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Thomas Rensel v. Centra Tech, Inc.

United States District Court, S.D. Florida

December 13, 2019

Jacob Zowie Thomas Rensel and others, Plaintiff,
Centra Tech, Inc. and others, Defendants.


          Robert N. Scola, Jr. United States District Judge.

         Consistent with Federal Rule of Civil Procedure 55(b)(2), the Plaintiffs seek the Court's entry of a default judgment against Defendant Centra Tech, Inc. (“Centra Tech”). A Clerk's default was entered against Centra Tech on January 30, 2019. (ECF No. 169.) Centra Tech moved to set aside the Clerk's default on June 15, 2019 (ECF No. 214), but the Court denied Centra Tech's motion on September 12, 2019. (ECF No. 234.) The Plaintiffs motion is now properly before this Court.

         I. Background

         In December of 2017, the Plaintiffs in this case filed a class action complaint against Defendant Centra Tech and a number of related individuals. Defendant Centra Tech, a company founded in May 2016, purported to sell cryptocurrency, “Centra Tech Tokens” or “CTR Tokens, ” in an initial coin offering (“ICO”). The ICO allegedly raised funds for, among other things, a debit card backed by Visa and Mastercard that would allow users to instantly use cryptocurrencies to make purchases. Between July 23, 2017 and April 20, 2018, Centra Tech's ICO raised more than $32 million from thousands of investors. The founders of Centra Tech, Defendants Sharma, Farkas, and Trapani are currently the subjects of an SEC enforcement action for securities fraud (S.E.C. v. Sharma et al., No. 18-cv-2909-DLC (S.D.N.Y.)[1] and are being criminally prosecuted in the Southern District of New York for the fraudulent Centra Tech scheme. United States v. Sharma et al., No. 18-cr-340-LGS (S.D.N.Y.).

         This case was originally filed against nine defendants; some are co-conspirators in the criminal case, while others were only peripherally involved with the alleged sale of false securities. The Court granted motions to dismiss as to a handful of Defendants and the Plaintiffs voluntarily dismissed the remaining individual Defendants. The only remaining Defendant is Centra Tech.

         II. Legal Standard

         Federal Rule of Civil Procedure 55(b)(2) authorizes a court to enter default judgment against a defendant who fails to plead or otherwise defend. Fed.R.Civ.P. 55(b)(2). A “defendant, by his default, admits the plaintiff's well-pleaded allegations of fact, ” as set forth in the operative complaint. Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc., 561 F.3d 1298, 1307 (11th Cir. 2009). In issuing a default judgment, a court may award damages “without a hearing [if the] amount claimed is a liquidated sum or one capable of mathematical calculation, ” as long as “all essential evidence is already of record.” S.E.C. v. Smyth, 420 F.3d 1225, 1231, 1232 n.13 (11th Cir. 2005) (quoting Adolph Coors Co. v. Movement Against Racism & the Klan, 777 F.2d 1538, 1544 (11th Cir. 1985)).

         III. Analysis

         A. Violation of Section 12(a)(1) of the Securities Act

         Section 12(a)(1), 15 U.S.C. § 77l(a)(1), of the Securities Act creates a private right of action against any person who “offers or sells a security in violation of” Section 5, 15 U.S.C. § 77e, of the Securities Act. See, e.g., Raiford v. Buslease, Inc., 825 F.2d 351, 353 (11th Cir. 1987). In order to establish liability under Section 12(a)(1), a Plaintiff must prove (1) the defendants sold or offered to sell securities; (2) no registration statement was in effect as to the securities; and (3) interstate transportation or communication and the mails were used in connection with the sale or offer of sale. SEC v. Levin, 849 F.3d 995, 1001 (11th Cir. 2017).

         A transaction or an investment contract qualifies as a security if it is: (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. SEC v. R.G. Reynolds Enters., 952 F.2d 1125, 1130 (9th Cir. 1991) (citing Hocking v. Dubois, 885 F.2d 1449, 1455 (9th Cir. 1989) (en banc), cert. denied, 494 U.S. 1078 (1990)).

         Here, each of these elements is present. First, Plaintiffs invested Bitcoin, Ethereum, and other digital currencies to purchase CTR Tokens. (ECF No. 97 at ¶¶ 3, 32-41, 316.) As this Court has already recognized, under established law, an investment of cryptocurrency constitutes an “investment of money.” (ECF No. 79 at 9-10 (citing SEC v. Friendly, 49 F.Supp.2d 1363, 1368-69 (S.D. Fla. 1999) (King, J.))).

         Second, by purchasing CTR Tokens, Plaintiffs invested in a “common enterprise” with Defendant Centra Tech and its founders. In the Eleventh Circuit, “a common enterprise exists where the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment.” SEC v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 (11th Cir. 1999) (citation and quotations omitted). As this Court has recognized, “the fortunes of individual investors in the Centra Tech ICO were directly tied to the failure or success of the products the Defendants purported to develop, ” and “[a]n individual investor could exert no control over the success or failure of this investment.” (ECF NO. 79 at 10.) Plaintiffs have thus established the existence of a common enterprise.

         Third, the “reasonable expectation of profit” prong is satisfied when “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” Bamert v. Pulte Home Corp., 445 Fed. App'x 256, 262 (11th Cir. 2011) (quoting Williamson v. Tucker, 645 F.2d 404, 418 (11th Cir. 1981)). Here, because the success of the CTR Tokens purchased by Plaintiffs was entirely dependent on the efforts and actions of the Defendant, the third prong is satisfied. Accordingly, the offering of CTR Tokens was an investment contract under the Securities Act, such that the Defendant sold or offered to sell securities by virtue of the Centra Tech ICO.

         Additionally, no registration statement was ever filed with the SEC in connection with the Centra Tech ICO or CTR Tokens, ECF No. 97 at ¶ 82, nor has Centra Tech ever claimed that any such a registration was filed or in effect. Finally, Centra Tech utilized “an instrumentality of interstate commerce, ” by marketing and selling CTR Tokens on the internet, including through the Centra Tech Token Sale Home Page and the Centra Tech Smart Contracts. Id. at ¶ 315; ECF No. 79 at 11 (citing SEC v. Levin, No. 12-cv-21917, 2013 WL 594736, at *12 (S.D. Fla. Feb. 14, 2013) (King, J.) (“the Internet which necessarily includes email, is an ‘instrumentality of interstate commerce.'”)).

         Based on the foregoing, Plaintiffs have established a sufficient basis for relief under Section 12(a)(1) and thus, the Court ...

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