Securities And Exchange Commission v. San Francisco Regional Center LLC et al

Filing 128

ORDER by Judge Richard Seeborg denying 101 Motion to Dismiss. (cl, COURT STAFF) (Filed on 5/15/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,

United States District Court
Northern District of California

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Case No. 17-cv-00223-RS
ORDER DENYING MOTION TO
DISMISS

v.
SAN FRANCISCO REGIONAL CENTER
LLC, et al.,
Defendants.

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Defendant Comprehensive Care Of Oakland, L.P. and its general partner, defendant

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Comprehensive Care Of California, LLC, (collectively, “Compcare”) move to dismiss two of the

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four claims for relief in the complaint brought against them and numerous other defendants by the

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Securities and Exchange Commission (“SEC”). Pursuant to Civil Local Rule 7-1(b), the matter is

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suitable for disposition without oral argument, and the hearing set for May 18, 2017 is vacated.

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The motion will be denied.

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The general background of this action has been set forth in a prior order and will not be

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recounted here. Compcare seeks dismissal of the first two claims for relief, both of which allege

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violations of §10(b) of the Exchange Act and Rule 10b-5. A prima facie claim for a violation of §

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10(b) of the Exchange Act and Rule 10b-5 has five elements: “(1) a material misrepresentation or

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omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4)

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transaction and loss causation, and (5) economic loss.” Zucco Partners, LLC v. Digimarc Corp.,

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552 F.3d 981, 990 (9th Cir. 2009). The pleading of such claims must also satisfy the particularity

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requirements of Rule 9 of the Federal Rules of Civil Procedure. See SEC v. Berry, 580 F. Supp.

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2d 911, 920 (N.D. Cal. 2008).1
Compcare contends the SEC has not pleaded sufficient facts showing that Compcare—as

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opposed to other defendants—engaged in any prohibited conduct, and that the claims against it fail

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under both Rule 12(b)(1) and Rule 9. Compcare’s argument, however, is premised on

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disregarding the extensive allegations of conduct undertaken by defendant Thomas Henderson in

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connection with, and as a manager of, Compcare. In addition to general allegations describing the

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overall alleged scheme, which included Compcare, paragraphs 58-64, pages 12-15, of the

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complaint focus on Compcare specifically.
Compcare insists these alleged wrongful acts cannot be imputed to it because Henderson

United States District Court
Northern District of California

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was effectively a “rogue agent” acting adversely to Compcare’s interest. Compcare also points to

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the rule that in the context of a fraud suit involving multiple defendants, a plaintiff must, at a

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minimum, “identif[y] the role of [each] defendant [ ] in the alleged fraudulent scheme.” Swartz v.

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KPMG LLP, 476 F.3d 756, 764-65 (9th Cir. 2007).

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Compcare’s reliance on limitations on “group pleading” is unavailing. If the allegations

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regarding Henderson’s conduct taken in connection with Compcare are attributable to it, there is

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no question that Compcare’s “role” in the scheme is adequately delineated. Because Compcare’s

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attempt to distance itself from Henderson by declaring him a “rogue” agent does not present an

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issue that can be adjudicated at the pleading stage, those allegations are indeed attributable to

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Compcare. Accordingly, the motion to dismiss must be denied.

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On reply, Compcare acknowledges that the heightened standard for pleading scienter under the
Private Securities Litigation Reform Act, 15 U.S.C. § 78u–4(b)(2), does not apply here, where the
plaintiff is the SEC. See Berry, 580 F. Supp. 2d at 920-21.
ORDER DENYING MOTION TO DISMISS
CASE NO. 17-cv-00223-RS

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IT IS SO ORDERED.

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Dated: May 15, 2017
______________________________________
RICHARD SEEBORG
United States District Judge

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United States District Court
Northern District of California

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ORDER DENYING MOTION TO DISMISS
CASE NO. 17-cv-00223-RS

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