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Olenicoff v. UBS AG

February 24, 2009


The opinion of the court was delivered by: Andrew J. Guilford United States District Judge


Before the Court is a Motion to Dismiss or Transfer Based on Improper Venue ("Motion") filed by Defendants Synthesis Energy Systems, Inc. ("SES"), Michael Storey ("Storey"), Timothy Vail ("Vail"), and David Eichinger ("Eichinger") (collectively "SES Defendants"). After considering all papers and arguments submitted, the Courts DENIES in part and GRANTS in part the Motion, with leave to amend.


This Motion to Dismiss focuses on claims for securities fraud, RICO violations, civil conspiracy, fraud, and conversion based on an alleged complex scheme to defraud. The following facts are taken from Plaintiffs' First Amended Complaint ("FAC"), and for the purposes of this motion, the Court assumes them to be true.

Plaintiff Igor M. Olenicoff ("Olenicoff") is a commercial real estate developer and the President of Plaintiff Olen Properties, Corp. ("Olen"). Plaintiffs name some thirty defendants in this case, all of whom are alleged to have conspired in a "carefully crafted investment scheme" to defraud Plaintiffs, thousands of other investors, and the United States Treasury Department out of hundreds of millions of dollars in fees, costs, and taxes. (FAC ¶ 1.)

In June 2006, Plaintiffs' investment portfolio was under the control of Union Charter, a corporate finance entity with business offices in the United States and Switzerland. Defendants SES and Storey had direct relationships with Union Charter, as Storey had served on the board of directors at Union Charter. (FAC ¶ 83.) When SES was created, Union Charter helped issue 2,000,000 shares of common stock through private placements. (FAC ¶ 83.) Defendants Vail, Echinger, and Storey were directors at SES by the end of 2005. (FAC ¶ 83.) In May 2006, Vail became President and CEO of SES, and Eichinger became CFO and Senior Vice President of Corporate Development of SES. (FAC ¶ 83.) Each of these defendants owns at least 1 million shares of SES and is "an integral part of the company's operations." (FAC ¶ 83.)

In 2005 or 2006, Union Charter, the SES Defendants, and other defendants named in this case "devised a plan to benefit the SES Defendants while concurrently benefitting all parties involved." (FAC ¶ 84.) Defendants Storey and David Schwedel ("Schwedel") had served together as officers and directors of Union Charter and thus had knowledge of Plaintiffs' assets. Schwedel and Storey "agreed to forego the investment parameters acknowledged by Union Charter to provide SES with much-needed investment capital." (FAC ¶ 84.) In or around June 2006, the SES Defendants, with other named defendants in this case, conspired together and caused to be formed a shell Panamanian company named Teflomi Investment and Trade, Inc. ("Teflomi"). (FAC ¶ 84.) That same month, other named defendants in this case, "with the full knowledge of each of the SES Defendants," caused five million dollars to be transferred from one of Olenicoff's accounts to Teflomi. (FAC ¶ 85.) As part of the scheme, Teflomi then, with the full knowledge of Storey, Vail, and Eichinger, transferred the five million dollars to SES in exchange for one million shares of SES stock. (FAC ¶ 85.) SES did not have publicly traded shares at that time, and the stock certificate was a "lettered" stock that could not be sold under the securities laws. (FAC ¶ 85.) The five million was used for the "financing of the SES operation including funding salaries of individual defendants." (FAC ¶ 85.) In exchange for the transactions, SES paid Union Charter and others a finder's fee of $1.4 million. (FAC ¶ 86.) Defendants purposefully and intentionally hid this fraud and self-dealing from Plaintiffs by concealing the true names of the securities on periodic statements sent to Olen's Orange County, California office. (FAC ¶ 86.)

In or around May 2008, Olenicoff learned that the Teflomi shares were non-existent. Olenicoff immediately contacted the SES Defendants from Olen's Orange County, California office to demand return of the converted funds. (FAC ¶ 87.) The SES Defendants refused to return Plaintiffs' funds that had been diverted to SES, but quickly reissued the one million shares that had previously been registered to Teflomi to Igor Olenicoff as free trading stock. (FAC ¶ 87.) "The re-issuance of stock happened swiftly and no documentation was requested by anyone at SES to demonstrate that Olen or Mr. Olenicoff had ownership rights to the shares." (FAC ¶ 87.) The SES Defendants then delivered those shares to Olen's Orange County, California office. (FAC ¶ 87.)

Plaintiffs state a total of twenty-two claims against the various defendants. Ten of those claims are brought against the SES Defendants: Plaintiffs' seventh claim for fraud in connection with the purchase or sale of securities, eighth claim for violations of Sections 25401 and 25501 of the California Corporations Code, tenth and eleventh claims for violations of RICO, fourteenth claim for civil conspiracy, fifteenth claim for unfair business practices, eighteenth claim for conversion, twentieth claim for unjust enrichment/constructive trust, twenty-first claim for accounting, and twenty-second claim for declaratory relief. Four claims are brought against Defendant Storey individually: Plaintiffs' fourth claim for fraudulent misrepresentation, fifth claim for constructive fraud, sixth claim for negligent misrepresentation, and ninth claim for breach of fiduciary duty. The SES Defendants first argue that venue in this district is improper as to the claims against them and move for dismissal or transfer. The SES Defendants then argue that seven of Plaintiffs' claims against the SES Defendants and all of the claims against Storey individually should be dismissed for failure to state a claim.


Under Federal Rule of Civil Procedure 12(b)(6), acomplaint must be dismissed when a plaintiff's allegations fail to state a claim upon which relief can be granted. Fed R. Civ. P. 12(b)(6). Rule 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed R. Civ. P. 8(a)(2). "[O]rdinary pleading rules are not meant to impose a great burden upon a plaintiff." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 347 (2005). "Specific facts are not necessary; the statement need only 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Erickson v. Pardus, 127 S.Ct. 2197, 2200 (2007) (per curiam) (quoting Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964 (2007)). Thus, a complaint may not be dismissed for failure to state a claim where the allegations plausibly show "that the pleader is entitled to relief." Bell Atlantic, 127 S.Ct. at 1965. Conversely, a complaint should be dismissed for failure to state a claim where the factual allegations do not raise the "right of relief above the speculative level." Id.

In deciding a 12(b)(6) motion, the Court must accept as true all factual allegations in the complaint and must draw all reasonable inferences from those allegations, construing the complaint in the light most favorable to the plaintiff. Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667, 670 (9th Cir. 1993); see also Enesco Corp v. Price/Costco, Inc., 146 F.3d 1083, 1085 (9th Cir. 1988). However, courts are not required "to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).

Fraud claims must meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires enough specificity to give a defendant notice of the particular misconduct to be able to defend against the charge. Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001) (citation omitted). To satisfy this specificity requirement, "the who, what, when, where, and how" of the misconduct must be alleged. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997) (internal quotation marks omitted). Thus, factual allegations must include "the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007).

Dismissal under Rule 12(b)(6) without leave to amend is appropriate only when the Court is satisfied that the deficiencies of the complaint could not possibly be cured by amendment. See Jackson v. Carey, 353 F.3d 750, 758 (9th Cir. 2003) (citing Chang v. Chen, 80 F.3d 1293, 1296 (9th Cir. 1996)); See also Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000).


The SES Defendants request that the Court take judicial notice of two documents in support of the Motion to Dismiss: (1) a Subscription Agreement dated June 9, 2006 and signed by Teflomi, Union Charter, and SES through Vail; and (2) the Certificate of Incorporation of SES, filed with the Delaware Secretary of State on or about June 27, 2005. In its Opposition to the Motion, Plaintiffs request that the Court take judicial notice of certain portions of Regulation D of the 1933 Securities Act, 17 C.F.R. § 230.501-506.

Under Federal Rule of Evidence 201, "[a] judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. Facts subject to judicial notice may be considered on a motion to dismiss. Mullis v. United States Bankruptcy Ct., 828 F.2d 1385, 1388 (9th Cir. 1987). The Court finds that both the Certificate of Incorporation and Regulation D are "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." The requests for judicial notice of those documents are GRANTED. The Subscription Agreement is referenced in the FAC, and the Court may take judicial notice of the agreement under the "incorporation by reference" doctrine. See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) ("documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss"). Plaintiffs do not appear to challenge the authenticity of the Subscription Agreement. Defendants' request that the Court take judicial notice of the Subscription Agreement is GRANTED.



The SES Defendants first argue that venue is improper in this district and request that the Court dismiss the claims against them or, alternatively, sever the claims and transfer them to the Southern District of Texas. Analysis of the venue issue is difficult now because the FAC is likely to be amended. To assist counsel, the Court provides the following analysis, and will permit other attacks on venue based on the state of the pleadings in the future.

Due process requires that a defendant have certain minimum contacts with a forum. See Int'l Shoe Co v. Washington, 326 U.S. 310, 316 (1945). Minimum contacts can be established by such minimal acts as the delivery of a contract, the mailing of insurance premiums, or phone calls and trips to a particular forum. See McGee v. Int'l Life Ins. Co., 355 U.S. 220, 223 (1957); Sher v. Johnson, 911 F.2d 1357, 1363-64 (9th Cir. 1990). Any act by a defendant in which it purposefully directs its activities into a particular forum can subject it to personal jurisdiction in the forum. Venue is proper in a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred. 28 U.S.C. § 1391(b). In securities actions, venue is proper in any district where any act or transaction constituting the violation occurred. See 15 U.S.C. § 78aa. Further, "under the co-conspirator venue theory, where an action is brought against multiple defendants alleging a common scheme of acts ...

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