Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 1 of 95 Page ID #:1

1 JOHN A. CASE, JR. (126671)

jcase@CaseWebLaw.com
2 LAW OFFICES OF JOHN A. CASE, JR.
3 11601 Wilshire Blvd. Suite 500
Los Angeles, California 90025
4 (310) 203-3911, fax (310) 867-2096
5 Attorneys for Plaintiff
6 MERKAMERICA INC., a California corporation
7
8 UNITED STATES DISTRICT COURT
9
CENTRAL DISTRICT OF CALIFORNIA
10
11 MERKAMERICA INC., a California ) Case No. 2:19-cv-06111
12 corporation, )
) COMPLAINT FOR:
13 Plaintiff, )
) (1) VIOLATION OF SECTION
14 vs. ) 10(b) OF SECURITIES
15 ) EXCHANGE ACT OF 1934
EILAND GLOVER, an individual; ) AND SEC RULE 10b-5
16 JOHN REITANO, an individual; )
WALKER WILLSE, an individual; ) (2) VIOLATION OF SECTION 20
17 KOWALA SEZC, a Cayman Islands ) OF SECURITIES EXCHANGE
18 special economic zone company; ) ACT OF 1934
and DOES 1-100, inclusive, )
19 ) (3) VIOLATION OF CALIFORNIA
Defendants. ) CORPORATIONS CODE
20 ) § 25401
21
(4) VIOLATION OF CALIFORNIA
22 CORPORATIONS CODE
§§ 25504 AND 25504.1
23
24 (5) COMMON LAW FRAUD

25 (6) CONSPIRACY TO DEFRAUD

26 (7) NEGLIGENT
MISREPRESENTATION
27
28 (8) RESCISSION

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1 (9) QUANTUM MERUIT

2 (10) UNFAIR BUSINESS
3 PRACTICES IN VIOLATION
OF CALIFORNIA BUSINESS
4 & PROFESSIONS CODE
§ 17200
5
6 (11) IMPLIED CONTRACT

7 (12) EQUITABLE RESTITUTION

8 DEMAND FOR JURY TRIAL
9
10 COMPLAINT
11 For its Complaint herein, plaintiff MERKAMERICA INC., a
12 California corporation, alleges, based upon its own personal knowledge or
13 upon information and belief as to matters not within its own personal
14 knowledge, as follows:
15
16 NATURE OF THE ACTION
17 1. This is a securities fraud case involving cryptocurrency.
18 Plaintiff Merkamerica Inc. ("Merkamerica") invested in defendant Kowala
19 SEZC under two contracts, entitled Simple Agreements for Future Tokens
20 ("SAFTs"), dated January 21 and 23, 2018. The SAFT agreements provided
21 that, in consideration for Merkamerica's payment to defendant Kowala SEZC
22 of $307,844.12, defendants would launch their "kCoin" cryptocurrency, and
23 defendants would issue to Merkamerica a certain number of mining tokens,
24 giving Merkamerica the right to process blockchain transactions and earn
25 profits once the kCoin was launched. This transaction was a sale of securities
26 under federal law. Merkamerica and other purchasers of defendants' mining
27 tokens were investing in the success of defendants' business venture to
28 develop and launch the kCoin cryptocurrency.
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1 2. Merkamerica's profit from the investment depended on

2 defendants' managerial efforts to develop and launch the kCoin. However,
3 defendants never launched the kCoin, never issued mining tokens, and never
4 returned any money to Merkamerica. Defendants promised to use
5 Merkamerica's investment funds to develop and launch the kCoin, but instead
6 kept investor money for themselves. Merkamerica never was able to process
7 blockchain transactions to earn kCoins. Merkamerica never earned any
8 income from its investment of $307,844.12 in the Kowala enterprise.
9 3. Defendants knew at all relevant times that the software code
10 was not proven to work, that defendants never had a working blockchain, that
11 the software code might never work to achieve promised results, and that the
12 kCoin would not launch within the promised time frame. They falsely
13 represented that the kCoin would be launched within two months, when they
14 knew a launch could not happen for years, if ever. Defendants concealed
15 material facts from Merkamerica, and made false promises and false
16 representation of facts, to induce Merkamerica to rely on such promises and
17 representations in making the decision to invest $307,844.12 in Kowala
18 SEZC. Merkamerica reasonably relied on defendants' false promises and
19 representations and suffered loss as a result.
20
21 JURISDICTION AND VENUE
22 4. This action is brought to remedy violations of Section 10(b)
23 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C.
24 § 78j(b); SEC Rule 10b-5, 17 C.F.R. 240.10b-5; Section 20 of the Exchange
25 Act, 15 U.S.C. § 78t; and related state claims.
26 5. The subject matter jurisdiction of this Court is based upon
27 Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331
28 and 1367.
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1 6. Venue is proper in this Court pursuant to 15 U.S.C. § 78aa

2 and 28 U.S.C. § 1391(b) because acts or transactions constituting the
3 violation occurred in the Central District of California; one or more defendants
4 may be found or transacts business in the Central District of California; a
5 substantial part of the events or omissions giving rise to the claims pleaded
6 herein occurred in the Central District of California; one or more defendants
7 are subject to personal jurisdiction in the Central District of California; and one
8 or more defendants are not resident in the United States.
9 7. In connection with the acts, conduct, and other wrongs
10 complained of herein, defendants, directly and indirectly, used the means and
11 instrumentalities of interstate commerce, including without limitation telephone
12 and electronic communications.
13
14 PARTIES
15 8. Plaintiff Merkamerica Inc. is a corporation incorporated in the
16 State of California with its principal place of business in the County of Los
17 Angeles, State of California.
18 9. On information and belief, defendant Eiland Glover
19 ("Glover") is an individual residing in the State of Tennessee.
20 10. On information and belief, defendant John Reitano
21 ("Reitano") is an individual residing in the State of California.
22 11. On information and belief, defendant Walker Willse ("Willse")
23 is an individual residing in the State of Tennessee.
24 12. On information and belief, defendant Kowala SEZC is a
25 special economic zone company registered in the Cayman Islands with its
26 principal place of business in the Cayman Islands.
27 13. Plaintiff is unaware of the true names and capacities of the
28 defendants sued as Does 1 through 100, inclusive, and therefore sues those
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1 defendants by such fictitious names. Plaintiff will amend this Complaint to

2 allege their true names and capacities when that information is ascertained.
3 Plaintiff is informed and believe, and therefore alleges, that each of the
4 fictitiously named defendants is responsible in some manner for the
5 occurrences herein alleged, and that plaintiff's injuries as herein alleged were
6 proximately caused by such defendants.
7 14. On information and belief, defendants' actions alleged herein
8 were undertaken by each defendant individually; were actions that each
9 defendant caused to occur; were actions that each defendant authorized,
10 controlled, directed, or had the ability to authorize, control, or direct; or were
11 actions in which each defendant assisted, participated, or otherwise
12 encouraged; and are actions for which each defendant is liable. On
13 information and belief, each of the defendants acted as the agent, employee,
14 partner, co-conspirator, or alter ego of each of the other defendants. On
15 information and belief, in performing the acts and omissions alleged herein,
16 each of the defendants acted within the course and scope of such agency,
17 employment, partnership, conspiracy, or alter ego relationship. On
18 information and belief, in performing the acts and omissions alleged in this
19 Complaint, each of the defendants herein acted in concert and conspiracy
20 with each of the other defendants herein; and aided and abetted the other
21 defendants, in that each defendant had knowledge of those actions, provided
22 assistance, and benefited from those actions, in whole or in part; except as
23 otherwise specifically alleged herein.
24 15. Allegations made on information and belief are based on
25 defendants' admissions, statements of third party witnesses, and documents.
26 //
27 //
28 //
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1 GENERAL ALLEGATIONS
2 A. Blockchain and Cryptocurrency.
3 16. "Blockchain" is specially-written software that permits
4 transactions to be digitally recorded in a secure, transparent, independently
5 verifiable, and widely-distributed manner. It does so by creating an exact
6 copy of all blockchain transactions on the computer equipment of every
7 participant in the blockchain, establishing independent proof of transactions.
8 Each time a new transaction is confirmed, the transaction is published to
9 every computer as a new link in the blockchain, which may be independently
10 examined and verified by all other participants in the blockchain.
11 17. Blockchain makes possible the creation of new virtual
12 currencies, called cryptocurrencies, which are difficult to counterfeit.
13 Cryptocurrency is held in the form of software code in anonymous "wallets."
14 Transfers of cryptocurrency are confirmed and recorded through the
15 blockchain confirmation process described above. The most famous
16 cryptocurrency is Bitcoin. Bitcoin is actively traded, and the market value of
17 one Bitcoin reached an all-time high of $20,000 in December 2017. Other
18 established cryptocurrencies such as Ethereum and Litecoin have tangible
19 market value and can be exchanged for U.S. dollars or other currency in a
20 relatively simple manner. Cryptocurrencies are generally independent of each
21 other and created by software developers or, sometimes, business promoters
22 who hire software developers to write the code.
23 18. Blockchain also has non-currency applications. One such
24 application is for "smart contracts." Smart contracts are self-executing
25 contracts where the terms of agreement among the parties are directly written
26 into software code. If the conditions for performance are met, the transaction
27 will take place automatically through the blockchain confirmation process
28 described above.
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1 19. The process of confirming blockchain transactions often

2 generates a small amount of cryptocurrency, awarded to the blockchain
3 participant who successfully confirms the transaction, as a way to incentivize
4 participation. Many blockchains, such as Bitcoin, require that complex
5 equations be solved in order to confirm transactions, and a reward goes to the
6 victor in the race to solve equations. This reward method is called "proof of
7 work." A downside of this method is that there are numerous computers
8 attempting to win the race to confirm transactions and earn blockchain
9 rewards. Blockchain participants have dedicated substantial computing
10 resources to this task, incurring high energy consumption that could be
11 avoided if only one computer was used to confirm each transaction.
12 20. Because numerous computers are in the hunt to confirm
13 transactions but only one can reap each reward, the process of confirming
14 blockchain transactions came to be known as "mining," as in "mining for
15 Bitcoin." Blockchain participants who seek to confirm transactions are
16 commonly called "miners." A "mining token" is a digital certification of the
17 right to confirm transactions in a particular blockchain.
18 21. An alternative to "proof of work" is called "proof of stake." It
19 does not reward the fastest to confirm a transaction, but instead allocates
20 rewards among holders of mining tokens in the blockchain. "Proof of stake"
21 helps avoid the energy waste that was a by-product of "proof of work."
22 22. For every successful cryptocurrency, there are hundreds of
23 failed ideas. Blockchain has become a "get-rich-scheme" for promoters who
24 hope to cash in on the success of Bitcoin, often by deceiving investors into
25 investing in cryptocurrency ideas that the promoters know will never work.
26 //
27 //
28 //
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1 B. Background of the Individual Defendants

2 23. Paragraphs 24 to 30 below are alleged on information and
3 belief. The sources of such information and belief are defendants' own public
4 statements on LinkedIn, Twitter, and other online platforms, and reports
5 posted on websites that follow cryptocurrency.
6 24. The two founders of defendant Kowala SEZC are
7 defendants Eiland Glover and John Reitano. Glover held the title of Chief
8 Executive Officer from January 2016 to present. Reitano held the title of Chief
9 Technology Officer from March 2016 to October 2018.
10 25. Defendant Willse was third in the corporate hierarchy of
11 defendant Kowala SEZC. He held the title of Vice President, Business
12 Development from December 2016 to December 2018.
13 26. Defendants Glover, Reitano, and Willse were previously
14 involved in a cryptocurrency venture called "UR Technology." This project
15 had the lofty goal of distributing UR cryptocurrency for free to everyone in the
16 world. In early 2017, such defendants claimed that UR had a market
17 capitalization as high as $1.75 million, even though it was being distributed for
18 free. Such defendants abandoned UR in mid-2017 to develop Kowala SEZC's
19 kCoin project. The UR project was a failure. Ultimately, UR was delisted from
20 online exchanges and stopped trading. In July 2017, defendants offered UR
21 owners to exchange kCoins for up to 50 million UR coins, for free, following
22 the launch of the kCoin. However, the launch of the kCoin never happened.
23 27. Defendant Reitano previously ran at least two other failed
24 cryptocurrency ventures: Neutrino in 2014 and Coinflash in 2013. The
25 original name of Neutrino was Privatecoin. Neutrino purported to make
26 financial transactions private and untraceable by routing them through the
27 dark web. Industry commentators accused Neutrino of offering a "shady
28 coin." Reitano claimed that the Neutrino coins were fully decentralized, but
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1 industry commentators concluded that the development team controlled the

2 Neutrino coin supply and were engaging in false trades to create an
3 artificially-inflated price before selling to the general public. Neutrino was
4 unsuccessful, and the coin failed. Coinflash tried to ride the Bitcoin wave,
5 offering a Bitcoin-trading network similar to airport currency kiosks. This
6 venture was also unsuccessful.
7 28. Defendant Glover had no prior experience in cryptocurrency
8 other than Kowala and the failed UR project. He was falsely portrayed as a
9 cryptocurrency expert and held himself out as such in numerous public
10 statements on the Internet and in the blockchain community. In fact, Glover is
11 the proprietor of a garden-variety test preparation and tutoring service in
12 Nashville, Tennessee.
13 29. Similar to Glover, defendant Willse had no prior experience
14 in cryptocurrency other than Kowala and the failed UR project. According to
15 Willse's LinkedIn profile, he first worked as a pharmaceutical research
16 associate. Then he transitioned into online marketing, first for real estate
17 leasing companies, then for a network of urgent care clinics, then for
18 employer-services businesses. Now he works for a tax consulting company.
19 30. Glover, Reitano, and Willse misrepresent their work
20 experience in their LinkedIn profiles. Glover claims that he was "CEO and
21 Co-Founder" of Kowala from January 2016 to present, but he fails to disclose
22 that he was running the failed UR venture in 2016 and 2017. Glover does not
23 disclose on LinkedIn that he was CEO of UR. He also omits his entire work
24 experience from 2008 to 2012 from his LinkedIn profile. Reitano makes the
25 similar claim that he was "Co-Founder and CTO" of Kowala from March 2016
26 to October 2018. Reitano leaves out his role as co-founder of UR in the years
27 2016 and 2017. Reitano omits all of his work experience for the period June
28 2010 to February 2016 from his LinkedIn profile. Reitano was running failed
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1 cryptocurrency projects during that period. Willse claims that he was "Vice
2 President Business Development" of Kowala from December 2016 to
3 December 2018, but he omits the failed UR project entirely.
4 31. The foregoing facts concerning defendants' previous
5 cryptocurrency experience were unknown to Merkamerica prior to
6 Merkamerica's investment in Kowala SEZC. The only exception is that
7 defendant Glover told Merkamerica that Reitano created the Neutrino privacy
8 coin, and falsely claimed that Neutrino was a huge success. The individual
9 defendants concealed their prior experience, lack thereof, and previous
10 failures from Merkamerica when Merkamerica was making the decision to
11 invest in Kowala SEZC. Had Merkamerica known the true facts, it would not
12 have invested in Kowala SEZC.
13
14 C. The Kowala White Paper
15 32. Defendants Glover and Reitano were the authors of a "white
16 paper" explaining their kCoin concept (the "Kowala White Paper"). "White
17 paper" is the term commonly used in the blockchain world for a written
18 explanation of concept. Defendants provided the Kowala White Paper to
19 prospective investors, including Merkamerica, to solicit investment funds in
20 the form of purchases of mining tokens. The version of the Kowala White
21 Paper provided to Merkamerica was version 1.0.
22 33. On information and belief, defendants Glover, Reitano,
23 Willse, Kowala SEZC, and other defendants knew and intended that the
24 Kowala White Paper would be provided to prospective purchasers of mining
25 tokens, including Merkamerica, to induce them to rely on the Kowala White
26 Paper, to purchase mining tokens, and to invest in Kowala SEZC. On
27 information and belief, defendants Glover and Reitano authored the Kowala
28 White Paper specifically for this purpose. The source of this information and
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1 belief is the placement of the Kowala White Paper on Kowala SEZC's website,
2 as described in Paragraph 56 below, and by defendants Glover and Willse's
3 use of the Kowala White Paper as a marketing tool to solicit Merkamerica's
4 investment, as described in Paragraphs 86 to 132 below.
5 34. The Kowala White Paper was entitled "The Kowala Protocol:
6 A Family of Distributed, Self-Regulating, Asset-Tracking Cryptocurrencies."
7 35. In the Kowala White Paper, defendants represented to
8 prospective investors, including Merkamerica, that kCoins will be a
9 "stablecoin" with a price pegged to a corresponding traditional currency such
10 as U.S. dollars. The Kowala White Paper represented:
11 "Cryptocurrencies such as Bitcoin, Ether, and Dash exhibit
12 significant volatility. Consumers, merchants, traders, investors, miners
13 and developers have a need for a cryptocurrency whose value can be
14 counted on to remain roughly stable from one day to the next and
15 whose operation does not depend on potentially unreliable third parties
16 such as banks.
17 "Cryptocurrencies with automated value-pegging mechanisms,
18 such as NuBits and BitUSD, have suffered repeated failures due to
19 malfunction and lack of adoption, while companies that hold centralized,
20 one-to-one reserves in fiat, such as Tether, have proven vulnerable to
21 the whims of banks and governments.
22 "The Kowala Protocol is our proposed method for creating a new
23 family of cryptocurrencies which maintain stable values while retaining
24 other benefits of cryptocurrencies, such as decentralization, security,
25 privacy, speed of transfer, and low transaction costs."
26 36. Coindesk.com called stablecoins the "Holy Grail" of
27 cryptocurrency. In the Kowala White Paper, defendants represented that the
28 price of kCoins will be stable, unlike Bitcoin, the value of which can rise and
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1 fall suddenly and dramatically based on the whims of investor demand,

2 making it unsuitable for use as a currency to pay for everyday transactions at
3 a fixed price. The value proposition for stablecoins is to serve as a true virtual
4 currency that can be used as a substitute for traditional currencies and other
5 cryptocurrencies, without wide fluctuations in exchange rates. A price quoted
6 in stablecoins will remain the same in the morning and in the evening,
7 because the exchange rate will not fluctuate in relation to the corresponding
8 traditional currency. There is great consumer demand for a stablecoin
9 product. Facebook recently announced that it is developing a stablecoin that
10 will be tied to other assets. Existing stablecoins have not been successful in
11 capturing this demand.
12 37. In the Kowala White Paper, defendants described their
13 kCoin cryptocurrency as a non-asset-backed stablecoin. They distinguished
14 kCoins from asset-backed stablecoins such as Tether, which the Kowala
15 White Paper said was "proven vulnerable to the whims of banks and
16 governments." Tether was backed 1:1 by corresponding U.S. dollars. The
17 stability of asset-backed stablecoins derives from the fact that they can be
18 readily exchanged for traditional currencies held in reserve. The downside of
19 asset-backed stablecoins is that they require large capital investment to back
20 the stablecoins. Kowala's kCoin was not backed by assets and did not
21 require such investment.
22 38. In the Kowala White Paper, defendants also distinguished
23 kCoins from "[c]ryptocurrencies with automated value-pegging mechanisms,
24 such as NuBits and BitUSD," which the Kowala White Paper said "have
25 suffered repeated failures due to malfunction and lack of adoption." By
26 implication, defendants promised that their kCoin will not suffer from such
27 failures.
28 //
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1 39. In the Kowala White Paper, defendants represented that "a

2 stable cryptocurrency [was] needed." Defendants represented that the kCoin
3 will be a replacement for volatile cryptocurrencies such as Bitcoin, Ether, and
4 Dash, and a substitute for traditional currencies such as the dollar.
5 Defendants represented that consumers will use a stable cryptocurrency for
6 "avoiding cryptocurrency volatility when purchasing real-world products and
7 services; avoiding volatility of less stable fiat currencies (such as of those of
8 Venezuela, Zimbabwe, Nigeria, etc); providing a stable store of value; and
9 gaining access to bank-like services offered by third parties (for consumers
10 without easy access to bank accounts denominated in stable fiat currencies)."
11 Defendants represented that merchants will use a stable cryptocurrency for
12 "avoiding volatility when selling products and services for cryptocurrency; and
13 gaining access to bank-like services offered by third parties (for merchants
14 without easy access to bank accounts denominated in stable fiat currencies)."
15 40. In the Kowala White Paper, defendants told prospective
16 investors, such as Merkamerica, that purchasers of mining tokens will be able
17 to use such tokens for "reaping mining rewards consistently, no matter whose
18 machine solves the block; and having the option to sell or lease acquired
19 mining rights."
20 41. In the Kowala White Paper, defendants represented that the
21 kCoin will operate in the following manner:
22 "The Kowala Protocol defines a method for constructing a family of
23 distributed, self-regulating, asset-tracking cryptocurrencies called
24 kCoins.
25 "Each kCoin is designed to be traded on open exchanges and to
26 maintain a close to one-to-one value relative to any widely traded asset
27 such as a currency (USD, EUR, JPY, etc.) or other asset. Each kCoin is
28 identified by a symbol consisting of the letter 'k' followed by the symbol
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1 of the underlying asset. For example, the kCoin of USD is kUSD, that of
2 EUR is kEUR, and so forth.
3 "kCoins constantly gather market information from endorsed
4 sources and regulate their value through three core mechanisms:
5 variable block rewards, variable fees, and an active and well-informed
6 trading market. In time, these mechanisms always return each kCoin to
7 parity with its underlying, tracked asset. The certainty of each kCoin’s
8 eventual return to parity, in turn, creates pure arbitrage opportunities for
9 traders seeking to profit from slight fluctuations in kCoin market prices
10 around the peg."
11 42. In the Kowala White Paper, defendants promised
12 prospective investors, including Merkamerica, that by using an algorithm to
13 issue and destroy kCoins automatically in response to the current market
14 price for kCoins, they will control the quantity of kCoins in the marketplace.
15 The Kowala White Paper described the process and mathematics of the
16 algorithm over five pages, which the Kowala White Paper summarized as
17 follows:
18 "At its core, the Kowala Protocol consists of three mechanisms
19 that keep the market price of kUSD at or very near $1.
20 "The section Mechanism 1: Block Reward Algorithm below
21 describes how a variable block reward is used to push the market price
22 toward the target of $1 when necessary.
23 "The section Mechanism 2: Stability Fee describes how, in the
24 scenario in which the market price is below $1 and the block reward
25 algorithm is not sufficient to bring it back to $1, a special, variable fee is
26 applied to each subsequent transaction until the market price begins to
27 rise.
28 //
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1 "The section Mechanism 3: Trading Activity describes how traders,

2 informed by the previous two mechanisms and motivated by a desire for
3 profit, are expected to engage in trading activity that accelerates the
4 return of the market price of kUSD to $1."
5 43. For the variable block reward described in Mechanism 1, the
6 Kowala White Paper represented that when "the price of kUSD is over $1 and
7 rising or flat . . . we set the block's reward to 1% more than the previous
8 block's reward, subject to the block reward cap, which prevents prolonged
9 periods of block reward increase from growing too quickly." When "the market
10 price of kUSD is under $1 and is falling or flat . . . the divergent-falling portion
11 of the block reward function states that we should set the block's reward to the
12 the previous block reward divided by 1.01 (subject to a minimum of 0.0001
13 kUSD)."
14 44. The Kowala White Paper described the stability fee in
15 Mechanism 2 as follows: "The Kowala Protocol specifies that every
16 transaction sender be charged special fee, called a stability fee, amounting to
17 a small percentage (ranging between 0.001% and 2%) of the transaction
18 amount; the stability fee is charged in addition to the cost of each
19 transaction’s 'gas', which is used to compensate miners for the marginal cost
20 of processing each transaction. The primary purpose of the stability fee is to
21 reduce coin supply during prolonged periods when the market price fails to
22 recover from a price below $1. Rather than being sent to the miners, the
23 value represented by the stability fee is effectively destroyed by being sent to
24 a dead-end address."
25 45. Defendants represented in the Kowala White Paper that
26 "[g]iven sufficient time, the first two mechanisms above will cause the price of
27 kUSD to revert to parity (i.e., 1 USD per kUSD)." Defendants further
28 //
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1 warranted that, under Mechanism 3, expected market behavior will also help
2 the kCoin maintain its stable value.
3 46. In summary, the Kowala White Paper represented that
4 reducing the quantity of kCoins will cause the price of kCoins to rise, and
5 increasing the quantity of kCoins will cause the price to fall, thereby
6 maintaining a stable value for kCoins pegged to the associated currency. The
7 Kowala White Paper represented that the issuance and destruction of kCoins
8 will occur through the processing of transactions in its blockchain. If the
9 algorithm calls for increasing the kCoin supply, miners will earn a larger
10 amount of kCoins for completing blockchain transactions. If the algorithm
11 calls for reducing supply, completing a blockchain transaction will cause a
12 certain amount of kCoin to be destroyed. Thus, in the Kowala White Paper,
13 defendants Glover and Reitano promised that they will create kCoins with
14 stable values.
15 47. In the Kowala White Paper, defendants promised investors
16 that the kCoin will be a "proof of control" blockchain. This was a form of
17 "proof of stake." Defendants promised that upon initiation of each blockchain
18 transaction, their software will assign the transaction to only one token holder.
19 That token holder will confirm the assigned transaction and reap the mining
20 reward. Assignments will be distributed evenly among tokens held by active
21 miners. Defendants promised that any token purchaser or lessee who
22 actively mined kCoins will be assigned blockchain transactions and will
23 receive rewards for confirming transactions. This "consensus" mechanism
24 was an innovation by defendants, not used by other blockchain developers.
25 In the Kowala White Paper, defendants represented that the "proof of control"
26 system will consume substantially less electricity, 5 megawatts for 100,000
27 kCoin miners vs. 774 megagwatts for 100,000 Bitcoin miners, because their
28 //
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1 unique "proof of control" system will reward token holders without a race to
2 confirm transactions.
3 48. In the Kowala White Paper, defendants told investors,
4 including Merkamerica, that "1. Up to 10% of the total generated mUSD
5 [mining tokens] will be sold to early investors, development team members,
6 and advisors as soon as is practical, in order to raise funds for the
7 development of kUSD; 2. 15% of the total generated mUSD will be retained
8 indefinitely by Kowala; and 3. the remaining 75% of all mUSD will be sold in
9 one or more public token offerings within 12 months of the first sales in part 1
10 above." Since only active token holders will be permitted to process
11 transactions on the blockchain, wide distribution of tokens was essential to
12 achieve decentralization of ownership and price stability.
13 49. In the Kowala White Paper, defendants promised
14 prospective investors, including Merkamerica, that once the Kowala
15 blockchain was launched, there will be public demand for kCoins as a viable
16 alternative to traditional currencies and other cryptocurrencies. Defendants
17 promised prospective investors, including Merkamerica, that investors will
18 profit from the purchase of mining tokens, because investors will earn kCoins
19 for processing blockchain transactions. Defendants promised prospective
20 investors, including Merkamerica, that investment funds provided to purchase
21 mining tokens will be used to develop the kCoin blockchain for public release.
22 Defendants promised investors including Merkamerica that the mining of
23 kCoins will ultimately be decentralized, achieving network effects and
24 guaranteeing the stability of the kCoin price.
25 50. Defendants Glover, Reitano, and other defendants made the
26 foregoing statements with the intent to induce investors such as Merkamerica
27 to rely on the statements in deciding to purchase Kowala mining tokens from
28 Kowala SEZC. Defendants Glover, Reitano, Willse, Kowala SEZC, and other
17
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1 defendants authorized the online publication of the Kowala White Paper and
2 its public distribution to prospective investors including Merkamerica.
3 Merkamerica relied on the foregoing representations in the Kowala White
4 Paper in making its decision to purchase Kowala mining tokens from Kowala
5 SEZC.
6 51. The kCoin algorithm was not original to defendants. It was
7 first postulated in a paper entitled "A Note on Cryptocurrency Stablisation:
8 Seigniorage Shares" written by Robert Sams in 2014. In that paper, Sams
9 wrote: "The solution to coin distribution offered here is different. I suggest
10 that there needs to be two types of coin: coin that acts like money and coin
11 that acts like shares in the system’s seigniorage. For short, we’ll just call
12 these coins and shares. Coins and shares are identical in all respects . . .
13 except for the process that regulates their respective supply. [¶] Coins are the
14 object of stabilisation . . . . When coin supply needs to increase, coinbase is
15 distributed to share holders in exchange for a certain percentage of shares,
16 which are destroyed (coin supply increases, share supply decreases). When
17 coin supply needs to decrease, sharebase is distributed to coin holders in
18 exchange for a certain percentage of coin, which are destroyed (coin supply
19 decreases, share supply increases)."
20 52. In defendants' concept, kCoins were the equivalent of Sams'
21 "coins," and Kowala mining tokens served the purpose of Sams' "shares."
22 The major difference between Sams' structure and defendants' concept was
23 that Sams would destroy shares from time to time to maintain price stability,
24 but in defendants' algorithm, no mining tokens could be surrendered or
25 destroyed to maintain stability, because investors would lose mining rights.
26 Investors would be loathe to buy mining tokens if the algorithm would destroy
27 such tokens from time to time. Thus, defendants wrote their algorithm to
28 create and destroy only kCoins, not mining tokens. Further, token holders
18
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1 gain kCoins when the supply of kCoins needs to increase, but do not lose
2 kCoins when kCoins need to be destroyed. The sale of mining tokens was
3 essential to the Kowala kCoin concept, and defendants obtained millions of
4 dollars from investors by selling Kowala mining tokens.
5
6 D. The Kowala Website
7 53. Defendants maintained a website at the URL kowala.tech,
8 which they used to market their kCoin concept and the sale of Kowala mining
9 tokens to prospective investors, including Merkamerica.
10 54. The "Wayback Machine" (URL: archive.org) is an Internet
11 repository of archived websites as they appeared at various times during their
12 lifetimes. It crawls the web and takes snapshots of websites as they
13 appeared to the general public at the time the snapshot was made. It took
14 snapshots of the kowala.tech 78 times between October 25, 2017 and
15 February 15, 2019. The paragraphs below are based on "Wayback Machine"
16 snapshots of the kowala.tech website taken on December 3, 2017 and
17 February 7, 2018.
18 55. At the very top of the home page of the kowala.tech website
19 as it appeared to the general public on December 3, 2017, the first words
20 displayed to website visitors were the following:
21 "STEADY. READY. GO! A new day is dawning. kUSD is the world's
22 first autonomously stabilized cryptocurrency. The fastest, most efficient
23 blockchain ever. Made for humans and ready for business."
24 56. Immediately underneath these words were a link to the
25 Kowala White Paper and a link entitled "Get Tokens." Clicking on the link to
26 the Kowala White Paper took visitors to a PDF version of the Kowala White
27 Paper authored by defendants Glover and Reitano. Clicking on the link to
28 "Get Tokens" took visitors to another part of the home page (accessible also
19
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1 by scrolling down), where defendants wrote: "Securities laws prevent us from

2 selling mUSD tokens to non-accredited investors before the launch of kUSD.
3 Don't worry, we're saving plenty for a public sale in December." This was
4 followed by a text box entitled "Send me updates on the public sale" where a
5 visitor could input his or her e-mail address.
6 57. The kowala.tech home page contained many sections,
7 accessible by scrolling down. Immediately below the two links described
8 above was a section entitled "MAKING MONEY MAKE SENSE." It continued:
9 "REAL PEOPLE NEED REAL STABILITY.
10 "Volatile currency is not useful. No one wants to wake up and find
11 half their savings missing. No one can live with a currency that changes
12 value while they’re in the grocery store.
13 "kUSD is a stable cryptocurrency pegged to the US dollar. For the
14 first time, you can run real life and real businesses in cryptocurrency.
15 All with a stable value you can rely on."
16 58. Underneath this text were the following words, each
17 preceded by checkmark: "Stable. Autonomous. Decentralized."
18 59. Immediately below that was a section entitled "IT'S TIME
19 FOR A BLOCKCHANGE." It continued:
20 "THE NEXT GENERATION OF BLOCKCHAIN NETWORKS.
21 "Traditional cryptomining pits miners against each other in fierce,
22 wasteful, expensive competition. We think that’s stupid. kUSD miners
23 cooperate to advance the blockchain.
24 "Kowala’s Yap Consensus, inspired by the Yapese people who
25 use immovable Rai stones as currency, has revolutionized blockchains.
26 With a cooperative network of miners, the kUSD blockchain can quickly,
27 efficiently and robustly finalize blocks without significant energy waste.
28 //
20
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 21 of 95 Page ID #:21

1 "Say goodbye to million-dollar mining rigs and hello to futuristic

2 elegance. Finally, minting currency is as simple as it always should
3 have been."
4 60. Underneath this text were the following words, each
5 preceded by checkmark: "Energy efficent. [sic] Affordable. Fast."
6 61. Immediately below that was a section entitled "MINING
7 ANYONE CAN DIG." It continued:
8 "mUSD IS THE kUSD MINING TOKEN.
9 "The mining network is made up of mUSD holders. Only mUSD
10 holders can mine, and that’s the key to fast transactions, low energy
11 consumption, and reasonable hardware requirements.
12 "mUSD holders own and run the network, and reap block rewards
13 for their efforts. Unlike most other cryptocurrencies, you don’t need a
14 volcano-powered, snow-cooled supercomputer to mine kUSD. You can
15 use your laptop, or even a cheap server in the cloud."
16 62. Underneath this text was another link to "Get Tokens."
17 63. Immediately below that was a section entitled "A BANKLESS
18 TASK." It continued:
19 "OUR WALLET APP IS DESIGNED FOR HUMANS.
20 "Mass adoption of cryptocurrency requires professional-grade
21 wallet applications with all the features that users expect. The Kowala
22 app has a world-class user experience that supports push notifications
23 and P2P trading out of the box.
24 "With the Kowala app, getting into crypto is as easy as hailing an
25 Uber. Now anyone in the world can send, save and spend stable
26 cryptocurrency instantly, securely and safely. It’s about time."
27 64. Underneath this text were three words, each preceded by
28 checkmark: "Intuitive. Secure. Safe."
21
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1 65. Immediately below that was a section entitled "MEET THE

2 KOWALA FAMILY." This was followed by short descriptions of 14 Kowala
3 staff members, including defendants Glover, Reitano, and Willse, who were
4 the first three staff members listed. Immediately below these descriptions was
5 the "Get Tokens" section described above.
6 66. Underneath the "Get Tokens" section was a section entitled
7 "FREQUENTLY ASKED QUESTIONS." It continued:
8 "What's the difference between kUSD and all the other
9 cryptocurrencies?
10 "kUSD has all the features of other cryptocurrencies like Bitcoin
11 and Ethereum. Unlike these, however, kUSD has a stable value pegged
12 to the US dollar.
13 "Is the wallet app compatible with Windows, Mac, Android, iOS?
14 "Android and web-based versions of the app will be launched
15 along with the kUSD blockchain in December, which means you'll be
16 able to get, use, secure, and control your kUSD from any internet-
17 connected computer or other device on the planet.
18 "We expect iOS approval to take longer. In the meantime, iPhone
19 users can use the app with via [sic] their iPhone's web browser after
20 launch.
21 "What is the mission of Kowala?
22 "Kowala’s mantra is elegant technology for human prosperity.
23 (Italics in original.)
24 "Our mission is to create intuitive, and accessible technologies
25 that make it simple for every human to have total control over his or her
26 money and transact safely and securely with the entire world instantly at
27 little or no cost. Our goal is to finally realize the promise of Bitcoin for all
28 humans.
22
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1 "How is Kowala being funded?

2 "To date, Kowala has been funded by its founders and a small
3 group of private investors dedicated to bringing cryptocurrency to
4 everyone.
5 "In October of 2017, Kowala began a limited token pre-sale open
6 only to accredited investors. The majority of the token sale is being
7 reserved for a planned public sale in December 2017.
8 "Owners of mUSD mining tokens do the work of the blockchain
9 and earn mining rewards for their efforts.
10 "What kind of adoption, distribution and trading is required for
11 kUSD to function properly?
12 "Public exchanges serve as oracles for the kUSD blockchain,
13 which then automatically increases or decreases the kUSD money
14 supply based on the market price to keep the value of kUSD close to $1.
15 While kUSD can function properly with only one exchange and as few
16 as 3 active traders, multiple exchanges and more active traders make
17 the entire system more robust.
18 "Why would miners direct hash power towards a coin that has a
19 variable block reward?
20 "kUSD mining is energy-efficient and low cost cpu mining, so there
21 should be no incentive for miners to exit, even if block rewards are
22 temporarily $0. Furthermore, kUSD’s consensus mechanisms can
23 provide more consistent block rewards to miners than mechanisms
24 similar to ETH and BTC."
25 67. This was followed by a contact e-mail address,
26 kowalasezc@kowala.tech, and the name and address of Kowala SEZC, c/o
27 Cayman Enterprise City, P.O. Box 10315, Grand Cayman KY1-1003, Cayman
28 Islands. Underneath that was a copyright notice: "©2017 Kowala SEZC. All
23
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 24 of 95 Page ID #:24

1 rights reserved" and then logos for the law firm Perkins Coie and the
2 accounting firm Deloitte.
3 68. Defendants Kowala SEZC, Glover, Reitano, Willse, and
4 other defendants made the foregoing statements with the intent to induce
5 investors such as Merkamerica to rely on the statements in deciding to
6 purchase Kowala mining tokens from Kowala SEZC. Defendants Kowala
7 SEZC, Glover, Reitano, Willse, and other defendants authorized the online
8 publication of the kowala.tech website and its public distribution to prospective
9 investors including Merkamerica. Merkamerica relied on the foregoing
10 representations on the kowala.tech website in making its decision to purchase
11 Kowala mining tokens from Kowala SEZC.
12 69. The next version of the kowala.tech website captured by the
13 Wayback Machine was that appearing to the general public on February 7,
14 2018. It was identical to the December 3, 2017 version, except that the "Get
15 Tokens" link and section were removed, and the logos for Perkins Coie and
16 Deloitte were removed. The rest of the website was identical.
17
18 E. The Mining Tokens Were Securities.
19 70. The mining tokens sold by defendants to investors including
20 Merkamerica were "investment contracts," and thus securities governed by
21 the federal securities laws, under the test set forth in SEC v. W.J. Howey Co.,
22 328 U.S. 293, 301 (1946).
23 71. The first element of the Howey test requires that there be
24 "an investment of money." The U.S. Securities and Exchange Commission
25 ("SEC") stated that the use of cryptocurrency to purchase tokens meets this
26 requirement. Here, defendants sold mining tokens to Merkamerica in
27 exchange for Bitcoin valued at $307,844.12, meeting the first element of the
28 Howey test.
24
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1 72. The second element of the Howey test requires investment

2 in a common enterprise with a reasonable expectation of profit through that
3 enterprise. The SEC stated that this element is met when investors pay
4 cryptocurrency in exchange for tokens, from which the investors expect to
5 profit. In the Kowala White Paper, defendants told investors, including
6 Merkamerica, that "[u]p to 10% of the total generated mUSD [mining tokens]
7 will be sold to early investors, development team members, and advisors as
8 soon as is practical, in order to raise funds for the development of kUSD
9 [kCoins]." In the Kowala White Paper, defendants told investors that investors
10 will use their mining tokens for "reaping mining rewards consistently, no
11 matter whose machine solves the block; and having the option to sell or lease
12 acquired mining rights." On the kowala.tech website, defendants told
13 investors "mUSD [token] holders own and run the network, and reap block
14 rewards for their efforts" and "[o]wners of mUSD mining tokens do the work of
15 the blockchain and earn mining rewards for their efforts." The website further
16 told investors that "kUSD’s consensus mechanisms can provide more
17 consistent block rewards to miners than mechanisms similar to ETH and
18 BTC." Merkamerica purchased mining tokens from defendants in reliance on
19 the Kowala White Paper and the kowala.tech website. Merkamerica
20 purchased tokens from defendants reasonably expecting to profit from the
21 mining rights associated with the tokens, meeting the second element of the
22 Howey test.
23 73. The third element of the Howey test requires that the
24 investors' profits be derived from the managerial efforts of others. Here,
25 Merkamerica relied on defendants to complete development of the kCoin and
26 to launch a working blockchain, so that Merkamerica and other investors
27 could begin to profit from their purchase of mining tokens and earn rewards by
28 confirming transactions in the Kowala blockchain. Merkamerica's profits
25
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1 depended entirely on defendants' completion of the development and launch

2 of the Kowala blockchain. This meets the third element of the Howey test.
3 74. For these reasons, the mining tokens purchased by
4 Merkamerica were a security, and defendants were required to comply with
5 the federal securities laws at all times, including the anti-fraud provisions of
6 those laws.
7 75. Defendants conceded that the Kowala mining tokens are
8 regulated by the federal securities laws. Defendant Kowala SEZC filed Form
9 D with the SEC on July 27, October 2, and November 7, 2017 for offerings of
10 mining tokens. In its Form D filings, Kowala SEZC claimed exemption from
11 registration under the federal securities laws. In the SAFTs provided to
12 prospective purchasers of mining tokens, including the SAFTs signed by
13 Merkamerica, defendants required investors to complete an investor
14 questionnaire to establish accredited investor status for the express purpose
15 of qualifying for exemption under Regulation D; required investors to
16 represent and warrant that they were accredited investors under Regulation
17 D; and gave U.S. residents notice in the SAFT agreements that the sale of
18 "this security instrument" was not registered and that transfers of "this
19 security" are restricted unless the securities are registered or otherwise
20 exempt from registration.
21
22 F. Defendants' Targeting of California Investors.
23 76. Paragraphs 77 to 82 below are alleged on information and
24 belief. The sources of this information and belief are defendants' consultant
25 Chris Groshong ("Groshong"), defendants' Chief Marketing Officer Craig
26 Bromberg ("Bromberg"), and internally-prepared financial statements provided
27 by defendant Glover to software developer Endian. Groshong described
28 //
26
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1 himself as a blockchain consultant who helped defendants set up their

2 strategy for obtaining investment.
3 77. Defendants intentionally targeted California investors,
4 including Merkamerica, for its seed round in advance of product launch.
5 Defendants raised more than $2 million from seed investors before
6 Merkamerica. Defendants obtained a substantial amount of such seed
7 funding from California investors.
8 78. Defendant Reitano, defendants' consultant Groshong, and
9 defendants' accountant Joe Richardson lived in San Diego, California, and
10 defendants solicited investment funds from California investors while these
11 persons were living there.
12 79. On Kowala SEZC's behalf, Bromberg told Merkamerica's
13 CEO Steven Merker ("Merker") that defendants formulated the kCoin
14 marketing and investment strategy at one or more meetings occurring in
15 San Diego, California. Bromberg told Merker that defendants intended to
16 solicit investment funds from investors in Silicon Valley, Los Angeles, and
17 San Diego, California, believing that investors interested in cryptocurrencies
18 were most likely to be located in these areas.
19 80. Some of the earliest investors in Kowala SEZC were friends
20 and family of defendants' consultant Groshong, who approached them in
21 California to invest in Kowala SEZC. Groshong himself, a California resident,
22 purchased Kowala mining tokens from defendants.
23 81. Defendants solicited investment funds from California
24 investors, including Merkamerica, by means of personal meetings in
25 California, telephone calls to California, sending e-mails and text messages to
26 California, and otherwise corresponding with investors located in California.
27 Defendants sent SAFTs to investors in California for the purchase of Kowala
28 mining tokens, and California investors signed such SAFTs in California.
27
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1 Investments funds were transmitted to Kowala SEZC from California. The

2 individual defendants, including Glover, Reitano, and Willse, acting on behalf
3 of themselves and defendant Kowala SEZC, intended to and did target
4 California investors to purchase Kowala mining tokens and thereby to invest
5 in Kowala SEZC.
6 82. Bromberg told Merker that defendants registered their U.S.
7 affiliate, Kowala Inc., as a foreign corporation doing business in California
8 specifically for the purpose of soliciting California investors to invest in Kowala
9 SEZC and the kCoin project. Defendants registered Kowala Inc. as a foreign
10 corporation doing business in California on June 4, 2018. Kowala Inc. itself
11 filed Chapter 7 bankruptcy on April 10, 2019 and is not named as a defendant
12 herein.
13
14 G. Defendants' Solicitation of Merkamerica's Investment
15 83. Defendants began soliciting Merkamerica, a California
16 corporation, at the January 2018 North American Bitcoin conference in Miami,
17 Florida. Merkamerica's CEO Merker and Merkamerica's manager Quinn
18 Alexander ("Alexander") were attending the conference based on
19 Merkamerica's general interest in cryptocurrency investment. Merkamerica
20 was talking to founders of cryptocurrency projects at these conferences
21 looking deals to obtain a lower price for investment in seed rounds and obtain
22 the greatest "risk-to-reward" ratio. Public token offerings come with more risk
23 and less reward, because they are priced much higher than seed rounds.
24 Merkamerica could have found more expensive public token offerings online,
25 but sent Merker and Alexander to cryptocurrency conferences to look for less
26 expensive seed round offerings.
27 84. On January 19, 2018, the last day of the Miami conference,
28 defendants' consultant Groshong approached Alexander via Twitter and sent
28
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1 her a private message asking her to come down to the hotel lobby to speak.
2 In the lobby, Groshong told Alexander that Kowala was a stablecoin project
3 that was almost ready to launch, that Kowala's seed funding was almost fully
4 subscribed, that Kowala's CEO – defendant Glover – was at the conference,
5 and that Glover was leaving Miami that evening. Groshong asked Alexander
6 if she wanted to speak to Glover about investing in Kowala before Glover left
7 town. Glover was in the lobby, and Groshong briefly introduced Alexander to
8 Glover. Alexander went upstairs to speak to Merker. Merker agreed to meet
9 wtih Glover that evening. Merker and Alexander were under the impression
10 that Glover was leaving Miami that evening, and that this was Merkamerica's
11 only chance to get into Kowala's seed round.
12 85. Kowala's seed round was not open to the public. On
13 information and belief, Glover was soliciting investors privately at the Miami
14 conference. Kowala did not have any booths or any marketing materials at
15 the conference. On information and belief, Glover paid for a basic conference
16 ticket just like other attendees and was trying to meet people informally during
17 the conference to solicit investments in Kowala. The sources of this
18 information and belief are Glover's statements to Merker and Alexander at the
19 conference.
20 86. Around 5:00 p.m. on January 19, 2018, Merker and
21 Alexander, on behalf of Merkamerica, met with defendant Glover in the hotel
22 lobby. The meeting lasted about two hours. At that meeting, Glover referred
23 Merker and Alexander to the kowala.tech website and told them they could
24 access the Kowala White Paper online to read and learn about the kCoin
25 concept. Glover told Merker and Alexander that the Kowala White Paper
26 explained the offer of Kowala mining tokens and how Merkamerica would
27 profit from the investment.
28 //
29
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1 87. Defendants Glover, Reitano, Willse, Kowala SEZC, and

2 other defendants knew, intended, and authorized that Glover would refer
3 prospective investors to the kowala.tech website and provide the Kowala
4 White Paper to prospective investors, including Merkamerica, to induce them
5 to rely on the Kowala White Paper and the kowala.tech website, to purchase
6 mining tokens, and to invest in Kowala SEZC.
7 88. At that January 19, 2018 meeting, Glover told Merker and
8 Alexander that "he had a working blockchain that was ready to launch," that
9 the kCoin was a "working project," and that the kCoin would be launched by
10 February or March 2018. Glover told Merker and Alexander: "We are a live
11 working blockchain that can hold the kUSD stable, and you can make mining
12 rewards from the mUSD. We are preparing to launch in February." Glover
13 told Merker and Alexander that purchasers of Kowala mining tokens will be
14 able to mine and earn kCoins upon launch, and that Merkamerica will start to
15 earn mining profits upon launch of the kCoin in February or March 2018.
16 89. At that January 19, 2018 meeting, Glover told Merker and
17 Alexander that "the seed round was ending this weekend at the North
18 American Bitcoin conference and they had collected all the seed money they
19 needed." Glover told Merker and Alexander that the next round of token sales
20 will be open to the public, and that they will be raising the token price for the
21 public sale. To Merker, Glover was acting as if Merkamerica's investment
22 was simply an afterthought and that Kowala did not need Merkamerica's
23 money. Nonetheless, Glover assured Merker and Alexander that
24 Merkamerica will get a lower price for purchasing tokens in the seed round
25 than will be offered in the public token sale.
26 90. Merker and Alexander specifically asked Glover about how
27 tokens were being allocated among management, seed round investors, and
28 purchasers in the public token sale (the "token metrics"). Glover directed
30
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1 them to the Kowala White Paper and specifically confirmed to Merker and
2 Alexander that 10% of the tokens were being sold in the seed round, 15% of
3 the tokens were being retained by Kowala for its own account; and the
4 remaining 75% of the tokens will be sold in the public token sale. Glover told
5 Merker and Alexander to talk to defendant Willse about token metrics,
6 identifying Willse as the Vice President of Business Development for Kowala.
7 91. At that January 19, 2018 meeting, Glover represented to
8 Merker and Alexander that the value of kCoins will be stable, through the
9 algorithm described in the Kowala White Paper. Glover told Merker and
10 Alexander: "Our stable coin is the kUSD, and the kUSD will hold a dollar
11 peg." Glover told Merker and Alexander: "The mUSD is the token that you
12 buy and use to run the network which generates kUSD." Glover told Merker
13 and Alexander that the purchase of mining tokens will generate kUSD, that
14 kUSD will be sold on exchanges for Bitcoin, dollars, and other currencies and
15 cryptocurrencies, and that Kowala will be putting mUSD tokens on exchanges,
16 where token holders will trade and profit from sale of tokens to third parties.
17 92. At that January 19, 2018 meeting, Glover explained to
18 Merker and Alexander how the mining tokens will produce revenue for token
19 holders. He explained the "proof of control" concept to Merker and Alexander.
20 He told Merker and Alexander that each token holder will be assigned sectors
21 in the blockchain, that the token holders will have the right to complete
22 blockchain transactions assigned to their respective sectors, and that token
23 holders will earn rewards of kCoins upon completing transactions assigned to
24 their sectors. Glover assured Merker and Alexander that application of the
25 Kowala algorithm will cause kCoins to maintain stable values corresponding
26 with the associated currency, that token holders will be able to convert kCoins
27 to that associated currency, and that token holders will earn profits as a result.
28 //
31
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1 93. At that January 19, 2018 meeting, Glover told Merker and
2 Alexander that John Reitano was on the Kowala team. Glover told Merker
3 and Alexander that Reitano was a "genius," that Reitano "created the Neutrino
4 privacy coin," and Reitano was "a leader in the [blockchain] space." Glover
5 told Merker and Alexander that Neutrino was a huge success. Glover told
6 Merker and Alexander that he and Reitano "had known each other for the past
7 10-15 years and were business partners not only in life but in business."
8 Glover told Merker and Alexander that "John and I have been in the crypto
9 space for many years." Glover told Merker and Alexander that Reitano
10 created the kCoin, solved the stability issue, and was getting the kCoin ready
11 for launch in February 2018. Glover did not mention any other projects that
12 he or Reitano were involved in, other than Neutrino.
13 94. At that January 19, 2018 meeting, Glover told Merker and
14 Alexander that the kCoin was much better then other stablecoins, in particular
15 Basecoin. Glover claimed that Kowala solved the stability issue that Basecoin
16 could not. On information and belief, Basecoin was a stablecoin concept that
17 relied on three sets of digital assets: the cryptocurrency itself, pegged to the
18 U.S. dollar; a token called "base bonds" that would be sold in exchange for
19 Basecoin whenever coin supply needed to be reduced, to be redeemed at a
20 later date with interest like a traditional bond; and a second token called "base
21 shares," for which dividends of Basecoin would be issued whenever coin
22 supply needed to be increased. Glover told Merker and Alexander:
23 "Basecoin was just a bunch of really rich investors holding their funds in
24 Basecoin to maintain stability. It's destined to fail, and from my talks with
25 Basecoin investors, they know this and that’s why it hasn't launched in over a
26 year." On information and belief, the Basecoin project was terminated as of
27 December 2018, not because the Basecoin was not stable, but because the
28 promoters believed that regulatory compliance with federal securities laws
32
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1 would interfere with liquidity and price stability, making the project
2 unworkable. On information and belief, the Basecoin promoters refunded the
3 entire capital investment of about $133 million to their investors. The sources
4 of this information and belief are public statements by the founders of
5 Basecoin and third party analysts writing about Basecoin.
6 95. At that January 19, 2018 meeting, Glover told Merker and
7 Alexander: "We solved the problem that Basecoin couldn’t solve. We made
8 our stable coin stable. We are the only stable coin to figure out how to do this
9 without being backed. We are using something called seigniorage shares."
10 This was a reference to the Robert Sams paper. Glover told Merker and
11 Alexander that investors in Kowala would all become "billionaires" from this
12 project. Glover said to Merker and Alexander that they could rest assured
13 that Kowala was the best stablecoin, because of Kowala's working software
14 code.
15 96. At that January 19, 2018 meeting, Glover told Merker and
16 Alexander that funds obtained from the sale of Kowala mining tokens will be
17 used for the development of the Kowala blockchain. He did not tell them that
18 such funds would be used to pay for expensive hotels, meals, or first-class
19 travel for Glover, Reitano, Willse, or other defendants.
20 97. Merker and Alexander felt pressured in the January 19, 2018
21 meeting to buy Kowala mining tokens. Glover told Merker and Alexander that
22 Glover had sold enough mining tokens to end the seed round, and they were
23 ready to move to the public token sale. Glover indicated to Merker and
24 Alexander that he was leaving Miami, and this was Merkamerica's last chance
25 to invest before the public sale. Glover asked Merker and Alexander if
26 Merkamerica met the qualifications as an accredited investor under SEC
27 Regulation D. At that January 19, 2018 meeting, Glover was informed that
28 //
33
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 34 of 95 Page ID #:34

1 Merkamerica, Merker, and Alexander were residents of California, and that

2 Merker and Alexander were acting at all times on behalf of Merkamerica.
3 98. On information and belief, based on Willse's statements to
4 Merker and Alexander, defendant Glover contacted defendant Willse to let
5 him know about Merkamerica's interest in purchasing Kowala tokens. On
6 January 19, 2018, defendant Willse e-mailed Alexander and encouraged her
7 to visit the kowala.tech website and read the Kowala White Paper. They
8 e-mailed each other to set up a phone call for the next day, to include Merker.
9 99. On January 20, 2018, defendant Willse called Merker and
10 Alexander to solicit Merkamerica's purchase of Kowala mining tokens. Willse
11 offered Merker and Alexander the opportunity to purchase "mUSD to earn
12 kUSD which would always be valued at a dollar and stable." Willse told
13 Merker and Alexander that Kowala had raised more than $2 million in seed
14 funding. Willse told Merker and Alexander that Glover and Reitano had been
15 in the crypto space for many years, without mentioning any specific projects
16 by name. Willse told Merker and Alexander that he was excited about the
17 kCoin and the prospect of creating kUSD which will always be valued at a
18 dollar on exchanges. Willse told Merker and Alexander that he was excited
19 about mUSD being able to be sold on exchanges.
20 100. In that January 20, 2018 call, Merker and Alexander asked
21 Willse about the token metrics, and Willse directed them to review the Kowala
22 White Paper on the kowala.tech website for this information. Willse pressured
23 Merkamerica to buy now, telling Merker and Alexander that this was the end
24 of the seed round funding. Willke mentioned to Merker and Alexander that a
25 "Middle Eastern businessman" had purchased almost all of the last tier of the
26 seed round for $500,000. Willse told Merker and Alexander that Kowala had
27 secured all the funding it needed, that the next round of funding will be public,
28 and that the token price will increase. Willse assured Merker and Alexander
34
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 35 of 95 Page ID #:35

1 that Merkamerica will get a lower price for tokens in the seed round than will
2 be offered in the public sale.
3 101. Defendants Glover, Reitano, Willse, Kowala SEZC, and
4 other defendants knew, intended, and authorized that Willse would refer
5 prospective investors to the kowala.tech website and provide the Kowala
6 White Paper to prospective investors, including Merkamerica, to induce them
7 to rely on the Kowala White Paper and the kowala.tech website, to purchase
8 mining tokens, and to invest in Kowala SEZC.
9 102. In that January 20, 2018 call, Merker asked Willse how
10 much time Merkamerica had to make the decision to invest. Willse replied to
11 Merker that this was the final tier of the seed round, and it was almost sold
12 out, and from there the price will increase. Willse said to Merker: "I wouldn’t
13 wait too long."
14 103. In that January 20, 2018 call, Willse confirmed to Merker and
15 Alexander that funds obtained from the sale of Kowala mining tokens will be
16 used for the development of the Kowala blockchain. He did not tell them that
17 such funds would be used to pay for expensive hotels, meals, or first-class
18 travel for Glover, Reitano, Willse, or other defendants. During this call, Willse
19 was informed that Merkamerica, Merker, and Alexander were residents of
20 California, and that Merker and Alexander were acting on behalf of
21 Merkamerica.
22 104. On January 20, 2018, after that call ended, defendant Willse
23 e-mailed the first SAFT to Alexander for Merkamerica's review and
24 consideration. In reply that same day, Merker e-mailed Willse asking about
25 the seed round tiers that had been offered and sold by Kowala SEZC, and
26 about the Kowala team members. Willse replied by e-mail to Merker, stating
27 that Kowala SEZC has fully sold six tiers and most of a seventh tier of mining
28 tokens, raising $2,151,724 to date. Willse represented to Merker that 33.2%
35
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 36 of 95 Page ID #:36

1 of the maximum number of mining tokens had been sold to date. Willse told
2 Merker that there were still about $126,000 worth of tokens available to
3 purchase in the seventh tier. Willse provided Merker with a spreadsheet
4 showing the different tiers of seed funding, the price per token in each tier,
5 and the total dollar value of investment in each tier. Willse stated to Merker
6 that "the pre-sale will be ending after this tier and we will move to a new
7 model" and that he didn't "have details on what the new model will look like."
8 Willse also provided Merker with a list of current Kowala team members,
9 including defendants Glover as CEO, defendant Reitano as CTO, and
10 defendant Willse as VP Business Development.
11 105. Merker and Alexander returned to California on the evening
12 of January 20, 2018. Willse knew Merker and Alexander were physically
13 present in California during all of the following communications in January
14 2018. Whenever he sent an e-mail or placed a phone call to Merker or
15 Alexander, Willse knew that Merker and Alexander were physically located in
16 California, would receive Willse's e-mails and telephone calls in California,
17 and would sign the SAFTs in California. On information and belief, Willse did
18 not take any action to solicit investment in Kowala SEZC or to receive
19 investment funds on Kowala SEZC's behalf without the knowledge and
20 approval of Glover and Reitano, who were the co-founders of Kowala SEZC.
21 On information and belief, Glover and Reitano, on behalf of themselves and
22 Kowala SEZC, knew and expressly approved that Willse was soliciting
23 Merkamerica's purchase of Kowala mining tokens while Merkamerica, Merker,
24 and Alexander were physically located in California. On information and
25 belief, defendants Glover and Reitano knew during this period that Merker
26 and Alexander were physically located in California, would receive Willse's
27 e-mails and telephone calls in California, and would sign the SAFTs in
28 California. The sources of this information and belief are Merkamerica's
36
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 37 of 95 Page ID #:37

1 knowledge and understanding of the hierarchical organization of Kowala

2 SEZC and the relationship among Glover, Reitano, and Willse as witnessed
3 by Merker and Alexander in conversations with each of them. Glover and
4 Reitano were the co-founders of Kowala SEZC. In Merker and Alexander's
5 observation, Glover was clearly the boss; Reitano had equal authority with
6 Glover; and Willse acted at all relevant times as having full authority from
7 Glover and Reitano to take actionis on behalf of Kowala SEZC. Merker and
8 Alexander observed that each defendant was aware of the content of other
9 defendants' conversations with Merkamerica, and that they kept each other
10 informed of what each other was doing.
11 106. Willse's January 20, 2018 spreadsheet told Merker that the
12 price per token was increasing in each funding tier. Willse's spreadsheet
13 showed that the price per token had increased from $0.015 per token in the
14 first and second tiers to $0.049804 per token in the seventh tier. Willse's
15 spreadsheet also told Merker that the difference in price per token between
16 the sixth and seventh tiers was almost double. Willse's January 20, 2019
17 e-mail told Merker that only about $126,000 of mining tokens remained
18 available to purchase in the seventh tier, and that there was no eighth tier.
19 107. Merker and Alexander were excited that Merkamerica was
20 buying at the end of the private sale. They believed that once a private sale
21 closes, and the public sale opens up, the price is increased 20-50% from the
22 last round of the private sale. They thought Merkamerica was getting a
23 substantial discount from the public sale price for purchasing Kowala mining
24 tokens in the seed round.
25 108. Merkamerica had up to $300,000 available for
26 cryptocurrency investment at that time, more than the $126,000 in tokens
27 available for purchase in the seventh tier. Merker e-mailed Willse on
28 January 21, 2018, telling Willse that Merkamerica was interested to invest
37
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 38 of 95 Page ID #:38

1 between $100,000 and $300,000 in Kowala mining tokens. Merker asked

2 Willse "what would that look like" if Merkamerica were to invest more than
3 $126,000. Merker asked Willse if such investment would "just blend into and
4 close these tiers." In a separate e-mail, Merker told Willse that Merkamerica
5 "would take the last 126k if that's it."
6 109. Willse replied ten minutes later, offering Merkamerica
7 investment in an eighth tier. Willse e-mailed Merker an orphaned
8 spreadsheet line, presumably for an eighth tier, showing a price per token of
9 $0.056154 and a total available for purchase of $176,645. Willse wrote that
10 "Tier 8 was scheduled to be smaller. See below [referring to the orphaned
11 spreadsheet line]. We can do that as well. You would end up with a bit over
12 $300 K. What do you think?" Based on Willse's prior statement that there
13 was no eighth tier, it appeared to Merkamerica that defendants created a new
14 eighth tier of seed round investment for the specific purpose of accepting the
15 total amount Merker said Merkamerica was able to invest. Willse quoted
16 Merkamerica a eighth-round price per token of $0.056154, which was 15%
17 higher than the seventh round token price. Willse told Merker than the token
18 price was increasing substantially with each funding round.
19 110. On January 21, 2018, Willse sent Merker an e-mail with
20 instructions on how to sign the SAFT for the seventh tier purchase, how to
21 provide documentation to qualify for exemption from securities registration,
22 and how to pay for the mining tokens.
23 111. Before signing the SAFT for the seventh tier purchase,
24 Merker wanted to pin down the terms of the eighth tier. He e-mailed Willse on
25 January 21, 2018 and asked, "So for the last tier at .056 cents, to fill that one
26 up we would need to purchase all $176k of it?" Willse replied, "That is
27 correct. If you don't want to go over $300K, we can keep that as the limit for
28 you." (Italics in original.)
38
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 39 of 95 Page ID #:39

1 112. Before Merkamerica purchased any Kowala mining tokens,

2 Merker reviewed the kowala.tech website and reviewed the Kowala White
3 Paper published on the kowala.tech website.
4 113. On January 21, 2018, knowing that Merker had returned to
5 California, defendant Willse e-mailed the SAFT to Merker for the purchase of
6 Kowala mining tokens in the seventh tier, via Docusign for Merkamerica's
7 approval and signature. The SAFT was digitally signed by Willse on Kowala
8 SEZC's behalf. The purchase was offered at the seventh-tier price of
9 $0.049804 per token, to be paid in Bitcoin of equal value.
10 114. Merker reviewed the SAFT that Willse sent him. The SAFT
11 made numerous representations, including without limitation the following:
12 (a) Section 1(a) of the SAFT promised that, in
13 consideration for the payment of the purchase price to Kowala SEZC, Kowala
14 SEZC will launch its kUSD cryptocurrency, and that upon such launch,
15 Kowala SEZC will issue to Merkamerica a specified number of mUSD mining
16 tokens, giving Merkamerica the right to process blockchain transactions and
17 earn profits once kUSD was launched.
18 (b) Section 5(f) of the SAFT represented and warranted
19 that Kowala SEZC "owns or possesses (or can obtain on commercially
20 reasonable terms) sufficient legal rights to all patents, trademarks, service
21 marks, trade names, copyrights, trade secrets, licenses, information,
22 processes and other intellectual property rights necessary for its business as
23 now conducted and as currently proposed to be conducted, without any
24 conflict with, or infringement of the rights of, others."
25 (c) The SAFT notified U.S. residents that Kowala SEZC's
26 sale of "this security instrument" was not registered under U.S. law and that
27 transfers of "this security" are restricted unless the securities are registered
28 under U.S. law or otherwise exempt from registration under U.S. law.
39
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 40 of 95 Page ID #:40

1 115. In reliance on Glover and Reitano's representations in the

2 Kowala White Paper, defendants' representations on the kowala.tech website,
3 Kowala SEZC's representations in the SAFT signed by Willse, and the
4 representations made by Glover and Willse, Merker digitally signed the SAFT
5 on Merkamerica's behalf, via Docusign on January 21, 2018. The SAFT
6 stated, underneath Merker's signature, that Merkamerica's address was in
7 Venice, California. To the extent there was any inconsistency between the
8 Kowala White Paper, the kowala.tech website, and the specific statements
9 made by Glover and Willse, Merkamerica relied on the statements made by
10 Glover and Willse.
11 116. Later that day, Willse e-mailed Merker confirmation of
12 receipt of the signed SAFT and specific instructions for payment. Willse
13 requested that Merkamerica pay Kowala SEZC for the mining tokens in
14 Bitcoin. From Merkamerica's office in California, Merker accessed
15 Merkamerica's existing Bitcoin holdings and, on January 22, 2018, transferred
16 11.15754964 Bitcoin, having a then-current cash value of $128,566.88, to
17 Kowala SEZC to pay for Merkamerica's purchase of mining tokens from
18 Kowala SEZC in Tier 7. This amount included a "conversion fee" that
19 Merkamerica was required to pay to Kowala SEZC. For the total payment of
20 $128,566.88, Merkamerica purchased 2,543,558 mUSD mining tokens that
21 Kowala SEZC agreed to transfer to Merkamerica upon launch of the kCoin.
22 117. On January 22, 2018, Merker e-mailed Willse to inform him
23 that the Bitcoin had been sent to Kowala's SEZC's walled to pay for the Tier 7
24 purchase. Merker told Willse that Merkamerica decided to invest around
25 $300,000. Merker requested that Willse send Merker the balance required for
26 the purchase of mining tokens in Tier 8.
27 118. Willse responded to Merker by e-mail that day. Willse asked
28 Merker if Merkamerica wanted to limit its total investment to $300,000 and not
40
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 41 of 95 Page ID #:41

1 purchase the entire eighth tier. Willse also informed Merker that the Bitcoin
2 transfer for the seventh tier purchase was not yet confirmed.
3 119. Merker replied to Willse by e-mail that day. Merker told
4 Willse that Merkamerica would purchase the entire allotment of mining tokens
5 in the eighth tier. Merker also informed Willse that Merkamerica would have
6 to convert other cryptocurrencies to Bitcoin, and asked Willse to provide the
7 updated rate for Bitcoin, which is subject to wide fluctuations in daily
8 exchange value.
9 120. By reply e-mail on January 22, 2018, Willse responded
10 "excellent" to Merker's statement that Merkamerica would purchase all the
11 tokens in the eighth tier. Willse told Merker that he sent Merkamerica a new
12 SAFT for the eighth tier purchase and quoted the current Bitcoin exchange
13 rate. Willse informed Merker that Willse would wait until the Bitcoin rate reset
14 that evening and would send Merkamerica a new calculation and funding
15 instructions at that time.
16 121. On January 22, 2018, defendant Willse e-mailed a second
17 SAFT to Merker in California for the purchase of Kowala mining tokens in the
18 eighth tier, via Docusign for Merkamerica's approval and signature. The
19 SAFT was digitally signed by Willse on Kowala SEZC's behalf. The purchase
20 was offered at the eighth-tier price of $0.056154 per token, to be paid in
21 Bitcoin of equal value.
22 122. On January 22, 2018, Willse sent an e-mail to Merker
23 confirming that Kowala SEZC received Merkamerica's payment for the mining
24 tokens in the seventh tier. Willse told Merker in that e-mail that "[w]e currently
25 expect the launch of kUSD to occur by February 28, 2018."
26 123. Later that day on January 22, 2018, before signing the
27 second SAFT for the Tier 8 investment, Merker realized that he was confused
28 about the token metrics described in the Kowala White Paper. The Kowala
41
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 42 of 95 Page ID #:42

1 White Paper represented that 10% of the total number of mining tokens would
2 be sold in private sales to early investors, development team members, and
3 advisors; that Kowala would retain only 15% of the total number of tokens for
4 its own account; and that the remaining 75% would be sold in public token
5 offerings within 12 months of the first private token sale. Merker e-mailed
6 Willse on January 22, 2018, stating that he remembered Willse telling him that
7 "the 10% was sold and the 15% was retained, and the final 75% was almost
8 sold out." Merker asked Willse if his recollection was true, and if so, why was
9 the almost sold out 75% omitted from Willse's January 20, 2018 spreadsheet
10 showing seven tiers of investment. Merker was concerned because he
11 wanted to make sure that Merkamerica was purchasing tokens in the 10%
12 allocated for private early investors at a lower token price, and not in the 75%
13 to be sold to the general public at a higher token price.
14 124. Willse responded to Merker by e-mail on January 22, 2018.
15 Willse made clear to Merker that defendants "absolutely are not sold out of
16 the 75%" and that the spreadsheet showed that only 33.2% of the mining
17 tokens had been sold or were unavailable. Willse clarified: "I did say 'it looks
18 like the pre-sale will be ending after this tier and we will move to a new model.'
19 That new model is being determined and will involve the remaining 717 Million
20 [tokens]." Willse confirmed to Merker that the token metrics stated in the
21 Kowala White Paper were correct. Willse asked Merker if Merker would like to
22 speak on the telephone to discuss. Merker agreed.
23 125. Willse spoke to Merker and Alexander on the telephone on
24 January 22, 2018 around 6:00 p.m. Pacific Standard Time. Willse knew that
25 Merker and Alexander were in California during this telephone call. Willse
26 confirmed to Merker and Alexander that Merkamerica was investing in the
27 private seed round at a lower token price, and not in the public token sale at a
28 higher token price.
42
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1 126. Merker and Alexander told Willse in that January 22, 2018
2 call that Merkamerica wanted to be purchasing tokens in the 10% allocated to
3 private early investors, and not in 75% allocated for a public token sale. They
4 told Willse that it was important to Merkamerica to be investing with the early
5 investors to obtain the greatest "risk-to-reward" ratio in the seed round, and
6 that was why Merkamerica was specifically looking for seed round
7 investments. Merker and Alexander mentioned "seed round" several times in
8 the conversation. Willse clarified to Merker and Alexander that Merkamerica
9 was investing in the final tier of the seed round, and that the seed round would
10 end with Merkamerica's investment.
11 127. In that January 22, 2018 call, Merker told Willse that both
12 Merker and Alexander had read the Kowala White Paper. Merker asked
13 Willse to confirm specifically that the token metrics represented in the Kowala
14 White Paper were true, and Willse confirmed to Merker and Alexander that
15 they were true. Willse specifically confirmed to Merker and Alexander that
16 Kowala was going to sell the remaining tokens to public investors not affiliated
17 with Kowala.
18 128. In that January 22, 2018 call, Willse talked about how great
19 of a project this will be. Willse convinced Merker and Alexander that the
20 Kowala project will be a revenue generator and a stable cryptocurrency.
21 Merker specifically asked Willse about revenue generation, and Willse
22 responded to Merker and Alexander that "mUSD will create kUSD, and kUSD
23 will be stable." Merker and Alexander asked Willse about when Merkamerica
24 would begin to see a return on its investment in Kowala mining tokens. They
25 specifically asked Willse when the kCoin would launch. Willse responded to
26 Merker and Alexander that "we are on track to launch in February [2018]."
27 Willse promised that Merkamerica would begin earning a return on investment
28 within two months. Willse's statements to Merker and Alexander in the
43
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 44 of 95 Page ID #:44

1 January 22, 2018 call confirmed Glover's statements made to Merker and
2 Alexander at the January 19, 2018 meeting and Willse's statements made to
3 Merker and Alexander in the January 19, 2018 telephone call.
4 129. After the Bitcoin rate reset on January 22, 2018, Willse
5 e-mailed payment instructions to Merker, stating that "[t]his e-mail serves as a
6 reminder that we have not received the funds due per your SAFT." Merker
7 had not signed the second SAFT at this point.
8 130. Merker reviewed the second SAFT that Willse sent him. The
9 terms, conditions, and disclosures in the second SAFT were identical to those
10 in first SAFT. In reliance on Glover and Reitano's representations in the
11 Kowala White Paper, defendants' representations on the kowala.tech website,
12 Kowala SEZC's representations in the SAFT signed by Willse, and the
13 representations made by Glover and Willse, Merker digitally signed the
14 second SAFT on Merkamerica's behalf, via Docusign on January 23, 2018.
15 The SAFT stated, underneath Merker's signature, that Merkamerica's address
16 was in Venice, California. To the extent there was any inconsistency between
17 the Kowala White Paper, the kowala.tech website, and the specific statements
18 made by Glover and Willse, Merkamerica relied on the statements made by
19 Glover and Willse.
20 131. From Merkamerica's office in California, Merker converted
21 Merkamerica's other cryptocurrencies to Bitcoin and, on January 23, 2018,
22 transferred 16.64266130 Bitcoin, having a then-current cash value of
23 $179,277.24, to Kowala SEZC to pay for Merkamerica's purchase of mining
24 tokens from Kowala SEZC in Tier 8. This amount included a "conversion fee"
25 that Merkamerica was required to pay to Kowala SEZC. For the total payment
26 of $179,277.24, Merkamerica purchased 3,145, 729 mUSD mining tokens that
27 Kowala SEZC agreed to transfer to Merkamerica upon launch of the kCoin.
28 //
44
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Case 2:19-cv-06111-PSG-GJS Document 1 Filed 07/16/19 Page 45 of 95 Page ID #:45

1 The total number of tokens purchased by Merkamerica under the two SAFTs
2 was 5,689,287.
3 132. On January 24, 2018, Willse sent an e-mail to Merker
4 confirming that Kowala SEZC received Merkamerica's payment for the mining
5 tokens in the eighth tier. Willse told Merker in that e-mail that "[w]e currently
6 expect the launch of kUSD to occur by February 28, 2018."
7 133. Thoroughout the process of soliciting Merkamerica's
8 investment in Kowala SEZC, defendants failed to warn Merkamerica of the
9 risk that the software might not work. To the contrary, every representation
10 and statement by defendants to Merkamerica assured Merkamerica that
11 defendants had working blockchain code that performed as promised, and
12 that the kCoin blockchain would launch in February or March 2018.
13 134. Defendants reached out to Merkamerica, a California
14 corporation, and sold mining tokens to Merkamerica. Defendants knew that
15 Merkamerica was a California corporation with its principal place of business
16 in Los Angeles, California. Defendants acknowledged in the SAFTs that they
17 were entering into a relationship with a California entity, which was
18 Merkamerica. Defendants knew that Merkamerica would be performing all its
19 obligations under the SAFTs in California, such obligations being
20 Merkamerica's purchase of mining tokens from defendants and payment of
21 investment funds to defendants. Defendants prepared the SAFTs and
22 inserted Merkamerica's California address into the SAFTs. Defendants
23 e-mailed the SAFTs to Merkamerica in California for signature. Defendants
24 knew that Merkamerica would be signing the SAFTs in California. Defendants
25 knew that Merkamerica would be sending the investment funds from
26 California. Merker was physically located in California when he signed the
27 SAFTs on Merkamerica's behalf; when he arranged to transfer Bitcoin to
28 defendants to pay for the mining tokens on Merkamerica's behalf; and when
45
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1 he exchanged U.S. dollars and other cryptocurrencies in Merkamerica's

2 account for Bitcoin in order to pay defendants for the mining tokens on
3 Merkamerica's behalf. Defendants benefited from Merkamerica's actions in
4 California by receiving the Bitcoin paid by Merkamerica to defendants for the
5 mining tokens. Defendants were obligated to deliver mining tokens to
6 Merkamerica in California, but failed to do so. Because defendants knew at
7 all times that Merkamerica was located in California, it was reasonably
8 foreseeable to defendants that Merkamerica would suffer harm in California.
9 135. Merkamerica was harmed in California. Merkamerica is a
10 California corporation and parted with investment funds in California. Merker
11 was physically present in California when he transferred Bitcoin to defendants
12 to pay for Merkamerica's purchase of Kowala mining tokens under the SAFTs.
13 136. Defendants Glover, Willse, and other defendants made the
14 foregoing statements with the intent to induce Merkamerica to rely on the
15 statements in deciding to purchase Kowala mining tokens from Kowala SEZC.
16 Defendants Reitano, Willse, Kowala SEZC, and other defendants authorized
17 Glover to make the foregoing statements to Merkamerica, and defendants
18 Glover, Reitano, Kowala SEZC, and other defendants authorized Willse to
19 make the foregoing statements to Merkamerica. Merkamerica relied on the
20 foregoing statements in making its decision to purchase Kowala mining tokens
21 from Kowala SEZC.
22
23 H. Fraud In Connection With The Purchase And Sale Of Securities.
24 137. Paragraphs 138 to 142 below are alleged on information and
25 belief. The sources of such information and belief are statements by Endian,
26 a software development company, and its owners Paul Fox and Adrian Duke.
27 138. In or about 2016, defendants Glover and Reitano hired
28 Endian to help them write software for the prior "UR" coin venture. When
46
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1 Glover and Reitano abandoned UR for the kCoin project, they hired Endian to
2 write software for the kCoin project instead. Paul Fox was embedded within
3 Kowala to serve as lead developer, and Kowala outsourced the services of
4 other Endian programmers to write the code for Kowala. Defendants currently
5 owe Endian and its owners more than $200,000 for services rendered but
6 unpaid.
7 139. Endian, Fox, and Duke stated that, in January 2018 when
8 Merkamerica made its investment in Kowala SEZC, neither defendants nor
9 anyone at Endian had the belief or expectation that the kCoin algorithm would
10 work in practice, that the software code for the Kowala blockchain would work
11 as promised, or that the price of the kCoin would ever be stabilized as
12 promised. Endian called Kowala a "science experiment" to determine the
13 viability of the project. The true facts were that the algorithm was purely
14 theoretical, no code had ever been written to make the algorithm work, and
15 the software developers writing the code could not reasonably guarantee that
16 the code would work as promised.
17 140. Endian and its owners described the software development
18 process as having two main parts. The first was to develop the "stability
19 mechanisms" to apply the algorithm to real-time transactions. These
20 mechanisms included writing software code to control the quantity of kCoins
21 produced upon completion of each blockchain transaction (which they called
22 "minting") and the quantity destroyed to reduce supply as needed to maintain
23 price stability (which they called "burning"). The mechanisms also included
24 software code to obtain current kCoin market prices from third party
25 marketplace sources ("oracles") and to send instructions to the Kowala
26 network as to how many kCoins to mint or burn as needed for price stability.
27 141. Defendants represented to Merkamerica that launch of a
28 fully operational kCoin blockchain would occur in February or March 2018,
47
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1 only a month or two after Merkamerica's token purchases in January 2018.

2 However, before January 2018, Endian and its owners expressly told
3 defendants that it would take two or three years to develop the stability
4 mechanisms, if ever. Defendants knew that their promises to Merkamerica
5 that they had working software, that their software was able to maintain stable
6 values for kCoins, that the kCoin blockchain was ready to launch, and that the
7 kCoin would be launched by February or March 2018, were false when made.
8 Glover's statement to Merkamerica that Reitano had solved the stability issue
9 was also false when made, because the stability issue was not solved and
10 would take two or three years to solve, if ever, and also because Endian and
11 its software developers were the ones solving the stability issue, not Reitano.
12 142. According to Endian and its owners, the mining tokens that
13 defendants sold to investors including Merkamerica were independent of the
14 stability mechanisms. Defendants promised Merkamerica that the mining
15 tokens would have a "proof-of-control" consensus mechanism to assign
16 rewards to particular token purchasers. According to Endian and its owners,
17 this by itself was a "staggering undertaking from a game theoretical and
18 computer science perspective." Endian was required to write a lot more code
19 to develop this mechanism, which Endian and its owners described as
20 extremely labor-intensive and unnecessary to the stability mechanisms.
21 Having to write code for "proof of control" interfered with Endian's efforts to
22 find a solution to the stability mechanisms.
23 143. Merkamerica did not have knowledge of the foregoing facts
24 at the time it purchased Kowala mining tokens and invested in Kowala SEZC
25 in January 2018. Had Merkamerica known the true facts, it would not have
26 invested in Kowala SEZC.
27 144. Accordingly, defendants committed securities fraud in
28 several ways. First, Merkamerica's entire investment was based on a big lie.
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1 Defendants falsely promised Merkamerica that they were able to create

2 kCoins with stable values. This promise was made in the Kowala White
3 Paper, on the kowala.tech website, and in the communications described in
4 Paragraphs 86 to 132 above. This promise was false when made.
5 Defendants did not hold the belief that such software would or could ever be
6 developed. Endian and its owners told defendants that it would take two or
7 three years to develop the software, and there was no reasonable guarantee
8 it would ever work. Defendants' promise was material to Merkamerica's
9 investment decision. Merkamerica relied on defendants' promise in making
10 the decision to purchase Kowala mining tokens and to invest in Kowala SEZC.
11 Had Merkamerica known the true facts, it would not have invested in Kowala
12 SEZC.
13 145. Second, to induce Merkamerica to make its investment in
14 Kowala's mining tokens in January 2018, defendants specifically represented
15 to Merkamerica that they had working software, that their software was able to
16 maintain stable values for kCoins, that the kCoin blockchain was ready to
17 launch, and that the kCoin would be launched by February or March 2018.
18 These representations were made in the Kowala White Paper, on the
19 kowala.tech website, and in the communications described in Paragraphs 86
20 to 132 above. These representations were false when made. Defendants
21 knew that the stability mechanisms for the kCoin would not be ready to launch
22 for two or three years, if ever. Defendants did not hold the belief that the
23 kCoin would be launched in February or March 2018. Defendants'
24 representations were material to Merkamerica's investment decision.
25 Merkamerica relied on defendants' representations in making the decision to
26 purchase Kowala mining tokens and to invest in Kowala SEZC. Had
27 Merkamerica known the true facts, it would not have invested in Kowala
28 SEZC.
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1 146. Third, defendants falsely promised Merkamerica that

2 Merkamerica will profit from the purchase of mining tokens. This promise was
3 made in the Kowala White Paper, on the kowala.tech website, and in the
4 communications described in Paragraphs 86 to 132 above. This promise was
5 false when made. Defendants did not hold the belief that Merkamerica would
6 be able to profit from its investment, because the stability mechanisms were
7 not developed, and there was no reasonable guarantee the stability
8 mechanisms would work. Defendants' representations were material to
9 Merkamerica's investment decision. Merkamerica relied on defendants'
10 representations in making the decision to purchase Kowala mining tokens and
11 to invest in Kowala SEZC. Had Merkamerica known the true facts, it would
12 not have invested in Kowala SEZC.
13 147. Fourth, defendants failed to warn Merkamerica of the risk
14 that the software might not work. When Merkamerica made its investment,
15 defendants knew that the software was not reasonably guaranteed to work
16 and would take two or three years to develop, if ever. Defendants had a duty
17 to disclose these material facts to Merkamerica. Instead, defendants assured
18 Merkamerica that defendants had a working project, that the project would be
19 launched, and that Merkamerica would start to earn mining profits when the
20 kCoin blockchain was launched in February or March 2018. Defendants
21 represented to Merkamerica that the stability mechanisms worked and that
22 the "proof of control" method for rewarding token purchasers worked. These
23 representations were made in the Kowala White Paper, on the kowala.tech
24 website, and in the communications described in Paragraphs 86 to 132
25 above. These representations were material to Merkamerica's investment
26 decision. Merkamerica relied on defendants' representations in making the
27 decision to purchase Kowala mining tokens and to invest in Kowala SEZC.
28 //
50
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1 Had Merkamerica known the true facts, it would not have invested in Kowala
2 SEZC.
3 148. Fifth, defendants failed to warn Merkamerica that the
4 investment in Kowala mining tokens was risky and that Merkamerica might
5 lose all its investment in Kowala SEZC. When Merkamerica made its
6 investment, defendants knew that the software was not reasonably
7 guaranteed to work and would take two or three years to develop, if ever.
8 Defendants knew if that if the software did not work, Merkamerica was likely to
9 lose all of its investment in Kowala SEZC. Defendants had a duty to disclose
10 these material facts to Merkamerica. Instead, defendants assured
11 Merkamerica that the software worked and was ready to launch, that the
12 kCoin would be launched by February or March 2018, and that Merkamerica
13 would begin to earn blockchain rewards upon launch. These representations
14 were made in the Kowala White Paper, on the kowala.tech website, and in the
15 communications described in Paragraphs 86 to 132 above. Defendants'
16 representations were material to Merkamerica's investment decision.
17 Merkamerica relied on defendants' representations in making the decision to
18 purchase Kowala mining tokens and to invest in Kowala SEZC. Had
19 Merkamerica known the true facts, it would not have invested in Kowala
20 SEZC.
21 149. Sixth, defendants misrepresented the ownership of the
22 intellectual property for the blockchain. Defendants falsely claimed in the
23 SAFT agreements that Kowala SEZC "owns or possesses (or can obtain on
24 commercially reasonable terms) sufficient legal rights to all patents,
25 trademarks, service marks, trade names, copyrights, trade secrets, licenses,
26 information, processes and other intellectual property rights necessary for its
27 business as now conducted and as currently proposed to be conducted,
28 without any conflict with, or infringement of the rights of, others." This
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1 statement was false when made. Defendants knew at all relevant times that
2 Endian's developers owned the code. When defendants stopped paying
3 them, the developers disabled Kowala's access to Github, where the software
4 was being stored. As of today, the developers control the code, not
5 defendants. Merkamerica relied on defendants' claim of ownership in making
6 the decision to purchase Kowala mining tokens and to invest in Kowala SEZC.
7 Had Merkamerica known the true facts, it would not have invested in Kowala
8 SEZC.
9 150. Seventh, defendants represented that Merkamerica's
10 investment funds would be used "for the development of kUSD." This
11 representation was made in the Kowala White Paper, on the kowala.tech
12 website, and in the communications described in Paragraphs 86 to 132
13 above. This representation was false when made. On information and belief
14 based on Kowala SEZC's own internally-produced financial statements,
15 Glover, Reitano, and Willse pocketed hundreds of thousands of dollars in
16 investment funds from Merkamerica and other investors for their own personal
17 use and enrichment, including without limitation lavish trips to the Cayman
18 Islands, China, and South Korea, among other places. These financial
19 statements are described in Paragraph 193 below. At the time Merkamerica
20 made the decision to invest in Kowala SEZC, Glover, Reitano, Willse, and
21 other defendants knew they would, and intended to, profit personally from
22 Merkamerica's purchase of Kowala mining tokens and use such funds for their
23 own personal enrichment and not for the development of kUSD. When
24 Merkamerica made its investment in Kowala SEZC, defendants did not hold
25 the belief that all of Merkamerica's investment funds would be used to develop
26 kUSD. Defendants' representation that investment funds would be used for
27 the development of kUSD was material to Merkamerica's investment decision.
28 Merkamerica relied on defendants' representation in making the decision to
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1 purchase Kowala mining tokens and to invest in Kowala SEZC. Had

2 Merkamerica known the true facts, it would not have invested in Kowala
3 SEZC.
4 151. Eighth, defendants touted Reitano's experience to
5 Merkamerica, claiming that Reitano was a genius and that the kCoin project
6 will succeed because Reitano was involved. These representations were
7 made in the communications described in Paragraphs 86 to 132 above. In
8 truth, defendants concealed from Merkamerica that Reitano's prior
9 cryptocurrency experience was a failure, and that Glover and Willse were
10 inexperienced. Such concealed facts were material to Merkamerica's
11 decision to invest in Kowala. Defendants had a duty to disclose these
12 material facts to Merkamerica. Merkamerica relied on defendants'
13 representations in making the decision to purchase Kowala mining tokens and
14 to invest in Kowala SEZC. Had Merkamerica known the true facts, it would
15 not have invested in Kowala SEZC.
16 152. The foregoing frauds and material omissions go to the heart
17 of Merkamerica's claim, which is that there was no working blockchain and no
18 profit opportunity for Merkamerica, and that defendants did not hold the
19 beliefs they expressed to Merkamerica when Merkamerica invested in Kowala
20 SEZC.
21 153. Defendants also made promises and representations to
22 Merkamerica as to the mechanics of the investment, in order to induce
23 Merkamerica to purchase mining tokens and invest in Kowala SEZC. These
24 promises were false when made. At the time they solicited Merkamerica to
25 invest in Kowala SEZC, defendants knew they would, and intended to, change
26 the investment terms whenever they felt like it, to enrich themselves to the
27 detriment of Merkamerica and other investors, despite their promises to
28 Merkamerica.
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1 154. Ninth,1 in the Kowala White Paper, defendants promised that

2 10% of the total number of mining tokens would be sold in private sales to
3 early investors, development team members, and advisors; that Kowala would
4 retain 15% of the total number of tokens for its own account; and that the
5 remaining 75% would be sold in public token offerings within 12 months of the
6 first private token sale. Willse e-mailed a spreadsheet to Merker on
7 January 20, 2018 showing that the combined percentage of tokens allocated
8 for private sales and Kowala's own account had risen to 33.2%, leaving 66.8%
9 available for the public token sale. Merker became concerned that
10 defendants had sold the tokens reserved for the public sale, and asked for
11 specific clarification from Willse. On January 22, 2018, Willse expressly
12 assured Merkamerica that Merkamerica's purchase of tokens in the seventh
13 and eighth tiers were the last of the private pre-sale and that the remaining
14 tokens would be sold in the public token sale to public investors not affiliated
15 with Kowala. Defendants consistently represented in the Kowala White
16 Paper, the kowala.tech website, and Glover and Willse's representations to
17 Merker and Alexander that token ownership would be decentralized. These
18 assurances were material to Merkamerica in making its investment decision.
19 Merkamerica relied on defendants' assurances in making the decision to
20 purchase Kowala mining tokens and to invest in Kowala SEZC.
21 155. However, defendants' representations that the remaining
22 tokens would be sold in the public token sale and that token ownership would
23 be decentralized were false when made. When Merkamerica made its
24 investment, defendants knew that they fully intended to change the token
25 metrics whenever it suited them, including substantially reducing or
26 eliminating the amount to be sold in a public token sale, and that they always
27
1
This paragraph is marked "ninth" to continue the sequence from the eight
28 frauds listed previously.
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1 intended to retain majority ownership of the tokens and the kCoin blockchain.
2 Defendants knew that when Merkamerica made its investment, this was not
3 the last seed round; that defendants intended to sell tokens in a future seed
4 round if it so desired; that defendants intended to sell tokens in later rounds
5 for a lower price than Merkamerica paid; and that defendants intended to give
6 away tokens for free, like Glover, Reitano, and Willse did with their prior coin
7 UR. As described in Paragraphs 165 to 192 below, after Merkamerica made
8 its investment, defendants promptly reneged on their promises and changed
9 the token metrics several times, at one point reserving 82% of the total
10 number of tokens for their own account, instead of 10%. On information and
11 belief based on Kowala SEZC's own internally-produced financial statements,
12 defendants raised more than $1 million in new seed funds from private sales
13 to accredited investors after Merkamerica made its investment in Kowala
14 SEZC, in violation of their promise to sell the remaining tokens in the public
15 token sale. Defendants attempted to induce Merkamerica to sign a revised
16 SAFT to give Kowala the right to change token metrics at will, but
17 Merkamerica refused. As described in Paragraph 181 below, defendant
18 Glover confessed to Merker and Alexander that defendants always intended
19 to keep control of a majority of the mining tokens. Had Merkamerica known
20 the true facts, it would not have invested in Kowala SEZC.
21 156. Tenth, defendants falsely represented to Merkamerica that
22 by investing early in Kowala, Merkamerica would pay a lower price to
23 purchase tokens than later token purchasers would pay. This representation
24 was false when made. Defendants knew at all relevant times that they would
25 sell tokens at any price, whether lower or higher than the price Merkamerica
26 paid, or even give away tokens for free if they felt like it. Defendants'
27 representation was material to Merkamerica's investment decision.
28 Merkamerica relied on defendants' representation in making the decision to
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1 purchase Kowala mining tokens and to invest in Kowala SEZC. Had

2 Merkamerica known the true facts, it would not have invested in Kowala
3 SEZC. As described in Paragraphs 172 to 180 below, after Merkamerica
4 made its investment, defendants held a later investment round in which they
5 offered Merkamerica and other investors a large quantity of additional tokens
6 for free, or for a price lower than what Merkamerica paid, if only such
7 investors would sign a new SAFT that materially changed their contractual
8 rights. Merkamerica refused, but other investors have said to Merkamerica
9 that they accepted the offer. Defendants also offered to sell tokens to
10 cryptocurrency exchanges for a lower price than Merkamerica paid for them.
11 157. Eleventh, defendants did not disclose to Merkamerica that
12 they had offered to UR owners to exchange kUSD for up to 50 million UR
13 coins, for free, following the launch of the kCoin blockchain, as a way to
14 satisfy prior UR coin holders who were holding a worthless product.
15 Defendants represented to the UR owners that the kUSD being given to them
16 would have an aggregate value of up to $125,000. Such concealed facts
17 were material to Merkamerica's investment decision. Giving away kUSD to
18 non-token holders would cause an increase in coin supply and a decrease in
19 the value of kUSD, disrupting the stability mechanisms from the day of launch.
20 Defendants did not offer Merkamerica any kUSD for free. Instead,
21 Merkamerica paid for mining rights to earn its own kUSD. Giving away kUSD
22 for free reduced the value of what Merkamerica paid money to buy.
23 Defendants had a duty to disclose these material facts to Merkamerica.
24 Merkamerica relied on defendants' representations in making the decision to
25 purchase Kowala mining tokens and to invest in Kowala SEZC. Had
26 Merkamerica known the true facts, it would not have invested in Kowala
27 SEZC.
28 //
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1 158. Glover, Reitano, Willse, and other defendants controlled the

2 actions of Kowala SEZC at all relevant times. Glover, Reitano, Willse, and
3 other defendants had knowledge of all the facts set forth above, made
4 numerous false representations to Merkamerica that they knew were not true,
5 and conspired with each other to deceive Merkamerica as to the true facts of
6 this investment. Specifically, on information and belief, before Merkamerica
7 purchased Kowala mining tokens and made its investment in Kowala SEZC,
8 Glover, Reitano, and Willse made an agreement with each other to induce
9 investors to purchase Kowala mining tokens by lying to them and by
10 concealing the true facts as described above. In furtherance of this
11 agreement, Glover and Reitano wrote the Kowala White Paper, which
12 defendants published on the kowala.tech website. Glover, Reitano, and
13 Willse agreed on the language of the kowala.tech website and published it
14 online. Glover and Willse instructed investors including Merkamerica to
15 review the Kowala White Paper and the kowala.tech website, with Reitano's
16 knowledge and authorization. Glover, Reitano, and Willse made direct
17 misrepresentations, and omitted to disclose material facts, to investors
18 including Merkamerica as described above, with each other's knowledge and
19 authorization. Glover, Reitano, and Willse used Kowala SEZC as a vehicle to
20 sign contracts with investors and to obtain investor money which they used for
21 their own personal profit and enrichment. At all relevant times, each
22 defendant knew, intended, and authorized that each other defendant was
23 making false and misleading statements to Merkamerica and other investors
24 to induce them to purchase Kowala mining tokens from Kowala SEZC. Each
25 defendant encouraged and assisted each other defendant to do so. The
26 sources of this information and belief are Merkamerica's knowledge and
27 understanding of the hierarchical organization of Kowala SEZC and the
28 //
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1 relationship among Glover, Reitano, and Willse as witnessed by Merker and

2 Alexander in conversations with each of them.
3 159. Glover, Reitano, Willse, and other defendants unlawfully
4 obtained $307,844.12 from Merkamerica and millions of dollars from other
5 investors and personally profited from their conspiracy to commit fraud and
6 other wrongful acts perpetrated against investors including Merkamerica.
7 Glover, Reitano, Willse, and other defendants are jointly liable for each other's
8 wrongful conduct committed in furtherance of the conspiracy. Merkamerica
9 suffered loss in the amount of $307,844.12 as a result of this conspiracy
10 among Glover, Reitano, and Willse.
11
12 I. Post-Investment Events.
13 160. After Merkamerica purchased Kowala mining tokens and
14 invested in Kowala SEZC in January 2018, various events occurred that show
15 the falsity of defendants' representations and promises made to induce
16 Merkamerica's investment.
17 161. Defendants did not launch the kCoin in February or March
18 2018, as they originally promised to Merkamerica.
19 162. Shortly after Merkamerica purchased Kowala mining tokens
20 and invested in Kowala SEZC in January 2018, defendants issued a new
21 version of the Kowala White Paper, version 2.0, authored again by defendants
22 Glover and Reitano ("White Paper 2.0"). White Paper 2.0 made substantial
23 changes to the "proof of control" system by which token purchasers would
24 profit from participation in the Kowala blockchain. In White Paper 2.0, Glover
25 and Reitano wrote:
26 "Konsensus: The Kowala Consensus Mechanism . . . .
27 "Like other cryptocurrencies, kUSD will be mined. All qualifying
28 miners will have the chance to earn a reward of kUSD by contributing to
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1 the advancement and security of the blockchain. A miner is an active

2 node on the network that controls a minimum number (currently set at
3 30,000, but subject to change in the future) mTokens and performs
4 certain required computational tasks. In order to advance the
5 blockchain, the network must include at least one miner, though we
6 expect there to be several.
7 "Mining in Konsensus will proceed one block at a time. For every
8 block, a leader, called the proposer, is deterministically elected from the
9 current miners. All other miners are known as validators for the duration
10 of the block. The function of the proposer is to assemble and propose
11 the next block in the chain, and the function of the validators is to vote
12 on whether to accept the proposed block or reject it. . . .
13 "Election Based on mToken Ownership.
14 "Miners will not have an even chance of being elected as the
15 proposer; rather, their likelihood of being chosen will be proportional to
16 the number of mTokens controlled by the miner. . . . Over time, a miner
17 will be elected proposer with a frequency proportional to the ratio of the
18 number of tokens he or she uses to mine to the total tokens used by all
19 active miners. After being elected, a proposer must correctly perform
20 the actual work of proposing and will be then rewarded for this work.
21 "Price Oracles.
22 "The determination of the current market price of kUSD is intended
23 to be achieved through a price oracle system, which includes individual
24 price oracles , associated rules, and a supporting smart contract. The
25 price oracles are expected to be independent, highly-motivated miners
26 who determine the data used to calculate the market price of kUSD.
27 Only eligible miners can participate as oracles. To be eligible, a miner
28 must maintain a minimum stake of mUSD (currently set at 6 million, but
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1 subject to change in the future) and not be banned by a majority of other

2 oracles. Each oracle will be incentivized by special rewards, called
3 oracle rewards, to identify exchange trade data and to report that data
4 by sending it to a special smart contract, called the oracle smart
5 contract. . . .
6 "An oracle will only receive an oracle reward when the oracle has
7 been selected as the proposer of a block. . . .
8 "Proposer Eligibility, Proposal Stake.
9 "Konsensus aims to punish dishonest or free-loading miners by
10 making them ineligible to propose blocks (and thus earn rewards) for a
11 game-theoretically sufficient number of blocks. For example, a would-be
12 proposer must have participated in the prior 10,000 blocks as a validator
13 in order to be eligible to propose the current block.
14 "In order to receive mining rewards, proposers will be required to
15 stake a minimum number of mUSD tokens (currently 30,000, but subject
16 to change in the future). Furthermore, for performance reasons, the
17 roster of active miners will have a maximum size. Once the roster is full,
18 in order to mine, a prospective miner will need to offer a mining stake (a
19 specific number of mUSD tokens) that is higher than the lowest stake of
20 all miners in the roster. A proposed stake that is greater than this lowest
21 stake will be accepted and will bump the miner with the lowest stake off
22 the roster. This maximum size is expected to be 10 miners when the
23 kUSD blockchain begins actively minting tokens based on live exchange
24 data. We expect to increase the maximum roster size in the future by
25 adjusting the consensus protocol or related mechanisms. Independent
26 of roster size, mUSD owners may, in the future and independently of
27 Kowala, decide to license the use of their mUSD tokens to another party
28 //
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1 that has a sufficiently large mining stake to be part of the roster of active
2 miners." (Italics in original.)
3 163. The effect of these changes in White Paper 2.0 was to
4 deprive the vast majority of token purchasers of the right to earn profit from
5 completing transactions in the kCoin blockchain. Only the ten token
6 purchasers holding the largest quantities of Kowala mining tokens would be
7 permitted to complete transactions and earn mining rewards. The likely
8 candidates were defendants themselves, who controlled the tokens retained
9 by Kowala SEZC, and the oracles holding 6 million tokens or more. Other
10 token purchasers could earn mining rewards only if they licensed their mining
11 rights to one of the ten, at a price that would likely be discounted because the
12 other token purchasers had no other way to earn profits except by licensing.
13 The ten largest would hold all the market power.
14 164. Merkamerica had purchased 5,689,287 mUSD mining
15 tokens under the two SAFTs. It did not qualify to be an oracle under
16 defendants' new "proof of control" system set forth in White Paper 2.0. There
17 was no reasonable guarantee that Merkamerica would be one of the ten token
18 purchasers holding the largest quantities of Kowala mining tokens, or that
19 Merkamerica would be permitted to complete transactions or earn mining
20 rewards without having to license its tokens to another token holder.
21 Defendants' change in terms in White Paper 2.0 deprived Merkamerica of the
22 right to profit from its investment.
23 165. After Merkamerica purchased Kowala mining tokens and
24 invested in Kowala SEZC in January 2018, defendants broke numerous
25 promises to Merkamerica and made radical changes to the token metrics, i.e.,
26 the allocation of mining tokens among management, seed round investors,
27 and purchasers in a public sale.
28 //
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1 166. In February 2018, defendants opened a new pre-sale round

2 for seed investors, in direct contradiction to their representation to
3 Merkamerica that Merkamerica was investing in the last seed round before
4 the public sale. On February 15, 2018, Glover e-mailed a general
5 announcement about a new "private sale," which he described as the "last
6 chance to buy mUSD" tokens. Glover said that Kowala SEZC was looking to
7 raise $27,830,700 in this investment round. Glover told investors that "[w]e
8 will be using the funds to ramp up our marketing efforts, hire a CMO, add
9 members to the dev team, and launch kUSD with a bang!" On February 27,
10 2018, Willse sent an e-mail to Merker that confirmed the new pre-sale round.
11 167. Defendants distributed a fact sheet to potential investors in
12 the new pre-sale round. The fact sheet showed that, for the new pre-sale
13 round, defendants had changed the token allocation from what they
14 represented in the Kowala White Paper, and from what Willse confirmed to
15 Merker in their January 22, 2018 telephone call. Instead of selling the
16 remaining tokens in a public sale, defendants changed the token metrics so
17 that Kowala SEZC would directly own 15% of all tokens, would distribute an
18 additional 9.7% of all tokens to Kowala team members and a "reserve"
19 account, and would hold back 50% of all tokens for alleged "stability rewards."
20 "Stability rewards" had nothing to do with stability mechanisms. Instead,
21 Glover claimed that withholding 50% of the tokens was intended to prevent
22 "attackers" from taking control of 51% of the Kowala network. There have
23 been incidents in unrelated blockchains where "attackers" used majority
24 control to interfere with recording new blocks, prevent miners from completing
25 blocks, monopolize mining of new blocks, control mining rewards, block
26 transactions, and send and immediately reverse transactions, making it
27 appear as though they still had the coin they just spent ("double counting").
28 Regardless of the reason given, holding back 50% of the tokens from public
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1 sale effectively doubled defendants' token holdings during the period that the
2 50% was locked up.
3 168. Merker and Alexander attended the Consensus
4 cryptocurrency conference in New York on May 14-16, 2018. Glover was
5 there. Merker and Alexander tried to speak with him, but from Merker's
6 perspective, it appeared that Glover was avoiding a meeting. Merker and
7 Alexander were finally able to speak with Glover before the conference
8 ended. To Merker, Glover appeared nervous and began talking about things
9 defendants were working on. He told Merker and Alexander that defendants
10 were working on a deal with Indiegogo, a crowdfunding website for technology
11 companies, to sell $30 million worth of Kowala mining tokens in the public
12 token sale. Defendants later sent out a press release making the same
13 representation. Willse later told Merker and Alexander in a telephone call that
14 Indiegogo refused to list the public token sale on its website unless and until
15 defendants first sold $5 million worth of tokens to accredited investors without
16 any help from Indiegogo's marketing or promotions, and that Indiegogo
17 required defendants to pay at least $5,000 for the listing. Glover did not
18 disclose these additional facts to Merker and Alexander in their meeting at the
19 conference, and defendants did not disclose these additional fact in public
20 press releases.
21 169. On July 18, 2018, Willse sent an e-mail to Merker and
22 Alexander transmitting what he called an "exchange draft." He wrote that
23 "[t]This is the draft of how we are approaching exchanges." Exchanges are
24 websites where owners of cryptocurrencies may buy, sell or exchange them
25 for other digital currency or traditional currency like U.S. dollars or Euro. The
26 exchange draft was a four-page document that proposed a new set of token
27 metrics. Under the exchange draft, Kowala SEZC would directly own 20% of
28 all tokens, would distribute only 7.41% of all tokens to Kowala team members,
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1 and would sell 35% of all tokens in a "crowd sale" to accredited investors
2 through Indiegogo. The 50% allocated to "stability rewards" was eliminated
3 from the token metrics. The exchange draft allocated 18.25% of all tokens to
4 "partners," including the exchanges to which defendants would be sending the
5 exchange draft. In the exchange draft, defendants proposed to give millions
6 of tokens to exchanges, for free, based on daily trading volume of kCoins, and
7 to sell more tokens to exchanges at the discounted price of $0.03 per token,
8 less than what Merkamerica paid for its tokens.
9 170. On July 19, 2018, Willse e-mailed to Merker revised versions
10 of the exchange draft. In one version, defendants proposed to give certain
11 exchanges six million mining tokens, for free, upon listing kUSD on the
12 exchange. The exchange draft stated: "At the listing price on Indiegogo of
13 $0.11 that represents a value of $660,000." It further explained: "As an
14 owner of 6,000,000 mUSD, the exchange will qualify for election as a
15 'Supernode'. A SuperNode has some governance rights and performs the
16 oracle function for the network. In exchange for this service to the community,
17 supernodes earn a 4% bonus on their block rewards." In the revised versions
18 of the exchange draft, defendants repeated its offer to sell more tokens to
19 exchanges at the discounted price of $0.03 per token, less than what
20 Merkamerica paid for its tokens.
21 171. As stated in the exchange drafts, defendants originally
22 intended to sell mining tokens in the Indiegogo crowd sale for a price of $0.11
23 per token. On July 29, 2018, defendants sent an e-mail to Merker "on behalf
24 of mTOKEN sales," stating that "[t]he Indiegogo sale is scheduled to begin on
25 August 3, 2018." Defendants continued: "[W]e’ve lowered the token prices
26 for the Indiegogo sale to reflect current market conditions and to sell more
27 quickly. The mUSD planned token price for the sale has been set at $0.11
28 with discounted tiers of 30%, 20%, and 15%. These discounts will create
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1 token pricing levels of $0.0770, $0.0880, and $0.0935 respectively.

2 Additionally, we’ve set aside tokens that give us the flexibility to bring in
3 strategic crypto funds with compelling prices as low as $0.0440 per token. [¶]
4 Our goal is to sell 375,809,638 mUSD tokens for a total raise of $32,037,772."
5 172. In this same July 29, 2018 e-mail, defendants offered to give
6 Merkamerica more than a million additional mining tokens, for free.
7 Defendants said that "[w]e appreciate your support and your status as an
8 early mUSD purchaser." Defendants divided the dollar value of
9 Merkamerica's original investment by a price of $0.0420 per token, to derive
10 an amount of additional mining tokens to offer Merkamerica for free. Had
11 Merkamerica accepted this free tokens, its effective price per token would
12 have been $0.0420, less than the amount being offered to "strategic crypto
13 funds." However, to receive these free tokens, defendants required
14 Merkamerica to sign a new SAFT to replace the previous SAFTs.
15 173. In this same July 29, 2018 e-mail, defendants also offered to
16 sell additional tokens to current token holders, including Merkamerica, in
17 addition to the free tokens being offered to Merkamerica, for a steeply
18 discounted price of $0.0150 per token. Defendants said that 46,853,662
19 tokens were available for purchase at this price, and that the maximum any
20 one purchaser could purchase at that price was 5 million tokens. The
21 $0.0150 price per token was much lower than what Merkamerica originally
22 paid for its tokens. By making this offer to current token holders, defendants
23 broke their promise to Merkamerica that the next sale of mining tokens after
24 Merkamerica's purchase would be in the public token sale for a higher price
25 than what Merkamerica paid.
26 174. On July 30, 2018, defendants sent an e-mail to Merker "on
27 behalf of mTOKEN sales," transmitting the new SAFT that defendants
28 required Merkamerica to sign in exchange for free mining tokens. The new
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1 SAFT disclosed for the first time that the launch of the kCoin was not
2 guaranteed. It made this disclosure by stating that defendant Kowala SEZC
3 "plans to implement in the . . . Network substantially all of the functionality of
4 the Kowala Protocol as described in the Kowala Protocol White Paper.
5 However, there is no guarantee that the Company will succeed in
6 implementing such functionality." (Italics added.) "Kowala Protocol" was
7 defined to mean the "protocol that is designed to enable holders of mUSD to
8 mine kUSD, a cryptocurrency designed to maintain a close to one-to-one
9 value with the U.S. Dollar, among other potential future uses," in other words,
10 the kCoin blockchain described in the Kowala White Paper.
11 175. The SAFTs signed by Merkamerica promised delivery of
12 mining tokens upon launch of the kUSD version of kCoin. The new SAFT
13 divided the promised launch into three stages: an "Alpha" launch, a "Beta"
14 launch, and a "Full Network" launch. The Alpha launch was defined to occur
15 on the date on which Kowala SEZC releases software that enables it to
16 deliver mining tokens to purchasers. The Beta launch was defined to occur
17 on the date on which Kowala SEZC releases software that allows token
18 holders to mine kUSD and receive variable mining rewards based on the
19 market price of kUSD. The Full Network launch was defined to occur on the
20 date on which Kowala SEZC announces that the kUSD network has achieved
21 full functionality. In other words, defendants intended to deliver non-functional
22 tokens to purchasers in the Alpha launch, but the tokens would not be able to
23 mine kCoin and earn mining rewards until the "Beta" launch.
24 176. The new SAFT disclosed for the first time that "there is no
25 guarantee that any of Alpha Network Launch, Beta Network Launch, Full
26 Network Launch or delivery of Tokens, will occur at any particular time or at
27 all."
28 //
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1 177. The new SAFT disclosed for the first time that "the Kowala
2 Protocol is being developed and it may require several iterations which may
3 result in material changes to the Company's current design of the protocol as
4 outlined in the company's whitepaper and other marketing materials. Further,
5 the purchaser understands that the timing, the Token allocation structure and
6 other ongoing development plans of the protocol, Alpha Network Launch, Beta
7 Network Launch, Full Network Launch and delivery of the Tokens may be
8 subject to change in the sole and absolute discretion of the Company." This
9 new language would give defendants the right to change the kCoin blockchain
10 and the token metrics whenever and however they wanted, if Merkamerica
11 would agree to it by signing the new SAFT.
12 178. The terms of the new SAFT proposed to make several
13 material changes to the contractual relationship between Merkamerica and
14 Kowala SEZC, including without limitation the following:
15 (a) In the new SAFT, Kowala SEZC indicated that it might,
16 but was not obligated to, deliver mining tokens to token purchasers upon the
17 Alpha launch, and promised that it would deliver mining tokens to token
18 purchasers by the time of the Beta launch if not delivered earlier. The new
19 SAFT provided that the delivery of tokens would be accompanied by "General
20 Token Terms" binding Merkamerica that Kowala SEZC would determine in its
21 sole discretion. The new SAFT required Merkamerica to "acknowledge[ ] that
22 the General Token Terms once determined by the Company, shall be subject
23 to change on an ongoing basis in the sole and absolute discretion of the
24 Company as and to the extent the company deems necessary or advisable in
25 connection to the use of the Kowala Protocol." In other words, defendants
26 were requiring Merkamerica to agree to be bound by token terms that it had
27 not seen, and to give defendants the right to change those token terms at any
28 time in any way that defendants want.
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1 (b) The new SAFT required the purchaser to agree "not to

2 transfer any tokens received under this agreement to another party before the
3 Full Network Launch." The effect of this provision was an indefinite lockup of
4 token resales until such time as Kowala SEZC announces that full
5 functionality is achieved. Defendants retained the power to sell or resell their
6 own tokens without restriction, and there was no lockup for Kowala team
7 members or for defendants' partners such as exchanges and oracles.
8 179. The new SAFT disclosed that "[t]he Purchaser has been
9 advised that this instrument has not been approved for trading by the
10 Commodity Futures Trading Commission under the Commodity Exchange
11 Act." But the new SAFT also disclosed that it was being offered only to
12 accredited investors as defined under SEC Regulation D, and that the
13 "securities" were not registered under the federal securities laws.
14 180. In the foregoing ways, defendants wrote the new SAFT to
15 give themselves unlimited power and authority to do essentially whatever they
16 want with investors' money. Merkamerica refused to sign the new SAFT.
17 Other token purchasers have said that they did sign the new SAFT and
18 agreed to material changes in the structure of their investment.
19 181. On July 31, 2018, on Merkamerica's behalf, Merker and
20 Alexander had a conference call with defendants Glover and Willse. In that
21 call, Glover confessed to Merker and Alexander that defendants always
22 intended to keep control of a majority of the mining tokens. Glover told
23 Merker and Alexander that defendants had structured the token metrics to
24 make it appear that token ownership would be decentralized, and that
25 defendants would not control ownership fof the blockchain. Glover claimed
26 that they did so to fool the SEC into believing that the Kowala mining tokens
27 were not securities. If the tokens are deemed securities, then they cannot be
28 sold on exchanges without registration or exemption from the federal
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1 securities laws. If the tokens are not securities, then defendants could sell the
2 tokens to a wider public, including unaccredited investors, without the high
3 cost of securities compliance and SEC scrutiny. Glover told Merker and
4 Alexander that the token metrics were "smoke and mirrors" so the SEC
5 “thinks” they are decentralized. Glover told Merker and Alexander that the
6 50% of tokens defendants had proposed to withhold as "stability rewards"
7 could not be withheld and had to be released in order for the token to be
8 deemed decentralized by the SEC. Glover told Merker and Alexander that
9 this was why defendants were now splitting up the tokens into various
10 tranches such as partner token allocation, company allocation, marketing
11 allocation, etc., to hide the true ownership of the tokens. Glover admitted to
12 Merker and Alexander that this was all contrived to keep the kCoin centralized
13 and under defendants' control, but to make it look like ownership was
14 decentralized. Glover admitted to Merker and Alexander that the tokens can
15 never be decentralized because of how the software was being written.
16 182. Notwithstanding the reasons given by Glover, as long as
17 defendants controlled a majority of the Kowala mining tokens, defendants
18 would receive a majority of the mining rewards once the kCoin was launched,
19 and defendants could control the value of the tokens by selling or trading
20 large quantities, or by manufacturing fake trades and publicly misrepresenting
21 their value, just like Reitano was accused of doing with his "Neutrino" coin.
22 183. Glover was incorrect to tell Merker and Alexander that a
23 decentralized token would not be deemed a security. The Kowala mining
24 tokens were securities under the Howey text at all relevant times, regardless
25 of decentralization, because token purchasers were dependent on
26 defendants' managerial efforts to launch the kCoin and allow token
27 purchasers to earn mining rewards.
28 //
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1 184. In that July 31, 2018 call, Merker and Alexander told Glover
2 and Willse why they felt the changes to the token metrics were wrong and
3 were devaluing Merkamerica's investment. Glover told Merker and Alexander
4 that he agreed that the changes were wrong and that he will make things
5 right. Merkamerica made a counteroffer to buy additional tokens under a
6 different price and terms than offered by defendants.
7 185. On August 1, 2018, Merker spoke on the telephone with
8 defendant Willse. In that call, Willse told Merker that Kowala would not be
9 making any new deals outside of the one they offered all investors.
10 Defendants had rejected Merkamerica's counteroffer.
11 186. On August 4, 2018, on Merkamerica's behalf, Merker met in
12 person with defendant Glover in Nashville, Tennessee. At that meeting,
13 Merker told Glover that what defendants were doing with the tokens was
14 wrong. Glover agreed that what they were doing was wrong. This meeting
15 lasted about three hours.
16 187. After the August 4, 2018 meeting, Merkamerica developed a
17 new proposal under which Kowala SEZC would "airdrop" (distribute for free)
18 tokens to existing token holders, in proportion to their existing holdings, as a
19 way to distribute the 50% "stability reserves" and work toward decentralization
20 of the tokens without defendants' retaining control of them. Merkamerica also
21 proposed a lockup of defendants' tokens for a reasonable period, such as two
22 or three years, to prevent defendants from selling off large quantities of tokens
23 on exchanges after launch and thereby depressing the resale price of tokens,
24 causing harm to early investors such as Merkamerica. Merker sent this
25 proposal to Glover, and Merker and Alexander discussed it with defendants
26 Glover and Reitano in a subsequent conference call.
27 188. On August 8, 2018, Willse sent Merker and Alexander the
28 following e-mail regarding the exchange offers: "We are updating the docs so
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1 that any specific musd price (such as $03 [sic] is not on there. Please destroy
2 or archive the ones that your [sic] currently have and do not distribute. Once
3 we have a cleaned-up version, I will share. Thanks."
4 189. On August 10, 2018, Merker and Alexander spoke on the
5 telephone with defendant Glover. In that call, Glover told Merker and
6 Alexander that Kowala SEZC would not be doing an airdrop, but instead
7 would consider a six-month lockup period for Kowala's tokens. This was the
8 last conversation Merker or Alexander had with any defendant.
9 190. In September 2018, defendants claimed to have conducted
10 the "Alpha" launch of the kCoin blockchain. On information and belief from
11 Endian and its owners, this was a stripped-down demo version of the
12 proof-of-control mechanism, and not a launch of the stability mechanisms that
13 needed years to develop. Endian said that it took 1-1/2 years to get from
14 concept to Alpha launch of the proof-of-control mechanism. Under the SAFTs
15 with Merkamerica, Kowala SEZC was required to issue tokens to
16 Merkamerica upon launch of the kCoin blockchain. Kowala SEZC did not
17 issue any tokens upon the Alpha launch, showing that defendants did not
18 believe that the Alpha launch was the same launch referred to in the SAFTs
19 signed by Merkamerica.
20 191. On October 24, 2018, Kowala SEZC opened the Indiegogo
21 crowd sale of Kowala mining tokens. However, the sale was open only to
22 accredited investors under Regulation D. In a November 7, 2018 public
23 statement to potential investors in the offering, defendants claimed that "[t]he
24 kUSD blockchain, together with its native digital stablecoin, kUSD, serve as a
25 complete payments platform that is blazingly fast, cost efficient, and globally
26 accessible." Defendants claimed that Kowala SEZC was founded in 2016,
27 that it "[b]ootstrapped and raised seed equity in 2017 of $600,000," that it
28 "[s]old $3.5M worth of mUSD tokens in a limited pre-sale," and that it "[f]iled
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1 patents in the U.S. and internationally patent pending in U.S. (16/140,407)

2 and PCT (US/18/52492)." Defendant Glover repeated the same
3 representations in a November 8, 2018 e-mail to current token holders,
4 including Merkamerica, regarding the Indiegogo sale.
5 192. Defendants abruptly terminated the Indiegogo crowd sale on
6 November 16, 2018. In a November 16, 2018 public statement, defendants
7 announced: "We have decided to discontinue our pre-functionality token sale
8 of mUSD mining rights due to poor market conditions. All purchases made
9 during this qualified sale will be refunded to purchasers."
10 193. Defendant Glover provided unaudited financial statements to
11 Endian, in an effort to convince Endian that defendants had no money to pay
12 the substantial amount owed to Endian. Merkamerica did not know about
13 these financial statements until 2019. These financial statements show that
14 defendants siphoned off half or more of investor funds for their own account.
15 In those financial statements, defendants claimed to have raised more than
16 $3 million from investors. From this investor funding, defendants reported that
17 they spent almost $870,000 on "professional fees," almost $180,000 for
18 "marketing," more than $126,000 in "payroll and benefits," and more than
19 $250,000 on "travel and entertainment." This spending was excessive for a
20 company without a working blockchain. The financial statements showed that
21 an unnamed "shareholder" was paid off in January 2018 from investor funds
22 in the amount of $115,963. Defendants also declared "currency gains" that
23 reached a high of about $400,000 in December 2017. The last item suggests
24 that defendants hold a large balance of cryptocurrency, but there was not a
25 separate line item for cryptocurrency holdings on the balance sheet.
26 194. In March 2019, on information and belief from Endian and its
27 owners, Eiland Glover notified Endian that Kowala voluntarily ceased
28 //
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1 operations and may file for bankruptcy. However, neither Kowala SEZC nor
2 any other defendant in this case filed for bankruptcy.
3 195. As of the time of the filing of this Complaint, defendants have
4 neither issued mining tokens to Merkamerica, nor refunded money to
5 Merkamerica. The tokens promised to Merkamerica are worthless.
6 196. On April 5, 2019, Merkamerica gave formal written notice of
7 rescission of the SAFTs to Kowala SEZC.
8
9 J. Loss Causation
10 197. Merkamerica relied on the Kowala White Paper authored by
11 defendants Glover and Reitano, the kowala.tech website owned by Kowala
12 SEZC, the representations in the SAFT agreements signed by Willse on
13 behalf of Kowala SEZC, and the statements made by defendants Glover and
14 Willse to Merker and Alexander in making the decision to purchase Kowala
15 mining tokens and to invest in Kowala SEZC. Merkamerica paid a total of
16 $307,844.12 to Kowala SEZC, and never received any value in return for this
17 payment. Merkamerica suffered loss in the amount of $307,844.12.
18
19 FIRST CLAIM FOR RELIEF
20 VIOLATION OF SECTION 10(b) OF THE
21 SECURITIES EXCHANGE ACT OF 1934 AND SEC RULE 10b-5
22 198. Plaintiff hereby incorporates by reference paragraphs 1
23 through 197 above, as if fully set forth herein.
24 199. Because the Kowala mining tokens are securities as alleged
25 above, defendants were required to comply with the federal securities laws at
26 all times, including the anti-fraud provisions of Section 10(b) of the Securities
27 Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. As alleged
28 above, defendants committed securities fraud and conspired with each other
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1 to commit securities fraud in the offer and sale of Kowala mining tokens to
2 Merkamerica.
3 200. As alleged above, defendants violated Section 10(b) of the
4 Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by
5 employing devices, schemes, and artifices to defraud; making untrue
6 statements of material facts, and omitting to state material facts necessary in
7 order to make the statements made, in light of the circumstances under which
8 they were made, not misleading; and engaging in acts, practices, and courses
9 of business which operated as a fraud or deceit upon Merkamerica in
10 connection with the purchase and sale of securities.
11 201. In actively making false and misleading statements to
12 Merkamerica, including without limitation the Kowala White Paper, the
13 kowala.tech website, the SAFTs, and the statements directly made to
14 Merkamerica and its representatives Merker and Alexander, each defendant
15 is primarily liable for the fraud perpetrated on Merkamerica. Each defendant
16 had ultimate authority over such defendant's own statements and over
17 statements made on behalf of Kowala SEZC, including the content of such
18 statements and whether and how to communicate the statements. Each
19 defendant participated in, controlled, and acquiesced in the making of the
20 false and misleading statements alleged herein.
21 202. Merkamerica, not knowing of the truth concerning
22 defendants' false and misleading statements, reasonably and justifiably relied
23 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
24 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
25 substantial amounts to defendants. Had Merkamerica known the true facts
26 before entering into the SAFTs with Kowala SEZC and paying substantial
27 amounts to defendants, Merkamerica never would have done so.
28 //
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1 203. As a direct and proximate result of its reliance on

2 defendants' false and misleading statements, Merkamerica suffered damage
3 in connection with the purchase and sale of securities in an amount to be
4 proved at trial, but not less than $307,844.12.
5 204. Under the circumstances described herein, defendants will
6 be unjustly enriched if they are allowed to profit by their wrongful conduct.
7 Therefore, Merkamerica is entitled to a constructive trust on, and a
8 disgorgement of, all funds, assets, accounts, and business opportunities
9 unjustly acquired by defendants.
10
11 SECOND CLAIM FOR RELIEF
12 VIOLATION OF SECTION 20
13 OF THE SECURITIES EXCHANGE ACT OF 1934
14 205. Plaintiff hereby incorporates by reference paragraphs 1
15 through 204 above, as if fully set forth herein.
16 206. Defendants Glover, Reitano, Willse, and other defendants
17 acted as controlling persons of defendant Kowala SEZC within the meaning of
18 Section 20 of the Securities Exchange Act of 1934. By reason of their
19 positions as co-founders, co-owners, or executive officers of Kowala SEZC,
20 such defendants had the power and authority to cause Kowala SEZC to
21 engage in the fraudulent conduct alleged above. Such defendants were able
22 to, and did, directly and indirectly, control the management and conduct of
23 Kowala SEZC's business and the contents of its representations, promises,
24 and statements made to and relied upon by Merkamerica and other investors
25 in making the decision to invest in Kowala SEZC. Such defendants
26 participated in the making of defendant Kowala SEZC's false and misleading
27 statements alleged above. Accordingly, such defendants are "control
28 //
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1 persons" of Kowala SEZC within the meaning of Section 20 of the Securities

2 Exchange Act of 1934.
3 207. Merkamerica, not knowing of the truth concerning
4 defendants' false and misleading statements, reasonably and justifiably relied
5 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
6 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
7 substantial amounts to defendants. Had Merkamerica known the true facts
8 before entering into the SAFTs with Kowala SEZC and paying substantial
9 amounts to defendants, Merkamerica never would have done so.
10 208. As a direct and proximate result of its reliance on
11 defendants' false and misleading statements, Merkamerica suffered damage
12 in connection with the purchase and sale of securities in an amount to be
13 proved at trial, but not less than $307,844.12.
14 209. Under the circumstances described herein, defendants will
15 be unjustly enriched if they are allowed to profit by their wrongful conduct.
16 Therefore, Merkamerica is entitled to a constructive trust on, and a
17 disgorgement of, all funds, assets, accounts, and business opportunities
18 unjustly acquired by defendants.
19
20 THIRD CLAIM FOR RELIEF
21 VIOLATION OF CALIFORNIA CORPORATIONS CODE § 25401
22 210. Plaintiff hereby incorporates by reference paragraphs 1
23 through 209 above, as if fully set forth herein.
24 211. Under California Corporations Code § 25401, it is unlawful
25 for any person to offer or sell a security in the State of California, by means of
26 any written or oral communication that includes an untrue statement of a
27 material fact or omits to state a material fact necessary to make the
28 //
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1 statements made, in light of the circumstances under which the statements

2 were made, not misleading.
3 212. As alleged above, defendant Kowala SEZC made untrue
4 statements of material fact and omitted to state material facts to Merkamerica
5 in offering and selling Kowala mining tokens to Merkamerica. Merkamerica
6 was in privity with Kowala SEZC under the SAFTs.
7 213. Merkamerica, not knowing of the truth concerning
8 defendants' false and misleading statements, reasonably and justifiably relied
9 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
10 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
11 substantial amounts to defendants. Had Merkamerica known the true facts
12 before entering into the SAFTs with Kowala SEZC and paying substantial
13 amounts to defendants, Merkamerica never would have done so.
14 214. Under California Corporations Code § 25501, as a direct and
15 proximate result of its reliance on defendants' false and misleading
16 statements, Merkamerica is entitled to a judgment of rescission of the SAFTs
17 and an award of the consideration paid for the security in an amount to be
18 proved at trial, but not less than $307,844.12, plus interest at the legal rate.
19 Alternatively, Merkamerica is entitled to recover damages from Kowala SEZC
20 in an amount to be proved at trial, but not less than $307,844.12.
21 215. Under the circumstances described herein, defendants will
22 be unjustly enriched if they are allowed to profit by their wrongful conduct.
23 Therefore, Merkamerica is entitled to a constructive trust upon, and
24 disgorgement of, all money, assets, property, receivables, and opportunities
25 unjustly obtained by defendants in connection therewith.
26 //
27 //
28 //
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1 FOURTH CLAIM FOR RELIEF

2 VIOLATION OF CALIFORNIA CORPORATIONS CODE
3 §§ 25504 and 25504.1
4 216. Plaintiff hereby incorporates by reference paragraphs 1
5 through 215 above, as if fully set forth herein.
6 217. Under California Corporations Code § 25504, every person
7 who directly or indirectly controls a person liable under California Corporations
8 Code § 25501, every partner in a firm so liable, every principal executive
9 officer or director of a corporation so liable, every person occupying a similar
10 status or performing similar functions, every employee of a person so liable
11 who materially aids in the act or transaction constituting the violation, and
12 every broker-dealer or agent who materially aids in the act or transaction
13 constituting the violation, are also liable jointly and severally with and to the
14 same extent as such person, unless the other person who is so liable had no
15 knowledge of or reasonable grounds to believe in the existence of the facts by
16 reason of which the liability is alleged to exist.
17 218. Under California Corporations Code § 25504.1, any person
18 who materially assists in any violation of California Corporations Code
19 § 25401, with intent to deceive or defraud, is jointly and severally liable with
20 any other person liable under this chapter for such violation.
21 219. As alleged above, defendant Kowala SEZC violated
22 California Corporations Code § 25401 and is liable to Merkamerica under
23 California Corporations Code § 25501 for making untrue statements of
24 material fact and omitting to state material facts to Merkamerica in offering
25 and selling Kowala mining tokens to Merkamerica.
26 220. As alleged above, defendants Glover, Reitano, Willse, and
27 other defendants were principal executive officers or directors of defendant
28 Kowala SEZC. As alleged above, defendants Glover, Reitano, Willse, and
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1 other defendants directly or indirectly controlled defendant Kowala SEZC. As

2 alleged above, defendants Glover, Reitano, Willse, and other defendants
3 materially aided and assisted defendant Kowala SEZC in the acts and
4 transactions constituting the violation of California Corporations Code
5 § 25401. As allleged above, defendants Glover, Reitano, Willse, and other
6 defendants intended to induce Merkamerica and other investors to rely on the
7 false and misleading statements alleged above in making the decision to
8 purchase Kowala mining tokens and invest in Kowala SEZC.
9 221. Merkamerica, not knowing of the truth concerning
10 defendants' false and misleading statements, reasonably and justifiably relied
11 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
12 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
13 substantial amounts to defendants. Had Merkamerica known the true facts
14 before entering into the SAFTs with Kowala SEZC and paying substantial
15 amounts to defendants, Merkamerica never would have done so.
16 222. As a direct and proximate result of its reliance on
17 defendants' false and misleading statements, Merkamerica suffered damage
18 in connection with the purchase and sale of securities in an amount to be
19 proved at trial, but not less than $307,844.12.
20 223. Under the circumstances described herein, defendants will
21 be unjustly enriched if they are allowed to profit by their wrongful conduct.
22 Therefore, Merkamerica is entitled to a constructive trust upon, and
23 disgorgement of, all money, assets, property, receivables, and opportunities
24 unjustly obtained by defendants in connection therewith.
25 //
26 //
27 //
28 //
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1 FIFTH CLAIM FOR RELIEF

2 COMMON LAW FRAUD
3 224. Plaintiff hereby incorporates by reference paragraphs 1
4 through 223 above, as if fully set forth herein.
5 225. As alleged above, defendants made false and misleading
6 representations and promises to Merkamerica. These representations and
7 promises were false and misleading when made, and defendants did not
8 intend to perform their promises to Merkamerica at the time they made them.
9 226. Defendants knew of the falsity of such representations and
10 promises, and of the truth regarding facts that were concealed or falsely
11 misrepresented, or had no belief in the truth of such promises and
12 representations. Defendants made such promises and representations with
13 the intention to induce Merkamerica to rely on such promises and
14 representations in making the decision to enter into the SAFTs with Kowala
15 SEZC, to purchase Kowala mining tokens from Kowala SEZC, to invest in
16 Kowala SEZC, and to pay substantial amounts to defendants.
17 227. Merkamerica, not knowing of the truth concerning
18 defendants' false and misleading statements, reasonably and justifiably relied
19 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
20 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
21 substantial amounts to defendants. Had Merkamerica known the true facts
22 before entering into the SAFTs with Kowala SEZC and paying substantial
23 amounts to defendants, Merkamerica never would have done so.
24 228. As a direct and proximate result of its reliance on
25 defendants' false and misleading statements, Merkamerica suffered damage
26 in an amount to be proved at trial, but not less than $307,844.12.
27 229. Under the circumstances described herein, defendants will
28 be unjustly enriched if they are allowed to profit by their wrongful conduct.
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1 Therefore, Merkamerica is entitled to a constructive trust on, and a

2 disgorgement of, all funds, assets, accounts, and business opportunities
3 unjustly acquired by defendants.
4 230. Defendants' conduct was malicious, fraudulent, oppressive,
5 and despicable within the meaning of California law. Merkamerica is therefore
6 entitled to an award of exemplary and punitive damages against defendants in
7 a sum appropriate to punish and to make an example of them.
8
9 SIXTH CLAIM FOR RELIEF
10 CONSPIRACY TO DEFRAUD
11 231. Plaintiff hereby incorporates by reference paragraphs 1
12 through 230 above, as if fully set forth herein.
13 232. As alleged above, defendants Glover, Reitano, Willse, and
14 other defendants agreed and conspired with one another to engage in the
15 fraudulent and deceitful acts against Merkamerica as alleged above. The
16 conspiracy was formed by agreement between defendants Glover, Reitano,
17 Willse, and other defendants. Accordingly, each of those defendants is jointly
18 liable for the wrongful conduct of any other such defendants committed in
19 furtherance of the conspiracy.
20 233. As a direct and proximate result of defendants' wrongful
21 conduct, Merkamerica suffered damage in an amount to be proved at trial, but
22 not less than $307,844.12.
23 234. Under the circumstances described herein, defendants will
24 be unjustly enriched if they are allowed to profit by their wrongful conduct.
25 Therefore, Merkamerica is entitled to a constructive trust on, and a
26 disgorgement of, all funds, assets, accounts, and business opportunities
27 unjustly acquired by defendants.
28 //
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1 235. Defendants' conduct was malicious, fraudulent, oppressive,

2 and despicable within the meaning of California law. Merkamerica is entitled
3 to an award of exemplary and punitive damages against defendants in a sum
4 appropriate to punish and make an example of them.
5
6 SEVENTH CLAIM FOR RELIEF
7 NEGLIGENT MISREPRSENTATION
8 236. Plaintiff hereby incorporates by reference paragraphs 1
9 through 235 above, as if fully set forth herein.
10 237. As alleged above, defendants made false and misleading
11 representations and promises to Merkamerica. These representations and
12 promises were false and misleading when made. Defendants made such
13 promises and representations with the intention to induce Merkamerica to rely
14 on such promises and representations in making the decision to enter into the
15 SAFTs with Kowala SEZC, to purchase Kowala mining tokens from Kowala
16 SEZC, to invest in Kowala SEZC, and to pay substantial amounts to
17 defendants.
18 238. Defendants owed a duty of care to Merkamerica not to act
19 unreasonably and not to create an unreasonable risk of harm to Merkamerica
20 from their acts. Defendants breached such duty of care by making the
21 representations and promises alleged above to Merkamerica and by inducing
22 Merkamerica to rely thereon. Defendants had no reasonable ground for
23 believing that their representations and promises were true when made.
24 239. It was reasonably foreseeable to defendants that making
25 such representations and promises to Merkamerica without a reasonable
26 ground for believing such to be true, or negligently failing to abide by such
27 representations and promises, could cause serious damage to Merkamerica.
28 //
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1 It was reasonably foreseeable to defendants that Merkamerica would rely on

2 such representations.
3 240. Merkamerica, not knowing of the truth concerning
4 defendants' false and misleading statements, reasonably and justifiably relied
5 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
6 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
7 substantial amounts to defendants. Had Merkamerica known the true facts
8 before entering into the SAFTs with Kowala SEZC and paying substantial
9 amounts to defendants, Merkamerica never would have done so.
10 241. As a direct and proximate result of its reliance on
11 defendants' false and misleading statements, Merkamerica suffered damage
12 in an amount to be proved at trial, but not less than $307,844.12.
13 242. Under the circumstances described herein, defendants will
14 be unjustly enriched if they are allowed to profit by their wrongful conduct.
15 Therefore, Merkamerica is entitled to a constructive trust upon, and
16 disgorgement of, all money, assets, property, receivables, and opportunities
17 unjustly obtained by defendants in connection therewith.
18
19 EIGHTH CLAIM FOR RELIEF
20 RESCISSION
21 243. Plaintiff hereby incorporates by reference paragraphs 1
22 through 242 above, as if fully set forth herein.
23 244. Pursuant to Civil Code § 1689, Merkamerica is entitled to
24 rescind the SAFTs and recover not less than $307,844.12 paid to defendants
25 under the SAFTs, on the grounds that (a) defendants fraudulently induced
26 Merkamerica to agree to the SAFTs; (b) Merkamerica and defendants were
27 mutually mistaken; (c) Merkamerica was unilaterally mistaken; and (d) the
28 //
83
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1 consideration failed as a result of defendants' failure to deliver Kowala mining

2 tokens under the SAFTs, as more particularly discussed below.
3 245. Merkamerica is entitled to rescind the SAFTs and its
4 payments to defendants on grounds of fraud, as follows:
5 (a) As alleged above, defendants made false and
6 misleading representations and promises to Merkamerica. These
7 representations and promises were false and misleading when made, and
8 defendants did not intend to perform their promises to Merkamerica at the
9 time they made them.
10 (b) Defendants knew of the falsity of such representations
11 and promises, and of the truth regarding facts that were concealed or falsely
12 misrepresented, or had no belief in the truth of such promises and
13 representations. Defendants made such promises and representations with
14 the intention to induce Merkamerica to rely on such promises and
15 representations in making the decision to enter into the SAFTs with Kowala
16 SEZC, to purchase Kowala mining tokens from Kowala SEZC, to invest in
17 Kowala SEZC, and to pay substantial amounts to defendants.
18 (c) Merkamerica, not knowing of the truth concerning
19 defendants' false and misleading statements, reasonably and justifiably relied
20 thereon in entering into the SAFTs with Kowala SEZC, purchasing Kowala
21 mining tokens from Kowala SEZC, investing in Kowala SEZC, and paying
22 substantial amounts to defendants. Had Merkamerica known the true facts
23 before entering into the SAFTs with Kowala SEZC and paying substantial
24 amounts to defendants, Merkamerica never would have done so.
25 246. Merkamerica is entitled to rescind the SAFTs and its
26 payments to defendants on grounds of mutual mistake. Merkamerica
27 believed that defendants would create kCoins with stable values; that that the
28 kCoin blockchain was a "working project" that was ready to launch by
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1 February or March 2018; that Merkamerica would profit from the purchase of
2 mining tokens; that Kowala SEZC owned the intellectual property for the
3 blockchain; that Merkamerica's payments would be used for the development
4 of kUSD; that defendants Reitano, Glover, and Willse were highly qualified to
5 develop a new cryptocurrency; that the token metrics would stay the same as
6 represented in the Kowala White Paper; that token ownership would be
7 decentralized; that Merkamerica would pay a lower price to purchase tokens
8 than later token purchasers would pay; that Merkamerica was investing in the
9 last of the seed round; and that the next round of investment would be a
10 public token offering at a token sales price higher than what Merkamerica
11 paid. Defendants knew and believed that the Kowala blockchain would not
12 launch for two or three years if ever; that there was no reasonable guarantee
13 that the Kowala blockchain would work or that Merkamerica would profit from
14 its investment; that Endian owned the intellectual property for the blockchain;
15 that investor funds would be diverted for defendants' personal use and
16 enrichment, including without limitation lavish trips to the Cayman Islands,
17 China, and South Korea, among other places; that defendants Reitano,
18 Glover, and Willse lacked the qualifications to develop a new cryptocurrency;
19 that defendants would change the token metrics at any time, whenever it
20 suited them; that defendants always intended to keep control of a majority of
21 the mining tokens; that token ownership would never be decentrallized; that
22 defendants would hold new seed rounds after Merkamerica made its
23 investment; that defendants would sell tokens after Merkamerica made its
24 investment for prices lower than what Merkamerica paid; and that defendants
25 offered to give kCoins to UR coin holders for free. Had Merkamerica known
26 about the mistake before entering into the SAFTs with Kowala SEZC and
27 paying substantial amounts to defendants, Merkamerica never would have
28 done so.
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1 247. Merkamerica is entitled to rescind the SAFTs and its

2 payments to defendants on grounds of unilateral mistake. Merkamerica
3 believed that defendants would create kCoins with stable values; that that the
4 kCoin blockchain was a "working project" that was ready to launch by
5 February or March 2018; that Merkamerica would profit from the purchase of
6 mining tokens; that Kowala SEZC owned the intellectual property for the
7 blockchain; that Merkamerica's payments would be used for the development
8 of kUSD; that defendants Reitano, Glover, and Willse were highly qualified to
9 develop a new cryptocurrency; that the token metrics would stay the same as
10 represented in the Kowala White Paper; that token ownership would be
11 decentralized; that Merkamerica would pay a lower price to purchase tokens
12 than later token purchasers would pay; that Merkamerica was investing in the
13 last of the seed round; and that the next round of investment would be a
14 public token offering at a token sales price higher than what Merkamerica
15 paid. Defendants knew that Merkamerica was mistaken about these facts and
16 used that mistake to take advantage of Merkamerica. Merkamerica's mistake
17 was not caused by excessive carelessness. Had Merkamerica known about
18 the mistake before entering into the SAFTs with Kowala SEZC and paying
19 substantial amounts to defendants, Merkamerica never would have done so.
20 248. Merkamerica is entitled to rescind the SAFTs and its
21 payments to defendants on grounds of failure of consideration. Defendants
22 never transferred to Merkamerica any Kowala mining tokens, which were the
23 total consideration to be provided by defendants to Merkamerica under the
24 SAFTs.
25 249. Merkamerica hereby offers and tenders to defendants
26 everything of value received from them in connection with the SAFTs, upon
27 the condition that defendants restore to Merkamerica everything of value
28 //
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1 received from Merkamerica, offset against each other, unless defendants are
2 unable or positively refuse to do so, pursuant to California Civil Code § 1691.
3 250. Accordingly, for the foregoing reasons, Merkamerica is
4 entitled to a judgment of rescission of the SAFTs and an award of restitution
5 and consequential damages sufficient to restore Merkamerica to its original
6 economic position, in an amount to be proved at trial, but not less than
7 $307,844.12.
8 251. Under the circumstances described herein, defendants will
9 be unjustly enriched if they are allowed to profit by their wrongful conduct.
10 Therefore, Merkamerica is entitled to a constructive trust upon, and
11 disgorgement of, all money, assets, property, receivables, and opportunities
12 unjustly obtained by defendants in connection therewith.
13
14 NINTH CLAIM FOR RELIEF
15 QUANTUM MERUIT
16 252. Plaintiff hereby incorporates by reference paragraphs 1
17 through 251 above, as if fully set forth herein.
18 253. As of August 31, 2018, Merkamerica had performed
19 numerous services for defendants at the special request of defendants, as
20 alleged below. Defendants knew these services were being provided by
21 Merkamerica and promised to pay their reasonable value. Defendants
22 accepted, used, and enjoyed the services provided by Merkamerica.
23 254. Merkamerica's services to defendants included the following:
24 (a) On February 28, 2018, Merker had a two-hour call with
25 defendant Willse and Kowala's CFO Bromberg during which Merker, on behalf
26 of Merkamerica, advised Bromberg as to marketing strategies.
27 //
28 //
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1 (b) On March 19, 2018, Merkamerica prepared and

2 e-mailed to Bromberg a two-page summary of marketing services defendants
3 requested from Merkamerica.
4 (c) On April 12, 2018, Merkamerica connected defendants
5 with an investment fund, Interfacemax.
6 (d) On April 12, 2018, Merkamerica e-mailed Glover and
7 Willse regarding Taurn, an investor, which Merker met with and made an
8 introduction to while in Korea.
9 (e) On May 5, 2018, Merkamerica sent a marketing survey
10 to its contacts to assist defendants with investor feedback.
11 (f) On May 7, 2018, Merkamerica exchanged
12 correspondence with Bromberg about defendants attending the ADI mining
13 summit conference. Merkamerica prepared marketing materials for
14 defendants to use at this conference. Defendants attended this conference
15 and used and presented Merkamerica's marketing materials there.
16 (g) Merkamerica advised defendants to send out a mining
17 survey. On May 7, 2018, defendants followed this advice and sent out a
18 mining survey.
19 (h) On June 1, 2018, Merkamerica connected Bromberg
20 with Tess Hau, a consultant with connections to cryptocurrency exchanges.
21 Bromberg had a two-hour conversation with Tess Hau as a result of this
22 introduction.
23 (i) On June 16-20, 2018, Merkamerica attended the
24 Blockchain Economic Forum investor conference in San Francisco, had
25 multiple meetings with investors on defendants' behalf, and met with Tess
26 Hau to discuss investor relations.
27 (j) On July 8, 2018, Merkamerica reached out to Jill
28 Carrigan to obtain exchange contacts for defendants.
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1 (k) On July 11, 2018, Merkamerica reached out to

2 defendant Willse to see whether defendants were interested in Merkamerica's
3 connections with exchanges. Defendants asked for the connections and sent
4 Merkamerica a one-page investment summary for investors, exchanges, and
5 partners.
6 (l) In July and August 2018, Merkamerica connected with
7 several individuals regarding setting up and selling Kowala mining tokens.
8 During this time, Merkamerica discussed with defendants how defendants
9 would pay Merkamerica for the consulting work it had done and would
10 continue to do. Defendants confirmed to Merkamerica that Merkamerica
11 would be compensated for its services to defendants.
12 (m) On July 25, 2018, Merkamerica connected defendants
13 with Adam McBride, who has connections with exchanges. Defendants had
14 an hour-long call with Adam McBride as a result of this introduction.
15 (n) Merkamerica had a call with a gentleman from Japan
16 who has connections to exchanges and who also wanted to buy kUSD.
17 (o) In late July 2018, defendants Glover and Willse
18 informed Merkamerica that Bromberg had been fired. They asked
19 Merkamerica to provide a marketing package.
20 (p) On August 3 and 4, 2018, Merker flew at his own
21 expense to Nashville, Tennessee and met with defendant Glover for three
22 hours. They discussed Merkamerica's consulting on behalf of defendants.
23 (q) On August 5 and 6, 2018, Merkamerica spent two full
24 days putting together a marketing package for defendants. Merkamerica sent
25 the marketing package it created to defendant Glover.
26 255. Merkamerica spent at least 80 hours providing the foregoing
27 services to defendants. Merkamerica's regular consulting fee is $500 per
28 hour.
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1 256. Although demanded by Merkamerica from defendants,

2 defendants have not made payment for those services. The fair and
3 reasonable value of the services provided by Merkamerica to defendants is an
4 amount not less than $40,000.00. There is now due, owing and unpaid from
5 defendants to Merkamerica an amount to be proved at trial, but not less than
6 $40,000.00.
7 257. Under the circumstances described herein, defendants will
8 be unjustly enriched if they are allowed to profit by their wrongful conduct.
9 Therefore, Merkamerica is entitled to a constructive trust upon, and
10 disgorgement of, all money, assets, property, receivables, and opportunities
11 unjustly obtained by defendants in connection therewith.
12
13 TENTH CLAIM FOR RELIEF
14 UNFAIR BUSINESS PRACTICES IN VIOLATION OF
15 CALIFORNIA BUSINESS & PROFESSIONS CODE § 17200
16 258. Plaintiff hereby incorporates by reference paragraphs 1
17 through 257 above, as if fully set forth herein.
18 259. Defendants engaged in unfair business practices in violation
19 of Business & Professions Code § 17200, et seq. Such business practices
20 include, without limitation, defendants' practice of creating and marketing
21 valueless cryptocurrencies; fraud and manipulation of the cryptocurrency
22 markets and blockchain media to make it appear that their valueless
23 cryptocurrencies have value; public dissemination of so-called "white papers"
24 for the same purpose; the use of mining tokens and other methods to deceive
25 victims into transferring money and legitimate cryptocurrencies to defendants;
26 fraud and deception of legitimate investors and vendors; and false claims and
27 misrepresentation of intellectual property ownership.
28 //
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1 260. Defendants will, unless preliminarily and permanently

2 enjoined, continue to engage in unfair business practices against
3 Merkamerica and other actual and potential victims. Unless defendants are
4 so enjoined, Merkamerica and others will suffer immediate and irreparable
5 harm for which they lack an adequate remedy of law. Merkamerica is
6 therefore entitled to an order of this Court, pursuant to Civil Code § 3422 and
7 Code of Civil Procedure § 526, preliminarily and permanently enjoining
8 defendants from engaging in such unfair business practices as alleged above.
9 261. Merkamerica is also entitled to orders and judgment of this
10 Court compelling defendants to restore to Merkamerica any and all money
11 and property, real or personal, acquired by means of such unfair business
12 practices, in an amount to be proved at trial, but not less than $307,844.12.
13 262. Under the circumstances described herein, defendants will
14 be unjustly enriched if they are allowed to profit by their wrongful conduct.
15 Therefore, Merkamerica is entitled to a constructive trust upon, and
16 disgorgement of, all money, assets, property, receivables, and opportunities
17 unjustly obtained by defendants in connection therewith.
18
19 ELEVENTH CLAIM FOR RELIEF
20 IMPLIED CONTRACT
21 263. Plaintiff hereby incorporates by reference paragraphs 1
22 through 262 above, as if fully set forth herein.
23 264. The wrongful conduct described herein caused a contract to
24 be implied by law between Merkamerica and defendants, by which defendants
25 have an obligation to repay Merkamerica all money and items of value
26 unjustly obtained by defendants.
27 265. Although demanded by Merkamerica from defendants,
28 defendants have not repaid anything to Merkamerica. There is now due,
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1 owing and unpaid from defendants to Merkamerica an amount to be proved at

2 trial, but not less than $347,844.12.
3 266. Under the circumstances described herein, defendants will
4 be unjustly enriched if they are allowed to profit by their wrongful conduct.
5 Therefore, Merkamerica is entitled to a constructive trust upon, and
6 disgorgement of, all money, assets, property, receivables, and opportunities
7 unjustly obtained by defendants in connection therewith.
8
9 TWELFTH CLAIM FOR RELIEF
10 EQUITABLE RESTITUTION
11 267. Plaintiff hereby incorporates by reference paragraphs 1
12 through 266 above, as if fully set forth herein.
13 268. Merkamerica is entitled to equitable restitution of all money
14 and items of value unjustly obtained by defendants. Under the circumstances
15 described herein, defendants will be unjustly enriched if they are allowed to
16 profit by their wrongful conduct. Accordingly, Merkamerica seeks a judgment
17 and order of this Court awarding Merkamerica complete relief based on the
18 principles of equity in an amount to be proved at trial, but not less than
19 $347,844.12, including without limitation restitution to Merkamerica of all
20 money and items of value paid to and unjustly obtained by defendants, all
21 consequential damages to which Merkamerica is entitled, and a constructive
22 trust on, and a disgorgement of, all funds, assets, accounts, and business
23 opportunities unjustly acquired by defendants.
24 //
25 //
26 //
27 //
28 //
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1 WHEREFORE, plaintiff Merkamerica prays for judgment in its

2 favor and against defendants as follows:
3 1. On the First, Second, Third, Fourth, Fifth, Sixth, and Seventh
4 Claims for Relief, for damages according to proof, but not less than an amount
5 to be proved at trial, but not less than $307,844.12.
6 2. On the Third and Eighth Claims for Relief, for judgment of
7 rescission as pleaded.
8 3. On the Third, Eighth, and Tenth Claims for Relief, for
9 restitutionary relief in an amount to be proved at trial, but not less than
10 $307,844.12.
11 4. On the Fifth and Sixth Claims for Relief, for an award of
12 exemplary and punitive damages against defendants in a sum appropriate to
13 punish and to make an example of them.
14 5. On the Eighth Claim for Relief, for consequential damages
15 sufficient to restore Merkamerica to its original economic position.
16 6. On the Ninth Claim for Relief, for damages according to
17 proof, but not less than an amount to be proved at trial, but not less than
18 $40,000.00.
19 7. On the Tenth Claim for Relief, for injunctive relief as
20 pleaded.
21 8. On the Eleventh and Twelfth Claims for Relief, for
22 restitutionary relief in an amount to be proved at trial, but not less than
23 $347,844.12.
24 9. On all Claims for Relief, for constructive trust.
25 10. For costs of suit, attorney's fees in an amount not less than
26 $150,000.00, and prejudgment interest.
27 //
28 //
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1 11. For such other and further relief as the Court may deem just
2 and proper.
3
4 DATED: July 16, 2019 LAW OFFICES OF JOHN A. CASE, JR.
5 /s/
6 By:______________________________
John A. Case, Jr.
7 Attorneys for Plaintiff MERKAMERICA
INC., a California corporation
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1 DEMAND FOR JURY TRIAL

2
3 Plaintiff MERKAMERICA INC. hereby demands a trial by jury.
4
5 DATED: July 16, 2019 LAW OFFICES OF JOHN A. CASE, JR.
6 /s/
7 By:______________________________
John A. Case, Jr.
8 Attorneys for Plaintiff MERKAMERICA
INC., a California corporation
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