The opinion of the court was delivered by: Oliver W. Wanger United States District Judge
MEMORANDUM DECISION AND ORDER GRANTING PLAINTIFFS' MOTION FOR LEAVE TO MODIFY SCHEDULING ORDER AND TO FILE THIRD AMENDED COMPLAINT
Before the Court is Plaintiffs' motion for leave to modify the Scheduling Order and to file a Third Amended Complaint.
Defendants Downey Brand LLP ("Downey Brand") and Genske Mulder & Company ("Genske Mulder") filed motions for summary judgment against the Plaintiffs in this action in late 2009. The motions were heard on December 21, 2009. In opposing these motions for summary judgment, Plaintiffs relied on evidence of a Valley Gold Offering Memorandum marked "draft" which was allegedly provided by Tim Brasil to Plaintiffs on April 22, 2004.
Plaintiffs asserted that the April 21, 2004 draft of the Offering Memorandum does not disclose that George Vieira was the subject of a criminal investigation by the United States in New Jersey. The section of the Offering detailing "Risks Specific to Company," provided to Plaintiffs on April 23, 2004 states: Dependency on Key Personnel ...
Mr. Vieira, one of the principal organizers of the Company and this transaction is currently the chief executive officer of CVD. George Vieira, was, [sic] for a short period of time, an officer of Supreme West, Inc. ('Supreme West'). Suprema West is a subsidiary of Supreme Specialties, Inc. ('Suprema'). Suprema and Suprema West are in bankruptcy. Suprema is also the subject of an investigation being conducted by the Securities and Exchange Commission and the U.S. Attorney's Office. Assertions have been made that financial data for Suprema was misrepresented. Mr. Vieira has been contacted by the U.S. Attorney's Office and may be a subject of this investigation. No formal charges have been brought against Mr. Vieira ....
Defendants complained that it was not until Plaintiffs' opposition to their motions for summary judgment were filed, that Plaintiffs contended that the draft Offering Memorandum provided to them did not disclose the criminal investigation of George Vieira. In addition, Defendants complained that Plaintiffs seek to withstand summary judgment on the ground that they relied on statements in the Offering Memorandum about the profitability of the cheese plant while it was owned by Land O' Lakes, low estimates of the expense of refurbishing the plant, and financial forecasts generated by Genske Mulder, none of which are alleged in the Second Amended Complaint. Because Plaintiffs did not allege these claims their Second Amended Complaint, Defendants argued that Plaintiffs cannot defeat summary judgment on this ground.
After the motions for summary judgment were taken under submission, two of the Plaintiffs died, necessitating substitutions and amended motions for summary judgment. At the hearing on September 21, 2010, Plaintiffs were ordered to file a motion for leave to amend the Scheduling Order and to file a Third Amended Complaint. Plaintiffs timely complied with this Order and have lodged a proposed Third Amended Complaint ("TAC").
Here, the First Amended Scheduling Conference Order filed on July 28, 2008, (Doc. 86), states:
IV. Orders Re Amendments to Pleadings
1. The pleadings are settled.
The Defendants designated as Does 1-25, inclusive, are DISMISSED without prejudice.
The proposed TAC includes the following allegations (highlighted in blue) that were not alleged in the Second Amended Complaint:
62. During the period from March 25, 2003 through May 1, 2003, at the PROMOTERS' direction and with the substantial participation, assistance and input from DOWNEY BRAND and GENSKE MULDER, six versions of the Offering Memorandum were prepared, designated in the lower left hand corner with control numbers from 509121.1 through 509121.6, two versions of the Subscription Agreement were prepared, designated in the lower left hand corner with the control numbers 512253.1 and 512253.2, and four primary versions of the Operating Agreement were prepared, designated in the lower left hand corner with the words "Draft Dated" followed by a the numerical designation for a date. For example, the third iteration of the Operating Agreement included a footer in the lower left hand corner of each page stating: "Draft Dated 4/21/2003." The fourth and final version of the Operating Agreement included in the lower left hand corner the designation: "Draft Dated 4/22/2003."
63. At some point between April 22, 2003 and May 1, 2003, the footer on the "final" version of the Operating Agreement was changed to read "5/01/03 #511731.4" and the signature pages were changed. DOWNEY BRAND did not, however, designate this slightly revised document as a new version (version five), keeping instead the designation of the document as being version four.
64. On or about April 22, 2003, the PROMOTERS for the first time caused either the fourth or fifth version of the Offering Memorandum attached hereto as Exhibit B, together with accompanying subscription agreements, to be delivered to Plaintiffs and other members of CVD., together with the second version of the Subscription Agreement and the third version of the Operating Agreement.
65. The PROMOTERS informed Plaintiffs Manual and Mariana Lopes that the deal would collapse unless thetheir subscription agreements and investment checks werewas executed and returned that samethe next day, April 22, 200323, 2003. Several other investors were similarly told that their subscription agreements needed to be turned in on April 23, 2003. On the basis of the documentary records produced in this litigation, Plaintiffs are informed and believe, and thereon allege, that the PROMOTERS needed to document significant investor commitments for the Bank of Stockton, as part of the PROMOTERS request for bank approval for CVD to participate as an investor in Valley Gold, LLC. That approval was requested on April 23, 2003.
66. Plaintiffs signed the subscription agreements and delivered checks totaling $534,000 as their initial investment in VALLEY GOLD that same day, April 22. Manual and Mariana Lopes submitted their signed subscription agreement on April 23, 2003.
67. On or about September 22, 2003, the PROMOTERS solicited additional investments by Plaintiffs in VALLEY GOLD, in the form of a swap of additional equity in VALLEY GOLD in exchange for supplying milk to VALLEY GOLD.
At the time that the PROMOTERS solicited this additional "milk for equity" investment in VALLEY GOLD, no Offering Memorandum was supplied to Plaintiffs. However, between April 22, 2003 and September 22, 2003, copies of the business plan that is attached hereto as Exhibit A, or similar iterations of that business plan, were made availableprovided to Plaintiffs, as were the financial projections that are attached hereto as Exhibit C.
74. On April 18, 2003, DOWNEY BRAND faxed version four of the Offering Memorandum using the interstate instrumentality of the telephone lines to investors Joe Nunes, Evaristo Vaz, Joe Machado, Dennis Nunes, Jose Homen and Frank Borba, with instructions to read the document carefully over the weekend, in preparation for a meeting at DOWNEY BRAND's Stockton office on Monday, April 21, 2003. A true and correct copy of version four of the Offering Memorandum is attached hereto as Exhibit D.
75. DOWNEY BRAND, GENSKE-MULDER and CARY all met with the PROMOTERS that same day, April 21, 2003, and and Joe Nunes, Everisto Vaz, Joe Machado, Tim Brasil, Dennis Nunes, Jose Homen and Frank Borba on April 21, 2003 at 1:30 pm. The attendees reached the meeting by using the interstate highway system. Between April 18, 2003 and April 21, 2003, DOWNEY BRAND further revised the Offering Memorandum, creating version 5 of that document. A true and correct redline of version 5, showing the changes from version 4, is attached hereto as Exhibit E.
76. At that evening and the next morning, April 2221, 2003, finalized meeting, the attorneys from DOWNEY BRAND discussed the disclosures and other terms of the Offering Memorandum. in great detail, and secured the approval of the management committee of Valley Gold to approve the Offering Memorandum and direct the company's officers to deliver it and the subscription agreements to the potential investors in Valley Gold.
Although the attorneys at DOWNEY BRAND had known since April 11, 2003 that George Vieira was the potential subject of a criminal investigation into Suprema Specialties, and although they had already drafted disclosure language on the issue which they read to George Vieira's criminal defense attorney on April 11, 2003, and although DOWNEY BRAND had prepared both versions 4 and 5 of the Offering Memorandum after April 11, 2003, DOWNEY BRAND did not disclose or discuss the issue during the April 21, 2003 meeting, and did not include the disclosure in either version 4 or version 5 of the Offering Memorandum.
77. On April 22, 2003Rather, the disclosure language which appears in the "final" version of the Offering Memorandum and subscription agreements were deliveredwas added by DOWNEY BRAND on April 22, 2003. Thereafter, at approximately 2:09 pm on April 22, 2003, Patty Bernard from DOWNEY BRAND used the interstate instrumentality of the Internet to Plaintiffs and other members of CVD for execution and return that day. Plaintiff MANUAL LOPES showed the Offering Memorandume-mail to Susan Tomsha-Miguel, who provided tax and accounting services to the LOPES DAIRY, and she telephoned one or more of the Defendants around noon with some questions about the financial projections in the Paul Anema at GENSKE-MULDER both Word and WordPerfect files containing version six of the Offering Memorandum. Shortly afterward, Plaintiffs delivered signed subscription agreements and checks, version 4 of the Operating Agreement and version 2 of the Subscription Agreement. She separately faxed resumes of Reyad Mahmoud and Jose Fernandes, using the interstate instrumentality of the interstate highway system.telephone lines. ...
Securities Fraud: Securities Act of 1934
112. Plaintiffs incorporate by reference as though set forth in full the allegations of paragraphs 1 through 111-11, above.
113. This is a civil cause of action asserted by Plaintiffs (except Maria Machado and Antonio Estevam) individually and on behalf of CVD against GEORGE VIEIRA, CARY, GENSKE- MULDER, DOWNEY BRAND, and DOES 21 through 40, inclusive.
114. The business plan and the Offering Memorandum and the related materials and communications supplied by these defendants to Plaintiffs, including the materials used to induce plaintiffs to enter into the "milk for equity" contracts contained, served as manipulative and deceptive devices and contrivances intended to contravene the rules and regulations of the Securities and Exchange Commission as necessary and appropriate for the protection of investors, and thus violated section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. §78j(b)) by and through the use of the instrumentalities of interstate commerce, as set forth in paragraphs 68-78, supra.
115. The interests procured from Plaintiffs in the form of membership interests in VALLEY GOLD -- a limited liability company formed under California law -- constituted securities within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 because Plaintiffs were induced to invest their money (and later their rights to payment for milk) into a common enterprise from which they expected to earn profits through the efforts and acumen of others, namely GEORGE VIEIRA and the other officers and employees of VALLEY GOLD.
116. In violation of the Securities Exchange Act of 1934, Exchange Act Rule 10b-5 enacted under the regulatory authority of the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002, the business plan and the Offering Memorandum and the related materials and communications supplied by these defendants to Plaintiffs, contained material misrepresentations and omissions of material facts that caused the communications to Plaintiffs to be materially misleading, and constituted a fraudulent and deceitful manipulation and contrivance of the regulatory requirements enacted under the Federal Securities laws for the protection of parties like Plaintiffs.
Among other material misrepresentations and material omissions of material facts, these materials:
SUPPRESSION OF THE FINAL VERSION OF THE OFFERING MEMORANDUM
117. On the afternoon of April 22, 2003, DOWNEY BRAND sent an e-mail to Paul Anema at GENSKE-MULDER with electronic versions of the Offering Memorandum (version six), the Subscription Agreement (version two) and the Operating Agreement for Valley Gold (version four). Paul Anema, however, did not deliver any of these materials to Plaintiffs.
118. Rather, earlier on April 22, 2003, Tim Brasil, one of GEORGE VIEIRA's friends and a member of Valley Gold's management committee, distributed investment packets to Manual and Mariana Lopes, Joseph Lopes and Raymond Lopes. These investment packets consisted of either version 4 or version 5 of the Offering Memorandum, version 2 of the Subscription Agreement, and version 3 of the Operating Agreement for Valley Gold.
119. Manual and Mariana Lopes were instructed to sign the Subscription Agreement and return the packet to CARY the next day, which they did. In addition, a meeting was scheduled for all of the investors, on or about May 1, 2003 at the Gustine factory. Those Plaintiffs who had not previously turned in their investment packets to CARY were instructed that after May 1, 2003, the investment would close.
Accordingly, Raymond Lopes and Joseph and Michael Lopes took the signed Subscription Agreements and the other investment documents to the May 1, 2003 meeting and gave them to CARY and/or members of the Valley Gold management committee.
120. At that May 1, 2003 meeting, CARY had new documents that he said were not materially different than what had previously been distributed. The Plaintiffs were all instructed to pick up the new documents, sign them, and turn them back in. The documents from May 1, 2003 may have consisted solely of the Operating Agreement, which DOWNEY BRAND had revised that day, or it may have included the final Offering Memorandum as well. In either event, Plaintiffs were only given access to the documents long enough to pick them up, find a space at the table in order to sign the documents, and to then turn them in.
121. At the conclusion of the May 1, 2003 meeting, CARY collected all of the materials that had been previously distributed.
122. Approximately two months later, after the cheese plant was operating and long after the initial investments were completed, the Plaintiffs received bound investment packets for their records, including the final, fully executed Operating Agreement, the final transfer documents from the sale of the factory from Land O' Lakes to Valley Gold, and the final Offering Memorandum, among other items. Plaintiffs had no reason to suspect that the Offering Memorandum in this packet was different than what they had previously received.
123. The only version of the Offering Memorandum that Plaintiffs were given an opportunity to read included no disclosures at all about the criminal investigation into Suprema Specialties and the investigation into George Vieira.
124. DOWNEY BRAND intentionally and materially assisted the PROMOTERS in concealing from Plaintiffs the information about the criminal investigation into George Vieira. DOWNEY BRAND did so by, among other things: (a) waiting until April 22, 2003 to insert the disclosure into the final version of the Offering Memorandum that by design,
Plaintiffs were not given any opportunity to review; (b) by intentionally failing to discuss the issue at the April 21, 2003 meeting with the management committee members for Valley Gold; (c) by omitting the disclosure from the Offering Memorandum that was faxed to the management committee members on April 18, 2003, with a cover letter that indicated that all substantive information for the Offering Memorandum was included with that draft; (d) by failing to maintain document control over versions four and five of the Offering Memorandum; (e) by transmitting even the final version of the Offering Memorandum in electronic format, in which it could easily and surreptitiously be changed; and (f) by requiring that Plaintiffs surrender all of the documents that they had been given to review.
OTHER MISSTATEMENTS AND OMISSIONS
125. Even the final version of the Offering Memorandum, which Plaintiffs were not given the opportunity to read, included materially misleading provisions; these materials:
a. Stressed that VALLEY GOLD's success was dependent upon the unique "experience and abilities of Mr. [George] Vieira [and two associates]" without disclosing that Mr. Vieira's unique experience was not formed in the successful production of cheese products, but rather in the concoction of fictitious cheese products and cheese diluted with starch fillers manufactured not for commercial success with consumers, but rather to inflate the apparent inventory value and sales volume of a by then bankrupt cheese manufacturer, for the sole purpose of perpetuating a hundreds of million dollar securities fraud on securities investors situated similarly to Plaintiffs;
b. Disclosed that Mr. Vieira had been contacted by the U.S. Attorney's Office as part of its investigation into the bankruptcy of Suprema Specialties, Inc., without disclosing that GEORGE VIEIRA was already actively involved in negotiations with the United States Attorney's Office to plead guilty to securities and bank fraud;
Included financial projections supplied by GENSKE-MULDER that vastly exceeded the performance of any startup cheese manufacturer, with the possible exception of Suprema Specialties, Inc., whose dramatic reported growth was by then known in the financial community (but not to Plaintiffs) to have been the result of smoke, mirrors and a fraudulent Round-Tripping scheme orchestrated by a criminal enterprise headquartered in New Jersey.
c. Included financial figures for the historical operation of the cheese facility that were false, combining 18 months of operating data from Land O'Lakes and reporting it as having been achieved in the 2001 calendar year;
d. Falsely stated that the Land O' Lakes financial documents had been reviewed by GENSKE-MULDER; and
e. Falsely stated that the other financial projections and figures in the Offering Memorandum had been provided by GENSKEMULDER.
126. The final version of the Offering Memorandum provided a brief disclosure concerning Suprema Specialties' bankruptcy, but did so in a way to minimize the importance of the information and in a manner that created the impression that GEORGE VIEIRA's sole involvement with Suprema Specialties occurred because he "was, for a short period of time, an officer of Suprema West, Inc. . . . a subsidiary of Suprema Specialties, Inc." The Offering Memorandum did not disclose that GEORGE VIEIRA was not just any officer, but was the Chief Operating Officer and was thus directly responsible for fraudulent financial transactions that government officials were investigating. The Offering Memorandum also did not disclose that GEORGE VIEIRA had reached an agreement with the United States Attorney's Office to plead guilty to securities fraud and conspiracy to commit bank and mail fraud. And the Offering Memorandum did not disclose that in addition to being an officer of Suprema Specialties West, Inc., GEORGE VIEIRA and his wife MARY VIEIRA were also officers and owners of CMM, which was also a subject of the criminal investigation as well as a probable broker for any cheese produced by VALLEY GOLD.
127. As a result of defendants' violations of the Federal Securities Laws, including the Securities Exchange Act of 1934, Exchange Act Rule 10b-5 enacted under the regulatory authority of the Securities and Exchange Commission and the Oxley Sarbanes-Oxley Act of 2002, Plaintiffs have incurred damages by investing millions of dollars into a doomed enterprise and supplied millions more in milk to that enterprise -- milk for which ...