NY Court nixes Telegram’s attempt to challenge scope of injunction

Maria Nikolova

Judge P. Kevin Castel disagrees with Telegram which asserted that the preliminary injunction ought not reach initial purchasers of Grams who are not US-based.

Judge P. Kevin Castel of the New York Southern District Court today axed an attempt by Telegram to challenge the scope of the preliminary injunction issued against it in March.

As FinanceFeeds has reported, in its Opinion and Order of March 24, 2020, the Court granted a request by the Securities and Exchange Commission (SEC) for a preliminary injunction. That same day, Telegram filed a notice of appeal.

Shortly afterwards, Telegram asked the Court to clarify whether the scope of the preliminary injunction set forth in the Order of March 24, 2020 applies only to Purchase Agreements with US-based investors. Judge Castel today said that, in granting the SEC’s motion, the Court adopted the exact language of the preliminary injunction proposed by the SEC over five months ago. In its opposition to the preliminary injunction motion, Telegram had a full and fair opportunity to explain why the relief sought by the SEC was overbroad or otherwise inappropriate.

Telegram now asserts that the preliminary injunction ought not reach those Initial Purchasers who are not US-based because it would result in the extra-territorial application of the U.S. securities law. Telegram argues that both defendant entities are non-US persons and the majority of Initial Purchasers are not US persons and that the Gram Purchase Agreements with these non-US parties were entered into outside the United States through contracts containing foreign choice-of-law provisions.

Telegram now proposes for the first time that it “will implement safeguards to protect against non-U.S. Private Placement purchasers reselling Grams to U.S. purchasers in the future, including but not limited to imposing express contractual prohibitions as a precondition to non-U.S. Private Placement purchasers receiving Grams upon launch of the TON Blockchain and configuring the TON digital wallet to preclude U.S.-based addresses.”

According to Judge Castel, there are a number of problems with this proposal. First, Telegram does not explain how the imposition of these new restrictions would be lawful modifications of the Gram Purchase Agreements entered into in 2018. Second, the TON Blockchain was designed and is intended to grant anonymity to those who purchase or sell Grams. Therefore, any restriction as to whom a foreign Initial Purchaser could resell Grams would be of doubtful real-world enforceability. Further, Telegram’s new proposals are raised long after the pre-injunction discovery period has closed and, as such, the SEC has been deprived of the opportunity to challenge their efficacy through expert testimony or other evidence.

“Finally, the argument in favor of a clarification is less than straightforward, to be polite”, the Judge says, adding that, in its opposition to the preliminary injunction, Telegram raised no objection to the form of the injunction.

That is why, Telegram’s application was denied.

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