NORMAN V. STRATEMAN

Filing 51

ORDER by Judge Yvonne Gonzalez Rogers granting 36 Motion to Dismiss; granting 37 Motion to Dismiss. Court DISMISSES WITH PREJUDICE the entire action. (fs, COURT STAFF) (Filed on 12/16/2016)

1
2
3
4
5

UNITED STATES DISTRICT COURT

6

NORTHERN DISTRICT OF CALIFORNIA

7
8

DONALD NORMAN,

Case No. 16-cv-03587-YGR

Plaintiff,
9
v.

ORDER GRANTING MOTIONS TO DISMISS

10
11

INTERSANGO, LLC, ET AL.,

Re: Dkt. Nos. 36, 37

United States District Court
Northern District of California

Defendants.
12
13

Plaintiff Donald Norman brings this derivate shareholder action against defendants Patrick

14

Strateman, Jamie Strateman, and Amir Taaki, and nominal defendants Intersango, LLC and

15

Intersango Ltd. (collectively, “Intersango” or the “Company”)1 for alleged fraud, breaches of

16

fiduciary duties, and violations of certain securities regulations. Specifically, plaintiff brings the

17

following causes of action: as against P. Strateman and Taaki, (i) breach of fiduciary duty; as

18

against P. Strateman and J. Strateman (ii) conspiracy to commit conversion of corporate funds;

19

(iii) conversion of corporate funds; (iv) conspiracy to commit fraud; and (v) fraud; as against P.

20

Strateman only, (vi) unjust enrichment; and, presumably, as against the Company, (vii) violation

21

of Securities and Exchange Commission (“SEC”) Regulation D, Rule 502; and (viii) accounting.

22

Defendant Patrick Strateman and nominal defendant Intersango each filed a motion to

23

dismiss on the following grounds: (i) failure to state a claim pursuant to Federal Rule of Civil

24

Procedure 12(b)(6); (ii) in the absence of the singular federal claim alleged in the first amended

25

complaint (“FAC”), lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure

26
27
28

1

Neither Jamie Strateman nor Amir Taaki have appeared in this action, and there is no
indication that either has been served.

1

12(b)(1); and (iii) failure to satisfy certain procedural requirements in a derivative shareholder

2

action.
Having carefully considered the pleadings and the papers submitted, and for the reasons set

3
4

forth below, the Court finds that plaintiff failed to state any federal claims and therefore GRANTS

5

defendants’ motions to dismiss for lack of subject matter jurisdiction and DISMISSES WITH

6

PREJUDICE the entire action. In its 24-page opposition, plaintiff devotes only a page to its sole

7

federal claim.2 Because the Court finds that it has no subject matter jurisdiction over the action,

8

the Court declines to exercise supplemental jurisdiction over the state law claims and does not

9

address defendants’ alternative grounds for dismissal thereof.

10

I.

BACKGROUND
A.

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23

Procedural Background

Plaintiff initiated this action on June 25, 2016 by filing a verified shareholder derivative
complaint. (Dkt. No. 1.) On September 1, 2016, defendant P. Strateman moved to dismiss, in
part, for lack of subject matter jurisdiction. Specifically, defendant argued that there was no
diversity jurisdiction in this action and that plaintiff did not otherwise allege a federal question.
(Dkt. No. 23.) On September 15, 2016, plaintiff filed a notice of non-opposition, but sought leave
to amend to allege a federal claim. (Dkt. No. 31.) On September 27, 2016, the Court granted
defendant’s motion to dismiss for lack of subject matter jurisdiction and granted plaintiff leave to
amend. (Dkt. No. 33.) Plaintiff filed an amended complaint on October 11, 2016 alleging, among
others, a violation of the Securities Act and the Securities Exchange Act. (Dkt. No. 35, “FAC.”)
Specifically, plaintiff alleges that defendants failed to comply with a certain regulation by selling
“securities” without the proper disclosures. (FAC ¶¶ 55–58.) On this basis, plaintiff contends that
this Court properly has subject matter jurisdiction over the action. (Id. at ¶ 14.)

24
25
26
27
28

2

Twelve days after defendant P. Strateman filed his reply and over two weeks after
defendant Intersango filed its reply, plaintiff filed an additional opposition, which addresses
specifically defendant Intersango’s motion to dismiss. (Dkt. No. 49.) Such opposition is
procedurally improper, and as such, the Court STRIKES the same from the record. In any event,
plaintiff again dedicates only one page to his sole federal claim, which merely repeats the
arguments contained in his first opposition. (Compare Dkt. No. 43 with Dkt. No. 49.)
2

B.

1
2
3
4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Factual Background

Plaintiff Norman, along with defendants P. Strateman and A. Taaki, created Intersango
with the intent to “own and operate the company as equals.” (Id. at ¶ 4.) Intersango was
originally incorporated in the United Kingdom as a private limited company on June 27, 2011 and
then subsequently registered as a limited liability company in the state of Delaware on July 5,
2011. (Id. at ¶ 3.) Intersango operated as a bitcoin exchange, which earned money by taking fees
from bitcoin transactions.3
Plaintiff alleges that he, P. Strateman, and Taaki each received equal shares of Intersango
and “acted and governed the business as if a general partnership.” (Id. at ¶ 7.) “Unanimous
agreement was required for all major company decisions,” and each was “assigned various roles”
in managing Intersango. (Id.) Plaintiff further alleges that, in “exhcange for his one-third share of
the Company, [he] agreed to act as the CEO . . . and provided the initial operational funding for
the Company in excess of $60,000.” (Id.) Taaki, in turn, “provided much of the technical
expertise” and P. Strateman was “in charge of many of the technical aspects” of running
Intersango. (Id.)
Generally, plaintiff alleges that, in the fall of 2012, P. Strateman “used his power and
control over [Intersango’s] assets to essentially shut Norman and Taaki out of the day-to-day
business and operations of Intersango.” (Id. at ¶ 8.) Plaintiff contends that P. Strateman has
“repeatedly, to the detriment of [Intersango] and its shareholders, made completely unilateral
decisions on behalf of the Company either without seeking the approval of the other member
managers or against their express wishes.” (Id.) With regards to Taaki, plaintiff alleges that Taaki
“abandoned and abdicated all of his managerial responsibilities and walked away from his duties
as a member manager.” (Id. at ¶ 9.) Additionally, plaintiff alleges that P. Strateman entered into a
“conspiracy with his mother, Jamie Strateman, both to commit fraud and to commit conversion
with respect to Intersango’s assets.” (Id. at ¶ 12.)

26
27
28

3

According to the FAC, bitcoin “is a digital asset and an innovative payment system
released as open-source software in 2009.” (Id. at ¶ 3.)
3

1

II.

LEGAL FRAMEWORK
Pursuant to Rule 12(b)(6), a complaint may be dismissed for failure to state a claim upon

2
which relief may be granted. Dismissal for failure to state a claim under Federal Rule of Civil
3
4
5
6

Procedure 12(b)(6) is proper if there is a “lack of a cognizable legal theory or the absence of
sufficient facts alleged under a cognizable legal theory.” Conservation Force v. Salazar, 646 F.3d
1240, 1242 (9th Cir. 2011) (quoting Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th
Cir. 1988)). The complaint must plead “enough facts to state a claim [for] relief that is plausible

7

on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is plausible on its

8

face “when the plaintiff pleads factual content that allows the court to draw the reasonable

9

inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009). If the facts alleged do not support a reasonable inference of liability, stronger than a

11
United States District Court
Northern District of California

10

mere possibility, the claim must be dismissed. Id. at 678–79; see also In re Gilead Scis. Sec.

12

Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (a court is not required to accept as true “allegations

13

that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences”).

14

A motion to dismiss pursuant to Rule 12(b)(1) is a challenge to the court’s subject matter

15

jurisdiction. “Federal courts are courts of limited jurisdiction,” and it is “presumed that a cause

16

lies outside this limited jurisdiction.” Kokkonen v. Guardian Life Ins.Co. of Am., 511 U.S. 375,

17

377 (1994). The party invoking the jurisdiction of the federal court bears the burden of

18

establishing that the court has the requisite subject matter jurisdiction to grant the relief requested.

19

Id. A challenge pursuant to Rule 12(b)(1) may be facial or factual. See White v. Lee, 227 F.3d

20

1214, 1242 (9th Cir. 2000). In a facial attack, the jurisdictional challenge is confined to the

21

allegations pled in the complaint. See Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).

22

The challenger asserts that the allegations in the complaint are insufficient “on their face” to

23

invoke federal jurisdiction. Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004).

24

To resolve this challenge, the court assumes the allegations in the complaint are true and draws all

25

reasonable inferences in favor of the party opposing dismissal. See Wolfe, 392 F.3d at 362.

26

Additionally, when all federal claims are dismissed before trial, the Ninth Circuit has held that

27

“pendent state claims also should be dismissed.” Jones v. Cmty. Redevelopment Agency of the

28

City of Los Angeles, 733 F.2d 646, 651 (9th Cir. 1984).
4

1
2
3
4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

III.

DISCUSSION

Defendants move to dismiss all of plaintiff’s causes of action for failure to state a claim.
Additionally, defendants argue that if the Court were to dismiss plaintiff’s singular federal cause
of action, the Court should refuse to exercise supplemental jurisdiction over plaintiff’s state law
claims. Plaintiff does not allege any other basis for the exercise of the Court’s subject matter
jurisdiction. The Court thus proceeds with an analysis of whether plaintiff has adequately alleged
a federal cause of action.
Plaintiff’s only federal cause of action here is a claim that defendants violated SEC
Regulation D, Rule 502. Plaintiff contends that Rule 502 requires that unregistered securities be
“preceded by disclosures that approximate those which would be disclosed in a formal
registration,” which were allegedly lacking here. (FAC ¶ 57.) Specifically, plaintiff alleges only
that: “Prior to receiving plaintiff’s monies in exchange for ownership shares in the [c]ompany,
Strateman disseminated or approved certain material false statements and omissions, including but
not limited to i) omitting that he would not honor his fiduciary duties to the [c]ompany should
there be trouble and ii) that his intention was not to take one-third of the profits, but 100%.” (Id.
at ¶ 58.)
Defendants challenge plaintiff’s claim under Rule 502 on three grounds: (i) plaintiff’s
membership interest in Intersango does not constitute a “security” interest under the federal
securities laws; (ii) because such transactions occurred outside the United States, they are not
covered by the federal securities laws; and (iii) Rule 502 does not apply to the circumstances
alleged by plaintiff. Plaintiff argues only that his interests do constitute a security interest under
the securities laws and that the alleged transactions partially occurred in the United States, but
plaintiff fails to argue that Rule 502 applies to the transactions at issue here. For the reasons
below, the Court agrees with defendants that plaintiff has failed to state a federal cause of action:
As an initial matter, the Court addresses whether the interest here qualifies as a “security”
to warrant protection under the federal securities laws. Both the Securities Act and the Exchange
Act define “security” expansively, and the Supreme Court has rejected a “narrow and literal
reading” of such definition. Warfield v. Alaniz, 569 F.3d 1015, 1020 (9th Cir. 2009) (citing Reves
5

1

v. Ernst & Young, 494 U.S. 56, 60 (1990)); see 15 U.S.C. § 77b(1) (defining security under the

2

Security Act); 15 U.S.C. § 78c(1) (defining security under the Exchange Act). “Novel,

3

uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as a

4

matter of fact that they were widely offered or dealt in under terms or courses of dealing which

5

established their character in commerce as ‘investment contracts,’ or as ‘any interest or instrument

6

commonly known as a security.’” SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943).

7

In determining whether a particular instrument or ownership interest is considered a security under

8

either act, the Supreme Court applies a three-prong test requiring: (i) an investment of money; (ii)

9

in a common enterprise; (iii) with an expectation of profits produced by the efforts of others.
Warfield, 569 F.3d at 1020 (citing SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946)). “The

11
United States District Court
Northern District of California

10

third prong of this test, requiring ‘an expectation of profits produced by the efforts of others,’

12

involves two distinct concepts: whether a transaction involves any expectation of profit and

13

whether expected profits are the products of the efforts of a person other than the investor.” Id.

14

“[T]he nature of an instrument is to be determined at the time of issuance, not at some subsequent

15

time.” Danner v. Himmelfarb, 858 F.2d 515, 520 (9th Cir. 1988) (citation omitted).

16

Given the nature of plaintiff’s allegations regarding the creation of his membership interest

17

in Intersango, the Court finds that such interest does not satisfy the third prong of the Ninth

18

Circuit’s test to determine whether plaintiff purchased an interest or instrument, which constitutes

19

a “security.” Specifically, plaintiff alleges the following:

20
21
22
23
24
25
26
27

Norman, Taaki, and Strateman all received equal shares of Intersango. Corporate
governance documents, such as Bylaws and or Operating agreements were not
formally entered into by the Parties, who acted and governed the business as if a
general partnership. They were all member managers of Intersango. Unanimous
agreement was required for all major company decisions. Additionally, they were
all assigned various roles in the Company. In exchange for his one-third share of
the Company, Norman agreed to act as the CEO of the Company, although he was
generally in charge of only non-technical aspects of Intersango’s operations, and
provided the initial operational funding for the Company in excess of $60,000.
(FAC ¶¶ 4–5; see also id. at ¶ 5 (“The Company was created upon an agreement by plaintiff
Norman and Defendants Strateman and Taaki that they would own and operate the company as
equals”).) Plaintiff argues only that defendant P. Strateman never passed over control over the

28
6

1

entity and therefore plaintiff’s profits were wholly dependent on P. Strateman’s efforts. However,

2

as discussed above, the nature of the instrument is to be determined at the time of issuance. See

3

Danner, 858 F.2d at 520. Here, the FAC unambiguously alleges that, at the time of issuance, the

4

parties contemplated that each would be involved in the operation and management of Intersango.

5

Moreover, plaintiff’s argument that he never exercised control over the Company is belied by the

6

allegations in the FAC. In the FAC, plaintiff does not allege that P. Strateman “never” passed

7

over control, but rather that P. Strateman wrested control from the other members in the fall of

8

2012 “to essentially shut Norman and Taaki out of the day-to-day business and operations of

9

Intersango.” (FAC ¶ 8.) Such an arrangement is not characteristic of the “security” interest

10

United States District Court
Northern District of California

11

contemplated by the federal securities laws.
Thus, the Court finds that plaintiff does not have a protectable “security” interest and has

12

therefore failed to state a claim under the federal securities laws and regulations promulgated

13

thereunder.4 Accordingly, the Court DISMISSES plaintiff’s claim under Regulation D, Rule 502.

14

Because the Court finds that, given the nature of the allegations and the prior opportunity to

15

amend, plaintiff cannot plead a violation of the federal securities laws, such dismissal is with

16

prejudice and without leave to amend.5

17

Furthermore, given the Court’s dismissal of plaintiff’s only federal cause of action, and in

18

the absence of any other basis for the Court’s exercise of subject matter jurisdiction, the Court

19

declines to exercise supplemental jurisdiction over plaintiff’s state law claims and DISMISSES the

20

remainder of the action for lack of subject matter jurisdiction.

21
22
23
24
25
26
27
28

4

Because the Court finds that plaintiff’s interests in Intersango do not constitute
“securities,” the Court does not address defendants’ other grounds for dismissing plaintiff’s
federal cause of action.
5

Specifically, the Court finds that amendment would be futile given the history of the case
(see Dkt. No. 33 (previous order dismissing for lack of subject matter jurisdiction based on
plaintiff’s admission that diversity jurisdiction did not exist)) and plaintiff’s concessions in his
response to an order to show cause regarding the merits of his federal claim (see Dkt. No. 44 at 2
(in explaining why his opposition was late, plaintiff indicates that he “became concerned that
establishing his Federal Securities claims would be more of a burden then [sic] a benefit”); id. at 3
(“The fact, simply, is that Defendant has not met its burden in order to have a dismissal herein,
except perhaps re Plaintiff’s Federal Claim.”)).
7

1
2
3
4
5
6
7
8
9

IV.

CONCLUSION
For the foregoing reasons, the Court GRANTS defendants’ motions to dismiss as follows:

The Court DISMISSES WITH PREJUDICE plaintiff’s cause of action under the federal securities laws
for failure to state a claim. The Court DISMISSES the balance of the action for lack of subject
matter jurisdiction. The Clerk shall close the file.
IT IS SO ORDERED.
Dated: December 16, 2016
______________________________________
YVONNE GONZALEZ ROGERS
UNITED STATES DISTRICT COURT JUDGE

10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
8