McCauley et al v. Najafi et al

Filing 40

ORDER granting 28 Motion to Dismiss for Failure to State a Claim. The Clerk of Court shall terminate this action. Signed by Judge Steven P Logan on 09/29/2017.(KAS)

Download PDF
1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 Bill McCauley, et al., 9 10 Plaintiffs, vs. 11 12 Jahm J. Najafi et al., Defendants. 13 14 ) ) ) ) ) ) ) ) ) ) ) ) No. CV-16-03461-PHX-SPL ORDER Before the Court is Defendants’ Motion to Dismiss Plaintiffs’ First Amended 15 16 Complaint. (Doc. 28.) For the reasons set forth below, the motion will be granted. 17 I. Background 18 Plaintiffs Bill McCauley and Edward J. Kendler, individually and on behalf of all 19 others similarly situated (“Plaintiffs”), bring this securities class action suit against 20 Defendants Jahm Najafi, Kevin Weiss, David Franke, James Staudohar, and Scott Wiley, 21 and each of their respective spouses (collectively, “Defendants”), for claims arising from 22 the 2013 merger of Xhibit Corporation (“Xhibit”) and SkyMall Holdings Corporation 23 (“SkyMall”). 24 Prior to declaring bankruptcy in 2015 (Doc. 19 ¶ 79-80), Xhibit Corporation was a 25 publicly traded company that specialized in internet marketing and nutraceutical 26 products. (Doc. 19 ¶ 55.) Xhibit reported a net worth of $3 million in April 2013. (Doc. 27 19 ¶ 43.) During the spring of 2013, Xhibit’s management was approached by Defendant 28 Najafi to discuss a proposed merger between Xhibit and Defendant Najafi’s company, 1 SkyMall Holdings Corporation1 (“SkyMall”). (Doc. 19 ¶ 44.) While presented “as a way 2 for SkyMall and Xhibit to join their businesses and mutually strengthen one another,” 3 (Doc. 19 ¶ 44) Plaintiffs contend that Defendants intended to use the merger as a means 4 to create “a materially fraudulent and deceptive public market for SkyMall—an insolvent, 5 previously private company with a history of operating losses.” (Doc. 19 ¶ 2.) The 6 Xhibit-SkyMall merger was finalized on May 16, 2013. (Doc. 19 ¶ ¶ 16, 51.) 7 After the merger, Plaintiffs allege that Defendants made numerous adjustments to 8 Xhibit’s business model including: (1) the termination of Xhibit’s original business lines; 9 (2) the sale of SkyMall Ventures—SkyMall’s profitable loyalty business line—to repay 10 Defendant Najafi’s affiliates that had extended credit to SkyMall; and (3) numerous 11 leadership changes including the appointments of Defendants Weiss as CEO and 12 Defendant Wiley as CFO, as well as the addition of Defendant Najafi to the Board of 13 Directors. (Doc. 19 ¶¶ 45-76.) It is furthered alleged that during this time, Defendants 14 were “deceptively inflating the value of Xhibit . . . overstating Xhibit’s assets and net 15 worth by tens of millions of dollars and deceptively understating Xhibit’s operating 16 expenses by hundreds of millions of dollars.” (Doc. 19 ¶¶ 5-6.) Plaintiffs maintain that 17 Defendants orchestrated this fraud on Xhibit investors and the public through a series of 18 filings with the U.S. Securities and Exchange Commission (“SEC”) that were 19 deliberately untimely so as to conceal the fluctuating—and ultimately, declining—value 20 of Xhibit. (Doc. 19 ¶¶ 45-76.) 21 Xhibit and SkyMall LLC filed for bankruptcy on January 22, 2015 (Doc. 19 ¶ 79), 22 “effectively rendering Xhibit’s stock worthless.” (Doc. 19 ¶ 11.) On August 23, 2016, 23 Plaintiffs McCauley and Kendler, who between them bought nearly $3 million worth of 24 Xhibit stock after the merger (Docs. 19-1, 19-2), filed the present action in the Maricopa 25 County Superior Court. Plaintiffs bring claims pursuant to Arizona Securities laws, Ariz. 26 Rev. Stat. §§ 44-1991(A)(2), 44-1991(A)(3), and 44-1999(B), on behalf of themselves 27 1 28 SkyMall Holdings Corporation includes: SkyMall, LLC; SkyMall Ventures, LLC; and SkyMall Interests, LLC. (Doc. 19 ¶ 2, n. 2.) 2 1 and all persons who purchased or held securities issued by Xhibit Corporation between 2 May 16, 2013 and September 10, 2014. (Doc. 19 ¶¶ 85-106.) Defendants removed the 3 case on October 11, 2016 pursuant to the Class Action Fairness Act of 2005 and 28 4 U.S.C. §§ 1332(d), 1441, 1446, and 1453. (Doc. 1 at 3.) Plaintiffs McCauley and Kendler 5 were appointed to serve as Lead Plaintiffs. (Doc. 24.) Defendants have moved to dismiss 6 Plaintiff’s First Amended Complaint. (Doc. 28.) 7 II. Standard of Review 8 To survive a motion to dismiss, a complaint must contain “a short and plain 9 statement of the claim showing that the pleader is entitled to relief” such that the 10 defendant is given “fair notice of what the . . . claim is and the grounds upon which it 11 rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007) (quoting Fed. R. Civ. P. 12 8(a)(2); Conley v. Gibson, 355 U.S. 41, 47 (1957)). The Court may dismiss a complaint 13 for failure to state a claim under Federal Rule 12(b)(6) for two reasons: (1) lack of a 14 cognizable legal theory, and (2) insufficient facts alleged under a cognizable legal theory. 15 Balistreri v. Pacificia Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). 16 A complaint must “state a claim to relief that is plausible on its face.” Ashcroft v. 17 Iqbal, 556 U.S. 662, 678 (2009) (internal citation omitted). Facial plausibility requires the 18 plaintiff to plead “factual content that allows the court to draw the reasonable inference 19 that the defendant is liable for the misconduct alleged.” Id. “Where a complaint pleads 20 facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line 21 between possibility and plausibility of entitlement to relief.’” Id. (quoting Twombly, 550 22 U.S. at 557). Although a complaint “does not need detailed factual allegations,” a 23 plaintiff must “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 24 555. This requires “more than labels and conclusions, and a formulaic recitation of the 25 elements of a cause of action.” Id. 26 In deciding a motion to dismiss the Court must “accept as true all well-pleaded 27 allegations of material fact, and construe them in the light most favorable to the non- 28 moving party.” Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010). In 3 1 comparison, “allegations that are merely conclusory, unwarranted deductions of fact, or 2 unreasonable inferences” are not entitled to the assumption of truth, id., and “are 3 insufficient to defeat a motion to dismiss for failure to state a claim.” In re Cutera Sec. 4 Litig., 610 F.3d 1103, 1108 (9th Cir. 2010) (internal citation omitted). A plaintiff need 5 not prove the case on the pleadings to survive a motion to dismiss. OSU Student All. v. 6 Ray, 699 F.3d 1053, 1078 (9th Cir. 2012). 7 Fraud claims are subject to Rule 9(b) of the Federal Rules of Civil Procedure, 8 which requires that a plaintiff “state with particularity the circumstances constituting 9 fraud or mistake.” Fed. R. Civ. P. 9(b). Rule 9(b) requires that the pleader “state the time, 10 place, and specific content of the false representations as well as the identities of the 11 parties to the misrepresentation.” Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 12 F.2d 1393, 1401 (9th Cir. 1986). The plaintiff must also “set forth . . . an explanation as 13 to why the disputed statement was untrue or misleading when made.” Yourish v. Cal. 14 Amplifier, 191 F.3d 983, 993 (9th Cir. 1999); see also Vess v. Ciba-Geigy Corp. USA, 15 317 F.3d 1097, 1106 (9th Cir. 2003) (“Averments of fraud must be accompanied by the 16 who, what, when, where, and how of the misconduct charged.”) (citation and quotation 17 marks omitted). “Rule 9(b) does not allow a complaint to merely lump multiple 18 defendants together but requires plaintiffs to differentiate their allegations . . . and inform 19 each defendant separately of the allegations surrounding his alleged participation in the 20 fraud.” United States v. Corinthian Colls., 655 F.3d 984, 997-98 (9th Cir. 2011) (citation 21 omitted). The plaintiff must identify each defendant’s role in the “fraudulent scheme.” Id. 22 at 998. 23 III. Discussion 24 In its amended complaint, Plaintiffs allege that Defendants violated the following 25 sections of Arizona Securities law: § 44-1991(A)(2), § 44-1991(A)(3), and § 44-1999(B). 26 The Court addresses each count in turn. 27 /// 28 /// 4 1 A. 2 “By its express terms, A.R.S. § 44-1991(A) prohibits direct or indirect fraud in 3 connection with the purchase or sale of securities.” Faccioloa v. Greenberg Traurig, No. 4 CV-10-1025-PHX-FJM, 2011 WL 5833785, at *1 (D. Ariz. Nov. 21, 2011). Subsection 2 5 explicitly states that it is a fraud to: Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Count 1: 44-1991(A)(2) Ariz. Rev. Stat. § 44-1991(A)(2). The heightened pleading standard of § 44-1991 requires that “the complaint shall specify each alleged untrue statement or material omission and the reason or reasons why the statement or omission is misleading or the omission is material.” Ariz. Rev. Stat. § 442082(A); Faccioloa, 2011 WL 5833785, at *1. Moreover, the complaint must also allege specific facts that give rise to the “strong inference that the defendant acted with the required state of mind.” Ariz. Rev. Stat. § 44-2082(B). Plaintiffs’ claims against Defendant focus on the following allegedly fraudulent actions taken by Defendants including: (1) concealing SkyMall’s poor financial condition in the May 17, 2013 press release announcing the merger; (2) overvaluing the merger’s worth in Xhibit’s financial statements; (3) failing to include qualifications about concerns over SkyMall’s worth in its financial statements completed prior to the merger; (4) overvaluing SkyMall’s intangible assets, tradename, and goodwill; (5) failing to inform shareholders about Xhibit’s plans to eliminate and sell particular business lines; and (6) making material omissions about Xhibit’s financial condition in its April 2014 financial statements. (Doc. 19 at 7-16; Doc. 28 at 7-13.) It is important to note, however, that none of these allegations relate to fraudulent actions taken by Defendants in connection with the sale or purchase of securities. To state a claim under Ariz. Rev. Stat, § 44-1991(A)(2), Plaintiffs must allege that Defendants committed a fraud that resulted in the sale or purchase of securities by Plaintiffs. Here, Plaintiffs focus on actions taken by Defendants 5 1 that merely impacted the value of Xhibit’s securities. Because there are no allegations 2 that Defendants committed a fraud that resulted in the sale or purchase of Xhibit 3 securities, Plaintiffs fail to state a claim under Ariz. Rev. Stat. § 44-1991(A)(2). 4 B. Count 2: § 44-1991(A)(3) 5 Under § 44-1991(A)(3), it is fraud to “[e]ngage in any transaction, practice or 6 course of business which operates or would operate as fraud or deceit.” Claims of fraud 7 brought under § 44-1991(A)(3) must also satisfy the pleading requirements of Ariz. Rev. 8 Stat. §§ 44-2082(A)-(B). Moreover, to avoid conflating the subsections of § 44-1991(A), 9 allegations of “[m]anipulative conduct must be distinct from omissions or representations 10 under state law.” Red River, 2012 WL 2507517, at *10. Because Plaintiffs’ claim against 11 Defendants under Ariz. Rev. Stat. § 44-1991(A)(3) is a literal recitation of the statute 12 itself (Doc. 19 ¶ 96), Plaintiffs fail to state a claim under Ariz. Rev. Stat. § 44- 13 1991(A)(3). 14 C. Count 3: § 44-1999(B) 15 Ariz. Rev. Stat. § 44-1999(B) provides for joint and several liability for those who 16 directly or indirectly control any person liable for a violation of § 44-1991. The evidence 17 presented by Plaintiffs in their claims under § 44-1999(B) are identical to those claims 18 under § 44-1991(A)(2) and § 44-1991(A)(3). Because Plaintiffs have failed to state a 19 claim under § 44-1991, it follows that Plaintiffs’ claims under Ariz. Rev. Stat. § 44- 20 1999(B) must also fail. 21 IV. Conclusion 22 Plaintiffs’ First Amended Complaint fails to state a claim under Ariz. Rev. Stat. §§ 23 44-1991(A)(2), 44-1991(A)(3), and 44-1999(B). Given that Plaintiffs have already had 24 the opportunity to amend their Complaint, the Court finds that further opportunities to 25 amend would be futile and will dismiss this action without leave to amend. See Owens v. 26 Kaiser Found. Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 2001) (“In determining 27 whether leave to amend is appropriate, the district court considers ‘the presence of any of 28 four factors: bad faith, undue delay, prejudice to the opposing party, and/or futility’”); 6 1 Moore v. Kayport Package Express, Inc., 885 F.2d 531, 538 (9th Cir. 1989) (“Leave to 2 amend need not be given if a complaint, as amended, is subject to dismissal”). 3 Accordingly, 4 IT IS ORDERED: 5 1. That Defendants’ Motion to Dismiss (Doc. 28) is granted; and 6 2. That the Clerk of Court shall terminate this action. 7 Dated this 29th day of September, 2017. 8 9 Honorable Steven P. Logan United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7

Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.

Why Is My Information Online?