The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge
ORDER (1) GRANTING IN PART, DENYING IN PART GEORGE ART BISHOP'S MOTION FOR PARTIAL SUMMARY JUDGMENT, (2) GRANTING IN PART, DENYING IN PART JOHN FLAXEL'S MOTION FOR PARTIAL SUMMARY JUDGMENT, (3) GRANTING IN PART, DENYING IN PART KEN MARINAI'S MOTION FOR PARTIAL SUMMARY JUDGMENT, and (4) GRANTING DEFENDANT LARRY JOHNSON'S MOTION FOR EXTENSION OF TIME TO FILE EXHIBITS (Doc. Nos. 219, 220, 221, & 260)
BACKGROUND OF THE PRESENT MOTIONS
On March 31, 2007, plaintiffs George Art Bishop, John Flaxel, and Ken Marinai (together, "moving plaintiffs") each filed a motion for partial summary judgment. (Doc. Nos. 219, 220, & 221.) Each plaintiff's motion included a thirty-four page memorandum of points and authorities, and the moving plaintiffs jointly lodged 163 exhibits. (Doc. Nos. 223-31.) Those motions were initially set for hearing on May 29, 2007. This hearing date was thrice continued*fn1 -first when attorney John Dratz, Jr. withdrew as counsel for defendants Larry Johnson; Soil Savers, Inc.; Soil Savers of New York, Inc.; Soil Savers of Florida, Inc.; Soil Savers of Florida, LLC; Soil Savers Technologies, Inc.; SSI Holdings, Inc.; and RTJ Enterprises Inc. ("Johnson defendants"*fn2 ) (Doc. No. 239), the second time upon the ex parte motion of plaintiffs' counsel (Doc. No. 241), and then a third time upon the ex parte motion of Larry Johnson for an extension of time to file his opposition memorandum (Doc. No. 250). On July 26, 2007, because, inter alia, Mr. Johnson did not timely submit evidence in support of his opposition, the motions for partial summary judgment were taken under submission, without appearances or oral argument.*fn3 (Doc. No. 258.)
After reassignment, this Court set a hearing on the motions for partial summary judgment for November 16, 2007. Mr. Johnson appeared telephonically. The Court invited Mr. Johnson to supplement his filings in opposition to summary judgment, but he declined.*fn4 The Court also provided Mr. Johnson a month to retain counsel, but no licensed attorney entered an appearance for Johnson or the entity defendants. By written Order, the Court again submitted the matter on December 17, 2007 and indicated that it would rule on the motions on or before January 25, 2008.
Generally, this action arises from alleged misrepresentations in the personal communications of Larry Johnson and literature concerning the assets and business prospects of three business entities: Soil Savers, Fuel FX, Soil Savers of New York
Soil Savers, Inc. ("Soil Savers") was formed as a Texas corporation on March 30, 2001. (SSUF No. 1.) Mr. Johnson is the chairman, president, and CEO of Soil Savers. (SSUF No. 2; see Lodgment Exhibit 2.) In a promotional booklet received by plaintiffs Marinai and Bishop*fn6 , Soil Savers represented that it had patented technologies for soil and water remediation. (SSUF No. 154.) The booklet represented that the estimated value of its patents exceeded $200 million dollars. (SSUF No. 155.) Johnson did not, in fact, know the value of the patents and said that it was "like appraising water." (SSUF No. 158 (quoting Lodgment Exhibit 7, at 169:6-8).) The booklet further represented that Johnson's business partner, Mr. William Rippetoe, had filed eight patent applications in the past year*fn7 . (SSUF No. 159.) Since Soil Savers's incorporation, Rippetoe did not file actual patent applications, but instead filed provisional patent applications*fn8 and disclosure documents*fn9 . (SSUF No. 160.)
The promotional booklet projected that Soil Savers would net millions of dollars of profit in 2004-06. (SSUF No. 161.) However, Soil Savers never operated at an annual profit and, in fact, lost $2 million in 2002-03. (SSUF Nos. 162, 274.)
In addition to the promotional booklet, plaintiffs Marinai and Flaxel received memoranda that Johnson signed. (SSUF No. 165; see Marinai Decla. ¶ 10; Flaxel Decla. ¶¶ 14-15.) The April 8, 2003 memorandum represented that Soil Savers held provisional patents worth $50 million, in addition to $118 million of value not recorded on its books. (Lodgment Exhibit 76.) The memorandum further represented that Soil Savers of New York had $12 million in projects scheduled for the next twelve to eighteen months. (SSUF No. 174.) As discussed infra, Soil Savers of New York went out of business after three months, having never completed a project. The second memorandum, dated April 17, 2003, represented that Soil Savers would process three million tons of soil in fiscal year 2004. (Lodgment Exhibit 99.) The memo concluded, "Once this is achieved an investor could reasonably expect $750,000 on an annual basis." (Id.)
In May 2003, Johnson emailed Marinai twice. A May 14, 2003 email represented that, although not reflected on the balance sheets, the value of the patents was at least $50 million. (Lodgment Exhibit 115.) Johnson attached financial statements, including an income statement that showed net income of approximately $1.67 million dollars as of May 14, 2003. (Id.) The second email, dated May 19, 2003, represented that Soil Savers would have a project in Kuwait by year's end. (Lodgment Exhibit 116.) The record provides no indication that the project in Kuwait actually materialized.
In conjunction with his purchase of Soil Savers stock, Flaxel requested financial statements. (SSUF No. 222.) The income statement that Johnson faxed to Flaxel reported a net income of approximately $1.65 million as of May 2, 2003. (Lodgment Exhibit 103.) Flaxel attended a Soil Savers board meeting on May 8, 2003. (Doc. No. 225.) While there, Johnson represented, inter alia, that Soil Savers had total ownership of its patented technologies. (Doc. No. 226; see Flaxel Decla. ¶¶ 14-15.)
In 2004, Soil Savers began negotiating with Zoom Developers USA, LLC ("Zoom")*fn10 for a worldwide license of Soil Savers technology. (SSUF No. 256.) This transaction involved the creation of various wholly owned subsidiaries to transfer Soil Savers technologies. (SSUF Nos. 259-63.) Soil Savers announced the transaction in a September 25, 2004 press release and October 7, 2004 investment report. (SSUF Nos. 270, 274.) The moving plaintiffs knew nothing about the Zoom deal before Soil Savers issued these documents. (SSUF Nos. 271-73.) The investor report was also the first time that the moving plaintiffs learned of the extent of Soil Savers's losses in the 2002-03 fiscal years. (SSUF Nos. 275-77.)
From 2003-05, Soil Savers transferred approximately $3.2 million*fn11 to Johnson or entities wholly owned by Johnson, which he used for conducting personal business. (Chelsea Decla. ¶ 38.) This includes amounts from both Soil Savers bank accounts and a Zoom account opened in the name of Soil Savers, LLC (a holding company). (SSUF Nos. 278-80, 283-309.)
In April/May 2003,*fn12 Marinai purchased $800 thousand of Soil Savers stock. (SSUF No. 242.) Marinai purchased an additional $200 thousand of Soil Savers stock on August 26, 2003. (SSUF No. 247.) Marinai subsequently received royalty checks of $2,265 and $2,966.35 (SSUF No. 255.)
On April 30, 2003, Flaxel signed subscription and investment agreements to purchase $500 thousand of Soil Savers stock. (SSUF No. 233.) However, payment for Flaxel's shares was not wired until June 3, 2003, after he had attended the May 2003 board meeting. (SSUF No. 235.) Flaxel never received any royalties from Soil Savers. (SSUF No. 254.)
On August 8, 2002, Bishops purchased $70 thousand of Soil Savers stock. (SSUF No. 205.) Bishop never received any royalties from Soil Savers. (SSUF No. 211.) Bishop received two additional stock certificates, each for 100,000 shares of Soil Savers stock, because the Board of Directors voted for a forward split of the stock. (SSUF No. 212.)
Fuel FX, Inc. ("Fuel FX") was formed as a Texas corporation on June 18, 2001. (SSUF No. 3.) Mr. Johnson is the chairman, president, and CFO of Fuel FX. (SSUF No. 4; see also Lodgment Exhibit No. 3.) In a marketing booklet received by the moving plaintiffs, Fuel FX represented that it had patented technologies for fuel treatment to improve gas mileage and lower emissions in diesel- and gas-powered engines. (SSUF No. 53.) The booklet further represented that Johnson's business partner, Mr. William Rippetoe, had filed a patent application for the Fuel FX technology, in addition to the more than fifty patents that he already held. (SSUF No. 54.) In fact, Rippetoe held only six patents, and none of those were granted during the existence of Soil Savers and Fuel FX. (SSUF No. 18.) Since Fuel FX's incorporation, Rippetoe did not file actual patent applications, but instead filed provisional patent applications and disclosure documents. (SSUF Nos. 18-19; see also Pls. Joint Surreply at 3, 5, & Exhibit 2.)
The marketing booklet also discussed Fuel FX's business purposes. It stated that Fuel FX, having completed research and field trials on its primary product, "has now aggressively moved to marketing and production." (SSUF No. 54 (quoting Lodgment Exhibit 5, at 018763).) The booklet indicated that Fuel FX would purchase a demonstration trailer costing more than $180,000, but that purchase was never made. (SSUF Nos. 72-73.) The booklet offered specific prognostications concerning the number of units that Fuel FX expected to sell and revenues that it expected to obtain, while offering investors a royalty for each unit sold. (Doc. Nos. 65, 70, & 76.) However, Johnson never expected Fuel FX to be profitable because it was intended to be a research and development enterprise. (SSUF Nos. 61, 71.)
In addition to the Fuel FX booklet, plaintiffs Flaxel and Marinai received a letter on company letterhead entitled "Re: Fuel FX Reactor Information." (SSUF Nos. 98, 113.) Mike Parsons*fn13 wrote in each letter that an investor could expect a fifteen-fold return on an investment of $50,000. (SSUF Nos. 99, 114.)
From September 2002 to April 2004, Fuel FX issued more than $2 million of checks to Soil Savers, in addition to other checks written to Johnson and corporate entities controlled by Johnson. (SSUF Nos. 144-149.) Rather than the $8.3 million in gross sales predicted by the advertising booklet, Fuel FX's actual sales in 2003 amounted to slightly over $80 thousand. (SSUF No. 150.) In February 16, 2004, Johnson sold Soil Savers's shares in Fuel FX to Mr. Erik Ulsteen for less than $500,000.*fn14 (SSUF Nos. 134-35.) Ulsteen then wrote to the other shareholders and demanded that they give up their shares. (SSUF No. 138.)
On December 11, 2002, plaintiff Marinai purchased $50 thousand of Fuel FX stock. (SSUF No. 119.) Marinai received royalty payments of $108 and $204.33 (SSUF Nos. 123-24) and also reviewed the February 2003 activity report concerning the installation of one unit and the scheduling of numerous demonstrations (SSUF Nos. 125-26). Marinai then purchased an additional $100 thousand of Fuel FX stock on March 15, 2003. (SSUF No. 128.) Marinai received one additional royalty check for $638.01. (SSUF No. 129.)
On December 10, 2002, plaintiff Flaxel purchased $50 thousand of Fuel FX stock. (SSUF No. 104.) Flaxel received royalty payments of $100.08 and $408.66. (SSUF No. 105.) Flaxel then purchased an additional $50 thousand of Fuel FX stock on February 27, 2003. (SSUF No. 107.) Flaxel received one additional royalty check for $212.67. (SSUF No. 109.)
In connection with the purchase of Soil Savers of New York stock, discussed infra,*fn15
Bishop purchased $112.5 thousand of Fuel FX stock in June 2002. (SSUF Nos. 92, 94.) Bishop subsequently obtained royalty checks in the amounts of $1,715, $472.50, and $857.50. (SSUF No. 95.)
C. Soil Savers of New York
With respect to Soil Savers of New York ("SSNY"), Johnson emailed plaintiff Bishop to offer purchase of its "outstanding stock" a week before the company was incorporated in New York in May 2002. (SSUF Nos. 27, 29.) Johnson promised Bishop a $1.00 per ton royalty on soil processed in specific states in the Northeastern and mid-Atlantic regions, as well as an annual return that would more than double, perhaps even quintuple, Bishop's original proposed investment of $200,000. (SSUF No. 27.) Bishop made the solicited investment through his IRA account on June 19, 2002.*fn16 (SSUF No. 41.) Soil Savers was the only other owner of SSNY. (SSUF No. 38.) SSNY went out of business after three months when its first and only project at John F. Kennedy Airport failed in the demonstration phase. (SSUF No. 42.) Bishop never received any royalties or other form of return from his ownership of SSNY stock. (SSUF No. 49.)
SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate under Rule 56(c) where the moving party demonstrates the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute about a material fact is genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248.
A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to make a showing sufficient to establish an element essential to that party's case on which that party will bear the burden of proof at trial. Id. at 322-23.
If the moving party meets this initial burden, the nonmoving party cannot defeat summary judgment merely by demonstrating "that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); Triton Energy Corp. v. Square D Co., 68 F.3d 1216, 1221 (9th Cir. 1995) (citing Anderson, 477 U.S. at 252) ("The mere existence of a scintilla of evidence in support of the nonmoving party's position is not sufficient."). Rather, the nonmoving party must "go beyond the pleadings and by her own affidavits, or by 'the depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (quoting Fed. R. Civ. P. 56(e)). In reviewing the record, the Court is not obligated "to scour the record in search of a genuine issue of triable fact." Keenan v. Allen, 91 F.3d 1275, 1279 (9th Cir. 1996) (internal citation omitted).
A. Federal Securities Fraud
Section 10(b) of the Securities Exchange Act prohibits the "use or employ, in connection with the purchase or sale of any security, . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . ."
15 U.S.C. § 78j(b). In accordance with this statutory authority, the Securities Exchange Commission promulgated Rule 10b-5, which creates a private cause of action for investors harmed by materially false or misleading statements. 17 C.F.R. § 240.10b-5. Rule 10b-5 makes it unlawful for any person "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made[,] in light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." Id. The elements of a § 10(b) claim are (1) a material misrepresentation or omission, (2) scienter, i.e., a wrongful state of mind, (3) a connection to the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss.*fn17 Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).
Section 20 of the Securities Exchange Act also provides for "controlling person" liability: Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable[.]
15 U.S.C. § 78t(a). The statute excludes controlling persons who acted in good faith and did not participate in the violation. Id. To make the prima facie case for controlling person liability, "a plaintiff must prove: (1) 'a primary violation of federal securities law' and (2) 'that the defendant exercised actual power or control over the primary violator.'" No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003) (quoting Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000)). The regulations define "control" as "the power to direct or cause the ...