SECURITIES AND EXCHANGE COMMISSION v. BINANCE HOLDINGS LIMITED et al Document 191

District Of Columbia District Court
Case No. 1:23-cv-01599-ABJ-ZMF
Filed December 12, 2023

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Page 1 UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
No. 1:23-cv-01599-ABJ-ZMF
v.
BINANCE HOLDINGS LIMITED,
BAM TRADING SERVICES INC.,
BAM MANAGEMENT US HOLDINGS INC.,
AND CHANGPENG ZHAO,
Defendants.
REPLY MEMORANDUM OF LAW IN SUPPORT OF
DEFENDANTS BAM TRADING SERVICES INC. AND BAM MANAGEMENT US
HOLDINGS INC.’S MOTION TO DISMISS
Page 2 TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ................................................................................................. I.
THE SEC FAILS TO ALLEGE ANY OF THE PRODUCTS ARE SECURITIES. .. A.
The SEC Was Required to Plead the Existence of a Contract. ............................... 1. The SEC Admits Howey Was Premised on a Contract………….…………….2. The Term “Scheme” in Howey Does Not Magically Remove the “Contract”
Requirement of “Investment Contract.”…………………..………….………
B.
Even if an Investment Contract Did Not Require a Contract (Which It Does), the
SEC Fails to Plead the Elements of Howey. ......................................................... 1. The SEC Fails to Plead that Purchasers of Digital Assets on BAM’s Platform
Invested Money into a “Common Enterprise.”…………….…………………2. The SEC Concedes “Post-Purchase Efforts” Are Necessary but Fails to Plead
Any Such Efforts by BAM………………..…………………….……………
II.
C.
The Staking Claim Must be Dismissed. ................................................................
D.
The Major Questions Doctrine Precludes SEC Action. ........................................
THE SEC FAILS TO STATE CLAIM UNDER SECTION 17(A). ........................... A.
The SEC States No Claim of Fraud against BAM’s Customers. ..........................
B.
The SEC States No Claim of Fraud against Equity Investors in BAM. ...............
CONCLUSION ........................................................................................................................

i
Page 3 TABLE OF AUTHORITIES
Page(s)
Cases
Bd. of Trade of City of Chicago v. SEC,
677 F.2d 1137 (7th Cir. 1982) ...................................................................................................Brink v. Raymond James & Assocs., Inc.,
892 F.3d 1142 (11th Cir. 2018) ...............................................................................................CFTC v. McDonnell,
287 F. Supp. 3d 213 (E.D.N.Y. 2018) .......................................................................................Chicago Mercantile Exch. v. SEC,
883 F.2d 537 (7th Cir. 1989) .....................................................................................................Das v. Rio Tinto PLC,
332 F. Supp. 3d 786 (S.D.N.Y. 2018)......................................................................................Deckebach v. La Vida Charters, Inc. of Fla.,
867 F.2d 278 (6th Cir. 1989) ...................................................................................................FDA v. Brown & Williamson Tobacco Corp.,
529 U.S. 120 (2000) .................................................................................................................Friel v. Dapper Labs,
2023 WL 2162747 (S.D.N.Y. Feb. 22, 2023) ..........................................................................Gregory v. ProNAi Therapeutics Inc.,
757 F. App’x 35 (2d Cir. 2018) ...............................................................................................Hocking v. Dubois,
885 F.2d 1449 (9th Cir. 1989) .................................................................................................In re Alphabet, Inc. Sec. Litig.,
1 F.4th 687 (9th Cir. 2021) ......................................................................................................In re Bed Bath & Beyond Corp. Sec. Litig.,
2023 WL 4824734 (D.D.C. July 27, 2023)..............................................................................In re Citigroup Sec. Litig.,
2023 WL 2632258 (S.D.N.Y. Mar. 24, 2023) .........................................................................In re Westinghouse Sec. Litig.,
90 F.3d 696 (3d Cir. 1996).......................................................................................................
ii
Page 4 In re Xcel Energy, Inc.,
286 F. Supp. 2d 1047 (D. Minn. 2003) ....................................................................................Lorenzo v. SEC,
139 S. Ct. 1094 (2019) .............................................................................................................Malouf v. SEC,
933 F.3d 1248 (10th Cir. 2019) ...............................................................................................Masters v. GlaxoSmithKline,
271 F. App’x 46 (2d Cir. 2008) ...............................................................................................Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund,
575 U.S. 175 (2015) .................................................................................................................Parnes v. Gateway 2000, Inc.,
122 F.3d 539 (8th Cir. 1997) ...................................................................................................Retail Wholesale & Dep’t Store Union Loc. 338 Ret. Fund v. Hewlett-Packard
Co.,
845 F.3d 1268 (9th Cir. 2017) .................................................................................................Revak v. SEC Realty Corp.,
18 F.3d 81 (2d Cir. 1994) ..................................................................................................12, Rockies Fund, Inc. v. SEC,
428 F.3d 1088 (D.C. Cir. 2005) ...............................................................................................Rollins v. Wackenhut Servs., Inc.,
703 F.3d 122 (D.C. Cir. 2012) .................................................................................................Salcer v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
682 F.2d 459 (3d Cir. 1982).....................................................................................................SEC v. Banner Fund Int’l,
211 F.3d 602 (D.C. Cir. 2000) ...................................................................................................SEC v. C. M. Joiner Leasing Corp.,
320 U.S. 344 (1943) ...................................................................................................................SEC v. Digital Licensing Inc d/b/a Debt Box,
No. 23-cv-00482-RJS-DBP (D. Utah Nov. 30, 2023) ...............................................................SEC v. Edwards,
540 U.S 389 (2004) ..................................................................................................................SEC v. Goble,
682 F.3d 934 (11th Cir. 2012) .................................................................................................iii
Page 5 SEC v. Int’l Loan Network, Inc.,
770 F. Supp. 678 (D.D.C. 1991), aff’d, 968 F.2d 1304 (D.C. Cir. 1992) ................................SEC v. Kik Interactive Inc.,
492 F. Supp. 3d 169 (S.D.N.Y. 2020)......................................................................................SEC v. Life Partners, Inc.,
87 F.3d 536 (D.C. Cir. 1996) .............................................................................................13, SEC v. Payward,
23 Civ. 6003 (N.D. Cal. Nov. 20, 2023) ..................................................................................SEC v. Rio Tinto
plc, 41 F.4th 47 (2d Cir. 2022).................................................................................................SEC v. Ripple Labs, Inc.,
2022 WL 2705396 (S.D.N.Y. July 12, 2022) ............................................................................SEC v. Ripple Labs, Inc.,
2023 WL 4507900 (S.D.N.Y. July 13, 2023) ..............................................................10, 14, SEC v. RPM Int'l, Inc.,
282 F. Supp. 3d 1 (D.D.C. 2017) ...........................................................................19, 21, 22, SEC v. Rubera,
350 F.3d 1084 (9th Cir. 2003) .................................................................................................SEC v. Terraform Labs Pte., Ltd.,
2023 WL 4858299 (S.D.N.Y. July 31, 2023) ....................................................................10, SEC v. W.J. Howey Co.,
328 U.S. 293 (1946) ......................................................................................................... passim
SEC v. Wey,
246 F. Supp. 3d 894 (S.D.N.Y. 2017)......................................................................................SEC v. Winemaster,
529 F. Supp. 3d 880 (N.D. Ill. 2021) .......................................................................................State v. Gopher Tire & Rubber Co.,
177 N.W. 937 (Minn. 1920).......................................................................................................State v. Heath,
153 S.E. 855 (N.C. 1930) ...........................................................................................................United States ex rel. PCA Integrity Assocs., LLP v. NCO Fin. Sys., Inc.,
2020 WL 686009 (D.D.C. Feb. 11, 2020) ...............................................................................
iv
Page 6 United States v. Bowdoin,
770 F. Supp. 2d 142 (D.D.C. 2011) .........................................................................................United States v. Coscia,
177 F. Supp. 3d 1087 (N.D. Ill. 2016) .....................................................................................United States v. Naftalin,
441 U.S. 768 (1979) .................................................................................................................Vess v. Ciba-Geigy Corp. USA,
317 F.3d 1097 (9th Cir. 2003) ...........................................................................................20, Wals v. Fox Hills Dev. Corp.,
24 F.3d 1016 (7th Cir. 1994) ...................................................................................................Williams v. Taylor,
529 U.S. 362 (2000) ...................................................................................................................Statu

7 U.S.C. § 2(a)(1)(H) .......................................................................................................................7 U.S.C. § 2(c)(2)(D)(i)(II) ..............................................................................................................7 U.S.C. § 9 ........................................................................................................................
U.S.C. § 9(1)(A).................................................................................................................
Wall Street Reform and Consumer Protection Act, 124 Stat. 1376–
2223 (2010) ........................................................................................................................
Act, 5 U.S.C. §§ 77a-77aa (2018) .................................................................................Wash. Rev. Code Ann. § 19.230.370...............................................................................................Rules
Fed. R. Civ. P. Rule 9(b) ........................................................................................................ passim
Fed. R. Civ. P. Rule 12(b)(6) .........................................................................................................Regulations
17 C.F.R. § 180.1 ........................................................................................................................
C.F.R. § 240.17a-2 ....................................................................................................................17 C.F.R. § 240.17a-3 ..............................................................................................................23,
v
Page 7 Other Authorities
Brief for the Amici Curiae DeFi Education Fund, SEC v. Coinbase, Inc., No. 23cv-04738-KPF (S.D.N.Y. Aug. 11, 2023) ...............................................................................Brief for the Amici Curiae Securities Law Scholars, SEC v. Coinbase, Inc., No.
23-cv-04738-KPF (S.D.N.Y. Aug. 11, 2023) ............................................................................Brief for the SEC, SEC v. W.J. Howey Co., No. 843, 1946 WL 50582 (U.S. Apr.
17, 1946) ........................................................................................................................
for the SEC, SEC v. Edwards, No. 02-1196, 2003 WL 21498455, (U.S. June
26, 2003) ........................................................................................................................
Security Futures Products Overview (Jan. 13, 2015) .........................................................Digital Asset Market Structure and Investor Protection Act, H.R. 5745, 118th
Cong. (2023) ........................................................................................................................
Application of FinCEN’s Regulations to Certain Business Models
Involving Convertible Virtual Currencies (May 9, 2019) .........................................................FinCEN, Application of FinCEN’s Regulations to Persons Administering,
Exchanging, or Using Virtual Currencies (Mar. 18, 2013) .......................................................Hr'g Before the U.S. H. Fin. Servs. Comm., 117th Cong. 12 (May 6, 2021) ................................In re: Coinbase Inc.,
23-1779 (3d Cir. 2023) ............................................................................................................In the Matter of Coinbase Inc.,
CFTC Docket No. 21-03 (Mar. 19, 2021) .................................................................................In the Matter of Jeremy Rounsville,
CFTC Docket No. 23-02 (Nov. 3, 2022) ...................................................................................In the Matter of Randy Craig Levine,
CFTC Docket No. 23-31 (July 6, 2023) ....................................................................................Katanga Johnson, U.S. SEC Chair Gensler calls on Congress to help rein in
crypto “Wild West”, Reuters (Aug. 3, 2021) ...........................................................................Keep Innovation in America Act, H.R. 1414, 118th Cong. (2023) .................................................Letter for Respondent SEC, In re: Coinbase Inc., 23-1779 (3d Cir. Nov. 21, 2023) ....................Lummis-Gillibrand Responsible Financial Innovation Act, S. 2281, 118th Cong.
(2023) ........................................................................................................................
CLASS="hdiv">Page 8 Pennsylvania Department of Banking and Securities, Money Transmitter Act
Guidance for Virtual Currency Businesses (Jan. 23, 2019).......................................................SEC Dir. Div. of Corp. Fin. William Hinman, Digital Asset Transactions: When
Howey Met Gary (Plastic) (June 14, 2018) ...............................................................................Tr. of Oral Arg. at 55:17-24, Terraform Labs, No. 23 Civ. 1346 (S.D.N.Y. June
15, 2023) ........................................................................................................................
Bureau of Financial Institutions, Notice to Virginia Residents Regarding
Virtual Currency (Aug. 25, 2021)..............................................................................................Washington Department of Financial Institutions, Industry Guidance for Virtual
Currency, Cryptocurrency, and Digital Assets (May 13, 2023) ................................................
vii
Page 9 The Securities and Exchange Commission (“SEC”) seeks regulatory jurisdiction over
virtual commodities that Congress has not conferred on it. To accomplish this, the SEC in its
Response to BAM Trading’s and BAM Management’s (collectively “BAM”) Motion to Dismiss
(“Resp.”) argues that this Court should remove the word “contract” from the legislative limitation
on its jurisdiction as dictated by the law’s inclusion of the term “investment contract” and ignore
the Supreme Court’s well-established, three-prong test for identifying an investment contract, set
forth in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). As BAM set forth in its Memorandum of
Law in Support of Their Motion to Dismiss (“MTD”), the SEC has not adequately alleged that the
Digital Asset transactions on BAM’s platform constitute investment contracts. As a result, BAM
has not violated any of the securities laws. Moreover, even if there is ambiguity about how to apply
the term “investment contract” to digital assets, such a major question should be addressed by
Congress and not by a court, a separation of powers proven necessary by the SEC’s own history
of territorial aggrandizement.
PRELIMINARY STATEMENT
The SEC argues that Congress enacted the securities laws in the 1930s to provide the SEC
such flexibility that it would have jurisdiction over every potential financial asset, despite
Congress’s use of precise words with crystallized meaning that concretely limited the SEC’s reach.
The only way to apply the securities laws to the Digital Assets1 on BAM’s platform is to ignore
the word “contract” in the term “investment contract,” a term deliberately included by Congress
to define and limit the SEC’s jurisdiction. That language has a clear meaning, and the Supreme
Court has been clear that this Court cannot ignore it.

Where capitalized, “Digital Assets” refers collectively to the twelve assets offered on BAM’s
platform that are alleged by the SEC to be investment contracts (BNB, BUSD, SOL, ADA,
MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI). See MTD at 7.
1
Page 10 The SEC also urges this Court to ignore the other agencies that already have jurisdiction
over the very digital asset transactions at issue in this case. Resp. at 40. BAM obtained a license
as a money services business with the Financial Crimes Enforcement Network of the US
Department of Treasury (“FinCEN”) and as a money transmitter in each of 43 states and territories
requiring it where it conducted business. Compl. ¶ 29. Unlike the SEC’s approach to the digital
asset space, FinCEN2 and state regulators3 have each issued guidance explaining the applicability
of their regulatory regimes to virtual currency transmission.4 Additionally, BAM has previously
acknowledged that it must follow the guidelines set forth by the Commodity Futures Trading
Commission (“CFTC”) to cover the sale of commodities. MTD Ex. 1.5 The SEC wrongly believes
it can unilaterally ignore the existing regulation of Digital Assets and Digital Assets transactions
in the United States.
The SEC protests that the only issue here is whether digital assets are securities and urges
the Court to ignore the ramifications on the jurisdiction of the CFTC and other federal (and state)

See, e.g., FinCEN, Application of FinCEN’s Regulations to Certain Business Models Involving
Convertible Virtual Currencies, FIN-2019-G001 (May 9, 2019); FinCEN, Application of
FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN2013-G001 (Mar. 18, 2013).
See, e.g., Washington Department of Financial Institutions, Industry Guidance for Virtual
Currency, Cryptocurrency, and Digital Assets (May 13, 2023); Virginia Bureau of Financial
Institutions, Notice to Virginia Residents Regarding Virtual Currency (Aug. 25, 2021);
Pennsylvania Department of Banking and Securities, Money Transmitter Act Guidance for Virtual
Currency Businesses (Jan. 23, 2019).

Pursuant to its money transmitter licenses, BAM is subject to, and follows, robust customer
disclosure requirements. See, e.g., Wash. Rev. Code Ann. § 19.230.370 (requiring virtual currency
licensees to disclose: “[a] schedule of fees the licensee may assess on a transaction”; “whether the
product or service provided is insured or guaranteed by an agency of the United States”; “[a] notice
that the transfer of virtual currency or digital units is irrevocable”; “a notice describing the
licensee’s liability for unauthorized, mistaken, or accidental transfers”).

Indeed, the non-BAM Defendants recently settled various actions with the Department of Justice,
CFTC, and FinCEN. See Dkt. 188 (Dec. 8, 2023). The BAM Defendants were not a defendant in
any of those actions or settlements.
2
Page 11 regulators. Resp. 41. But if digital assets are “securities,” then the CFTC loses its own regulatory
and enforcement authority in numerous contexts. In 2010, Congress adopted the Dodd-Frank Wall
Street Reform and Consumer Protection Act which significantly expanded the CFTC’s
enforcement authority over swap transactions and fraud in the sale of commodities.6 However,
Congress specifically excluded “any security” from the CFTC’s expanded jurisdiction7 —
enforcement authority that the CFTC has repeatedly used against fraud in the sale of digital assets.The SEC’s position would limit the CFTC’s jurisdiction over digital assets in other contexts as
well.Regrettably, this is not the first time the SEC has inappropriately attempted to seize the
jurisdiction of the CFTC. As just one example from a different but analogous context, in 1981,
after the CFTC exercised regulatory authority over a then innovative product by authorizing the
Chicago Board of Trade (“CBOT”) (a futures exchange) to offer futures on Government National
Mortgage Association certificates, the SEC authorized the Chicago Board of Options Exchange (a
securities exchange) to trade options on the same instrument despite the CFTC’s “exclusive
jurisdiction” over such products. In subsequent litigation, the court rebuked the SEC and found

7 U.S.C. § 9 (prohibiting fraud in sale of any commodity in interstate commerce); 17 C.F.R.
§ 180.1 (adopting regulation to prohibit fraud in sale of commodities); see also id. § 1.6 (adopting
rules prohibiting willful evasion of CFTC authority).
7 U.S.C. § 2(a)(1)(H).

See, e.g., In the Matter of Coinbase Inc., CFTC Docket No. 21-03 (Mar. 19, 2021) (liability under
§ 9(1)(A) for wash trading in digital assets by former employee); In the Matter of Randy Craig
Levine, CFTC Docket No. 23-31 (July 6, 2023) (liability under § 9(1)(A) for deceptive and
fraudulent scheme to induce investors to send money to purchase digital assets); In the Matter of
Jeremy Rounsville, CFTC Docket No. 23-02 (Nov. 3, 2022) (liability under § 9(1)(A) for
individual’s participation “in a scheme to solicit customers for the alleged managed trading virtual
currencies”).
When leveraged digital asset transactions in such assets are offered to retail participants, the
CFTC has full regulatory authority to require entities to register with the CFTC, as such
transactions are economically similar to futures transactions. See 7 U.S.C. § 2(c)(2)(D)(i)(II).
3
Page 12 that options on the certificates fell within the CFTC’s “exclusive jurisdiction” because they “ha[d]
the character of a legitimate commodity derivative” and “Congress quite clearly intended to create
one federal agency with the expertise to regulate the commodities industry.” Bd. of Trade of City
of Chicago v. SEC, 677 F.2d 1137, 1159 (7th Cir. 1982) (internal citations omitted). A few years
later when the SEC again sought to extend jurisdiction over another novel instrument – index
participations (effectively perpetual future contracts based on the value of a basket of securities) –
courts again rejected the SEC’s bold attempt to seize control of that market because of the
exclusive jurisdiction of the CFTC. See Chicago Mercantile Exch. v. SEC, 883 F.2d 537, 550 (7th
Cir. 1989).
The ultimate resolution of those disputes is instructive here – concurrently with being
rebuked by the courts, the SEC and CFTC proposed jurisdictional solutions, recognized they did
not have the authority to implement those solutions, reached an agreement, proposed agreed
legislation to Congress and Congress then enacted appropriate legislation. Judge Campbell
correctly concluded that proposed joint legislation to Congress “could and should have been
pursued at the inception of this controversy.” See Bd. of Trade of City of Chicago v. SEC, 677 F.2d
1137, 1167 (7th Cir. 1982) (Campbell, W., concurring). Nearly 40 years ago, the courts, the SEC,
and the CFTC recognized that only Congress could determine the major questions at issue (without
using the phrase) to resolve their jurisdictional disputes. Id. (“The proper authority to resolve this
matter is, of course, Congress.”).
Accepting the SEC’s theory would allow the SEC to impose its unbounded view of its
jurisdiction and frustrate Congress’s nascent but incomplete efforts to develop a comprehensive
framework for digital assets. See, e.g., Digital Asset Market Structure and Investor Protection Act,
H.R. 5745, 118th Cong. (2023); Lummis-Gillibrand Responsible Financial Innovation Act, S.
4
Page 13 2281, 118th Cong. (2023); Keep Innovation in America Act, H.R. 1414, 118th Cong. (2023).
“Congress has yet to authorize a system to regulate virtual currency,” and the overlapping claims
of authority by numerous regulators are “incomplete.” CFTC v. McDonnell, 287 F. Supp. 3d 213,
220-21 (E.D.N.Y. 2018). The Digital Assets sold on BAM are strings of computer code and, like
the virtual currencies at issue in McDonnell, “fall well-within the common definition of
‘commodity.’” Id. at 228. Assets that fall under the definition of commodities may be regulated by
the SEC only when they have characteristics that make them securities, otherwise the SEC
necessarily seizes jurisdiction that Congress has allocated to the CFTC. The SEC offers inadequate
and shifting guidance for why digital assets are investment contracts in certain contexts but not
others and for how secondary market transactions of digital assets can be investment contracts.The SEC even seeks to extend “investment contract” to the provision of IT services to facilitate
customers staking their own digital assets, ignoring both the words “investment” and “contract.”
In addition, the SEC seems determined to destroy BAM even before the Court can rule on
any of the significant questions presented by the case. A single day after filing the Complaint, the
SEC brought an “emergency” TRO to shut down BAM entirely. See Dkt. 4.11 The SEC’s

Until recently, the SEC acknowledged that a particular digital asset may be the subject of an
investment contract in one context but not others. SEC Dir. Div. of Corp. Fin. William Hinman,
Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018),
https://www.sec.gov/news/speech/speech-hinman-061418 (“Can a digital asset that was originally
offered in a securities offering ever be later sold in a manner that does not constitute an offering
of a security? . . . [Y]es.”). In SEC v. Ripple Labs, Inc., the court rejected the SEC’s attempt to
“distance[] itself” from Hinman’s remarks. 2022 WL 2705396, at *3 (S.D.N.Y. July 12, 2022). It
is not extraordinary for financial instruments to morph between securities and non-securities. For
example, futures on a security index are exclusively under the CFTC’s jurisdiction if the index is
broad based, but the same product may be deemed a security if the index’s composition changes.
See, generally, CFTC, Security Futures Products Overview (Jan. 13, 2015), available at
https://cftc.gov/IndustryOversight/ContractsProducts/SecurityFuturesProduct/sfpoverview.html.
The SEC’s excessive overreach in its attempted TRO and related discovery is instructive to the
SEC’s overall approach. A district court recently ordered the SEC in another digital assets case to
5
Page 14 Complaint is filled with vague allegations of fraud, “manipulative trading,” and “wash trading.”
But the only “fraud” the SEC actually alleges is that BAM’s adoption of a standard compliance
program became securities fraud because it was not 100% effective. Resp. at 38-39. Such
allegations fall well short of Rule 9(b)’s heightened pleading standard. The Court must give effect
to the actual statutes passed by Congress and halt the SEC’s regulate-and-strangulate-byenforcement strategy.ARGUMENT
I.
THE SEC FAILS TO ALLEGE ANY OF THE PRODUCTS ARE SECURITIES.
A.
The SEC Was Required to Plead the Existence of a Contract.
The Court must dismiss the SEC’s claims regarding secondary market trading in the Digital
Assets because the claims are entirely premised on the flawed argument that the SEC can simply
delete “contract” from the term “investment contract.” The SEC fails to allege the existence of any
sort of contractual arrangement between BAM’s customers and BAM (or any other party) in
connection with the sale of the Digital Assets on BAM’s platform and instead advances the
untenable position that an investment contract can exist without any sort of contractual
arrangement.13 The SEC’s pleading is thus fatally deficient and should be dismissed.
show cause for why the court should not impose sanctions on the SEC due to concerns that “the
Commission made materially false and misleading representations” while “seeking an ex parte
TRO and while later seeking to preserve the TRO.” Order to Show Cause, SEC v. Digital Licensing
Inc d/b/a Debt Box, No. 23-cv-00482-RJS-DBP, Dkt. 215 (D. Utah Nov. 30, 2023).
See Nov. 27, 2023 Status Conf. Tr. at 31-32, Dkt. 180 (detailing the “significant harm” to BAM
due to the SEC’s unwarranted TRO, including layoffs of hundreds of employees, limited or
terminated relationships with many banking partners, average monthly volume of assets on the
platform decreasing “by almost 90 percent,” and a loss of “almost half” of users on a monthly
basis).
The Amicus Curiae brief filed by the New Finance Institute concedes that the crystallized Howey
test does not extend to the Digital Assets by proposing that the SEC be granted permission to
regulate investment contracts pursuant to a novel, disjunctive, “Modified Howey” test with no legal
basis whatsoever. See Br. Amicus Curiae New Finance Institute at 3-4, Dkt. 176.
6
Page 15 Courts must “give effect, if possible, to every clause and word of a statute.” Williams v.
Taylor, 529 U.S. 362, 404 (2000). The SEC does not have free rein to inject into “investment
contract” whatever expansive meaning it sees fit by claiming that the statutory terms “investment”
and “contract” are not words to be given effect but mere “labels” that “do not themselves define
the term.” Resp. at 26, 27. The phrase “investment contract” is no mere “label.” Instead, in Howey
the Supreme Court held that the term “investment contract” not only had meaning but had a very
clear meaning, and that its meaning had been “crystallized by . . . prior judicial interpretation” of
decades of state court opinions that “uniformly applied” the definition for an “investment
contract.” Howey, 328 U.S. at 298.
Howey followed the numerous state courts that endorsed the standard articulated in State
v. Gopher Tire & Rubber Co., 177 N.W. 937 (Minn. 1920), that an “investment contract”
unsurprisingly includes an investment and a contract. Id.14 The SEC misleadingly claims that
Gopher Tire supports its position because post-sale obligations were placed “on the investor, not
the promoter.” Resp. at 24. However, in Gopher Tire, the court identifies several profit-sharing
obligations imposed on the promoters, plainly refuting the SEC’s stance. 177 N.W. at 937-39.
When Congress enacted the securities laws, state courts applying the definition of “investment
contract” consistently included: (1) a contractual right and (2) a right to future value. Howey, U.S. at 298; see also Br. Amicus Curiae Paradigm Operations LP at 8, Dkt. 128-1 (“Paradigm
Br.”). The SEC asks this Court to disregard both the actual words used by Congress (“contract”)
and the clear Congressional intent as articulated in Howey. The SEC only seeks to do so here

See, e.g., State v. Heath, 153 S.E. 855, 857 (N.C. 1930) (reasoning that “investment contract”
“implies the apprehension of an investment as well as of a contract.”); Br. at 13, 13 n. 6 (collecting
cases). see also Brief for the Amici Curiae Securities Law Scholars at 3-17, SEC v. Coinbase, Inc.,
Case No. 23-cv-04738-KPF (S.D.N.Y. Aug. 11, 2023), Dkt. 59 (discussing pre-Howey state cases).
7
Page 16 because it cannot plead that the transactions on BAM’s platform confer to customers any
contractual claim to the future income, profit, or assets of a business enterprise.
1.
The SEC Admits Howey Was Premised on a Contract.
The SEC concedes that contractual terms were “present and relevant” in Howey but then
claims “they were not dispositive or required.” Resp. at 21. The SEC selectively quotes a portion
of one sentence in Howey stating that it is “immaterial whether the shares in the enterprise are
evidenced by formal certificates or by nominal interests in the physical assets employed in the
enterprise.” 328 U.S. at 299. But the Supreme Court was not stating that a contractual arrangement
was “immaterial.” Rather, the Supreme Court was explaining that when deciding if an investment
agreement exists, a court should look not only to the four corners of each individual contract or
arrangement but also to the broader context of the relevant transaction. Doing this, the Howey
Court determined that the “shares in the enterprise are evidenced by land sales contracts and
warranty deeds.” Id. at 300. These associated contracts and contractual terms were the essence of
the investment and certainly were “required” for the investment contract to exist.The SEC’s position that Howey does not “require[]” contractual terms is also inconsistent
with its own prior briefing. See MTD at 13, 17-18; Brief for the SEC, SEC v. Edwards, No. 021196, 2003 WL 21498455, at *17 (U.S. June 26, 2003) (“[t]he second word in the quoted term,
‘contract,’ means ‘[a]n agreement between two or more persons to do or forbear something.’ Thus,
the very term ‘investment contract’ makes clear that instruments of that name include those in

Nor should the Court give any credence to the SEC’s unmoored claim in its Response that the
district court cases from this Circuit cited in BAM’s MTD somehow “foreclose any argument that
post-sale, legally enforceable managerial efforts or payments are required” to find an investment
contract. Resp. at 24. In its opening brief, BAM identified promises by promoters to deliver future
value to investors in each of the three cases the SEC cites (and in the five other decisions the SEC
does not even attempt to distinguish). See MTD at 14-15 n. 7.
8
Page 17 which a return—whether labeled income or profit—is promised in a contract”) (emphasis added);
Brief for the SEC at 9, 28-29, SEC v. W.J. Howey Co., No. 843, 1946 WL 50582 (U.S. Apr. 17,
1946) (“contractual rights of investors” are probative of whether the “character of a transaction
was that of an investment contract”) (emphasis added). The SEC tries to walk back this language
by suggesting its briefs only argued investment contracts can “include” contractual arrangements,
not that they must do so. Resp. at 27. However, if the SEC’s briefing did not address whether all
investment contracts require a contractual arrangement, then the SEC certainly cannot have it both
ways by arguing that, in Howey or Edwards, the Supreme Court ruled on a question not before it
and found that an investment contract does not require a contractual arrangement. Resp. at 21.
The SEC cannot avoid the multiple contractual arrangements necessary to form the
investment contract identified in Howey. Resp. at 21. The SEC quotes from the Supreme Court’s
decision in Joiner in which the Court found it “unnecessary to determine” an issue of state contract
law in assessing whether an investment contract existed. Resp at 25 (quoting SEC v. C. M. Joiner
Leasing Corp., 320 U.S. 344, 349 (1943)). However, the full context directly contradicts the SEC’s
claims that contracts are not essential: “But at any rate, the acceptance of the offer quoted made a
contract in which payments were timed and contingent upon completion of the well and therefore
a form of investment contract in which the purchaser was paying both for a lease and for a
development project.” Joiner, 320 U.S. at 349.
The SEC quotes SEC v. Banner Fund Int’l to suggest that an investment contract is “anything
that investors purchase” (emphasis added), so a contract is not required. Resp. at 21 (citing Banner
Fund, 211 F.3d 602, 614 (D.C. Cir. 2000)). However, the SEC glosses over the full context of the
quotation, which is that “[a]n investment contract is, for these purposes, anything that investors
purchase with (1) an expectation of profits arising from (2) a common enterprise that (3) depends
upon the efforts of others.” 211 F.3d at 614 (restating Howey). The SEC also fails to acknowledge
that there was a contract at issue in Banner, just as there was in every other case the SEC tries to
cite for the proposition that investment contracts do not require contracts. Id. at 606.
9
Page 18 2.
The Term “Scheme” in Howey Does Not Magically Remove the
“Contract” Requirement of “Investment Contract.”
The SEC also seeks refuge in the term “scheme” in Howey and subsequent case law to
argue that an investment contract can be found in the absence of any contractual arrangement. See
Resp. at 21 (citing Hocking v. Dubois, 885 F.2d 1449, 1457 (9th Cir. 1989)). No case supports this
position and Howey itself rejects the notion that a “scheme” can be severed from a contractual
arrangement, explaining the flexibility of the Howey test as addressing “the countless and variable
schemes devised by those who seek the use of the money of others on the promise of profits.”
Howey, 382 U.S. at 299 (emphasis added). Similarly, the Edwards Court emphasized the
importance of contracts to investment contracts by finding a negotiated, contractual entitlement to
a fixed return could form the basis of an investment contract. Edwards, 540 U.S. at 397 (“We are
considering investment contracts.”) (emphasis in original).
The SEC also incorrectly suggests that Terraform Labs concluded that a scheme under
Howey can apply in the absence of contractual obligations. Resp. at 26 (quoting SEC v. Terraform
Labs Pte., Ltd., 2023 WL 4858299, at *11 (S.D.N.Y. July 31, 2023)). While the court in Terraform
noted that a “technically valid written or oral contract under state law” was not required, it still
required a contractual relationship – acknowledging that “scheme” applied to circumstances where
the “contracting parties agree – that is, scheme – that the contractee will make an investment of
money in the contractor’s profit-seeking endeavor.” Terraform, 2023 WL 4858299, at *11. The
same is true for the other district court digital assets decisions the SEC cites. See SEC v. Ripple
Labs, Inc., 2023 WL 4507900, at *7 (S.D.N.Y. July 13, 2023) (institutional sales of XRP token
through contracts reflected “an investment in Ripple’s efforts”).
The SEC mischaracterizes BAM’s position as being that “sales of crypto assets on trading
platforms and in secondary markets can never be sales of investment contracts.” Resp. at 33. BAM
10
Page 19 B.
Even if an Investment Contract Did Not Require a Contract (Which It Does),
the SEC Fails to Plead the Elements of Howey.
The SEC does not dispute that the Digital Assets are solely computer code but claims they
are different from ordinary commodities like an orange which can be separated from the “orange
grove enterprise” at issue in Howey because “[a] crypto asset does nothing on its own.” Resp. at
28-29. The SEC’s circular definition cannot differentiate the Digital Assets the SEC claims are
securities from others such as bitcoin and ether which it says are “not at issue” here. Id. at 74. Even
if the Court were to accept the SEC’s incorrect proposition that an “investment contract” does not
require a contract, its hodge podge of general allegations about the Digital Assets do not allege the
elements of an investment contract under Howey.
1.
The SEC Fails to Plead that Purchasers of Digital Assets on BAM’s
Platform Invested Money into a “Common Enterprise.”
The SEC fails to allege a “common enterprise” under Howey because the Complaint’s
allegations foreclose the possibility of finding either horizontal or vertical commonality.
Horizontal commonality is “defined by the pooling of investment funds, shared profits, and shared
losses . . . .” SEC v. Life Partners, Inc., 87 F.3d 536, 543 (D.C. Cir. 1996). The SEC concedes that
the funds BAM received for sales of Digital Assets were never remitted to the issuers or developers
associated with those assets. Compl. ¶ 91 (buyers and sellers of Digital Assets are not known to
each other, and “[u]pon execution of a trade, other functionality in the Binance.com Platform
settles the trade”); id. ¶¶ 223-24 (BAM matching engine functions similarly); id. ¶¶ 232-(customer funds are held at Trust Company B). This is fatal to a finding of horizontal commonality.
As the SEC admits, “courts have found horizontal commonality where investors’ funds were
never argued that. Rather, BAM’s position is that simply because an asset may, at some point, be
part of an investment contract does not make the asset itself an investment contract in perpetuity.
11
Page 20 pooled to develop a crypto asset and related ecosystem, or investors shared pro rata in the success
or failure of the enterprise through changes in the price of the crypto asset,” but there was no
pooling here, nor does the SEC allege that Digital Assets included rights to the profits of any
enterprise. Resp. at 12.
The SEC cannot cure its deficient pleading by arguing horizontal commonality exists
because secondary market purchasers “purchased identical tokens whose prices rise and fall
together,” making their fortunes “interdependent.” Resp. at 18. This situation is no different than
what secondary market purchasers experience with bitcoin—a commodity that the SEC concedes
is not at issue. The essential piece missing from the SEC’s analysis is that horizontal commonality
requires that “the fortunes of each investor depend on the profitability of the enterprise as a whole
. . .” Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994) (internal citations omitted)
(emphasis added). By conflating BAM’s customers’ interests in the value of the Digital Assets
with interests in the value of the respective issuer’s or promoter’s business as a whole, the SEC
“seeks to impose liability by reducing the ‘common enterprise’ requirement to a ‘common interest’
requirement.” Paradigm Br. at 15 (emphasis in original). Indeed, secondary market purchases of
the Digital Assets in the absence of proceeds being remitted to the issuers of those assets are
nothing like the “common enterprise” found by the court in SEC v. Kik Interactive Inc., in which
the issuer “pooled proceeds from its sales of Kin in an effort to create an infrastructure for Kin,
and thus boost the value of the investment.” 492 F. Supp. 3d 169, 179 (S.D.N.Y. 2020).
The SEC also suggests that in the absence of horizontal commonality a form of “vertical
commonality” may be sufficient to find a common enterprise. Resp. at 11-12. It is not.18 This Court

While this Circuit has not ruled on this question, horizontal commonality is the only approach
that is consistent with the Securities Act. Horizontal commonality fits within the securities laws
12
Page 21 previously concluded that using vertical commonality – which requires the investors’ success to
rely on “the skill of the promoter” – would “impermissibly collaps[e] the second and third elements
of Howey.” SEC v. Int’l Loan Network, Inc., 770 F. Supp. 678, 690 (D.D.C. 1991), aff’d, 968 F.2d
1304 (D.C. Cir. 1992) (internal citation omitted); see also Revak, 18 F. 3d at 88. The Court should
also not accept “strict vertical commonality” (which requires that the fortunes of investors are tied
to the fortunes of the promoter), but even if it did, the SEC’s allegations fall plainly short. See
Resp. at 11-12 (citing Life Partners, 87 F.3d at 543-45). The SEC does not (and could not) allege
that BAM’s customers have strict vertical commonality with either BAM (who solely receives
transaction fees) or the issuers of the Digital Assets (whose fortunes could rise or fall
independently of the prices of the assets they once issued for any number of reasons).
2.
The SEC Concedes “Post-Purchase Efforts” Are Necessary but Fails
to Plead Any Such Efforts by BAM.
The SEC concedes that, in this Circuit, the “efforts of others” prong of Howey requires
“post-purchase efforts.” Resp. at 14 (citing Life Partners, 102 F.3d at 548).19 To meet this prong,
this Circuit requires “post-purchase service . . . that could be fairly characterized as
entrepreneurial.” Id. at 548 (recognizing that “post-purchase entrepreneurial activities are the
‘efforts of others’ most obviously relevant to the question whether a promoter is selling a
because the Securities Act “is a disclosure statute” and “requires promoters and issuers to make
uniform disclosure to all investors, and this requirement makes sense only if the investors are
obtaining the same thing, namely, an undivided share in the same pool of assets and profits.” Wals
v. Fox Hills Dev. Corp., 24 F.3d 1016, 1019 (7th Cir. 1994) (emphasis in original). By contrast,
vertical commonality does not fit and has also been rejected in other Circuits. See, e.g., id. at 1018;
Deckebach v. La Vida Charters, Inc. of Fla., 867 F.2d 278, 281 (6th Cir. 1989); Salcer v. Merrill
Lynch, Pierce, Fenner & Smith Inc., 682 F.2d 459, 460 (3d Cir. 1982).
The Life Partners court also noted the SEC’s failure to point “to a single case in which an
investment vehicle was deemed a security subject to the federal securities laws although the
investor did not look to the promoter (or another party) to provide significant post-purchase
efforts.” Id.
13
Page 22 ‘security’”). The SEC claims to have “well-pled allegations” of post-purchase efforts by “issuers,
developers, and promoters.” Resp. at 20. However, the SEC fails to allege that the buyers of the
Digital Assets on BAM’s platform were parties to any contractual arrangements with the issuers
or promoters that could create such post-purchase obligations.20 The SEC tries to address this by
claiming that “[t]he Complaint alleges that all investors received the same marketing materials and
other public promises of promoters and issuers.” Resp. at 35; see also Resp. at 20 n. 1. Yet the
SEC contradicts that premise by conceding that buyers and sellers of the Digital Assets on BAM’s
platform had no idea who any of the other buyers and sellers were. Compl. ¶¶ 91, 224, 262. For
OCBS and Convert services, the SEC pleads BAM was the counterparty. Id. ¶ 228. This Court
correctly observed that once the Digital Assets are available “on the platform and people can trade
them, sell them, and repurchase them . . . people aren’t responding to the initial offering, they’re
responding to the asset.” MTD at 24 (citing Tr. of TRO Hr’g at 14–15 (June 13, 2023), Dkt. (cleaned up) (emphasis added)).Even in Ripple, where the court (not in this Circuit) explicitly stated the SEC did not need
to show post-purchase efforts by the promoter, the court nevertheless found that the XRP token
was not a security when sold through “blind bid/ask transactions” because the sellers “could not
have known if their payment of money went to Ripple, or any other seller of XRP.” SEC v. Ripple
Likewise, the SEC fails to identify any significant post-purchase managerial or entrepreneurial
efforts promised or undertaken by BAM with respect to any of the Digital Assets. Resp. at 14, 20;
see generally Compl. ¶¶ 352-509. The SEC’s Response also fails to identify any allegations in the
Complaint of BAM amplifying token issuers’ messages on its platform. See Resp. at 19.

The SEC’s deficient allegations are easily distinguishable from the SEC’s registration claims
against Terraform Labs. As previously discussed, SEC v. Terraform Labs does not negate the
contract requirement of an “investment contract.” In addition, the court there was addressing
whether the developer and issuer of the assets in question could have violated the securities laws
by selling those assets directly to buyers on secondary markets, but the court did not address
secondary market transactions in those assets solely between third parties (like those here).
Terraform Labs, 2023 WL 4858299, at *3, 15.
14
Page 23 Labs, Inc., 2023 WL 4507900, at *11 (S.D.N.Y. July 13, 2023). The “economic reality is that a
Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know
to whom or what it was paying its money.” Id. The SEC correctly notes that the Ripple court did
not explicitly conclude that all secondary market sales of XRP could not be investment contracts
as that question was not before the court. However, it logically follows that if blind bid-ask sales
by the issuer of XRP itself were not investment contracts, then blind bid-ask sales by any number
of anonymous sellers on BAM’s platform are not either. Id. at *11 n. 16.
Instead of pleading facts about how the Digital Assets could be investment contracts when
bought and sold on BAM’s platform, the SEC simply asserts that the “crypto assets cannot be
separated from the investment contracts they represent,” Resp. at 29, but that simply is not the law.
No court has concluded this and in Terraform Labs, on which the SEC relies, the SEC conceded
that the relevant digital asset was not itself an investment contract. See Tr. of Oral Arg. at 55:1724, Terraform Labs, No. 23 Civ. 1346, (S.D.N.Y. June 15, 2023), Dkt. 42. The SEC relies on Friel
v. Dapper Labs, but that was a case brought against a company that issued NFTs while also
creating and controlling a private blockchain that was the only market where purchasers could
trade those NFTs – a point the court found decisive. 2023 WL 2162747, at *1 (S.D.N.Y. Feb. 22,
2023) (The “critical causal connection” alleged was that “if, hypothetically, Dapper Labs went out
of business and shut down the Flow Blockchain, the value of all Moments would drop to zero”).
This is materially distinguishable from the BAM platform’s role as one of numerous markets for
the purchase and sale of the Digital Assets (none of which the SEC alleges BAM created). The
SEC has thus failed to plead the elements of Howey itself, requiring dismissal of the registration
claims.
15
Page 24 C.
The Staking Claim Must be Dismissed.
BAM’s role in staking—–facilitating customer orders with IT and providing other
ministerial services—–is not an investment contract. The SEC concedes it is “the blockchain
protocol” that “select[s] block validators from crypto asset holders who have committed or
‘staked’” their assets, Compl. ¶ 68,22 but nevertheless argues that BAM “offer[s] and sell[s]” an
investment contract because it provides ministerial technical services to customers who wish to
stake their own digital assets with third-party node operators. See Resp at 41. The SEC is wrong.
First, the SEC fails to plead that BAM’s staking services involve an “investment of
money.” MTD at 32-34. No part of the process by which customers designate their own digital
assets for staking and receive staking rewards involves a customer “commit[ting] his assets to the
enterprise in such as a manner as to subject himself to financial loss.” SEC v. Rubera, 350 F.3d
1084, 1090 (9th Cir. 2003); see Resp. at 43. When a BAM customer elects to stake his or her digital
assets, the customer maintains ownership over the assets, including staking “for as long as the
[customers] choose to stake their tokens.” Compl. ¶ 350; see also MTD Ex. 5 (“Notwithstanding
anything herein to the contrary, . . . the Digital Assets held in your Account(s) are owned and
controlled by you and title to the Digital Assets held in your Account(s) shall at all times remain
with you.”) (emphasis added). The SEC tries to plead a “risk of loss” by vaguely pointing to
“slashing penalties,” “operational risks,” “[BAM’s] solvency,” and “changes in the value of . . .
crypto assets while committed to these programs” as “unique risks” associated with BAM’s staking
services. Resp. at 43. However, the risks customers face from slashing and potential changes in
value of the staked assets are the same risks customers would face if staking without BAM’s

For an accurate explanation of how the technical process of staking through third-party service
providers works, see Brief for the Amici Curiae DeFi Education Fund at 10-19, SEC v. Coinbase,
Inc., Case No. 23-cv-04738-KPF (S.D.N.Y. Aug. 11, 2023), Dkt. 60.
16
Page 25 involvement, and the SEC does not even allege any slashing-related losses by BAM’s staking
customers occurred. See Compl. ¶¶ 341, 349.23 Vague allegations regarding BAM’s potential
solvency and operational risks without a specific connection to its ministerial role in the customer’s
staking process are insufficient for the Court to find that BAM’s customers “place[] [their] money
at risk in anticipation of a profit.” United States v. Bowdoin, 770 F. Supp. 2d 142, 149 (D.D.C.
2011) (internal citation omitted).
Second, the SEC fails to plead that BAM’s ministerial staking services constitute
significant entrepreneurial post-purchase “efforts of others.” Resp. at 43-44. In Life Partners, the
court found that the “efforts of others” prong was not satisfied by the combination of “pre-purchase
services as a finder-promoter” and “largely ministerial post-purchase services.” 87 F.3d at 548.
After customers purchased a fractional interest in a medical insurance policy from LPI, LPI would
provide on-going administrative services that included ensuring the policy did not lapse,
converting group policies into individual polices and arranging for resale of the customer’s
interest. Id. at 540. The court noted that purchasers’ “profit depends entirely upon the mortality of
the insured,” categorized LPI services as “ministerial” and refused to find that LPI’s efforts were
those from which purchasers expected to profit. Id. at 548. The SEC’s allegations that BAM
offered “technical expertise and knowhow, industry relationships, and infrastructure” are
unavailing; to the extent any of these characteristics refer to services provided by BAM, they do

The SEC miscasts the risk of staked assets changing in value as related to BAM when it alleges
that “BAM Trading will not allow users to sell or withdraw crypto assets while they are staked.”
Compl. ¶ 349. The SEC recognizes that certain blockchain protocols, and not BAM, designate
“bonding” or “lock-up” periods for staked assets. See id. ¶ 347; see also MTD at 34 n. 12, 42.
17
Page 26 not satisfy Howey because they refer to pre-purchase efforts, comparable to the pre-purchase
services that LPI provided as a “finder-promoter.” Compl. ¶ 343; Life Partners, 87 F.3d at 548.D.
The Major Questions Doctrine Precludes SEC Action.
The SEC contends this is simply a “routine” enforcement action. Resp. at 46. That assertion
is false. Chair Gensler previously urged Congress to act to provide the SEC additional authority to
regulate cryptocurrencies.25 Having failed to achieve authority from Congress, the SEC decided to
act on its own, bringing multiple lawsuits against various digital asset platforms, while at the same
time avoiding formal rulemaking.26 As this Court wisely questioned during a previous hearing,
“Why is it prudent, from the Commission’s point of view, to assign the determination that would
have such far-reaching [e]ffects in a billion dollar industry to a lone federal district judge . . . ?”
Dkt. 69 at 28:12-16 (June 13, 2023). The SEC asks this Court for a radical expansion of the
agency’s authority under Howey to allow it to impose substantial penalties on a trillion-dollar
industry without Congressional approval. Whether as a matter of statutory construction or by
invoking the major questions doctrine, the Court should intervene to preserve the CFTC’s and

The SEC’s generalized allegations regarding BAM’s solvency and operations also do not satisfy
the “efforts of others” requirement of Howey. See Life Partners, 87 F.3d at 545 (“The promoter’s
‘efforts’ not to engage in criminal or tortious behavior, or not to breach its contract are not the sort
of entrepreneurial exertions that the Howey Court had in mind when it referred to profits arising
from ‘the efforts of others.’”).

Hr’g Before the U.S. H. Fin. Servs. Comm., 117th Cong. 12 (May 6, 2021); see also Katanga
Johnson, U.S. SEC Chair Gensler calls on Congress to help rein in crypto “Wild West”, REUTERS
(Aug. 3, 2021) (Chair Gensler stated, “We need additional congressional authorities to prevent
transactions, products and platforms from falling between regulatory cracks.”).
In 2022, Coinbase submitted a rulemaking petition seeking clarity around how existing securities
laws affect digital assets and on April 26, 2023 filed a petition with the Third Circuit seeking a
writ of mandamus to force the SEC to respond to its petition. In re: Coinbase Inc., 23-1779 (3d
Cir. 2023). The SEC has still failed to do so, repeatedly urging delay. Id. (Letter for Respondent
SEC, Dkt. 37). Meanwhile, the SEC continues regulating by enforcement. See SEC v. Payward,
23 Civ. 6003 (N.D. Cal. Nov. 20, 2023).
18
Page 27 other agencies’ (as well as states’) existing jurisdiction and allow Congress to decide. See FDA v.
Brown & Williamson, 529 U.S. 120, 144 (2000) (court must interpret scope of regulatory authority
granted by statute “as a symmetrical and coherent regulatory scheme”).
II.
THE SEC FAILS TO STATE CLAIM UNDER SECTION 17(A).
The SEC’s unsupported allegations of fraud leveled against BAM have succeeded in doing
great damage to BAM, see supra at 6 n.12, but fail to state a plausible legal claim. The SEC needed
to plead with specificity that (1) a material volume of the self-match trades was executed with the
intent to deceive by the individual entities or algorithms that made those trades and (2) BAM
knowingly misrepresented the presence of those trades through its descriptions of its compliance
programs. The SEC has not adequately alleged either set of facts under Rule 9(b). Thus, even if
the Digital Assets were securities (and they are not), the SEC’s fraud claims should be dismissed.
BAM’s purported “misstatements” include the compliance policy itself, requirements that
users follow the policy, and descriptions about BAM’s compliance with the policy. Such
statements regarding a compliance program are inherently aspirational even when describing
present (rather than future) activity, and the SEC does not distinguish the cases BAM cited to this
effect. MTD at 42 (citing In re Citigroup Sec. Litig., 2023 WL 2632258, at *15 (S.D.N.Y. Mar.
24, 2023) (present tense statement about compliance too general and aspirational to be
actionable)).27 BAM’s statements that it had compliance procedures “did not reasonably suggest
that there would be no violations.” Retail Wholesale, 845 F.3d at 1278.

See also Retail Wholesale & Dep’t Store Union Loc. 338 Ret. Fund v. Hewlett-Packard Co., F.3d 1268, 1278 (9th Cir. 2017) (compliance materials “inherently aspirational” despite being
“stated affirmatively and in the present tense”). The SEC relies on this Court’s decision in SEC v.
RPM Int'l, Inc., 282 F. Supp. 3d 1, 25 (D.D.C. 2017), but in that case, numerous misstatements
were alleged, only one of which related to the effectiveness of internal controls, and the Court
never addressed the sufficiency of that particular allegation.
19
Page 28 The SEC attempts to transform those statements into misrepresentations by claiming they
were made at a time that BAM knew wash trading was taking place and at a level that would be
material to an investor. Resp. at 54. But that sleight-of-hand does not relieve the SEC of its burden
to plead wash trading with particularity. A wash trade does not occur every time orders for the
same beneficial owner match. Instead, a self-matched trade is only a wash trade if the trader also
intends the two trades to match and does so hoping to deceive investors. Compl. ¶ 240; Rockies
Fund, Inc. v. SEC, 428 F.3d 1088, 1093 (D.C. Cir. 2005). The SEC cannot say “wash trading”
without also pleading facts that establish the elements of wash trading. Similarly, the SEC’s
allegation that one employee in January 2021 noted that it was theoretically possible for wash
trading to occur does not amount to alleging that such wash trading by third parties actually did
occur and was known to BAM. Compl. ¶ 264; see Omnicare, Inc. v. Laborers Dist. Council Constr.
Indus. Pension Fund, 575 U.S. 175, 183-84 (2015) (complaint must plead sufficient facts showing
defendant did not genuinely believe its statements were true at the time they were made).
Focusing on the adequacy of the wash trading allegations is not a “fundamental
misunderstanding of the SEC’s claim.” Resp. at 55. Rule 9(b) requires all averments of fraud to
be pled with specificity or else the “district court should disregard those averments or strip them
from the claim. The court should then examine the allegations that remain to determine whether
they state a claim.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1104–05 (9th Cir. 2003).
“[W]here, as here, securities fraud claims are based on failure to disclose uncharged illegal
conduct, the complaint must state a plausible claim that the underlying conduct occurred.” Das v.
Rio Tinto PLC, 332 F. Supp. 3d 786, 803 (S.D.N.Y. 2018). So too here, the SEC cannot charge
that BAM was negligent for failing to detect purported wash trading without properly alleging the
underlying wash trading with particularity. The SEC admits that the Complaint does not allege
20
Page 29 intent to deceive but only allegations equally consistent with trading activity that the SEC
recognizes as lawful and legitimate—“bona fide self-trades” from separate trading strategies at the
same firm. MTD at 39-40; see Compl. ¶ 33. Thus, every wash-trading allegation by the SEC is
conclusory and the Court must “strip” all such allegations from the Complaint. Vess, 317 F.3d at
1104.
Even if the SEC had alleged wash trading occurred, the minimal amount alleged is
immaterial as a matter of law. Information qualifies as material only if “there is a substantial
likelihood that a reasonable shareholder would consider it important” in making an investment
decision as a result of it “having significantly altered the ‘total mix’ of information made
available.” RPM Int’l., 282 F. Supp. 3d at 23 (internal citations omitted). The only specific selftrading the SEC alleges is in one digital asset, COTI, during an 11-day period. Compl. ¶ 274.The SEC attributes this trading to Sigma Chain, not BAM, in the conclusory allegation “Sigma
Chain also engaged in wash trading.” Id. Even if the SEC had alleged with particularity that the
trading by Sigma Chain was done with improper intent, and that BAM was aware of Sigma Chain’s
intent during this one cherry-picked example, the alleged self-trading accounted for only 7.8% of
the volume of COTI sold on BAM.29 But more importantly, it represented only 0.01% of the total
volume on BAM during this “strategic” 11-day period.
The SEC also alleges that “wash trading” occurred from June through August 2021 in 51 of digital assets. Compl. ¶¶ 272-275. These vague allegations fail Rule 9(b) as the SEC makes no
allegations regarding the volume of such trading, despite having available all trading data. See also
Dkt. 40 at 30 (noting that only 0.14% of BAM’s aggregate trading volume from June through
August 2021 resulted from the purported self-trades by Sigma Chain).
Total volume of purported “wash trades” (3,712,678) divided by total volume of trades
(47,740,838). Compl. ¶ 274.

COTI was trading at 25 cents (see https://www.coindesk.com/price/coti/) and total volume times
25 cents equals $891,042, which is $81,004 per day. At the time, BAM was trading $24 billion
21
Page 30 The SEC theorizes that self-trading could have affected the decisions of some unspecified
digital asset investors as to which digital asset to trade. Resp. at 57. But that allegation is absent
from the Complaint. See Compl. ¶ 278 (alleging only that “[v]olume is important for investors in
crypto asset securities”). It also does nothing to suggest that BAM could have been negligent in
failing to identify that 0.01% of its trades purportedly resulted from wash trading. Materiality is
not a “quibble” and nothing prevents it from resolution on a motion to dismiss. Resp. at 55. The
SEC attempts to rely on In re Xcel Energy, Inc., 286 F. Supp. 2d 1047, 1056 (D. Minn. 2003), but
that case actually helps BAM. The court noted that less than 10% of revenue coming from wash
trading might not be material but 50% would be. Id.31 Here, the SEC only alleges a volume of
0.01% during a “strategic” period. Compl. ¶ 271. Courts regularly find impacts of less than 1%
immaterial as a matter of law and should do the same here.A.
The SEC States No Claim of Fraud against BAM’s Customers.
The claims relating to BAM’s customers fail for additional reasons. The SEC has failed to
plausibly allege that defendants obtained money or property “through the use of the misstatements
or omissions.” RPM Int’l., 282 F. Supp. 3d at 14, 30 (emphasis added) (noting SEC cannot leave
court “guessing as to whether . . . compensation was affected by making a false statement”). The
monthly or $800 million per day. Compl. ¶ 256. $800 million daily revenue divided by $81,003 in
daily self-trades equals 0.01% of trading volume during the 11-day period.
The SEC also quotes dicta out of context from a case involving spoofing (not wash trading).
Resp. at 55 (quoting United States v. Coscia, 177 F. Supp. 3d 1087, 1091-92 (N.D. Ill. 2016)).
See In re Xcel Energy, Inc., 286 F. Supp. 2d at 1056; In re Westinghouse Sec. Litig., 90 F.3d
696, 715 (3d Cir. 1996) (misstatements affecting 1.2% immaterial as matter of law at pleading
stage); Masters v. GlaxoSmithKline, 271 F. App’x 46, 50 (2d Cir. 2008) (affirming dismissal at
pleading stage as misstatements relating to 3% of revenue immaterial as a matter of law); RPM
Int’l,, 282 F. Supp. 3d at 24 (noting 5% threshold for materiality); United States ex rel. PCA
Integrity Assocs., LLP v. NCO Fin. Sys., Inc., 2020 WL 686009, at *23 (D.D.C. Feb. 11, 2020)
(discussing 10% threshold).
22
Page 31 SEC claims that the “money or property” increased trading revenues by BAM but never connects
the trading revenue to the purported misstatements. Resp. at 55. It “is not sufficient that a
materially untrue statement was made and the person also made money.” SEC v. Wey, 246 F. Supp.
3d 894, 915 (S.D.N.Y. 2017).
For its Section 17(a)(3) claim, the SEC only alleges misstatements, and, as this Court has
noted, such a claim “must include more than the same misrepresentations or omissions underlying
the misstatement.” RPM Int’l, 282 F. Supp. 3d at 31. The SEC argues that Lorenzo v. SEC, 139 S.
Ct. 1094, 1096 (2019), stands for the proposition that misrepresentations alone are sufficient. Resp.
at 56. But the SEC made the same argument in SEC v. Rio Tinto PLC, 41 F.4th 47, 55 (2d Cir.
2022), and the Second Circuit rejected it, finding that Lorenzo held only that dissemination of false
information provides a basis for scheme liability—not that misstatements alone can trigger scheme
liability. Id.33 Alternatively, the SEC suggests its allegations concerning unspecified dissemination
are sufficient but fails to identify (as required) any allegations about the who, what, when, where
and how any such dissemination occurred.
Any purported statements to customers touting BAM as an exchange were not “in the offeror-sale” because they only would have influenced which exchange to use. The SEC offers no case
that contradicts this view.34 Alternatively, the SEC theorizes that BAM’s statements could have

The cases cited by the SEC only address whether dissemination of false statements can form the
basis of scheme liability; none address whether false statements alone can do so. Resp at 55 (citing
In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 709 (9th Cir. 2021) (analyzing whether dissemination
is sufficient for scheme liability); United States SEC v. Winemaster, 529 F. Supp. 3d 880, (N.D. Ill. 2021) (same); Malouf v. SEC, 933 F.3d 1248, 1259 (10th Cir. 2019) (same); In re Bed
Bath & Beyond Corp. Sec. Litig., 2023 WL 4824734, at *12 (D.D.C. July 27, 2023) (denying
motion to dismiss because the claim involved more than misstatements)).
The SEC argues that the cases cited by BAM, Brink and Goble, conflict with United States v.
Naftalin, 441 U.S. 768, 773 (1979). Resp. at 57. They do not. In Naftalin, the defendant lied to
brokers to induce them to place fraudulent sales, and the court found the defendant liable even
23
Page 32 affected the decisions of some unspecified investors as to which digital asset to trade. Resp. at 57.
But that allegation is entirely absent from the Complaint. See Compl. ¶ 278 (alleging only that
“[v]olume is important for investors in crypto asset securities”). And even if the alleged statements
had influenced which digital asset a particular investor purchased, such statements would not have
resulted in BAM obtaining any additional “money or property” (as BAM would have made money
regardless of which digital asset the investor obtained).
Finally, the SEC’s Response addresses arguments BAM raised as to why certain statements
(trading rules and 2019 webinar) were not applicable to equity investors and argues those
statements instead apply to digital asset traders. Resp. at 57-59. But these statements fail for the
same reasons discussed above as all the others.
B.
The SEC States No Claim of Fraud against Equity Investors in BAM.
In addition to the fundamental lack of adequate allegations of fraud in connection with
purported wash trading, the specific allegations as to BAM equity investors fail for additional
reasons. The SEC argues BAM misrepresented its trade surveillance program to equity investors
in the 2021 pitch deck and in a trade surveillance manual. Resp. at 59; MTD Exs. 3 & 4.35 As
discussed, such aspirational statements are not actionable, but even if they were, the SEC fails to
allege how it could be important to sophisticated investors that BAM had issues for a few months
effectively using one of seven vendors referenced a single time in the middle of a lengthy slide
though he was using an intermediary. Id. In contrast, Brink and Goble found statements to investors
about which trading platform, broker or investment account to use were not “in the offer-or-sale.”
Brink v. Raymond James & Assocs., Inc., 892 F.3d 1142, 1148-50 (11th Cir. 2018); SEC v. Goble,
682 F.3d 934, 943 (11th Cir. 2012).
BAM’s MTD argues that the trading rules and statements in the 2019 webinar cannot be
actionable against equity investors. The SEC’s Response does not dispute this, only arguing that
these statements are applicable to digital asset investors (which as discussed above, they are not).
Resp. at 57-58.
24
Page 33 deck. MTD Ex. 4; see also Parnes v. Gateway Inc., 122 F.3d 539, 546 (8th Cir. 1997). The SEC
has also failed to meet Rule 9(b)’s burden by alleging the “who” and “when”—pointing only to a
vague allegation that the July 2021 trade surveillance manual was “provided to Equity Investors”
without alleging that it was provided as part of a solicitation or at a time when the surveillance
procedures in it were not being followed. See Resp. at 59; Compl. ¶ 249. Thus, for all these reasons
the SEC has failed to properly allege any fraud claim under Section 17(a)(2) or 17(a)(3), and so
Count 13 must be dismissed.
CONCLUSION
There are no securities at issue in the SEC’s enforcement action against BAM. Instead, the
SEC is repeating its errors of the past by endeavoring to expand its jurisdiction through unilateral
actions and litigation regardless of the consequences to a large and growing industry and its
trespass into other regulators’ jurisdiction against Congressional direction. The correct way to
resolve these issues is through Congress, supported by interagency coordination. The Court should
put an end to the SEC’s reckless and destructive jurisdictional landgrab. For the foregoing reasons,
BAM’s Motion to Dismiss should be granted with prejudice.
In a footnote at the end of its brief, the SEC requests the Court find any dismissal of any of its
claims for any reason to be without prejudice and leave to amend. Resp. at 72 n. 6. The Court
should disregard this unsupported request. See Gregory v. ProNAi Therapeutics Inc., 757 F. App’x
35, 39 (2d Cir. 2018) (affirming denial of leave to amend securities claim where “plaintiffs sought
leave to amend in a footnote at the end of their opposition to defendants’ motion to dismiss” and
“included no proposed amendments”). “Rule 12(b)(6) dismissals are typically with prejudice and
do not require particular justification by the district court.” Rollins v. Wackenhut Servs., Inc., F.3d 122, 132 (D.C. Cir. 2012) (J. Kavanaugh, concurring) (explaining that parties have right to
amend their complaint within 21 days of receiving a motion to dismiss).
25
Page 34 Dated: December 12,
Respectfully submitted,
/s/ Daniel J. Davis
/s/ George S. Canellos
Daniel J. Davis (D.C. Bar #484717) (pro
hac vice)
KATTEN MUCHIN ROSENMAN LLP
1919 Pennsylvania Ave NW
Washington DC daniel.davis@katten.com
George S. Canellos (pro hac vice)
Matthew J. Laroche (pro hac vice)
MILBANK LLP
55 Hudson Yards
New York, NY GCanellos@milbank.com
MLaroche@milbank.com
Christian T. Kemnitz (pro hac vice)
Levi Giovanetto (D.C. Bar #1001160) (pro
hac vice)
Sheehan H. Band (pro hac vice)
KATTEN MUCHIN ROSENMAN LLP
525 W. Monroe Street
Chicago, IL christian.kemnitz@katten.com
levi.giovanetto@katten.com
sheehan.band@katten.com
Gary DeWaal (pro hac vice)
KATTEN MUCHIN ROSENMAN LLP
50 Rockefeller Plaza
New York, NY gary.dewaal@katten.com
Attorneys for Defendants BAM Trading
Services Inc. and BAM Management
Holdings US Inc.
Attorneys for Defendants BAM Trading
Services Inc. and BAM Management
Holdings US Inc
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