Earth Gen Biofuel, Inc. v. Jonathan Fink

Filing 31

ORDER DENYING PLAINTIFFS EX PARTE APPLICATION FOR TEMPORARY RESTRAININGORDER 27 by Judge Otis D. Wright, II (lc)

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United States District Court
Central District of California

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EARTH GEN BIOFUEL INC., a Nevada

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Case № 2:16-cv-07161-ODW (SS)

corporation,
Plaintiff,

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ORDER DENYING PLAINTIFF’S

v.

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EX PARTE APPLICATION FOR

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JONATHAN FINK, an individual; DOES

TEMPORARY RESTRAINING

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1 through 50, inclusive,

ORDER [27]

Defendants.

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I.

INTRODUCTION

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Before the Court is Plaintiff Earth Gen Biofuel Incorporated’s ex parte

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application for a temporary restraining order to enjoin Defendant Jonathan Fink from

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making further sales in its stock and to freeze his assets pending resolution of this

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case. (ECF No. 27.) For the following reasons, the Court DENIES the application.1

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II.

FACTUAL BACKGROUND

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Plaintiff is a Nevada corporation headquartered in Los Angeles, California.

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(Compl. ¶ 1, ECF No. 1.) Defendant is a resident of Los Angeles County. (Id. ¶ 2.)

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After carefully considering the papers filed in support of the application, the Court deems the
matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15.

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On September 23, 2016, Plaintiff filed this case alleging: (1) violations of Securities

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Exchange Act Section 10(b) and Rule 10b-5; (2) breach of fiduciary duty; (3) unjust

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enrichment; and (4) common law fraud. (Compl. ¶¶ 13–36.) Plaintiff filed this ex

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parte application for a temporary restraining order on January 19, 2017, seeking to

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enjoin Defendant from making further sales in its stock and to freeze Defendant’s

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assets pending resolution of this case. (Appl. 15, ECF No. 27.) Defendant filed an

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opposition to Plaintiff’s application on January 20, 2017.

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Because the parties have presented very different versions of the facts in their

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submissions, the Court summarizes both versions below.

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(ECF Nos. 29–30.)

A. Plaintiff’s Version

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On September 25, 2013, Defendant approached Plaintiff’s chief executive

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officer, George Shen, about helping to register Plaintiff as a publicly traded

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corporation. (Shen Decl. ¶ 2, ECF No. 27.) Shen thereafter hired Defendant as a

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consultant. (Id. ¶ 3.) However, Shen never made Defendant an officer or employee of

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Plaintiff. (Id.)

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Shen indicates that on “several occasions,” Plaintiff forged Shen’s name, issued

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himself and other investors stock, and then sold the stock for his personal benefit.2

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(Id. ¶¶ 5, 12.) On April 28, 2016, and June 8, 2016, Defendant told Plaintiff’s

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shareholder, Mark Andres, that he needed some of his stock to finance Plaintiff’s

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operations. (Id. ¶¶ 6–7.) Believing that the proceeds from these sales would be

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returned to the company, Andres agreed to surrender a significant number of his

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shares. (Id. ¶ 8.) Defendant then sold that stock for his personal benefit and failed to

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remit any portion of the proceeds to Plaintiff. (Id. ¶¶ 6–7.) After the April 28, 2016

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incident, Defendant forged Shen’s signature to issue new shares of Plaintiff’s stock.

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(Id. ¶ 5.)

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On July 13, 2016, and July 17, 2016, Defendant convinced Shen to infuse funds

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into investor relations. (Id. ¶¶ 13, 15.) This drove up the value of Plaintiff’s stock.

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Shen suggests that Defendant last engaged in forgery on July 22, 2016. (Id. ¶ 12.)

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(Id. ¶¶ 10, 14.) Once the stock had increased in value, Defendant sold “blocks” of his

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shares. (Id.) Sale of Defendant’s shares drove the value of Plaintiff’s shares back

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down. (Id. ¶ 16.)

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At some point in October 2016, Defendant attempted to remove the restrictive

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ledger from “additional stock.”3 (Id. ¶ 18.) He represented to “Corporate Stock

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Transfer” that Plaintiff had given him authorization to do so. (Id.)

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B. Defendant’s Version

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Defendant asserts that he met Shen in March 2012. (Fink Decl. ¶ 2.) Shen

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sought Defendant’s advice about registering one of his companies as a publically

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traded corporation.

(Id.)

Shen then formed Earth Gen Biofuel Incorporated on

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August 28, 2012. (Id.) That same day, Shen issued Defendant 1,440,0004 shares of

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stock in Plaintiff for $1,000. (Id. ¶ 3.) At its peak, this issuance equated to roughly

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1.64 percent of all outstanding shares in the corporation. (Id.) Defendant claims that

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this was the only time he was issued shares of Plaintiff’s stock. (Id.)

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Defendant served as secretary of the corporation from August 28, 2012, to

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September 25, 2012. (Id. ¶ 2.) On September 25, 2012, Defendant resigned that post

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and in October 2012 became a consultant for the corporation. (Id.)

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Defendant categorically denies that Andres ever surrendered shares to him on

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June 8, 2016. (Id. ¶ 8.) Defendant further asserts that he never sold “any” shares

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“owned by Mark Andres.”

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“proceeds” from any sale of Andres’ shares. (Id.) Defendant also denies forging

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Shen’s signature and issuing shares to investors for his personal benefit. (Id. ¶ 9;

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Opp’n 3, ECF No. 29.)

(Id.)

Additionally, he claims not to have received

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It is unclear whether this activity occurred before or after Shen was served with the complaint on
October 16, 2016. (See ECF No. 10.)
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This figure represents the total number of shares Defendant purchased on August 28, 2012, after
several reissuances and a stock split. (Fink Decl. ¶ 6.)

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Further, Defendant denies that his motivation for encouraging the infusion of

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funds into investor relations was a desire for personal gain. (Id. ¶ 10.) He claims that

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such investment was necessary for Plaintiff’s growth. (Id.)

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Lastly, Defendant denies representing to “Corporate Stock Transfer” that

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Plaintiff had given him authority to remove restrictive ledgers from certain stocks.

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(Id. ¶ 11.)

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Securities and Exchange Commission (“SEC”) guidelines, legally ask a transfer agent

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to remove such ledgers. (Id.)

He alleges that owners of stock with restrictive ledgers may, under

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LEGAL STANDARD

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“An application for a temporary restraining order involves the invocation of a

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drastic remedy which a court of equity ordinarily does not grant, unless a very strong

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showing is made of a necessity and desirability of such action.” Youngstown Sheet &

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Tube Co. v. Sawyer, 103 F. Supp. 978, 980 (D.D.C. 1952). The standard for granting

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a temporary restraining order “is identical to the standard for issuing a preliminary

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injunction.” Brown Jordan Intern. v. Mind’s Eye Interiors, Inc., 236 F. Supp. 2d

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1152, 1154 (D. Haw. 2002).

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Pursuant to Federal Rule of Civil Procedure 65, a court may grant preliminary

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injunctive relief in order to prevent “immediate and irreparable injury.” Fed. R. Civ.

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P. 65(b). To obtain this relief, the plaintiff must establish: (1) a likelihood of success

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on the merits; (2) a likelihood that he will suffer irreparable harm if the preliminary

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relief is not granted; (3) that the balance of equities tips in his favor; and (4) that the

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injunction is in the public interest. See Winter v. Natural Res. Def. Council, Inc., 555

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U.S. 7, 20 (2008). In the Ninth Circuit, the Winter factors may be evaluated on a

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sliding scale: “serious questions going to the merits, and a balance of hardships that

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tips sharply toward the plaintiff can support issuance of a preliminary injunction, so

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long as the plaintiff also shows that there is a likelihood of the irreparable injury and

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that the injunction is in the public interest.” Alliance for the Wild Rockies v. Cottrell,

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632 F.3d 1127, 1135 (9th Cir. 2011) (internal quotations omitted).

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III.

DISCUSSION

A. Likelihood of Success on the Merits
The primary issue in this case is whether Defendant committed fraud.

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defendant may be held liable for securities fraud under Rule 10b-5 where he directly

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or indirectly uses any means or instrumentality of interstate commerce, or the mails or

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any facility of any national securities exchange, (a) to employ any device, scheme, or

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artifice to defraud, or (b) to make any untrue statement of a material fact, or (c) to

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engage in any act, practice, or course of business which operates or would operate as a

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fraud or deceit upon any person, in connection with the purchase or sale of any

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security. 17 C.F.R. § 240.10b-5. A defendant may be held liable for fraud under

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California law where he makes: “(1) a misrepresentation (false representation,

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concealment, or nondisclosure); (2) with knowledge of its falsity (or scienter); (3)

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with the intent to defraud; (4) that caused justifiable reliance; and (5) resulting

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damage.” Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal. 4th 979, 990 (2004).

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If the assertions in Plaintiff’s declaration are true, then Plaintiff possesses a fair

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likelihood of success on the merits as to its securities fraud claim, if not its common

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law fraud claim as well. Plaintiff allegedly issued himself and others stock by forging

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the name of Plaintiff’s CEO George Shen. (Shen Decl. ¶ 5.) He then sold those

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shares for his own benefit. (Id.) This is securities fraud plain and simple; use of a

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deceitful or manipulative device in connection with the subsequent sale of securities.

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SEC v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996). Further, Plaintiff alleges that

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Defendant made false statements to obtain shares from Mark Andres, and then sold

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those shares for his personal benefit without remitting any of the proceeds to Plaintiff.

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(Shen Decl. ¶¶ 6–7.) Again, this may constitute securities fraud because there were

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false statements made in connection with a subsequent sale of securities. Fehn, 97

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F.3d at 1289.

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However, Defendant disputes Plaintiff’s account in its entirety. Defendant

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asserts that he never forged the signature of Plaintiff’s CEO to issue himself stock,

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and that all of his stock in Plaintiff was purchased lawfully on August 28, 2012. (Fink

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Decl. ¶¶ 3, 9; Opp’n 3.) He also claims that Andres never provided him with stock

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and that he never sold “any” stock “owned by” Andres. (Id. ¶ 8.)

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Where there is a limited evidentiary record and material facts are in dispute,

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courts have generally considered the likelihood of success factor to weigh against

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granting a temporary restraining order. See Purdum v. Wolfe, No. C–13–04816 DMR,

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2014 WL 171546, at *6 (N.D. Cal. Jan. 15, 2014) (“As the record before the court is

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limited, the court declines to resolve this factual dispute, and accordingly finds that

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Plaintiffs have failed to demonstrate a likelihood of success on the merits on this

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claim.”); Hansen Beverage Co. v. Vital Pharm., Inc., No. 08–CV1545 IEG (POR),

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2008 WL 5427601, at *4 (S.D. Cal. Dec. 30, 2008) (finding that the plaintiff failed to

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demonstrate a likelihood of success where there was a limited record and disputes of

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material fact).

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Almost every material fact in this case is disputed. Additionally, each side has

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offered only a single declaration concerning the substantive issues, leaving the Court

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with an extremely limited record from which to render a decision. As such, the Court

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follows the lead of other district courts in the Ninth Circuit and finds that the

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likelihood of success factor weighs against granting the temporary restraining order.

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B. Immediate and Irreparable Injury

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The Court also finds that the immediate and irreparable injury factor weighs

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against granting the temporary restraining order. To begin, the parties seem to agree

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that Plaintiff has not engaged in any additional forgery since July 2016 or fraud of any

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kind since October 2016 when he tried to remove the restrictive ledgers from certain

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securities without Plaintiff’s permission. (Shen Decl. ¶¶ 12, 18.) Further, there is no

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indication that Plaintiff has continued to sell off his existing stock since this case was

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filed. Thus, it is unclear why a temporary restraining order is necessary at this

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particular point in time, more than three months after Defendant was served with the

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complaint.

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Plaintiff also presents scant evidence that the potential harm would be

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irreparable. In the context of evaluating whether to grant a temporary restraining

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order, harm is irreparable where it extends beyond pecuniary injury. See Regents of

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Univ. of Cal. v. Am. Broad. Cos., Inc., 747 F.2d 511, 519 (9th Cir. 1984) (“a party is

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not entitled to a preliminary injunction unless he or she can demonstrate more than

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simply damages of a pecuniary nature”).

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Here, Plaintiff attempts to dress up straightforward monetary injury as a loss of

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corporate goodwill. While Ninth Circuit case law allows for the possibility that

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damage to a corporation’s goodwill may be “irreparable,” Plaintiff has not put forth

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any evidence, beyond conclusory statements in the application itself, that Defendant’s

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actions have caused or will cause meaningful damage to its reputation. (Appl. 9–10);

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see also Herb Reed Enters., LLC v. Florida Entm’t Mgmt., Inc., 736 F.3d 1239, 1250

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(9th Cir. 2013) (“Evidence of loss of control over business reputation and damage to

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goodwill could constitute irreparable harm.”).

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declaration are completely devoid of any mention of corporate goodwill or

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reputational injury; these submissions do not indicate that investors view Plaintiff less

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favorably or that they are less inclined to invest in Plaintiff as a result of Defendant’s

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alleged activities.

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temporary restraining order must be supported by specific facts in “an affidavit or a

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verified complaint”). Because there does not appear to be an immediate risk of

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irreparable harm, the Court finds that the second factor weighs against granting the

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temporary restraining order.

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C. Balance of Equities

The complaint and Plaintiff’s

See Fed. R. Civ. P. 65(b)(1) (an ex parte application for a

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The third factor balances potential harm to the plaintiff in the absence of a

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temporary restraining order with potential harm to the defendant if a temporary

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restraining order is granted. Johnson v. Macy, 145 F. Supp. 3d 907, 920 (C.D. Cal.

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2015). The Court finds that the potential harm to Defendant outweighs the potential

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harm to Plaintiff.

While there is a chance Plaintiff might experience additional

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downward pressure on its share price if Defendant continues to sell off his stock,

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Defendant’s small stake in the corporation makes it unlikely that his activities are

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capable of delivering a fatal blow to Plaintiff.5 (See Fink Decl. ¶ 3.) Conversely, a

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total asset freeze is likely to have a crippling effect on Defendant. It is unclear how

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Defendant, as an individual, would be able to cover his day-to-day expenses for the

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duration of this potentially year-long lawsuit if such a freeze is put in place. For these

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reasons, the Court finds that the balance of equities factor weighs against granting the

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temporary restraining order.

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D. The Public Interest

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Neither party discusses the public interest factor. As the other three factors

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weigh against granting the temporary restraining order, the Court finds it unnecessary

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to

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215CV05524ODWJEM, 2015 WL 6870009, at *4 (C.D. Cal. Nov. 6, 2015) (holding

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that it is not necessary to address the public interest factor where the other three

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Winter factors weigh against granting a temporary restraining order).

address

the

public

interest

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IV.

factor.

See

Melamed

v.

Herold,

No.

CONCLUSION

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Because three out of the four Winter factors weigh against granting a temporary

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restraining order, Plaintiff has not made “a clear showing that [he] is entitled to such

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relief.” 555 U.S. at 22. The Court therefore DENIES Plaintiff’s application for a

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temporary restraining order. (ECF No. 27.)

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IT IS SO ORDERED.

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January 24, 2017

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____________________________________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE

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The Court also finds that it is unlikely Plaintiff would be able to engage in additional forgery or
fraud now that Defendant is aware of his tactics.

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