Early-Stage Victory: How Defense Strategy Defeated Securities Class Action Against HUMBL

Complex securities class actions rarely end quickly, but when fundamental legal requirements remain unmet despite multiple attempts, even the most determined plaintiff effort can collapse at the pleading stage. The recent decision in Pasquinelli v. HUMBL, Inc. (D. Del., Case No. 23-743-JLH) illustrates how effective defense strategy, focused on core pleading deficiencies, can achieve complete dismissal with prejudice.

On December 19, 2025, U.S. District Judge Jennifer L. Hall granted motions to dismiss filed by HUMBL, Inc., its executives, and related defendant George Sharp, terminating all claims after plaintiffs’ third attempt to state viable causes of action. The decision provides a roadmap for defense counsel facing securities claims involving novel products or thinly-traded stocks.

From Allegations to Dismissal: The Litigation Arc

The plaintiff class accused HUMBL and associated individuals of violating multiple federal securities provisions—specifically Sections 10(b) and 20(a) of the Securities Exchange Act, along with Sections 5 and 12(a)(1) of the Securities Act. Their theory combined two distinct legal challenges: that defendants issued materially false and misleading statements to investors, and that HUMBL’s “BLOCK ETX” service constituted an unregistered security offering.

Despite having three opportunities to cure pleading deficiencies (the court considered the Second Amended Class Action Complaint), plaintiffs could not satisfy fundamental requirements. Defense counsel recognized that attacking these threshold elements—rather than engaging with the merits—offered the most efficient path to resolution.

The strategic focus proved correct. By systematically demonstrating that plaintiffs failed to meet basic pleading requirements for each claim, defendants achieved total victory without reaching substantive questions about HUMBL’s conduct or statements.

The Reliance Barrier: Three Theories, Three Failures

Securities fraud claims under Section 10(b) and Rule 10b-5 require plaintiffs to demonstrate reliance on the alleged misrepresentation. This element serves as the critical link between defendant conduct and plaintiff injury. Without reliance, no fraud claim can proceed.

Plaintiffs understood this requirement and attempted three distinct paths to satisfy it. Each attempt failed.

Direct Reliance Claims

First, plaintiffs alleged they directly relied on HUMBL’s statements when making investment decisions. But the Delaware court found these allegations conclusory—mere legal conclusions lacking specific factual support. Plaintiffs failed to identify which statements they relied upon, when they encountered these statements, how the statements influenced their decisions, or what specific actions they took as a result.

Effective pleading requires concrete factual allegations showing the reliance chain. Boilerplate assertions that “plaintiffs relied on defendants’ statements” provide no meaningful information and cannot survive dismissal.

The Fraud-on-the-Market Doctrine

Recognizing the weakness of direct reliance allegations, plaintiffs invoked the fraud-on-the-market (FOTM) presumption—a judicial doctrine allowing plaintiffs in efficient market cases to presume reliance based on the theory that public misstatements become embedded in stock prices.

This presumption depends entirely on market efficiency. If a security trades in an efficient market where information rapidly affects price, courts may presume that investors rely on the integrity of that price (which reflects all public information, including misstatements).

But demonstrating market efficiency requires satisfying multiple criteria. Courts typically apply the framework established in Cammer v. Bloom and Krogman v. Sterritt, examining factors such as trading volume, analyst coverage, market makers, and the empirical relationship between company news and stock price movement.

Judge Hall’s analysis proved devastating to plaintiffs’ FOTM argument. Applying the relevant factors, she found seven of eight weighed against a finding of market efficiency. Without an efficient market, no FOTM presumption could apply. Without the presumption, plaintiffs had no viable reliance theory for most class members.

This aspect of the decision carries significant implications for securities defense, particularly in cases involving smaller companies, OTC securities, or thinly-traded stocks. Defense counsel should aggressively challenge market efficiency claims, recognizing that defeating FOTM often defeats the entire class mechanism.

Affiliated Ute and Material Omissions

Plaintiffs made a third attempt, seeking to invoke the Affiliated Ute presumption applicable to certain omission cases. Under this doctrine, when defendants have a duty to disclose material facts and fail to do so, plaintiffs may sometimes establish reliance through the fact of the omission itself rather than proving actual reliance.

The court rejected this theory as well, holding that plaintiffs failed to adequately plead that defendants owed any duty to disclose the omitted information. Without a duty, no omission-based presumption could apply.

The triple failure on reliance proved fatal to all Exchange Act claims.

Attacking Market Efficiency: The Cammer/Krogman Framework in Practice

The court’s market efficiency analysis deserves closer examination because it demonstrates how defense counsel can systematically dismantle FOTM claims.

The Cammer and Krogman decisions established a multi-factor test examining objective market characteristics:

1. Trading volume and share turnover
2. Number of securities analysts following the stock
3. Presence of market makers and arbitrageurs
4. Company eligibility to file SEC Form S-3 registration statements
5. Empirical evidence of price response to unexpected news
6. Market capitalization
7. Bid-ask spread
8. Float (publicly available shares)

In Pasquinelli, seven factors cut against plaintiffs. This lopsided result reflects the reality that many securities—particularly those of smaller companies or those trading on less sophisticated markets—simply do not trade in efficient markets as securities law defines that term.

Defense teams should conduct early market efficiency analysis whenever facing FOTM-based claims. Gathering objective data on these factors (much of which is publicly available through trading records, SEC filings, and market databases) can provide powerful ammunition for dismissal motions. When multiple factors weigh against efficiency, courts have little basis to find the necessary market conditions for the FOTM presumption.

Challenging “Security” Status: When Products Don’t Fit the Definition

Beyond the reliance problems that doomed Exchange Act claims, plaintiffs faced an equally fundamental challenge with their Securities Act theories. They alleged that HUMBL’s BLOCK ETX service constituted an unregistered security, triggering strict liability under Sections 5 and 12(a)(1).

But calling something a “security” doesn’t make it so. Federal securities law provides specific definitions, and the Supreme Court’s decision in SEC v. W.J. Howey Co. established the test for determining when a transaction constitutes an “investment contract” (a category of security).

The Howey test requires: (1) an investment of money (2) in a common enterprise (3) with profits to come solely from the efforts of others. Plaintiffs needed to satisfy all three elements.

Judge Hall found the allegations insufficient, particularly regarding the “common enterprise” element. Plaintiffs failed to plausibly allege that BLOCK ETX participants pooled funds, shared returns, or otherwise participated in the type of collective venture that securities law seeks to regulate.

Moreover, plaintiffs’ complaint lacked allegations suggesting that BLOCK ETX users purchased equity interests, shares, or other ownership stakes. The service appeared to function as a consumer product rather than an investment vehicle—users paid for access to functionality, not for an expectation of profit from others’ efforts.

This distinction matters enormously in modern litigation, particularly for technology and fintech companies offering novel products. Many digital platforms facilitate transactions, provide services, or enable exchanges without creating securities relationships. Courts remain reluctant to expand securities definitions to encompass ordinary commercial relationships.

Defense counsel representing companies offering innovative products should carefully analyze whether plaintiff allegations actually satisfy Howey requirements or merely assert legal conclusions. Many products that plaintiffs label “securities” lack the fundamental characteristics that justify securities regulation.

Derivative Claims: The Cascading Effect

With primary liability claims eliminated, plaintiffs’ Section 20(a) control-person claims necessarily failed as well. Control-person liability under Section 20(a) operates as a form of derivative or secondary liability—it requires an underlying primary violation by the controlled entity.

When no primary violation exists (because no Section 10(b) claim survives), no secondary liability can attach. The court’s reasoning here was straightforward and required little additional analysis. Once the foundation crumbled, the superstructure collapsed.

This principle applies across various forms of secondary or derivative securities claims. Defense counsel should recognize that defeating primary claims often automatically eliminates entire categories of related claims, achieving judicial efficiency and complete victory in a single motion.

Futility and the Final Opportunity

Perhaps the most significant aspect of Judge Hall’s decision was her determination that further amendment would be futile. Despite having drafted three versions of their complaint—the original, a First Amended Complaint, and the Second Amended Complaint that the court considered—plaintiffs could not cure the fundamental deficiencies.

Federal Rule of Civil Procedure 15(a) generally favors granting leave to amend complaints, but this liberality has limits. When a plaintiff has had multiple opportunities to correct problems and repeatedly fails, or when the deficiencies are substantive rather than technical, courts may properly deny further attempts.

The futility determination in Pasquinelli reflected several factors:

First, plaintiffs had already received two prior opportunities to strengthen their allegations. The Second Amended Complaint represented their third attempt to plead viable claims.

Second, the deficiencies were not minor or technical. Plaintiffs failed on fundamental elements—reliance, security status, and the factual predicates for their legal theories. These were not problems fixable through better drafting but rather reflected substantive legal failures.

Third, defendants had clearly articulated the problems in their motion briefs, and plaintiffs had full opportunity to address these issues in their opposition and through prior amendments. At some point, continued opportunities simply waste judicial resources.

The court’s willingness to close the door demonstrates an important principle: persistence alone cannot overcome fundamental legal insufficiency. For defense counsel, this aspect of Pasquinelli confirms that properly framing threshold issues and documenting repeated failures can lead to dismissal with prejudice, eliminating future litigation risk.

Strategic Lessons for Securities Defense

The HUMBL decision offers several practical lessons for defense counsel in securities litigation:

Identify and Target Threshold Deficiencies Early

Rather than engaging with the merits of plaintiffs’ factual allegations, defendants focused on fundamental pleading requirements. This strategy avoided protracted discovery and motion practice on substantive issues, achieving resolution at the earliest possible stage.

Defense teams should carefully review complaints to identify threshold problems—failures to plead required elements, insufficient factual support for legal conclusions, or invocation of doctrines where prerequisites cannot be met.

Attack Reliance Comprehensively

The HUMBL defendants didn’t simply argue that direct reliance was unproven—they systematically addressed every possible reliance theory, demonstrating why none applied. This comprehensive approach prevented plaintiffs from falling back on alternative theories.

When moving to dismiss securities fraud claims, defense counsel should anticipate and preemptively address all potential reliance theories: direct reliance, FOTM presumption, and Affiliated Ute omission-based presumption. Addressing one theory while ignoring others may leave plaintiffs an escape route.

Challenge Market Efficiency Aggressively

In cases involving smaller capitalization companies, OTC securities, or limited trading markets, the FOTM presumption may be vulnerable. Defense counsel should gather objective market data early and present detailed analysis showing that statutory factors weigh against efficiency.

This analysis serves multiple purposes: it can defeat class certification even if claims survive dismissal, it may encourage early settlement when plaintiffs recognize their class mechanism is weak, and it provides strong grounds for dismissal before discovery.

Question Security Status When Appropriate

For companies offering novel products, services, or platforms, plaintiffs may attempt to characterize ordinary commercial relationships as securities transactions. Defense counsel should carefully analyze whether Howey requirements are genuinely satisfied or whether plaintiffs simply assert legal conclusions.

Many products facilitate transactions, enable exchanges, or provide access to services without creating the type of common enterprise and profit expectation that securities law targets. When product characteristics don’t genuinely fit securities definitions, courts may properly dismiss claims before addressing merits.

Document Repeated Failures

When plaintiffs amend complaints multiple times without curing identified deficiencies, defense counsel should clearly document the pattern in motion briefing. This creates a record supporting futility arguments and may persuade courts to deny further amendment opportunities.

The strongest futility arguments show not just that current pleadings are insufficient, but that plaintiffs have already had multiple opportunities to address the same problems and failed each time.

Conclusion: A Template for Early Resolution

Pasquinelli v. HUMBL, Inc. demonstrates that even in the complex world of securities class actions, fundamental legal requirements still matter. When plaintiffs cannot satisfy threshold pleading requirements despite multiple opportunities, courts will dismiss claims with prejudice rather than allow indefinite amendment.

For defense counsel, the decision provides both a roadmap and reassurance. By identifying and attacking core legal deficiencies—particularly reliance elements and security status—defendants can achieve complete victory at the pleading stage. The key lies in comprehensive motion practice that addresses every potential theory and documents every prior failure.

As securities litigation continues to evolve and plaintiffs target new types of companies and products, the principles illustrated in HUMBL remain constant: allegations must satisfy established legal requirements, presumptions depend on specific factual predicates, and courts will eventually close the door when repeated attempts cannot cure fundamental deficiencies.