MVP Asset Management (USA) LLC v. Vestbirk, et al

Filing 147

ORDER signed by Judge Garland E. Burrell, Jr on 3/21/13. For the stated reasons, Defendants' 12(b)(6) dismissal motion challenging the federal claims is granted, Defendants 12(b)(6) motion challenging the state claims is deemed withdrawn, and Defendants' 12(b)(2) dismissal motion is denied as moot because of this ruling. Defendants' 12(b)(1) motion is denied because it is based on a challenge that is moot. Plaintiff is granted 10 days from the date on which this order is fil ed to file a Fifth Amended Complaint addressing the deficiencies of Plaintiffs pleading discussed in this order. Further, Plaintiff is notified that this action may be dismissed with prejudice under Rule 41(b) if Plaintiff fails to file an amended complaint within the prescribed time period. (Meuleman, A)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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MVP ASSET MANAGEMENT (USA) LLC,
a Delaware Limited Liability
Company,
Plaintiff,

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v.
STEVEN VESTBIRK; JEFF BALLIET;
ALLISON HANSLIK; JIM GRANT; ARK
ROYAL ASSET MANAGEMENT, LTD., a
Bermuda Limited Company;
VESTBIRK CAPITAL MANAGEMENT,
LTD., a Bermuda Limited Company;
ARK ROYAL ASSET MANAGEMENT, LLC,
a Nevada Limited-Liability
Company; ARK DISCOVERY, LLC, a
Business Entity of Unknown Form;
ARK ROYAL HOLDINGS, LLC, a
Nevada Limited-Liability
Company; ARK ROYAL SERVICES,
LLC, a Nevada Limited-Liability
Company; ARK ROYAL CAPITAL, LLC,
a Nevada Limited-Liability
Company; ARK ROYAL CAPITAL
FUNDING, LLC, a Nevada LimitedLiability Company; ARK ROYAL
CAPITAL, INC., a Nevada
Corporation; ARK ROYAL
RESOURCES, LLC, a Nevada
Limited-Liability Company; ARK
ROYAL ASSURANCE LLC, a Nevada
Limited-Liability Company; and
ARK ROYAL INVESTMENTS, LLC, a
Nevada Limited-Liability
Company;
Defendants.
________________________________

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2:10-cv-02483-GEB-CKD
ORDER

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Defendants

filed

a

motion

to

dismiss

Plaintiff’s

Fourth

2

Amended Complaint (“FAC”) under Federal Rule of Civil Procedure (“Rule”)

3

12(b)(6), 12(b)(1), and 12(b)(2). Defendants argue, inter alia, that

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Plaintiff has failed to state federal securities fraud claims, the Court

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lacks diversity jurisdiction over Plaintiff’s state claims, “Plaintiff

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. . . has failed to comply with the strict pleading requirements of the

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Private Securities Litigation Reform Act (“PSLRA”) . . . and Rule 9(b),”

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and “Plaintiff fails to allege the facts necessary to establish personal

9

jurisdiction over Moving Defendants in California.” (Defs.’ Notice of

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Mot. and Mot. to Dismiss FAC Pursuant to Rule 12(b)(6), 12(b)(1), and

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12(b)(2) (“Defs.’ Mot.”) 2:22–23, 2:25–3:2, 3:4–6, 4:8–9; ECF No. 128.)

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Defendants argue dismissal should be with prejudice since “no possible

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curative allegation remains” by which the Plaintiff could cure the FAC’s

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deficiencies. (Id. 2:23.) Plaintiff opposes the motion. (Pl.’s Opp’n to

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Defs.’ Mot. (“Pl.’s Opp’n”), ECF No. 134.)

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I. REQUESTS FOR JUDICIAL NOTICE

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Defendants support their dismissal motions with a request

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“that the Court incorporate by reference into Plaintiff’s Complaint and

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take judicial notice of for purposes of ruling on Defendants’ Motion to

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Dismiss several . . . documents,” including a Subscription Agreement.

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(Defs.’ Request for Judicial Notice (“Defs.’ RJN”) 2:2–4, ECF No. 129.)

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“[A] court may consider a writing referenced in a complaint but not

23

explicitly incorporated therein if the complaint relies on the document

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and its authenticity is unquestioned.” Swartz v. KPMG LLP, 476 F.3d 756,

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763 (9th Cir. 2007). Since Plaintiff does not dispute the authenticity

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of the referenced Subscription Agreement, and references and quotes from

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the Subscription Agreement in the FAC, (FAC ¶¶ 51, 59, 71), the

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2

1

Subscription

2

reference principle.

Agreement

is

considered

under

the

incorporation-by-

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Defendants also request that the Court take judicial notice of

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and incorporate into the FAC by reference a Confidential Information

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Memorandum dated February 2008. (Defs.’ RJN 2:11–13.) Plaintiff filed an

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objection

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Memorandum is not necessary to the decision on the motion issued below.

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Therefore, this document is not considered, and the request for judicial

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notice is denied.

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to

this

Defendants

request.

further

However,

request

the

Confidential

judicial

notice

Information

of additional

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documents, to which Plaintiff does not object. (Defs.’ RJN 2:14–4:9.)

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Plaintiff

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Defendants do not object. (Pl.’s Request for Judicial Notice, ECF No.

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136.) However, since these documents are neither necessary to nor

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considered in the decision on the motion, these documents are not

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considered, and these requests for judicial notice are therefore denied.

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II. FEDERAL CLAIMS

also

requested

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Decision

notice

of

documents,

to

which

A. Legal Standards

19

judicial

on

Defendants’

Rule

12(b)(6)

motion

requires

20

determining “whether the complaint’s factual allegations, together with

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all reasonable inferences, state a plausible claim for relief.” Cafasso,

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U.S. ex rel. v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1054 (9th Cir.

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2011) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009)). “A claim

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has facial plausibility when the plaintiff pleads factual content that

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allows the court to draw a reasonable inference that the defendant is

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liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Bell

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Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)).

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3

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When determining a claim’s sufficiency, the court “accept[s]

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factual allegations

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pleadings in the light most favorable to the non-moving party.” Fayer v.

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Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (citing Manzarek v. St. Paul

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Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008)). However,

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this tenet “is inapplicable to legal conclusions.” Iqbal, 556 U.S. at

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678. Further, “[a] pleading that offers ‘labels and conclusions’ or ‘a

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formulaic recitation of the elements of a cause of action will not do.’

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Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid

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of ‘further factual enhancement.’” Id. (quoting Bell Atl. Corp. v.

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Twombly, 550 U.S. 544, 555, 557 (2007)). “In sum, for a complaint to

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survive a motion to dismiss, the nonconclusory ‘factual content,’ and

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reasonable inferences from that content, must be plausibly suggestive of

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a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv.,

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572 F.3d 962, 969 (9th Cir. 2009).

in

the

complaint

as

true

and

construe[s] the

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“To state a claim under § 10(b) . . . , a plaintiff must show

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that the securities transaction at issue was a securities transaction

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that is covered by the Exchange Act [the Securities Exchange Act of

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1934].” Cascade Fund, LLP v. Absolute Capital Mgmt. Holdings Ltd., No.

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08-cv-01381-MSK-CBS, 2011 WL 1211511, at *3 (D. Colo. Mar. 31, 2011)

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(citing Morrison v. Nat’l Austl. Bank Ltd., 558 U.S. ---, 130 S. Ct.

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2869, 2884 (2010)). “Section 10(b) reaches the use of a manipulative or

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deceptive device or contrivance only in connection with the purchase or

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sale of a security listed on an American stock exchange, and the

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purchase or sale of any other security in the United States.” Morrison,

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130 S. Ct. at 2888. Therefore, “the focus of the Exchange Act is not

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upon the place where the deception originated, but upon purchases and

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sales of securities in the United States. . . . [I]t is parties or
4

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prospective parties to those transactions that the statute seeks to

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‘protec[t].’” Id. at 2884 (quoting Superintendent of Ins. of N.Y. v.

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Bankers Life & Cas. Co., 404 U.S. 6, 10 (1971)). First, “the plaintiff

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[must] meet[] the threshold inquiry” that the Exchange Act covers the

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securities transaction. Cascade Fund, LLP, 2011 WL 1211511, at *3

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(citing Dura Pharms., Inc. v. Bruoudo, 544 U.S. 336 341 (2005); Sec. &

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Exch. Comm’n v. Wolfson, 539 F.3d 1249, 1256 (10th Cir. 2008); Adams v.

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Kinder-Morgan, Inc., 340 F.3d 1038, 1095 (10th Cir. 2003)). Then the

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“securities fraud complaint under § 10(b) . . . must satisfy the dual

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pleading requisites of Federal Rule of Civil Procedure 9(b) and the

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PSLRA.” In re VeriFone Holdings, Inc. Sec. Litig., 2012 WL 6634351, at

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*3 (citing Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990–91

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(9th Cir. 2009)).

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B. Discussion

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Defendants seek dismissal of Plaintiff’s Exchange Act claims

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under Rule 12(b)(6). Plaintiff alleges in its first claim a violation of

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Section 10(b), and in its second claim control person liability under

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Section

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allegations do not cure the deficiencies in Plaintiff’s prior complaint,

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which was dismissed in a prior Order. (Order 15:27–16:1, ECF No. 126.)

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Defendants argue: “As set forth in [the dismissal] Order, ‘[t]o state a

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claim under § 10(b) . . . , a plaintiff must show that the securities

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transaction at issue was a securities transaction that is covered by the

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Exchange Act.’” (Defs.’ Mot. 14:16–18 (quoting Order 9:26–28 (quoting

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Cascade Fund, LLP v. Absolute Capital Mgmt. Holdings Ltd., 2011 WL

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1211511, at *3 (D. Colo. Mar. 31, 2011))).)

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20(a).

(FAC

¶¶

88-98.)

Defendants

argue

that

Plaintiff’s

“Section 10(b) reaches the use of a manipulative or
deceptive device or contrivance only in connection
with the purchase or sale of a security listed on
an American stock exchange, and the purchase or
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sale of any other security in the United States.
. . . [T]he focus of the Exchange Act is not upon
the place where the deception originated, but upon
purchases and sales of securities in the United
States.”

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(Id. 14:20-25 (quoting Order at 10 (quoting Morrison, 130 S. Ct. at

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2888, 2884 (citation omitted))).) Further, Defendants argue that “[a]

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Section 20(b) claim may be dismissed summarily if a plaintiff fails to

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establish a primary violation of Section 10(b).” (Id. 21:4-5 (citing

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Order at 12 (citing In re Societe Generale Sec. Litig., No. 08 Civ.

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2495(RMB), 2010 WL 3910286, at *9 (S.D.N.Y. Sept. 29, 2010); Morrison,

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130 S. Ct. at 2876 n.2; see also In re Verifone Sec. Litig., 11 F.3d

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865, 872 (9th Cir. 1993))).)

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Plaintiff counters that under Absolute Activist Value Master

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Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), the relevant inquiry

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involved with determining whether a plaintiff has sufficiently alleged

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that a domestic transaction exists focuses on whether the plaintiff has

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allege[d] facts leading to the plausible inference
that the parties incurred irrevocable liability
within the United States: that is, that the
purchaser incurred irrevocable liability within the
United States to take and pay for a security, or
that the seller incurred irrevocable liability
within the United States to deliver a security.

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(Pl.’s

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(internal quotation marks omitted)).) Plaintiff argues that it “became

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irrevocably bound upon the exchange of the purchase funds in New York.”

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(Id. 3:1–2.)

Opp’n

2:14-16

(quoting

Absolute

Activist,

677

F.3d

at

68

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Plaintiff alleges in the FAC that it engaged with Defendants

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in domestic transactions of securities that are not listed on an

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American

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allegations concerning the alleged transactions:

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stock

exchange.

Plaintiff’s

FAC

contains

the

At all times relevant hereto Verwaltungs- und
Privat-Bank Aktiengesellschaft (“VP Bank”) served
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following

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as the Custodian Bank for MVP. Citco Global Custody
NV (“Citco”) is a custodial service based in the
Netherlands. VP Bank maintains with Citco Account
Number 190023 in which, as MVP’s Custodian Bank, VP
Bank holds on behalf of MVP the assets of MVP. All
of MVP’s investments in the Ark Discovery Fund
alleged herein are held, and have been held at all
times since they were purchased, for the benefit of
MVP in VP Bank’s Account Number 190023 with Citco.
Pursuant to its power of attorney for MVP, MVPAM
caused MVP to make the investments in the Ark
Discovery Fund alleged herein through MVP’s
custodian, Citco. On or about March 26, 2008,
Plaintiff caused MVP, through Citco, to enter into
a subscription for the purchase [of] 10,000 shares
of the Ark Discovery Fund (Offshore) Ltd. for $1
million with a value date of April 1, 2008. The
Subscription Agreement for the purchase of these
shares instructed MVP to wire the purchase funds to
the Ark Discovery Fund’s New York bank account. MVP
complied with Ark Discovery Fund’s instructions and
consummated its subscription when MVP’s purchase
funds were wired by Citco from its bank account at
HSBC Bank in New York which, in turn, wired the
funds to the Ark Discovery Fund’s account at JP
Morgan Chase in New York. The Subscription
Agreement provides that upon the wiring of MVP’s
purchase funds “[t]his subscription is irrevocable
by the Investor . . .” and, therefore, when MVP
wired its purchase funds to Ark Discovery Fund’s
New York bank account MVP incurred irrevocable
liability within the United States to take and pay
for the Ark Discovery Fund shares. Plaintiff is
informed and believes, and thereupon alleges, that
the $1 million purchase funds never left the United
States but, instead, were held in New York on Ark
Discovery Fund’s account at JP Morgan Chase in New
York until disbursed in the United States to make
the loans to Petters which constituted Ark
Discovery Fund’s asset portfolio.

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. . .
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On or about July 1, 2008, Plaintiff caused MVP,
through Citco, to enter into a subscription for the
purchase [of] 10,000 [sic] shares of the Ark
Discovery Fund (Offshore) Ltd. for $1 million [sic]
with a value date of July 1, 2008.1 The Subscription

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Plaintiff alleges that the second (July 1 value date) and third
(August 1 value date) purchases were for 10,000 shares each and valued
at $1 million each, but as this is inconsistent with all prior
complaints—which each allege purchases of 5,000 shares for $500,000—the
(continued...)
7

1

Agreement for the purchase of these shares
instructed MVP to wire the purchase funds to the
Ark Discovery Fund’s New York bank account. MVP
complied with Ark Discovery Fund’s instructions and
consummated its subscription when MVP’s purchase
funds were wired by Citco from its bank account at
HSBC Bank in New York which, in turn, wired the
funds to the Ark Discovery Fund’s account at JP
Morgan Chase in New York. Plaintiff is informed and
believes,
and
thereupon
alleges,
that
the
Subscription Agreement provides that upon the
wiring of MVP’s purchase funds “[t]his subscription
is irrevocable by the Investor . . .” and,
therefore, when MVP wired its purchase funds to Ark
Discovery Fund’s New York bank account MVP incurred
irrevocable liability within the United States to
take and pay for the Ark Discovery Fund shares.
Plaintiff is informed and believes, and thereupon
alleges, that the $500,000 purchase funds never
left the United States but, instead, were held in
New York on Ark Discovery Fund’s account at JP
Morgan Chase in New York until disbursed in the
United States to make the loans to Petters which
constituted Ark Discovery Fund’s asset portfolio.

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. . .
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On or about July 28, 2008, Plaintiff caused MVP,
through Citco, to enter into a subscription for the
purchase [of] 10,000 [sic] shares of the Ark
Discovery Fund (Offshore) Ltd. for $1 million [sic]
with a value date of August 1, 2008. The
Subscription Agreement for the purchase of these
shares instructed MVP to wire the purchase funds to
the Ark Discovery Fund’s New York bank account. MVP
complied with Ark Discovery Fund’s instructions and
consummated its subscription when MVP’s purchase
funds were wired by Citco from its bank account at
HSBC Bank in New York which, in turn, wired the
funds to the Ark Discovery Fund’s account at JP
Morgan Chase in New York. The Subscription
Agreement provides that upon the wiring of MVP’s
purchase funds “[t]his subscription is irrevocable
by the Investor . . .” and, therefore, when MVP
wired its purchase funds to Ark Discovery Fund’s
New York bank account MVP incurred irrevocable
liability within the United States to take and pay
for the Ark Discovery Fund shares. Plaintiff is
informed and believes, and thereupon alleges, that
the $500,000 purchase funds never left the United

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(...continued)
Court assumes these were each intended to refer to purchases of 5,000
shares for $500,000.
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1

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States but, instead, were held in New York on Ark
Discovery Fund’s account at JP Morgan Chase in New
York until disbursed in the United States to make
the loans to Petters which constituted Ark
Discovery Fund’s asset portfolio.

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(FAC ¶¶ 51, 59, 71.) The gravamen of Plaintiff’s allegations is that

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once Plaintiff wired money from its New York–based bank account into

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Defendants’ New York–based bank account, Plaintiff “incurred irrevocable

7

liability within the United States.” (Id.)

2

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Plaintiff states these allegations are based on language taken

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from the Subscription Agreement. (Pl.’s Opp’n 19:23–20:4; see Defs.’

10

RJN, Ex. A.) Plaintiff alleges that “[t]he Subscription Agreement

11

provides

12

subscription is irrevocable by the Investor . . .’ and, therefore, when

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MVP wired its purchase funds to Ark Discovery Fund’s New York bank

14

account MVP incurred irrevocable liability within the United States.”

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(FAC ¶¶ 51, 59, 71 (quoting Defs.’ RJN, Ex. A).)

that

upon

the

wiring

of

MVP’s

purchase

funds

‘[t]his

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This allegation conveys that Plaintiff incurred irrevocable

17

liability within the United States. However, Defendants argue that

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either “it is the submission of the Subscription Agreement that renders

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the obligation binding,” or, “[a]lternatively, . . . the agreement

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became irrevocable once the Subscription Agreement was accepted by the

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Fund, as only then would there be an offer and acceptance.” (Defs.’ Mot.

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17:16–20.) The Subscription Agreement, which has been incorporated into

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the

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Plaintiff’s allegation. See Steckman v. Hart Brewing Inc., 143 F.3d

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1293, 1295–96 (9th Cir. 1998) (“[W]e are not required to accept as true

26

conclusory allegations which are contradicted by documents referred to

27

in the complaint.”). Consideration of the text of the Subscription

28

Agreement from which both parties quote shows that, under the terms of

FAC

by

reference,

supports

Defendants’

9

argument

rather

than

1

the

2

irrevocable liability within the United States” upon wiring money into

3

Defendants’ New York–based bank account.

Subscription

Agreement,

Plaintiff

did

not

actually

“incur[]

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The relevant portion of the Subscription Agreement states:

5

10

Payment of the total purchase price in the amount
of USD 1,000,000 is enclosed herewith/has been
wired to the Fund’s [(referencing Defendants)]
Custodian in accordance with the above wire
instructions. This subscription is irrevocable by
the Investor [Plaintiff] except under the terms of
the Offering Memorandum Amended and Restated 14
November 2006 and may be accepted if, as and when
received. The Fund reserves the right to reject
without cause all subscriptions up to the time the
shares are issued.

11

(Defs.’ RJN, Ex. A, at 38.) Although the Subscription Agreement states

12

that Plaintiff cannot revoke its subscription, it does not state that

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the subscription’s irrevocability hinges on the transfer of funds.

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9

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Plaintiff alleges the following in the FAC with respect to
entering into the Subscription Agreement:

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At all times relevant hereto Verwaltungs- und PrivatBank Aktiengesellschaft (“VP Bank”) served as the
Custodian Bank for MVP. Citco Global Custody NV
(“Citco”) is a custodial service based in the
Netherlands. VP Bank maintains with Citco Account
Number 190023 in which, as MVP’s Custodian Bank, VP
Bank holds on behalf of MVP the assets of MVP. . . .
Pursuant to its power of attorney for MVP, MVPAM
caused MVP to make the investments in the Ark
Discovery
Fund
alleged
herein
through
MVP’s
custodian, Citco. On or about March 26, 2008,
Plaintiff caused MVP, through Citco, to enter into a
subscription for the purchase [of] 10,000 shares of
the Ark Discovery Fund (Offshore) Ltd. for $1 million
with a value date of April 1, 2008.

24

. . .

25

27

On or about July 1, 2008, Plaintiff caused MVP,
through Citco, to enter into a subscription for the
purchase [of] 10,000 [sic] shares of the Ark
Discovery Fund (Offshore) Ltd. for $1 million [sic]
with a value date of July 1, 2008.

28

. . .

17
18
19
20
21
22

26

10

1

3

On or about July 28, 2008, Plaintiff caused MVP,
through Citco, to enter into a subscription for the
purchase [of] 10,000 [sic] shares of the Ark
Discovery Fund (Offshore) Ltd. for $1 million [sic]
with a value date of August 1, 2008.

4

(FAC ¶¶ 51, 59, 71.) No locations are alleged for VP Bank, Citco, MVP,

5

or the Ark Discovery Fund (Offshore) Ltd. (“Ark Discovery Fund”), nor is

6

it clear where parties were located when they “enter[ed] into . . .

7

subscription[s] for the purchase [of] . . . shares of the Ark Discovery

8

Fund,” (id.), which is the relevant information required to determine

9

when and where the parties incurred irrevocable liability. See Absolute

10

Activist, 677 F.3d at 68 (stating “the point of irrevocable liability

11

can be used to determine the locus of a securities purchase or sale.”);

12

In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144, 150 (S.D.N.Y.

13

2012) (“‘[T]he “purchase” and “sale” take place when the parties become

14

bound to effectuate the transaction,’ thereby equating ‘irrevocable

15

liability’ with entering into a binding contract.” (quoting Absolute

16

Activist, 677 F.3d at 68) (footnote omitted)).

2

17

Plaintiff alleges that MVPAM “is a Limited Liability Company

18

organized and existing under the laws of the State of Delaware with its

19

principal place of business until August 2009 in Tahoe City, California

20

and since September 2009 in San Francisco, California.” (FAC ¶ 3.)

21

Plaintiff does not allege MVP’s location but alleges that MVP is “an

22

Investment Company organized and existing under the laws of the British

23

Virgin Islands.” (Id.) Plaintiff does not allege a location for VP Bank.

24

(See id.) Plaintiff alleges that Citco “is a custodial service based in

25

the Netherlands.” (Id. ¶ 51.) Plaintiff alleges that Ark Discovery Fund

26

is “a British Virgin Islands Limited Liability Company.” (Id. ¶ 23.) The

27

administrator of Ark Discovery Fund is Beacon Management Limited, with

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an address, phone number, and fax number in Bermuda. (Defs.’ RJN, Ex. A,
11

1

at 38.) Although Plaintiff has alleged some connection to the United

2

States for some of the entities, Plaintiff has not alleged the locations

3

of the relevant parties when the parties entered into the Subscription

4

Agreement.

5

Instead,

Plaintiff

alleges

that

it

“complied

with

Ark

6

Discovery Fund’s instructions” regarding the Subscription Agreement.

7

(FAC ¶¶ 51, 59, 71.) The instructions in the Subscription Agreement

8

state: “To Subscribe carefully read this Agreement and then complete and

9

fax this form to the Administrator.” These instructions are followed by

10

the contact information for Beacon Management Limited in Bermuda.

11

(Defs.’ RJN, Ex. A, at 38.) The next page of the Subscription Agreement

12

includes the statement, “THE INVESTOR REQUESTS THAT ALL CORRESPONDENCE

13

BE SENT / TRANSMITTED TO:,” which is then followed by Citco addresses

14

and contact information in the Netherlands and Ireland. (Id. at 39.) Two

15

signatures and a stamp that appear to correspond to Citco are also on

16

this page. (Id.)

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The execution of the Subscription Agreement bound Citco (on
Plaintiff’s behalf) to the following terms:
2.

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21
22
23
24

3.

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26
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4.

The Investor(s) agrees that the Investor
may not cancel, terminate or revoke this
Subscription Agreement or any agreement
of the Investor(s) made hereunder and
that this Subscription Agreement shall
survive the death or disability or [sic]
the Investor(s) and shall be binding upon
the
Investor(s)’s
heirs,
executors,
administrators, successors and permitted
assigns.
This Subscription Agreement has been duly
and validly authorised, executed and
delivered by the Investor(s) and, upon
acceptance by the Fund, will constitute
the
valid,
binding
and
enforceable
agreement of the Investor(s).
This Subscription Agreement and the
documents referred to herein constitute
the entire agreement between the parties
hereto with respect to the subject matter
12

1

hereof.

2

(Defs.’ RJN, Ex. A, at 46 (emphasis added).) Plaintiff has not alleged

3

where Defendants were located when they accepted the Subscription

4

Agreement, (see FAC), which, under the Subscription Agreement, dictates

5

the point at which (and where) the Plaintiff and Defendants would have

6

made a “valid, binding and enforceable agreement.” (Defs.’ RJN, Ex. A,

7

at 46.) This location therefore determines whether the alleged agreement

8

is a “domestic transaction” for purposes of Section 10(b). However,

9

Plaintiff’s allegations concerning the Subscription Agreement coupled

10

with

11

insufficient to establish the existence of a domestic transaction, which

12

Section 10(b) requires.2 Accordingly, Plaintiff’s Section 10(b) claim is

13

dismissed.

the

relevant

portions

of

the

Subscription

Agreement

are

14

Further, Defendants seek dismissal of Plaintiff’s Section

15

20(a) control person liability claim, arguing that “[a] Section 20(a)

16

claim may be dismissed summarily if a plaintiff fails to establish a

17

primary violation of Section 10(b).” (Defs.’ Mot. 21:4–5.) “Congress has

18

established liability in Section 20(a) for every person who, directly or

19

indirectly, controls any person liable for violations of the securities

20

laws.” Janus Capital Grp. v. First Derivative Traders, 564 U.S. ---, 131

21

S. Ct. 2296, 2304 (2011). Therefore, Plaintiff’s “control person claims

22

under Section 20(a) are ‘necessarily predicated on a primary violation

23

of securities law.’ . . . Because Plaintiff[’s] primary claim[] under

24

Section 10(b) . . . [is] dismissed, ‘these secondary claims must also be

25
26
27
28

2

Since Plaintiff has not met its “threshold inquiry” that the
securities transaction is covered by the Exchange Act, whether Plaintiff
has met the elements of a Section 10(b) claim under the heightened Rule
9(b) and PSLRA pleading standards is not considered in this order.
Cascade Fund, LLP, 2011 WL 1211511, at *3.
13

1

dismissed.’” In re Societe Generale Sec. Litig., No. 08 Civ. 2495, 2010

2

WL 3910286, at *9 (S.D.N.Y. Sept. 29, 2010); see also Morrison, 130 S.

3

Ct. at 2876 n.2. (“Liability under § 20(a) is obviously derivative of

4

liability under some other provision of the Exchange Act.”).

5

III. SUPPLEMENTAL JURISDICTION

6

Defendants further argue since Plaintiff has not shown a basis

7

for federal subject matter jurisdiction, Plaintiff’s state claims should

8

be dismissed under 28 U.S.C. § 1367(c)(3). “[T]he district court [has]

9

discretionary authority to retain jurisdiction over state-law claims

10

where it has dismissed on the merits federal claims over which it did

11

have original jurisdiction.” Herman Family Revocable Trust v. Teddy

12

Bear, 254 F.3d 802, 806 (9th Cir. 2001). “Pursuant to the supplemental

13

jurisdiction statute, when a district court dismisses on the merits a

14

federal claim over which it had original jurisdiction, it may then

15

decline to exercise supplemental jurisdiction over the remaining state

16

claims . . . .” Id. “Under [United Mine Workers of America v.] Gibbs, a

17

federal court should consider and weigh in each case . . . the values of

18

judicial economy, convenience, fairness, and comity in order to decide

19

whether to exercise jurisdiction over . . . pendent state-law claims.”

20

Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 (1988) (citing United

21

Mine Workers of Am. v. Gibbs, 383 U.S. 715, 726–27 (1966)).

22

Since it is unclear whether Plaintiff will be able to allege

23

a

24

dismissed under 28 U.S.C. § 1367(c). However, in the interest of

25

judicial economy the portion of the motion challenging Plaintiff’s state

26

claims is deemed withdrawn since it is unclear whether a federal

27

question could be alleged. See generally EcoDisc Tech. AG v. DVD

28

Format/Logo Licensing Corp., 711 F. Supp. 2d 1074, 1085 (C.D. Cal. 2010)

viable

federal

question,

Plaintiff’s

14

state

claims

will

not

be

1

(“The Court declines to address the merits of the state law claims until

2

Plaintiff has pleaded a viable federal cause of action.”); Jones v. Cal.

3

Dep’t of Corr., No. 1:08-CV-01383-LJO, 2011 WL 902103, at *7 (E.D. Cal.

4

Mar. 15, 2011) (“Since Plaintiff has failed to allege a cognizable claim

5

for a violation of her federal rights, the Court declines to address her

6

supplemental state law claims.”), aff’d, 473 F. App’x 741 (9th Cir.

7

2012); Carnero v. Wash. Mut., No. C-09-5330 JF PVT, 2010 WL 1136384, at

8

*3 (N.D. Cal. Mar. 22, 2010) (“Unless and until [Plaintiff] alleges a

9

viable claim under federal law, the Court will decline to address her

10

state law claims.”); Coleman v. Adams, No. 1:06-CV-00836-AWI-WMW-PC,

11

2009 WL 900719, at *1 n.1 (E.D. Cal. Mar. 31, 2009) (“As it is not yet

12

clear whether Plaintiff’s federal claims will go to trial, the court

13

declines to address the sufficiency of Plaintiff’s state law claims, or

14

whether the court will exercise supplemental jurisdiction over them.”).

15

Although the merits of Plaintiff’s state claims are not

16

addressed in this order, “Defendant raise[s] several arguments regarding

17

the deficiencies in Plaintiff’s state law claims” that Plaintiff should

18

consider to avoid dismissal with prejudice. Grangetto v. Minn, No. 1:10-

19

CV-00701-AWI, 2010 WL 4810726, at *9 (E.D. Cal. Nov. 12, 2010), report

20

and recommendation adopted, No. 1:10-CV-0701, 2011 WL 386855 (E.D. Cal.

21

Feb. 3, 2011). “[P]laintiff [i]s counseled to consider the arguments

22

raised by [D]efendants respecting the [state claims’] pleading defects

23

asserted.” Occupational-Urgent Care Health Sys., Inc. v. Sutro & Co.,

24

Inc.,

25

Plaintiff[] choose[s] to file an amended complaint, Plaintiff[] should

26

re-evaluate the arguments raised by Defendants in support of their

27

motions to dismiss the state law claims.” Manuel v. Discovery Home

28

Loans, LLC, No. C 10-01185 JSW, 2010 WL 2889510, at *5 (N.D. Cal. July

711

F.

Supp.

1016,

1018

(E.D.

15

Cal.

1989).

Therefore,

“if

1

22, 2010).

2

IV. CONCLUSION

3

For the stated reasons, Defendants’ 12(b)(6) dismissal motion

4

challenging the federal claims is granted, Defendants’ 12(b)(6) motion

5

challenging the state claims is deemed withdrawn, and Defendants’

6

12(b)(2) dismissal motion is denied as moot because of this ruling.

7

Defendants’ 12(b)(1) motion is denied because it is based on a challenge

8

that is moot.

9

Plaintiff is granted ten (10) days from the date on which this

10

order

11

deficiencies of Plaintiff’s pleading discussed in this order. Further,

12

Plaintiff is notified that this action may be dismissed with prejudice

13

under Rule 41(b) if Plaintiff fails to file an amended complaint within

14

the prescribed time period.

15

Dated:

is

filed

to

file

a

Fifth

Amended

Complaint

addressing

March 21, 2013

16
17
18

GARLAND E. BURRELL, JR.
Senior United States District Judge

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20
21
22
23
24
25
26
27
28
16

the