On February 7, 2025, Judge Paul A. Engelmayer of the United States District Court for the Southern District of New York denied a motion for judgment on the pleadings in a putative class action against a cryptocurrency exchange company (the “Company”), its parent, and the parent’s CEO for alleged violations of Sections 12 and 15 of the Securities Act of 1933 (the “Securities Act”), Section 29(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and securities laws of California, Florida, and New Jersey.
Underwood v. Coinbase Glob., Inc., No. 21 Civ. 8353 (PAE) (S.D.N.Y. Feb. 7, 2025). Plaintiffs allege that the Company lists and sells digital assets qualifying as securities without registering as a securities exchange or broker-dealer. The District Court, in a decision covered
here, previously dismissed the amended complaint in its entirety, holding that even if cryptocurrencies were deemed securities; plaintiffs had failed to adequately allege that the Company itself sold or solicited cryptocurrency tokens to or from exchange participants, or that any contract with the Company required plaintiffs to purchase or sell prohibited securities. The Second Circuit affirmed dismissal of the Exchange Act claims but reinstated the Securities Act and state law claims, holding that plaintiffs had adequately alleged privity between the Company and plaintiffs and that the Company held title to the tokens subject to the transactions at issue and, therefore, had adequately alleged that the Company was a “statutory seller” under Section 12(a) of the Securities Act because it “passed title or other interest in the security, to the buyer for value.” On remand, the Company filed an answer and moved for judgment on the pleadings. The District Court denied the motion, holding that plaintiffs’ allegations under the Securities Act and state laws were plausible, given the Second Circuit’s decision and the mandate rule, which requires a trial court to follow an appellate court’s prior ruling on an issue in the same case.
The Company argued that plaintiffs failed to plead that it was a statutory seller because it never held title to the digital assets listed on its platforms and its user agreements explicitly state that title to the digital currency remains with the users. The Court, “substantially constrained” by the Second Circuit’s decision, found that plaintiffs plausibly alleged that the Company held title to the tokens because it allegedly places all deposited assets into a centralized wallet and because the customer allegedly only ever interacts with the Company’s wallet deposit address. The Company renewed an argument it had made previously, that plaintiffs’ allegations as to privity and title are expressly contradicted by its user agreements, which state that title shall always remain with the customer. The Second Circuit had found that “the differing language in the various user agreements that plausibly apply to Plaintiffs’ claims precludes resolution of the title and privity issues on a motion to dismiss.” On remand, the Company attached to its answer all versions of its user agreement in effect at the relevant time. The District Court, however, noted that the Second Circuit’s decision did not “pivot” on the language of the user agreements and did not hold that “title is a purely legal question of contract interpretation, disconnected from the factual realities of plaintiffs’ interactions with [the Company].” The Court made it clear that it would not preclude a later motion directed to the statutory seller issue after a fuller record emerged.
The Court ordered the parties to prepare a proposed case management plan that provides for bifurcation of discovery, with full discovery on the statutory seller issue to be addressed first, “given the potential for the resolution of that issue to resolve the outstanding claims.”
