Original post w/Images here: https://x.com/NuclearHerbs/status/1745852571431174169

Welcome back to #PulseChainLawSchool. I hope everyone enjoyed the holidays and is looking forward to a happy and prosperous 2024.

Now that we have some idea of what Richard’s legal team is thinking based on the letter they filed (see Richard’s post from a few days ago), let’s take a quick look at what the impact of some of those potential motions would be. This week, I’ll start with the first issue raised by Richard’s counsel, which is generally where you put your strongest argument.

Basically, they argue that the SEC failed to plead enough facts to establish that the EDNY can exercise personal jurisdiction over Richard Heart. This is significant because without proper jurisdiction, the court has no ability to hear the case at all or enter any kind of judgment. It’s essentially over if RH wins on this issue.

This would probably be brought as a (likely combined) Rule 12(b)(2) motion to dismiss on the jurisdiction issue and a Rule 12(b)(6) on the deficiencies in pleading properly. In deciding a motion to dismiss, a judge must assume the facts outlined in the Complaint are true. This is just procedural at this point; it has nothing to do with whether the facts in the Complaint are actually true. Those facts must still be proven by the Plaintiff later if the Complaint survives the motion to dismiss.

Additionally, MTDs are limited to the pleadings on file, the Court is not allowed to consider matters outside the pleadings. So it can’t look at other documentary evidence, affidavits, testimony, etc. There are limited exceptions to this, but there are limited exceptions to almost everything in law, so I’m just going to limit this discussion to what happens in the overwhelming majority of cases. For the above reasons and more, most MTDs are denied.

Remember, it was up to the Plaintiff, the SEC, to properly plead facts that support its case. Failing to do so can be problematic. Draft a shitty Complaint and you may be stuck with it.

So let’s start with what the law says, and then go back and look at what the SEC alleged.

The basic principle is this: You can’t just go out and grab someone who lives in a foreign country (or another state, if you’re in a state court) and haul their ass into a court somewhere without telling a judge *why* it’s appropriate for this person to have to appear there. This is the concept behind personal jurisdiction. As the world has evolved from a more localized economy to a more global economy where goods manufactured all around the world can cause injury to people here in the US, the requirements to haul someone’s ass into court here in the US has naturally evolved.

Probably the most important case on the issue is Int’l Shoe Co. v. Washington, 326 U.S. 310 (1945), and every law student in the US has read it. From that case, we got a 2-part test that tells the court when it can exercise personal jurisdiction over a non-resident person or entity. First, the Plaintiff must establish that the Defendant has “minimum contacts” with the jurisdiction he’s being sued in, and that he intended to avail himself of the benefits and protections of state law, in this case NY. If that part is met, the second step is to determine whether it is reasonable to require the Defendant to appear and defend in that particular court. There are other important cases that discuss this test, including the World-Wide Volkswagen case cited by Richard’s attorneys, and if you went to law school after 1980, you studied that one too. The WWVW case quotes another famous case on the issue, Burger King v. Rudzewicz, 471 U.S. 462 (1985), describing examples of when a court can’t exercise jurisdiction over someone (image below).

There was a recent 2022 case decided by the 5th Circuit called Douglass v NYK that does a very good analysis of when a foreign defendant can be made to appear and defend a suit in a US federal court. The due process analysis starts on page 14, and the application to the defendant starts on page 24. The 5th Circuit also notes that the 2nd Circuit (where Richard is being sued) has adopted a similar analysis, so we can expect the judge to analyze the case the same way. It also does a good job explaining the difference between specific jurisdiction and general jurisdiction, which I just don’t have the patience to do. Spoiler alert: The court held that the Defendant couldn’t be forced to appear in a US Court. Link here to the opinion: https://courtlistener.com/opinion/7857277/douglass-v-nippon-yusen-kabushiki/…

Don’t want to read it? Cool. I’ll summarize.

In the simplest terms, “minimum contacts” means that a court can’t exercise jurisdiction over someone unless the Defendant has purposefully done something there, as Richard’s attorneys point out. Example: A Japanese car manufacturer has dealerships in NY and sells cars to NY residents. There’s no question that a NY court can exercise personal jurisdiction over that Japanese manufacturer, because they are purposefully availing themselves of the laws of NY in selling vehicles there. So the question in Richard’s case is whether Richard purposefully did something to create minimum contacts with NY and avail himself of the laws and benefits of NY, which would then make it reasonable to expect to have to appear and defend an action there.

Now, we head over to the SEC Complaint to see what they claim happened in this case. First, note that jurisdiction and venue are two completely different things.

Jurisdiction is the power to decide an issue, venue is where it should be decided. A lot of people use them interchangeably, but they’re two separate things, not that it matters here. I mention it only because of the Complaint’s language in Paragraph 18.

Paragraph 16 of the Complaint cites Section 22(a) of the Securities Act [15 US.C. § 77v(a)] as a basis for jurisdiction. You can google that yourself. But note the requirements contained in that section:

“Any such suit or action may be brought in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the offer or sale took place, if the defendant participated therein, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.”

Key things here:
“wherein the defendant is found”
“or is an inhabitant”
“or transacts business”
“or in the district where the offer or sale took place, if the defendant participated therein”

Since Richard wasn’t served in NY, and doesn’t live in or transact business in NY, the issue seems to boil down to “in the district where the offer or sale took place, if the defendant participated therein.” That’s interesting, no? There are two parts to that requirement, not just whether or not a transaction occurred there, but the defendant has to participate in that transaction.

So now we look at paragraphs 17 and 18. 17 discusses mailing stuff, wiring money, and using brokerages. Not sure this helps the SEC establish any transactions occurred in the EDNY, since there are zero specifics included. This reads to me as boilerplate language that is probably cut-and-pasted into every Complaint.

Paragraph 18 is more interesting, because it was drafted specifically to support the SEC’s allegations. Here’s the entire paragraph: “Venue is proper in this District because many of the crypto asset transactions described herein took place on Uniswap, a so-called decentralized crypto asset trading platform whose developers are headquartered in Brooklyn. Heart specifically designed PulseX as a fork of Uniswap. Additionally, at least one investor of PulseChain and PulseX resides in this District.”

That’s also interesting. Did you catch that as well?

They don’t allege any *Hex* holders reside in the EDNY, just one PLS and PLSX holder. Shitty drafting? Or do they not have anyone? Why is this important?

Because it is literally *impossible* for you to buy either PLS or PLSX on Uniswap since neither are available on the Ethereum blockchain, and that’s the only place Uniswap exists. So, the allegation that “many of the crypto asset transactions took place on Uniswap” cannot be true, at least as far as PLS/PLSX are concerned. Therefore, the SEC failed to properly allege that even a single PLS/PLSX transaction took place in the EDNY. Hell, the SEC doesn’t even allege that Uniswap’s servers are in the EDNY, only that some of its developers are ‘headquartered’ there, whatever that means.

Interestingly, it doesn’t appear that the SEC even understands the difference between Pulsechain and Ethereum, as evidenced by Paragraph 14 where it claims PLSX is a token on Ethereum. I’m of the opinion that, at a bare minimum, you should probably understand the thing you want to regulate. Either they intentionally lied to try and establish jurisdiction & venue by claiming PLSX is an ERC-20 token with transactions on Uniswap, or they’re incompetent. Neither are good.

The line that Uniswap’s developers are headquartered in Brooklyn is laughable. It makes no difference where non-parties live or work, because non-parties are not part of the lawsuit and therefore none of their rights are impacted. I think the SEC is trying to claim something like: “There’s a guy in Brooklyn who drew a picture of a unicorn. It inspired the Defendant, who lives somewhere in Europe, to draw a different picture of a unicorn that looks kinda-sorta like the Brooklyn guy’s picture if you squint real hard. Therefore, we should be able to sue him in Brooklyn.” It’s ludicrous.

Besides, in my opinion, being forced to travel to Brooklyn should be ruled unconstitutional just as a matter of principle. It’s basically a human rights violation.

Finally, since the statute requires the Defendant participate in the transaction, where is it alleged that Richard participated in any Uniswap transaction? Again, it’s the SEC’s job to draft the Complaint to contain these allegations, and they didn’t. The Complaint reads like the SEC knows personal jurisdiction is tenuous at best, but they don’t have anything else they can add to solidify it.

Remember, at the motion to dismiss stage, the allegations in the Complaint are the only thing evaluated. If the SEC did a shitty job drafting it, they’re stuck with it for now. The usual remedy is to allow the Plaintiff to cure the deficiency by amending their Complaint. However, I’m not sure what facts they can add here, since (a) it’s impossible to transact in PLS/PLSX on Uniswap (or even pHEX for that matter), (b) they can’t prove, and haven’t even alleged in the Complaint, that Richard participated in any Uniswap transaction, and (c) who cares if he did anyway since it doesn’t establish minimum contacts under current jurisprudence.

Pros/Cons if he wins a 12(b)(2) motion to dismiss: (Note: a win on a 12(b)(6) sometimes means Plaintiffs get another chance to plead the Complaint correctly)

Good for Richard in that the SEC can’t do a damned thing to him. Clean win, case is over. He saves a Ferrari’s worth of attorneys fees, at least.

Bad only to the extent that the issue of whether Hex, PLS, and PLSX are securities remains undecided, leaving that issue in limbo (possibly permanently). Whether or not you agree with CEXs, institutional investors, etc, they’ll probably remain spooked if this issue doesn’t get resolved.

Not that I give af, but a clean win on this issue would probably end up with the overwhelming number of RH hating dipshits out there to claim Richard won on some “technicality” and didn’t really beat the SEC. These people are known legally as idiots, and you should point and laugh at them. Black’s Law Dictionary citation for proof: https://thelawdictionary.org/idiot/ Remember this if it comes true.

Just my thoughts. Nothing I say is legal advice. I could be wrong. I’ve been wrong before and will certainly be wrong in the future.

But I think this motion would have teeth.

Also, Gary Gensler sucks.