On August 10, 2023, Judge Ronnie Abrams of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative securities class action alleging that a cryptocurrency mining company (the "Company") and certain of its officers and directors violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"). Winter v. Stronghold Digital Mining, Inc., No. 22-CV-3088 (RA), 2023 WL 5152177 (S.D.N.Y. Aug. 10, 2023). Plaintiffs allege that the Company made false and misleading statements in its registration statement and prospectus filed in connection with the Company's October 2021 initial public offering ("IPO") regarding the Company's supply chain risks. The Court granted the motion to dismiss the Section 12(a)(2) claim of one plaintiff for lack of standing, but otherwise denied the motion to dismiss.
The Company is engaged in Bitcoin mining, i.e., using computers to solve cryptographic puzzles to correctly guess a new "hash," which results in the creation of new Bitcoin. Plaintiffs allege that the Company entered into an agreement with a manufacturer of cryptocurrency miners (the "Manufacturer") to purchase 15,000 Bitcoin miners in April 2021. In the Company's offering materials filed on October 19, 2021, the Company stated that it "anticipated" that (i) the Manufacturer would deliver 2,500 miners by October 31, 2021; 5,000 miners by November 30, 2021; 5,000 miners by December 31, 2021; and the remaining 2,500 miners by January 2022; and (ii) the Company's total hash rate capacity would equal 2,100 PH/s by December 2021. Plaintiffs allege that in November 2021, within three weeks of the Company's IPO, the Company disclosed publicly that the Manufacturer would not be able to deliver the Bitcoin miners within the timeline that the Company had set forth in its registration statement. Plaintiffs allege that the Company disclosed on March 29, 2022, that it (i) only received 3,300 of the 15,000 miners it had ordered from the Manufacturer, and (ii) failed to achieve the total hash rate it projected in the offering materials, in part because of Manufacturer's failure to deliver the miners. On March 30, 2022, plaintiffs allege that the Company's stock price dropped by approximately 35%. Plaintiffs allege that the Company's offering materials contained false and misleading statements because, at the time of the IPO, the Company was aware that (i) power outages in China would prevent the Manufacturer's timely delivery of the miners, (ii) the Manufacturer did not have the necessary parts on hand to build the Company's allotment of Bitcoin miners, and (iii) the Company had not yet fully paid the Manufacturer for the miners even though payment was due.
The Court first addressed the Company's argument that the claims should be dismissed because plaintiffs did not allege that the Company knew or should have known that the Manufacturer would not be able to deliver the required number of Bitcoin miners. The Court rejected the Company's argument because scienter is not a requirement of the Section 11 and 12(a)(2) claims pleaded in the litigation. In applying this reasoning, the Court distinguished cases holding that Section 11 and 12(a)(2) claims must be dismissed when allegedly omitted risks were neither known nor knowable at the time of the challenged offering. According to the Court, those decisions did not require dismissal because plaintiffs "plausibly allege that [the Company]'s statement that it 'anticipated' the delivery of miners described in the Offering Materials was materially false or misleading at the time of the IPO." The Court emphasized that plaintiffs had sufficiently alleged that, at the time of the IPO, the Company's payment to the Manufacturer was behind schedule, there were known power outages in China in September and October 2021 that would impact the manufacturing of the Bitcoin miners, and, according to a confidential witness, the Company's vice president stated in October 2021 that the manufacturer would not be able to deliver the Bitcoin miners on time. The Court noted that the Company's "knowledge" argument was more appropriate for a motion for summary judgment in the context of "due diligence" or "reasonable care" affirmative defenses.
The Court next addressed the Company's argument that the "bespeaks caution" doctrine required dismissal because of "the cautionary language in the IPO materials." The Court held that "[t]he doctrine does not apply . . . where a risk disclosed by Defendants has already transpired at the time the statements at issue were made." Regarding the Company's argument that misstatements about the delivery dates were immaterial, the Court held that the question was inappropriate for a motion to dismiss because, "absent fact discovery, the Court cannot determine that any delay in the shipment of miners would have been immaterial to investors given their alleged importance to [the Company]'s operations." The Court also held that defendants' negative causation arguments were best left for summary judgment.
Finally, the Court dismissed the Section 12(a)(2) claim asserted by one of the plaintiffs for lack of standing. Defendants argued that plaintiff in question alleged only that he purchased securities "pursuant and/or traceable to the Offering Materials" and did not allege that he had purchased the Company's shares directly from the Company in a public offering. Plaintiffs did not contest this point, and the Court dismissed the 12(a)(2) claim of this particular plaintiff.
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