Barron v. Helbiz Inc.: A Rare Mixture of an ICO, Morrison, and State Law Claims

Pending before the Second Circuit is a unique (and apparently sua sponte) application of the jurisdictional test announced by the Supreme Court in Morrison v. Nat’l Australia Bank Ltd.,[1] to dismiss non-securities state law claims in connection with an Initial Coin Offering (“ICO”).

In Barron v. Helbiz Inc., the plaintiffs claimed they were deceived into purchasing cryptocurrency as part of a company’s “pump and dump” investment scheme.[2] The plaintiffs did not allege claims under the Securities Act of 1933 (the “Securities Act”) or the Securities Exchange Act of 1934 (the “Exchange Act”). Despite this, Judge Stanton of the Southern District of New York requested briefing from the parties on the application of Morrison, concluded that the ICO was extraterritorial based on Morrison, and then dismissed the case.[3] The case is on appeal to the Second Circuit,[4] and Morrison’s applicability to state law non-securities claims is front and center. If affirmed, this case could pave the way for Morrison to be used as a vehicle to dismiss state law claims if the underlying subject matter is a foreign security.

Extraterritorial Application of the Federal Securities Laws: Morrison and its Progeny

Section 10(b) of the Securities Exchange Act of 1934 applies to fraud “in connection with the purchase or sale” of a security.[5] Yet the face of the Exchange Act is unclear on whether it applies extraterritorially, an issue grappled with by the Courts of Appeals for decades after the act’s passage. In 2010, the Supreme Court resolved the issue in the landmark Morrison case, where the Court held that Section 10(b) of the Exchange Act permits claims brought by a plaintiff (1) transacting in “securities listed on domestic exchanges” or (2) entering into “domestic transactions in other securities.”[6] Put another way, the Supreme Court concluded that the Exchange Act does not provide a cause of action to plaintiffs who sue in connection with a foreign securities transaction.[7]

Although Morrison dealt exclusively with the Exchange Act, courts promptly broadened its application. The Southern District of New York—as affirmed by the Second Circuit—held in In re Vivendi Universal, S.A., Sec. Litig., that Morrison should apply equally between the two securities acts.[8] The Second Circuit further expanded on Morrison in Absolute Activist Value Master Fund Ltd. v. Ficeto, where the Court interpreted the second Morrison prong, which permits securities claims relating to “domestic transactions in other securities,” to mean transactions where “irrevocable liability is incurred or title passes within the United States.”[9] That is, a “domestic transaction” under Morrison requires evidence that the plaintiff became bound to the deal and lost the right to revoke within the United States.[10]

At least one court has applied Morrison to consider whether to dismiss Exchange Act claims that allegedly arose from an ICO.[11] What makes Barron unique, however, is that the claims here do not arise under either securities act; they are merely state law claims dealing with a foreign security. This means that, if affirmed, Barron may result in the extension of Morrison to readily dismiss state law claims where the underlying subject matter is a foreign security.

Barron v. Helbiz: An Expansion of Morrison to State Law, Non-Securities Claims

In Barron, a group of plaintiffs sued Helbiz, which claimed to be developing a transportation rental platform, after purchasing “HelbizCoin” cryptocurrency via the company’s ICO.[12] Helbiz marketed the tokens as the “native token for Helbiz transactions,” with the promise they would become the exclusive payment method for the company’s new rental platform.[13] The Terms and Conditions for HelbizCoin stated that the offer was not a United States securities offering, and United States residents were precluded from participation.[14]

Plaintiffs alleged that, in reality, the ICO was a “pump and dump” scam.[15] They claimed that Helbiz kept most of the money raised through the ICO for itself, never completed the rental platform, and accepted alternate payment methods despite the promise made to coin purchasers.[16] The investors in Barron brought claims under New York General Business Law for “breach of contract, trespass and conversion of chattels, constructive trust, quiet title, and deceptive acts.”[17]

Judge Stanton nevertheless requested sua sponte briefing on why the case should not be dismissed under a Morrison analysis. In a letter to the parties, the judge wrote that plaintiffs’ claims appear to allege acts in violation of the Securities Exchange Act, hence “[i]t is important for us all to know whether relief can be granted” in light of Morrison.[18]

After finding that HelbizCoin amounted to a security as an “investment contract” under S.E.C. v. W.J. Howey Co., Judge Stanton proceeded with a Morrison analysis, just as if plaintiffs’ claims arose under the Exchange Act.[19] The Helbiz coins were not listed on a domestic exchange, and they were not purchased in the United States.[20] Nor was it relevant that the server for the Helbiz website was housed in Kansas because the focus of Morrison is where the investors purchase the security.[21] The plaintiffs in Barron purchased the coins in the United Arab Emirates and United Kingdom, not in Kansas.[22] Thus, because plaintiffs purchased the coins outside the United States, the Court dismissed the case pursuant to Morrison.[23]

Both parties have submitted briefing on the matter, and a decision is pending before the Second Circuit. Because of the broad implications on securities law and ICOs, the appeal should be closely followed.

Haima Marlier is a partner in Morrison & Foerster’s New York office, Jamie Levitt is co-chair of the firm’s Commercial Litigation and Trial Group and Managing Partner of the New York office, and Derek Foran is a partner in the firm’s San Francisco office. Justin Young is a Morrison & Foerster associate not yet admitted to practice. He contributed to this article and his practice is supervised by principals of the firm admitted in New York.

[1] 561 U.S. 247 (2010).

[2] No. 20 CIV. 4703 (LLS), 2021 WL 229609, at *3 (S.D.N.Y. Jan. 22, 2021).

[3] See id. at 1.

[4] Barron v. Helbiz Inc., Case No. 21-00278 (2d Cir.).

[5] 15 U.S.C.A. § 78j(b).

[6] 561 U.S. 247, 267 (2010).

[7] See id. at 250.

[8] 842 F. Supp. 2d 522, 529 (S.D.N.Y. 2012).

[9] 677 F.3d 60 (2d Cir. 2012).

[10] See id. at 70.

[11] See In re Tezos Sec. Litig., No. 17-CV-06779-RS, 2018 WL 4293341 (N.D. Cal. Aug. 7, 2018) (declining to dismiss action where ICO transaction occurred within the United States).

[12] 2021 WL 229609, at *1.

[13] See id. at *1, 3.

[14] Id. at 1.

[15] Id. at *3.

[16] Id. at *1.

[17] Id.

[18] ECF No. 64.

[19] Barron, 2021 WL 229609, at *2–4 (citing S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946)).

[20] Id. at *5.

[21] See id. at *6.

[22] Id.

[23] Id.