Securities and Exchange Commission v. Coldicutt

Filing 25

ORDER denying 13 Motion to Dismiss for Failure to State a Claim. Signed by Judge Michael M. Anello on 11/17/2022. (alns)

Case 3:22-cv-00274-MMA-KSC Document 25 Filed 11/17/22 PageID.147 Page 1 of 14

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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SECURITIES AND EXCHANGE
COMMISSION,

Case No. 22-cv-274-MMA (KSC)
ORDER DENYING MOTION TO
DISMISS

Plaintiff,
v.

[Doc. No. 13]

ANDREW T.E. COLDICUTT,
Defendant.

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Plaintiff Securities and Exchange Commission (“Plaintiff” or “SEC”) filed this

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action alleging violations of federal securities law against Defendant Andrew T.E.

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Coldicutt (“Defendant” or “Coldicutt”). See Doc. No. 1. Defendant moves to dismiss

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both causes of action against him. Doc. No. 13. Plaintiff filed an opposition to

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Defendant’s motion, to which Defendant replied. See Doc. Nos. 20, 22. The Court found

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the matter suitable for determination on the papers and without oral argument pursuant to

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Federal Rule of Civil Procedure 78(b) and Civil Local Rule 7.1.d.1. See Doc. No. 15.

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For the following reasons, the Court DENIES Defendant’s motion to dismiss.
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I. BACKGROUND 1

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This action arises from purported violations of federal securities laws by

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Defendant. Compl. ¶ 1. Broadly, Plaintiff alleges that, beginning in 2017, Defendant

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participated in a “fraudulent scheme to create a sham public company and register an

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offering of its securities with the SEC, concealing from SEC filings the company’s true

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control persons/promoters and source of funding, and his role as its securities attorney.”

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Id.

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A.

Hiring of Defendant and Creation of Issuer A

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Defendant “is a securities attorney licensed to practice law in the State of

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California.” Id. ¶ 9. “On or about May 8, 2017, two purported hedge fund managers

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(“Fund Manager 1” and “Fund Manager 2,” collectively the “Fund Managers”) contacted

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[Defendant] to inquire about potential legal representation for their supposed hedge fund

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(the “Fund”).” Id. ¶ 13. Fund Manager 1 was an undercover FBI agent, and Fund

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Manager 2 was a cooperating witness. Id. ¶ 14–15. On or about May 16, 2017, in Del

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Mar, California, Defendant met with the Fund Managers, who told Defendant they

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wanted to create a company and take it public. Id. ¶¶ 17–18. “On or about June 21,

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2017, Fund Manager 1 signed [Defendant’s] engagement letter on behalf of the Fund and

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wired $5,000 to [Defendant’s] attorney trust account as a retainer.” Id. ¶ 22.

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“On or about July 18, 2017, the Fund Managers held a planning meeting with

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[Defendant] in Del Mar, California.” Id. ¶ 23. During the meeting, “[Defendant]

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described to the Fund Managers how he could create the façade of a bona fide business,

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take it public, and obtain quotation clearance for its stock to trade on the over-the-counter

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market[,]” and “suggested to the Fund Managers several ways to avoid regulatory

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scrutiny when creating a public shell company[,]” including that “the Fund Managers had

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Because this matter is before the Court on a motion to dismiss, the Court must accept as true the
allegations set forth in the Complaint. See Hosp. Bldg. Co. v. Trs. Of Rex Hosp., 425 U.S. 738, 740
(1976).
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to come up with a strong business plan for the shell company from which to prepare a

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registration statement, to persuade the SEC that the shell company was a real business.”

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Id. ¶¶ 28–51. “There was a peach on the table where the meeting took place, which had

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come from a nearby tree in the Fund Managers’ yard. [Defendant] joked that he could

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write a plan for a company that would pick surplus peaches from homeowners’

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backyards.” Id. ¶ 29. “Fund Manager 1 told [Defendant] that the Fund Managers

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planned to pivot the shell company into the cannabis business, and run a stock

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promotional campaign.” Id. ¶ 47. “[Defendant] replied that ‘we’ should come up with a

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business idea.” Id. ¶ 48. Defendant “stated that he could write the business plan[,]”

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“suggested that the shell company be a peach-picking company,” and “advised the Fund

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Managers to start looking for a CEO for the shell company.” Id. ¶¶ 49–51.

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“After the July 2018 meeting, [Defendant] drafted a business plan for Issuer A”

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that “described Issuer A as a company that would collect unpicked fruit from

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homeowners in the Southern California area, consolidate it, and sell it to grocery stores

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and the public generally.” Id. ¶ 53. Defendant “knew, when he drafted the business plan,

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that it was fictitious” and that “the Fund Managers planned for Issuer A to operate in the

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cannabis industry and run a stock promotion campaign.” Id. ¶¶ 54–55.

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“[Defendant] met with the Fund Managers on or about September 27, 2017 in Del

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Mar, California.” Id. ¶ 56. At the meeting, “the Fund Managers introduced [Defendant]

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to a consultant who would purportedly provide funding for Issuer A (the “Consultant”).”

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Id. ¶ 57. “The Fund Managers told [Defendant] that Consulting Company B was the

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Consultant’s company.” Id. ¶ 58. “[T]he Fund Managers and the Consultant discussed,

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in front of [Defendant], that Fund Manager 1’s money would go to Consulting Company

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B, and would then be loaned to Issuer A.” Id. ¶ 59. Defendant suggested “that

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Consulting Company B’s loans would become convertible to Issuer A Stock, which

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would generate more free trading shares.” Id. ¶ 60.

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“On or about October 16, 2017, the Fund Managers informed [Defendant] that they
had selected a puppet CEO (“the Puppet”) to serve as Issuer A’s CEO.” Id. ¶ 62. “The
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Puppet was, unbeknownst to [Defendant], an undercover FBI agent.” Id. ¶ 64.

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Defendant “understood that the Puppet was controlled by the Fund Managers” and

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“communicated on decisions concerning Issuer A with the Fund Managers and the

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Consultant, sometimes including the Puppet and sometimes not including him.” Id. ¶¶

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63, 65.

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“Between late 2017 and approximately mid-August of 2018, [Defendant]

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periodically contacted the Fund Managers about Issuer A.” Id. ¶ 66. “On or about

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November 14, 2017, in Del Mar, California, Fund Manager 1 introduced [Defendant] to

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an associate of his (the “Associate”), whose role he indicated was to help make Fund

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Manager 1’s new companies appear legitimate and to organize stock promotions.” Id. ¶

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67. “The Associate, unbeknownst to [Defendant] was a cooperating witness” who

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“became [Defendant’s] main point of contact regarding Issuer A.” Id. ¶¶ 69–70.

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“On November 20, 2017, [Defendant] incorporated Issuer A in Wyoming.” Id. ¶

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68. “In or about May 10, 2019, [Defendant] recommended to the Associate an audit firm

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(“Audit Firm C”), to serve as the outside auditor for Issuer A[,]” and “explained to the

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Associate that Audit Firm C had experience with microcap issuers, but did not audit so

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many microcap firms that it might arouse regulatory suspicion.” Id. ¶¶ 71–72. “During

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the same call, [Defendant] suggested to the Associate that the Puppet update his social

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media profile.” Id. ¶ 74. “[Defendant] told the Associate that most people have a

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biographical profile on social media, and the lack of one for the Puppet ‘looked strange.’”

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Id. ¶ 76. “[Defendant] recommended that the Puppet’s profile go back five years and that

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it should show him ‘doing something.’” Id. ¶ 77.

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“In or about January 19, 2018, the Fund Managers told [Defendant] that a

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stock promoter with whom they had met was leery of working with [Defendant], due to

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the SEC subpoena enforcement actions against him.” Id. ¶ 79. “On May 20, 2019,

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[Defendant] emailed the Puppet and the Associate, attaching an engagement letter for

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another attorney (“Attorney D”) who would provide the opinion letter for Issuer A’s

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Form S-1, instead of [Defendant] providing it.” Id. ¶ 80. “In an email dated June 5, 2019
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from [Defendant] to Audit Firm C, Issuer A’s bookkeeper, and the Puppet, [Defendant]

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falsely stated that changing attorneys had been the Puppet’s idea.” Id. ¶ 81.

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Nevertheless, Defendant “continued to perform legal work for Issuer A.” See id. ¶ 82.

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“In conversations with the Associate between at least May 15, 2019 and July 30, 2019,

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the Associate reiterated to [Defendant] that the Fund Managers intended to rebrand Issuer

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A as a cannabis company and then run a promotional campaign in order to sell its shares

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at a profit.” Id. ¶ 83.

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B.

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Filing of SEC Form S-1 and Amendments
“[Defendant] had begun to prepare Issuer A’s draft Form S-1 as early as October

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2017” and “[o]n or about May 10, 2019, [ ] sent the draft S-1 by email for review by

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Issuer A’s auditor, bookkeeper, and the Puppet.” Id. ¶¶ 85–86. “On June 17, 2019,

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[Defendant] filed Issuer A’s initial Form S-1 with the SEC.” Id. ¶ 87. Between June and

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August, 2019, [Defendant], on behalf of Issuer A, subsequently responded to several

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comments on the S-1 from the SEC’s Division of Corporation Finance.” Id. ¶ 88.

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“[Defendant] prepared and filed Issuer A’s amended Forms S-1 on July 25,

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August 5, and August 27, 2019.” Id. ¶ 89. “The Issuer A Form S-1 went effective on

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September 11, 2019.” Id. ¶ 90.

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“The Issuer A Form S-1 was materially false and misleading in several aspects,

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and gave the false impression that Issuer A was an actual fruit harvesting and distribution

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business, whereas it was a sham company.” Id. ¶ 91. Specifically, Defendant alleges the

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following: “[t]he Issuer A Form S-1 characterized Issuer A as a development stage

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company that would go into the fruit harvesting and distribution industry” when “[i]n

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reality, [Defendant] had simply made up the company” and “had been told, by the time

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he prepared the Form S-1, that the Fund Managers’ actual plan for Issuer A’s business

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was to convert it into a cannabis company and carry out a stock promotion campaign.”

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Id. ¶¶ 92–94. The Issuer A form S-1 also “had, as attachments, purported form

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agreements with third parties, for the fruit harvesting and distribution business.” Id. ¶ 97.

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“[Defendant] created the sham form agreements.” Id. ¶ 98. Although “[Defendant] knew
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the Fund Managers were in control of both Issuer A and the Puppet[,]” “[t]he Issuer A

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Form S-1 stated that the Puppet was Issuer A’s sole officer, director, promoter, and

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control person.” Id. ¶¶ 104–106. “The Issuer A Form S-1 stated that in 2017, the Puppet

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provided Issuer A $5,000 in initial funding for 5 million shares of its common stock”

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when “[i]n reality, [Defendant] recharacterized the $5,000 retainer that he had received

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from Fund Manager 1 on behalf of the Fund as funding by the Puppet.” Id. ¶¶ 110, 112.

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“[T]he Puppet did not provide any initial funding to Issuer A.” Id. ¶ 113. “The Issuer A

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Form S-1 stated that, from November 20, 2017 to May 20, 2019, Consulting Company B

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had provided $29,000 in funding to Issuer A, in return for promissory notes” when

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“[Defendant] had been told that Consulting Company B was merely a front for Fund

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Manager 1’s financing of the company.” Id. ¶¶ 116, 118. “Issuer A’s Form S-1 included

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an attorney opinion letter concluding that the shares to be issued in the offering were

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validly issued, fully paid, and non-assessable.” Id. ¶ 121. “[Defendant] had Attorney D

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sign the opinion letter in order to hide [Defendant’s] name from Issuer A’s Form S-1

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filed with the SEC.” Id. ¶ 123. “[Defendant] received at least $39,500 for his role in

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Issuer A’s fraudulent Form S-1.” Id. ¶ 125.

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Plaintiff brings two causes of action in its Complaint: (1) fraud in the offer or sale

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of securities in violation of Sections 17(a)(1) and (3) of the Securities Act, 15 U.S.C.

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§§ 77q(a)(1), 77q(a)(3); and (2) fraud in the offer or sale of securities in violation of

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Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2). Id. ¶¶ 133–42.

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Defendant now moves to dismiss both causes of action against him under Rules
12(b)(6) and 9(b).
II. LEGAL STANDARD
A Rule 12(b)(6) motion tests the legal sufficiency of the claims made in the

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complaint. See Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A pleading must

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contain “a short and plain statement of the claim showing that the pleader is entitled to

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relief,” Fed. R. Civ. P. 8(a)(2), such that the defendant is provided “fair notice of what the

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. . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S.
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544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). However, plaintiffs

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must also plead “enough facts to state a claim to relief that is plausible on its face.” Fed.

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R. Civ. P. 12(b)(6); Twombly, 550 U.S. at 570. The plausibility standard demands more

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than “a formulaic recitation of the elements of a cause of action,” or “naked assertions

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devoid of further factual enhancement.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

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(internal quotation marks omitted). Instead, the complaint “must contain allegations of

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underlying facts sufficient to give fair notice and to enable the opposing party to defend

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itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).

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In reviewing a motion to dismiss under Rule 12(b)(6), courts must assume the truth

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of all factual allegations and must construe them in the light most favorable to the

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nonmoving party. See Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir.

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1996). A court need not take legal conclusions as true merely because they are cast in the

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form of factual allegations. See Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir.

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1987). Similarly, “conclusory allegations of law and unwarranted inferences are not

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sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir.

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1998).

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Additionally, allegations of fraud or mistake require the pleading party to “state

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with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).

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“Averments of fraud must be accompanied by ‘the who, what, when, where, and how’ of

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the misconduct charged.” Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009)

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(citation omitted) (first quoting Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th

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Cir. 2003); and then quoting In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir.

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1994), superseded by statute on other grounds)). The context surrounding the fraud must

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“be ‘specific enough to give defendants notice of the particular misconduct . . . so that

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they can defend against the charge and not just deny that they have done anything

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wrong.’” Kearns, 567 F.3d at 1124 (quoting Bly–Magee v. California, 236 F.3d 1014,

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1019 (9th Cir. 2001)). The allegations “must set forth more than the neutral facts

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necessary to identify the transaction. The plaintiff must set forth what is false or
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misleading about a statement, and why it is false.” Vess, 317 F.3d at 1106 (internal

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quotation marks omitted). However, the SEC may aver scienter allegations generally

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since “[m]alice, intent, knowledge, and other conditions of a person’s mind may be

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alleged generally.” See Fed. R. Civ. P. 9(b); Fecht v. Price Co., 70 F.3d 1078, 1082 n.4

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(9th Cir. 1995), cert denied, 517 U.S. 1136 (1996) (“Plaintiff may simply state that

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scienter existed to satisfy the requirements of Rule 9(b).”)

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Where dismissal is appropriate, a court should grant leave to amend unless the

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plaintiff could not possibly cure the defects in the pleading. See Knappenberger v. City

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of Phoenix, 566 F.3d 936, 942 (9th Cir. 2009) (quoting Lopez v. Smith, 203 F.3d 1122,

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1127 (9th Cir. 2000)).

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III. DISCUSSION

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Defendant moves to dismiss all causes of action alleged against him. See Doc. No.

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13. The Court assesses each claim in turn.

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A.

Violation of Section 17(a)(2) of the Securities Act

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In its second cause of action, Plaintiff alleges violation of Section 17(a)(2).

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Compl. ¶¶ 138–42. Specifically, Plaintiff alleges that Defendant prepared and filed with

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the SEC Issuer A’s materially false and misleading registration statement and

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amendments thereto. Id. ¶¶ 85–124.

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To state a claim under Section 17(a)(2), Plaintiff must allege facts sufficient to

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show: “in connection with the offer or sale of a security: (1) a material false statement or

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omission; (2) made with at least negligence; (3) the receipt of money or property by

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means thereof; (4) by means of interstate commerce.” See SEC v. Wayland, No. SACV

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17-01156 AG (DFMx), 2019 U.S. Dist. LEXIS 115749, at *14 (C.D. Cal. Apr. 8, 2019)

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(citing SEC v. Glt Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001)).

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Defendant argues that the Complaint fails to plead the first and second elements,

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and additionally argues that the claim fails to meet the heightened pleading requirement

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set forth in Rule 9(b). See Doc. No. 13 at 21–23. 2 The Court confines its analysis to the

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elements challenged in the motion to dismiss.

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As to the first element, a fact is material when “a substantial likelihood that the

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disclosure of the omitted fact would have been viewed by the reasonable investor as

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having significantly altered the ‘total mix’ of information made available.” SEC v. Phan,

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500 F.3d 895, 902 (9th Cir. 2007) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32

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(1988)). In this case, the alleged misstatements occurred in registration statements and

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documents in support of those registration statements, including that the “Fund

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Managers’ actual plan for Issuer A’s business was to convert it into a cannabis

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company”, that the “purported form agreements with third parties, for the fruit harvesting

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and distribution business” attached to Form S-1 were shams, that Issuer A was “actually

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controlled/promote by the Fund Managers” and not the Puppet CEO, and that the

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description of Issuer A’s funding was false. See Compl. ¶¶ 85–124. This is sufficient to

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plead materiality. See SEC v. Husain, No. 2:16-cv-03250-ODW (E), 2017 U.S. Dist.

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LEXIS 29131, at *21 (C.D. Cal. Mar. 1, 2017) (“There is little doubt that a reasonable

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investor would have wanted to know the true identity of the shell’s leader, whether the

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shell was a viable business operating according to its stated business plan . . . Other than

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a corporation’s financials, its leadership, the nature of its operations, and its plan for the

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future would seem to be the most important pieces of information available to an

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investor.”).

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Defendant additionally urges that these allegations “do not describe fraud or Rule

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17(a) violations on the part of [Defendant]. The allegations, when considered

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individually and as a whole, describe a securities attorney competently and honestly

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performing his job on behalf of his perceived clients . . .” Doc. No. 13 at 15. However,

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in reviewing a motion to dismiss under Rule 12(b)(6), the Court must assume the truth of

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All citations to electronically filed documents refer to the pagination assigned by the CM/ECF system.
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all factual allegations and construe them in the light most favorable to the nonmoving

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party. See Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir. 1996). Doing so

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here, the Court is satisfied that the first element is sufficiently stated.

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As to the second element, Plaintiff alleges that Defendant “with scienter or

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negligence, obtained money or property by means of untrue statements of a material fact

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or by omitting to state a material fact necessary in order to make the statements made, in

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light of the circumstances under which they were made, not misleading.” Compl. ¶ 141.

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Negligence “is the failure to exercise reasonable care under all the circumstances.” SEC

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v. Cutting, No. 2:21-cv-103-BLW, 2022 U.S. Dist. LEXIS 178181, at *34 (D. Idaho Sept.

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28, 2022) (first citing Robare Group, Ltd. v. SEC, 922 F.3d 468, 477 (D.C. Cir. 2019);

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and then citing SEC v. Glt Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001))).

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Plaintiff adequately pleads negligence with its detailed allegations regarding the hiring of

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Defendant—a securities attorney—by the Fund Managers; the July 18, 2017 planning

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meeting regarding taking Issuer A public; subsequent communication between

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Defendant, the Fund Managers, and the Associate; and the allegedly misleading

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registration statements and amendments thereto prepared and filed by Defendant. See

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Compl. ¶¶ 13–51, 85–124. Additionally, Plaintiff sufficiently pleads scienter. See Fecht,

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70 F.3d at 1082 n.4 (9th Cir. 1995) (“Plaintiff may simply state that scienter existed to

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satisfy the requirements of Rule 9(b).”)

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Defendant also argues that the Complaint fails to plead fraud with the requisite

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particularity. See Doc. No. 13 at 14–19. In support of this argument, Defendant points to

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SEC v. Spinosa, 31 F. Supp. 3d 1371 (S.D. Fla. 2014). See id. at 14. Plaintiff urges that

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“[h]ere, the allegations of the Complaint fall well short of those in [Spinosa] [ ] that were

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deemed inadequate[.]” Id. at 15. However, Defendant’s reliance on Spinosa is

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misplaced. Spinosa is inapposite because the purported misstatements in the instant case

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are centered on Issuer A’s Form S-1 and attachments thereto rather than

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misrepresentations to specific investors. See Compl. ¶¶ 92–124. Additionally, Spinosa

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involved a complex Ponzi scheme, and it was in that context that the district court held
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that the SEC was required to identify the investors to whom the defendant made “oral

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misrepresentations on several occasions” in order to plead fraud with sufficient

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particularity. Spinosa, 31 F. Supp. 3d at 1374–75. The scheme “perpetrated by now-

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convicted Scott Rothstein” was carried out “through the sale of fake discounted

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settlements which Rothstein ran through his law firm.” Id. at 1373. The SEC alleged

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that the defendant, who worked at the bank where Rothstein’s firm maintained trust

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accounts, made misrepresentations to the investors to aid Rothstein’s scheme. Id. at

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1373–74. The court found it “necessary to identify the recipients to put [the defendant]

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on notice of the exact statements upon which the SEC’s claims are based.” Id. at 1375.

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In contrast, this case is straightforward and the allegations as to Defendant are

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sufficiently detailed to “give [Defendant] notice of the particular misconduct . . . so that

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[he] can defend against the charge and not just deny that [he has] done anything wrong.’”

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Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009). Defendant identifies

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specific filings with the SEC, Defendant’s alleged role in these filings, and what was

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purportedly misleading about the filings. See Compl. ¶¶ 85–124. This is sufficient to

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meet even the heightened pleading requirements of Rule 9(b). See SEC v. Ficeto, 839 F.

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Supp. 2d 1101, 1105 (C.D. Cal. 2011) (“The SEC provides detailed information

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regarding . . . Defendant, his [ ] role in the fraudulent transactions, the specific fraudulent

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acts that were allegedly performed, and how the acts constitute fraud.”)

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Accordingly, the Court DENIES the motion to dismiss Claim 2.

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B.

Violation of Sections 17(a)(1) and (3) of the Securities Act
In its first cause of action, Plaintiff alleges “scheme liability” arising under Section

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17(a)(1) and (3) of the Securities Act. Compl. ¶¶ 133–137. To state a claim under

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Section 17(a)(1), Plaintiff must allege facts sufficient to show Defendant (1) employed a

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device, scheme, or artifice to defraud; (2) in connection with the purchase of a sale or

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security; (3) with scienter; and (4) in interstate commerce. See Husain, 2017 U.S. Dist.

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LEXIS 29131, at *24 (citing SEC v. Zouvas, No. 16-cv-0998-CAB (DHB), 2016 WL

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6834028, at *5, *10 (S.D. Cal. Nov. 21, 2016)). Scienter is defined as a “mental state
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embracing intent to deceive, manipulate, or defraud.” See Aaron v. SEC, 446 U.S. 680,

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686 n.5 (1980) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, n.12 (1976)).

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Scienter can be established by showing knowledge or recklessness. SEC v. Feng, 935

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F.3d 721, 734 (9th Cir. 2019); see also Gebhart v. SEC, 595 F.3d 1034, 1041 (9th Cir.

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2010). The same elements required to establish a Section 17(a)(1) violation suffice to

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establish a 17(a)(3) violation, except that Section 17(a)(3) only requires a showing of

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negligence. Phan, 500 F.3d at 908.

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Defendant argues that the Complaint fails to plead the first and second elements,

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and additionally argues that the claim fails to meet the heightened pleading requirement

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set forth in Rule 9(b). See Doc. No. 13 at 20–21. The Court confines its analysis to the

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elements challenged in the motion to dismiss.

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As to the first element, in the Ninth Circuit, scheme liability requires that the

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defendant engaged in deceptive acts that had “the principal purpose and effect of creating

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a false appearance of fact in furtherance of the scheme.” SEC v. Baccam, 2017 U.S. Dist.

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LEXIS 88450, at *16 (C.D. Cal. June 8, 2017) (quoting Burnett v. Rowzee, 561 F. Supp

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2d 1120 (C.D. Cal. 2008)). This includes “manipulative or deceptive act[s] in

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furtherance of a scheme” that “create the false appearance of fact.” See Simpson v. AOL

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Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on other grounds, 519

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F.3d 1041 (9th Cir. 2008). However “[i]t is not enough that a transaction in which a

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defendant was involved had a deceptive purpose and effect; the defendant’s own conduct

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contributing to the transaction or overall scheme must have had a deceptive purpose and

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effect.” Id. (emphasis in original).

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At this early stage in the litigation, the Court is satisfied that Plaintiff adequately

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alleges the first element against Defendant for the purposes of a motion to dismiss. The

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scheme alleged here is that Defendant “participated in fraudulent scheme to create a sham

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public company and register an offering of its securities with the SEC, concealing from

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SEC filings the company’s true control persons/promoters and source of funding, and his

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role as its securities attorney.” Compl. ¶ 1. Defendant provides detailed allegations
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describing Defendant’s participation in the alleged scheme, including dates of

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conversations, participants in those conversations, Defendant’s involvement in those

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conversations, Defendant’s advice to the Fund Managers and Associate, Defendant’s

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preparation and filing of the purportedly “materially false and misleading” Issuer A Form

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S-1, Defendant’s creation of deceptive sham form agreements in support of Issuer A’s

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Form S-1, and Defendant’s preparation and filing of Issuer A’s Amended Forms S-1. Id.

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¶¶ 85–124. Plaintiff alleges that Defendant’s deceitful activities in furtherance of the

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scheme include, among other things, preparing a fictitious business plan for Issuer A and

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describing to the Fund Managers “how he could create the façade of a bona fide business,

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take it public, and obtain quotation clearance for its stock to trade on the over-the-counter

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market.” See id. ¶¶ 52–55

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As to the second element, Plaintiff alleges that Defendant “with scienter, employed

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devices, schemes and artifices to defraud; and, with scienter or negligence, engaged in

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transactions, practices, or courses of business which operated or would operate as a fraud

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or deceit upon the purchaser.” Id. ¶ 136. The same allegations described supra Section

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III.A suffice to plead negligence under Section 17(a)(3). Additionally, Plaintiff

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adequately pleads scienter under Section 17(a)(1). See Fecht, 70 F.3d at 1082 n.4

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(“Plaintiff may simply state that scienter existed to satisfy the requirements of Rule

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9(b).”)

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Defendant also argues that the Complaint fails to plead fraud with the requisite

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particularity. See Doc. No. 13 at 22. However, Plaintiff “provides detailed information

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regarding . . . Defendant, his [ ] role in the fraudulent transactions, the specific fraudulent

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acts that were allegedly performed, and how the acts constitute fraud.” Ficeto, 839 F.

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Supp. 2d at 1105. The Court is satisfied that Plaintiff meets the pleading requirements of

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Rule 9(b).

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Accordingly, the Court DENIES the motion to dismiss Claim 1.

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IV. CONCLUSION

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For the foregoing reasons, the Court DENIES Defendant’s motion to dismiss.

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Defendant must now respond to the Complaint within the time prescribed by Federal

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Rule of Civil Procedure 12.

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IT IS SO ORDERED.
Dated: November 17, 2022

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_____________________________

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HON. MICHAEL M. ANELLO
United States District Judge

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