In re Ripple Labs Inc. Litigation

• Court: District Court, N.D. California
• Decided: February 26, 2020
• Docket: 4:18-cv-06753
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA

7 VLADI ZAKINOV, et al., Case No. 18-cv-06753-PJH 8 Plaintiffs,

9 v. ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' 10 RIPPLE LABS, INC., et al., MOTION TO DISMISS 11 Defendants. Re: Dkt. No. 70 12

13 Defendant Ripple Labs, Inc.’s (“defendant Ripple”), defendant XRP II, LLC’s 14 (“defendant XRP II”), and defendant Ripple’s Chief Executive Officer, Bradley 15 Garlinghouse (“defendant Garlinghouse”) (collectively, “defendants”) motion to dismiss 16 plaintiff Vladi Zakinov’s (“plaintiff”) consolidated class action complaint came on for 17 hearing before this court on January 15, 2020. Plaintiff appeared through his counsel, 18 James Taylor-Copeland and Oleg Elkhunovhich. Defendants appeared through their 19 counsel, Damien Marshall, Kathleen Hartnett, and Menno Goedman. Having read the 20 papers filed by the parties and carefully considered their arguments and the relevant 21 legal authority, and good cause appearing, the court hereby GRANTS IN PART and 22 DENIES IN PART defendants’ motion for the following reasons. 23 BACKGROUND 24 This consolidated putative class action (“In re Ripple”) arises out of the creation, 25 dispersal, circulation, and sale of “XRP,” a sort of digital units often referred to as a 26 “cryptocurrency.” In re Ripple comprises various actions alleging both violations of 27 federal and California state securities laws. Such actions include Coffey v. Ripple et al., 1 Super. Ct. San Mateo Cty.), and Oconer v. Ripple Labs, Inc., 18-CIV-3332 (Cal. Super. 2 Ct. San Mateo Cty.). The procedural posture of this action is complex and its 3 restatement here is largely unnecessary. The court need note only that this action is the 4 only ongoing matter of those referenced above. For more information, the court directs 5 readers to its February 28, 2019 order denying remand. Dkt. 33. 6 On August 5, 2019, plaintiff filed the operative consolidated complaint against 7 defendants. In it, plaintiff alleges the following claims: 8 1. Violation of Section 12(a)(1) of the Securities Act (Title 15 U.S.C. § 9 77l(a)(1)) against defendants for the unregistered offer and sale of 10 securities. Compl. ¶¶ 169-175; 11 2. Violation of Section 15 of the Securities Act (Title 15 U.S.C. § 77o) against 12 defendant Ripple and defendant Garlinghouse for control person liability for 13 the primary violation of Title 15 U.S.C. § 77l(a)(1). Id. ¶¶ 176-183 (together 14 with U.S.C. § 77l(a)(1), the “federal securities claims”); 15 3. Violation of California Corporations Code § 25503 against defendants for a 16 primary violation of § 25110’s restriction on the offer or sale of unregistered 17 securities. Id. ¶¶ 184-190. 18 4. Violation of California Corporations Code § 25504 against defendant Ripple 19 and defendant Garlinghouse for control person liability in connection with 20 defendants’ primary violation of § 25110. Id. ¶¶ 201-207; 21 5. Violation of California Corporations Code § 25501 against defendant Ripple 22 and defendant XRP II, as well as a parallel material assistance claim under 23 § 25504.1 against defendant Ripple and defendant Garlinghouse, for 24 misleading statements in connection with the offer or sale of securities in 25 violation of § 25401. Id. ¶¶ 191-200; 26 6. Violation of California Business & Professions Code § 17500 against 27 defendants for misleading advertisements concerning XRP. Id. ¶¶ 208-212; 1 defendants for their unregistered offer or sale of securities in violation of 2 federal and state law, false advertising practices, misleading statements, 3 and offense to established public policy. Id. ¶¶ 212-222. 4 Defendants filed the instant motion to dismiss for failure to state a claim under 5 Rule 12(b)(6). Dkt. 70. At the core of plaintiff’s claims is that XRP qualifies as a security 6 under California state and federal law. While plaintiff alleges this legal theory at length in 7 his complaint, Compl. ¶¶ 121-159, defendants save their dispute with that theory for 8 another day and assume—solely for the instant motion—plaintiff’s legal position that XRP 9 qualifies as a security. Dkt. 70 at 11; Dkt. 74 at 9; Dkt. 75 at 7 n.1. Instead, defendants 10 challenge the complaint on grounds of Title 15 U.S.C. § 77m’s three-year statute of 11 repose and traditional Rule 12(b)(6) failure to state a claim grounds. Below, the court 12 provides a summary of the relevant allegations and judicially noticeable facts. 13 A. The Court Partially Grants Defendants’ Unopposed Requests for Judicial 14 Notice 15 As an initial matter, defendants request that the court take judicial notice of the 16 following documents: 17 • The Statement of Facts from the federal government’s May 2015 settlement 18 with defendants Ripple Labs and defendant Ripple XRP II (predecessor to 19 defendant XRP II, LLC). Dkt. 70-3. This document is cited or referenced in 20 the complaint at paragraphs 2 n.2, 25, and 112. 21 • The “Ripple Credits” page from defendant Ripple’s Wiki website. Dkt. 70-4. 22 This document is cited or referenced in the complaint at paragraphs 24 n.7, 23 130 n.91, and 145 n.99. 24 • A Quarter One 2018 XRP Markets Report. Dkt. 70-5. This document is 25 cited at complaint paragraph 36 n.16. 26 • An article titled “Ripple is sitting on close to $80 billion and could cash out 27 hundreds of millions per month—but it isn’t.” Dkt. 70-6. This document is 1 Here, the court need not consider the fourth request for judicial notice (Dkt. 70-6) 2 to resolve defendants’ motion. As a result, the court denies that request. Otherwise, 3 because plaintiff does not oppose the remaining requests and their underlying documents 4 are sufficiently cited at the complaint sections noted immediately above, the court grants 5 defendants’ request for judicial notice of those three documents and will incorporate their 6 contents by reference in its analysis below. 7 B. The Parties 8 1. Defendant Ripple 9 Defendant Ripple is a Delaware corporation with its principal place of business in 10 San Francisco. Compl. ¶ 14. While defendant Ripple sells certain enterprise software 11 products, the primary source of its income is the sale of XRP. Id. ¶ 28. 12 2. Defendant XRP II 13 Defendant XRP II is a New York limited liability company with its principal place of 14 business in San Francisco. Id. ¶ 15. Defendant XRP II’s predecessor is XRP Fund II, 15 LLC, which was incorporated in South Carolina on July 1, 2013. Dkt. 70-3 ¶ 22. 16 Defendant XRP II was created to “engage in the sale and transfer of” XRP to “various 17 third parties on a wholesale basis.” Id. 18 3. Defendant Garlinghouse 19 Defendant Garlinghouse is the Chief Executive Officer of defendant Ripple. 20 Defendant Garlinghouse has held that position since January 2017. Compl. ¶ 16. 21 Previously, Garlinghouse served as Ripple’s Chief Operating Officer from April 2015 22 through December 2016. Id. 23 4. Plaintiff 24 On June 21, 2019, the court appointed Bradley Sostack as lead plaintiff. Dkt. 60. 25 Plaintiff is a Florida resident. Id. ¶ 13. Between January 1, 2018 and January 16, 2018, 26 plaintiff purchased roughly 129,000 units of XRP for approximately $307,700 in other 27 cryptocurrencies. Id. Plaintiff alleges that he purchased such XRP “from defendants,” id. 1 defendants or incidentally on a cryptocurrency exchange. Plaintiff sold his XRP between 2 January 9, 2018 and January 17, 2018 for $189,600 in other cryptocurrency, representing 3 a $118,100 loss in XRP value. Id. ¶ 163. Plaintiff seeks to certify a Rule 23(b)(3) class 4 that generally includes all persons or entities who purchased XRP. Id. ¶ 160. 5 C. Relevant Allegations 6 In 2013, defendant Ripple generated 100 billion units of XRP. Compl. ¶ 2. 7 Following their creation, defendant Ripple gave 20 billion XRP to its founders and 8 retained the remaining 80 billion XRP. Id. ¶¶ 2, 22, 23. 9 1. XRP Escrow Program 10 Since the XRP’s creation, defendant Ripple has placed a substantial percentage of 11 XRP that it owns in escrow and developed a plan for when and in what quantities XRP 12 should be sold. Id. ¶ 5. As of May 2017, defendant Ripple maintained 62 billion XRP. 13 Id. ¶ 84. At that time, defendant Ripple stated that it would place 55 billion XRP in a 14 secured escrow account and would only offer and sell limited amounts of XRP at defined 15 intervals. Id. In an article, defendant Garlinghouse publicly stated that “[o]ur goal in 16 distributing XRP is to incentivize actions that build trust, utility, and liquidity.” Id. ¶ 86. In 17 that same publication, Garlinghouse subsequently characterized the XRP distribution as 18 “ongoing.” Id. Defendants adopted the escrow plan to allow investors “to mathematically 19 verify the maximum supply of XRP that can enter the market.” Id. ¶ 87. 20 2. Alleged Offers or Sales of XRP by Defendants 21 a. Sales Acknowledged in Defendants’ May 2015 Settlement 22 Agreement 23 In May 2015, defendant Ripple and defendant XRP II entered a settlement 24 agreement with the United States Attorney’s Office for the Northern District of California 25 (“USAO”) for violation of the Bank Secrecy Act, Title 31 U.S.C § 5330. Id. ¶ 25; Dkt. 70- 26 3. Significantly, plaintiff alleges that, as part of that agreement, defendants 27 “acknowledged that they sold XRP to the general public.” Compl. ¶ 25 (emphasis 1 violations section identifies the following XRP sale-related conduct by defendants since 2 2013: 3 • As of the date of the agreement, defendant Ripple “facilitated transfers of 4 virtual currency and provided virtual currency exchange transaction 5 services.” Dkt. 70-3 ¶ 2. 6 • “From at least March 6, 2013, through April 29, 2013, Ripple Labs sold 7 convertible virtual currency known as ‘XRP.’” Id. ¶ 17. 8 • “Throughout the month of April 2013, Ripple Labs effectuated multiple sales 9 of XRP currency totaling over approximately $1.3 million U.S. dollars.” Id. ¶ 10 20. 11 • “By on [sic] or about August 4, 2013, XRP II was engaged in the sale of 12 XRP currency to third-party entities.” Id. ¶ 23. 13 • Prior to September 26, 2013, defendant XRP II had “engag[ed] in numerous 14 sales of virtual currency to third parties.” Id. ¶ 26(a). 15 • On September 30, 2013, defendant XRP II “negotiated an approximately 16 $250,000 transaction . . . for a sale of XRP virtual currency with a third-party 17 individual.” Id. ¶ 28(a). 18 • In November 2013, defendant XRP II considered and rejected a roughly 19 $32,000 transaction. Id. ¶ 28(b). 20 • In January 2014, defendant XRP II considered and rejected an offer from 21 foreign-based customer who sought to purchase XRP. Id. ¶ 28(c). 22 Lastly, as part of the settlement, defendant XRP II is described as “created to 23 engage in the sale and transfer of the convertible virtual currency, XRP, to various third 24 parties on a wholesale basis.” Id. ¶ 22 (emphasis added). 25 b. Pre-2017 XRP Sales and Circulation Rates 26 On or before July 12, 2014, defendant Ripple stated on its website that it “sells 27 XRP to fund its operations and promote the network.” Compl. ¶ 24; Dkt. 70-4 at 4 1 defendant Ripple also disclosed the amount of XRP that it held and that in circulation. 2 Compl. ¶ 26. As of June 30, 2015, defendant Ripple held approximately 67.5 billion XRP. 3 Id. Of the remaining 32.5 billion XRP in circulation, 20 billion was held by defendants’ 4 founders and some other undisclosed amount was used for “business development 5 agreements.” Id. 6 In 2016, defendant Ripple promised but did not execute an agreement with a third- 7 party vendor an option to purchase 5 billion XRP in exchange for access to the vendor’s 8 consortium of financial institutions. Id. ¶ 104. Aside from this potential transaction, 9 neither plaintiff nor defendants alleged or proffered any judicially noticeable fact showing 10 any other specific instances of XRP sales between December 2014 and 2016. 11 c. Defendants’ Increase Their XRP Sales to the Public in 2017 12 Defendants sell XRP to retail consumers in exchange for legal tender or other 13 cryptocurrencies. Id. ¶ 4. Defendants also sell XRP “wholesale to larger investors” as 14 well as “significant quantities of XRP directly to the general public on cryptocurrency 15 exchanges.” Id. ¶¶ 30, 127, 156. The earliest indication of XRP’s listing on an exchange 16 that plaintiff alleges is May 18, 2017. Id. ¶ 44. 17 Significant to the instant motion, in 2017 and early 2018, defendants rapidly 18 accelerated their sale of XRP to the public. Id. ¶ 30. During that period, Ripple increased 19 its efforts to engage in distribution strategies aimed at the general public that would result 20 in stabilizing or strengthening XRP exchange rates against other currencies. Id. ¶ 5. 21 Since 2017, defendants have “earned over $1.1 billion through the sale of XRP.” Id. ¶ 22 30. 23 Plaintiff alleges that defendants, primarily through defendant XRP II, sold the 24 following amounts of XRP per quarter: 25 Annual Quarter Amount Allegedly Sold (in USD) 26 Q2 2017 $31 million 27 Q3 2017 $52 million 1 Q1 2018 $167 million 2 Q2 2018 $154 million 3 Q3 2018 $81 million 4 Q4 2018 $129 million 5 Q1 2019 $169 million 6 Q2 2019 $251 million 7 Id. ¶¶ 31-39. 8 Plaintiff alleges that such sales occurred through some combination of direct, 9 exchange, institutional, or programmatic sales. Id. As of August 5, 2019, defendant has 10 not registered XRP with the Securities and Exchange Commission (“SEC”) or qualified it 11 with the California Commissioner of Corporations. Id. ¶ 12. 12 3. Public Access to XRP 13 Defendant Ripple’s website provides advice on “How to Buy XRP” and includes 14 hyperlinks to exchanges trading XRP. Id. ¶¶ 4, 43, 135. In 2017, defendant Ripple, as 15 well as its various officers, published tweets concerning or including hyperlinks to such 16 exchanges. Id. ¶¶ 44-45. As of December 21, 2017, XRP was available for purchase or 17 sale at over 50 exchanges. Id. ¶¶ 45, 128. 18 4. Alleged Misstatements concerning XRP 19 Plaintiff alleges numerous purported misstatements by defendants concerning 20 XRP, its value, and its status as a non-security. Id. ¶¶ 42-83, 95-97. The court details 21 those misstatements in its analysis below. 22 DISCUSSION 23 A. Legal Standard 24 1. Rule 12(b)(6) 25 A motion to dismiss under Rule 12(b)(6) tests for the legal sufficiency of the claims 26 alleged in the complaint. Ileto v. Glock, 349 F.3d 1191, 1199-1200 (9th Cir. 2003). Rule 8 27 requires that a complaint include a “short and plain statement of the claim showing that 1 proper when the complaint either (1) lacks a cognizable legal theory or (2) fails to allege 2 sufficient facts to support a cognizable legal theory.” Somers v. Apple, Inc., 729 F.3d 953, 3 959 (9th Cir. 2013). While the court is to accept as true all the factual allegations in the 4 complaint, legally conclusory statements, not supported by actual factual allegations, 5 need not be accepted. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). The complaint 6 must proffer sufficient facts to state a claim for relief that is plausible on its face. Bell 7 Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 558-59 (2007). 8 As a general matter, the court should limit its Rule 12(b)(6) analysis to the 9 contents of the complaint, although it may consider documents “whose contents are 10 alleged in a complaint and whose authenticity no party questions, but which are not 11 physically attached to the plaintiff's pleading.” Knievel v. ESPN, 393 F.3d 1068, 1076 (9th 12 Cir. 2005); Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007) (“a court can consider a 13 document on which the complaint relies if the document is central to the plaintiff's claim, 14 and no party questions the authenticity of the document”). The court may also consider 15 matters that are properly the subject of judicial notice, Lee v. City of L.A., 250 F.3d 668, 16 688–89 (9th Cir. 2001), exhibits attached to the complaint, Hal Roach Studios, Inc. v. 17 Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1989), and documents 18 referenced extensively in the complaint and documents that form the basis of the 19 plaintiff's claims, No. 84 Emp'r-Teamster Jt. Counsel Pension Tr. Fund v. Am. W. Holding 20 Corp., 320 F.3d 920, 925 n.2 (9th Cir. 2003). 21 Lastly, a district court “should grant the plaintiff leave to amend if the complaint 22 can possibly be cured by additional factual allegations,” however, dismissal without such 23 leave “is proper if it is clear that the complaint could not be saved by amendment.” 24 Somers, 729 F.3d at 960. 25 2. Rule 9(b) 26 For actions alleging fraud, “a party must state with particularity the circumstances 27 constituting fraud or mistake.” Fed. R. Civ. Pro. 9(b). To satisfy Rule 9(b), a plaintiff 1 the identities of the parties to the misrepresentations.’” Swartz v. KPMG LLP, 476 F.3d 2 756, 764 (9th Cir. 2007). “Averments of fraud must be accompanied by ‘the who, what, 3 when, where, and how’ of the misconduct charged,” and “a plaintiff must set forth more 4 than the neutral facts necessary to identify the transaction. The plaintiff must set forth 5 what is false or misleading about a statement, and why it is false.” Vess v. Ciba-Geigy 6 Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (emphasis in the original). Plaintiff’s 7 allegations of fraud “must be specific enough to give defendants notice of the particular 8 misconduct which is alleged to constitute the fraud charged so that they can defend 9 against the charge and not just deny that they have done anything wrong.” Swartz, 476 10 F.3d at 764. 11 B. Analysis 12 1. Plaintiff’s Claims under the Federal Securities Laws Are Not Barred by 13 the Statute of Repose 14 Here, whether Title 15 U.S.C § 77(m)’s three-year statute of repose bars plaintiff’s 15 federal securities law claims depends upon two distinct issues: (1) the controlling rule for 16 measuring when the statute of repose commences for purpose of Title 15 U.S.C § 17 77l(a)(1); and (2) when the alleged (or judicially noticeable) sales of XRP first qualified as 18 a “bona fide” public offering within the meaning of Title 15 U.S.C. § 77l(a)(1). 19 The court analyzes each issue in turn. 20 a. The First Offered Rule Articulated by the Second Circuit in Stolz 21 Family Controls 22 Title 15 U.S.C § 77m provides the following in relevant part: 23 “No action shall be maintained to enforce any liability created under section 77k or 77l(a)(2) of this title unless brought within 24 one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by 25 the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77l(a)(1) of this title, 26 unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to 27 enforce a liability created under section 77k or 77l(a)(1) of more than three years after the sale.” 15 U.S.C. § 77m 1 (emphasis added). 2 Defendants argue that the statute of repose’s commencement is controlled by the 3 so-called “first-offered” rule articulated by the Second Circuit in Stolz Family Partnership 4 L.P. v. Daum, 355 F.3d 92 (2d Cir. 2004) (“Stolz”). Under that rule, “the three-year period 5 begins when the security is first bona fide offered.” Stolz, 355 F.3d at 100 (italics in the 6 original) (bold added). 7 In his briefing, plaintiff primarily argues that when the statute of repose 8 commences is controlled by the so-called “last-offered” rule stated by the district court In 9 re Bestline Products Securities and Antitrust Litigation, 1974 WL 386 (S.D. Fla. 1975) and 10 subsequently adopted by a court in this district in Hudson v. Capital Mgmt. Int'l, Inc., 1982 11 WL 1384 (N.D. Cal. Jan. 6, 1982). Under that rule, the three-year period begins “on the 12 date the alleged security was last offered to the public.” In re Bestline, 1975 WL 386 at 13 *2. Explained below, the court adopts the first-offered rule as controlling here.1 14 In Stolz, the Second Circuit considered two federal securities claims against a 15 defunct company, one of which was a claim for sale of unregistered securities (labeled 16 “membership units”) under § 77l(a)(1). 355 F.3d at 95. Plaintiff filed his initial complaint 17 in February 2001 and his operative pleading on November 19, 2001. Id. In it, plaintiff 18 alleged that “beginning in or about July, 1997 [sic] and continuously through the 19 bankruptcy filing . . . [defendant] engaged in a ‘public offering.’” Id. The district court held 20 that plaintiff’s original complaint was filed “more than three years after the membership 21 interests were ‘bona fide offered to the public’” and the claim was therefore time barred 22 under § 77m. Id. at 96. 23 On appeal, the Second Circuit focused its analysis on the core legal question 24 1 At oral argument, plaintiff’s counsel effectively abandoned the argument that the last- 25 offered rule controls. Instead, counsel only briefly mentioned Hudson as “the only in district decision” and then went on at length to discuss Stolz “if the court was to find the 26 reasoning of the Second Circuit in Stolz persuasive.” Despite plaintiff’s apparent concession, because of the significance of selecting the proper doctrine to dispose of 27 defendants’ statute of repose challenge in this motion and to guide the parties in this 1 here—namely, “at what point during the bona fide offer does the repose period begin?” 2 355 F.3d at 98-99. While the Second Circuit advanced several reasons in support of its 3 determination that the statute of repose is triggered by a defendant’s first bona fide offer 4 to the public of its allegedly unregistered securities—including the weight of precedent, 5 statutory interpretation, historical function of statutes of repose, and policy 6 considerations, 355 F.3d at 100-107—the court finds Stolz’s statutory construction 7 justification most persuasive. 8 Significantly, § 77m includes both a three-year statute of repose and a one year- 9 statute of limitations for claims brought under § 77l(a)(1). If the court were to interpret the 10 statute of repose to commence at the time of the last bona fide public offer, such 11 interpretation would effectively nullify its effect because “every potential plaintiff 12 purchasing a defendant's security during an offering period would have at least three 13 years before being constrained by the repose period, since each day during which the 14 offer continued would delay the start of the repose period. Therefore, the statute would 15 fail to enforce final repose with respect to any plaintiff, with one exception—a plaintiff 16 whose one-year limitations period was tolled not only for the duration of the offer, but for 17 the three years subsequent to the end of the offering period.” P. Stolz, 355 F.3d at 105 18 n.9. Stated differently, under the last-offered rule, the statute of repose would generally 19 bar a § 77l(a)(1) claim only if such claim fell within a tolling exception to § 77m’s one- 20 year statute of limitations. Absent such an exception, the one-year statute of limitation 21 would bar the § 77l(a)(1) claim two years before the statute of repose could take effect. 22 Plaintiff failed to explain how the last-offered rule would not result in such an eviscerating 23 effect upon the statute of repose, and the court does not see a way to adopt such 24 construction without rendering the statute of repose “surplusage.” Stolz, 355 F.3d at 105 25 n.9. Given such inability, the court concludes that the only reasonable way to construe 26 the statute of repose is by adopting the first-offered construction. 27 Separately, the court further finds that the authorities urged by plaintiff here in 1 correctly noted, Hudson stems from In re Bestline and itself offers no analytical 2 justification for adopting last-offered rule.2 To support its articulation of the last-offered 3 rule, the court in In re Bestline provides only the following: 4 “The defendants' interpretation of the statute [arguing the first- offered approach] is simply at odds with the remedial purposes 5 of the Securities Act of 1933. To hold as the defendants suggest would be to give individuals a license to sell 6 unregistered securities to whomsoever they wished if they first offered the security to a group of people and, so to speak, ‘ran 7 the gauntlet’ for three years. It is doubtful that Congress intended the 1933 Act's goals of registration, disclosure, and 8 private enforcement to be so easily frustrated. As a result, the defendants' interpretation of [Title 15 U.S.C. § 77(m)] must be 9 rejected in favor of the plaintiffs' interpretation, according to which the limitations period began on the date the alleged 10 ‘security’ was last offered to the public.” Stolz, 355 F.3d at 102 citing In re Bestline, 1975 WL 386 at *2. 11 While the court appreciates the policy concern identified above, such a concern 12 does not overcome the statutory interpretation-based justification articulated by Stolz in 13 support of the first-offered rule. Moreover, as the Second Circuit correctly noted, a 14 statute of repose is a creature of legislative supremacy that operates independent of 15 equitable concerns. Stolz, 355 F.3d at 102-03 (“[A] statute of repose begins to run 16 without interruption once the necessary triggering event has occurred, even if equitable 17 considerations would warrant tolling or even if the plaintiff has not yet, or could not yet 18 have, discovered that she has a cause of action.”) (internal citations omitted). By making 19 § 77m’s statute of repose applicable to § 77l(a)(1) claims, Congress decided to limit the 20 availability of such statutory claims. Such decision is contrary to In re Bestline’s doubt 21 about congressional intent and assertion that the first-offered rule would improperly 22 undermine § 77l(a)(1)’s remedial purposes. 23 Further, when articulating the last-offered rule, the court in In re Bestline 24 incorrectly characterized § 77m’s three-year statute of repose as a “statute of limitations.” 25 In re Bestline, 1975 WL 386, at *1 (“One of the more hotly contested issues is whether 26

27 2 Hudson, 1982 WL 1384, at *3 n. 3 (“The relevant offering is the last offering of the 1 the claims of the plaintiff class under section 12(1) of the Securities Act of 1933 are 2 barred by the Statute of Limitations contained in section 13 of the Act. In pertinent part, 3 section 13 reads: No action shall be maintained to enforce any liability created under . . . 4 section 12(1), unless it is brought within one year after the violation upon which it is 5 based. In no event shall any such action be brought to enforce a liability created under . . 6 . section 12(1) more than three years after the security was bona fide offered to the 7 public. . . The defendants take the position that the underscored language should be 8 interpreted to mean that an action under section 12(1) may not be brought more than 9 three years after the security was first offered to the public.”) (italics in the original) (bold 10 italics added). As explained in Stolz, Congress recognizes a significant distinction 11 between the function of a statute of repose and a statute of limitation.3 Because the court 12 in In re Bestline incorrectly characterized § 77m’s statute of repose as a statute of 13 limitations, it appears to have failed to account for the absolute nature of the three-year 14 statute of repose when advancing its “remedial purposes” policy critique. Given this 15 shortcoming, too, the court rejects the last-offered rule. 16 Lastly, plaintiff cites the Supreme Court in Cal. Public Employees’ Retirement Sys. 17 v. ANZ Sec., Inc., 137 S. Ct. 2042 (2017) for the proposition that § 77m’s statute of 18 repose “runs from the defendants’ last culpable act (the offering of the securities) . . .” Id. 19 at 2049. This citation fails to provide any guidance on the critical issue here: namely, 20 whether the subject offering means first- or last-bona fide offering. Further, the Supreme 21 Court in ANZ Securities did not consider the application of § 77m’s statute of repose to 22 an unregistered securities claim under § 77l(a). Instead, it considered the applicability of 23 that section to a subsequent suit alleging a misrepresentation claim initiated by a plaintiff 24

25 3 Stolz, 355 F.3d at 102 (“Statutes of limitations bear on the availability of remedies and, as such, are subject to equitable defenses . . . the various forms of tolling, and the 26 potential application of the discovery rule. In contrast, statutes of repose affect the availability of the underlying right: That right is no longer available on the expiration of the 27 specified period of time. In theory, at least, the legislative bar to subsequent action is 1 who was previously a member of a putative class action brought within the period of 2 repose. 137 S. Ct. at 2047. If the Supreme Court sought to reject the first-offered rule— 3 much less overrule a “vast majority” of lower court’s adopting the first-offered rule, Stolz, 4 355 F.3d at 100—it would not have done so by vague reference in an inapposite case. 5 In short, in the absence of controlling Ninth Circuit or Supreme Court authority, the 6 court has discretion to choose the applicable rule for determining when § 77m’s statute of 7 repose commences. Because the first-offered rule is better reasoned than its last-offered 8 counterpart, the court adopts it as controlling here. 9 b. The First Offered Rule Does Not Bars Plaintiff’s Federal 10 Securities Claims 11 Having decided the controlling rule for determining when the statute of repose 12 commences, the next issue is its application. Based on the allegations and judicially 13 noticeable facts, the court concludes that defendants did not make their first bona fide 14 public offering of XRP before August 5, 2016 (three years prior to plaintiff’s filing of his 15 federal securities claims in this action on August 5, 2019). 16 As a preliminary matter, defendants assert that “plaintiff must allege facts to show 17 compliance with Section 13 [Title 15 U.S.C. § 77m].” Dkt. 70 at 16. In support, 18 defendants cite Toombs v. Leone, 777 F.2d 465, 469 (9th Cir. 1985). Plaintiff responds 19 that the Ninth Circuit in Johnson v. Aljian, 490 F.3d 778 (9th Cir. 2007) “criticized” 20 Toombs, “observed” that a plaintiff does not need to allege facts that negate a potentially 21 applicable affirmative defense to survive an attack on the pleadings, and “urged” courts to 22 discard such a requirement. Dkt. 74 at 11 n.2. Defendants fail to address plaintiff’s 23 response in their reply. Both parties overstate their respective authority. 24 Plaintiff is correct that the Ninth Circuit in Johnson subsequently criticized Toombs 25 and urged disregarding its requirement. Johnson v. Aljian, 490 F.3d 778, 782 (9th Cir. 26 2007) (“We followed such general rule in Toombs v. Leone, 777 F.2d 465 (9th Cir.1985), 27 holding that ‘the plaintiff must affirmatively plead sufficient facts in his complaint to 1 Section 12 of the Securities Act of 1933. . . . This rule has incurred forceful, and we think 2 justified, criticism.”). However, Johnson does not stand for the proposition that “it is not 3 the plaintiff’s burden to negate an affirmative defense on the pleadings.” Rather, 4 Johnson expressly recognized that Toombs’ “disapproved pleading rule may survive in 5 this circuit with respect to Section 12.” 490 F.3d at 782 n.13 (emphasis added). 6 Contrary to defendants’ suggestion, Toombs does not require that plaintiff allege 7 facts showing compliance with § 77m’s statute of repose. Instead, Toombs requires 8 only that a plaintiff alleging a §77l claim must plead compliance with § 77m’s statute of 9 limitations. Toombs, 777 F.2d 465, 468 (9th Cir. 1985) (“In asserting a violation of 10 Section 12, the plaintiff must affirmatively plead sufficient facts in his complaint to 11 demonstrate conformity with the statute of limitations.”). Defendants failed to offer any 12 authority in support of extending Toombs’s pleading requirement to the statute of repose. 13 Given the Ninth Circuit’s more recent criticism of that requirement in Johnson, the 14 court concludes that plaintiff need not affirmatively allege that his federal securities claims 15 comply with the statute of repose. This conclusion is further supported by the general 16 rule that a plaintiff need not anticipate or negate an affirmative defense in his or her 17 pleadings. Perry v. Merit Sys. Prot. Bd., 137 S. Ct. 1975, 1987 (2017) (“In civil litigation, 18 a release is an affirmative defense to a plaintiff's claim for relief, not something the 19 plaintiff must anticipate and negate in her pleading.”). The court now turns to whether 20 plaintiff alleged sufficient facts showing a timely first bona fide public XRP offering. 21 In Stolz, the Second Circuit interpreted § 77m’s “bona fide” public offering 22 requirement to mean “when was the stock really and truly (genuinely) being offered to the 23 public, as opposed to, say, a simulated offering.” Id. at 99. The Second Circuit 24 emphasized that the phrase “bona fide” qualified “public,” rather than “first,” offering to the 25 public, id. citing Louis Loss & Joel Seligman, Securities Regulation § 2–B–6, n.285 (3d 26 ed.1996), and passingly footnoted that courts may find a first bona fide offer based upon 27 a defendant’s “clear objective attempts to secure purchasers,” id. at 104 n.7. Aside from 1 qualify as “bona fide” public offers and its application of the bona fide offer standard 2 provides no insight. 355 F.3d at 95, 106 (concluding that defendant “bona fide offered to 3 the public the security at issue . . . in July 1997” based upon the allegation “in paragraph 4 16 that beginning in or about July 1997 and continuously through the bankruptcy filing.”). 5 Here, based on plaintiff’s complaint and the judicially noticeable facts proffered, 6 the court cannot conclude that defendants’ first bona fide public offer to sell XRP 7 occurred before August 5, 2016. While defendants did acknowledge various 2013 offers 8 and sales in their May 2015 settlement with the USAO, the sales activity identified in that 9 settlement does not show that defendants targeted the general public when offering to 10 sell XRP. Instead, the activity identified in that agreement either shows that defendants 11 attempted or consummated particular transactions with specific third-party individuals or 12 entities, Dkt. 70-3 ¶¶ 23, 26(a), 28(a), 28(c), or generally refers to the existence of 13 defendants’ sales activity without defining the scope of the market for such sales, id. ¶¶ 14 17, 20. 15 Similarly, the complaint’s reference to an unexecuted agreement between 16 defendants and a third-party vendor in 2016, Compl. ¶ 104, is no different than the 17 handful of person-specific transactions noted in defendants’ May 2015 settlement. 18 Moreover, the limited nature of defendants’ pre-settlement agreement sales activity is 19 further shown by the settlement’s description of defendant XRP II as “created to engage 20 in the sale and transfer of the convertible virtual currency, XRP, to various third parties 21 on a wholesale basis.” Dkt. 70-3 ¶ 22 (emphasis added). 22 At oral argument, defendants reiterated that plaintiff, by his own pleading, admitted 23 the public nature of their pre-2017 sales. To support that assertion, defendants cite 24 paragraph 25 of the complaint, which alleges that defendants “acknowledged that they 25 sold XRP to the general public,” Dkt. 70 at 17, and the heading to Section IV of the 26 complaint, which is titled “XRP Genesis and Public Offerings,” Dkt. 70 at 17. Plaintiff’s 27 counsel then fell on that sword, acknowledging that the term “general” in paragraph 25 is 1 handful of transactions detailed in the May 2015 settlement. 2 While the court agrees with defendants that plaintiff’s own apparently mistaken 3 characterization of defendants’ pre-May 2015 sales activities as involving the “general 4 public” tend to belie his subsequent assertion that such activities did not qualify as a bona 5 fide public offering, the court finds that plaintiff’s aberrational use of the terms “public 6 offering” and “general public” are the sort of conclusory labels that it need not accept as 7 true on a motion to dismiss. Heimrich v. Dep't of the Army, 947 F.3d 574, 577 (9th Cir. 8 2020) (“The complaint ‘does not need detailed factual allegations,’ but the plaintiff must 9 provide more than ‘labels and conclusions’ to withstand scrutiny under Rule 12(b)(6).”). 10 Instead, the court examines the substance of the actual sales activity alleged and 11 judicially noticeable. Based on that examination, the court cannot conclude that 12 defendants made their first bona fide public offer before August 5, 2016. 13 Such conclusion is separately supported by the substantial volume of XRP sales 14 that allegedly occurred after August 5, 2016. Significantly, the first date alleged detailing 15 when defendants listed XRP on a cryptocurrency exchange is May 18, 2017. Compl. ¶ 16 44. Around this same time, individuals purchased $31 million worth of XRP, comprising 17 $21 million in sales to “market participants” directly and $10 million in exchange sales. 18 Id. ¶ 39. From 2017 Q2 onward, purchases by direct market participants, exchange 19 participants, programmatic participants, and institutions rose from tens of millions to over 20 $250 million quarterly. Id. ¶¶ 31-39. Such volumes of sales are greater than the handful 21 of one-off multi-thousand-dollar transactions and $1.3 million in monthly sales detailed in 22 the May 2015 settlement. Such a material change supports the inference that the 23 defendants did not make their first genuine attempt to sell to the public until 2017. 24 Lastly, at oral argument, defendants contended that the court could find a bona 25 fide public offer prior to the May 2015 settlement agreement based upon the fact that the 26 government investigated and prosecuted defendants for sales-related activities prior to 27 such agreement. Defendants failed to proffer any authority in support of such a 1 defendants requested this court take judicial notice of—speaks for itself. Already 2 discussed at length above, that agreement specifies only a handful of individualized 3 transactions and does not describe the culpable sales activities as public in nature. 4 The court cautions that, once the parties have developed a factual record, it may 5 revisit its determination on whether defendant made their first bona fide XRP offer to the 6 public before or after August 5, 2016. However, based upon the allegations and judicially 7 noticeable facts properly before this court on this motion, the court cannot find that such 8 offer occurred outside the three-year statute of repose.4 As a result, the court concludes 9 that § 77m does not bar plaintiff’s federal securities claims at this juncture.5 10 2. Plaintiff Adequately Alleged the Federal Securities Claim Against 11 Defendants 12 Title 15 U.S.C § 77l(a)(1) provides the following in relevant part: 13 “Any person who—

14 (1) offers or sells a security in violation of section 77e of this title, or 15 . . . 16 shall be liable, subject to subsection (b), to the person 17 purchasing such security from him . . .” 15 U.S.C § 77l(a)(1). 18 Title 15 U.S.C § 77e(a)(1) provides the following: 19 “Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly— 20 . . . 21 (1) to make use of any means or instruments of transportation 22 or communication in interstate commerce or of the mails to sell 23 4 Even if Toombs required plaintiff to include allegations negating the statute of repose’s 24 application here, defendants’ two-line challenge on this issue fails to explain how plaintiff’s allegations of increased sales activities starting in 2017, Compl. ¶¶ 5, 30-39, 45, 25 128, does not satisfy such obligation. 5 Because the court cannot conclude that the allegations support finding a bona fide 26 public offer before August 5, 2016, it need not determine whether defendants’ sale of XRP qualified as multiple separate offerings, Dkt. 74 at 12-15, as opposed to a so-called 27 “slow offer” of the same security over a prolonged period, Dkt. 70 at 19, whether applying such security through the use or medium of any prospectus or 1 otherwise;” 15 U.S.C. § 77e. 2 Here, defendants argue that plaintiff failed to state a claim under § 77l(a)(1) on the 3 following two grounds: (1) he failed to allege that he purchased his XRP as part of an 4 “initial distribution”; and (2) he failed to allege that defendants qualify as “sellers” within 5 the meaning of that section. The court analyzes each challenge in turn. 6 a. Title 15 U.S.C § 77l(a)(1) Does Not Require Plaintiff to Have 7 Purchased His XRP in an “Initial Distribution” 8 Here, defendants contend that, to state a claim under § 77l(a)(1), plaintiff must 9 allege that he purchased his XRP as part of an “initial distribution” of stock, as opposed to 10 on the “secondary open market.” Dkt. 70 at 20. In support of that contention, defendants 11 primarily rely upon Gustafson v. Alloyd Co., 513 U.S. 561 (1995). 12 In Gustafson, the Supreme Court interpreted the scope of the term “prospectus” as 13 used in Title 15 U.S.C. § 77l(a)(2). Gustafson, 513 U.S. at 564 (“Under § 12(2) of the 14 Securities Act of 1933 buyers have an express cause of action for rescission against 15 sellers who make material misstatements or omissions ‘by means of a prospectus.’ The 16 question presented is whether this right of rescission extends to a private, secondary 17 transaction, on the theory that recitations in the purchase agreement are part of a 18 ‘prospectus.’”). It held that that term “refer[s] to a document that describes a public 19 offering of securities by an issuer or controlling shareholder.” Id. at 584. While 20 Gustafson might suggest that claims under § 77l(a)(2) are limited to misrepresentations 21 made only in connection with initial distributions of securities, id. at 573 (“[plaintiff 22 purchaser], as well as Justice THOMAS in his dissent, respond that if Congress had 23 intended § 12(2) to govern only initial public offerings, it would have been simple for 24 Congress to have referred to the § 4 exemptions in § 12(2)”), such suggestion is unclear 25 and, in any event, would be limited to the § 77l(a)(2) claims at issue there. 26 In support of their proffered position, defendants further rely upon Gustafson’s 27 citation to another Supreme Court case, Blue Chip Stamps v. Manor Drug Stores, 421 1 Court in Gustafson did not cite Blue Chip Stamps “for [the] proposition that [the] 2 Securities Act extends only to ‘initial distributions of newly issued stock from corporate 3 issuers.’” Dkt. 75 at 13 (emphasis added). Instead, the Supreme Court in Gustafson 4 cited Blue Chips Stamps for the following proposition: 5 “The primary innovation of the 1933 Act was the creation of federal duties—for the most part, registration and disclosure 6 obligations—in connection with public offerings. See, e.g., . . . Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752, 95 7 S.Ct. 1917, 1933, 44 L.Ed.2d 539 (1975) (“The 1933 Act is a far narrower statute [than the Securities Exchange Act of 1934 8 (1934 Act)] chiefly concerned with disclosure and fraud in connection with offerings of securities—primarily, as here, 9 initial distributions of newly issued stock from corporate issuers”).” Gustafson, 513 U.S. at 571-72 (emphasis added) 10 (brackets in the original). 11 Given that “primary” is less restrictive than “only,” defendants’ position—again— 12 overreaches. As a result, defendants’ reliance upon Gustafson is misplaced. 13 Such mistake is further shown by the text of § 77l(a)(1) and its incorporated 14 reference to § 77e. Unlike § 77l(a)(2), which applies to certain sale of securities “by 15 means of prospectus or oral communication,” § 77e(a)(1) prohibits the sale of an 16 unregistered security “through the use or medium of any prospectus or otherwise.” 15 17 U.S.C. § 77e(a)(1) (emphasis added). Because subsection (a)(1) provides a broader 18 basis for assigning liability than its subsection (a)(2) counterpart, the court further rejects 19 defendants’ position and concludes that it may consider a § 77l(a)(1) claim premised 20 upon a purchase outside the initial distribution context. Given the above, plaintiff’s § 21 77l(a)(1) claim does not fail for want of purchasing his XRP in an initial distribution. 22 b. Plaintiff Has Alleged that Defendants Qualify as “Sellers” for 23 Purpose of His Federal Securities Claims 24 Next, while the parties agree that a “seller” within the meaning of § 77l(a)(1) 25 extends to a person who either (1) passes title of the security to the buyer or (2) solicits 26 the purchase with a self-interested financial motive, Dkt. 70 at 22; Dkt. 74 at 18-19 (both 27 citing Pinter v. Dahl, 486 U.S. 622, 641-42 (1988)), they disagree about such standard’s 1 application to defendants.6 With respect to showing seller status under a solicitation 2 theory, courts acknowledge that “any person who engaged in steps necessary to the 3 distribution of the unregistered security is liable.” Balestra v. ATBCOIN LLC, 380 F. 4 Supp. 3d 340, 357-58 (S.D.N.Y. 2019). 5 Here, plaintiff argues that defendants respectively qualify as “sellers” under the 6 solicitation theory. Significantly, plaintiff alleges that defendants systematically marketed 7 XRP and financially benefited from such efforts. On the latter point, plaintiff alleges that 8 from early 2017 to 2018 alone, defendants “have earned over $1.1 billion through the 9 sale of XRP.” Compl. ¶ 30. On the former point, plaintiff alleges that defendants 10 published various tweets, interviews, and articles pushing the adoption of XRP, id. ¶¶ 44, 11 45, 48-52, hosted conferences concerning XRP’s use, id. ¶ 46, explained on its website 12 how to purchase XRP and included a link to cryptocurrency exchanges for such 13 purchases, id. ¶ 43, and even began to lobby Congress and the SEC to adopt 14 cryptocurrency friendly laws, id. ¶ 54. Such alleged efforts by defendants, if proven, are 15 more than sufficient to establish their status as sellers under a solicitation theory. 16 Balestra, 380 F. Supp. 3d at 358 (“These promotional statements trumpeting the potential 17 of the ATB Coin and the ongoing opportunity to invest in the ATB ICO [initial coin offering] 18 . . . clearly reflect both [defendants’] efforts to solicit the sale of ATB Coins. . . . I therefore 19 conclude that the allegations set forth in the Complaint plausibly allege that both 20 [defendants] engaged in steps necessary to the distribution of the unregistered security . . 21 .”). Given that, plaintiff alleges sufficient facts that defendants qualify as sellers for 22 6 In their reply, defendants cite a footnote from Pinter stating that “§ 12(1) imposes liability 23 on only the buyer's immediate seller; remote purchasers are precluded from bringing actions against remote sellers. Thus, a buyer cannot recover against his seller's seller.” 24 Dkt. 75 at 16 citing Pinter, 486 U.S. at 644 n.21. Defendant failed to explain how this statement (tucked away in a footnote to a section discussing which sellers may be held 25 liable for passing title to a security) limits its recognition that a person may separately be found liable under a solicitation theory. Id. at 644 (“The [actual purchase of a security] 26 requirement, however, does not exclude solicitation from the category of activities that may render a person liable when a sale has taken place.”). Without more, the court 27 rejects any suggestion that defendants may not be held liable under a solicitation theory 1 purpose of plaintiff’s § 77l(a)(1) claim. As a result, plaintiff sufficiently alleged his § 2 77l(a)(1) claims against defendants. 3 c. Plaintiff Adequately Alleged a Title 15 U.S.C. § 77o Claim 4 Against Defendant Ripple and Defendant Garlinghouse 5 Title 15 U.S.C. § 77o provides the following: 6 “Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an 7 agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any 8 person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such 9 controlled person to any person to whom such controlled person is liable, unless the controlling person had no 10 knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled 11 person is alleged to exist.” 15 U.S.C. § 77o(a). 12 “To establish a prima facie case of control-person liability, a plaintiff must prove a 13 primary violation of the federal securities laws, and that the defendant exercised actual 14 power or control over the primary violator.” In re Harmonic, Inc., Sec. Litig., 2006 WL 15 3591148, at *5 (N.D. Cal. Dec. 11, 2006). “Control means the ‘possession, direct or 16 indirect, of the power to direct or cause the direction of the management and policies of a 17 person, whether through the ownership of voting securities, by contract, or otherwise.’” 18 Maine State Ret. Sys. v. Countrywide Fin. Corp., 2011 WL 4389689, at *12 (C.D. Cal. 19 May 5, 2011). 20 Here, plaintiff alleges that defendant Ripple and defendant Garlinghouse “directly 21 or indirectly controlled the primary violator,” defendant XRP II. Compl. ¶¶ 14-16, 177-83. 22 Defendants do not dispute that such allegations suffice to establish control person liability 23 under § 77o. Dkt. 70 at 24-25 (focusing their single paragraph analysis on defendant 24 Garlinghouse’s control person liability on only plaintiff’s purported failure to state a 25 primary violation); Dkt. 75 at 16 (contending only that plaintiff does not dispute that the 26 statute of repose equally applies to this claim as well, and that “this claim is derivative of 27 and dependent on his Section 12(a)(1) claim.”). Because plaintiff has stated an 1 the viability of plaintiff’s allegations that defendant Garlinghouse controlled such 2 defendants, the court concludes that plaintiff adequately alleged his § 77o claims against 3 defendant Ripple and defendant Garlinghouse. 4 3. Plaintiff Adequately Alleged Unqualified Securities Claims under 5 California Corporations Code §§ 25110, 25503, and 25504 6 a. Plaintiff Alleged a Claim under California Corporations Code § 7 25503 for Violation of § 25110’s Qualified Securities 8 Requirement 9 “Among other things, the [California Securities Law of 1968] Act prohibits the sale 10 of securities in an issuer transaction unless the sale has been ‘qualified’ in accordance 11 with statutory requirements.” Apollo Capital Fund, LLC v. Roth Capital Partners, LLC, 12 158 Cal. App. 4th 226, 249 (2007) (citing California Corporations Code § 25110). § 25110 13 makes it “unlawful for any person to offer or sell in this state any security in an issuer 14 transaction . . . whether or not by or through underwriters,” unless such sale satisfies 15 certain qualifications (which defendants here do not contest). Cal. Corp. Code § 25110. 16 California Corporations Code § 25503 further provides the following: 17 “[a]ny person who violates Section 25110 . . . shall be liable to any person acquiring from him the security sold in violation of 18 such section, who may sue to recover the consideration he paid for such security with interest thereon at the legal rate . . . or for 19 damages, if he no longer owns the security, or if the consideration given for the security is not capable of being 20 returned.” Cal. Corp. Code § 25503. 21 Here, defendants argue that plaintiff failed to state a claim for violation of § 25110 22 on the following three grounds: (1) he failed to allege that he purchased his XRP as part 23 of an “issuer transaction”; (2) he failed to allege that he purchased his XRP from 24 defendants, in satisfaction of § 25503’s purported privity requirement; and (3) he failed to 25 allege that defendants offered or sold XRP in California. The court analyzes each in turn. 26 27 1 i. Plaintiff Has Adequately Alleged an “Issuer Transaction” 2 for Purpose of His California Corporations Code § 25503 3 Claim 4 Here, defendants argue that § 25110 requires that plaintiff purchase the subject 5 security from defendants directly as part of an “issuer transaction,” which, they contend, 6 “are sales of securities purchased from the issuing corporation in a public offering.” Dkt. 7 70 at 25. In support of their position, defendants primarily rely upon Mirkin v. 8 Wasserman, 5 Cal. 4th 1082, 1104 (1993) and California Corporation Code § 25011. 9 In Mirkin, the California Supreme Court implied a distinction between an “issuer 10 transaction” under § 25110 and certain “aftermarket transactions,” which it generally 11 defined as “resales of securities after they have been purchased from the issuing 12 corporation in a public offering.” Mirkin, 5 Cal. 4th at 1104. Although the California 13 Supreme Court subsequently characterized its discussion in Mirkin about the California 14 Corporation Code as dicta,7 the court in Mirkin noted that § 25110 is limited to the sale of 15 unqualified securities made as part of an “issuer transaction.” Mirkin, 5 Cal. 4th at 1104 16 (citing § 25110 for the proposition that “the Legislature knew how to write a statute that 17 addressed only issuer transactions when that was what it intended to do.”) (emphasis 18 added). Based on Mirkin’s dicta, then, defendants are correct that, to state a claim under 19 § 25110, a plaintiff must have purchased his security as part of an “issuer transaction.” 20 However, the question remains whether plaintiff’s alleged subsequent purchases 21 on an exchange that defendants sold to nonetheless qualifies as an “issuer transaction” 22 for purpose of stating a claim for violation of § 25011. Significantly, § 25011 provides the 23 following in its entirety: 24 “‘Nonissuer transaction’ means any transaction not directly or indirectly for the benefit of the issuer. A transaction is indirectly 25

26 7 Diamond Multimedia Sys., Inc. v. Superior Court, 19 Cal. 4th 1036, 1044–45 (1999) (“Mirkin is not dispositive, however, as the quoted statement was dictum and was not 27 made with reference to the place at which a section 25500 plaintiff bought or sold stock. . for the benefit of the issuer if any portion of the purchase price 1 of any securities involved in the transaction will be received indirectly by the issuer. An offering which involves both an 2 issuer transaction and a nonissuer transaction shall be treated for the purposes of Chapters 2 (commencing with 3 Section 25110) and 4 (commencing with Section 25130) of Part 2 of this division as an issuer transaction, but for the 4 purposes of Chapter 1 (commencing with Section 25100) of Part 2 of this division they shall be treated as separate 5 transactions.” Cal. Corp. Code § 25011 (emphasis added). 6 Plaintiff’s § 25503 claim arises under § 25110, which is codified at California 7 Corporations Code Chapter 2, Part 2 of Division 1. As a result, § 25011 definition of 8 “issuer transaction” applies. Defendants do not contest that their decision to initially list 9 XRP on an exchange would qualify as an offering that, under their own proffered 10 definition of an issuer transaction (Dkt. 70 at 25), gives rise to a qualifying transaction. 11 Plainly, the purpose of listing XRP on an exchange is for market participants (like plaintiff) 12 to then purchase such XRP. Absent such subsequent purchases, defendants’ listings 13 would fail. Whether such subsequent purchases qualify as an “issuer transaction” (under 14 defendants’ proffered definition) or instead fall outside that definition as “nonissuer” 15 transactions is therefore beside the point here: because defendants’ XRP exchange 16 listings depended upon subsequent third-party purchases, it necessarily “involved” such 17 transactions. As a result, any purchase of XRP by plaintiff on an exchange qualifies as 18 an issuer transaction under § 25011 and, therefore, for purpose of his § 25503 claim. 19 ii. Plaintiff Adequately Alleged Privity with Defendants 20 Next, defendants contend that § 25110 includes a privity requirement and that 21 plaintiff failed to allege facts satisfying such requirement. While the court agrees that, to 22 state a claim under § 25503 for violation of § 25110, plaintiff must allege privity with 23 defendants, the court concludes that plaintiff satisfied that requirement. 24 California Corporations Code § 25503 provides the following in relevant part: 25 “Any person who violates Section 25110 . . . shall be liable to any person acquiring from him the security sold in violation of 26 such section . . .” Cal. Corp. Code § 25503 (emphasis added). 27 To support their interpretation of this section, defendants primarily rely upon 1 25503 and § 25110 to “create liability affording the immediate purchaser several 2 specific remedies.” 67 Cal. App. 3d at 712 (emphasis added). The court in Bowden 3 explained that “[t]he Legislature, in section 25503, by the words ‘any person acquiring 4 from him’ has required privity, with some exceptions, as a condition of recovery.” Id. 5 To support his competing interpretation, plaintiff primarily relies upon Moss v. 6 Kroner, 197 Cal. App. 4th 860 (2011), which, according to plaintiff, stands for the 7 proposition that whether privity is required depends upon which remedy is available 8 against the primary violator of the statute. Dkt. 74 at 24. Contrary to plaintiff’s 9 suggestion, the court in Moss did not consider the privity requirement for primary liability 10 claims pursuant to § 25503. Instead, the court in Moss considered whether California 11 Corporation Code’s secondary liability sections (§ 25504 and §25504.1) required privity 12 between plaintiff and secondary violators. Moss, 197 Cal. App. 4th at 871-72. While the 13 court in Moss recognized that privity is not required to recover damages against a 14 defendant on a secondary liability theory under § 25504 and § 25504.1, it acknowledged 15 that, to state a primary violation claim under § 25503, plaintiff must show privity with the 16 primary violator. Moss, 197 Cal. App. 4th at 878 (“While we agree . . . that ordinary 17 principles of rescission require strict privity in order to rescind contracts . . . we conclude 18 that the Legislature, when it enacted sections 25504 and 25504.1, intended to depart 19 from those principles by placing these certain secondary actors in the shoes of the 20 principal violator for the purpose of civil liability as long as the original direct violator 21 was in privity with the plaintiff.”) (emphasis added). 22 Plaintiff’s remaining authority (Openwave Systems, Inc. v. Fuld, 2009 WL 1622164 23 (N.D. Cal. June 6, 2009)) similarly does not consider privity in the context of primary 24 liability claims brought under § 25503. Id. at *5-9. Based on Bowden, the court concludes 25 that plaintiff must allege privity to state a claim under § 25503. 26 The court finds that plaintiff plausibly alleged that he purchased his XRP from 27 defendants for purpose of stating a primary violation claim under § 25503. As an initial 1 XRP securities from defendants.” Compl. ¶¶ 172, 187. While the court recognizes that 2 the above allegations do not specify a direct purchase, they also do not foreclose any 3 inference of such purchase. Significantly, as plaintiff pointed out at oral arguments its 4 129,000 XRP unit purchase during 2018 Q1, when compared to defendants sale of 0.095 5 percent of the XRP traded on the market that quarter, supports the inference that plaintiff 6 purchased approximately 122 XRP units from defendant (or approximately 19 XRP units, 7 discounting for plaintiff’s two week trading period and reasonably assuming uniform 8 distribution of sale by defendant during that period). 9 This conclusion is further supported by the more glaring (but largely unaddressed) 10 issue presented by this claim—namely, to what extent may defendants be considered in 11 privity with an exchange purchaser when a subsequent purchase qualifies as part of an 12 issuer transaction under § 25011. In any event, at this stage in the litigation, where the 13 court may draw reasonable inferences and the relationship between defendants, 14 subsequent purchasers, and the exchange is unclear, the court concludes that plaintiff 15 has adequately alleged privity in support of his § 25503 claim, though he may ultimately 16 be unable to prove it. 17 iii. Plaintiff Adequately Alleged that Defendants Offered the 18 Subject Securities in California 19 To state a claim premised upon a violation of § 25110, a plaintiff must allege that 20 the subject securities were offered or sold in California. Diamond Multimedia Sys., Inc., 21 19 Cal. 4th at 1053. California Corporations Code § 25008(a) provides that an offer or 22 sale of a security is made in California under any of the following conditions: 23 • When an offer to sell is made in this state; 24 • When an offer to buy is accepted in this state; or 25 • If both the seller and purchaser are domiciled in this state, the security is 26 delivered to the purchaser in this state. Cal. Corp. Code § 25008(a). 27 The California Supreme Court has acknowledged that an advertisement may 1 communication and leave nothing for negotiation.” Donovan v. RRL Corp., 26 Cal. 4th 2 261, 271 (2001), as modified (Sept. 12, 2001). 3 Here, plaintiff adequately alleged that defendants offered to sell XRP in California. 4 Significantly, plaintiff alleges that defendant Ripple “has an entire section of its website 5 dedicated to providing advice on ‘How to Buy XRP,’” and that such section “provides links 6 to exchanges and instructions on ‘how to buy XRP’ on those exchanges,” Compl. ¶¶ 43, 7 135. The court concludes that this information qualifies as an offer via advertisement 8 because the link invites the performance of a specific act (the purchase of XRP on an 9 exchange) without any further communication (because the guide explains how to 10 complete the purchase). Given the nature of exchanges, the court may reasonably infer 11 that the conversion rate (e.g., USD to XRP) is set by the market and therefore not subject 12 to particularized negotiation. Such inference is further supported by the “fungible” (i.e., 13 interchangeable or non-unique) nature of each XRP unit exchanged. Further, because 14 defendant Ripple allegedly posted the guide and hyperlink on its website, the court may 15 reasonably infer that such materials were accessible to individuals in this state. As a 16 result, plaintiff has adequately alleged that defendants offered the subject unregistered 17 securities “in this state” for purpose of his § 25503 claim.8 18 b. Plaintiff Adequately Alleged California Corporate Code § 25504 19 Control Person Liability Claims against Defendant Ripple and 20 Defendant Garlinghouse for Violation of § 25110 21 California Corporations Code § 25504 provides the following: 22 “Every person who directly or indirectly controls a person liable under Section 25501 or 25503, every partner in a firm so liable, 23 every principal executive officer or director of a corporation so liable, every person occupying a similar status or performing 24 similar functions, every employee of a person so liable who materially aids in the act or transaction constituting the 25

26 8 Defendants also fail to provide any authority interpreting Code § 25110’s “in this state” requirement to apply to only an offer or sale of a security purchased by plaintiff (as 27 opposed to similar such securities sold/offered to other third parties in California more violation, and every broker-dealer or agent who materially aids 1 in the act or transaction constituting the violation, are also liable jointly and severally with and to the same extent as such 2 person, unless the other person who is so liable had no knowledge of or reasonable grounds to believe in the existence 3 of the facts by reason of which the liability is alleged to exist.” Cal. Corp. Code § 25504. 4 5 This section “imposes ‘control person’ liability on those who assist others in 6 primary violations under the California Securities Act.” Jackson v. Fischer, 931 F. Supp. 7 2d 1049, 1064 (N.D. Cal. 2013). “[I]n the absence of a viable claim of primary liability, 8 plaintiff cannot state a claim against the D & O defendants for control person liability 9 under § 25504.” Id. at 1064. 10 Here, defendants contend only that “[b]ecause Plaintiff’s unqualified securities 11 claim fails, his control person liability claim also fails.” Dkt. 70 at 27. Defendants do not 12 contest that plaintiff’s allegations that defendant Ripple and defendant Garlinghouse 13 “directly or indirectly controlled the primary violator” defendant XRP II, Compl. ¶¶ 14-16, 14 177-83, suffice to establish control person liability. As analyzed above, plaintiff alleged a 15 primary liability claim under § 25503 for violation of § 25110. As a result, plaintiff has 16 alleged control person liability claims under § 25504 against defendant Ripple and 17 defendant Garlinghouse for violation of § 25110. 18 4. Plaintiff Failed to Allege Misrepresentation Claims Against Defendants 19 under California Corporations Code §§ 25401, 25501, and 25504.1 20 a. Plaintiff Failed to Allege a California Corporations Code § 25501 21 Claim for Violation of § 25401 22 California Corporations Code § 25401 makes it “unlawful for any person to offer or 23 sell a security in this state, or to buy or offer to buy a security in this state, by means of 24 any written or oral communication that includes an untrue statement of a material fact or 25 omits to state a material fact necessary to make the statements made, in the light of the 26 circumstances under which the statements were made, not misleading.” Cal. Corp. § 27 25401. In relevant part, California Corporations Code § 25501 provides the following: person who purchases a security from him or sells a security to 1 him . . . unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant 2 exercised reasonable care and did not know (or if he had exercised reasonable care would not have known) of the 3 untruth or omission.” Cal. Corp. Code § 25501. 4 Here, defendants argue that plaintiff failed to state a claim for violation of California 5 Corporations Code § 25401 on the following four grounds: (1) he failed to allege that he 6 purchased his XRP from defendants directly, in satisfaction of § 25501’s purported privity 7 requirement; (2) he failed to allege that defendants offered or sold XRP in California; (3) 8 he failed to allege that the misstatements complained of were directed at plaintiff; and (4) 9 he failed to allege any misstatement by defendants with the requisite specificity. 10 Because the court has already disposed of defendants first and second challenges 11 in its analysis above concerning the viability of plaintiff’s § 25503 claim, the court 12 analyzes only defendants’ third and fourth challenges. 13 i. California Corporations Code § 25401 Does Not Require 14 that a Defendant Direct Its Purported Misstatement to 15 Plaintiff to Be Actionable 16 In support of their position, defendants primarily rely upon SIC Metals, Inc. v. 17 Hyundai Steel Co., 2018 WL 6842958 (C.D. Cal. Nov. 14, 2018), which, they claim, 18 “rejected a Section 25401 claim where the plaintiffs ‘failed to allege any facts that indicate 19 [defendant] made a false or misleading statement to Plaintiffs when negotiating the 20 purchase of . . . stock’ from them.” Dkt. 75 at 18. The court in SIC Metals, Inc. offers no 21 reasoning in support of limiting actionable statements to those made expressly to a 22 plaintiff in his or her particular purchase of securities. 2018 WL 6842958 at *5. 23 In support of their position to the contrary, plaintiff primarily relies upon Mausner v. 24 Marketbyte LLC, 2013 WL 12073832, at *10 (S.D. Cal. Jan. 4, 2013), for the proposition 25 that “[t]o adequately plead that Defendants’ misrepresentations and omissions were 26 made ‘in connection with the purchase or sale of a security,’ Plaintiff must plead facts 27 demonstrating that the statements or omissions ‘coincided’ with the purchase or sale.” 1 of whether the challenged statement must target plaintiff specifically. 2 In the absence of any controlling circuit authority, the court concludes that § 25401 3 does not require that a defendant direct the alleged misstatement to the complaining 4 plaintiff. The text of that section does not include any such requirement. Indeed, when 5 construing that section, the court in Apollo Capital read-in the phrase “in connection with 6 the purchase or sale of securities” without any citation or reason in support. 158 Cal. 7 App. at 249. Absent justification, the court refuses to further tighten the requirements to 8 state a claim under that section. As a result, plaintiff’s § 25501 and § 25504.1 claims 9 survive defendants’ third challenge. 10 ii. Plaintiff Failed to Adequately Allege an Actionable 11 Misstatement under Rule 9(b) 12 As a preliminary matter, plaintiff suggests that Rule 9(b) does not necessarily 13 apply to his claims for violation of § 25401 because they might sound in negligence (as 14 opposed to fraud). Dkt. 74 at 27. Plaintiff fails to develop that potential distinction. In 15 any event, because Rule 9(b) applies to negligent misrepresentation claims,9 plaintiff’s 16 underdeveloped suggestion to the contrary is misplaced. As a result, the court applies 17 Rule 9(b) to plaintiff’s § 25501 and § 25504.1 claims for violation of § 25401. 18 Here, plaintiff failed to satisfy Rule 9(b)’s heightened pleading standards with 19 respect to defendants’ allegedly fraudulent misstatements. To satisfy such showing, 20 plaintiff relies upon the following sets of allegations. The court analyzes each below. 21 First – “Ripple claims that XRP has utility—like currency—in its use as a ‘bridge 22 currency’ for international payments. But, as discussed above, more than 60 percent of 23 XRP is owned by Ripple and none of that XRP is used for anything at all, other than to be 24 sold in the future to investors. Moreover, as for the XRP that was already sold or 25 otherwise distributed by Defendants, the vast majority of it is not used for bridging 26 9 Atl. Richfield Co. v. Ramirez, 176 F.3d 481 (9th Cir. 1999) (“The district court also 27 properly dismissed [defendant counter-claimaint’s] first and second counterclaims, for 1 international transactions, but for investment purpose. Accordingly, Defendants’ claim 2 that XRP has a utilitarian purpose is nothing but a red herring attempt to avoid the 3 application of securities laws.” Compl. ¶ 41. 4 Here, plaintiff fails to specify (1) who among defendants’ employees made the 5 statement, (2) when it was made, (3) where it was made, and (4) how it was 6 communicated. As a result, the misstatement alleged above fails Rule 9(b). 7 Second – “Similarly, on or about December 21, 2017, Ripple tweeted in Japanese 8 that XRP was now available on over 50 exchanges. That tweet linked to an article on 9 Ripple’s website which described XRP as ‘the fastest and most scalable [digital] asset on 10 the market.’ It continued, ‘[t]he market is taking notice of XRP’s speed, reliability and 11 scalability — which has strengthened the demand for XRP and where it’s listed. In fact, 12 we’re proud to announce that XRP has gone from being listed on six exchanges earlier 13 this year to more than 50 worldwide.’ The article also linked to a number of exchanges 14 where XRP could be purchased, and stated that ‘XRP’s long-term value is determined by 15 its utility—including its ability to help financial institutions source liquidity for payments 16 into and out of emerging markets.’” Id. ¶ 45. 17 Here, plaintiff fails to explain how or why the above statement is false. As a result, 18 the misstatement alleged above fails Rule 9(b). 19 Third – “Ripple’s CEO, Brad Garlinghouse, has also been a vocal advocate for 20 investing in XRP. In a December 14, 2017 interview with BNN, when asked if he is 21 personally invested in XRP, the CEO stated ‘I’m long XRP, I’m very, very long XRP as a 22 percentage of my personal balance sheet.’ He continued, stating that he is ‘not long on 23 some of the other [digital] assets, because it is not clear to me what’s the real utility, what 24 problem are they really solving.’ He ended by reiterating, ‘if you’re solving a real problem, 25 if it’s a scaled problem, then I think you have a huge opportunity to continue to grow that. 26 We have been really fortunate obviously, I remain very, very, very long XRP, there is 27 an expression in the industry HODL, instead of hold, it’s HODL . . . I’m on the HODL 1 Here, plaintiff fails to explain how or why the above statement is false. As a result, 2 the misstatement alleged above fails Rule 9(b). 3 Fourth – “52. On or about January 17, 2018, Garlinghouse tweeted a CNBC 4 article titled, “Ripple is sitting on close to $80 billion and could cash out hundreds of 5 millions per month – but it isn’t,” with the caption, “A good read on why fostering a healthy 6 $XRP ecosystem is a top priority at @Ripple.” . . . 53. However, the reality was that 7 Ripple was doing exactly the opposite of what CNBC reported. As laid out in Section 8 IV(B), Defendants issued and sold at least $167.7 million worth of XRP between January 9 1, 2018 and March 31, 2018.” Id. ¶¶ 52-53. 10 Here, plaintiff fails to explain how or why the alleged caption and accompanying 11 statements tweeted by defendant Garlinghouse are false. Plaintiff’s allegation that 12 “defendants issued and sold at least $167.7 million worth of XRP” during 2018 Q1 is not 13 necessarily inconsistent with (1) cashing-out hundreds of millions per month ($167 14 million quarterly divided by three months equals appx. $56 million per month) or (2) 15 fostering a healthy XRP ecosystem. Relatedly, paragraph 53’s cross-reference to 16 Section IV(B) does not alter that conclusion. Significantly, that section, at paragraph 36, 17 merely provides the figures for the $167.7 million in alleged sales during 2018 Q1. 18 Compl. ¶ 36. As a result, the misstatement alleged above fails Rule 9(b). 19 Fifth – “On April 26, 2017, Ripple tweeted a link to an article on its own site, 20 proclaiming: ‘#Ripple welcomes 10 additional customers to our #blockchain #payments 21 network.’ Neither this tweet nor the article it linked to informed readers that the blockchain 22 payments network did not refer to the XRP Ledger, but rather Ripple’s xCurrent 23 enterprise solution.” Id. ¶ 62. 24 Here, plaintiff fails to explain how or why defendants’ purported failure to specify 25 that the referenced network related to the enterprise solution creates an improper 26 impression that such solution is the same as XRP. Defendants raise this exact argument 27 in their motion, Dkt. 70 at 30, and plaintiff offers no response, Dkt. 74 at 27-28. As a 1 Sixth – Various statements (mostly tweets) by defendants on specified dates 2 concerning public interest in XRP (Compl. ¶ 63), advantages over Bitcoin (id. ¶ 64), the 3 growth and potential value of XRP (id. ¶¶ 65-66), the future use of XRP by American 4 Express, the Japan Bank Consortium, as well as other “banks and payment providers” 5 (id. ¶¶ 67, 68, 73), how XRP is more than “bank software” (id. ¶ 74), a partnership with 6 MoneyGram (id. ¶¶ 102-103), defendants’ intent to develop the infrastructure necessary 7 for banks to directly use XRP (id. ¶ 102), and how XRP’s value depends upon the XRP 8 Ledger’s use for cross-border payments as well as its adoption by enterprises (id. ¶ 149). 9 Again, plaintiff fails to explain how or why any of the misstatements alleged in the 10 above paragraphs are false. In their motion, defendants challenged the sufficiency of 11 various of these alleged misstatements. Dkt. 70 at 31. Plaintiff failed to respond to such 12 challenges. Dkt. 74 at 27-28. As a result, the misstatements alleged at paragraphs 63- 13 68, 70, 73-74, 102-03, and 149 all fail Rule 9(b). 14 Seventh – “95. Defendants made numerous statements to the public falsely 15 claiming XRP is not a security to prop up demand and its value. . . . 96. For example, on 16 approximately April 11, 2018, Ripple’s Chief Market Strategist, Cory Johnson, told CNBC: 17 ‘We absolutely are not a security. We don’t meet the standards for what a security is 18 based on the history of court law.’ Mr. Johnson also said, ‘Coinbase never ever raised the 19 issue of whether or not XRP is a security in our discussions about listing XRP. We’re 100 20 percent clear, it’s not a security. We don’t meet the standards.’ . . . 97. Ripple’s CEO 21 Garlinghouse made similar comments, claiming XRP is not a security, to the public 22 through a variety of avenues and media channels, including at the CB Insights Future of 23 Fintech, live-streamed by Yahoo Finance.” Id. ¶¶ 95-97. 24 Here, a statement that XRP does not qualify as a “security” is a position on a legal 25 question, not an actionable misstatement. Indeed, the rest of the statement alleged at 26 paragraph 96 (“We don’t meet the standards for what a security is based on the history of 27 court law”) further clarifies the basis for such stated opinion. The alleged misstatement 1 and how requirements. Significantly, such allegation also fails to specify the exact claims 2 made by defendant Garlinghouse concerning XRP’s status as a non-security. As a 3 result, the misstatements alleged at paragraph 96-97 fail Rule 9(b). 4 In addition to shortcomings detailed above, plaintiff also fails to identify the 5 respective involvement of each defendant in the alleged fraud. Compl. ¶ 198 6 (“Defendants, separately or together, had knowledge of the falsity or misleading nature 7 of a statement or omission made in connection with the offers or sales of XRP. 8 Alternatively, Defendants, separately or together, were negligent in failing to investigate 9 and discover the falsity of the statement or omission.”) (emphasis added). Such a failure 10 to differentiate which allegations of fraud apply to which defendants is separately 11 improper under Rule 9(b). Swartz, 476 F.3d at 764-65. 12 Lastly, to the extent plaintiff bases his § 25501 upon any purported misstatement 13 not analyzed above, Dkt. 74 at 27 (characterizing the seven sets of allegations analyzed 14 above as “examples” of the misstatements alleged), such claim fails Rule 9(b) because 15 plaintiff did not expressly identify such misstatements as the basis for this claim in his 16 complaint or opposition. 17 b. Plaintiff Failed to State a California Corporations Code § 25504.1 18 Claim Against Defendant Ripple Labs and Defendant 19 Garlinghouse 20 California Corporate Code § 25504.1 provides the following in relevant part: 21 “Any person who materially assists in any violation of Section 25110 . . . or 25401 . . . with intent to deceive or defraud, is 22 jointly and severally liable with any other person liable under this chapter for such violation.” Cal. Corp. Code § 25504.1. 23 Here, plaintiff has failed to allege a predicate violation of § 25401. Absent such 24 showing, plaintiff cannot allege joint and several liability under § 25504.1 against 25 defendant Ripple or defendant Garlinghouse. SIC Metals, Inc., 2018 WL 6842958, at *5 26 (“Plaintiffs nevertheless fail to sufficiently allege joint and several liability here. First . . . 27 Plaintiffs have failed to state an underlying violation of section 25401.”). 1 5. Plaintiff Failed to State Claims under California’s Consumer Protection 2 Statutes 3 California Business & Professions Code § 17200 “prohibits business acts that are 4 (1) fraudulent, (2) unfair, or (3) unlawful.” Siegal v. Gamble, 2016 WL 1085787, at *7 5 (N.D. Cal. Mar. 21, 2016). California Business & Professions Code § 17500 makes it 6 “unlawful for any company or employee thereof to make or disseminate any statement 7 concerning real or personal property or professional services, which is known, or which 8 by the exercise of reasonable care should be known, to be untrue or misleading.” Castro 9 Valley Union 76, Inc. v. Vapor Sys. Techs., Inc., 2012 WL 5199458, at *9 (N.D. Cal. Oct. 10 22, 2012). 11 Here, defendants argue that plaintiff failed to state claims under § 17200 and § 12 17500 on the following three grounds: (1) California’s consumer protection statutes do 13 not apply to claims alleging securities-related violations; (2) those statutes include a 14 legislative safe harbor, which applies here given that plaintiff’s federal securities claims 15 are barred by Title 15 U.S.C. § 77m’s statute of repose; and (3) plaintiff failed to allege 16 statements or conduct in support of these claims with the requisite Rule 9(b) specificity. 17 Because the court has already found that the statute of repose does not bar plaintiff’s 18 federal securities claims, the court analyzes only defendants first and third challenges. 19 a. California Business and Professions Code § 17200 and § 17500 20 Do Not Apply to Securities-Related Violations 21 Defendants are correct that § 17200 and § 17500 do not extend to actions that 22 relate to securities transactions. In support of that position, defendants primarily rely 23 upon Bowen v. Ziasun Techs., Inc., 116 Cal. App. 4th 777 (2004), as modified on denial 24 of reh'g (Apr. 7, 2004). 25 In Bowen, the court ruled that “Section 17200 does not apply to securities 26 transactions.” Id. at 788. In support of its adoption of that rule, the Bowen court looked 27 to the reasoning proffered by the Ninth Circuit in Spinner Corp. v. Princeville Dev. Corp., 1 consumer-protection statute similar to § 17200 not to extend to actions involving 2 securities, Spinner Corp., 849 F.2d at 392-93. The Bowen court found that the legislative 3 intent of § 17200 was no different than that of the Hawaii statute at issue in Spinner, 4 Bowen, 116 Cal. App. 4th at 788, and reasoned that, because California courts treat 5 federal court decisions interpreting federal counterpart statutes as extraordinarily 6 persuasive, and “the FTC has never applied the FTC Act to securities transactions,” § 7 17200 “should also not reach [securities] transactions,” id. at 788-89. 8 In response, plaintiff primarily relies upon Overstock.com, Inc. v. Gradient 9 Analytics, Inc., 151 Cal. App. 4th 688 (2007). While plaintiff is correct that the court in 10 Overstock limited Bowen, it expressly recognized the ongoing validity of Bowen’s ruling 11 that § 17200 does not extend to securities transactions. 151 Cal. App. 4th at 715 12 (“Whether one agrees with Bowen or not its holding that securities transactions are 13 not covered under the UCL bars lawsuits based on deceptive conduct in the sale 14 and purchase of securities, nothing more. Overstock's claims do not arise from any 15 stock transactions between the parties. Rather, they arise from the allegedly defamatory 16 reports . . .”) (italics in the original) (bold italics added) (footnote omitted). 17 Various courts in this district have commented on the reasoning and reach of 18 Bowen’s rule,10 however, the only potential criticism of Bowen by the California Supreme 19 Court—itself contained in a footnote—states only that: “Whatever the scope and merits of 20 that holding may be . . . it does not apply here.” Rose v. Bank of America, 57 Cal. 4th 21 390, 399 n.8 (Cal. 2013). Whatever its merits, then, Bowen remains California law. 22 As a result, the court concludes that Bowen bars plaintiff’s § 17200 claim to the 23 extent plaintiff premises that claim on the theory that XRP is a security. Further, because 24

25 10 Siegal v. Gamble, 2016 WL 1085787, at *7-8 (N.D. Cal. Mar. 21, 2016) (citing In re Charles Schwab Corp. Secs. Litig., 257 F.R.D. 534 (N.D. Cal. 2009) and Strigliabotti v. 26 Franklin Resources, Inc., 2005 WL 645529 (N.D. Cal. Mar. 7, 2005) in support of the proposition that courts have “narrowly limited” Bowen to securities transactions and 27 “questioned the validity of its conclusion,” but ultimately acknowledging that “[t]he fact 1 plaintiff’s § 17500 is based on the same securities-related allegations supporting its § 2 17200 counterpart, the court concludes that Bowen likewise bars that claim. 3 b. Plaintiff’s Business and Professions Code § 17200 and § 17500 4 Claims Also Fail Rule 9(b)’s Heightened Pleading Requirements 5 Here, plaintiff does not dispute that Rule 9(b)’s heightened pleading standard 6 generally applies to § 17200 and § 17500 claims in federal court. Dkt. 74 at 32. In 7 plaintiff’s three-paragraph opposition to defendants’ challenge that his § 17200 and § 8 17500 claims fail Rule 9(b), plaintiff relies solely upon the same seven categories of 9 purported misstatements that he identified in support of his misrepresentation claims 10 under California Corporations Code § 25401 and § 25504. Dkt. 74 at 32. As decided 11 above, such alleged misstatements fail Rule 9(b)’s heightened pleading requirements. 12 As a result, plaintiff’s § 17200 and § 17500 claims similarly fail those requirements.11 13 As previously stated, the court concludes that Bowen bars plaintiff’s § 17200 and § 14 17500 claims to the extent such claims depend upon XRP’s factual status as a security. 15 However, the statements that plaintiff’s § 17200 and § 17500 claims rely upon do not, 16 themselves, require a finding of such status to be actionably misleading. Identified in his 17 opposition brief, such statements instead reflect efforts at publicizing XRP’s usefulness 18 and scope of adoption, as well as defendants’ XRP sales activities. Dkt. 74 at 27-28 19 (bullets one through six). In the event XRP were factually determined not to be a 20 security (like any other non-security good subject to California consumer protection 21 statutes) and plaintiff alleged the above referenced misstatements with requisite Rule 22 9(b) specificity, those statements may still be actionable under § 17200 or § 17500 under, 23 for example, a theory of false advertising. As a result, the court allows plaintiff leave to 24

25 11 Although plaintiff argues that defendants’ alleged misstatements “are the crux of [his] FAL and UCL claims,” Dkt. 74 at 32, plaintiff also alleges that their “acts and practices” 26 violated § 17200 by offending “established public policy,” Compl. ¶ 218. Plaintiff fails to allege the established public policy offended in both his complaint and opposition. As a 27 result, to the extent plaintiff bases his § 17200 claim upon a theory of conduct distinct 1 amend his § 17200 and § 17500 claims to satisfy Rule 9(b) but only both under the 2 alternative theory that XRP is not a security and with respect to the above referenced 3 misstatements identified in plaintiff’s opposition brief. 4 CONCLUSION 5 For the above reasons, the court grants in part and denies in part defendants’ 6 motion to dismiss. The motion to dismiss the first and second causes of action for 7 violation of Title 15 U.S.C. § 77l(a)(1) and § 77o is DENIED. The motion to dismiss the 8 third and fifth causes of action for violation of California Corporations Code § 25503, § 9 25504, and § 25110 is DENIED. The motion to dismiss the fourth cause of action for 10 violation of California Corporations Code § 25501, § 25504.1, and § 25401 is GRANTED 11 with leave to amend. The motion to dismiss the sixth and seventh causes of action for 12 violations of California Business and Professions Code § 17200 and § 17500 is 13 GRANTED with prejudice, except as narrowly provided immediately above. 14 The court allows plaintiff 28 days from the date of this order to file an amended 15 consolidated complaint accounting for the deficiencies in the claims dismissed without 16 prejudice. In it, plaintiff must specifically set forth any alleged misrepresentation used to 17 support any amended claim. Failure to do so will result in dismissal of such claim with 18 prejudice. Plaintiff may not otherwise amend his complaint absent leave of court or 19 consent of defendants. Upon the filing of any amended complaint, plaintiff must also file 20 a redline clearly demarcating its changes from the existing complaint. 21 IT IS SO ORDERED. 22 Dated: February 26, 2020 23 /s/ Phyllis J. Hamilton PHYLLIS J. HAMILTON 24 United States District Judge 25 26 27