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Veltex Corp. v. Matin

September 27, 2010


The opinion of the court was delivered by: Audrey B. Collins Chief United States District Judge


Pending before the Court are motions to dismiss filed by Defendants Carmine Bua ("Bua"), Chisholm, Bierwolf, Nilson & Morrill, CPA ("CBNM"), Anne Tahim ("Tahim"), Patrick Day, Richard Day, and American Registrar and Transfer Co. ("ARTCO") (collectively, "Defendants"). (See Bua Mot. (Docket # 125); CBNM Mot. (Docket # 126); Tahim Mot. (Docket # 124); Patrick Day, Richard Day & ARTCO Mot. ("Day Mot.") (Docket # 122).) Plaintiff filed oppositions. (Opp'n to Bua Mot. (Docket # 129); Joint Opp'n to CBNM and Tahim Mots. ("Joint Opp'n") (Docket # 131); Opp'n to Patrick Day, Richard Day & ARTCO Mot. ("Opp'n to Day Mot.") (Docket # 133).) Defendants filed replies. (Bua Reply (Docket # 138); CBNM Reply (Docket # 140); Tahim Reply (Docket # 139); Patrick Day, Richard Day & ARTCO Reply ("Day Reply") (Docket # 137).) The motions came on for hearing on September 27, 2010. Having reviewed the parties' arguments and the record, the Court hereby GRANTS the motions.


This is a securities fraud case in which Plaintiff alleges that various defendants engaged in a "pump and dump" scheme to artificially inflate the value of Veltex stock by disseminating false information and then sell the inflated shares into the market. (See, e.g., First Amended Complaint ("FAC") ¶ 1.) Plaintiff Veltex is an apparel company that claims that it was a victim of this scheme along with unsuspecting investors. (FAC ¶¶ 1, 4.) Plaintiff alleges that the pump and dump scheme "required planning and numerous participants, including lawyers, accountants and transfer agents." (FAC ¶ 1.) Some of those defendants are currently before the Court with pending motions to dismiss.

Defendant Bua acted as Plaintiff's securities attorney. (See FAC ¶ 25.) Plaintiff alleges that Bua rendered fraudulent opinion letters ("Rule 504D Letters") approving the issuance of legend free shares of Veltex stock. (See, e.g., FAC ¶¶ 25, 68-69, 71.) Defendant CBNM is a certified public accounting firm that performed accounting work and consulting services for Plaintiff. (FAC ¶ 21.) Plaintiff alleges that CBNM's audit was faulty in various respects. (See, e.g., FAC ¶¶ 51-56.) Defendant Tahim is a certified public accountant who performed accounting work for Plaintiff. (FAC ¶ 23.) Plaintiff alleges that Tahim's audit was faulty in various respects. (See, e.g., FAC ¶¶ 49-50.) Defendant ARTCO is a corporate transfer agent engaged in facilitating the registry and transfer of corporate shares. (FAC ¶ 16.) Defendant Patrick Day was the President of ARTCO during certain periods, and was also a member of Plaintiff's Board of Directors. (FAC ¶ 17.) Defendant Richard Day held a variety of management positions with ARTCO and was a majority owner of ARTCO. (FAC ¶ 18.) Plaintiff alleges that ARTCO, Patrick Day and Richard Day improperly issued legend free shares of Veltex stock. (See FAC ¶ 72.) Plaintiff also alleges that the various defendants in Plaintiff's management, apparently including Patrick Day, engaged in various other misconduct. (See, e.g., FAC ¶¶ 32-34.)


Defendants move for dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6) on the ground that Plaintiff failed to state a claim upon which relief can be granted. The Supreme Court has recently clarified the pleadings necessary to state a claim for relief sufficiently to withstand a motion to dismiss under Rule 12(b)(6). See Ashcroft v. Iqbal, __ U.S. ___, 129 S.Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). Rule 8(a)(2) requires a "short plain statement of the claim showing that the pleader is entitled to relief," which does not require "detailed factual allegations," but it "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Iqbal, 129 S.Ct. at 1949. A claim must be "plausible on its face," which means that the Court can "draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In other words, "a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal quotations and alterations omitted). Allegations of fact are taken as true and construed in the light most favorable to the nonmoving party. See, e.g., Newdow v. Lefevre, 598 F.3d 638, 642 (9th Cir. 2010).*fn1

If the court finds dismissal appropriate, it must decide whether to grant leave to amend. Leave to amend under Rule 15(a) is "freely given when justice so requires." In the Ninth Circuit, "[t]his policy is 'to be applied with extreme liberality.'" Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (per curiam) (quoting Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001)). Dismissal without leave to amend is improper unless it is clear that the complaint cannot be saved by any amendment. Polich v. Burlington Northern, Inc., 942 F.2d 1467, 1472 (9th Cir. 1991). Where the plaintiff makes a bare request for leave to amend unaccompanied by additional facts that could cure the defects in the complaint, however, that is a strong indication that the plaintiff has no additional facts to plead. See In re Vantive Corp. Securities Litig., 283 F.3d 1079, 1098 (9th Cir. 2002), abrogation on other grounds recognized by South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008). Moreover, the Court's discretion is particularly broad in cases where leave to amend has been granted previously. See Metzler Inv. GmbH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1071 (9th Cir. 2008).*fn2


Defendants' pending motions raise a variety of arguments that they assert warrant dismissal of various of the claims asserted. The Court addresses each below.

A. First Cause of Action -- § 12 Claim

The FAC raises a claim under § 12 of the Securities Act of 1933. (See FAC ¶ 85.) That section provides that any person who "offers or sells a security" by means of untrue statements is liable "to the person purchasing such security from him." 15 U.S.C. § 77l(a).

Hence, § 12 "permits suit against a seller of a security... only by 'the person purchasing such a security from him,' thus specifying that a plaintiff must have purchased the security directly from the issuer." Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1081 (9th Cir. 1999) (emphasis in original). This poses two problems for Plaintiff. First, Plaintiff has not alleged that it actually purchased securities at all, which makes its claim as currently pled defective as to all Defendants. Plaintiff contends that it in fact did make at least one such purchase, however. (Peters Decl. ¶ 8, Ex. F.) Accordingly, with respect to that defect, this claim is DISMISSED without prejudice as to all moving Defendants. If Plaintiff amends this claim, it should specify which of the remaining Defendants sold securities to Veltex.

Second, Tahim argues that Plaintiff did not purchase any securities from her as required under § 12. (See Tahim Mot. at 10.) The Ninth Circuit has made clear that an accountant "merely performing professional services, without actively soliciting a purchase of the underlying securities, does not give rise to liability under section 12." Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 537 & n.5 (9th Cir. 1989); see also In re: Worlds of Wonder Securities Litig., 694 F. Supp. 1427, 1435 (N.D. Cal. 1988) (dismissing claims against accountants who finalized registration statement and prospectus and caused registration statement to become effective). Plaintiff fails to address this authority in opposition, and instead notes that claims against accountants are not categorically barred. (See Joint Opp'n at 18-19.) But Plaintiff does not provide an explanation why the particular allegations against this accountant pass muster under Ninth Circuit law. Accordingly, this claim is DISMISSED with prejudice as to Tahim.

B. First Cause of Action -- § 17(a) Claim

The FAC raises a claim under § 17(a) of the Securities Act of 1933. (See FAC ¶ 85.) This claim fails as a matter of law because there is no private right of action under § 17(a). In re Washington Public Power Supply Sys. Sec. Litig., 823 F.2d 1349, 1358 (9th Cir. 1987) (en banc) ("no private right of action lies under section 17(a)"). That claim is DISMISSED with prejudice against all moving Defendants.

C. First Cause of Action -- § 10b-5, Rule 10(b)-5 Claim

To state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege: (1) a misstatement or omission (2) of material fact (3) made with scienter (4) on which the plaintiff relied (5) which proximately caused its injury. DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 388 (9th Cir. 2002) Such claims are subject to heightened pleading requirements. Federal Rule of Civil Procedure 9(b) requires allegations ...

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