The Southern District of New York issued an opinion dismissing virtual currency trading platform Bitfloor’s alleged commodities fraud violations. The company was accused of violating the Commodities Exchange Act (CEA) as well as New York state law. Plaintiffs are Bitfloor customers, who claim the company made “false or misleading statements and omissions regarding Bitfloor’s operations and the reliance on those statements and omissions caused Plaintiffs to suffer economic losses.” Bitfloor filed a motion to dismiss plaintiffs’ First Amended Complaint. The court stated that because the CEA claim is time-barred, the motion was granted.
Bitfloor’s online virtual trading platform allowed consumers to buy and sell their cryptocurrencies, such as Bitcoin, on its platform or hold their cryptocurrencies in a digital wallet, in exchange for a fee. Users claimed that they currently “‘hold’ various amounts of Bitcoin in their Bitfloor wallets that they are ‘not able to access or sell.’” In 2012, Bitfloor was the “fourth-largest Bitcoin exchange in the world.” However, in 2013 the company announced it would “‘cease all trading operations indefinitely.’” Bitfloor attributed the shutdown to “the closure of its U.S. bank account by its banking partner, Capital One, which meant that it could ‘no longer provide the same level of USD deposits and withdrawals as [it had] in the past.’” Afterward, Bitfloor stated it would “be working with all clients to ensure that everyone receives their funds”; but the plaintiffs alleged that they were not notified by Bitfloor about its shutdown, nor have they received their funds.
The plaintiffs claimed that the defendant “‘deliberately closed their site making it impossible for Plaintiffs to contact Defendants and/or recover their property.’” In 2018, former Bitfloor CEO Shtylman sent a letter to the New York Department of Financial Services replying to a consumer complaint. In the letter, Shtylman states that there was a wind-down period to process withdrawals and return funds, but that the company was dissolved in August 2016. He stated that “[n]otwithstanding Bitfloor’s best efforts, approximately $59,000 in US dollar deposits was unable to be returned to Bitfloor customers.” The funds were held by the Internet Archive Federal Credit Union until it closed and the money it Bitfloor’s account was forfeited to the government. He added that as a result, “there is no longer a Bitfloor entity that has funds or bitcoins to redress [the] complaint.” The complaint was filed in January 2019.
The CEA is designed to protect an “innocent individual investor…from being misled or deceived.” A CEA claim must be brought no later than two years after the incident. The defendants alleged that the CEA claim is time-barred because “Plaintiffs should have been aware that they could not access their accounts one the Bitfloor site shut down in April 2013, but Plaintiffs failed to bring their claim until January 11, 2019 – nearly six years later.” The court found that plaintiffs “had inquiry notice of their injury more than two years before they filed their initial complaint on January 11, 2019, and that their CEA claim is therefore time-barred. However, the court notes that the complaint does not “allege the specific dates when Defendants shut down the site, when Plaintiffs first realized they could not access the site, or when Plaintiffs tried unsuccessfully to communicate with Defendants.” Therefore, along with plaintiffs claim that they were not notified by Bitfloor, it is difficult to determine when they became aware of the shutdown; however, they “were on inquiry notice more than two years prior to initiating this action.” T
The court states that the alleged facts in the first amended complaint and the other information provided would cause a reasonable person to determine he has been defrauded as early as April 2013, when the magazine article about Bitfloor ceasing operations was published and no later than August 2016 when the New York State Division of Corporations declared Bitfloor dissolved. Further, plaintiffs claimed that they accessed their Bitcoin from time to time, but were currently unable to access it, despite defendants claims that a user could “access, transfer, and withdraw Bitcoin using Bitfloor at any time.” The court states that, “[t]he loss of such abilities, combined with the alleged lack of any communication from Defendants, would surely ‘have caused eyebrows to raise’ and suggested to customers of ordinary intelligence that they had been defrauded.” As a result, the court holds that the duty of inquiry occurred as soon as April 2013 and as late as August 2016; the court stated that a “reasonably diligent inquiry” would have revealed the fraud.
The court claims that because plaintiffs did not engage in a “reasonable diligent inquiry, the CEA’s two-year statute of limitations bars Plaintiffs’ CEA claim on August 31, 2018 at the latest.” Since plaintiffs filed their initial complaint months later, the court holds that plaintiffs’ CEA claim is time-barred.