Opinion
23-cv-7305 (CM)
10-09-2024
RICHARD HAWES, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ARGO BLOCKCHAIN PLC, et al., Defendants.
DECISION AND ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE AMENDED COMPLAINT
McMahon, J.:
Defendant Argo Blockchain plc (“Argo”) is a publicly traded UK-based cryptocurrency mining company. Plaintiff and the putative members of the class he represents in this garden-variety securities fraud class action are a group of investors who claim to have bought Argo's
American Depositary Receipts (“ADRs”) in Argo's U.S. IPO and in the aftermarket. Like many investors in the cryptocurrency arena, they lost money - specifically when, in mid-2022, Argo announced that unexpected increases in energy prices and a fall in the price of Bitcoin led to a decline in the price of Argo's shares and ADRs. Plaintiff alleges that Argo and its principals made false and misleading statements, both in its Registration Statement and following the IPO. These allegedly misleading statements dealt principally with Argo's capitalization and its ability to withstand adverse market conditions.
Predictably, these events spawned a securities fraud class action. It was filed on behalf of two proposed classes: those who purchased Argo ADRs in the IPO (which raised $114.8 million for Argo) and those who acquired Argo ADRs between September 23, 2021 (the date of the IPO) and October 10, 2022, the day before Argo's shares hit a low price of $2.19 following a series of negative announcements from the company.
In moving to dismiss the amended class action complaint, Defendants have helpfully created two appendices - one which lists each statement identified in the pleading as misleading in connection with the Registration Statement, and one which lists each statement identified as misleading following the IPO. In these appendices, Defendants identify the legal principles on which they rely to buttress their claim that the pleading is fatally flawed; these include failure to allege contemporaneous falsity and reliance on various types of statements that are not, by their nature, actionable - forward-looking statements, “puffery,” and statements of opinion or belief rather than fact. They also set forth, in copious detail, various cautionary statements found elsewhere in the Registration Statement or in Argo's subsequent public statements that render the allegedly misleading disclosures not misleading, either under the “bespeaks caution” doctrine (for statements made in the Registration Statement, which is subject to the 1933 Securities Act) or the “safe harbor” doctrine (for subsequent statements that are challenged as violative of Section 10(b) of the 1934 Securities Exchange Act and Rule 10(b)-5 thereunder). Additionally, Defendants argue that Plaintiff has not managed to plead facts giving rise to a credible inference of scienter on the part of any of the individual defendants.
I commend Defendants for doing what the court would otherwise have had to do - identify every statement that must be evaluated and the rules allegedly applicable to that evaluation. It is an ideal way to set up a motion to dismiss in a securities fraud case. It also makes it easier to evaluate Plaintiff's response to the motion.
As Defendants correctly point out in their Reply Brief, Plaintiff does not respond in similar fashion, by taking each of the 28 allegedly false or misleading statements identified in Defendants' appendices and explaining why Defendants' specific arguments about that specific statement are wrong. Plaintiff does specifically address the alleged pleading errors in six of the 28 alleged misstatements and offers a rebuttal to one of the disclosed risks identified in the Appendices. It would have been far more helpful to the court if Plaintiff had followed Defendants' lead.
Indeed, so helpful have I found the Appendices - and having independently hit, in another case, on the very same strategy of analyzing a motion to dismiss alleged misstatement by alleged misstatement - that I am inclined to make it a rule that all motions to dismiss in securities fraud cases be done in this format.
But Plaintiff applies one overarching argument to all the statements addressing Argo's access to power. He alleges that Argo told the market that it planned to enter into a long-term electric power supply contract (Fixed-Price PPA) with Texas' main electric grid operator, implying it met the requirements for purchasing a Fixed-Price PPA. In fact, Plaintiff alleges that Argo was at all times undercapitalized and so was not in compliance with the requirements for obtaining such a contract, a fact that Argo's leadership team had to have known. Plaintiff also claims that Argo falsely asserted, as a matter of fact, that it could control and manage the volatility in cryptocurrency pricing by engaging in planned selling of cryptocurrency over an extended period in advance of forecasted “fiat” cash requirements - a goal it was unable to achieve.
There are a number of terms used in the Amended Complaint and the alleged misstatements that may be unfamiliar to one uninitiated into CryptoWorld (which includes the court). “Fiat” currency is what I would call “real money” -currency that is backed by a government, such as dollars.
Although Plaintiff sufficiently pleads that two of Defendants' statements are false and/or misleading, he fails to demonstrate the requisite strong inference of scienter. As a result, the motion to dismiss is granted.
Because we have evaluated every statement that is alleged to have been false or misleading individually, I conclude that it would be futile for Plaintiff to try to file a second amended complaint to cure the pleading defects of the first, and I deny the “motion” inserted at the end of the Opposition Brief for leave to amend yet again.
DISCUSSION
The following are the rules of law the court will use to evaluate Defendants' arguments about why Plaintiff has failed to plead a viable claim under either Securities Act Section 11 or Exchange Act Section 10(b) and Rule 10(b)-5.
Falsity: Section 11 claims are subject to Rule 8(a)'s “short plain statement” rule and “Liability against the issuer of a security is virtually absolute, even for innocent misstatements,” if misstatements are made. Wang v. Cloopen Group Holding Ltd., 661 F.Supp.3d 208, 224 (S.D.N.Y. Mar. 16, 2023). However, the plaintiff must still allege facts tending to show that particular statements were false/misleading at the time they were made. Additionally, to state a claim under Section 10(b) of the Exchange Act, which is subject to the enhanced pleading requirements of Fed.R.Civ.P. 9 and the Private Securities Litigation Reform Act (PSLRA), the plaintiff must not only identify the statements that are alleged to be fraudulent but also “explain why the statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 172 (2d Cir. 2004); Lewy v. SkyPeople Fruit Juice, Inc., No. 11-cv-2700, 2012 WL 3957916, at *7 (S.D.N.Y. Sept. 10, 2012).
The mere fact that an adverse event occurred following the making of a statement to the market, whether in a Registration Statement governed by Section 11 of the Securities Act or a statement subject to Section 10(b) of the Exchange Act, is an insufficient basis from which to infer that the statement was false when made. “Hindsight pleading” - too frequently seen in securities fraud cases - is impermissible, as “without contemporaneous falsity there can be no fraud.” In re Lululemon Sec. Litigation, 14 F.Supp.3d 553, 571 (S.D.N.Y. Apr. 18, 2014), aff'd.604 Fed.Appx. 62 (2d Cir. 2015). “An earlier statement is not somehow made misleading simply because it failed to foretell a defect [or] problem which later materialized.” Panther Partners, Inc. v. Ikanos Commc'ns, Inc., 538 F.Supp.2d 662, 672 (S.D.N.Y. 2008), aff'd 347 Fed.Appx. 617 (2d Cir. 2009).
A plaintiff must, therefore, allege facts “from which the Court can reasonably infer that the statements were false at the time they were made.” Gross v. AT&T Inc., 19-cv-2892, 2021 WL 9803956, at *3 (S.D.N.Y. Sept. 27, 2021), aff'd sub nom. Steamfitters Loc. 449 Pension Plan v. AT&T Inc., 2022 WL 17587853 (2d Cir. Dec. 13, 2022).
However, if facts are pleaded tending to indicate that a speaker “did not hold the belief she professed,” the statement is actionable, because a statement that is not believed when made is a false statement. Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175, 186 (2015).
Materiality/Reasonable Reliance : Certain types of statements are categorically incapable of being “false” or “misleading” because by their very nature no reasonable investor would rely on them. These include “forward-looking” statements, “puffery” and statements of opinion.
Statements fairly characterized as “forward looking,” or predictive, are immaterial as a matter of law as long as they are accompanied by risk disclosure language that “sufficiently warns” an investor that these are not statements of existing fact and are subject to factors “that could cause actual results to differ materially.” 15 U.S.C. § 78U-5(c)(1)(A)(i). Such forward-looking statements are frequently couched in terms of belief or expectation; use of the phrases “we expect” or “we believe” is generally taken as an indication that a statement is forward looking - especially when the statement of expectation or belief is coupled with language explaining why things might not work out. See Medina v. Tremor Video, Inc., No. 13-cv-8364, 2015 WL 1000011, at *3 (S.D.N.Y. March 5, 2015), aff'd, 640 Fed.Appx. 45 (2d Cir. 2016). Statements of this nature are referred to as being protected by the so-called “bespeaks caution” doctrine (for statements made in a Registration Statement governed by the Securities Act of 1933, 15 U.S.C §§ 77a et seq.) or by the “safe harbor” provisions of the PSLRA, 15 U.S.C. § 78u-5(c)(1)(A)(i), which applies to claims asserted under the Securities Exchange Act of 1934, 15 U.S.C §§ 78a et seq. In either event, they are not actionable. See Wang, 661 F.Supp.3d at 230.
The same rule and the same protections apply to statements that qualify as “puffery,” or corporate optimism - statements that are not “sufficiently specific for an investor to reasonably rely on that statement as a guarantee of some concrete fact or outcome.” City of Pontiac Policemen's & Firemen's Ret. Sys., v. UBS AG, 752 F.3d 173, 185 (2d Cir. 2014). Again, the use of phrases like “we expect” or “we believe” are signs of puffery, since “such language, at a minimum, signals to prospective investors that the predictions of the Company may not come to fruition.” Ladmen Partners, Inc., v. Globalstar, Inc., No. 07-cv-0976, 2008 WL 4449280, at *13 (S.D.N.Y. Sept. 30, 2008). Statements expressing a general view that “things are going well,” that a company is “well positioned,” or that a year was “successful” are also generally deemed to be puffery, and hence non-actionable. City of Warwick Mun. Emps. Pension Fund v. Rackspace Hosting, Inc., No. 17-cv-3501, 2019 WL 452051, at *4 (S.D.N.Y. Feb. 5, 2019).
As a general rule, statements of opinion, rather than actual fact, are not actionable. See Omnicare, 575 U.S. at 186. This is because opinions are “not quantifiable” and “are subject to interpretation.” Altayyar v. Etsy, Inc., 242 F.Supp.3d 161, 174 (E.D.N.Y. Mar. 16, 2017), aff'd 731 Fed.Appx. 35 (2d Cir. 2018). However, as the Supreme Court cautioned in Omnicare, an opinion can be the basis for a securities fraud claim if an “omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” Omnicare, 575 U.S. at 194.
Scienter: In order to state a viable claim under the Exchange Act (but not the Securities Act), a plaintiff must allege facts from which a trier of fact could infer that the misstatement was made with scienter - that is, with knowledge of the statement's incorrectness and/or a motive to lie or misstate. It is well settled that the pleaded facts, if circumstantial (as they often are), must give rise to a “strong inference” of conscious misbehavior or recklessness. Tellabs, Inc., v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23 (2007). “Under [the] heightened pleading standard for scienter, a ‘complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.'” Slayton v. Am. Exp. Co., 604 F.3d 758, 766 (2d Cir. 2010) (quoting Tellabs, 551 U.S. at 324).
Specific factual allegations about events such as “suspiciously timed” stock sales by corporate executives, In re Oxford Health Plans, Inc., 187 F.R.D. 133, 139 (S.D.N.Y. June 8, 1999), or dramatic errors in public announcements, see Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 195 (2d Cir. 2008), are generally thought of as giving rise to a strong inference of scienter by speakers, because they are indicative of a motive to lie or shade the truth. However, any circumstances that strongly evidence conscious misbehavior or recklessness can give rise to a viable allegation of scienter when “viewed holistically and together with the allegations of motive and opportunity.” New England Carpenters Guaranteed Annuity & Pension Funds v. DeCarlo, 80 F.4th 158, 177 (2d Cir. 2023).
As mentioned above, the moving Defendants have provided the court with two appendices. Appendix A identifies every allegedly false and misleading statement in the Registration Statement; Appendix B identifies every subsequent disclosure, whether oral or written that Plaintiff alleges to be false or misleading. The appendices will be added to the back of this opinion: the reader can refer to them as necessary. In the text of the opinion, the statements will simply be identified by Appendix (A or B) and statement number (1, 2, . . . n).
I. All Claims Asserted Under Section 11 the Securities Act of 1933 Are Dismissed With Prejudice and Without Leave to Amend
The reader is referred to Appendix A for the text of the referenced statements.
Statement A1 (AC ¶ 69): The statement in essence says that the issuer “believes” that “power efficiency” will become increasingly important “over the long term,” and indicates that Argo is “focused” on deploying mining machines at locations with access to reliable, renewable power sources in order to “reduce our power costs.” To the extent that this constitutes a statement of present fact - as opposed to a statement of belief that is subject to the bespeaks caution doctrine - not a single fact is pleaded tending to show that the statement is untrue. In fact, Plaintiff pleads facts tending to show that Argo located its mining machines in Texas, where there appeared to be extensive reliable power sources, some of them (including nuclear power) renewable. This means the Amended Complaint actually alleges that the statement is true. The Amended Complaint also contains an extended discussion of the favorable market and political conditions that would allow cryptocurrency miners to obtain plentiful electric power in West Texas. (See, e.g., AC ¶ 53.) Plaintiff alleges no facts from which it could be inferred that Texas was not a place where reliable renewable power sources existed, or that Defendants intended to build facilities anywhere else.
Moreover, this disclosure was accompanied by substantial risk disclosure language, including caveats about Argo's ability to build in Texas (which was not, in the end, its problem) and its ability to obtain electricity from “intermittent” and “variable” renewable energy sources “which may not always be available” at a sufficiently attractive cost - especially given the “unpredictable” nature of power cost fluctuations and state and local regulations. Argo disclosed that any failure to obtain sufficient power on terms and conditions that were “economic and practicable” would have a material adverse impact on its business results.
To the extent that Plaintiff argues that A1 is not subject to the bespeaks caution doctrine because of some undisclosed facts that would tend to seriously undermine the accuracy of the statement, he neither identifies what facts those are nor explains how Defendants were aware of them. See In re HEXO Corp. Sec. Lit., 524 F.Supp.3d 283, 302 (S.D.N.Y. Mar. 8, 2021). Significantly, the undisclosed statements cannot be about the impossibility of obtaining Fixed-Price PPA contracts, because literally nothing in the Registration Statement identifies such contracts, or any other specific method, as the way that Argo intended to obtain the electric power it needs. Rather, the Registration Statement repeatedly insists that Argo did not know whether it would be able to obtain power at a price it could afford. No reasonable investor could have been misled into thinking otherwise.
Plaintiff's pleading does not specify what he is talking about, so I am only guessing what the “undisclosed facts” might be or to what they might relate.
I thus agree with Defendants that Statement A1 is not actionable for failure to allege falsity, and as forward looking under the bespeaks caution doctrine. The statement is not “puffery.”
Statement A2 (AC ¶ 70): This statement says that Argo “aims” to optimize its mining by identifying and purchasing the most profitable mining machines with industry-leading return on investment, and then actively monitoring and adjusting the operation of those machines to enhance their performance - a strategy that Argo “believed” would enable it to build value over the long term. This is the quintessential forward-looking statement. Plaintiff does not allege that Argo really did not intend to identify and purchase the best machines in the industry, or even that Argo did not actually purchase the machines it thought were the best in the industry - which, by the bye, is no doubt a matter of opinion. Moreover, Argo sufficiently qualified its hope that the strategy of buying the best mining machines would “build value over the long term” by indicating that it was difficult to evaluate its prospects (for building value over the long term), given its lack of any operating history and the fact that its business model was “evolving” and “subject to various uncertainties.” Indeed, Argo actually said, “from time to time, we may modify aspects of our business model relating to our strategy. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to our business.” And once again, Argo announced that it might not be able to obtain electricity at a “sufficiently firm and unrestricted basis or at a price that we are willing to pay.” Investors were clearly warned that this was a novel and risky investment.
The same failure to plead what facts undermining the accuracy of Statement A2 Defendants knew but failed to disclose dooms Plaintiff's argument that this statement is not subject to the bespeaks caution doctrine.
Statement A3 (AC ¶ 71): This statement effectively combines aspects of Statements A1 and A2 - it says that Argo is investing heavily in purchasing, building and operating its mining facilities and states that owning and operating machines that can readily access low cost renewable power, in areas where there is room to expand, will offer competitive advantages. It is qualified by the disclaimer that there are many risks inherent in the development of a new cryptocurrency facility in Texas (where renewable power is ostensibly plentiful and renewable) - risks that cannot be predicted and that could negatively impact Argo's bottom line. Contrary to Plaintiff's position, the fact that portions of this statement deal in present facts (Argo is investing heavily in purchasing and building and operating its mining facilities) does not remove this statement from the bespeaks caution doctrine, since, fairly read and in context, the entire statement represents a gauging of future possibilities in light of some present fact that is not alleged to be untrue. As a result, Statement A3 qualifies as forward looking with qualification, and is not actionable. See Gissin v. Endres, 739 F.Supp.2d 488, 505 (S.D.N.Y. Sept. 1, 2010).
The same failure to plead what facts Defendants knew but failed to disclose that would seriously undermine the accuracy of Statement A3 dooms Plaintiff's argument that this statement is not subject to the bespeaks caution doctrine.
Statement A4 (AC ¶ 73): This statement couples an assertion of fact (“Since our inception, we have financed out operations primarily through cash generated by sales of cryptocurrency and sales of equity securities. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes.”) with a statement of belief about future prospects (“We believe that our sources of liquidity and capital resources will be sufficient to meet our existing business needs for at least the next 12 months.”) Nowhere does Plaintiff allege that the provably factual statements about Argo's operations funding or its liquidity requirement are either untrue, or were believed by Argo's management to be untrue at the time the Registration Statement was declared effective (September 22, 2021). The lengthy disclosure of the difficulty of evaluating the future prospects of an untried and untested business provides a more than sufficient caveat to the forward-looking prediction that Argo “believes” its fiscal resources can get it through the first year following the public offering. And while Plaintiff is correct when he asserts that Argo did not disclose that it did not have sufficient liquidity and capital resources to fund operations beyond that 12 month period, Argo was not required to make such a prediction. Moreover, given the extensive cautionary language about the volatility of both the cryptocurrency and energy markets, it would likely have had no basis to do so. The fact that Argo did not care to make predictions more than a year out from the IPO does not render its prediction about having enough capital to get through those first 12 months either false or not forward looking. Argo's cautionary disclosures and its reluctance to claim too much was borne out by the undeniable (indeed, pleaded) facts that the cryptocurrency market had a very good year in 2021, when Bitcoin hit a historic high - but cratered (for Argo and everyone else) in 2022, months after the IPO took place.
Statement A5 (AC ¶ 74): This statement indicates that, in order to control and manage the (fully disclosed) volatility in cryptocurrency pricing, Argo engages (statement of fact) in planned selling of cryptocurrency over an extended period in advance of forecasted fiat cash requirements, and that it expected (forward looking) to be able to sell Bitcoin to satisfy those requirements.
Plaintiff alleges that Argo failed to disclose that it could not control and manage the volatility in cryptocurrency pricing. There are two problems with that argument. First, the Registration Statement specifically and repeatedly disclosed that Argo's results had fluctuated and likely would continue to fluctuate in the future because of that very volatility - an admission that, while Argo might try to control and manage volatility, it could offer no guarantee that its efforts would be successful. Second, Argo specifically disclosed that the primary source of its revenues came from the sale of Bitcoin specifically, and announced that if the price of Bitcoin were to decline - as it did during 2022, well after the effective date of the Registration Statement - Argo's revenues could be adversely affected. The statement about Argo's planned strategy for controlling market volatility is not alleged to be false (because there is no allegation that Argo did not plan to try to control volatility by engaging in the planned selling of Bitcoin), and to the extent it is forward looking, it falls comfortably within the bespeaks caution doctrine. Again, Plaintiff has not identified a single fact that was in existence on the effective date of the Registration Statement that would have rendered Argo's disclosures untrue or misleading but that was not disclosed in the Registration Statement.
Statement A6 (AC ¶ 75): This last allegedly false statement in the Registration Statement reads as follows: “Argo's ‘investments in mining facilities are designed to significantly expand our mining capacity and provide us with meaningful control over our mining operations.'” Defendants claim that this statement is not alleged to be false; they are correct. Plaintiff fails to allege any fact tending to show that Argo's investments were not in fact “designed” to allow the company to significantly expand its mining capacity, or to provide it with meaningful control over mining operations. But many a rocket ship “designed” to blast into orbit has blown up on the launch pad; saying that something is “designed” to achieve certain goals does not either expressly or impliedly guarantee that those goals will be achieved. Moreover, this disclosure was accompanied by appropriately meaningful risk disclosure language about the possibility of changes to Argo's evolving business model and the ongoing fluctuation in its operating results “due to the highly volatile nature of digital assets.”
Post-Registration Evidence Does Not Change This Result: Plaintiff attempts to buttress his assertion that the Registration Statement was materially false and misleading on September 22, 2021 by citing to information received from Confidential Witnesses who were employed by Argo. However, the allegations relating to the CWs all relate to the period after the effective date of the Statement. For example, CW-1 allegedly had concerns about Argo's financial status when machines sat in a warehouse without being deployed. Unfortunately for Plaintiff, this occurred after the effective date of the IPO. No facts are alleged tending to show that, as of September 22, 2021, anyone at Argo knew that, at some point in the future, machines would be warehoused. In fact, the Amended Complaint affirmatively pleads that CW-1 - and all the other Confidential Witnesses - did not start working at Argo until 2022, well after the IPO took place. (AC ¶ 37)
Plaintiff also relies on an October 2022 report from Barclays Bank, which indicated that it was awaiting “clarity” about Argo's ongoing financial and operational difficulties. But that report came thirteen months after the effective date of the IPO. The Amended Complaint alleges numerous facts that occurred during those thirteen months - principally a precipitous decline in the price of cryptocurrency generally and Bitcoin in particular starting around May 2022, which is long after the IPO closed. These allegations plausibly tend to indicate that Argo's financial situation and prospects would have looked considerably different in October 2022 than they did in September 2021. While Plaintiff is correct that subsequent developments can sometimes be indicative of known problems in the past, see, e.g., In re Didi Glob. Inc. Sec. Litig., No. 21-cv-05807, 2024 WL 1119483, at *19 (S.D.N.Y. Mar. 14, 2024), that is not the most logical inference one can draw from the pleading he has crafted - a pleading that acknowledges that Bitcoin hit a historic high in the months after the IPO, only to crash in the following year. Indeed, the Amended Complaint affirmatively alleges that, in 2021, Argo both ran a profitable business and raised a significant amount of capital. (AC ¶ 128)
In sum, Plaintiff has failed to plead a viable claim that the Registration Statement was false or misleading on the date it became effective - September 22, 2021 - in violation of 15 U.S.C. § 77(k). That being so, his claims under Section 11 must be dismissed. Because, after exhaustive analysis of each of the allegedly false statements, I conclude that there is no reasonable possibility that further amendment of the Amended Complaint would do anything other than lead to another successful motion to dismiss - with consequent waste of scarce judicial resources - I deny Plaintiff leave to further amend his pleading. All claims relating to Section 11 of the '33 Act are dismissed with prejudice.
II. All Claims Asserted Under Section 10(b) of the Securities Exchange Act of 1934 Are Dismissed With Prejudice and Without Leave to Amend
The reader is referred to Appendix B for the text of the referenced statements.
a. Falsity
Appendix B identifies a total of 22 allegedly false or misleading statements that were made by or on behalf of Argo during the 13 months between the IPO and the last date of the proposed Class Period for the Exchange Act Class (October 10, 2022). In his responsive brief on the motion, Plaintiff does not address most of these statements individually. Instead, he classifies those statements into two groups: (1) statements about Argo's financial condition, and (2) statements about its access to power. Although Plaintiff does not choose to analyze every one of the 22 identified misstatements alleged in the Amended Complaint (and included in Appendix B), the court concludes that the statements that fall into the former group are B1, B3, B5, B6, B8, B9, B12, B13, B14, B15, B16, B17, B18, B19, B20, B21, and B22. In the second category are Statements B2, B4, B7, B10, and B11.
Plaintiff argues generally that the statements about Argo's financial condition were false and misleading because Argo failed to disclose that it was undercapitalized and had far too little cash on hand to operate the Helios Facility and withstand any setbacks that might occur in the volatile energy and Bitcoin markets.
Plaintiff argues generally that the statements about Argo's access to power were false and misleading because its management team was aware that Argo could not access power using a Fixed-Price PPA.
So let us begin by examining the statements that relate to Argo's financial condition.
Statement B1 (AC ¶ 130): In this statement, made on an earnings conference call on November 2, 2021, Argo (in the person of Defendant Alex Appleton, the CFO of the company) represented that the company was strengthening its balance sheet, “ha[s] very little debt overall” and that this fact, coupled with a lease, a mortgage, a Bitcoin backed loan, “cash on hand, and our hodl,” gave Argo “sufficient flexibility to pursue our strategic growth plans in Texas, infrastructure, and machines, et cetera.” Plaintiff does not allege that any of these statements is untrue, or plead facts tending to show that Argo had excessive debt, or did not have a lease or a mortgage or the proceeds from a Bitcoin-backed loan. What Plaintiff alleges, in essence, is that possessing these resources did not give Argo “sufficient flexibility” to pursue its strategic vision in the volatile cryptocurrency field. As noted above, Plaintiff identifies the “flaw” in this statement as Argo's failure to disclose that it was undercapitalized and did not have enough cash on hand to operate the Helios Facility in West Texas or to withstand the “foreseeable” vicissitudes of the cryptocurrency business.
“Hodl” as used in that statement is not a typo. HODL is an acronym commonly used in the cryptocurrency business to describe a particular business strategy. It means “hold on for dear life” and refers to a long-term investment strategy of holding onto cryptocurrency through price fluctuations, rather than selling if the price begins to sink. See, www.investopedia.com/terms/h/hodl.asp (last consulted Oct. 9, 2024). Plaintiff pleads this in its Amended Complaint (AC ¶ 125), and in his response to the motion, Plaintiff identifies Argo's “hodl” as Argo's stockpiled Bitcoin. See Plaintiff's Brief in Opposition (Dkt. # 54) at 13.
But the statement, “We have flexibility” is not capable of being a material misstatement. It is classic puffery and forward looking, predictive of Argo's ability to pivot in the future. The only question is whether this statement falls within the PSLRA's safe harbor because it was accompanied by sufficient risk disclosure. The answer is yes. While opining that Argo had “a decent war chest in this business,” the company also admitted that Argo did not have “the same kind of huge amounts of cash in the bank that some of our peers had” to operate in what Argo described as “an expensive business . . . a capital-intensive business.”
Statement B3 (AC ¶ 133): In an interview with CNBC on December 21, 2021, Defendant Peter Wall (the CEO of the company) said, “Argo was ‘extremely on the profitable end of things right now.'” (Emphasis added) Any allegation that this statement is false cannot be reconciled with the pleaded fact, found at AC ¶ 128, that Argo was running a profitable business at the end of 2021. December 21, 2021 is at the end of 2021. To the extent Wall used the word “extremely,” the adjective is mere puffery. Wall did not represent that Argo would be “extremely on the profitable end of things” in the future - he limited his comment to “right now.” The facts pleaded in the Amended Complaint support a conclusion that this was true.
The argument that the statement was misleading because of Argo's failure to contextualize it by announcing that it was undercapitalized and had insufficient cash to run its business while dealing with volatile markets does not hold water. This is a statement about Argo's profitability -a provable fact. Plaintiff concedes that Argo was profitable at the end of 2021. Nothing in this statement purports to predict Argo's future profitability, so the statement cannot be misleading for failing to point to things that might or might not happen in the future. And if such disclosure were somehow called for, not a single fact is alleged tending to show that Wall believed Argo to be undercapitalized.
Statement B5 (AC ¶ 137): After Appleton lauded a “really pleasing year, and one we're really proud of” - which is a demonstrably true statement, assuming (as I must on this motion) that the allegations of AC ¶ 128 are true - Wall opined that Argo was “well-positioned to continue . . . a very profitable level;” that it had entered into a number of private placements, which strengthened its balance sheet; and that the company's balance sheet at the end of 2021 was stronger than it was a year earlier. The last statement is unquestionably true as a matter of simple fact. Based on the allegations of AC ¶ 128, Argo did have a stronger balance sheet year over year comparing 2021 to 2020; nothing in the Amended Complaint suggests otherwise. Nor does Plaintiff challenge the provable fact that Argo had entered into private placements, which generated funds it could use in its business.
So we are left with the statement that Argo was “well positioned” to continue as a profitable enterprise. That statement of belief is both forward looking and puffery. Nor is it unqualified: in the same conference call, Argo disclosed that the company would require an additional $125 million in capital to complete Phase 1 of the Helios Project - an amount it hoped to raise by issuing and selling some Bitcoin. Furthermore, the entire statement about the strength of Argo's position is modified by the caveat “where we stand today” - today being April 28, 2022. The Amended Complaint alleges no fact tending to indicate that any of the unfavorable developments that were about to upend Argo's forecasts had already occurred by April 28 or were predicted to occur.
Statement B6 (AC ¶ 139): In its Form 20-F, filed with the SEC on May 2, 2022, Argo indicated that it believed that its sources of liquidity and capital resources (identified as cash generated by sales of cryptocurrency and equity securities) would be sufficient to meet the company's existing needs for the next 12 months - a statement identical to one made eight months earlier in the Registration Statement. (Statement A4) No facts are alleged tending to show that Argo's leadership team did not in fact harbor such a belief, or that it would have been unreasonable for them to do so as of May 2, 2022. For example, there is no allegation that Bitcoin's price (which, per publicly available research sites, hovered between $40,000 and $50,000 during April, the month immediately preceding the filing of this 20-F) had declined to such a level as to render it unlikely that Bitcoin sales would provide Argo with the liquidity it required. Of course, in the immediately succeeding weeks the bottom would indeed fall out of the Bitcoin market - but the issue for our purposes is whether the statement (of belief) was untrue when made on May 2. While Plaintiff alleges that this statement was misleading because it failed to disclose that Argo was undercapitalized and did not have enough cash to continue operations, not a single factual allegation in the pleading suggests that anyone believed that, or had reason to believe it, on May 2.
See https://finance.yahoo.com/quote/BTC-USD/history/?period1=1648771200&period2=1653955200 - for the period April 1, 2022 to May 31, 2022 (last consulted Oct. 9, 2024). The court takes judicial notice of the price of Bitcoin, which is a publicly available fact.
Additionally, the predictive statement falls within the PSLRA safe harbor. Argo disclosed in the same filing that (1) its operating results fluctuated and might continue to fluctuate due to the volatility of digital assets; (2) its total revenue and cash flow was substantially dependent on the market value of its Bitcoin and the volume of Bitcoin it could profitably mine; (3) its results and financial condition would be adversely affected by a decline in either the market value of Bitcoin or the amount the company could mine; (4) there was no assurance that Bitcoin would maintain its value or that there would continue to be a market for it. These are meaningful caveats modifying the prediction that Argo would have the cash and liquidity it needed to operate the business.
Statement B8 (AC ¶ 142): Here, Appleton stated, during a May 18, 2022 first quarter earnings conference, that the company was in a “healthy position” in terms of its hodl, and so was “well positioned” to fill the gap of $50 million that was needed to “build out the rest of phase 1” of Helios. Appleton also stated that “every day we mine more and more Bitcoin, and so that position, is is, you know, improves with every day that passes.” These statements were qualified by the admission that “our overall margin is obviously determined by . . . price of bitcoin, power costs and mining difficulties” and that Bitcoin's price had been “volatile” over “the last few weeks.”
In fact, although the Amended Complaint does not specifically allege this, Bitcoin's price had declined by almost $10,000, or 25%, in the two and one half weeks since the 20-F was filed on May 2. See https://finance.yahoo.com/quote/BTC-USD/history/?period1=1648771200&period2=1653955200 - for the period April 1, 2022 to May 31, 2022 (last consulted Oct. 9, 2024).
Saying that the company was in a “healthy position” or “well positioned” to be able to raise the money it needed in order to complete construction of Helios phase 1 is a statement of opinion. Bitcoin's price decline was a matter of public record which the company certainly did not need to disclose (though admitting to price volatility is effectively a disclosure that the price had fallen). The remainder of the statement, that Argo continued to mine additional Bitcoin each day, is a provable fact that Plaintiff does not challenge.
Plaintiff pleads that the above-discussed statements were reflected in favorable analyst reports on Argo that came out in May 2022. (AC ¶ 144) However, June 7, 2022 was, according to Plaintiff, a key date in the Argo story - the date on which the market began learning that things at Argo were not as rosy as its management had been predicting. In a press release issued that day, Argo disclosed that it had mined 25% fewer Bitcoin in May 2022 than it had in April, allegedly due to a confluence of factors, including increased market difficulty, a heat-induced power demand surge in Texas that led the company to cut back on its mining operations, and unplanned downtime at Helios. The following statements about Argo's finances were made contemporaneously with or after the June 7 press release.
Statement B9 (AC ¶ 145): In an interview on the Wolf of All Streets You Tube channel on June 7, the day of the press release, Wall stated, “we feel like we've got an awesome path to capital, to get us to the kind of growth that we need to fully build out the next 800 megawatts over the next couple of years.” This statement is not actionable because it is a statement of opinion about getting to “the kind of growth that we need” over the “next couple of years;” it is not a factual statement about current conditions.
Statement B12 (AC ¶ 152): In a CoinDesk interview on June 9, Wall said that Argo had never set unrealistic expectations for the future or overpromised, noted that the market had turned bearish, and said “I like where we're positioned.” Without opining one way or another on the issue of actual falsity, this statement - “I like where we're positioned” in a bearish market where “the strong survive” - qualifies as non-actionable puffery.
Statement B13 (AC ¶ 153): At a Q&A session after the company's June 29, 2022 Annual Meeting, Wall said “on top of a kind of low cost of production, our balance sheet is also strong enough to be able to withstand lower prices . . . so we feel like we're in a really good place as a miner, we feel like we're really well positioned, and that's a testament to the work that we did in 2021, and to really kind of overdelivering and under promising, which has kind of been the theme for us for the first half of this year.” Defendants insist that this statement is not false, and consists principally of puffery and opinion. I disagree in part. While statements about the balance sheet's being strong enough to withstand lower prices and being well positioned are indeed opinion and puffery, June 29, 2022 was at the end of the second quarter. The price of Bitcoin was continuing to drop; the company had already disclosed that its mining operations had to be cut back and its second quarter margins were declining. Yet Wall stated that the company had been “overdelivering and under promising” - a strange statement to make in light of those developments. “While statements containing simple economic projections, expressions of optimism, and other puffery are insufficient,” defendants “may be liable for misrepresentations of existing facts” where a complaint alleges “that the defendants did more than just offer rosy predictions; the defendants stated that [a] situation was ‘in good shape' or ‘under control' while they allegedly knew that the contrary was true.” Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000). Not only does Wall's statement tout Argo's strong returns in 2021, but it also explicitly states that Argo's theme of overdelivering continued throughout “the first half of [2022]” - a period that undeniably covers Argo's “underdelivering” on Bitcoin mining in May 2022 and beyond. For that reason, though it is a close call, Plaintiff has demonstrated that this statement is sufficiently false and/or misleading to move onto the next stage of analysis.
Statement B14 (AC ¶ 153): At the same Q&A. session, Appleton reminded analysts that “We own our own infrastructure. We are close to our machines. This gives us more control in a bear market. We've talked about the runway before . . . we're in a really good place from that point of view . . . maintaining that economic advantage over our peers and the mining margins that you see that we can achieve using our own equipment and from our own facility. So we are well placed.” In effect, Appleton said that Argo had advantages over its peers because it had its own facility and equipment.
This statement is not actionable. Defendants are certainly correct that it is not false for Argo to say that it owns its own infrastructure, or to opine that this gives it an economic advantage over its peers. No facts are pleaded tending to show that Appleton did not believe that Argo had an advantage over its peers. To the extent that Appleton used the now-familiar phrase “we are well placed,” he was offering an opinion, nothing more.
Statement B15 (AC ¶ 155): In this statement, made in a Q&A. session after the Annual General Meeting on June 29, 2022, Wall explained that Argo had already paid for 90% of the machines for the Helios facility and that 95% of the facility was paid for, which meant that the first 3.6 exahash from those machines was on track and paid for. These are all statements of fact -indeed, of past fact - and there is not a single allegation in the Amended Complaint tending to show that any of these assertions of fact was untrue. Plaintiff does not specifically assert in the Amended Complaint that these statements of fact were false or that they were required to be contextualized by disclosures about undercapitalization and an inability to withstand future fluctuations in energy markets and cryptocurrency prices. There is no such requirement.
A “hash” is a mathematical function that converts an input of arbitrary length into an output of fixed length. See https://www.investopedia.com/terms/h/hash.asp (last consulted Oct. 9, 2024). “Exahash” refers to one quintillion hashes. See https://www.investopedia.com/hash-rate-6746261 (last consulted Oct. 9, 2024).
Statement B16 (AC ¶ 156): At a June 23 web conference, Wall - after indicating that the company had $100 million in revenue the previous year (an ascertainable and apparently true fact) - asserted that first quarter margins were “very strong” and had been “in the top echelon amongst our peers;” he further opined that this was because Argo was “being efficient on our costs, making sure that we have some of the lowest costs in this space for operations.” The Amended Complaint contains no allegation tending to show that Argo was not in the top echelon among its peers or that the company did not have some of the lowest operating costs in the space, so there is no allegation that the statement was false when made. Moreover, to the extent that this constituted bragging about Argo's relative position in the market, it is puffery. This statement is not rendered false or misleading because Argo did not reveal that it was undercapitalized or unable to withstand future fluctuations; the statements Wall made (aside from the phrase “very strong”) are statements of past or present fact that are capable of being ascertained.
Statement B17 (AC ¶ 158): In its July 7 press release, Argo indicated “the Company is confident that it possesses sufficient liquidity to avoid any potential liquidation” of its Bitcoin-backed loan “if Bitcoin prices continue to decline.” The press release also noted that the company had been “using derivatives to limit downside risk” since Q4 of 2021. Plaintiff argues that this statement of confidence should have been qualified by the disclosure that Argo was undercapitalized and unable to withstand market vicissitudes, and in addition to this oft repeated language, adds that Argo's costs had “spiraled out of control” by the time the statement was released. No facts are pleaded tending to show that Argo had not in fact been using derivatives since the fourth quarter of 2021. But, while statements of confidence are ordinarily deemed puffery, a company's statement that it is “confident of its capacity to meet its anticipated obligations” - like possessing sufficient cash on hand to avoid any potential liquidation of a Bitcoin-backed loan -can be false or misleading when made against the backdrop of an alleged liquidity crisis. In re Vivendi Universal, S.A. Sec. Litig., 381 F.Supp.2d 158, 181 (S.D.N.Y. Nov. 3, 2003); see also Bratusov v. Comscore, Inc., No. 19-cv-3210, 2020 WL 3447989, at *9 n.6 (S.D.N.Y. June 24, 2020). Assuming, as we must at this stage, the accuracy of Plaintiff's allegations that Argo had “too little cash on hand” and costs that had “spiraled out of control,” Plaintiff plausibly alleges that Argo's statement of confidence about avoiding any potential liquidation was false and/or misleading when made. See Novak, 216 F.3d at 315. This statement advances onto the next stage of analysis.
Statement B18 (AC ¶ 158): The same press release quotes Wall as saying, “We have seen positive results from our risk management strategy through which we have reduced the Company's exposure to its [Bitcoin]-backed loan, and we have hired a full-time derivatives trader.” These are statements of ascertainable fact, and no facts are alleged to indicate that they are untrue - that is, that the company had not hired a full-time derivatives trade or seen positive results from its risk management strategy. Wall went on to repeat that “We believe” that Argo “is well positioned to navigate the current market conditions and further increase our efficiencies” - a statement of opinion that is not capable of being materially misleading.
Statement B19 (AC ¶ 161): Statement B19 is actually a series of statements that appear in Argo's August 24, 2022 Form 6-K. The verbiage identified as false and misleading - again, due to Argo's failure to disclose that it was undercapitalized and unable to withstand market vicissitudes - includes the following:
• “Argo is well positioned to weather the current downturn with its large and highly efficient mining infrastructure, runway for growth, and experienced management team, which has successfully navigated the Group through previous crypto winters.” As with many statements in which Defendants claim to be “well positioned,” this statement is one of belief that is not actionable, being both forward looking and puffery.
• “In response to the challenging market environment, we have adjusted our treasury management strategy.” That Argo altered its treasury management strategy is a provable fact, the falsity of which Plaintiff does not allege.
• “Despite the challenging economic environment in 2022, we continue to focus on our strategic priority of completing Phase 1 of Helios and laying the groundwork to further scale operations.” Once again, to the extent that this statement regarding Argo's focus constitutes a statement of present fact, not a single fact is pleaded tending to show that the statement is untrue.
• The 6-K also contains a statement of responsibility in which management “confirm[s] that to the best of our knowledge . . . the Interim Report . . . gives a true and fair view of the assets, liabilities, financial position and profit/loss of the Group.” Where Plaintiff has failed to allege a false or misleading statement in an underlying filing, a certification attesting to the truth of that filing cannot form an independent basis for liability. This follows from this district's consistent rule that a bare allegation regarding similar certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745, “adds nothing.” Rosi v. Aclaris Therapeutics, Inc., No. 19-cv-7118, 2021 WL 1177505, at *21 (S.D.N.Y. Mar. 29, 2021). “Either the SEC filings contain materially misleading statements (in which case those statements can form the basis for liability) or they do not contain such statements.” Id.; see also In re Glob. Brokerage, Inc., No. 1:17-cv-00916, 2019 WL 1428395, at *14 (S.D.N.Y. Mar. 28, 2019); In re Adient plc Sec. Litig.,
No. 18-cv-9116, 2020 WL 1644018, at *24 (S.D.N.Y. Apr. 2, 2020). Because Plaintiff has “not sufficiently alleged that Defendants made any false or misleading statements with respect to [the underlying filing], Defendants cannot be held liable for their [] certifications on the basis that they failed to disclose issues related to that area.” Adient, 2020 WL 1644018, at *24.
Statement B20 (AC ¶ 163): This statement, made by Wall at an August 25, 2022, earnings conference, again appears to be principally a statement of fact - noting that mining margin for the first six months of 2022 was 71%, “down from 81% but from the first half of 2021, still a very good margin” and “the highest amongst our peers.” No facts are alleged tending to show that Argo's margin was not 71%, that that was not the highest margin in its peer group of miners, or that 71% was not a “very good” margin (which in any event is a statement of opinion). Wall went on to say that he was proud of the team for “continuing to have really good efficiencies, even as, the price of Bitcoin has [fallen] during the first half of the year.” Again, no facts are pleaded tending to show that Argo did not have “good efficiencies” and the Amended Complaint affirmatively alleges that the price of Bitcoin did indeed fall during the first half of 2022.
Statement B21 (AC ¶ 163): In an earnings call on August 25, Appleton said, “In terms of our balance sheet, I think the first thing really to mention is how we've despite significant headwinds that we've had this year, our rigorous approach to cash flow and treasury management has meant that we have been cash neutral. So we're well placed there.” The first portion of the statement is not alleged to be false because, despite allegations that Argo had insufficient cash on hand to execute certain plans, there is no allegation that Argo was not “cash neutral,” or was operating with a negative balance sheet, at the time the statement was made. The second portion of the statement - that Argo was “well placed” - is once again an opinion, not a falsifiable fact.
Statement B22 (AC ¶ 166): Finally, on September 9, 2022, Wall said, in an operational update video, that Argo has “a derivatives trader that's now in place, and he is very focused on managing our treasury, making sure he's protecting the downside given all of the volatility that's going on, as well as making sure that we are able to benefit from the upside that we believe is coming in, you know, in the medium and long term, we are still bullish on Bitcoin in the long term, and again, are actively using, you know, derivatives to make sure that we're, you know, getting the balancing act right.” Once again, the fact that Argo had a derivatives trader in place is not alleged to be untrue; neither is there any allegation that he was not focused on achieving the result that Wall said he was trying to achieve. The statement is alleged to be misleading because of Argo's failure to disclose that it was undercapitalized and unable to withstand market vicissitudes - in other words, for failing to disclose information that might tend to undercut the ability of the derivatives trader to achieve the results he was undoubtedly trying to achieve. While this allegation has been held to be insufficient when made against many of the previous alleged misstatements, it is even less compelling in the context of a statement that specifically acknowledges and addresses the difficulty of navigating “all of the volatility that's going on” in the crypto market.
We now turn to the statements that relate to Argo's access to cheap energy.
Statement B2 (AC ¶ 132): On two occasions, in interviews conducted on November 21, 2021 and December 16, 2021, Defendant Wall “told the market that in Texas, Argo had access to ‘the cheapest power anywhere in the world' at less than two cents a kilowatt hour.” Defendants argue that this statement is not false, in that West Texas did indeed offer the cheapest power anywhere in the world to cryptocurrency miners. But Plaintiff argues that this statement was misleading because Argo failed to reveal that this “cheapest power” was available only by obtaining a Fixed-Price PPA - a contract for which Argo was allegedly ineligible due to a lack of creditworthiness. Plaintiff further argues that there were “requirements” for obtaining a Fixed-Price PPA - “requirements” that took the form on an unspecified amount of cash, letters of credit, or a guarantee, none of which Argo could meet, as was known to its management team.
If Plaintiff's allegation is true, then Defendants may well have omitted information that was necessary to make the flat assertion that Argo had access to this power not misleading.
The problem, of course, is that there is something missing from the Amended Complaint. It certainly alleges facts from which one could infer that, if there were requirements or qualifications for a PPA, Argo's management team would have known what those requirements were. Frankly, the mere fact that they managed the company gives rise to that inference. While Defendants argue that nowhere in this statement did Argo guarantee that it could enter into a Fixed-Price PPA, that misses the point. The statement flatly said that Argo “had access” to power at less than two cents a KWH - not that it might have access, not that it hoped to have access, but that it in fact had access to that power. If there was some requirement that disqualified Argo from getting access to power at this very low price, it had to be disclosed in order to make the statement not misleading.
But the pleading does not allege facts from which one could infer that there actually were such requirements, or what they might be. In fact, it alleges only that ERCOT - the Electric Reliability Council of Texas, which controls access to electricity in West Texas - “often requires some form of credit support, either liquid credit support in the form of cash or letters of credit, or a guarantee from the buyer in order to prove that it will be able to pay for the contracted energy.” (AC ¶ 105) (emphasis added) “Often” is not “always.” Had the pleading alleged that ERCOT always imposed such a requirement before allowing a Bitcoin miner to enter into a Fixed-Price PPA, Argo's statement that it “had access to the cheapest power anywhere in the world” would arguably fall outside the safe harbor, and be actionable. But the Amended Complaint alleges only that ERCOT sometimes imposed such a requirement - meaning that it is not possible to infer, from the facts pleaded, that Argo's management team knew that the company would be unable to procure power on such favorable terms when the statement was made. And if there were firm requirements for obtaining a Fixed-Price PPA, the Amended Complaint does not allege what they are - making it impossible to ascertain whether the facts about Argo that are alleged rendered it impossible, or even unlikely, that Argo could obtain a Fixed-Price PPA.
Statement B4 (AC ¶ 135): Argo's Form 6-K, filed on April 27, 2022, indicated that the company's strategic focus for 2022 was to “execute on our plans at Helios and to scale our operations.” Plaintiff does not allege that this statement is false or misleading. Instead, he focuses on the statement that Argo's “runway for growth” - fueled, apparently by an interconnection agreement that provided the company “with access to up to an additional 600 MW of capacity” -was unmatched by Argo's peers. This statement, like so many others, is alleged to have been false and misleading only in that Argo failed to say that it was undercapitalized and unable to withstand the vicissitudes of a volatile market.
Defendants argue that the statement is not false, and qualifies as puffery. They also rely on the safe harbor that the PSLRA provides for forward-looking statements, noting that the 6-K discloses that Argo's activities “expose it to a variety of financial risks: market risk, credit risk and liquidity risk,” that the company “is dependent on the state of the cryptocurrency market and general sentiment of crypto assets as a whole,” and that “there is no assurance that any digital asset, including bitcoin, will maintain its value or that there will be meaningful levels of trading activities to support markets in any digital asset.” In other words, the 6-K disclosed that investing in Argo carried risk, that Argo's profitability was not solely a function of its efforts, and that there was no assurance that sales of Bitcoin - identified as the source of its operating cash - would continue to generate the same level of funds.
The statement is forward looking only with respect to the phrase about Argo's runway for growth providing the company with a robust foundation on which to scale efficiently and profitably. The remainder of the statement, which Plaintiff does not highlight, is comprised of puffery and factual statements that Plaintiff has not alleged are false.
Statement B7 (AC ¶ 141): In its Form 20-F, dated May 2, 2022, Argo “again reiterated how inexpensive power at Helios Facility would be, stating that [Argo] ‘anticipate[s] that our net electricity costs will be below $0.02/kWh after including the benefits of participating in demand response programs offered by' ERCOT.” To the extent that Plaintiff alleges that this forwardlooking statement is misleading because it does not explain that Argo would not be able to obtain a fixed-price contract at the indicated level - a general allegation that would appear to be directed to this particular statement - Argo makes sufficient disclosure elsewhere in the same document that undercuts any such argument. For example, “We may not be able to secure access to electricity on a sufficiently firm and unrestricted basis or at a price that we are willing to pay,” and “We may be affected by price fluctuations in the wholesale and retail power markets.” The former statement undercuts any suggestion that Argo was promising that it could obtain power as cheaply as two cents/kwh; and the latter undercuts any suggestion that Argo would certainly be able to obtain a fixed-price contract (a fixed-price contract would insulate Argo from “fluctuations” in the wholesale and retail power markets; so disclosing that it might be affected by such fluctuations sufficiently disclosed that there could be no assurance that such a contract would be forthcoming). As for the argument about the failure to disclose Argo's undercapitalization, there is no need to qualify this factual assertion regarding the anticipated electricity cost, as the qualifications proposed by Plaintiff would not tend to make the facts asserted any more true than they already are.
Statement B10 (AC ¶ 149): In the June 7, 2022 Wolf of All Street You Tube video, Wall spoke about Argo's desire to “bet on ourselves.” Specifically, he said, “You need rigs, you need power, and you need capital. If you think about 2021, we used our Nasdaq IPO and a couple other little fundraisers before that to get the capital we needed to get the power and the rigs that we needed. We now have an enormous runway of power. 800 megawatts of power in West Texas in a particular part of the grid where there's an overabundance of renewable energy. That is a lot of it's going to waste because there's not enough transmission lines to take that power to market in Southern Texas. Texas is an energy island. You can't export across the state line .... That power that's generated in Texas has to stay in Texas. It's not connected to the national grid. On top of that, Texas is also a competitive grid. It's a deregulated market. Meaning, you can buy your power from a host of retailers, and because of that, ERCOT, who manages the grid, incentivizes large load users like ourselves to participate in these demand response programs. What they call ancillary services. These auxiliary services allow miners to shut down.” Like so many other statements, this one is alleged to be false and misleading because it fails to disclose that the company was undercapitalized and so unable to withstand market fluctuations.
Defendants argue that the statement is simply a true statement of facts: that crypto miners need “rigs”, “power,” and “capital;” that Argo had raised capital through the 2021 IPO and other “fundraisers” in order to purchase power and rigs; that there are 800 MW of power in West Texas that can neither be fully utilized in Texas nor exported for use elsewhere in the United States; that this power exists in a deregulated market; and that ERCOT incentivizes large load users (like Argo) to participate in demand response programs. Defendants are correct. Not a single fact is alleged in the Amended Complaint tending to show that any of these statements is false as a simple matter of fact.
Statement B11 (AC ¶ 150): During the same interview, Wall said that there was not a lot of power demand in the regions where the Helios Facility was located, but there was an overabundance of supply. Again, this is a simple statement of fact and nothing in the Amended Complaint tends to show that the fact asserted is false. Nor would any statement about Argo's capital structure tend to make the statement of fact not misleading.
b. Scienter
After painstaking analysis, we have identified a total of two potentially actionable statements that were made following Argo's June 7, 2022 announcement of decreased Bitcoin mining activity. Defendants argue that the claims based on these alleged misstatements, brought against Defendants Argo, Wall, and Appleton, should nonetheless be dismissed because Plaintiff has failed to plead scienter. The first statement, B13 (AC ¶ 153), was made by Defendant Wall on June 29, 2022, and the second statement, B17 (AC ¶ 158), was made on July 7, 2022 in an official Argo press release.
To state a valid claim under Section 10(b) and Rule 10b-5, a plaintiff must plead with particularity facts that give rise to a strong inference “that the defendant acted with scienter, a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 319, 323 (internal citations omitted). “Under the heightened pleading standard for scienter, a ‘complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.'” Slayton, 604 F.3d at 766 (quoting Tellabs, 551 U.S. at 324). “To apply this standard, this Court must ‘take into account plausible opposing inferences' and must consider ‘plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.' The inference of scienter ‘must be more than merely “reasonable” or “permissible”-it must be cogent and compelling, thus strong in light of other explanations.'” Schiro v. Cemex, S.A.B. de C.V., 396 F.Supp.3d 283, 300 (S.D.N.Y. July 12, 2019) (quoting Tellabs, 551 U.S. at 323-24).
A plaintiff can satisfy this pleading requirement by alleging facts showing either: (1) the defendant's motive and opportunity to commit fraud; or (2) strong circumstantial evidence of the defendant's conscious misbehavior or recklessness. In re Avon Sec. Litig., No. 19-cv-01420, 2019 WL 6115349, at *19 (S.D.N.Y. Nov. 18, 2019) (citing ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 198-99 (2d Cir. 2009)). Plaintiff proceeds via the second path by attempting to show strong circumstantial evidence of Defendants' conscious misbehavior or recklessness. Without “a motive for a defendant to commit fraud, ‘the strength of the circumstantial allegations [of conscious misbehavior or recklessness] must be correspondingly greater.'” In re: Petrobras Sec. Litig., No. 14-cv-9662, 2016 WL 1533553, at *2 (S.D.N.Y. Feb. 19, 2016) (quoting In re Advanced Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir. 2015)). Where a plaintiff alleges that the defendants knew about or had access to contrary facts, the plaintiff “must specifically identify the reports or statements containing this information.” Novak, 216 F.3d at 309.
As the two remaining statements pertain to Argo's capitalization and costs, the court's analysis of scienter focuses on whether Plaintiff has alleged a strong inference that Defendants knew or were reckless in not knowing, at the time these statements were made, that Argo's costs had spiraled out of control and that the company was severely undercapitalized. Plaintiff contends that Defendants, “had possession of or access to information indicating that their statements regarding the state of [Argo's] finances were false and/or misleading,” in part because they had “possession of or access to information showing Argo's operating costs and balance sheet.” (AC ¶¶ 190-91) He also includes information allegedly provided by three confidential witnesses who formerly worked at Argo's Helios facility in the following roles: (i) a supervisor (from January 2022 to an undisclosed date); (ii) a data technician (from May 2022 to December 2022); and (iii) a data center manager (from January 2022 to December 2022). (See id. ¶¶ 37-39)
On the issue of Argo's costs, Plaintiff alleges that Appleton and Wall, “were aware of the amount of Bitcoin being mined and the energy costs of doing so in real time.” (Id. ¶ 192) As evidence, Plaintiff explains that one of the confidential witnesses understood “that all of Argo's executives . . . monitored Grafana,” which was a third-party software that “showed how much Bitcoin was being mined in real time” and “collected data regarding the energy costs of mining.” (Id.) Plaintiff also explains that Appleton and Wall were aware of the costs of operating Helios because “they frequently discussed such costs, indicating that they either reviewed those costs and knew what they were talking about, or were reckless in speaking about operating costs without reviewing that information.” (Id. ¶ 193) For example, Plaintiff alleges that the following statements show that Defendants had knowledge of Argo's costs: on April 28, 2022, Appleton stated on a conference call that “in terms of operating costs and expenses, yes, they have increased” (id.); on June 7, 2022, Wall stated in an operational video “There was higher temperatures in Texas for the month of May, and so we curtailed, we voluntarily curtailed, a couple of times, energy prices went up, we gave that power back to the grid” (id. ¶ 194); on August 5, 2022, Wall stated in another operational video “so for the Helios Power Update month of July and also for June and also for this month our power costs in Texas are higher than we expected them to be” (id. ¶ 195); and finally on August 25, 2022, Wall stated during a conference call that “we had higher operating costs at Helios than we anticipated, largely due to higher power prices,” and, “We've had some issues on the cost side with the higher cost at Helios, which we believe are temporary as we ramp up operations” (id. ¶ 196).
On the issue of capitalization, Plaintiff similarly alleges that Wall and Appleton's statements during the Class Period demonstrate an extensive knowledge about Argo's financial positions and balance sheet - “specifically, the amount of cash Argo had on hand.” (Id. ¶ 197). On November 2, 2021, Appleton allegedly said that Argo, “had $86 million of cash on hand at the end of the quarter;” during an April 28, 2022 earnings conference call, Appleton allegedly touted a “very strong balance sheet” with “net assets . . . well into the $200 million -- $ 200 million or so” (id. ¶ 198); and during an August 25, 2022 earnings conference call, Appleton allegedly stated that, “despite significant headwinds that we've had this year, our rigorous approach to cash flow and treasury management has meant that we've been cash neutral” (id. ¶ 199). During the same August 25, 2022 earnings call, Wall is alleged to have said “for the quarter, we had a net loss of $38 million, which is driven mostly by the $38 million negative change in fair market value of our Bitcoin holdings.” (Id.) Plaintiff also points to Wall's monthly operational updates on mining revenue, Bitcoin holdings, and mining margin as evidence that he “was frequently apprising himself of the Company's financial position.” (Id. ¶ 200)
In addition to the facts alleged above, Plaintiff details Defendants' possession of or access to information about “[the] requirements for obtaining a Fixed-Price PPA” (id. ¶ 202), “Argo's loans with Galaxy and its equipment financing agreements with NYDIG” (id. ¶ 208), and “its significant holdings in Bitcoin . . . and, in turn, the fact that the decrease in the price of Bitcoin was a foreseeable setback inherent to any cryptocurrency mining operation” (id. ¶ 220). Because the two remaining statements primarily concern Argo's costs and capitalization, these allegations are relevant only to the extent they add to the broader picture of Defendants' knowledge of these aspects of Argo's finances.
Plaintiff faces two fundamental issues in establishing scienter as to either remaining statement.
First, although Plaintiff alleges a great deal of information that Defendants knew about Argo's financials, he fails to allege what information known by the Defendants was contrary to its statement that Argo was “confident that it possesses sufficient liquidity to avoid any potential liquidation.” (AC ¶ 158) “In order to allege scienter based on access to information, however, a plaintiff must either ‘specifically identify the reports or statements that are contradictory to the statements made' or ‘provide specific instances in which Defendants received information that was contrary to their public declarations.'” Schiro, 396 F.Supp.3d at 308 (quoting Glaser v. The9, Ltd., 772 F.Supp.2d 573, 588 (S.D.N.Y. 2011)). Plaintiff at no point identifies a report or internal statement known to Defendants that would tend to undermine Argo's ability to avoid potential liquidation of its loan. Instead, Plaintiff gestures broadly at internal financial data that could either have supported or contradicted Defendants' statements - we just don't know which. Bare facts that Defendants were aware of, or even fluent in the details of, Argo's financials are not allegations that the Defendants were aware that Argo's costs, cash on hand, or capitalization was anything other than Argo claimed it to be. Therefore, “Plaintiff has not ‘specifically identified any reports or statements' or any dates or time frame in which Defendants were put on notice of contradictory information.” Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, 694 F.Supp.2d 287, 300 (S.D.N.Y. Mar 17, 2010) (quoting Teamsters Local 445, 531 F.3d at 196).
Second, as to the statement regarding Argo's claimed “overdelivering” during a period of clear and present “underdelivering,” (AC ¶ 158), Plaintiff fails to allege a strong inference that “defendants' comfort . . . based on a more optimistic view of otherwise publicly available financial information,” can be deemed the sort of “extreme departure from the standards of ordinary care” capable of establishing scienter through recklessness. Jones v. Perez, 550 Fed.Appx. 24, 27 (2d Cir. 2013) (internal citations omitted). This is especially true where “the public was generally aware that [a defendant] was experiencing difficulties.” Id. at 26. As Plaintiff alleges, the June 7, 2022 operational update preceding this statement, “began to leak the truth about Argo's operations and financial condition, including at the Helios Facility.” (AC ¶ 147). The fact that a statement may be “sloppy, contradictory and poorly drafted,” does not mean that it is “consistent with the ‘reckless disregard for the truth' required to allege scienter.” In re Sunedison Sec. Litig., 300 F.Supp.3d 444, 493 (S.D.N.Y. Mar. 6, 2018) (quoting S.E.C. v. Obus, 693 F.3d 276, 286 (2d Cir. 2012)). While Wall may have arguably been negligent in his use of the word “overdelivering” after having recently announced a decrease in Argo's Bitcoin mining, Plaintiff has not alleged the facts that, if proved, would demonstrate “highly unreasonable” conduct “representing an extreme departure from the standards of ordinary care.” In re Advanced Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir. 2015). This is especially true where the at-issue statement was followed and contradicted by Wall's subsequent statement that “[Argo] had a rough month in May.” (Dkt. # 51 Ex. 4 at 12)
To the extent that Plaintiff's arguments regarding either statement are premised on Defendants' knowing failure to provide details about Argo's cost issues, “the allegation that defendants behaved recklessly is weakened by their disclosure of certain financial problems prior to the deadline to file its financial statements.” Rombach, 355 F.3d at 176. The evidence included in the Amended Complaint to demonstrate Defendants' knowledge of Argo's costs, with no exception, consists of disclosures about Argo's cost problems made both before and after the at-issue statements: “yes, [operating costs and expenses] have increased;” “energy prices went up;” “power costs in Texas are higher than we expected;” “we had higher operating costs at Helios than we anticipated.” (AC ¶¶ 192-96) No reasonable person would deem Plaintiff's insistence that Argo was fraudulently concealing a decaying balance sheet to be “at least as compelling as any plausible opposing inference” - such as a company, whose executives had great faith in an untried and unpredictable product, walking investors through its hardships every step of the way. Tellabs, 551 U.S. at 313.
Plaintiff's final three supplemental scienter arguments are also unconvincing.
Plaintiff argues that “knowledge of the facts underlying the fraudulent scheme may be imputed to the Individual Exchange Act Defendants” because “the fraud alleged herein relates to the core business of Argo.” (AC ¶ 225) The so-called “core operations doctrine” provides that, “When a plaintiff has adequately alleged that the defendant made false or misleading statements, the fact that those statements concerned the core operation of the company supports the inference that the defendant knew or should have known the statements were false when made.” In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F.Supp.2d 474, 489 (S.D.N.Y. July 7, 2004). While the Second Circuit “has not expressly determined if the core operation doctrine remains applicable to proving scienter after the enactment of the PSLRA,” In re Plug Power, Inc. Sec. Litig., No. 21-cv-2004, 2023 WL 5577276, at *21 (S.D.N.Y. Aug. 29, 2023), it has suggested that courts can consider core operations allegations as a supplementary means to plead scienter, “even if they cannot establish scienter independently.” New Orleans Emples. Ret. Sys. v. Celestica, Inc., 455 Fed.Appx. 10, 14 n.3 (2d Cir. 2011). Courts in this district have understood this instruction to mean that while “core operations” allegations can contribute supplemental support to a plaintiff's scienter claims, they cannot in and of themselves be enough to plead scienter. See, e.g., In re Skechers USA, Inc. Sec. Litig., 444 F.Supp.3d 498, 529 (S.D.N.Y. Mar. 12, 2020) (collecting cases). “In the utter absence of any other evidence of fraudulent intent, the doctrine itself is insufficient to give rise to the necessary inference.” Id.
The same fundamental problem with Plaintiff's scienter argument returns here: he has not adequately alleged that there was information pertaining to the core operations of Argo that contradicted Defendants' statements. As other courts in this district have done, I find that Plaintiff's core operations theory fails to cure the defect in its scienter pleading. See Glaser, 772 F.Supp.2d at 596; Shemian v. Rsch. In Motion Ltd., No. 11-cv-4068, 2013 WL 1285779, at *18 (S.D.N.Y. Mar. 29, 2013), aff'd, 570 Fed.Appx. 32 (2d Cir. 2014).
Next, Plaintiff argues that Defendants' scienter is bolstered by the departure of Argo's CTO following a disappointing Bitcoin mining update and the subsequent departures of Argo's CEO and CFO a month after Argo announced the sale of its Helios Facility. “[A] resignation can establish scienter only if the plaintiff alleges independent evidence corroborating that the employee who resigned held a culpable state of mind.” Schiro, 396 F.Supp.3d at 303. As Defendants correctly argue, Plaintiff fails to tie Argo's executive departures to any evidence of fraud, alleging instead that the departures broadly coincided with disappointing corporate announcements. “As presently pleaded, the terminations and resignations ‘are at least as consistent with punishing those at the helm for their poor judgment and leadership' as with their ‘relating to concocting a scheme to defraud shareholders.'” In re Lottery.com, Inc. Sec. Litig., No. 1:22-cv-07111, 2024 WL 454298, at *35 (S.D.N.Y. Feb. 6, 2024) (quoting Lighthouse Fin. Grp. v. Royal Bank of Scot. Grp., PLC, 902 F.Supp.2d 329, 343 (S.D.N.Y. Sept. 27, 2012), aff'd sub nom. IBEW Loc. Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scot. Grp., PLC, 783 F.3d 383 (2d Cir. 2015)).
Finally, despite Plaintiff's claims, Defendants' signing of SOX certifications fails to demonstrate a strong inference of scienter for the reasons discussed in detail above. While Plaintiff argues in its Opposition Brief that to sign the certifications, Defendants “necessarily needed access to information about Helios's operating costs,” (Dkt. # 54 at 24-25), Plaintiff again “fails to point to any document, report, or oral statement showing that the Defendants knew at the time that their statements regarding [Argo's financials] were false or misleading.” Saraf v. Ebix, Inc., 632 F.Supp.3d 389, 399 (S.D.N.Y. Sept. 30, 2022).
For these reasons, Plaintiff fails to demonstrate a strong inference of scienter on the part of any of the individual Defendants as to either of the two remaining false and/or misleading statements. “Because [Plaintiff] has failed to plead facts showing that ‘someone whose intent could be imputed to the corporation acted with the requisite scienter,' [he] has also failed to plead corporate scienter.” Swanson et al. v. Danimer Sci., Inc., et al., 2024 WL 4315109, at *3 (2d Cir. Sept. 27, 2024) (quoting Jackson v. Abernathy, 960 F.3d 94, 98 (2d Cir. 2020)).
III. All Claims Asserted Under Section 15 of the Securities Act and Section 20(a) of the Securities Exchange Act of 1934 Are Dismissed With Prejudice and Without Leave to Amend
Section 15 of the Securities Act and Section 20(a) of the Exchange Act establish joint and several liability for every person who, directly or indirectly, controls any person liable for a primary violation under the respective acts. See 15 U.S.C. §§ 77o(a); 78t(a). “To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud.” ATSI Communs., Inc. v. Shaar Fund, Ltd, 493 F.3d 87,108 (2d Cir. 2007).
Because Plaintiff fails to allege any primary securities law violation by any defendant in this case, Plaintiff's claims under Section 15 of the Securities Act and Section 20(a) of the Exchange Act are dismissed. See Lau v. Opera Ltd, 527 F.Supp.3d 537, 562 (S.D.N.Y. Mar. 13, 2021).
CONCLUSION
For the foregoing reasons, Defendants' Motion to Dismiss the Amended Complaint is GRANTED. The Clerk of the court is directed to remove Docket No. 49 from the Court's list of pending motions and to close the file. As previously explained, I find that it would be futile for Plaintiff to file a second amended complaint to cure the pleading defects of the first, and the “motion” inserted at the end of the Opposition Brief is denied.
This constitutes the decision and order of the court. It is a written decision.
Appendix A
(Table Omitted)
Appendix B
(Table Omitted)