to provide “sufficient detail 7 about a confidential witness’ position within the defendant company to provide a basis 8 for attributing the facts reported by that witness to the witness’ personal knowledge.” Id. 9 “To determine whether the complaint has done so, we look to the level of detail provided 10 by the confidential sources, the corroborative nature of the other facts alleged (including 11 from other sources), the coherence and plausibility of the allegations, the number of 12 sources, the reliability of the sources, and similar indicia.” Id. (internal quotation marks 13 and citation omitted). If the witnesses are found to be reliable, the Court then assesses 14 whether the witness’ statements themselves are “indicative of scienter.” Id. 15 The Court will assess each confidential witness and their statements in turn. 16 i. CW1 17 CW1 worked as an HR Generalist at Ryvyl from June 2021 to February 2022. 18 SAC ¶ 60. Initially, CW1 was “an onboarding specialist, working with Ryvyl’s 19 programming terminals” and dispensaries; CW1 was privy to information regarding each 20 dispensary’s revenue generation in this role. Id. In July 2021, CW1’s role shifted to 21 coordinating meetings for Ryvyl’s executives, onboarding new hires, and managing 22 office equipment. Id. CW1 details how a member of the development team responsible 23 for performing chargebacks trained CW1 on the company’s chargebacks system, which 24 reflected the volume of Ryvyl’s incoming and outgoing transactions. SAC ¶¶ 61-62. 25 CW1 states that Chairman Errez and CEO Nisan misrepresented Ryvyl’s revenue, as 26 “based upon the volume information [CW1], the revenue was nowhere close to the 27 1 representations” they made. Id. Specifically, “the volumes that CW1 saw were nowhere 2 close to the millions of dollars that the Company represented, and [] the volume was not 3 even close to a million.” SAC ¶ 62. CW1 reported the issue to their boss, who did not 4 know why the volume did not support Ryvyl’s representations and ultimately informed 5 CEO Nisan about the discrepancies. Id. 6 To be sure, Plaintiffs have added more substance to CW1’s statements in their 7 SAC. For instance, CW1 has described their role in the company and the training they 8 received on chargebacks with specificity. With this, the SAC adequately explains how 9 CW1’s position in the company and training on the job led them to believe that the 10 volume of chargebacks did not support Ryvyl’s revenue representations. However, the 11 SAC is still lacking in specifics on how, when, and to what extent Chairman Errez and 12 CEO Nisan misrepresented Ryvyl’s revenue. While the SAC alleges that CW1’s 13 concerns were eventually communicated to CEO Nisan, this allegation alone— 14 particularly without knowing CEO Nisan’s role in the chargebacks system, when he was 15 made aware of the issues, or what his response was—is insufficient to convince the Court 16 that CW1’s account is reliable such that it creates a strong inference of scienter. See 17 Zucco, 552 F.3d at 998 (finding that confidential witness statements did not establish “the 18 witnesses’ personal knowledge or reliability by recounting the particulars of the alleged 19 transgressions”). Without more specific details regarding the Individual Defendants’ 20 involvements with the chargeback system, it is difficult to see how CW1’s statements 21 offer more than speculation about the chargeback volume they saw. 22 Thus, while the SAC provides sufficient details about CW1’s position within the 23 company, it still fails to provide details about CW1’s personal knowledge of Defendants’ 24 misconduct. And CW1’s position as a human resources generalist alone is insufficient 25 for the Court to deem CW1’s statements reliable. See id. at 996 (finding that a human 26 resources employee, who “had no firsthand knowledge of the workings of the finance or 27 1 corporate departments,” supplied no basis for his claim that high-level finance employees 2 made certain decisions). Accordingly, CW1’s statements are not sufficiently reliable, nor 3 do they provide any support for an inference of scienter. 4 ii. CW2 5 CW2 worked “as a Marketing Specialist, Marketing Manager, and Project 6 Manager at Ryvyl from August 2021 to February 2023.” SAC ¶ 64. CW2 effectively led 7 the marketing team: they managed communications, the website, and social media; 8 worked with the sales team; implemented project management software; and obtained 9 buy-ins from internal stakeholders. Id. CW2 alleges that CFO Chung failed to properly 10 follow accounting standards, SAC ¶ 65, such as by implementing “improper accounting 11 [procedures] relating to revenue, debt, and depreciation value,” SAC ¶ 66. Based 12 apparently on the fact that Ryvyl is a small company where “everyone talk[s],” SAC ¶ 13 65, CW2 learned that CFO Chung required Ryvyl to use his “horrible” accounting 14 software, which it “should never have been using,” and Chung “was not doing his job.” 15 SAC ¶ 65. 16 CW2 also provides further details based on direct conversations they had with 17 CFO Byelick, who replaced CFO Chung after his resignation. SAC ¶ 66. CW2 had 18 “daily – if not weekly – conversations with CFO Byelick” in the office and while golfing 19 with him, many of which revolved around CFO Chung’s missteps in overseeing the 20 accounting team. Id. After CFO Chung’s departure, CFO Byelick discovered that 21 “Chung was not doing his job,” and that, had he properly performed his job, he “would 22 have discovered that the Company’s quarterly financial statements and year-end financial 23 statements were incorrect because there was no way to logically arrive at the incorrect 24 results.” SAC ¶ 67. “CW2 stated that CFO Byelick acknowledged to CW2 that Ryvyl’s 25 numbers were made up . . . and that information was hidden and disguised.” SAC ¶ 67. 26 27 1 Based on these conversations, CW2 was “100% certain” that Ryvyl was manipulating 2 numbers related to the financial statements. Id. 3 And, at the end of 2022, CW2 learned based on discussions with R. Clay Gilreath, 4 a senior treasury analyst in the accounting department, that “CEO Nisan discovered that 5 CFO Chung was making up numbers.” Id. CW2 states that the accounting department 6 had to audit Ryvyl’s financial results every quarter because they consistently needed 7 correcting. Id. CW2 further states that “CEO Nisan was a hands-on manager” who 8 “participated in the day-to-day decisions” at Ryvyl and frequently oversaw the 9 accounting department because of CFO Chung’s infrequent attendance in the office. 10 SAC ¶ 68. CW2 states that this accounting department was understaffed, had high 11 turnover, and sometimes assigned accounting work to unqualified employees. SAC ¶ 69. 12 While the SAC sufficiently describes CW2’s role and responsibilities at Ryvyl, 13 many of CW2’s statements fail to describe with particularity how and when CW2 learned 14 of the “improper accounting practices” and what exactly those practices were. Most of 15 the statements are vague hearsay, based on conversations with unidentified Ryvyl 16 employees and allege only conclusory assertions of accounting issues. While hearsay is 17 not automatically disqualified from consideration, it must be “sufficiently reliable, 18 plausible, or coherent.” Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1208 (9th Cir. 2016); 19 Zucco, 552 F.3d at 997 n.4. Here, CW2’s statements based on discussions with 20 undisclosed sources are not particular, reliable, or coherent enough. Zucco, 552 F.3d at 21 996 (“Some of the confidential witnesses were simply not positioned to know the 22 information alleged, many report only unreliable hearsay, and others allege conclusory 23 assertions of scienter”). 24 However, CW2 does provide reliable statements based on direct conversations 25 with both CFO Byelick and Gilreath. See SAC ¶¶ 66-68. Although no dates are 26 provided for the conversations with CFO Byelick, CW2 states that they took place 27 1 frequently in the office and while golfing. SAC ¶ 66. CFO Byelick, as CFO Chung’s 2 successor, would reasonably have knowledge of Chung’s accounting practices, and in 3 such a small company, it is reasonable that Byelick would have discussed CFO Chung’s 4 practices with other employees. The same can be said about CW2’s conversations with 5 Gilreath. As a member of CFO Chung’s accounting team, Gilreath has direct experience 6 with Ryvyl’s accounting practices and the expertise to provide plausible information 7 regarding the practices. These statements, which are based on conversations with Ryvyl 8 employees who would be knowledgeable about the subject, are reliable. See Glazer Cap. 9 Mgmt., L.P. v. Forescout Techs., Inc., 63 F.4th 747, 772 (9th Cir. 2023) (finding that a 10 confidential witness’ conversations with specific employees who would be 11 knowledgeable about the alleged conduct at issue were reliable). While CW2’s 12 statements alone are not sufficient to support a strong inference of scienter, the Court will 13 consider them in its holistic review. 14 iii. CW3 15 CW3 worked as a staff accountant at Ryvyl from May 2022 to July 2022. SAC ¶ 16 70. CW3 worked in the accounting department with Gilreath and Kineret Rubin, a family 17 friend of Chairman Errez who worked as a Controller. Id. CW3 explains that Gilreath 18 and Rubin were responsible for setting up Ryvyl’s wires, many of which were fake. SAC 19 ¶¶ 70-71. At bottom, CW3 alleges that Ryvyl was supposed to keep a percentage of its 20 incoming money and transfer out the rest to other companies, but that Ryvyl instead 21 made it seem “like it was making more money than it was.” SAC ¶ 70. 22 CW3 states that Ryvyl would keep money that was supposed to be transferred out 23 to other companies, and companies would contact Ryvyl to complain about not receiving 24 their money. Id. CW3 states that “Gilreath and Rubin told CW3 what information to 25 enter into the system, including wires for other companies,” and that they would tell CW3 26 “to just do what they said.” Id. Ultimately, CW3 notified Gilreath and Rubin that 27 1 documentation did not support the numbers that CW3 was told to enter. Id. Gilreath and 2 Rubin would assure CW3 that Chairman Errez “would negotiate [the numbers] on the 3 backend” and that documentation would follow, id., “but that never happened,” SAC ¶ 4 71. Chairman Errez, Gilreath, and Rubin would tell CW3 that numbers had changed 5 based on conversations between Errez and the clients, but “CW3 saw no documentation 6 to support” the purported changes. Id. CW3 further states that the accounting 7 department consisted of only five employees: Gilreath, Rubin, Reid Granados (Ryvyl’s 8 former Director of Finance), CFO Chung, and CW3. Id. 9 CW3’s position in the accounting department during a portion of the Class Period 10 gives them personal knowledge of Ryvyl’s accounting practices at the relevant time. 11 While the detailed allegations regarding Gilreath and Rubin’s accounting misconduct are 12 specific and detailed, these do not shed much direct light on any of the Defendants’ 13 actions. But CW3 also alleges direct communications with Chairman Errez, Gilreath, 14 and Rubin, in which CW3 was informed of changes that they ultimately did not see 15 supporting documentation for. And CW3 had several conversations with Rubin— 16 Chairman Errez’s family friend—regarding actions that Errez was going to take. 17 However, CW’s descriptions are somewhat vague. They do not explain what numbers 18 were changed, what documentation CW3 sought, why the wires are fake, or when any of 19 these events occurred. While these statements do tend to indicate scienter on Chairman 20 Errez’s—and therefore Ryvyl’s—part, they are not specific enough to support a strong 21 inference of scienter on their own. Nonetheless, they are reliable statements because of 22 CW3’s position in the accounting department and will be considered in the Court’s 23 holistic review. See S. Ferry LP, 542 F.3d at 784 (“Vague or ambiguous allegations are 24 now properly considered as a part of a holistic review when considering whether the 25 complaint raises a strong inference of scienter”). 26 27 1 iv. CW4 2 CW4 was an executive assistant to Chairman Errez and COO Min Wei from 3 February 2022 to July 2022. SAC ¶ 72. In this role, “CW4 attended weekly meetings 4 with CFO Chung (who attended many meetings remotely from South Korea), CEO 5 Nisan, Co-Founder and Chairman Errez,” and other senior management. Id. CW4’s 6 impression based on their attendance at these weekly meetings is that Ryvyl’s 7 accounting, including for inter-company wires, was “inaccurate” and a “shit show.” SAC 8 ¶ 73. CW4 confirmed that Ryvyl “was generating fake wires and keeping money that 9 was meant to be transferred onward to other companies,” and specifically stated that, 10 around June 2022, “Controller Rubin sent fake wires without blinking any eye.” Id. 11 Further, CW4 stated that red flags regarding Ryvyl’s accounting were raised during these 12 meetings. Id. Specifically, CW4 states that during a meeting that took place in March, 13 April, or May of 2022, COO Wei informed the meeting’s participants that some of 14 Ryvyl’s financial information was incorrect and that they needed to review it. Id. CW4 15 states “that CFO Chung agreed during that meeting that the information was incorrect.” 16 Id. 17 In its prior order, the Court found CW4 to be a reliable witness because of their 18 presence at executive meetings, where Ryvyl’s accounting and financial inaccuracies 19 were sometimes discussed. Cullen, 2024 WL 898206, at *16; see Cutler v. Kirchner, 696 20 F. App’x 809, 815 (9th Cir. 2017) (considering the statements of a confidential witness 21 who participated in quarterly meetings with the executive board and reported on what 22 was presented at the meetings). The Court also noted that while CW4 did not provide 23 sufficient details in the AC, they were uniquely positioned to do so considering their 24 attendance at these executive meetings. Cullen, 2024 WL 898206, at *19 n.10. In the 25 SAC, CW4 now states that red flags regarding the inaccurate and disorganized state of 26 Ryvyl’s accounting were raised at these meetings and corroborates some of CW3’s 27 1 statements by stating that Rubin “sent fake wires” around June 2022. CW4 also states 2 that between March and May of 2022, COO Wei informed the participants that some of 3 Ryvyl’s financials were incorrect, CFO Chung agreed that some financial information 4 was incorrect, and the participants were told to review the information.5 5 While these allegations tend to show that the Defendants were aware of accounting 6 issues at Ryvyl, there is an equally compelling, innocent explanation for these 7 allegations. Ryvyl dismissed its former accounting firm and engaged a new accounting 8 firm in April 2022, SAC ¶41, dismissed CFO Chung in August 2022, SAC ¶ 48, and 9 announced restatements to its previous financial statements in January 2023, SAC ¶ 53. 10 As currently pled, CW4’s statements indicate that the Defendants were made aware of the 11 accounting issues and immediately began working to fix them. As such, the Court is not 12 convinced that CW4’s statements support a strong inference of scienter on their own. 13 However, the Court will consider these statements in its holistic review.6 14

15 16 5 While the Court assumes that all three Individual Defendants were present at this specific meeting based on the allegation that CW4 attended weekly meetings with them, 17 the SAC fails to allege this specifically. See SAC ¶ 73. 18 6 Defendants labor over the fact that the CWs’ employment periods were in some cases 19 brief, and in other cases, did not coincide with the dates on which some of the alleged misstatements were made. See ECF No. 85-1 at 16-17. Although the Ninth Circuit has 20 discounted confidential witnesses who were not employed during the time period in 21 question, Zucco, 552 F.3d at 996-97, it has also noted that there is no rule that confidential witnesses must have been employed during the class period at all, let alone 22 for the whole time, see In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1145 (9th Cir. 23 2017) (considering statements of a confidential witness who was not employed during the class period). See also Roberts v. Zuora, Inc., 2020 WL 2042244 (N.D. Cal. Apr. 28, 24 2020) (“[t]hat none of the CWs was employed at Zuora during the entire Class Period 25 does not in itself render their statements unreliable”) (citing Quality Sys., 865 F.3d at 1145); Webb v. Solarcity Corp., 884 F.3d 844, 851 n.1 (9th Cir. 2018) (finding that CW 26 accounts “from before the class period [are] relevant because [they] can confirm what a 27 defendant should have known during the class period”) (internal quotation marks and 1 B. Severity of Internal Control Problems and SOX Certifications 2 Plaintiffs repeat their prior argument that “defendants’ alleged failure to maintain 3 an effective control environment, and their attestations to the contrary, supports a strong 4 inference of scienter.” Mulderrig v. Amyris, Inc., 492 F. Supp. 3d 999, 1027-28 (N.D. 5 Cal. 2020); see also Bielousov v. GoPro, Inc., 2017 WL 3168522, at *7 (N.D. Cal. July 6 26, 2017). The Court again finds that Ryvyl’s announcement of “one or more material 7 weaknesses . . . in the Company’s internal control,” SAC ¶ 53, after consistently 8 certifying that there were no internal control problems in the financial statements at issue, 9 SAC ¶¶ 31-32, 36, 38, 40, 42, 44-45, 47, 50, 52, supports the inference that “defendants 10 were aware of matters relevant to their certifications or recklessly failed to make 11 themselves aware.” Mulderrig, 492 F. Supp. 3d at 1028. These certifications “are part of 12 a broader picture from which a court may, at the initial pleading stage, infer a compelling 13 claim of scienter.” Thomas v. Magnachip Semiconductor Corp., 167 F. Supp. 3d 1029, 14 1043 (N.D. Cal. 2016). However, they are not enough to create a strong inference of 15 scienter on their own. See Zucco, 552 F.3d at 1004 (noting that allowing SOX 16 certifications to create an inference of scienter on their own would “eviscerate the 17 pleading requirements for scienter set forth in the PSLRA”). 18 C. Individual Defendants’ “Hands-on” Management Style 19 Plaintiffs argue that allegations of Individual Defendants’ “hands-on management 20 style” supports an inference of scienter. ECF No. 89 at 16-17. CW2 states that CEO 21 Nisan was a hands-on manager, participated in day-to-day decisions at Ryvyl, and 22 “oversaw many of the accounting responsibilities” at Ryvyl because CFO Chung was 23 24 25 citation omitted). Defendants also attach importance to the fact that the CWs were only 26 low-level employees. Id. at 17. However, they cite no case law to support this proposition directly. See ECF No. 85-1 at 17-18; ECF No. 90 at 3-4. 27 1 often out-of-office. SAC ¶ 68. Further, Plaintiffs allege that Ryvyl’s board, which 2 Chairman Errez and CEO Nisan sat on, tasked CFO Byelick with working with Simon & 3 Edwards to re-audit its internal controls. SAC ¶¶13-14. In a more attenuated way, 4 Errez’s and Nisan’s membership on the Board highlights their involvement in the 5 relevant decisions. 6 “General allegations of defendants’ hands-on management style [and] their 7 interaction with other officers and employees,” without more, are insufficient to support a 8 strong inference of scienter. In re Daou Sys., Inc., 411 F.3d 1006, 1022 (9th Cir. 2005), 9 abrogated on other grounds by Tellabs, 551 U.S. at 315-18. Courts have found scienter 10 in situations where there are “specific allegations of direct involvement in the production 11 of false accounting statements and reports,” Daou, 411 F.3d at 1023, or where “top 12 executives’ admittedly detail-oriented management style led to a reasonable inference 13 that the top executives were aware of significant accounting regularities,” id. (discussing 14 Nursing Home Pension Fund, Loc. 144 v. Oracle Corp., 380 F.3d 1226, 1234 (9th Cir. 15 2004)). 16 Here, the allegations regarding Chairman Errez’s and CEO Nisan’s involvement 17 with the board are not sufficient to show scienter. Plaintiffs do not allege that Errez and 18 Nisan were directly involved in the accounting decisions, just that they outsourced 19 Ryvyl’s auditing. And, in fact, the allegation that they directed a re-audit with a new 20 accounting firm cuts against an inference of scienter. However, CW2’s newly added 21 statements that CEO Nisan was a hands-on manager, involved in day-to-day decisions, 22 and oversaw many accounting responsibilities during CFO Chung’s (allegedly frequent) 23 absences support Plaintiffs’ position. See In re VeriFone Holdings, Inc. Sec. Litig., 704 24 F.3d 694, 710 (9th Cir. 2012) (finding that executives who were “hands-on managers 25 with respect to operational details and financial statements” would have been “on notice” 26 of accounting issues). To be clear, Plaintiffs do not allege, and CW2 does not state, that 27 1 CEO Nisan was directing or even aware of fraudulent accounting practices, and thus 2 these allegations cannot support a strong inference of scienter on their own. See, e.g., 3 Gammel v. Hewlett-Packard Co., 905 F. Supp. 2d 1052, 1078 (C.D. Cal. 2012) 4 (Plaintiffs’ “vague” allegations that CEO-defendant was a “hands on manager,” and that 5 defendants “directly participated in” management and were “directly involved in day-to- 6 day operations” were insufficient to establish an inference of scienter on their own). 7 Nonetheless, the Court will consider these allegations to weigh in favor of scienter in its 8 holistic review. 9 D. Resignations 10 Plaintiffs argue that CFO Chung’s resignation, which occurred five months before 11 Ryvyl announced its restatements, SAC ¶¶ 3, 48, 74, supports a strong inference of 12 scienter. ECF No. 89 at 17-18. Defendants dispute whether officer resignations on their 13 own can indicate scienter. ECF No. 85-1 at 23. 14 “Where a resignation occurs slightly before or after the defendant corporation 15 issues a restatement, a plaintiff must plead facts refuting the reasonable assumption that 16 the resignation occurred as a result of restatement's issuance itself in order for a 17 resignation to be strongly indicative of scienter.” Zucco, 552 F.3d at 1002. Here, Chung 18 resigned on August 16, 2022—four months after Ryvyl dismissed its old accounting firm 19 and five months before the restatements were announced. SAC ¶¶ 41, 48, 53. However, 20 the allegations surrounding Chung’s departure are not specific enough to show that any 21 of the other Defendants suspected that Chung committed fraud, or that suspected fraud 22 was the reason for his resignation. Absent more particularized allegations, it seems that 23 Chung resigned “because the errors that lead [sic] to the restatement occurred on his 24 watch or because he failed adequately to supervise his department.” In re U.S. 25 Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1074 (N.D. Cal. 2002); see also 26 Zucco, 552 F.3d at 1002 (“[a]bsent allegations that the resignation at issue was 27 1 uncharacteristic when compared to the defendant's typical hiring and termination patterns 2 or was accompanied by suspicious circumstances, the inference that the defendant 3 corporation forced certain employees to resign because of its knowledge of the 4 employee's role in the fraudulent representations will never be as cogent or as 5 compelling” as the innocent inference). While “the resignations here are not so numerous 6 or suspicious as to raise” a strong inference of scienter, Zucco, 552 F.3d at 1002, Chung’s 7 resignation nonetheless “adds one more piece to the scienter puzzle,” In re UTStarcom, 8 Inc. Sec. Litig., 617 F. Supp. 2d 964, 976 (N.D. Cal. 2009) (internal quotation marks and 9 citation omitted). The Court will thus consider the resignation in its holistic review. 10 E. Core Operations Inference and the Small Size of the Company 11 Plaintiffs contend that “[t]he facts alleged . . . support a strong inference of scienter 12 because they relate to the Company’s core operations,” specifically “Ryvyl’s payment 13 processing revenue, which is the Company’s primary source of revenue.” ECF No. 89 at 14 18-19. In conjunction with this, Plaintiffs also argue that Ryvyl’s small size—between 15 18 and 110 full-time employees during the Class Period—supports a strong inference of 16 scienter. Id. at 19. These combine to form the argument that the Individual Defendants 17 must have known of the accounting and financial issues because they were so central to 18 such a small company. 19 The core operations inference allows a court to “consider a senior executive’s role 20 in the company to determine whether there is a cogent and compelling inference that the 21 senior executive knew of the information at issue. This includes consideration of the 22 executive’s access to the information, and, whether, given the importance of the 23 information, it would be absurd to suggest that management was without knowledge of 24 the matter.” In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 706 (9th Cir. 2021) (internal 25 quotation marks and citations omitted). Here, Ryvyl’s business allegedly revolves 26 around “blockchain-based payment solutions.” SAC ¶ 21. Of Ryvyl’s three sources of 27 1 revenue, payment processing revenue is its primary source of revenue, SAC ¶¶ 24-25. 2 The alleged accounting issues involved charging third parties incorrectly, failing to pay 3 third parties, and generating fake wires. SAC ¶¶63, 70, 73. Thus, the allegations at issue 4 relate to the accounting of payment processing revenue. And Ryvyl’s small size makes it 5 more likely that the Individual Defendants knew of the issues, which concerned its core 6 operations. See Curry v. Hansen Med., Inc., 2012 WL 3242447, at *11 (N.D. Cal. Aug. 7 10, 2012) (finding scienter where defendants were executives of a “small company, with 8 less than 200 employees, focused on selling only one product”); see also Patel v. 9 Axesstel, Inc., 2015 WL 631525, at *11 (S.D. Cal. Feb. 13, 2015) (finding that “it would 10 be absurd to think that the CEO and CFO of a company with just thirty-five employees, 11 of whom only ten are involved in sales,” which the issues related to, would be unaware of 12 the issues). The Court thus finds that Plaintiffs’ allegations will support a finding of 13 scienter in its holistic review, but that they are not sufficient to create the inference on 14 their own. 15 The core operations inference is most applicable to CFO Chung and CEO Nisan. 16 Chung and Nisan signed off on the false or misleading information in the 2021 and 2022 17 financial statements and certified that Ryvyl had disclosed “[a]ll significant deficiencies 18 and material weaknesses in the design or operation of internal control over financial 19 reporting.” SAC ¶¶ 31-32; see also SAC ¶¶ 34, 36, 38, 40, 42, 44-45, 47, 50, 52, 67. 20 Chung was Ryvyl’s CFO during the relevant time period, SAC ¶ 15, and, according to 21 CW3, he headed an accounting team which consisted of only five employees, SAC ¶ 71. 22 According to CW2, “Nisan oversaw many of the accounting responsibilities at the 23 Company because of the lack of time that CFO Chung spent in the office.” SAC ¶ 68. 24 CW4 corroborates this statement by indicating that Chung attended many weekly 25 meetings remotely because he was in South Korea. SAC ¶ 72. As such, CEO Nisan was 26 likely knowledgeable about Ryvyl’s accounting processes, at least enough so that he was 27 1 willing to sign off on the financial statements.7 With CFO Chung and CEO Nisan both 2 overseeing the small accounting team to different degrees, being responsible for ensuring 3 proper internal controls, and certifying that such controls were in place, it would be 4 absurd to suggest that Chung and Nisan were unaware of the accounting problems. See 5 Alphabet, 1 F.4th at 706. Accordingly, this inference weighs strongly in favor of finding 6 that Chung and Nisan were deliberately reckless or acted intentionally. 7 F. Lack of Motive to Commit Fraud 8 Defendants argue that there are “no facts indicating that any Individual Defendant 9 took any specific actions to commit or benefit from the alleged fraud or that they even 10 had any motive to do so.” ECF No. 85-1 at 12-13. In particular, the Court notes that 11 “Plaintiffs do not allege that any Individual Defendant sold stock during the class 12 period.” Id. at 13. It is true that “a lack of stock sales can detract from a scienter 13 finding.” Webb, 884 F.3d at 856. But allegations of stock sales “are not a sine qua non 14 for raising such an inference,” especially where “other allegations in the complaint raise a 15 strong inference of scienter.” Alphabet, 1 F.4th at 707; see also No. 84 Employer- 16 Teamster Joint Council Pension Tr. Fund v. Am. W. Holding Corp., 320 F.3d 920, 944 17 (9th Cir. 2003) (“[T]he lack of stock sales by a defendant is not dispositive as to 18 scienter.”). Accordingly, the Court will consider the lack of any alleged motive— 19 financial or otherwise—for the Individual Defendants to commit fraud as weighing 20 against a finding of scienter in its holistic review. 21 22 23 24 25 7 The Court finds it notable that CEO Nisan signed off on the financial statements and 26 made certifications as to them, while Chairman Errez did not. See SAC ¶¶ 31-32, 34, 36, 38, 40, 42, 44-45, 47, 50, 52, 67. 27 1 G. Holistic Review8 2 While none of Plaintiffs’ allegations are sufficient to create a strong inference of 3 scienter on their own, the Court will review the allegations holistically to determine 4 whether “all of the facts alleged, taken collectively, give rise to a strong inference of 5 scienter.” Tellabs, 551 U.S. at 323. When conducting the holistic review, the Court must 6 “take into account plausible opposing inferences” that weigh against a finding of scienter. 7 Id. Where “a set of allegations . . . create[s] an inference of scienter greater than the sum 8 of its parts, it must still be at least as compelling as an alternative innocent explanation.” 9 Zucco, 552 F. 3d at 1006. 10 Plaintiffs contend that Defendants “engaged in a scheme to deceive the market and 11 a course of conduct that artificially inflated the price of the Company’s securities” when 12 they released inaccurate financial data and verified that there were no internal control 13 issues. SAC ¶ 93; see also SAC ¶¶ 60-73, 93-97, 102-06. The Defendants, however, 14 argue that the benign explanation—that the “errors were inadvertent” and they “reported 15 them to shareholders promptly after the new auditor determined errors had been made,” 16 ECF No. 85-1 at 24—is more compelling than an inference of scienter. 17 The confidential witnesses’ statements combine to show that accounting issues 18 existed during 2022. CW2’s statements indicate that Ryvyl was implementing improper 19 accounting procedures, hiding information, and “making up numbers.” SAC ¶¶ 67-68. 20 CW3 and CW4 both report that Ryvyl was sending out fake wires and withholding 21 money that was meant to be transferred to other companies. SAC ¶¶ 70-71, 73. 22

23 24 8 Defendants argue that Plaintiffs’ allegations regarding post-class period events, see SAC ¶¶76-86, do not support an inference of scienter. ECF No. 85-1 at 23-24. 25 Plaintiffs’ opposition brief does not respond to this argument and the allegations 26 generally do not appear to be relevant to the issue of scienter. Accordingly, the Court will not consider these allegations in its analysis. 27 1 Moreover, CW3 reports entering information into the system at Gilreath and Rubin’s 2 direction, and that Gilreath and Rubin, along with Chairman Errez, assured CW3 of 3 supporting documentation for the numbers, which CW3 never saw. SAC ¶¶ 70-71. The 4 statements of these three CWs from different levels and positions at the company 5 corroborate each other, which supports the reliability of the statements. See In re 6 Extreme Networks, Inc. Sec. Litig., 2018 WL 1411129, at *27 (N.D. Cal. Mar. 21, 2018) 7 (“The Court credits that the CWs corroborate each other with respect to what was going 8 on internally at [the company], which further supports the reliability of their 9 statements.”); Hatamian v. Advanced Micro Devices, Inc., 87 F. Supp. 3d 1149, 1163 10 (N.D. Cal. 2015) (finding corroborating CW statements reliable enough to support an 11 inference of scienter). 12 Plaintiffs must still allege that the Defendants knew of the accounting issues and 13 subsequently either intended to make the false statements or made them with deliberate 14 recklessness. At the outset, the Court notes two of its earlier findings. First, the Court 15 previously found that “Plaintiffs have not alleged scienter as to any of the Defendants for 16 the alleged misstatements prior to 2022.” Cullen, 2024 WL 898206, at *11. Plaintiffs 17 have not pled any additional allegations in the SAC that suggest any of the Defendants 18 had scienter regarding the statements in any of the 2021 interim reports. Thus, the Court 19 again finds that the allegations do not support a strong inference of scienter as to the 20 alleged misstatements prior to 2022. Second, the Court previously found that Plaintiffs 21 sufficiently alleged that CFO Chung and Ryvyl acted with scienter regarding the 2021 22 annual report and the first two 2022 interim reports and the accompanying SOX 23 certifications.9 Id. at *19. The Court found that Chung, as CFO, must have known of the 24

25 26 9 As the Court previously noted, these are the only statements and certifications that were produced during Chung’s tenure at Ryvyl. Cullen, 2024 WL 898206, at *19 n.9. 27 1 accounting problems (some of which were directly attributed to him), that his 2 subordinates directed fraudulent practices, and that he was present at meetings in which 3 the fraudulent accounting practices were discussed. Id. And it is now further alleged that 4 CFO Chung agreed that there was inaccurate financial data being generated at an 5 executive meeting between March and May of 2022. SAC ¶ 73. The Court sees no 6 reason to disturb its previous finding, and therefore DENIES the motion to dismiss as to 7 Chung and Ryvyl for these statements. 8 The Court also previously found that the allegations were not sufficient to show 9 that CEO Nisan and Chairman Errez acted with scienter, as they were not alleged to be 10 involved in the misconduct and a benign explanation was therefore more compelling than 11 an inference of scienter. Cullen, 2024 WL 898206, at *19. The SAC has bolstered its 12 allegations that Nisan and Errez acted with scienter. The Court will thus conduct another 13 holistic review as to Nisan and Errez. 14 As to Nisan, there are now allegations that lead to an inference that he was aware 15 of the accounting problems throughout 2022, and before the Restatements. CW4 states 16 that Nisan was present at meetings between February and August of 2022 where Ryvyl’s 17 executives raised concerns about inaccurate accounting, fake wires, missed transfers, and 18 other “red flags.” SAC ¶¶ 72-73. And COO Wei and CFO Chung specifically confirmed 19 that Ryvyl had inaccurate financial information at a meeting between March and May of 20 2022, where they told other executives to review the company’s financial information. 21 SAC ¶ 73. Moreover, CW2 now states that Nisan oversaw many of Ryvyl’s accounting 22 responsibilities throughout 2022 because of CFO Chung’s frequent absences. SAC ¶ 69. 23 CW2 also states that CEO Nisan learned that CFO Chung was making up numbers at the 24 end of 2022. SAC ¶ 68. When considered alongside the small size of the accounting 25 department and Ryvyl writ large, the severity of the internal control problems, the SOX 26 Certifications, that the fraud involved Ryvyl’s primary source of revenue, the timing of 27 1 CFO Chung’s resignation, and the lack of stock sales, it can be strongly inferred that 2 Nisan acted either intentionally or with deliberate recklessness when he approved the 3 false statements. 4 The innocent explanation for Nisan’s alleged conduct is still somewhat plausible. 5 He was informed of the accounting issues at a meeting between March and May of 2022, 6 SAC ¶ 73, and learned that CFO Chung was making up numbers at the end of 2022, SAC 7 ¶ 68. Ryvyl dismissed its former accounting firm and engaged a new accounting firm in 8 April 2022, SAC ¶ 41, dismissed CFO Chung in August 2022, SAC ¶ 48, and announced 9 restatements to its previous financial statements in January 2023, SAC ¶ 53. This 10 timeline of events could suggest that Nisan learned of the accounting issues and worked 11 with other executives at Ryvyl to fix them as soon as he learned of them. However, 12 based on Nisan’s alleged overseeing of the accounting department while being informed 13 of accounting issues at meetings, it is equally as plausible to suggest that he knew he was 14 approving false or misleading statements throughout 2022. See Siracusano v. Matrixx 15 Initiatives, Inc., 585 F.3d 1167, 1183 (9th Cir. 2009) (“Viewing the [complaint] as a 16 whole, the inference of scienter is cogent and at least as compelling as any plausible non- 17 culpable explanation for Appellees’ conduct”) (internal quotation marks omitted) (citing 18 Tellabs, 551 U.S. at 324). 19 As to Errez, CW4 states that Errez was present at the same meetings between 20 February and August of 2022 where accounting issues were raised and Ryvyl’s 21 executives were told to review the company’s financial information. SAC ¶¶ 72-73. And 22 CW3 now states that Gilreath and Rubin assured them that Errez would “renegotiate” on 23 the backend so that the numbers they told CW3 to enter would be accurate. SAC ¶ 70. 24 CW3 also states that Errez, Gilreath, and Rubin assured them that numbers had changed 25 based on Errez’s conversations with clients, but that CW3 saw no documentation to 26 support the changes. SAC ¶ 71. But the accounting issues are not “so deficient as to 27 1 amount to an egregious refusal to see the obvious or to investigate the doubtful.” Stein v. 2 Bridgepoint Educ., Inc., 2020 WL 3250596, at *13 (S.D. Cal. June 15, 2020) (quoting 3 N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1098 (9th Cir. 2011)). 4 And while the SAC suggests perhaps some involvement in vaguely suspicious accounting 5 “renegotiations,” the extent of Errez’s knowledge of wrongdoing or the specifics of the 6 issues are not known. Errez’s alleged involvement is also not corroborated by other 7 confidential witnesses or allegations. When these facts are considered holistically with 8 the severity of the internal control problems, Errez’s position on Ryvyl’s board of 9 directors, that the fraud involved Ryvyl’s primary sources of revenue, the timing of CFO 10 Chung’s resignation, and Errez’s lack of stock sales, the Court finds that the allegations 11 are not sufficient to support a strong inference of scienter. While the allegations indicate 12 that Errez could have been vaguely involved, they are not specific enough, and the 13 innocent explanation is far more compelling. See Webb, 884 F.3d at 855-56 (while the 14 allegations gave the court “pause” and indicated that “all was not right at the helm,” they 15 did not “give rise to an inference of scienter that is at least as compelling as the inference 16 of an honest mistake”). 17 The Court therefore GRANTS the motion to dismiss Count I without prejudice as 18 to Defendant Errez, and as to Defendants Chung, Nisan, and Ryvyl only for the alleged 19 misstatements in the 2021 interim reports and accompanying SOX certifications, and 20 additionally as to Defendant Chung for the alleged misstatements in the third quarter 21 2022 report and its accompanying SOX certification. The Court DENIES the motion to 22 dismiss as to Defendants Chung, Nisan, and Ryvyl for the alleged misstatements in the 23 2021 annual report, the first two 2022 interim reports, and their accompanying SOX 24 certifications. And the Court DENIES the motion to dismiss as to Defendants Nisan and 25 Ryvyl for the alleged misstatements in the 2022 third quarter report and its accompanying 26 SOX certification. The Court GRANTS Plaintiffs leave to amend as to all Defendants. 27 1 See Zucco, 552 F.3d at 989 (denying leave to amend is “improper unless it is clear that 2 the complaint could not be saved by any amendment”) (internal citation omitted). 3 II. Count II: Section 20(a) 4 Plaintiffs also allege a violation of Section 20(a) of the Securities Exchange Act of 5 1934, 15 U.S.C. § 78t(a). ECF No. 89 at 20-21. Section 20(a) makes “a defendant 6 employee of a corporation who has violated the securities laws . . . jointly and severally 7 liable to the plaintiff, as long as the plaintiff demonstrates a primary violation of federal 8 securities law and that the defendant exercised actual power or control over the primary 9 violator.” Zucco, 552 F.3d at 990 (internal quotation marks and citations omitted). 10 The parties dedicate very little space in their briefs to this issue. Defendants argue 11 that Plaintiffs fail to allege specific facts showing each Individual Defendants’ actual 12 exercise of power over Ryvyl. ECF No. 85-1. Plaintiffs argue that the Court already 13 denied the motion to dismiss the Section 20(a) claims, and that Defendants have waived 14 their arguments by not advancing them in their first motion to dismiss. ECF No. 89 at 15 20-21. Further, Plaintiffs argue that they need not show “culpable participation” and that 16 whether the Individual Defendants are control persons is a fact-intensive matter not 17 suitable for resolution at the pleading stage. Id. at 21. 18 As an initial matter, the Court notes that it only denied the motion to dismiss the 19 Section 20(a) claims in its previous order because the Defendants did not move to dismiss 20 “on the ground that the Individual Defendants are not ‘control persons.’” Cullen, 2024 21 WL 898206, at *20. However, contrary to Plaintiffs’ assertions, Defendants have not 22 waived their arguments that they are not control persons. Federal Rule of Civil 23 Procedure 12(h)(2) allows the defense of failure to state a claim upon which relief can be 24 granted to be raised as late as trial, which means it cannot have been waived at the 25 pleadings stage. See Wilson-Combs v. Cal. Dep’t of Consumer Affs., 555 F. Supp. 2d 26 1110, 1113 n.3 (N.D. Cal. 2008) (“under Rule 12(g), a party does not waive a ground for 27 1 moving to dismiss for failure to state a claim by not including that ground in an earlier 2 motion to dismiss”) (quoting In re Harmonic, Inc., Sec. Litig., 2006 WL 3591148, at *12 3 (N.D. Cal. Dec. 11, 2006)); see also Hamana v. Kholi, 2011 WL 5077614, at *1 (S.D. 4 Cal. Oct. 25, 2011) (same). Therefore, the Court will consider the merits of Defendants’ 5 newly raised arguments. 6 As discussed above, Plaintiffs have shown a primary violation of Section 10(b) as 7 to Ryvyl. The only question is whether the Individual Defendants are “control persons.” 8 “Whether a defendant is a controlling person is an intensely factual question, involving 9 scrutiny of the defendant’s participation in the day-to-day affairs of the corporation and 10 the defendant’s power to control corporate actions.” Mueller v. San Diego Ent. Partners, 11 LLC, 2017 WL 3387732, at *6 (S.D. Cal. Aug. 7, 2017) (internal quotation marks 12 omitted) (citing Kaplan v. Rose, 49 F.3d 1363, 1382 (9th Cir. 1994), overruled on other 13 grounds by City of Dearborn Heights, 856 F.3d at 605). Plaintiffs need not show that the 14 controlling person acted with scienter or even “culpably participated” in the alleged 15 wrongdoing. Paracor Fin., Inc. v. Gen. Elec. Cap. Corp., 96 F.3d 1151, 1161 (9th Cir. 16 1996). “[A]t the motion to dismiss stage, allegations about an individual’s title and duties 17 have been found to be sufficient to establish control.” Mueller, 2017 WL 3387732, at *6 18 (collecting cases). 19 Here, Plaintiffs have alleged that the Individual Defendants are all “senior 20 executive officers and/or directors.” SAC ¶ 17; see also SAC ¶¶ 13-20. Plaintiffs have 21 alleged that CFO Chung oversaw the accounting department from which the misconduct 22 emanated, SAC ¶ 71, that CEO Nisan was a “hands-on manager” involved in day-to-day 23 decisions and who, at times, also oversaw the accounting department, SAC ¶ 68, that 24 Errez was on Ryvyl’s board of directors when it directed an accounting re-audit, SAC ¶¶ 25 13-14, 49, and that he was involved in “renegotiating” financial figures, SAC ¶¶ 70-71. 26 Plaintiffs allege that, because of their positions at Ryvyl, the Individual Defendants were 27 1 || able to—and did—control the conduct of Ryvyl’s business and the “contents of its 2 ||reports, press releases, and presentations to securities analysts.” SAC 44 18-19. And 3 || they “had the ability and opportunity to prevent” the issuance of false or misleading 4 ||reports and SEC filings. SAC ¥ 19; see In re Immune Response Sec. Litig., 375 F. Supp. 5 983, 1031-32 (S.D. Cal. 2005) (finding sufficient control persons allegations where 6 || defendants were the CEO and chairman of the company, “had the authority to control the 7 ||company’s reports, press releases, and presentations to security analysts,” and had the 8 || ability to prevent issuance of false reports and press releases). 9 In sum, the Plaintiffs allege that the Individual Defendants held senior executive 10 || positions at Ryvyl and, by nature of those positions, could—and, in various respects, 11 did—control Ryvyl’s actions. The SAC thus sufficiently alleges that the Individual 12 || Defendants are control persons. Accordingly, the Court DENIES the motion to dismiss 13 || Count IT. 14 Conclusion 15 The Court GRANTS in part and DENIES in part the motion to dismiss. The Court 16 ||GRANTS the Plaintiffs leave to amend on all counts as to all Defendants. If Plaintiffs 17 ||choose to amend, they must file an amended complaint within 20 days of the date of this 18 || Order. 19 The Court GRANTS in part and DENIES in part Defendants’ request for judicial 20 || notice. 21 IT IS SO ORDERED. 22 ||Dated: October 21, 2024 <=

24 United States District Judge 25 26 27 33 28 23-CV-0185-GPC-SBC