UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Securities and Exchange Commission

v. Case No. 21-cv-260-PB Opinion No.

LBRY, Inc.

MEMORANDUM AND ORDER

The Securities and Exchange Commission (“SEC”) prevailed on

summary judgment on its claim that LBRY, Inc. conducted unregistered

offerings of securities in violation of § 5 of the Securities Act, 15 U.S.C. § 77e.

LBRY has filed a motion to limit the SEC’s remedies. In response, the SEC

asks the court to order LBRY to pay a civil penalty of $111,614 and issue an

injunction restraining LBRY from violating § 5 of the Securities Act and from

participating in unregistered offerings of crypto asset securities in the future.

For the following reasons, I find that both an injunction and a civil penalty

are appropriate in this case.

I. BACKGROUND1

The SEC filed its complaint in March 2021, alleging that LBRY failed

to register its offer and sale of digital tokens, LBC, in violation of § 5 of the

1 The facts relevant to the enforcement action are discussed in detail in the summary judgment order. See SEC v. LBRY, Inc.,

,

, at *1-2 (D.N.H. Nov. 7, 2022). Here, I focus only on facts that bear on the question of remedies. Securities Act. The complaint requested injunctive relief, disgorgement, and a

civil penalty. LBRY and the SEC eventually filed cross-motions for summary

judgment addressing the sole issue of liability: whether LBRY was required

to register its offering of LBC under the Securities Act. I granted the SEC’s

motion and denied LBRY’s motion based on my conclusion that “no

reasonable trier of fact could reject the SEC’s contention that LBRY offered

LBC as a security, and LBRY [did] not have a triable defense that it lacked

fair notice” that it needed to register its offerings. SEC v. LBRY, Inc.,

,

, at *8 (D.N.H. Nov. 7, 2022).

LBRY subsequently filed a motion to limit the SEC’s remedies, arguing

that a nominal civil penalty of $50,000 is the only appropriate remedy under

the circumstances of this case, which do not involve allegations of fraud and

relate solely to violations of the registration requirement. In objecting to

LBRY’s motion, the SEC initially sought three forms of relief: (1) a

permanent injunction against both LBRY and its wholly-owned subsidiary

Odysee; (2) disgorgement of any profits LBRY made through its unregistered

offerings; and (3) a civil penalty equal to LBRY’s gross pecuniary gain.

Following a hearing on LBRY’s motion, I directed the parties to engage

in limited discovery concerning LBRY’s financials. In supplemental briefing

following discovery, the SEC withdrew its request for disgorgement and

limited its request for a civil penalty to $111,614. As for injunctive relief, the

2 SEC’s proposed final judgment would enjoin LBRY both from violating § 5 of

the Securities Act and, pursuant to § 21(d)(5) of the Exchange Act, from

participating in any unregistered crypto asset securities offerings. See Doc.

107-1. The proposed injunction would also bind any person or entity that falls

within the scope of Federal Rule of Civil Procedure 65(d). See id.

In response, LBRY did not object to the modified civil penalty but

continued to urge that an injunction should not issue. In the alternative,

LBRY proposed a final judgment that differs in three relevant respects from

the SEC’s proposal: (1) it expressly asks the court to find that the injunction

against LBRY does not apply to its subsidiary Odysee or any other user of

LBC; (2) it seeks a “clarification” that my summary judgment order “did not

find that LBC tokens were ‘securities’ in and of themselves”; and (3) it omits

the provision enjoining LBRY from participating in any unregistered crypto

asset securities offerings. See Doc. 108-1.2

2 LBRY also made a cursory argument—presented for the first time in its supplemental brief in support of the motion to limit remedies—that the “major questions doctrine” forecloses the SEC’s efforts to regulate digital assets. See Doc. 108 at 2 (citing West Virginia v. EPA,

, 2609 (2022)). This eleventh-hour argument has been forfeited. See Sierra Club, Inc. v. Granite Shore Power LLC, No. 19-CV-216-JL,

, at *7 (D.N.H. Sept. 13, 2019) (collecting cases for the proposition that arguments not raised in a moving party’s opening brief are deemed waived). Indeed, an argument challenging the SEC’s authority to bring this enforcement action should have been raised earlier in the case, especially since the cited Supreme Court case was decided before I held oral argument on the cross- motions for summary judgment. 3 II. ANALYSIS

A. Permanent Injunction

The SEC requests that I enjoin LBRY from violating § 5 of the

Securities Act and from participating in unregistered offerings of crypto asset

securities. LBRY responds that an injunction is neither appropriate nor

necessary to deter future wrongdoing because it intends to dissolve and

“burn” its store of LBC. In the alternative, LBRY argues that the scope of the

injunction should be narrowed in three relevant respects. I address the

appropriateness of injunctive relief before turning to LBRY’s arguments

concerning its scope.

A permanent injunction is appropriate where a defendant has violated

the securities laws and the SEC demonstrates there is a reasonable

likelihood that the defendant will do so again. SEC v. Smith,

,

, at *9 (D.N.H. July 2, 2015); see SEC v. Haligiannis,

(S.D.N.Y. 2007) (citing SEC v. Commonwealth Chem. Sec.,

Inc.,

(2d Cir. 1978)). “The federal courts are vested with wide

discretion when an injunction is sought to prevent future violations of the

statutory securities laws.” SEC v. John Adams Tr. Corp.,

(D. Mass. 1988). Factors that a court may consider in determining

whether a defendant is reasonably likely to commit future violations of the

securities laws include “(1) the egregiousness of the violation; (2) the degree

4 of scienter; (3) the isolated or repeated nature of the violations; and (4) the

sincerity of defendant’s assurances against future violations.” Haligiannis,

; see SEC v. Cavanagh,

, 135 (2d Cir.

1998).

The totality of these factors justifies issuing an injunction against

LBRY to prevent future violations of the securities laws. First, although

LBRY’s actions did not involve fraud, its violations were nonetheless more

egregious than a mere unregistered offering. LBRY’s efforts went beyond

selling its pre-mine of LBC. Instead, LBRY used its position as a market

maker of LBC, was “acutely aware of LBC’s potential value as an

investment,” and “made sure potential investors were too.” LBRY,

, at *4-5. Second, the continuous nature of LBRY’s unregistered

offering—which persisted in some form even after the lawsuit was filed and

the SEC’s position on the registration requirement became clear—points to a

risk of future violations.3 And third, at no point has LBRY acknowledged the

unlawfulness of its conduct. Whether considered individually or in

3 LBRY disputes the extent of its post-lawsuit sales of LBC but acknowledges that some did occur. Specifically, LBRY maintains that it last sold LBC on the open market in February 2021, shortly before the complaint was filed. It concedes, however, that small-volume sales continued via MoonPay, Inc. through November 2021 and via the employee purchase program through January 2022. See Doc. 100-2 at ¶¶ 1-5. 5 combination, these factors demonstrate a reasonable likelihood of future

violations.

LBRY responds that the possibility of future violations is nonexistent

because it “intends to dissolve as soon as possible” and is willing to divest

itself of its remaining pre-mined LBC. See Doc. 89-1 at 7. Despite making

those representations months ago, LBRY has not yet taken either action. In

any event, I cannot rule out the possibility of future violations by others who

are automatically bound by the injunction pursuant to Rule 65(d).

Rule 65(d) provides that an injunction binds not only the parties but

also the following persons who receive actual notice of the injunction: (1) “the

parties’ officers, agents, servants, employees, and attorneys;” and (2) “other

persons who are in active concert or participation” with them. Fed. R. Civ. P.

65(d)(2). Pursuant to this rule, an injunction against a corporation “also runs

against the corporation’s officers, in their corporate capacities.” Med. Mut.

Ins. Co. of Maine v. Indian Harbor Ins. Co.,

(1st Cir. 2009)

(emphasis in original) (quoting SEC v. Coffey,

(6th Cir.

1974)). But corporate representatives “cannot be held legally liable in their

personal capacities unless and until they are joined as parties to the suit.”

Under certain circumstances, an injunction against a parent

corporation may also bind its subsidiary or an independent corporation that

acts in active concert with the enjoined corporation or its agents. See Royal

6 Knitwear Co. v. N.L.R.B.,

(1945) (“Successors and assigns may

. . . be instrumentalities through which defendant seeks to evade an order or

may come within the description of persons in active concert or participation

with them in the violation of an injunction.”); Golden State Bottling Co. v.

N.L.R.B.,

(1973) (holding that a bona fide successor who

had “knowledge that the wrong remains unremedied” could be bound by an

injunction pursuant to Rule 65(d)); United States v. Philip Morris USA Inc.,

(D.C. Cir. 2009) (holding that a subsidiary may be

subject to an injunction against its parent regarding “the common corporate

business to the extent it is so identified in interest with the parent that it

represents precisely the same legal right in respect to the subject matter

involved in the injunction”) (cleaned up). For example, a subsidiary that

receives property from its parent in an attempt to sidestep an injunction or

that otherwise aids or abets the parent in violating the injunction can be held

in contempt. See 11A Wright & Miller, Fed. Prac. & Proc. Civ. § 2956 (3d ed.)

(collecting cases). But neither the mere existence of a corporate relationship

nor “a contractual arrangement . . . [that] relates to something other than the

subject matter of the injunction suit” is sufficient to bring a subsidiary within

the purview of Rule 65(d). Id.

Applying these principles, I agree with LBRY that the SEC has not

presented sufficient evidence to-date that Odysee, LBRY’s subsidiary, should

7 be enjoined. LBRY has cited evidence showing that Odysee has a distinct

organizational structure, operations, revenue stream, leadership, and bank

account. See Doc. 100-1. None of the evidence that the SEC has cited

contradicts LBRY’s evidence or otherwise suggests that Odysee is either an

agent of LBRY within the meaning of Rule 65(d) or has acted in concert with

LBRY with respect to its offerings of unregistered securities. That said, I

decline LBRY’s offer to expressly hold that the injunction cannot be applied

to Odysee. To the extent Odysee would engage in conduct that would bring it

within the scope of Rule 65(d), it would be open to the SEC to seek a

contempt order.

As for third-party holders of LBC, the SEC has not argued in this case

that they could violate the injunction merely by purchasing or selling LBC.

Indeed, the SEC has expressly stated that it “is not seeking an order

prohibiting all third parties from buying or selling LBC.” Doc. 94 at 7

(emphasis in original). Given the SEC’s litigation posture, it suffices to say

that merely holding LBC or purchasing it for consumptive purposes is

insufficient to bring third parties within the purview of Rule 65(d). Instead,

third parties would need to act in concert with LBRY in order to be exposed

to a risk of being held in contempt of the injunction order.

Because the SEC does not seek relief against third-party purchasers of

LBC, I also decline both LBRY’s and the amici’s invitation to rule on whether

8 LBC is itself a security. Simply put, that issue has not been litigated in this

case. Accordingly, I take no position on whether the registration requirement

applies to secondary market offerings of LBC by persons or entities that are

not subject to the injunction pursuant to Rule 65(d).

Lastly, LBRY’s proposed judgment omits, without explanation, the

SEC’s proposal to enjoin LBRY pursuant to § 21(d)(5) of the Exchange Act

from engaging in unregistered offerings of crypto asset securities. Section

21(d)(5) authorizes a court to grant “any equitable relief that may be

appropriate or necessary for the benefit of investors” in “any action or

proceeding brought or instituted by the Commission under any provision of

the securities laws.” 15 U.S.C. § 78u(d)(5). For the same reasons discussed

earlier, I agree with the SEC that enjoining LBRY under this provision is

both appropriate and necessary for the benefit of investors.

Accordingly, in a final judgment entered concurrently with this

memorandum and order, the court will enjoin LBRY from violating § 5 of the

Securities Act and from participating in unregistered offerings of crypto asset

securities in the future.

B. Civil Penalty

The SEC also asks the court to impose a civil penalty of $111,614,

which is at the upper end of a “first-tier” penalty under the Securities Act.

Although LBRY does not specifically oppose this request in its supplemental

9 brief, LBRY argued in its original brief that a nominal first-tier penalty of

$50,000 is appropriate. I agree with the SEC that the requested penalty is

warranted in this case.

The Securities Act authorize district courts to impose civil penalties

against those who violate the securities laws. See 15 U.S.C. § 77t(d)(1). These

penalties are intended to “punish and deter securities law violations.” SEC v.

Boey,

,

, at *2 (D.N.H. July 22, 2013)

(cleaned up). The statute creates three tiers of civil penalties based on the

severity of the defendant’s misconduct. See 15 U.S.C. § 77t(d)(2). First-tier

penalties are available for all violations. Id. Second-tier penalties are

available only for “fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement.” Id. And third-tier penalties are

available for all second-tier violations that “directly or indirectly resulted in

substantial losses or created a significant risk of substantial loss to other

persons.” Id. For each of these tiers, the maximum allowable penalty is the

greater of (1) a set dollar amount enumerated in the statute (“statutory

amount”), or (2) the defendant’s gross pecuniary gain from the violation. See

id. The statutory amounts, adjusted for inflation, for a defendant who is not a

natural person are: $111,614 for first-tier violations; $558,071 for second-tier

violations; and $1,116,140 for third-tier violations. See Adjustments to Civ.

10 Monetary Penalty Amounts, SEC Release No. 6212,

(Jan. 6,

2023).

Within the statutory range, “the actual amount of the penalty [is] left

up to the discretion of the district court,” based on the particular facts of the

case. SEC v. Kern,

(2d Cir. 2005); see Boey,

, at *2 (explaining that the statute “establishes a ceiling” but does not

“require that the full allowable penalty be imposed”) (cleaned up). In

exercising that discretion, courts have considered (1) the egregiousness of the

violation, (2) the defendant’s scienter, (3) the repeated nature of the violation,

(4) the defendant’s admission of wrongdoing and cooperation with

authorities, and (5) the defendant’s financial situation. See SEC v. Kapur,

, at *7 (S.D.N.Y. Nov. 29, 2012); SEC v. Locke Capital

Mgmt., Inc.,

(D.R.I. 2011).

The parties agree that a first-tier penalty is appropriate in this case

because there were no allegations of fraudulent activities. They disagree,

however, as to the appropriate amount of that penalty. The SEC argues that

the maximum statutory amount for a first-tier violation is warranted

principally because LBRY’s unregistered offerings were egregious and

continued after this lawsuit was filed. LBRY responds that a nominal penalty

is reasonable because LBRY did not act with scienter and “entered the

11 cryptocurrency market during a time of great uncertainty as to the regulatory

requirements.” Doc. 89-1 at 14.

Under the circumstances, I find that the imposition of a maximum

statutory amount for a first-tier penalty is appropriate. Especially since

LBRY’s misconduct continued after the SEC’s position on the registration

requirement became clear, its violation is more egregious than a simple

unregistered offering. The penalty is also necessary to deter LBRY and others

from conducting unregistered offerings, while also taking into account

LBRY’s representations that it is without funds to pay a larger fine.

III. CONCLUSION

For the foregoing reasons, LBRY’s motion to limit remedies (Doc. 89) is

resolved as follows: In accordance with a final judgment issued concurrently

with this memorandum and order, LBRY is permanently enjoined from

violating § 5 of the Securities Act and from participating in unregistered

offerings of crypto asset securities. LBRY is also ordered to pay a civil penalty

of $111,614.

SO ORDERED.

/s/ Paul J. Barbadoro Paul J. Barbadoro United States District Judge

July 11, 2023

cc: Counsel of Record

12