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Collins v. Winex Investments

March 27, 2009


The opinion of the court was delivered by: M. James Lorenz United States District Court Judge


Pending before the court is Defendants' motion to dismiss portions of the first amended complaint. For the reasons which follow, the motion is GRANTED IN PART AND DENIED IN PART. Plaintiffs are granted LEAVE TO AMEND.

Plaintiffs purchased limited liability company units in Defendant Winex Investments, LLC ("Winex"). At a January 29, 2007 meeting, Defendant Emilio Pineda persuaded Plaintiffs to refinance their home to raise the funds to invest in Winex. (Compl. at 4.) Defendant William Krusheski, Winex' Chief Financial Officer "guaranteed" Plaintiffs would receive a twenty percent return on their investment. (Id.) On January 31, Mr. Pineda assisted Plaintiffs in refinancing their home by pre-qualifying them for a high-interest adjustable rate loan. (Id.) In March 2007, Messrs. Pineda and Krusheski provided Plaintiffs with the Winex Private Placement Memorandum. (Id. at 5.) It stated that Sonador Capital Management, Inc. ("Sonador"), the private trading firm providing investment management services, would use "defensive measures," including "[c]onstant review and [a]nalysis of [t]rading and [p]ortfolio [r]isk exposure" and "[c]onservative policies on [m]argin." (Id. at 4; see also id. at 5.) In addition, it stated that Plaintiffs would have daily internet access to their account. (Id at 5.) The latter representation was also made to Plaintiffs by Mr. Krusheski in several letters, including a May 18, 2007 letter, and by Messrs. Pineda and Krusheski in meetings with Plaintiffs in January 2007, including the January 29, 2007 meeting. (Id.)

Based on Messrs. Pineda's and Krusheski's representations and advice, Plaintiffs were persuaded to invest $50,000 in Winex. (Compl. at 4.) However, Plaintiffs were not provided internet access to their account, and the promised conservative policies were not followed. (Id. at 4, 5.) Winex lost over eighty percent of Plaintiffs' investment. (Id. at 4-5.) When Plaintiffs requested to withdraw their investment, Defendants repeatedly refused, and on one occasion required Plaintiffs to sign a waiver releasing them from all wrongdoing as a condition before liquidating their investment. (Id. at 9.)

Plaintiffs filed a complaint in state court. Defendants removed it to this court. They based federal question jurisdiction on Plaintiffs' securities fraud claim under 15 U.S.C. Section 78j. Subsequently Plaintiffs filed an amended complaint alleging causes of action for securities fraud under federal law, intentional misrepresentation, negligent misrepresentation and breach of fiduciary duty under California common law, and securities fraud under California Corporations Code Section 25401 against Winex and Messrs. Pineda, Krusheski, John Sullivan and Robert B. Hydeman. Defendants moved to dismiss portions of the amended complaint.

Initially, Defendants move to dismiss all claims against Mr. Sullivan based on a bankruptcy stay issued on March 31, 2008 in Mr. Sullivan's bankruptcy case. However, the court takes judicial notice of the August 25, 2007 order of the Bankruptcy Court granting Plaintiffs' motion for relief from stay. Defendants' argument that all claims against Mr. Sullivan are precluded by the bankruptcy stay is rejected.

In all other respects, Defendants' motion is based on Federal Rule of Civil Procedure 12(b)(6). A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v., 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is warranted under Rule 12(b)(6) where the complaint lacks a cognizable legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984); see Neitzke v. Williams, 490 U.S. 319, 326 (1989) ("Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law"). Alternatively, a complaint may be dismissed where it presents a cognizable legal theory yet fails to plead essential facts under that theory. Robertson, 749 F.2d at 534. The "complaint must, at a minimum, plead 'enough facts to state a claim for relief that is plausible on its face.'" Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1122 (9th Cir. 2008), quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, ___; 127 S.Ct. 1955, 1974 (2007).

In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). However, legal conclusions need not be taken as true merely because they are cast in the form of factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); W. Mining Council v., 643 F.2d 618, 624 (9th Cir. 1981). Similarly, "conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998.)

First, Defendants maintain that Plaintiffs failed to adequately allege intentional misrepresentation with the particularity required by Federal Rule of Civil Procedure 9(b).*fn1 To comply with Rule 9(b), "the circumstances constituting fraud... shall be stated with particularity." Fed. R. Civ. P. 9(b). "A pleading is sufficient under Rule 9(b) if it identifies the circumstances constituting fraud so that a defendant can prepare an adequate answer from the allegations." Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989). In this regard, it is sufficient to plead items such as the time, place and nature of the alleged fraudulent activities. Id. Contrary to Defendants' argument (Defs' Mem. of P.&A. at 13; Reply at 1), Plaintiffs allege all of these particulars (see Compl. at 4-5).

Defendants also complain that Plaintiffs do not allege knowledge with particularity. (Reply at 1, 2-3.) There is no such requirement under Rule 9(b), which states that "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally."

Further, Defendants contend that Plaintiffs' allegations that Sonador's error and poor trading caused the loss of value are inconsistent with knowledge and intent to defraud. (Reply at 2-3.) Plaintiffs' allegations, which suggest Defendants' negligence rather than knowledge and intent, are not fatal to the fraud claim. "A party may state as many separate claims... as it has, regardless of consistency." Fed. R. Civ. Proc. 8(d)(3).

Defendants next move to dismiss the negligent misrepresentation claim, arguing that Plaintiffs did not allege any facts in support thereof. (Mem. of P.&A. at 13.) This argument has no merit. Although Plaintiffs do not expansively allege this claim, they incorporate by reference all prior allegations. (Compl. at 6.) Defendants also maintain that Plaintiffs did not sufficiently allege that the representations were made "without reasonable ground for believing [them] to be true." Apollo Capital Fund, LLC v. Roth Capital Partners, LLC, 158 Cal. App. 4th 226, 243 (2007) (listing elements). Plaintiffs incorporated their allegations that Defendants knew their representations were false; accordingly, for purposes of Rules 8(a) and 9(b), they sufficiently alleged that Defendants had no reasonable ground to believe their representations to be true. Defendants' reliance on Apollo Capital to support their argument about the requisite pleading specificity is misplaced because federal law controls procedural issues in federal court, particularly where an issue is directly covered by the Federal Rules of Civil Procedure. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1102 (9th Cir. 2003); see also fn. 1 supra. It is immaterial that the claim sued upon arises under state law and a different result would have been reached in a state court action. Vess, 317 F.3d at 1102.

Defendants next move to dismiss the securities fraud claim under 15 U.S.C. Section 78j(b) and 17 C.F.R. Section 240.10b-5(b). These statutes prohibit the use of any manipulative or deceptive device in the purchase or sale of a registered security. Specifically, it is unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).

Contrary to Defendants' argument (Mem. of P.&A. at 7-8; Reply at 5), this claim is based solely on Defendants' alleged misrepresentation about the use of "risk management policies..., including conservative policies on margin calls and constant review and analysis of trading and portfolio risk exposure" (Compl. at 7; see also id. at 4, 5). Therefore, ...

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