The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge
AMENDED ORDER: (1) GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' FIRST AMENDED COMPLAINT, AND (2) GRANTING PLAINTIFFS' MOTION FOR WRIT OF ATTACHMENT [Docs. 17 & 27]
Pending before the Court are Defendants' motion to dismiss Plaintiffs' First Amended Complaint ("FAC"), and Plaintiffs' motion for writ of attachment. The matters came on for hearing on August 13, 2010. Andrew Tine and Dean Janis appeared on behalf of Plaintiffs. Todd Atkins appeared on behalf of Defendants. For the reasons set forth below, Defendants' motion to dismiss is granted in part and denied in part. Plaintiffs' motion for writ of attachment is granted.
Plaintiffs Robert Albergo and David Irwin allege that in early 2006, they were induced to invest a combined $1,025,000 in unrestricted stock of a "start-up" company called Nurovysn Biotech Corporation (now Immunosyn) through Argyll Equities. (FAC ¶ 120.) Plaintiffs claim they did so only after Defendants Douglas McClain, Sr., James Miceli and their agent, Dr. Brenner, made false representations regarding the potential value of the stock. (Id. at ¶ 114.) Specifically, Plaintiffs allege they were told Argyll Equities owned the exclusive right to sell a super drug called SF-1019. (Id. at ¶ 52.) Defendants asserted SF-1019 "was the next Google" and that studies had shown the drug to cure multiple sclerosis and diabetic skin ulcers. (Id. at ¶ 54.) Plaintiffs were also told: Nurovysn would be listed in the NASDAQ shortly after its public offering for $15.50 per share, an Osmond family member invested millions in the start-up company, SF-1019 would be given "orphan status" leading to an expedited FDA approval, and Immunosyn would obtain approval for the sale of SF-1019 in the United States within a two-week time frame. (Id. at ¶¶ 58-61, 73.)
Based on these representations, Plaintiffs were induced to enter into what the parties have called the First Argyll Contracts. (Id. at ¶ 65.) Under these contracts, executed in March and April 2006, Plaintiff Albergo paid $1,000,000 and Plaintiff Irwin paid $25,000 in exchange for 100,000 and 2,500 free-trading shares of common stock in Immunosyn, respectively. (Id. at ¶¶ 68, 72.) Neither Plaintiff received the stock. (Id. at ¶ 128, 137.) In March 2007, Plaintiffs were told that SF-1019 was already approved for sale in Canada, garnering $26,000,000 in monthly orders. (Id. at ¶ 78.) Then, on May 7, 2007, Plaintiffs received a letter from Defendant Miceli requiring them to sign new contracts, the Second Argyll Contracts, in order to receive their original stock certificates. (Id. at ¶ 79.) The Second Argyll Contracts contained terms and conditions not present in the First Contracts. (Id. at ¶ 80.) For example, the shares of stock being purchased by Plaintiffs were now restricted. (Id.) There were also references to SEC filings that were inconsistent with representations in the First Argyll Contracts. (Id.) However, because of the alleged false representations of Defendants, and given the requirement that Plaintiffs sign the Second Argyll Contracts in order to receive the original stock they purchased, both Plaintiffs signed the Second Argyll Contracts. (Id. at ¶ 81.) To this date, Defendants continue to assert Immunosyn's potential strength in the market, although the company reported no revenue in 2007 or 2008 in its 10-Q and is currently selling stock at less than $1.00 per share. (Id. at ¶¶ 77, 92, 109.)
After signing the Second Argyll Contracts, Plaintiffs discovered Defendants had been selling SF-1019 through various commercial channels in violation of the exclusive license, and that Defendants had failed to report and allocate income to Immunosyn to the detriment of its stockholders. (Id. at ¶ 94.) Plaintiffs also allege that since 2006, over $1,000,000 was fraudulently transferred from Argyll Equities to Defendants Dona Miceli and the Thomas Road Company. (Id. at ¶¶ 164, 168.)
Plaintiffs allege Defendants' schemes were devised years ago. (See id. at ¶ 143.) Defendants Miceli, McClain, Sr. and McClain, Jr. purportedly entered into a 15-year partnership agreement on or about January 15, 1999. (Id. at ¶ 19.) On August 26, 1999, Defendant James Miceli was convicted of felony money laundering, forgery, perjury and theft over $100,000 in the State of Illinois. (Id. at ¶ 20.) In addition, Defendant McClain, Sr. was involved with a company called Nextpath Technologies, through which he sold large volumes of what was promised to be unrestricted stock to several unsuspecting investors. (Id. at ¶¶ 22, 26.) Instead, the investors received restricted stock after much delay, sued Defendant McClain, Sr. based on his misleading information, and obtained judgment against him for approximately $4,500,000. (Id. at ¶¶ 26, 27.)
Plaintiffs filed this lawsuit against five individual defendants: James Miceli, CEO of Argyll Biotech/Argyll Equities, Dona Miceli, wife of James Miceli, Douglas McClain, Sr., "controlling person" of Argyll Biotech/Argyll Equities and "Chief Science Officer" of Argyll Biotech, Douglas McClain, Jr., President of Argyll Biotech/Argyll Equities and CFO of Immunosyn, and Stephen Ferrone, President of Immunosyn, as well as the four corporations involved: Argyll Equities, LLC, Argyll Biotechnologies, LLC, Immunosyn Corp., and the Thomas Road Company. Plaintiffs have asserted eight claims for relief: (1) breach of contract, (2) violation of the Securities Exchange Act, (3) fraud and fraud in the inducement, (4) violation of RICO, (5) conspiracy to violate RICO, (6) civil conspiracy, (7) unjust enrichment, and (8) fraudulent conveyance.
In two recent opinions, the Supreme Court established a more stringent standard of review for 12(b)(6) motions. See Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). To survive a motion to dismiss under this new standard, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (citing Twombly, 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). "Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)). The reviewing court must therefore "identify the allegations in the complaint that are not entitled to the assumption of truth" and evaluate "the factual allegations in [the] complaint to determine if they plausibly suggest an entitlement to relief." Id. at 1951.
2. Securities Fraud, Fraud and Fraud in the Inducement
Defendants argue Plaintiffs' first cause of action for securities fraud and second cause of action for fraud and fraud in the inducement do not meet the heightened pleading standards of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). (Def.'s Mot. to Dismiss 10:12-14.) Each is addressed in turn.
a. Fraud and Fraud in the Inducement
The elements of a fraud claim are false representation, knowledge of falsity, intent to defraud, justifiable reliance, and damages. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003). Under Rule 9(b), "A party must state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). A plaintiff must set forth the time, place and content of the false representation and explain why it is false. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (superseded by statute on other grounds). In other words, fraud allegations must be accompanied by "the who, what, when, where, and how" of the misconduct charged. Vess, 317 F.3d at 1106. The "alleged fraud must be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong." Id. However, Rule 9(b) "may be relaxed as to matters within the opposing party's knowledge ... [and] the particularity requirement may be satisfied if the allegations are accompanied by a statement of the facts on which the belief is founded." Moore v. Kayport Package Express, 885 F.2d 531, 540 (9th Cir. 1989).
Here, Plaintiffs allege they relied on a series of misrepresentations before entering in to both the First and Second Argyll Contracts. In early 2006, Plaintiff Albergo engaged in conversations and writings with Defendants Miceli and McClain, Sr. Defendants made multiple misrepresentations, including that Immunosyn had an exclusive right to sell SF-1019, SF-1019 had the ability to cure multiple sclerosis and diabetic skin ulcers, there were studies to conclusively prove the effectiveness of SF-1019 and an Osmond family member invested millions of dollars in Immunosyn. (FAC ¶¶ 52-61.) Similarly, Plaintiff Irwin alleges that in early 2006, Dr. Jochen Brenner represented to him that he was selling Immunosyn stock, that Immunosyn was the "sole licensee" of a new "wonder drug," that Immunosyn had exclusive rights to make and sell SF-1019, that the drug cured severe cases of diabetes, that Immunosyn would obtain approval for the sale of SF-1019 in the United States within two weeks and that the stock would go public at that time for $15.50 per share. (Id. at ¶¶ 71-73.) Both Plaintiffs allege they were fraudulently induced into signing the Second Argyll Contracts because on March 26, 2007, Dr. Brenner represented that SF-1019 was approved for sale in Canada and that orders had been received for 130,000 vials per month--totaling $26,000,000 every month. (Id. at ¶ 78.) Further, on May 7, 2007, Defendant Miceli sent both Plaintiffs a letter with enclosed copies of the promised stock certificates, requiring Plaintiffs to sign the Second Argyll Contracts to receive their original stock certificates. (Id. at ¶ 79.) Plaintiffs argue Defendants pulled a "bait and switch" because the Second Argyll Contracts now referred to the shares of stock, which were already paid for, as "restricted" stock. (Id. at ¶ 80.)
Defendants argue the claim fails because Plaintiffs failed to include detailed allegations describing what was represented about Immunosyn, when the information was provided, why that information was false, and the appropriate level of scienter. Defendants also argue that Dr. Brenner is not alleged to be an agent of Defendants, and that any agency claim fails because it was not until ...