-PJW Veltex Corporation v. Javeed Azziz Matin et al, No. 2:2010cv01746 - Document 143 (C.D. Cal. 2010)
Court Description: ORDER GRANTING MOTIONS TO DISMISS by Judge Audrey B. Collins: granting 122 , 124 , 125 , 126 Motions to Dismiss: For the reasons stated above, the pending motions to dismiss are GRANTED. The § 12 claim is dismissed without prejudice as to B ua, CBNM, Patrick Day, Richard Day and ARTCO, and is dismissed with prejudice as to Tahim. The § 17(a) claim is dismissed with prejudice as to all moving Defendants. The § 10 claim is dismissed without prejudice as to Bua, Patrick Day, Richard Day and ARTCO, and is dismissed with prejudice as to Tahim and CBNM. The state law claims against Tahim are dismissed without prejudice. (see document for further details) (bm)
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-PJW Veltex Corporation v. Javeed Azziz Matin et al Doc. 143 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 VELTEX CORPORATION, Plaintiff, 12 13 14 CV 10-1746 ABC (PJWx) ORDER GRANTING MOTIONS TO DISMISS v. JAVEED AZZIZ MATIN, et al., Defendants. 15 16 17 Pending before the Court are motions to dismiss filed by 18 Defendants Carmine Bua (“Bua”), Chisholm, Bierwolf, Nilson & Morrill, 19 CPA (“CBNM”), Anne Tahim (“Tahim”), Patrick Day, Richard Day, and 20 American Registrar and Transfer Co. (“ARTCO”) (collectively, 21 “Defendants”). 22 126); Tahim Mot. (Docket # 124); Patrick Day, Richard Day & ARTCO Mot. 23 (“Day Mot.”) (Docket # 122).) 24 Bua Mot. (Docket # 129); Joint Opp’n to CBNM and Tahim Mots. (“Joint 25 Opp’n”) (Docket # 131); Opp’n to Patrick Day, Richard Day & ARTCO Mot. 26 (“Opp’n to Day Mot.”) (Docket # 133).) 27 (Bua Reply (Docket # 138); CBNM Reply (Docket # 140); Tahim Reply 28 (Docket # 139); Patrick Day, Richard Day & ARTCO Reply (“Day Reply”) (See Bua Mot. (Docket # 125); CBNM Mot. (Docket # Plaintiff filed oppositions. (Opp’n to Defendants filed replies. Dockets.Justia.com 1 (Docket # 137).) 2 2010. 3 Court hereby GRANTS the motions. The motions came on for hearing on September 27, Having reviewed the parties’ arguments and the record, the 4 5 6 I. BACKGROUND This is a securities fraud case in which Plaintiff alleges that 7 various defendants engaged in a “pump and dump” scheme to artificially 8 inflate the value of Veltex stock by disseminating false information 9 and then sell the inflated shares into the market. (See, e.g., First 10 Amended Complaint (“FAC”) ¶ 1.) 11 company that claims that it was a victim of this scheme along with 12 unsuspecting investors. 13 pump and dump scheme “required planning and numerous participants, 14 including lawyers, accountants and transfer agents.” 15 of those defendants are currently before the Court with pending 16 motions to dismiss. 17 Plaintiff Veltex is an apparel (FAC ¶¶ 1, 4.) Plaintiff alleges that the (FAC ¶ 1.) Defendant Bua acted as Plaintiff’s securities attorney. Some (See FAC 18 ¶ 25.) 19 (“Rule 504D Letters”) approving the issuance of legend free shares of 20 Veltex stock. 21 certified public accounting firm that performed accounting work and 22 consulting services for Plaintiff. 23 that CBNM’s audit was faulty in various respects. 24 51-56.) 25 performed accounting work for Plaintiff. 26 alleges that Tahim’s audit was faulty in various respects. 27 e.g., FAC ¶¶ 49-50.) 28 engaged in facilitating the registry and transfer of corporate shares. Plaintiff alleges that Bua rendered fraudulent opinion letters (See, e.g., FAC ¶¶ 25, 68-69, 71.) (FAC ¶ 21.) Defendant CBNM is a Plaintiff alleges (See, e.g., FAC ¶¶ Defendant Tahim is a certified public accountant who (FAC ¶ 23.) Plaintiff (See, Defendant ARTCO is a corporate transfer agent 2 1 (FAC ¶ 16.) 2 certain periods, and was also a member of Plaintiff’s Board of 3 Directors. 4 management positions with ARTCO and was a majority owner of ARTCO. 5 (FAC ¶ 18.) 6 improperly issued legend free shares of Veltex stock. 7 Plaintiff also alleges that the various defendants in Plaintiff’s 8 management, apparently including Patrick Day, engaged in various other 9 misconduct. Defendant Patrick Day was the President of ARTCO during (FAC ¶ 17.) Defendant Richard Day held a variety of Plaintiff alleges that ARTCO, Patrick Day and Richard Day (See FAC ¶ 72.) (See, e.g., FAC ¶¶ 32-34.) 10 11 II. 12 STANDARDS Defendants move for dismissal pursuant to Federal Rule of Civil 13 Procedure 12(b)(6) on the ground that Plaintiff failed to state a 14 claim upon which relief can be granted. 15 recently clarified the pleadings necessary to state a claim for relief 16 sufficiently to withstand a motion to dismiss under Rule 12(b)(6). 17 See Ashcroft v. Iqbal, __ U.S. ___, 129 S. Ct. 1937 (2009); Bell Atl. 18 Corp. v. Twombly, 550 U.S. 544 (2007). 19 plain statement of the claim showing that the pleader is entitled to 20 relief,” which does not require “detailed factual allegations,” but it 21 “demands more than an unadorned, the-defendant-unlawfully-harmed-me 22 accusation.” 23 on its face,” which means that the Court can “draw the reasonable 24 inference that the defendant is liable for the misconduct alleged.” 25 Id. 26 of his entitlement to relief requires more than labels and 27 conclusions, and a formulaic recitation of the elements of a cause of 28 action will not do.” The Supreme Court has Rule 8(a)(2) requires a “short Iqbal, 129 S. Ct. at 1949. A claim must be “plausible In other words, “a plaintiff’s obligation to provide the grounds Twombly, 550 U.S. at 555 (internal quotations 3 1 and alterations omitted). 2 construed in the light most favorable to the nonmoving party. 3 e.g., Newdow v. Lefevre, 598 F.3d 638, 642 (9th Cir. 2010).1 4 Allegations of fact are taken as true and See, If the court finds dismissal appropriate, it must decide whether 5 to grant leave to amend. 6 given when justice so requires.” 7 is ‘to be applied with extreme liberality.’” 8 Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (per curiam) 9 (quoting Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 Leave to amend under Rule 15(a) is “freely In the Ninth Circuit, “[t]his policy Eminence Capital, LLC v. 10 (9th Cir. 2001)). 11 it is clear that the complaint cannot be saved by any amendment. 12 Polich v. Burlington Northern, Inc., 942 F.2d 1467, 1472 (9th Cir. 13 1991). 14 unaccompanied by additional facts that could cure the defects in the 15 complaint, however, that is a strong indication that the plaintiff has 16 no additional facts to plead. 17 Litig., 283 F.3d 1079, 1098 (9th Cir. 2002), abrogation on other 18 grounds recognized by South Ferry LP, No. 2 v. Killinger, 542 F.3d 19 776, 784 (9th Cir. 2008). 20 particularly broad in cases where leave to amend has been granted 21 previously. 22 F.3d 1049, 1071 (9th Cir. 2008).2 Dismissal without leave to amend is improper unless Where the plaintiff makes a bare request for leave to amend See In re Vantive Corp. Securities Moreover, the Court’s discretion is See Metzler Inv. GmbH v. Corinthian Colleges, Inc., 540 23 24 25 1 26 27 28 As discussed more fully below, some of Plaintiff’s claims are subjected to heightened pleading standards. 2 Plaintiff previously requested – and was granted – leave to amend with respect to Defendants Bua, Tahim, and CBNM. (See June 28, 2010 Tr. at 14-18.) 4 1 III. 2 ANALYSIS Defendants’ pending motions raise a variety of arguments that 3 they assert warrant dismissal of various of the claims asserted. 4 Court addresses each below. The 5 A. 6 The FAC raises a claim under § 12 of the Securities Act of 1933. First Cause of Action – § 12 Claim 7 (See FAC ¶ 85.) 8 sells a security” by means of untrue statements is liable “to the 9 person purchasing such security from him.” That section provides that any person who “offers or 15 U.S.C. § 77l(a). 10 Hence, § 12 “permits suit against a seller of a security . . . only by 11 ‘the person purchasing such a security from him,’ thus specifying that 12 a plaintiff must have purchased the security directly from the 13 issuer.” 14 (9th Cir. 1999) (emphasis in original). 15 Plaintiff. 16 purchased securities at all, which makes its claim as currently pled 17 defective as to all Defendants. 18 did make at least one such purchase, however. 19 F.) 20 without prejudice as to all moving Defendants. 21 this claim, it should specify which of the remaining Defendants sold 22 securities to Veltex. 23 Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1081 This poses two problems for First, Plaintiff has not alleged that it actually Plaintiff contends that it in fact (Peters Decl. ¶ 8, Ex. Accordingly, with respect to that defect, this claim is DISMISSED If Plaintiff amends Second, Tahim argues that Plaintiff did not purchase any 24 securities from her as required under § 12. 25 The Ninth Circuit has made clear that an accountant “merely performing 26 professional services, without actively soliciting a purchase of the 27 underlying securities, does not give rise to liability under section 28 12.” (See Tahim Mot. at 10.) Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 537 & n.5 5 1 (9th Cir. 1989); see also In re: Worlds of Wonder Securities Litig., 2 694 F. Supp. 1427, 1435 (N.D. Cal. 1988) (dismissing claims against 3 accountants who finalized registration statement and prospectus and 4 caused registration statement to become effective). 5 to address this authority in opposition, and instead notes that claims 6 against accountants are not categorically barred. 7 18-19.) 8 particular allegations against this accountant pass muster under Ninth 9 Circuit law. 10 Plaintiff fails (See Joint Opp’n at But Plaintiff does not provide an explanation why the Accordingly, this claim is DISMISSED with prejudice as to Tahim. 11 B. 12 The FAC raises a claim under § 17(a) of the Securities Act of First Cause of Action – § 17(a) Claim 13 1933. 14 there is no private right of action under § 17(a). 15 Public Power Supply Sys. Sec. Litig., 823 F.2d 1349, 1358 (9th Cir. 16 1987) (en banc) (“no private right of action lies under section 17 17(a)”). 18 Defendants. (See FAC ¶ 85.) This claim fails as a matter of law because In re Washington That claim is DISMISSED with prejudice against all moving 19 C. 20 To state a claim under § 10(b) and Rule 10b-5, a plaintiff must 21 allege: (1) a misstatement or omission (2) of material fact (3) made 22 with scienter (4) on which the plaintiff relied (5) which proximately 23 caused its injury. 24 288 F.3d 385, 388 (9th Cir. 2002) Such claims are subject to 25 heightened pleading requirements. Federal Rule of Civil Procedure 26 9(b) requires allegations of fraud be pled with particularity. 27 e.g., Desaigoudar v. Meyercord, 223 F.3d 1020, 1023 (9th Cir. 2000). 28 First Cause of Action – § 10b-5, Rule 10(b)-5 Claim DSAM Global Value Fund v. Altris Software, Inc., See, The Private Securities Litigation Reform Act of 1995 (“PSLRA”) 6 1 modifies Rule 9(b) to add further pleading requirements for securities 2 claims. 3 by hindsight.” 4 2005). 5 private securities complaint alleging that the defendant made a false 6 or misleading statement must: (1) specify each statement alleged to 7 have been misleading and the reason or reasons why the statement is 8 misleading; and (2) state with particularity facts giving rise to a 9 strong inference that the defendant acted with the required state of See id. The PSLRA was designed to eradicate “pleading fraud In re: Daou Sys., Inc., 411 F.3d 1006, 1021 (9th Cir. “Under the PSLRA’s heightened pleading instructions, any 10 mind.” 11 321 (2007) (internal citations and quotations omitted). 12 Circuit has traditionally analyzed these overlapping issues as a 13 single inquiry. 14 Cir. 2001). 15 facts in the complaint, taken as a whole, raise a strong inference 16 that defendants intentionally or [with] ‘deliberate recklessness’ made 17 false or misleading statements to investors.” 18 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, The Ninth See, e.g., Ronconi v. Larkin, 253 F.3d 423, 429 (9th The Court therefore must determine whether “particular Id. The Supreme Court has provided guiding principles in determining 19 whether that pleading standard has been met. 20 accept all factual allegations as true. 21 Second, the Court must look to the allegations in the complaint in 22 their entirety. 23 plausible competing inferences. 24 survive . . . only if a reasonable person would deem the inference of 25 scienter cogent and at least as compelling as any opposing inference 26 one could draw from the facts alleged.” 27 28 1. Id. First, the Court is to Tellabs, 551 U.S. at 322. Third, the court must take into account Id. at 323. “A complaint will Id. at 324. Bua Bua’s challenge to the sufficiency of the FAC focuses on whether 7 1 Plaintiff sufficiently pled scienter. 2 Plaintiff alleges that Bua drafted at least 33 Rule 504D Letters 3 approving the issuance of unrestricted, legend free Veltex common 4 stock. 5 exemption was available, and that the Rule 504D Letters were premised 6 on misrepresentations that Wilshire Equity was a Texas resident and 7 that Veltex, Javeed Matin (“Matin”) and Wilshire Equity were 8 unaffiliated. 9 Plaintiff argues that, despite receiving these facts from Matin and (FAC ¶ 69.)3 (See Bua Mot. at 7-11.) Plaintiff argues that no securities law (See Opp’n to Bua Mot. at 4-8, 12; see also FAC ¶ 71.)4 10 others at Veltex, Bua actually knew, or with deliberate recklessness 11 disregarded, that his Rule 504D Letters were false. 12 Mot. at 12; see also FAC ¶ 71(a).)5 (See Opp’n to Bua 13 3 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Bua was compensated up to $1,000 for each of the letters. (FAC ¶ 69.) 4 Matin was the CEO and Chairman of the Board of Veltex. (FAC ¶ 5.) Wilshire Equity “was the vehicle that received the inflated, unrestricted and legend free Veltex common stock shares which were then sold to unsuspecting investors through several smaller, regional brokerage accounts in California and in Utah.” (FAC ¶ 66.) Plaintiff alleges that, “[b]ecause Wilshire Equity was wholly owned by Matin, who was also CEO and Chairman of the Board of Veltex, he was deemed to be an ‘affiliate’ of Veltex, and under applicable law . . . the Veltex shares transferred to Wilshire were required to bear a restrictive legend by the transfer agent at the time the shares were issued, unless an attorney certifies that under Regulation D, Rule 504 . . ., the proposed shares are ‘legend free shares.’” (FAC ¶ 67.) 5 The parties differ in their categorization of Plaintiff’s claim. Bua views the claim as being based on his issuance of a false or misleading statement. (See Reply at 5 (“The claim must be pled with specific facts to show a defendant made a false or misleading statement and the defendant had the requisite scienter when he made such statement.”).) Plaintiff views the claim as arising under a “scheme liability” theory. (Opp’n to Bua Mot. at 11.) A defendant may be liable under a “scheme liability” theory where he engaged in a deceptive act as part of a larger scheme to defraud the securities market where that act has the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme. See, e.g., Burnett v. Rowzee, 561 F. Supp. 2d 1120, 1125 (C.D. Cal. 2008). The 8 1 “An attorney who undertakes to make representations to 2 prospective purchasers of securities is under an obligation, imposed 3 by Section 10(b), to tell the truth about those securities.” 4 v. Paul, 547 F.3d 1055, 1063 (9th Cir. 2008). 5 attorneys must have the requisite scienter to be held liable. 6 Scienter exists where there is “a highly unreasonable omission, 7 involving not merely simple, or even inexcusable negligence, but an 8 extreme departure from the standards of ordinary care.” 9 Value Fund, 288 F.3d at 389(quoting Hollinger v. Titan Capital Corp., Thompson Of course, those DSAM Global 10 914 F.2d 1564, 1569 (9th Cir. 1990)). 11 that a lawyer’s reliance on information provided by his client and 12 failure to investigate is probative of scienter only where he knows or 13 has good reason to know that the facts provided are inaccurate. 14 Kline v. First Western Government Sec., Inc., 24 F.3d 480, 486 (3d 15 Cir. 1994) (“When the opinion . . . is based on underlying materials 16 which on their face or under the circumstances suggest that they 17 cannot be relied upon without further inquiry, then the failure to 18 investigate further may ‘support an inference that when the defendant 19 expressed the opinion it had no genuine belief that it had the 20 information on which it could predicate that opinion.’” (quoting 21 Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir. 1985))). 22 The Third Circuit has found Plaintiff has not met that standard. See For example, Plaintiff 23 alleges that “Bua knew, or consciously and recklessly disregarded” the 24 affiliate relationship between Veltex, Matin and Wilshire Equity. 25 (See FAC ¶ 71(a).) Plaintiff argues that such scienter can be 26 27 28 parties do not delineate any difference in the scienter requirement between the two types of claims, and the Court deciphers none. (See June 25, 2010 Minute Order at 4 n.2.) 9 1 inferred because Bua had good reason to distrust his client’s contrary 2 representations in light of the similarities in the signatures on 3 Bua’s paychecks from Veltex and the signature on behalf of Wilshire 4 Equity on Securities Purchase Agreements. 5 theoretically possible that an attorney may have recognized the 6 similarity in signatures on these unrelated documents. 7 fails to provide authority that attorneys are expected to sleuth 8 through seemingly unrelated documents in an attempt to detect 9 inaccuracy in facts provided by their clients.7 10 (See FAC ¶ 71(a).)6 It is But Plaintiff With respect to the alleged misrepresentation that Wilshire 11 Equity was a Texas resident, Bua issued a letter advising that 12 Pennsylvania law had been reinterpreted to provide stricter legend 13 requirements, making Texas law more favorable. 14 41.) 15 504D Letters switched Wilshire Equity from a Pennsylvania to a Texas 16 resident, Plaintiff fails to consider the plausible inference that Bua 17 believed Wilshire Equity actually became a Texas resident in response 18 to his opinion that Texas law was more beneficial than Pennsylvania (See FAC ¶ 71(f), Ex. While Plaintiff points to the fact that Bua’s subsequent Rule 19 20 21 22 23 24 25 26 27 28 6 These were not Matin’s signatures, but allegedly the signature of Mazhar Haque. (FAC ¶ 71(a).) His name is not typed on the signature page. (See FAC Exs. 36-37.) 7 Nor does the Court find persuasive Plaintiff’s allegation that Bua was put on notice by Richard Day of unrelated errors in his letters. There is no indication that Bua failed to correct any errors identified or that he was provided notice that any of the alleged misrepresentations at issue in the pending motion were inaccurate. Plaintiff’s opposition indicates that Bua was “frequently” notified of inaccuracies in his Rule 504D Letters. (See Opp’n to Bua Mot. at 18.) Of the allegedly 33 or more Rule 504D Letters drafted by Bua for Veltex, Plaintiff identified two instances of inaccuracies being pointed out to him. (See FAC ¶¶ 69, 71(b), 71(c).) Plaintiff also alleges an instance in which Bua provided an explanation to Richard Day as to the basis of his opinion. (See FAC ¶ 71(e).) 10 1 law. 2 if a reasonable person would deem the inference of scienter cogent and 3 at least as compelling as any opposing inference one could draw from 4 the facts alleged.” (emphasis added).) 5 explain why Bua should have doubted that Wilshire Equity actually 6 became a Texas resident after he had opined that Texas law was more 7 beneficial.8 8 9 Tellabs, 551 U.S. at 324 (scienter is sufficiently alleged “only Plaintiff fails to adequately The ultimate question on a motion to dismiss is whether the allegations as a whole, including even vague and ambiguous 10 allegations, raise a strong inference of scienter. 11 F.3d at 784. 12 inference of scienter, taking the FAC’s allegations as a whole it 13 still fails to do so. 14 further opportunity to allege this claim against Bua in accord with 15 the pleading requirements of the PSLRA. 16 DISMISSED with leave to amend. 17 18 2. South Ferry, 542 While the FAC moved Plaintiff closer to raising a strong The Court will therefore allow Plaintiff one This claim against Bua is CBNM CBNM’s challenge to the sufficiency of the FAC focuses on whether 19 Plaintiff sufficiently pled falsity or scienter. 20 Plaintiff alleges that CBNM was hired in September 2004 by Veltex to 21 perform an audit for its financial statements as of December 31, 2003. 22 (FAC ¶ 52.) CBNM did in fact perform that audit. (CBNM Mot. at 2-5.) (FAC ¶ 52, Ex. 30.) 23 24 25 26 27 28 8 Indeed, Plaintiff provides little factual support for its apparent contention that Wilshire Equity was not actually a Texas resident at that time. Plaintiff states in a footnote that Wilshire Equity shared the same Texas address as other entities who were issued Veltex unrestricted shares. (See Opp’n to Bua Mot. at 6 n.7; FAC ¶ 71(g).) Plaintiff failed to sufficiently explain why this allegation shows that Wilshire Equity was not a Texas resident and/or why it supports an inference of scienter. 11 1 Plaintiff does not allege that any of the financial information in the 2 financial statements audited by CBNM was false. 3 reported that the financial statements accurately reflected that 4 Veltex had a net loss of $1.8 million. 5 does not dispute the accuracy of that figure. For example, CBNM (See FAC Ex. 30.) Plaintiff Instead, Plaintiff argues that CBNM “falsely represented” that it 6 7 had complied with accepted auditing standards when, in fact, it had 8 not. 9 explain why an outside auditor can be held liable for securities fraud (See Joint Opp’n at 10.) Plaintiff failed to sufficiently 10 based solely on its failure to comply with accounting standards when 11 that failure in no way impacted the substance of the financial 12 information at issue. 13 failed to competently perform its audit as represented, Plaintiff 14 fails to show that they state a claim for securities fraud. 15 While those allegations may show that CBNM Moreover, Plaintiff failed to sufficiently plead scienter. As 16 noted above, scienter exists where there is “a highly unreasonable 17 omission, involving not merely simple, or even inexcusable negligence, 18 but an extreme departure from the standards of ordinary care.” 19 Global Value Fund, 288 F.3d at 389. 20 auditors, the Ninth Circuit has articulated a very high standard: 21 [T]he mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter. Rather, scienter requires more than a misapplication of accounting principles. The plaintiff must prove that the accounting practices were so deficient that the audit amounted to no audit at all, or an egregious refusal to see the obvious, or to investigate the doubtful, or that the accounting judgments which were made were such that no reasonable accountant would have made the same decisions if confronted with the same facts. 22 23 24 25 26 DSAM In analyzing the scienter of 27 DSAM Global Value Fund, 288 F.3d at 390 (quoting In re Software 28 Toolworks, Inc., 50 F.3d 615, 627-28 (9th Cir. 1994)). 12 Plaintiffs 1 “must allege enough information so that a court can discern whether 2 the alleged GAAP violations were minor or technical in nature, or 3 whether they constituted widespread and significant inflation of 4 revenue.” Daou Systems, 411 F.3d at 1017 (internal quotations 5 omitted). In this case, Plaintiff lists alleged accounting violations 6 unaccompanied by any inflation in the revenue figures provided by 7 CBNM. 8 9 This is not sufficient to plead scienter. For these reasons, Plaintiff failed to sufficiently plead this claim against CBNM.9 Accordingly, because Plaintiff has previously 10 amended the complaint as to CBNM, this claim against CBNM is DISMISSED 11 with prejudice. 3. 12 Tahim 13 Plaintiff alleges that Tahim violated the securities laws by 14 issuing an audit report that failed to conform with GAAP standards and 15 was substantially deficient. 16 a threshold matter that the claim is untimely. 17 Claims for security fraud must be brought no later than the earlier of 18 (1) two years after the discovery of the facts constituting the 19 violation; or (2) five years after such violation. 20 1658(b). 21 limitations (subject to tolling principles) and a five-year statute of 22 repose (not subject to tolling principles). (See Joint Opp’n at 7.) Tahim argues as (Tahim Mot. at 3-4.) 28 U.S.C. § Thus, the securities laws include both a two-year statute of See Lampf, Pleva, 23 24 25 26 27 28 9 Plaintiff also argues that CBNM may be liable under a scheme liability theory. (See Joint Opp’n at 15-16.) As noted above, scheme liability requires allegations of a deceptive act as part of a larger scheme to defraud the securities market where that act has the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme. Burnett, 561 F. Supp. 2d at 1125. Plaintiff has failed to allege with specificity an actionable deceptive act purportedly engaged in by CBNM. Plaintiff also failed to allege sufficient facts supporting a strong inference of scienter. 13 1 Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991). 2 Here Plaintiff alleges that Tahim issued her audit report on January 3 6, 2004. 4 later, on March 10, 2010. 5 (FAC ¶ 49.) The Complaint was filed more than six years (Complaint (Docket # 1).)10 Plaintiff’s opposition ignores Tahim’s argument that the claim is 6 barred by the five-year repose provision. (See Joint Opp’n at 16 7 (addressing only the two-year statute of limitations, not the five- 8 year statute of repose).) 9 run on the date of the alleged false representation. The five-year statute of repose begins to In re Juniper 10 Networks, Inc. Sec. Litig., 542 F. Supp. 2d 1037, 1051 (N.D. Cal. 11 2008); see also Lampf, 501 U.S. at 364 (calculating repose period from 12 date of alleged misrepresentations). 13 a separate violation, so the five-year period runs separately for each 14 violation when it occurs. 15 re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 1014 (N.D. Cal. 16 2007)). 17 made prior to the five-year period under a theory of a continuing 18 wrong. 19 wrongdoing by Tahim is untimely, and Plaintiff provided no reason to 20 find otherwise. 21 that could be made to make the claim timely. 22 Plaintiff cannot amend to avoid the five-year statute of repose, this 23 claim against Tahim is DISMISSED with prejudice. 25 Juniper, 542 F. Supp. 2d at 1051 (citing In Plaintiffs may not recover for alleged misrepresentations Id. 4. 24 Each false statement constitutes Accordingly, on its face, the FAC’s allegation of Nor does Plaintiff identify any factual allegations Accordingly, because Richard Day, Patrick Day and ARTCO Richard Day, Patrick Day and ARTCO (collectively, the “Day 26 27 28 10 By March 10, 2005 (five years before the filing of the complaint), CBNM was responsible for auditing Plaintiff. (See, e.g., FAC ¶ ¶ 48(n), 51-52.) 14 1 Defendants”) also move to dismiss the § 10 claim brought against them. 2 The Day Defendants’ alleged involvement in the securities scheme 3 differs from the accountant and attorney Defendants discussed above. 4 Plaintiff alleges that ARTCO, Patrick Day and Richard Day issued 5 legend free shares of Veltex stock: 6 7 8 9 10 11 12 13 14 ARTCO, which operated as Veltex’ [sic] share transfer agent, financially benefitted from each such transfer it effected. Defendant Patrick Day, who is the President of ARTCO (and whose father, Richard Day, is the majority owner of ARTCO, and had been one of Veltex’s outside securities attorneys), was also a Director of Veltex at the same time ARTCO served as Veltex’ [sic] share transfer agent. Upon receipt of the “authorization letter” from Matin or other of the Management Defendants, ARTCO would then issue the legend free and unrestricted shares to Wilshire Equity or one of the other entities, and they would be sold directly on the open market to unsuspecting members of the general investing public, or in turn transferred to other nominees controlled by Matin and the other Management Defendants, who then sold them to the public. 15 (FAC ¶ 72; see also FAC ¶¶ 16-18.) 16 Plaintiff also alleges that the various defendants in Plaintiff’s 17 management, including Patrick Day, engaged in various other 18 misconduct. 19 Richard Day contacted Bua on at least three occasions to point out 20 inaccuracies in his Rule 504D Letters or request an explanation for 21 the basis of Bua’s opinion. 22 Although not specified by name, (See, e.g., FAC ¶¶ 32-34.) Plaintiff also alleges that (See FAC ¶¶ 71(b), (c), (e).) As with the accountants and attorney Defendants, the Day 23 Defendants argue that the § 10 claim against them has not been 24 sufficiently pled under the PSLRA. 25 26 a. Patrick Day Plaintiff argues that liability attaches for Patrick Day based on 27 material misrepresentations and omissions in press releases and other 28 statements issued while he was a board member of Veltex. 15 (See Opp’n 1 to Day Mot. at 14.) 2 sufficiency of the FAC’s allegations on scienter. 3 that Patrick Day “was able to, and did, control the content” of those 4 press releases and other statements. 5 support of that proposition its allegation that all “Management 6 Defendants, because of their positions as Officers and/or Directors of 7 Veltex, were able to, and did, control the content of press releases 8 and other public statements pertaining to Veltex.” 9 Day Mot. at 6.) 10 Patrick Day’s motion challenges, inter alia, the (See id.) Plaintiff argues Plaintiff cites for (FAC ¶ 2; Opp’n to Even assuming such a fact was pled sufficiently, Plaintiff failed 11 to properly plead scienter. 12 scienter exists because Patrick Day was a Director of Veltex and 13 President of ARTCO, so he was involved “in the day-to-day operations 14 of both.” 15 allegations that management had an important role in the company but 16 does not contain additional detailed allegations about the defendants’ 17 actual exposure to information, it will usually fall short of the 18 PLSRA standard.” 19 ‘corporate management’s general awareness of the day-to-day workings 20 of the company’s business does not establish scienter–at least absent 21 some additional allegation of specific information conveyed to 22 management and related to the fraud’ or other allegations supporting 23 scienter.” 24 been pled in the FAC. 25 Plaintiff argues a strong inference of (Opp’n to Day Mot. at 16.) “Where a complaint relies on South Ferry, 542 F.3d at 784. Id. at 784-85. “As a general matter, That type of additional allegation has not As an initial matter, Plaintiff failed to identify detailed 26 factual allegations showing that Patrick Day had an awareness of the 27 day-to-day operation of Veltex. 28 sufficiently pled in the FAC, however, it is not sufficient to Even assuming that fact was 16 1 establish scienter under the PSLRA because the FAC does not include 2 additional allegations showing information conveyed to Patrick Day 3 concerning the fraud or other allegations supporting scienter. Accordingly, this claim against Patrick Day is DISMISSED without 4 5 prejudice. c. 6 Richard Day Plaintiff’s opposition asserts that Richard Day made material 7 8 omissions in authorizing the improper issuance of millions of shares 9 of Veltex stock without a restrictive legend based on Bua’s erroneous 10 Rule 504D Letters. 11 Richard Day’s scienter, Plaintiff argues that a strong inference 12 arises because (1) he corrected some errors in Bua’s Rule 504D Letters 13 and (2) he served as a securities attorney for Veltex in 2006. 14 id. at 16.) 15 of the alleged fraud and had contacted Bua to ensure that the Rule 16 504D Letters were free from glaring defects “in an effort to make 17 ARTCO’s distribution of Veltex stocks appear legitimate.” 18 7.) 19 Day informed Bua of inaccuracies in his letters because he wanted and 20 expected the letters on which he relied to be accurate. 21 (See Opp’n to Day Mot. at 14-15.) With respect to (See Plaintiff infers from these facts that Richard Day knew (See id. at Plaintiff ignores the competing, plausible inference that Richard As the Supreme Court has recognized, the Court does not determine 22 the strength of inferences in a vacuum without considering plausible, 23 nonculpable explanations for a defendant’s conduct. 24 at 323-24. 25 as least as compelling as the harmless competing inference. 26 Considering all of the allegations in the FAC, the Court does not 27 believe that Plaintiff’s inference is as compelling and, therefore, 28 finds Richard Day’s scienter to be insufficiently pled. Tellabs, 551 U.S. Plaintiff fails to explain why its nefarious inference is 17 Id. at 324 1 (scienter is sufficiently alleged “only if a reasonable person would 2 deem the inference of scienter cogent and at least as compelling as 3 any opposing inference one could draw from the facts alleged.” 4 (emphasis added).) 5 6 Accordingly, the Court DISMISSES without prejudice this claim against him.11 d. 7 8 9 ARTCO Plaintiff does not identify any basis to hold ARTCO liable separate from the allegations against Patrick and Richard Day. (See, 10 e.g., Opp’n to Day Mot. at 14-15 (analyzing purported 11 misrepresentations and omissions of Richard and Patrick Day with no 12 reference to other factual allegations concerning ARTCO).) 13 Accordingly, the claim against ARTCO fails for the reasons identified 14 above and is DISMISSED without prejudice.12 15 D. 16 CBNM and Tahim request that the Court dismiss the California 17 Sixth and Seventh Causes of Action state law claims against them. (CBNM Mot. at 10-11; Tahim Mot. at 18 11 19 20 21 22 23 24 25 26 27 28 Plaintiff lastly alleges that it sufficiently pled scheme liability as to the Day Defendants based on the allegations discussed above, as well as the allegation that Patrick Day signed two authorizations for the issuance of shares of Veltex stock pursuant to Rule 504D. (See Opp’n to Day Mot. at 11; FAC Ex. 34 at 200, 219.) As Plaintiff acknowledges, a scheme liability claim requires a showing of scienter, among other elements. (See Opp’n to Day Mot. at 12 n.3.) Scienter has not been sufficiently pled. 12 The Court notes that some of Plaintiff’s arguments regarding the Day Defendants are based on facts not contained in the FAC but purportedly supported by evidence provided in declaration form. The Day Defendants call into doubt the veracity of some of that evidence by, for example, noting that some of the documents appear to have been forged or altered. The Court expresses no opinion at this time regarding these additional factual allegations and accompanying evidentiary support. In light of the Court’s granting Plaintiff leave to amend, however, the Court reminds Plaintiff of its Rule 11(b) obligations with respect to any new allegations pled. 18 1 12.) The Court may decline to exercise supplemental jurisdiction over 2 state claims following dismissal of all federal claims. 3 § 1367(c). See 28 U.S.C. With respect to Tahim, the Court has dismissed all federal claims 4 5 against her with prejudice and declines to exercise supplemental 6 jurisdiction as to the state law claims against her. 7 state law claims against Tahim are DISMISSED without prejudice. With respect to CBNM, the Court did not dismiss the § 12 claim 8 9 Accordingly, the against CBNM with prejudice. Accordingly, the Court finds its request 10 to dismiss the state law claims on this ground premature. The Court 11 defers ruling on this argument until such time as Plaintiff pleads a 12 viable federal claim against CBNM or the Court dismisses the federal 13 claims against CBNM with prejudice.13 14 15 16 IV. CONCLUSION For the reasons stated above, the pending motions to dismiss are 17 GRANTED. The § 12 claim is dismissed without prejudice as to Bua, 18 CBNM, Patrick Day, Richard Day and ARTCO, and is dismissed with 19 prejudice as to Tahim. 20 as to all moving Defendants. 21 prejudice as to Bua, Patrick Day, Richard Day and ARTCO, and is 22 dismissed with prejudice as to Tahim and CBNM. 23 against Tahim are dismissed without prejudice. The § 17(a) claim is dismissed with prejudice The § 10 claim is dismissed without The state law claims 24 25 13 26 27 28 CBNM also substantively challenges the sufficiency of the allegations to state claims under state law. (CBNM Mot. at 6-10.) The Court will rule on these arguments only if Plaintiff has sufficiently pled a federal claim against CBNM or if the Court determines that it should exercise supplemental jurisdiction over these state law claims despite the absence of a federal claim. 19 1 2 Any amended complaint must be filed no later than October 18, 2010.14 3 4 IT IS SO ORDERED. 5 6 DATED: 9/27/10 7 _______________________________ 8 AUDREY B. COLLINS 9 CHIEF UNITED STATES DISTRICT JUDGE 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 14 26 27 28 In its reply brief, CBNM requests that the Court make findings regarding compliance with Rule 11(b). (CBNM Reply at 12.) As this was raised for the first time in reply, the Court does not rule on it now. Moreover, CBNM’s request appears premature as the statute indicates that such findings should be made “upon final adjudication of the action.” 15 U.S.C. 78u-4(c)(1). 20
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