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Ezeude v. Paypal, Inc.

United States District Court, N.D. California, San Jose Division

November 15, 2017

KINGSLEY EZEUDE, et al., Plaintiffs,
v.
PAYPAL, INC., et al., Defendants.

          ORDER STAYING CASE RE: DKT. NO. 31

          LUCY H. KOH United States District Judge

         Before the Court is Defendants PayPal, Inc. and PayPal Holdings, Inc.'s Motion for Stay of Proceedings. ECF No. 31 (“Mot.”). Plaintiffs Kingsley Ezeude and Chukwuka Obi brought a class action against Defendants alleging that Defendants aided and abetted a Ponzi scheme operated by two non-parties, Traffic Monsoon, LLC (“Traffic Monsoon”) and Charles David Scoville (“Scoville”), and that Defendants were otherwise negligent. Defendants seek to stay the proceedings in this case until the United States District Court for the District of Utah lifts a stay order in another case brought by the Securities and Exchange Commission (“SEC”) against Scoville and Traffic Monsoon. See SEC v. Traffic Monsoon, LLC, No. 16-cv-00832-JNP (D. Utah). Plaintiffs oppose Defendants' motion. ECF No. 48. Defendants filed a reply. ECF No. 54. Having considered the submissions of the parties, the record in this case, and the relevant law, the Court hereby STAYS this proceeding until the stay order in Traffic Monsoon is lifted and the Tenth Circuit resolves the interlocutory appeal in Traffic Monsoon.

         I. BACKGROUND

         A. The Traffic Monsoon Case

         On July 26, 2016, the SEC brought suit against Traffic Monsoon and Scoville in the United States District Court for the District of Utah (the “Utah Court”). See ECF No. 32 (“RJN”)[1] Exh. 1. The SEC's complaint alleged that (1) Traffic Monsoon, a limited liability company with a principal place of business in Utah, sold advertising products called “AdPacks”; and (2) Scoville “is the only member and controlling person of Traffic Monsoon” and therefore “controls and oversees all of [Traffic Monsoon's] business functions.” Id. ¶¶ 13-32. The SEC further alleged that Traffic Monsoon's sale of AdPacks constituted a Ponzi scheme, which in turn amounted to securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b), and Rule 10b-5(a) and (c) promulgated thereunder, 17 C.F.R. § 240.10b-5(a) & (c). Id. ¶¶ 90-92.

         Based on Traffic Monsoon's alleged fraud, the SEC filed an ex parte application for a temporary restraining order (“TRO”), an order appointing a receiver, and an order freezing Traffic Monsoon's assets. See RJN Exh. 2. On July 26 and 27, 2017, the Utah Court granted all of the SEC's requests. See RJN Exhs. 3 & 4.

         Subsequently, on March 28, 2017, based on its finding that “[t]he SEC has made a clear showing that it will prevail and that Mr. Scoville will continue to violate the law by operating a Ponzi scheme absent an injunction, ” the Utah Court issued a preliminary injunction maintaining both the receivership and the asset freeze imposed by the TRO. See RJN Exh. 7 at 43; RJN Exh. 8 at 1-3. The Utah Court also issued the following stay of litigation:

The Court hereby orders a stay of all litigation in any court against Traffic Monsoon, LLC or Charles Scoville where (1) the Securities and Exchange Commission is not a party or privy to a party in the lawsuit and (2) the lawsuit involves or seeks to recover the assets frozen by this Order. The parties to any such litigation are enjoined from taking any action in connection with the lawsuit, including, but not limited to, the issuance or employment of process. All courts presiding over any such litigation are also enjoined from taking or permitting any action in the lawsuit until further order of this Court.

RJN Exh. 8 at 3. However, because the Utah Court found that its preliminary injunction order contained several controlling legal questions “as to which there is substantial ground for difference of opinion and . . . an immediate appeal from the order may materially advance the ultimate termination of the litigation, ” the Utah Court certified its preliminary injunction order for interlocutory appeal to the Tenth Circuit pursuant to 28 U.S.C. § 1292(b). Id. at 44. The Utah Court specifically identified three issues for which there was a “substantial ground for difference of opinion.” Id. One of those issues was whether “Traffic Monsoon's particular business model constitutes a Ponzi scheme.” Id.

         On April 14, 2017, Traffic Monsoon and Scoville appealed the Utah Court's preliminary injunction to the Tenth Circuit. See Notice of Appeal, ECF No. 85, SEC v. Traffic Monsoon, LLC, No. 16-cv-00832-JNP (D. Utah Apr. 15, 2017). On April 17, 2017, the Tenth Circuit docketed this appeal. See SEC v. Traffic Monsoon, LLC, No. 17-4059 (10th Cir.).

         B. The Instant Case

         On May 4, 2017, Plaintiffs Kingsley Ezeude and Chukwuka Obi (collectively, “Plaintiffs”) filed a complaint against Defendants PayPal, Inc. and PayPal Holdings, Inc. (collectively, “Defendants”). ECF No. 1 (“Compl.”). Plaintiffs brought their action both individually and on behalf of a putative class. See Id. at 1. In their complaint, Plaintiffs allege that (1) Plaintiffs are victims of the Ponzi scheme operated by Traffic Monsoon and Scoville; (2) Defendant PayPal, Inc., served as a payment processor for Traffic Monsoon; and (3) the Ponzi scheme operated by Traffic Monsoon and Scoville “was facilitated by the knowing assistance and negligent actions of Defendant PayPal, Inc.” Id. ¶¶ 1, 3. Plaintiffs' complaint asserts five causes of action against Defendants, including (1) aiding and abetting fraud; (2) aiding and abetting a breach of fiduciary duty; (3) gross negligence; (4) negligence; and (5) violation of Cal. Corp. Code § 25504.1. Id. at 36, 40, 46, 48, 49.

         On September 7, 2017, Defendants filed a motion to dismiss. ECF No. 30. That same day, Defendants filed the instant motion seeking to stay the proceedings in this case until the Utah Court's stay order is lifted. ECF No. 31.

         II. ...


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