Securities and Exchange Commission v. Arbitrade Ltd.

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

Case No. 22-cv-23171-BLOOM/Otazo-Reyes

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v.

ARBITRADE LTD.;

CRYPTOBONTIX INC.;

TORY R.J. HOGG;

JAMES L. GOLDBERG;

STEPHEN L. BRAVERMAN;

MAX W. BARBER;

SION TRADING FZE,

Defendants.

____________________________________________/

ORDER ON MOTIONS TO DISMISS

THIS CAUSE is before the Court upon Defendant James L. Goldberg’s (“Goldberg”)

Motion to Dismiss, ECF No. [25] (“Goldberg’s Motion”), filed on January 12, 2023, which was

joined by Defendant Tory R.J. Hogg (“Hogg”), ECF No. [27]; and Defendant Stephen L.

Braverman’s (“Braverman”) separate Motion to Dismiss, ECF No. [30] (“Braverman’s Motion”),

filed on January 13, 2023. Plaintiff Securities and Exchange Commission (“SEC”) filed Responses

to both Motions. See ECF No. [48] (responding to Goldberg’s Motion); ECF No. [47] (responding

to Braverman’s Motion). Goldberg filed a Reply in support of his Motion, ECF No. [62], which

was joined by Hogg, ECF No. [63]. Braverman filed a Reply in support of his Motion. ECF No.

[61]. The Court has carefully considered the Motions, the Responses, the Replies, the record in

this case, the applicable law, and is otherwise fully advised. For the reasons set forth below,

Defendants’ Motions are denied.

I. INTRODUCTION

On September 30, 2022, the SEC filed a 13-count Complaint against Arbitrade Ltd.

(“Arbitrade”), its “control person” Goldberg, and its Chief Operations Officer, Braverman;

Cryptobontix Inc. (“Cryptobontix”) and its “control person” Hogg; and SION Trading FZE

(“SION”) and its founder, owner, and sole officer, Max W. Barber (“Barber”). ECF No. [1] ¶ 1.

The SEC accuses Defendants of engaging in “a classic pump and dump scheme” involving a crypto

asset called “Dignity” or “DIG.” Id. ¶ 2. The Complaint sets forth the following scheme:

In early 2017, Hogg, through his company Cryptobontix, developed a crypto asset, which

was later named “Dignity” or “DIG.” Id. ¶ 17. Three billion DIG tokens were created, and they

were all owned by Hogg and Cryptobontix. Id. ¶ 19. Hogg and Cryptobontix began trading the

tokens on a crypto asset-trading platform called “Livecoin.” Id.

Hogg recruited Arbitrade and the individuals who controlled it, Goldberg and Braverman,

to assist in promoting an “initial coin offering” of DIG tokens. Id. ¶¶ 10-11, 20-21. Arbitrade’s

website represented that DIG tokens would eventually be redeemable for gold. Id. ¶ 24. Arbitrade

and Cryptobontix “consistently advertised” that they would back the DIG tokens with gold worth

$1 per token. Id. ¶ 26.

In the Spring of 2018, Hogg and Goldberg were introduced to Barber and SION as a

potential source to acquire gold. Id. ¶ 27. Arbitrade and SION executed a “Memorandum of

Understanding” (“MOU”) in which they agreed to execute a definitive contract under which

Arbitrade would purchase $10 billion of gold bullion from SION, in exchange for an equity interest

in Arbitrade, 150 million DIG tokens, and monthly installments of approximately $1 million. Id.

¶¶ 28-29.

Several days after executing the MOU, Arbitrade and SION signed an “Asset Pledge

Agreement,” under which SION agreed to provide Arbitrade a “Safe Keeping Receipt” indicating

that Arbitrade held title to $10 billion in gold bullion. Id. ¶ 30. The deal was finalized in September

2018 when Arbitrade and SION executed an “Assignment Agreement” that purportedly transferred

to Arbitrade “all of [SION’s] ownership rights and title in the Gold which vests in [SION] pursuant

to the [Safe Keeping Receipt].” Id. ¶ 31. The Safe Keeping Receipt is a single-page document

issued by G4S Cash Services LLC (“G4S”), a company specializing in vaulting and transport of

valuable assets. Id. ¶ 32. The Safe Keeping Receipt does not refer to Arbitrade or SION holding

title to gold of any value, but rather references a gold “Certificate of Guarantee.” Id. ¶¶ 32-34. That

“Certificate of Guarantee” and related documentation are replete with errors and “appear to be

forgeries[.]” Id. ¶ 40.

To strengthen the appearance that the gold transaction was legitimate, Arbitrade engaged

two accounting firms to evaluate and confirm details of the transaction. Id. ¶ 41. The scope of one

firm’s investigation was narrowly dictated by SION, and neither of the firms confirmed whether

SION actually possessed rights or title to gold bullion. Id. ¶¶ 43-47. Defendants “ignored the red

flag presented when SION told [one of the firms] to drop its request for a video conference with

the G4S employee whose signature purportedly appears on the Safe Keeping Receipt.” Id. ¶ 48.

“Arbitrade also acquiesced to SION’s requirement that Arbitrade should have no direct

communications with G4S personnel.” Id. ¶ 49.

In October 2018, Braverman on behalf of Arbitrade attempted to hire Bureau Veritas, a

company that specializes in inspection and certification services, to provide an opinion about the

existence of the gold bullion that Arbitrade purportedly purchased from SION. Id. ¶ 50. Bureau

Veritas “refused to accept the engagement when it became clear that Arbitrade wanted the firm to

issue its opinion without conducting any physical examination of the gold, with Braverman telling

the firm that ‘[c]ounting bars I believe is overkill.’” Id. ¶ 51.

From March 2018 through January 2019, Defendants Arbitrade, Cryptobontix, Hogg,

Goldberg, Braverman, and Barber “made material misstatements or omissions” concerning

Arbitrade’s purported acquisition of billions of dollars of gold bullion. Id. ¶ 53. In actuality,

“Arbitrade never acquired or received title to $10 billion in gold bullion,” and no audit of the $10

billion in gold was ever performed by a major accounting firm,” as represented in one of the news

releases. Id. ¶¶ 72-73. Braverman personally reviewed at least one of the false press releases prior

to its issuance. Id. ¶ 55. The representations in the news and press releases concerning Arbitrade’s

acquisition of gold bullion “were blatantly false and misleading.” Id. ¶ 71.

The effect of the false and misleading news stories was to create artificial demand for DIG

tokens and inflate their price. Id. ¶¶ 76-77. DIG investors bought the DIG tokens with Bitcoin or

other crypto assets. Id. ¶ 82. They relied on Defendants’ representations that the value of DIG

tokens would increase once Arbitrade and Cryptobontix secured sufficient gold to back the DIG

tokens. Id. ¶ 84.

While Arbitrade and Cryptobontix were engaged in “the false promotional campaign,” Hogg

and Goldberg sold their DIG tokens, making proceeds “totaling about $36.8 million.” Id. ¶ 79-80.

Braverman converted those proceeds to cash, which he then redistributed between Hogg,

Goldberg, and himself. Id. ¶¶ 86-88. By February 2020, the DIG token “reached a sustained

valuation of zero.” Id. ¶ 91.

For Defendants’ roles in the scheme, the SEC brings the following claims:

Count I (against Arbitrade, Cryptobontix, Hogg, and Goldberg) for registration violations of

Sections 5(a) and (c) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e(a) and (c);

Count II (against Hogg and Goldberg) for defrauding investors, in violation of Section

17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1);

Count III (against Hogg and Goldberg) for negligently making untrue statements while

selling securities, in violation of Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2);

Count IV (against Hogg and Goldberg) for negligently engaging in practices of “fraud or

deceit,” in violation of Section 17(a)(3) of the Securities Act, 15 U.S.C. § 77q(a)(3);

Count V (against Arbitrade, Cryptobontix, Hogg, and Goldberg) for knowingly or recklessly

employing devices, schemes, or artifices to defraud in connection with the purchase or sale of

securities, in violation of Section 10(b) and Rule 10b-5(a) of the Exchange Act of 1934 (“Exchange

Act”), 15 U.S.C. § 78(j)(b) and 17 C.F.R. § 240.10b-5(a);

Count VI (against Arbitrade, Cryptobontix, Hogg, and Goldberg) for knowingly or recklessly

making untrue statements of material facts in connection with the purchase or sale of securities, in

violation of Section 10(b) and Rule 10b-5(b) of the Exchange Act, 15 U.S.C. § 78(j)(b) and 17

C.F.R. § 240.10b-5(b);

Count VII (against Arbitrade, Cryptobontix, Hogg, and Goldberg) for knowingly or

recklessly engaging in acts, practices, and courses of business which operated as a fraud or deceit

in connection with the purchase or sale of securities, in violation of Section 10(b) and Rule 10b-

5(c) of the Exchange Act, 15 U.S.C. § 78(j)(b) and 17 C.F.R. § 240.10b-5(c);

Count VIII (against Hogg) as the control person liable for Cryptobontix’s violations of the

Exchange Act;

Count IX (against Hogg and Goldberg) as control persons liable for Arbitrade’s violations of

the Exchange Act;

Count X (against Braverman and Barber) for aiding and abetting Arbitrade, Cryptobontix,

Hogg, and Goldberg’s violations of the Exchange Act as set forth in Count V;

Count XI (against Braverman and Barber) for aiding and abetting Arbitrade, Cryptobontix,

Hogg, and Goldberg’s violations of the Exchange Act as set forth in Count VI;

Count XII (against Braverman and Barber) for aiding and abetting Arbitrade, Cryptobontix,

Hogg, and Goldberg’s violations of the Exchange Act as set forth in Count VII; and

Count XIII (against SION) for unjust enrichment.

In his Motion to Dismiss, Goldberg argues that this case must be dismissed for lack of subject

matter jurisdiction because the SEC lacks the authority to regulate DIG tokens, which Goldberg

asserts are not securities. ECF No. [25]. The SEC responds that Defendants’ sales of DIG tokens

constitute investment contracts under the traditional Howey test. ECF No. [48] at 5 (citing SEC v.

W.J. Howey Co., 328 U.S. 293 (1946)).

In Braverman’s separate Motion to Dismiss, Braverman argues that Counts X, XI, and XII

against him must be dismissed because (A) the Complaint fails to allege that he had a general

awareness of the pump and dump scheme, (B) the Complaint fails to allege how Braverman

provided substantial assistance in that scheme, and (C) the Complaint fails to allege a primary

Securities Law violation. ECF No. [30]. The SEC contests Braverman’s arguments and argues that

the Complaint sufficiently alleges Braverman’s liability as an aider and abettor for the foregoing

acts. ECF No. [47].

II. LEGAL STANDARD

A motion to dismiss brought under Federal Rule of Civil Procedure 12(b)(1) challenges

the district court’s subject-matter jurisdiction and takes one of two forms: a “facial attack” or a

“factual attack.” Lawrence v. Dunbar, 919 F.2d 1525, 1528-29 (11th Cir. 1990). “A ‘facial attack’

on the complaint ‘require[s] the court merely to look and see if [the] plaintiff has sufficiently

alleged a basis of subject matter jurisdiction, and the allegations in his complaint are taken as true

for the purposes of the motion.’” McElmurray v. Consol. Gov’t of Augusta-Richmond Cnty., 501

F.3d 1244, 1251 (11th Cir. 2007) (quoting Lawrence, 919 F.2d at 1529). “‘Factual attacks,’ on the

other hand, challenge the existence of subject matter jurisdiction in fact, irrespective of the

pleadings, and matters outside the pleadings, such as testimony and affidavits are considered.” Id.

(quotation marks omitted); see also Stalley ex rel. U.S. v. Orlando Reg’l Healthcare Sys., Inc., 524

F.3d 1229, 1233 (11th Cir. 2008) (“[A] factual attack on a complaint challenges the existence of

subject matter jurisdiction using material extrinsic from the pleadings, such as affidavits or

testimony.” (citation omitted)). “[F]ederal claims should not be dismissed on motion for lack of

subject matter jurisdiction when that determination is intermeshed with the merits of the claim and

when there is a dispute as to a material fact.” Lawrence, 919 F.2d at 1531; see, e.g., Eaton v.

Dorchester Dev., Inc., 692 F.2d 727, 734 (11th Cir. 1982) (reversing district court’s dismissal

when jurisdictional determination was “inextricably intertwined” with the merits of the lawsuit”).

To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a pleading

in a civil action must contain “a short and plain statement of the claim showing that the pleader is

entitled to relief.” Fed. R. Civ. P. 8(a)(2). Although a complaint “does not need detailed factual

allegations,” it must provide “more than labels and conclusions, and a formulaic recitation of the

elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)

(citations omitted); see Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (explaining that Rule 8(a)(2)’s

pleading standard “demands more than an unadorned, the-defendant-unlawfully-harmed-me

accusation”). Nor can a complaint rest on “‘naked assertion[s]’ devoid of ‘further factual

enhancement.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557 (alteration in original)).

“To survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as

true, to ‘state a claim to relief that is plausible on its face.’” Id. (quoting Twombly, 550 U.S. at

570). When a defendant moves to dismiss for failure to state a claim upon which relief can be

granted under Rule 12(b)(6), the court must accept the plaintiff’s allegations as true and evaluate

all possible inferences derived from those facts in favor of the plaintiff. See Am. Marine Tech, Inc.

v. World Grp. Yachting, Inc., 418 F. Supp. 3d 1075, 1079 (S.D. Fla. 2019).

Securities fraud claims, “like other types of fraud claims, have always been subject to Fed.

R. Civ. P. 9(b)'s heightened pleading requirements, which require a complaint “to state with

particularity the circumstances constituting fraud.” Mizzaro v. Home Depot, Inc., 544 F.3d 1230,

1237 (11th Cir. 2008). Rule 9(b) requires a party to “state with particularity the circumstances

constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind

may be alleged generally.” Fed. R. Civ. P. 9(b). Under Rule 9(b), “it is sufficient to plead the who,

what, when, where, and how of the allegedly false statements and then allege generally that those

statements were made with the requisite intent.” Mizzaro, 544 F.3d at 1237.

III. DISCUSSION

The Court begins with Goldberg’s Motion, which contests the SEC’s jurisdiction to bring

this lawsuit. It then turns to Braverman’s Motion, which challenges the sufficiency of the SEC’s

allegations.

A. Goldberg’s Motion

In his Motion, Goldberg argues that the SEC does not have jurisdiction to bring this action

because the crypto assets at issue are not “securities” within the meaning of the Securities Act.

ECF No. [25]. He argues that Congress has not clearly authorized the SEC to regulate the digital

currency market, and the SEC is overreaching its authority in bringing this case. See generally id.

In Response, the SEC correctly points out that Congress defined the term “security”

broadly “to encompass virtually any instrument that might be sold as an investment.” In re

Bitconnect Securities Litigation, No. 18-cv-80086, 2019 WL 9104318, at *6 (S.D. Fla. Aug. 23,

2019) (quoting Reves v. Ernst & Young, 494 U.S. 56, 61 (1990)). The Securities Act defines the

term “security” to encompass “any note, stock, treasury stock, security future, security-based swap,

bond, debenture, . . . investment contract, . . . or, in general, any interest or instrument commonly

known as a ‘security.’” 15 U.S.C. § 77b(a)(1). The SEC asserts that Defendants’ offering of DIG

tokens constitutes an “investment contract” under the test set forth in SEC v. W.J. Howey Co., 328

U.S. 293 (1946).

In Howey, the Supreme Court established a test to determine whether a particular scheme

constitutes an “investment contract”: “whether the scheme involves an investment of money in a

common enterprise with profits to come solely from the efforts of others.” 328 U.S. at 301. That

definition “embodies a flexible rather than a static principle, one that is capable of adaptation to

meet the countless and variable schemes devised by those who seek the use of the money of others

on the promise of profits.” Id. at 299. In analyzing whether something is a security, “form should

be disregarded for substance and the emphasis should be on economic reality.” Tcherepnin v.

Knight, 389 U.S. 332, 336 (1967) (citing Howey, 328 U.S. at 298). According to the Howey test,

“an investment contract exists if there is (a) an investment of money, (b) in a common enterprise,

(c) based on an expectation of profits to be derived from the entrepreneurial or managerial efforts

of others.”1 SEC v. Friendly Power Co. LLC, 49 F. Supp. 2d 1363, 1368 (S.D. Fla. 1999).

1 This third element is sometimes broken apart into two factors: whether there is an expectation of profits, and whether

the profits are derived solely from the efforts of others. See, e.g., SEC v. ETS Payphones, Inc., 408 F.3d 727, 732 n.1

(11th Cir. 2005). Given the posture and facts alleged in this case, there is presently no need to break apart this element.

Beginning with the first Howey element, an “‘investment of money’ refers to an

arrangement whereby an investor commits assets to an enterprise or venture in such a manner as

to subject himself to financial losses.” Friendly Power, 49 F. Supp. 2d at 1368–69 (citation

omitted). Here, the Complaint alleges that investors committed funds in the form of Bitcoin and

other crypto assets to buy DIG tokens, which would later be redeemable for gold. ECF No. [1]

¶¶ 24, 82. Goldberg does not dispute that an “investment of Bitcoin satisfies the first element of

the Howey test.” In re Bitconnect, 2019 WL 9104318, at *7. The first Howey element is satisfied.

Turning to the second element – “common enterprise” – the Eleventh Circuit employs a

“broad vertical commonality” test. SEC v. ETS Payphones, Inc., s, 732 (11th Cir. 2005) (citation

omitted). “That test requires the movant to “show that the investors are dependent upon the

expertise or efforts of the investment promoter for their returns.” Id. (quotation marks omitted).

Here, the Complaint alleges that investors’ expectation of profits derived from their expectation

that the value of their DIG tokens would increase due to the efforts of Arbitrade and Cryptobontix

to back the tokens with gold bullion. ECF No. [1] ¶¶ 83-84. “Investors’ expectation of those profits

came from, among other things, the representations that Arbitrade and Cryptobontix would obtain

the promised gold to back the DIG tokens, and that investors would be able to redeem DIG tokens

for gold, of which the supply would be directly dependent on the extent to which revenues were

generated to fund company gold purchases.” Id. ¶ 84. In light of those plausible allegations, and

absent argument from Goldberg, the Court finds that the Complaint sufficiently alleges that

investors were “dependent upon the expertise or efforts of the investment promoter for their

returns.” ETS Payphones, 408 F.3d at 732.

The third element of the Howey test asks whether “investors expect their ‘profits to come

solely from the efforts of others.’” SEC v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1201 (11th

Cir. 1999) (quoting Howey, 328 U.S. at 301). “[T]he crucial inquiry [for the third prong] is the

amount of control that the investors retain” over their investment. Id. at 1201 (quotation marks

omitted). Here, the DIG investors’ role was limited to purchasing the DIG tokens. ECF No. [1]

¶ 84. Investors had no role in the business operations of Cryptobontix or Arbitrade and were

entirely passive. Id. They had no “ability to control the profitability of [their] investment, either by

[their] own efforts or by majority vote in a group venture[.]” Gordon v. Terry, 684 F.2d 736, 741

(11th Cir. 1982). According to the Complaint, investors’ expectation of profits derived solely from

the actions of Arbitrade and Cryptobontix, including their efforts to back the value of DIG tokens

with gold bullion. ECF No. [1] ¶ 84. The Complaint sufficiently alleges that DIG investors’

fortunes depended on the actions of Arbitrade and Cryptobontix, so the third prong of Howey is

satisfied. See, e.g., In re Bitconnect, 2019 WL 9104318 at *9 (concluding that the third Howey

element was satisfied in similar circumstances).

The allegations within the Complaint satisfy all three elements of the Howey test that

determines whether an investment contract exists. Somewhat tellingly, Goldberg does not attempt

to apply the Howey test to the DIG scheme alleged in the Complaint, nor does Goldberg specify

which element of the Howey test is not satisfied. See generally ECF No. [25] (Goldberg’s Motion);

ECF No. [62] (Goldberg’s Reply).

Rather, Goldberg criticizes the SEC’s analysis as attempting “to demonstrate that the

subject tokens are themselves securities.” ECF No. [62] at 4. Goldberg argues that “the underlying

asset (whether oranges or digital tokens)” can never constitute investment contracts in and of

themselves. Id. (citing SEC v. Telegram Grp. Inc., No. 19-cv-9439 (PKC), 2020 WL 1547383, at

*1 (S.D.N.Y. Apr. 1, 2020)). As Goldberg correctly points out, “the analysis of whether a digital

asset is offered or sold as a security is not static and does not strictly inhere to the instrument.”

ECF No. [25] at 13 (quoting former SEC-Chairman Jay Clayton). However, contrary to Goldberg’s

assertion, the SEC does not argue that DIG tokens are securities merely because they are crypto

assets. See generally, ECF No. [48]. Rather, the SEC argues – and the Court agrees – that “the

entire scheme” involving DIG tokens, as alleged in the Complaint, constitutes an “investment

contract” under the Howey test. Telegram, 2020 WL 1547383 at *1.

The Court is likewise unpersuaded by Goldberg’s discussion of how other crypto assets

were categorized in circumstances not analogous to those alleged in the Complaint. See ECF No.

[25] at 11-13 (discussing XRP coins and citing, inter alia, a consent judgment in CFTC v. Omega

Knight 2, No. 18-cv-22377-RNS (S.D. Fla. 2019)). Whether other crypto assets constitute

securities or commodities is not the issue before this Court. Goldberg has provided no cognizable

argument as to why the specific scheme described in the Complaint does not constitute an

investment contract under the well-established Howey test.

Lastly, Goldberg offers a policy argument, warning that “tremendous implications for the

digital economy” will result if the Court accepts the SEC’s position that the DIG tokens constitute

securities in this case. ECF No. [25] at 9. The Court is not convinced. This is by no means the first

time a federal court has applied the Howey test to conclude that the sale of crypto assets may

constitute securities. See, e.g., Rensel v. Centra Tech, Inc., No. 17-cv-24500, 2022 WL 2103051,

at *3-4 (S.D. Fla. May 31, 2022), report and recommendation adopted, 2022 WL 2104210 (S.D.

Fla. June 10, 2022); SEC v. LBRY, Inc., No. 21-cv-260, 2022 WL 16744741, at * 7 (D.N.H. Nov.

7, 2022); SEC v. Kik Interactive, Inc., 492 F. Supp. 3d 169, 178 (S.D.N.Y. 2020); see also ECF

No. [48] at 11 (citing additional cases).

Finally, Goldberg attached five exhibits to his Motion. ECF No. [25-1]. The parties dispute

whether the Court may consider them at the present stage of the case. See ECF No. [48] at 13 (SEC

arguing that the extrinsic evidence “is incomplete, irrelevant, inaccurate, or contradictory”); ECF

No. [62] at 5 (Goldberg explaining that “the exhibits are submitted for this Court’s convenience,

to provide minimal context for the proper consideration of jurisdiction and for no other purpose.”).

The Court agrees with the SEC that none of the five exhibits are relevant to the Rule 12(b)(1)

jurisdictional issue of whether DIG tokens constitute securities. They cannot be considered at this

Motion to Dismiss stage of the case.

Accordingly, Goldberg’s Motion, which was joined by Hogg, is denied. The Court turns to

Braverman’s Motion to Dismiss, which attacks the sufficiency of the Complaint’s allegations

under Federal Rule of Civil Procedure 12(b)(6).

B. Braverman’s Motion

Counts X, XI, and XII of the Complaint seek to hold Braverman liable as an aider and abettor

for alleged violations of the Exchange Act committed by Goldberg, Hogg, Arbitrade, and

Cryptobontix (“the Primary Defendants”). ECF No. [1] at 21-23. Braverman moves to dismiss

those Counts because the Complaint (i) fails to allege a primary securities law violation, (ii) fails

to allege Braverman’s “general awareness” of the Primary Defendants’ scheme, and (iii) fails to

allege that Braverman provided “substantial assistance” to the scheme. ECF No. [30]. The SEC

responds that the Complaint sufficiently alleges all necessary elements to hold Braverman liable

as an aider and abettor. ECF No. [47].

To state a claim for aiding and abetting a securities law violation, a complaint must allege

“(1) a primary violation by another party; (2) a ‘general awareness’ by the accused aider-abettor

‘that his role was part of an overall activity that is improper’; and (3) that ‘the accused aider-

abettor’ must have ‘knowingly and substantially assisted the violation.’” SEC v. Big Apple

Consulting USA, LLC, 783 F.3d 786, 800 (11th Circ. 2015) (quoting Woods v. Barnett Bank of Ft.

Lauderdale, 765 F.2d 1004, 1009-10 (11th Cir. 1985)); see also FTC v. WV Universal Mgmt.,

LLC, 877 F.3d 1234, 1241 (11th Cir. 2017) (“[T]he test for liability [] requires a primary violation,

substantial assistance, and a culpable state of mind.”).

i. Primary Violations

In Counts X, XI, and XII, the Complaint accuses Braverman of aiding and abetting the

Primary Defendants’ violations of Section 10(b) of the Exchange Act, as alleged in Counts V, VI,

and VII of the Complaint, respectively. ECF No. [1] at 21-23. Thus, the first step is to determine

whether Counts V, VI, and VII state claims for relief under Section 10(b) of the Exchange Act.

“In order to prove a violation under § 10(b), the SEC must show the defendants: (1)

employed a device, scheme or artifice to defraud or made materially false statements; (2) in

connection with the purchase or sale of securities; (3) using an instrumentality of interstate

commerce; and (4) with scienter.” SEC v. Monterosso, 768 F. Supp. 2d 1244, 1262 (S.D. Fla.

2011) (citing SEC v. Merchant Cap., LLC, 483 F.3d 747, 766 (11th Cir. 2007)). Securities fraud

claims are also subject “Fed. R. Civ. P. 9(b)'s heightened pleading requirements, which require a

complaint “to state with particularity the circumstances constituting fraud.” Mizzaro, 544 F.3d at

1237. Under Rule 9(b), “it is sufficient to plead the who, what, when, where, and how of the

allegedly false statements and then allege generally that those statements were made with the

requisite intent.” Id. at 1237.

Count V asserts liability under 17 CFR § 240.10b-5(a), which imposes liability for

“employ[ing] any device, scheme, or artifice to defraud[.]” Count VI is based on § 240.10b-5(b),

which prohibits making untrue statements or omitting material facts. Count VII invokes § 240.10b-

5(c), which refers to “any act, practice, or course of business which operates or would operate as

a fraud or deceit upon any person[.]” “The main difference between a 10b-5(b) misrepresentation

claim and a 10b-5(a) and (c) scheme liability claim is that, while 10b-5(b) involves ‘deceptive

statements,’ 10b-5(a) and (c) scheme liability involves ‘deceptive conduct.’” In re Tupperware

Brands Corp. Secs. Litigation, No. 20-cv-357, 2021 WL 247870, at *5 (M.D. Fla. Jan. 25, 2021)

(quoting IBEW Local 595 Pension & Money Purchase Pension Plans v. ADT Corp., 660 F. App’x

850, 856 (11th Cir. 2016)).

1. Scheme Liability

Braverman first argues that “the Complaint fails to plead deceptive or manipulative

conduct devised to defraud investors.” ECF No. [30] at 15. The Complaint alleges a scheme

whereby the Primary Defendants (a) offered the sale of DIG tokens to investors, ECF No. [1]

¶¶ 22-23; (b) consistently advertised that those tokens would be backed by gold and redeemable

for gold, id. ¶¶ 24, 26; (c) entered into a “sham” transaction to create the appearance that they had

acquired billions of dollars of gold bullions, id. ¶¶ 26-51; (d) misrepresented facts concerning that

gold transaction and auditing of the supposed gold bullion to make the transaction appear

legitimate, id. ¶¶ 52-75; and (e) sold their own DIG tokens at prices that were inflated due to

investors’ reliance on the Primary Defendants’ misrepresentations related to the gold bullion. Id.

¶¶ 77-79. Those allegations sufficiently allege a “scheme” to defraud investors.

Braverman argues that the Complaint sets forth mere “‘abnormalities’ in the gold

acquisition transaction,’” which “‘without more, does not plausibly support the SEC’s much larger

inference’ of a scheme to defraud.” ECF No. [30] at 16 (quoting SEC v. Sason, 433 F. Supp. 3d

496, 511–12 (S.D.N.Y. 2020)). The Court disagrees. The Complaint goes far beyond alleging

“abnormalities” related to the Arbitrade-SION gold transaction. Rather, it alleges that the entire

gold transaction was a sham and that Arbitrate never actually acquired title to the billions of dollars

of gold bullion. ECF No. [1] ¶¶ 72. The inference that the gold transaction was a sham is supported

by plausible allegations that the Safe Keeping Receipt was deficient, id. ¶¶ 33-34, related

documents are replete with “spelling and punctuation errors” and “appear to be forgeries,” id. ¶ 40,

SION intentionally limited the scope of the auditing firms’ investigation, id. ¶¶ 43-49, Braverman

explicitly instructed Bureau Veritas not to conduct a physical examination of the purported gold,

id. ¶ 51, and Arbitrade never actually acquired $10 billion in gold bullion. Id. ¶ 72. The Court finds

that the Complaint contains sufficient allegations to support the SEC’s inference that the gold

transaction was a sham.

2. Misrepresentations

Braverman argues that the Complaint fails to allege with particularity any material

misrepresentations or materially misleading omissions to support Count VI. ECF No. [30] at 20.

Federal Rule of Civil Procedure 9(b) requires that the Complaint set forth “(1) precisely what

statements or omissions were made in which documents or oral representations; (2) the time and

place of each such statement and the person responsible for making (or, in the case of omissions,

not making) them; (3) the content of such statements and the manner in which they misled the

plaintiff; and (4) what the defendant obtained as a consequence of the fraud.” FindWhat Inv'r Grp.

v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011) (citations omitted).

The Complaint asserts five misrepresentations. On May 24, 2018, Arbitrade and

Cryptobontix issued an email news release claiming that Arbitrade was acquiring $8.7 billion

worth of bullions and that investors would be able to redeem their DIG tokens for that bullion.

ECF No. [1] ¶¶ 55-60. On June 28, 2018, Hogg, on behalf of Arbitrade, announced at a press

conference that Arbitrade would be receiving title to $10 billion worth of physical gold. Id. ¶ 61.

On July 5, 2018, Arbitrade and Cryptobontix issued a news release stating that they had reached a

“definitive deal” to acquire gold billion, and that $3 billion worth of gold would be allocated to

backing DIG tokens. Id. ¶¶ 63, 65. On November 5, 2018, Arbitrade issued a press release

announcing that the company had received over $10 billion in gold bullion and “completed the

required ‘regulatory gold vaulting verification compliance.’” Id. ¶¶ 66-67. Finally, on January 9,

2019, Arbitrade issued a press release announcing that its shipment of gold from SION was

“vaulted and secured,” and Arbitrade ensured “consisted growth of its precious metals holdings.”

Id. ¶¶ 68-69.

In each of these statements, Arbitrade stated that it would acquire or had acquired title to

billions of dollars of gold bullion. Accepting as true the Complaint’s plausible allegation that the

gold transaction was a sham, those statements were false and misleading. Id. ¶ 71. Except for the

January 9, 2019 press release, each of the statements “resulted in a spike in the price of DIG.” Id.

¶ 77. As a result, Hogg, Goldberg, and Cryptobontix were able to sell their DIG tokens at

“artificially inflated prices[.]” Id. ¶ 79.

The Court concludes that, under the heightened pleading requirements of Federal Rule of

Civil Procedure 9(b), the Complaint sufficiently alleges the Primary Defendants’ liability under

Count VI. Arbitrade is responsible for each of the five statements, Cryptobontix is responsible for

the May 24 and July 5 statements, and Hogg is responsible for the June 28 statements on behalf of

Arbitrade. The SEC has “attributed allegedly fraudulent statements and omissions to specific

defendants,” namely, Arbitrade, Cryptobontix, and Hogg. Phillips v. Scientific-Atlanta, Inc., 374

F.3d 1015, 1019 (11th Cir. 2004). As for Goldberg, the Complaint alleges that he “was an

undisclosed control person of Arbitrade” who “exercised significant control over the day-to-day

business affairs of Arbitrade and had the second largest ownership interest in the company,” id.

¶ 10, and he “reviewed and approved at least three of the false and misleading releases[.]” ECF

No. [1] ¶ 54. The Complaint plausibly alleges Goldberg’s liability for statements within

Arbitrade’s press release. See Phillips, 374 F.3d at 1018-19 (discussing the “group pleading

doctrine”). Accordingly, the five misrepresentations are alleged with sufficient particularly under

Rule 9(b).

3. Scienter

Braverman additionally argues that the Complaint fails to allege the Primary Defendants’

scienter. ECF No. [30] at 16-17. He cites Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1287 (11th

Cir. 1999) for the proposition that the SEC must allege sufficient facts to create a “strong

inference” of scienter. However, the Bryant court was discussing the heightened level of scienter

that must be alleged in cases brought under the Private Securities Litigation Act (PSLRA). Id.

“The PSLRA applies only to private actions, not to actions filed by the SEC.” SEC v. Betta, No.

09-cv-80803, 2010 WL 963212, at *5 (S.D. Fla. Mar. 15, 2010) (citing 15 U.S.C. § 78u–4(a)(1)

(“The provisions of this subsection shall apply in each private action arising under this chapter”)).

Here, the Rule 9(b) standard applies, under which “it is sufficient to plead the who, what, when,

where, and how of the allegedly false statements and then allege generally that those statements

were made with the requisite intent.” Mizzaro, 544 F.3d at 1237. That requisite is satisfied by “‘an

intent to deceive, manipulate, or defraud,” or ‘severe recklessness.’” Id. at 1238 (quoting Bryant,

187 F.3d at 1282).

Braverman argues that the Complaint merely alleges that the Primary Defendants “ignored

purported signs of fraud in the dealings with SION related to the gold acquisition transaction.”

ECF No. [30] at 17. According to Braverman, the Primary Defendants “actively took steps to

evaluate and confirm the details of the transaction.” Id. The Court disagrees. As discussed above,

the Complaint contains substantial and plausible allegations that Arbitrade’s gold transaction with

SION was a sham. Given that Hogg and Goldberg were the primary owners and controllers of

Arbitrade, ECF No. [1] ¶ 10, they would have been aware that Arbitrade never actually received

title to $10 billion in gold bullion. Id. ¶ 72. Assuming, as it must at this stage of the case, that the

gold transaction was a sham, the Primary Defendants made knowing or extremely reckless

misrepresentations when stating that the DIG tokens were backed by gold.

It is certainly possible, as Braverman asserts, that the Primary Defendants truly intended to

back the DIG tokens with gold bullion, purchase gold bullion from SION, and confirm the gold’s

existence through three outside firms. ECF No. [30] at 15-16. However, in light of the

abnormalities and imprecision of the documents reflecting the Arbitrade-SION transaction, ECF

No. [1] ¶¶ 31-34, 39-40, the narrow scope of the three firms’ auditing, which never entailed a

physical inspection of gold bullion, id. ¶¶ 42-51, and that Arbitrade never actually acquired $10

billion in gold bullion,2 id. ¶ 71, the Complaint contains sufficient facts “giving rise to a strong

inference that the defendants either intended to defraud investors or were severely reckless when

they made the allegedly materially false or incomplete statements.” Mizzaro, 544 F.3d at 1238

(quotation marks omitted). Accordingly, the Complaint sufficiently alleges that the Primary

Defendants acted with scienter.

In sum, the Complaint sufficiently alleges in Counts V-VII violations of Section 10(b) of

the Exchange Act. The remaining issues are whether Braverman had “general awareness” of the

scheme, and whether he knowingly provided substantial assistance.

ii. General Awareness

Braverman argues that the Complaint fails to establish Braverman’s “general awareness” of

his participation in an improper activity.” Big Apple Consulting, 783 F.3d at 800. General

awareness may be inferred by the “surrounding circumstances and expectations of the parties.”

2 At this stage in the case, the Court must accept this key allegation as true. Mizzaro, 544 F.3d at 1239.

Woods, 765 F.2d at 1009. The “awareness requirement can be satisfied by extreme recklessness,

which can be shown by ‘red flags,’ ‘suspicious events creating reasons for doubt,’ or ‘a danger . . .

so obvious that the actor must have been aware of” the danger of violations.” S.E.C. v. K.W. Brown

& Co., 555 F. Supp. 2d 1275, 1307 (S.D. Fla. 2007) (quoting Howard v. SEC, 376 F.3d 1136, 1143

(D.C.Cir.2004)).

According to the Complaint, Braverman was held out as the Chief Operations Officer of

Arbitrade. 3 ECF No. [1] ¶ 11. Despite that role and the critical importance of the gold bullion to

Arbitrade’s business, Braverman never asked an auditing firm to confirm the existence, location,

ownership, or origin of the gold itself. Id. ¶ 46. He ignored the red flag that SION – a company

with whom Arbitrade ostensibly entered into an arm’s length transaction to purchase billions of

dollars’ worth of gold – narrowly dictated the scope of an auditing firm’s investigation. Id. ¶ 47.

He also “ignored the red flag presented when SION told [one of the accounting firms] to drop its

request for a video conference with the G4S employee whose signature purportedly appears on the

Safe Keeping Receipt.” Id. ¶ 48. He overlooked issues that should have been readily obvious upon

inspecting the Safe Keeping Receipt. Id. ¶¶ 33-40. Braverman was tasked with hiring Bureau

Veritas to provide an opinion about the existence of gold, but he instructed Bureau Veritas not to

physically inspect the gold. Id. ¶¶ 50-51.4 Braverman reviewed at least one of the five false press

3 Braverman asserts that he was not the Chief Operations Officer of Arbitrade, but rather of “Arbitrade Exchange

(Bermuda) Ltd.” ECF No. [30] at 6. For purposes of ruling on Braverman’s Motion to Dismiss, the Court accepts as

true the factual assertion within the Complaint. Iqbal, 556 U.S. at 678.

4 Braverman attached to his Motion to Dismiss an email chain between Braverman and Bureau Veritas, which is the

source of the allegation in the Complaint that Braverman instructed the firm that “[c]ounting bars I believe is overkill.”

See ECF No. [31-1]. The SEC does not contest Braverman’s assertion that the Court may consider the email as a

document incorporated by reference into the Complaint. See ECF No. [30] at 8 n.1. The Court concludes that the

Complaint’s statement is not taken “out-of-context,” as Braverman asserts, id. at 11, but rather supports the

Complaint’s allegation that Braverman did not want Bureau Veritas to physically inspect the gold bullion.

releases prior to its issuance.5 Id. ¶ 55. He converted Hogg and Goldberg’s Bitcoin proceeds from

their DIG sales to cash, which he then redistributed among Hogg, Goldberg, and himself. Id. ¶¶

86-89.

The Court concludes that the allegations “create, at the very least, an inference that

[Braverman] had a general awareness that his role was part of an overall activity that is

improper[.]” SEC v. Monterosso, No. 07-cv-61693, 2008 WL 11333251, at * 4 (S. D. Fla. Sept.

26, 2008). He acted with at least “extreme recklessness” by assuming without confirming that the

gold transaction was legitimate, despite numerous “red flags” indicating it was not. K.W. Brown,

555 F. Supp. 2d at 1307. Accordingly, the “general awareness” element is satisfied.

iii. Substantial Assistance

Lastly, Braverman argues that the Complaint fails to allege that Braverman provided

“substantial assistance” in the fraudulent scheme. ECF No. [30] at 14. “The element of substantial

assistance is met when, based upon all the circumstances surrounding the conduct in question, a

defendant's actions are a ‘substantial causal factor’ in bringing about the primary violation.” K.W.

Brown, 555 F. Supp. 2d at 1307 (quoting Woods, 765 F.2d at 1013).

The SEC argues that Braverman provided substantial assistance by “being responsible for

hiring Bureau Veritas,” “reviewing at least one of the false press releases prior to its issuance,”

and “being responsible for converting the Bitcoin proceeds of the DIG sales to cash[.]” ECF No.

[47] at 9. The SEC’s first two arguments are unconvincing. Given that Bureau Veritas refused to

accept the engagement, Braverman’s failed attempt to hire it did not assist the scheme in any way.

5 Braverman faults the Complaint for failing to specify which of the press releases Braverman reviewed. ECF No. [30]

at 8. That failure to specify might prevent Braverman from being held directly liable for making a false statement.

Nonetheless, the fact that he reviewed at least one unspecified release helps to show his “general awareness” because

it shows his involvement in the firm’s operations and therefore supports the inference that he was aware of the general

scheme.

Case No. 22-cv-23171-BLOOM/Otazo-Reyes

ECF No. [1] § 51. Absent specificity regarding which of the false press releases Braverman

reviewed, the Court cannot conclude that his review of an unidentified release constitutes

“substantial assistance.” Jd. §] 55. However, the Court agrees with the SEC that Braverman

provided substantial assistance by converting Hogg and Goldberg’s Bitcoin proceeds into cash. /d.

4 86. Braverman provides no citations for the proposition that the Complaint must specifically

allege “the amount of Bitcoin proceeds converted to cash or when the conversions took place,” or

the timing and amounts of Braverman’s distributions to Hogg and Goldberg. ECF No. [61] at 8.

The allegation that he converted and redistributed the Defendants’ Bitcoin proceeds suffices to

support the inference that he played a “substantial causal factor” in the Defendants’ scheme. K.W.

Brown, 555 F. Supp. 2d at 1307 (quotation marks omitted).

IV. CONCLUSION

Accordingly, it is ORDERED AND ADJUDGED as follows:

1. Defendant Goldberg’s Motion to Dismiss, ECF No. [25], is DENIED.

2. Defendant Hogg’s Motion to Dismiss, ECF No. [27], is DENIED.

3. Defendant Braverman’s Motion to Dismiss, ECF No. [30], is DENIED.

4. Goldberg, Hogg, and Braverman shall file a Response to the Complaint no later than

April 19, 2023.

DONE AND ORDERED in Chambers at Miami, Florida, on April 5, 2023.

UNITED STATES DISTRICT JUDGE

Copies to:

Counsel of Record

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