Opinion
Civil Action No. 2:18-cv-00804
07-02-2020
RAY BALESTRA, Plaintiff, v. CLOUD WITH ME LTD., et al, Defendants.
District Judge Mark R. Hornak
ECF No. 22
REPORT & RECOMMENDATION ON MOTION TO CERTIFY CLASS
I. RECOMMENDATION
For the reasons stated herein, it is respectfully recommended that the Motion for Class Certification filed by Plaintiffs, ECF No. 22, be granted. It is further recommended that Plaintiffs Olum and Balestra be appointed Class Representatives and that Levi & Korsinsky, LLP be appointed Class Counsel pursuant to Federal Rule of Civil Procedure 23(a), 23(b)(3), and 23(g).
II. FACTUAL AND PROCEDURAL HISTORY
This is a securities class action against Defendants Cloud With Me Ltd. ("Cloud" or the "Company"), Gilad Somjen ("Somjen"), and Asaf Zamir ("Zamir") (collectively, "Defendants"). The Complaint, filed on June 19, 2018, alleges that from July 25, 2017, through June 19, 2018 (the "Class Period"), Defendants offered and sold Plaintiffs and the Class (defined below) unregistered securities—in the form of Cloud Tokens ("CLD Tokens")—in violation of Section 12(a)(1) and 15(a) of the Securities Act of 1933 ("Securities Act") 15 U.S.C. §§ 771(a)(1), 772(a). ECF No. 1. Following repeated attempts to serve Defendants, all of which are located outside of the United States, service was effected on October 18, 2018. ECF No. 10. No response was filed to the Complaint by any of the Defendants and Motions for Default were filed on April 30, 2019. ECF Nos. 11,12,13. These were followed by Requests for Entry of Default, filed on May 1, 2019. ECF Nos. 14, 15, 16. Default against all Defendants was entered by the Clerk on May 3, 2019. ECF Nos. 17, 18, 19. The present Motion to Certify Class and to appoint Plaintiffs Olum and Balestra as Class Representatives and Levi & Korsinsky, LLP as Class Counsel pursuant to Federal Rule of Civil Procedure 23(a), 23(b)(3), and 23(g) was filed on March 12, 2020. ECF No. 22.
The Clerk of Court noted that the Motions were filed under the wrong event on May 1, 2019, prompting the revised filings.
The following factual summary of the claim is taken from Plaintiffs' Brief in Support of the Motion and is found to properly and adequately summarize the claims set forth in the Complaint at ECF No. 1:
Defendant Cloud is an Irish Private Company Limited that is a reseller of cloud services offered by large providers such as Google and Amazon. ¶ 19.2 Cloud also claims to be creating a decentralized cloud dubbed the "Cloud Crowd." Id. Defendant Cloud was founded by Somjen and Zamir. Id. ¶¶ 20-21. To raise capital to fund "the global Deployment of GridNodes infrastructure for migrating the web into a decentralized cloud," the Company offered and sold CLD Tokens. Id. ¶ 3. Between July 25, 2017 and August 25, 2017, Cloud's offer and sale of CLD Tokens raised at least $10 million in bitcoin ("BTC"), ethereum ("ETH"), fiat and other virtual currency investments. Id. ¶ 2. In connection with the Cloud ICO, Defendants released a white paper (the "White Paper") which described various aspects of Cloud's business model and purported benefits to purchasing CLD Tokens. ¶ 4. The White Paper claimed that CLD Tokens would derive their value primarily from becoming "the standard currency for the emergent decentralized cloud services ecosystem, governing contribution-based pro-rata payments, clearing and distribution of financial benefits to the new role players of the Crowd Cloud." Id. As the CLD Tokens purportedly became the "standard currency" for such services, it was expected to rise in value. Id. In an effort to further entice investors to invest in the Cloud ICO, Defendants made various claims to the public that the value of CLD Tokens was set to significantly increase due to the following reasons: (1) "Decentralized Cloud Services"; (2) "Earning Potential"; (3) "Immediate Liquidity"; and (4) "You Can Now Buy Tokens With a Credit Card." Id. ¶ 47. Plaintiffs each participated in the Cloud ICO and sustained financial harm as a result of Defendant Cloud's violations of the Securities Act and the Exchange Act. Id. ¶ 25; [ECF No. 5-1].
Plaintiffs' Brief in Support, ECF No. 23, pp. 3- 4.
III. STANDARD OF REVIEW
A party seeking class certification must first demonstrate that all requirements of Federal Rule of Civil Procedure 23(a) are satisfied. Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 345 (2011). These requirements are:
(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.Fed. R. Civ. P. 23(a). Named Plaintiff must then show that the class is maintainable under one of the types of class actions described in Rule 23(b). Wal-Mart Stores, Inc., 564 U.S. at 345. Plaintiffs in this case have chosen to proceed under Rule 23(b)(3), which requires a determination as to whether common questions predominate over any individual questions and whether the handling of the matter as a class action is superior to other available methods of resolving the controversy. A Rule 23(b)(3) class must also be "currently and readily ascertainable based on objective criteria." Marcus v. BMW of N. Am. LLC, 687 F.3d 583, 593 (3d Cir. 2012). To satisfy this standard, plaintiff must show that "(1) the class is defined with reference to objective criteria; and (2) there is a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition." City Select Auto Sales, Inc. v. BMW Bank of N. Am., Inc., 867 F.3d 434, 439 (3d Cir. 2017) (quoting Byrd v. Aaron's Inc., 784 F.3d 154, 163 (3d Cir. 2015)).
Plaintiff has the burden of making this showing and must do so by a preponderance of the evidence. Id. (citing Carrera v. Bayer Corp., 727 F.3d 300, 306 (3d Cir. 2013)).
Class action has been recognized as "a particularly appropriate means to resolve claims based on securities laws." In re Chambers Dev. Sec. Litig. 912 F. Supp. 822, 836 (W.D. Pa. 1995)(quoting Eisenberg v. Gagnon, 766 F.2d 770, 775 (3d Cir. 1985)). See also Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 345 (2005).
IV. ANALYSIS
A. Rule 23(a) Requirements
1. Numerosity
Rule 23(a)(1) requires that "the class is so numerous that joinder of all members is impracticable." Plaintiffs represent that they do not yet know the precise number of potential Class members but reasonably believe that there are thousands. ECF No. 23, p. 8. Courts in this District have found that if the potential number of class members exceeds 40, the first requirement of Rule 23(a) has been met. See e.g., Hayden v. Freightcar Am., Inc., No. 3:2007-21, 2008 WL 375762 at *9 (W.D. Pa. Jan. 11, 2008) (quoting Stewart v. Abraham, 275 F.3d 220, 226-27 (3d Cir. 2001)). As there has been no representation by Defendants, the Court must rely on the representations of Plaintiffs but sees no reason to find said representation to be false. The Court finds that this prong has been satisfied.
2. Commonality
Rule 23(a)(2) requires that "there are questions of law or fact common to the class." The Supreme Court has explained that the "common contention...must be of such a nature that it is capable of classwide resolution- which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke." Wal-Mart Stores, Inc., 564 U.S. at 350. The threshold for the commonality requirement in the Third Circuit is low. Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 183 (3d Cir. 2001). In addition, it is not required that all claims be identical and "factual differences among the claims of the putative class members do not defeat certification." See In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions, 148 F.3d 283, 310 (3d Cir. 1998) (quoting Baby Neal v. Casey, 43 F.3d 48, 56 (3d Cir.1994)). In this case, Plaintiffs advise that almost all of the questions of both law and fact are common to Plaintiffs and to all other purchasers of the CLD Tokens during the Class Period. These common questions include whether:
(i) Defendants offered and sold unregistered securities in violation of the federal securities laws; (ii) Plaintiffs and other Class members will suffer irreparable harm if such securities laws violations are not remedied; and (iii) the Class is entitled to compensatory, injunctive, and/or rescissory relief as a result of Defendants' wrongful conduct as alleged herein.
ECF No. 23, p. 10, citing to ¶25 of the Complaint, ECF No. 1. This is confirmed by an examination of the Complaint and the Court finds that the commonality requirement is satisfied.
3. Typicality
Rule 23(a)(3) requires that "the claims or defenses of the representative parties are typical of the claims or defenses of the class." "[E]ven relatively pronounced factual differences will generally not preclude a finding of typicality where there is a strong similarity of legal theories or where the claim arises from the same practice or course of conduct." In re NFL Players Concussion Injury Litig., 821 F.3d 410, 428 (3d Cir. 2016) quoting In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions, 148 F.3d 283, 311 (3d Cir.1998). Here, Plaintiffs allege that
Defendants violated the Securities Act's registration provisions by offering and selling unregistered securities (in the form of CLD Tokens) in connection with the Cloud ICO; and (ii) sustained damages as a result of their respective investments in the Cloud ICO during the Class Period as a result of the Defendants' wrongful conduct.
ECF No. 23, p. 11-12. Again, there is no argument to the contrary; however, the Court sees no reason to disagree with this conclusion from a reading of the claims presented. The Court finds that the typicality prong has been met.
4. Adequacy
Rule 23 (a)(4) requires the representative parties will fairly and adequately protect the interests of the class. The Third Circuit has made this a two-pronged inquiry: (1) whether the representative's interests are antagonistic to those of the class; and (2) whether the attorneys for the class representatives are capable of and qualified to represent the entire class. See Beck v. Maximus, Inc., 457 F.3d 291, 296 (3d Cir. 2006); Baby Neal for and by Kanter v. Casey, 43 F.3d 48, 55 (3d Cir. 1994). Plaintiffs argue that their interests are the same as those of the putative class members and they have a strong interest in establishing liability. They further allege that there are no conflicts between their interests and those of the putative class members. Plaintiff Onum was previously appointed Lead Plaintiff in this case. ECF No. 8. In addition, the proposed lead plaintiffs have provided Declarations that support their ability to prosecute the case on behalf of all class members. ECF Nos. 24-1, 24-3. As to the adequacy of representation by proposed class counsel, the Court has reviewed the Declaration of Attorney Yates, including the firm resume for Levi & Korsinsky, LLP, ECF No. 24, Ex. 3, and finds that the proposed firm has significant experience in litigating class action securities cases. Based upon the above, the Court finds that both proposed lead Plaintiffs and proposed class counsel will fairly and adequately protect the interests of the class and provide capable legal representation. Therefore, the adequacy prong has been met.
B. Rule 23(b) Requirements
Now that the Court has found that the Rule 23(a) prerequisites are met, it must examine the requirements of Rule 23(b)(3). That is, do common questions predominate over any individual questions and is the handling of the matter as a class action superior to other available methods of resolving the controversy. In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 533- 34 (3d Cir. 2004). The Third Circuit further requires that the class be currently and readily ascertainable and has held that, to satisfy this standard, plaintiff must show that "(1) the class is defined with reference to objective criteria; and (2) there is a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition." City Select Auto Sales, Inc., 867 F.3d at 439.
1. Common Questions/Predominance
As found above, common questions of law and fact exist in this matter. Further, Plaintiffs argue, these common questions predominate over any questions affecting only individual members. "The Rule 23(b)(3) predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem Prods, v. Windsor, 521 U.S. 591, 623 (1997). "Predominance is a test readily met in... securities fraud class actions." Id., at 625."The presence of individual questions does not per se rule out a finding of predominance" as long as "issues common to the class overwhelm individual issues . . . ." Neale v. Volvo Cars of N. Am., LLC, 794 F.3d 353, 371 (3d Cir. 2015). See In re Linerboard Antitrust Litig., 305 F.3d 145, 162 (3d Cir. 2002) ("Most courts have refused to deny class certification simply because there will be some individualized questions raised during the proceedings.").
Plaintiffs argue that the resolution of the common issues identified above will substantially resolve each individual claim of the class and, therefore, that there is a clear predominance of common questions over individual ones. From its review of the Complaint, the Court agrees and finds that Plaintiffs meet the predominance requirement of Rule 23(b)(3).
2. Superiority
Rule 23(b)(3) also requires a determination that the handling of the matter as a class action be superior to other available methods of resolving the controversy. Rule 23 outlines four factors relevant to this inquiry: (1) the class members' interests in individually controlling the prosecution or defense of separate actions; (2) the extent and nature of any litigation concerning the controversy already begun by or against class members; (3) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and (4) the likely difficulties in managing the class action.
There does not seem to be an interest in the individual control of the prosecution of the claims as each claim may be too small to warrant the effort required. If Plaintiffs are correct and there are thousands of individual claimants, the process of trying each claim individually would be entirely inefficient and unmanageable. See In re Flat Glass Antitrust Litig., 191 F.R.D. 472, 489 (W.D. Pa. 1999). Plaintiffs aver that there are no other actions begun by or against class members regarding this controversy. ECF No. 23, p. 29. The Complaint alleges that the conduct complained of took place in this District as a substantial number of the transactions took place here and Defendants received transfers of money by doing business here. ECF No. 1 ¶17.
The Court assumes that there will be some difficulties in managing this case, primarily because it involves an unusual form of investment, but certainly less so than managing the filing of possibly thousands of individual claims. The class process itself should not cause management difficulties. Individual proof of damages may be required but that does not alone make a class action unmanageable. See Flat Glass at 489. The Court therefore finds that handling this matter as a class action is superior to other methods.
3. Ascertainability
Plaintiffs argue that the class is ascertainable because the identity of the members can be determined by an examination of the books and records maintained by Defendants, investor trading records and records from virtual currency exchanges. ECF No. 23, p. 14. They further argue that potential class members will have access to trading records and will be able to self-identify as well as present proof of their investments. Id., p. 15. See Gonzalez v. Corning, 317 F.R.D. 443, 504 (W.D. Pa. 2016). Plaintiffs point out that there is publicly-available information through public blockchains for cryptocurrencies invested. ECF No. 23, p. 16. The fact that Defendants have not responded to the Complaint will hamper this to some extent; however, investor trading records and records from virtual currency exchanges may provide an adequate method of identifying members, and, of course, there is self-identification. According to Plaintiffs, Cloud ICO investors receive a Token Purchase Certificate that could be used to prove their purchases and claims. Examples of these certificates are attached to the Onum Declaration and referenced in paragraphs 8 and 9 of same. ECF Nos. 24-1, 24-2, 24-3.
See also Balestra Declaration, ¶¶ 7-8 and Exs. A-B, ECF Nos. 24-4, 24-6.
The District Court in Connecticut recently ruled on a motion for class action involving virtual currency. Audet v. Fraser, 332 F.R.D. 53 (D. Conn. 2019). That case provided a helpful overview of cryptocurrency that is informative on this issue. "Virtual currency is a digital representation of value that can be traded and functions as a medium of exchange." Id. at 59. "Each unit of virtual currency has a 'blockchain' that serves as an electronic public ledger of all transactions in that currency." Id.(internal citations omitted). The court in Audet found that that class members could be ascertained via investor records and pointed out that, to the extent class members could not provide proofs of their losses, their recovery would be limited or reduced. Id. at 73 (citing In re Digital Music Antitrust Litigation. 321 F.R.D. 64, 90 (S.D.N.Y. 2017)).
The Court finds, therefore, that the class is currently and readily ascertainable based upon objective criteria.
V. CONCLUSION
For the foregoing reasons, it is respectfully recommended that the Motion for Class Certification filed by Plaintiffs, ECF No. 22, be granted. It is further recommended that Plaintiffs Olum and Balestra be appointed Class Representatives and that Levi & Korsinsky, LLP be appointed Class Counsel pursuant to Federal Rule of Civil Procedure 23(a), 23(b)(3), and 23(g).
The undersigned granted a motion to appoint Onum as Lead Plaintiff and Levi & Korsinsky, LLP as class counsel on October 18, 2018. ECF No. 8. --------
In accordance with the Federal Magistrate Judge's Act, 28 U.S.C. § 636(b)(1)(B) and (C), and Rule 72.D.2 of the Local Rules of Court, the parties are allowed fourteen (14) days from the date of service of this Report and Recommendation to file written objections thereto. Any party opposing such objections shall have fourteen (14) days from the date of service of objections to respond thereto. Failure to file timely objections will constitute a waiver of any appellate rights. Dated : July 2, 2020
/s/_________
Lisa Pupo Lenihan
United States Magistrate Judge