Teague v. Alternate Energy Holdings, Inc. et al

Filing 73

MEMORANDUM DECISION AND ORDER denying 31 Motion to Dismiss; granting 36 Motion to Supplement. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by cjm)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
LANCE TEAGUE, individually and on
behalf of all others similarly situated,
Plaintiffs,

Case No. 1:10-cv-00634-BLW
MEMORANDUM DECISION AND
ORDER

v.
ALTERNATE ENERGY HOLDINGS,
INC., DONALD GILLISPIE and
JENNIFER RANSOM,
Defendants.

INTRODUCTION
Before the Court is defendants’ Motion to Dismiss Amended Complaint (Dkt. 31).
The Court has determined oral argument would not significantly assist the decisional
process and will decide the motion without a hearing. For the reasons expressed below,
the Court will deny the motion to dismiss, as well as defendants’ alternative request to
stay this matter.
BACKGROUND
Lead plaintiff Jerry Pehlke, Jr. represents a putative class of investors who
purchased Alternate Energy Holdings, Inc. stock during the period October 23, 2006

MEMORANDUM DECISION AND ORDER - 1

through December 14, 2010.1
Plaintiffs describe Alternate Energy as a company that “purports to operate in the
electric power generation industry by acquiring and developing nuclear plant sites and
obtaining licenses for their construction and operation throughout the United States,
especially Idaho.” Amended Complaint (FAC), Dkt. 29 ¶ 5 (emphasis added). On
December 14, 2010 – roughly four years after the company went public – the SEC
temporarily suspended trading of Alternate Energy common stock. Two days later, the
SEC filed a securities fraud complaint, alleging that Alternate Energy is a sham operation
with “no realistic possibility of building a multi-billion dollar nuclear reactor.” SEC
Compl., Case No. 1:10-cv-621-EJL-REB (D. Idaho), Dkt. 1, ¶ 1.2 Plaintiff filed this
action on December 20, 2011. FAC ¶¶ 120, 122.
The SEC and plaintiffs in this case allege substantially the same misconduct.
Most significantly, both allege that defendants engaged in two primary schemes to
artificially inflate the price of Alternate Energy’s stock: (1) improper use of stock
promoters; and (2) false press releases.
Regarding stock promoters, plaintiffs allege that individual defendant Donald
1

More precisely, plaintiffs allege two class periods, based on two separate types of
alleged securities fraud. “Market Manipulation” claims are made on behalf of investors who
purchased stock between October 23, 2006 through December 14, 2010, while “False Statement”
claims are made on behalf of investors who purchased stock between March 31, 2009 and
December 14, 2010. Amended Compl., Dkt. 29, ¶¶ 2, 3.
2

In July 2011, the SEC filed an amended complaint, which adds some additional claims.
See First Amended Compl., SEC Action Dkt. 87. In this fact statement, however, the Court
refers to the December 16, 2010 complaint because the parties generally focus on the SEC’s
December 2010 actions. See, e.g., FAC ¶ 13 (alleging that “[i]t was not until December 16,
2010, when the SEC instituted its civil action . . . that any reasonable investor or class member
could have reasonably suspected” defendants’ alleged fraud).
MEMORANDUM DECISION AND ORDER - 2

Gillispie “knowingly ordered stock promoters to manipulate the stock price by ordering
them to buy company stock at the end of certain trading days so as to artificially inflate
the stock’s price and trading volume.” FAC ¶ 42; see also SEC Compl. ¶¶ 2, 16.
Plaintiffs flesh out this allegation with summaries of various email communications
between individual defendant Donald Gillispie and stock promoter Billy Harbour. One
such communication is described as follows:
On January 17, 2007, Gillispie sent an email to Harbour, which stated:
“Billy . . . .there is no evidence you have been buying stock today or any
day recently at $1,00 or higher . . . I had someone buy 100 shares this
morning at $1.20 and the stock jumped to that price accordingly . . . and
then drifted down to 96 cents . . . please don’t lie to me about this any more
. . . it does not help in rebuilding your character now . . . .”
FAC ¶ 48.
The second major category of alleged misconduct involves false press releases.
Plaintiffs allege that in September 2010, Gillispie caused Alternate Energy to release two
press releases stating that no company director or “line officer” had ever sold any of their
Alternate Energy shares. See FAC ¶ 62; SEC Compl. ¶¶ 19-20. But defendant Jennifer
Ransom, a senior vice president of the company, sold one million shares between June
and September 2010, and Gillispie allegedly sold some of his own shares through
nominees. FAC ¶ 65-71; SEC Compl. ¶¶ 21, 25.
Plaintiffs also allege that another press release falsely stated that the company had
not paid Pinnacle Digest to recommend its stock. FAC ¶ 104; see SEC Compl. ¶ 34.
In addition to the press releases and improper use of stock promoters, plaintiffs
allege that defendants materially understated Gillispie’s and Ransom’s compensation on

MEMORANDUM DECISION AND ORDER - 3

the 2009 10-K, FAC ¶¶ 92-103; see also SEC Compl. ¶¶ 30-33.
In the SEC action, on December 16, 2010, the Court granted the SEC’s ex parte
application to freeze Alternate Energy’s assets. Two months later, in February 2011, the
Court entered a stipulated order lifting the asset freeze.
Meanwhile, on December 29, 2010, the SEC lifted its suspension, allowing
Alternate Energy’s stock to resume trading. The share price plunged. On December 13,
2010 – the day before the SEC suspended trading – Alternate Energy’s stock closed at
$.58 per share. On December 29, it opened at 6 cents per share and closed at 8 cents per
share – thus losing over 85 percent of its value in a single day.
Plaintiffs focus on this drastic price drop to support their theory that defendants’
fraudulent conduct caused their losses. As they put it, Alternate Energy’s “stock price
dropped catastrophically because the market became aware of the SEC’s allegations that
the Defendants knowingly or recklessly engaged in a fraudulent scheme and made
materially false and misleading statements, as alleged in the Amended Complaint.” FAC
¶ 126.
MOTION TO DISMISS
Plaintiffs allege defendants violated section 10(b) of the Exchange Act of 1934
and SEC Rule 10b-5. Section 10(b) makes it unlawful to “use or employ, in connection
with the purchase or sale of any security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission may
prescribe.” 15 U.S.C. § 78j(b). The scope of Rule 10b-5 is coextensive with that of
Section 10(b). SEC v. Zandford, 535 U.S. 813, 815 n.1 (2002). “In a typical § 10(b)
MEMORANDUM DECISION AND ORDER - 4

private action a plaintiff must prove (1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the misrepresentation or omission and
the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Scientific–
Atlanta, Inc., 552 U.S. 148, 156 (2008) (citation omitted).
This motion focuses on the sixth element of a Section 10(b) violation – loss
causation. Loss causation is the causal connection between a defendant’s material
misrepresentation and a plaintiff’s loss. Dura Pharms., Inc. v. Broudo, 544 U.S. 336,
344-45 (2005). “A plaintiff bears the burden of proving that a defendant’s alleged
unlawful act ‘caused the loss for which the plaintiff seeks to recover damages.’” In re
Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (quoting 15 U.S.C. § 78u–
4(b)(4)).
In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 344-45 (2005), the
Supreme Court held that a person who misrepresents the financial condition of a
corporation in order to sell stock is only liable to a relying purchaser for the loss the
purchaser sustains when the facts “become generally known” and “as a result” share
value depreciates. To adequately plead loss causation, the Court held, a plaintiff must
allege that the “share price fell significantly after the truth became known.” Id. at 347.
1.

Intervening Cause
Alternate Energy argues that plaintiffs’ efforts to allege loss causation are doomed

because even assuming the market learned of and reacted negatively to the frauds alleged
in the complaint, there are at least two intervening causes for the price drop: (1) the
MEMORANDUM DECISION AND ORDER - 5

SEC’s “reckless” conduct in December 2010, and (2) the disaster at a nuclear plant in
Japan, which was triggered by a March 11, 2011 earthquake.
A.

The SEC’s Conduct

Turning first to the SEC’s conduct, defendants argue that there is only one reason
Alternate Energy’s share price dropped so drastically on December 29, 2010. As
Alternate Energy puts it, “while Plaintiff’s allegation is that the stock price lost almost all
its value as a result of the Defendants’ alleged fraudulent conduct, the far more obvious
reason that the stock price was wholly decimated was as a result of AEHI’s[3] inability to
do any business whatsoever when the SEC unilaterally decided to un-suspend trading of
AEHI’s stock at a time when all of its assets were frozen and the company had not yet
had an opportunity to respond to the SEC’s false allegations.” Mot. Memo, Dkt. 32, at
13. Given this purportedly “obvious reason” for the December 29 plunge in Alternate
Energy’s stock price, defendants argue that the Court cannot reasonably infer any other
cause for the decline.
The Court is unpersuaded. It is reasonable to infer that on December 16, the
public learned of the fraudulent activity when the SEC filed its lawsuit. It is further
reasonable to infer that the market reacted negatively to that information, which caused
the stock price to drop on December 29, 2011, when trading resumed. Defendants may
argue that the market was not specifically reacting to the fraud but that is simply their
theory of the case; it is not the only obvious explanation for the December 29 share price
drop.
3

The parties use the acronym AEHI for Alternate Energy Holdings, Inc.

MEMORANDUM DECISION AND ORDER - 6

The Court notes that plaintiffs are not entirely clear as to precisely when the
market learned the “truth” about defendants’ alleged misconduct. In a section of the
complaint entitled “Loss Causation and Damages,” plaintiffs allege: “The relevant truth
concerning Defendants’ fraudulent conduct entered the market on December 14, 2010, at
9:30 a.m. E.S.T., at which time the SEC issued an order to temporarily suspend trading of
the Company’s common stock.” FAC ¶ 120. Earlier in the complaint, however,
plaintiffs peg December 16, 2010 as the day the market learned the truth:
It was not until December 16, 2010, when the SEC instituted a civil
action . . . that any reasonable investor or class member could have
reasonably suspected that the Company’s statements with respect to
Defendants’ Company stock positions and compensation were false and
misleading. Nor could investors have reasonably suspected that the
Company and certain of its officers were engaging in a scheme to
artificially inflate the Company’s stock price.
Id. ¶ 13.
Defendants take issue with this inconsistency (as well as plaintiffs’ related
arguments), gleefully pointing out that “Plaintiffs are unable to understand their own
allegations!”4 Reply, Dkt. 37, at 6. Granted, plaintiffs’ complaint is inconsistent on this
point. And, based on the allegations in this complaint, the Court does not have grounds
to infer that the market learned the details of defendants’ alleged conduct at 9:30 a.m.,
E.S.T., on December 14, 2010. The complaint does not allege any factual revelations that
accompanied the trading suspension.

4

The litigants in this action tend to shrillness. They label each other as “frivolous,”
“vicious,” “outrageous,” and so on. The Court does not find such rhetoric persuasive and is
hopeful that future briefs will adopt a calmer tone.
MEMORANDUM DECISION AND ORDER - 7

But the larger point is that just two days later – while trading was suspended – the
SEC filed its complaint which details defendants’ alleged fraud. And four days after that,
plaintiffs filed their own complaint – again, while trading was suspended. Under these
circumstances, it is plausible that the market reacted to defendants’ specific acts on
December 29, when trading resumed. At a minimum, it is reasonable to infer that
defendants’ alleged frauds were a substantial (if not the only) cause for the December 29
price drop. The Court thus finds that plaintiffs have adequately pled loss causation.
The foundation for this holding begins with Ninth Circuit authority holding that a
“plaintiff is not required to show ‘that a misrepresentation was the sole reason for the
investment’s decline in value’ in order to establish loss causation.” In re Daou Sys, Inc.
Sec. Litig., 411 F.3d 1006, 1025 (9th Cir. 2005) (emphasis added by Daou, citing
Robbins v. Koger Props, Inc., 116 F.3d 1141, 1447 n.5 (11th Cir. 1997)). “[A]s long as
the misrepresentation is one substantial cause of the investment’s decline in value, other
contributing forces will not bar recovery under the loss causation requirement’ but will
play a role ‘in determining recoverable damages.’” Id. (citation omitted). Further, in
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court
acknowledged that when there is more than one cause for a particular loss, securities
fraud plaintiffs will prove loss causation only to the extent the fraud caused the loss:
As we made clear in Dura Pharmaceuticals, the fact that a stock’s “price
on the date of purchase was inflated because of [a] misrepresentation’ does
not necessarily mean that the misstatement is the cause of a later decline in
value. We observed that a price drop could instead be the result of other
intervening causes, such as ‘changed economic circumstances, changed
investor expectations, new industry-specific or firm-specific facts,
conditions, or other events.’ If one of those factors were responsible for the
MEMORANDUM DECISION AND ORDER - 8

loss or part of it, a plaintiff would not be able to prove loss causation to that
extent.”
Id. at 2186 (emphasis added; all internal citations omitted; quoting Dura
Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-43 (2005)).
In short, the loss causation analysis can be more complex than Alternate Energies
would have it. This point is underscored in In re Gilead Sciences, Inc. Securities
Litigation, 536 F.3d 1049 (9th Cir. 2008). There, plaintiffs brought a Rule 10b-5 claim,
alleging that Gilead unlawfully marketed one of its drugs. Id. at 1050-51. On August 7,
2003, the FDA publicized a warning letter detailing Gilead’s illegal marketing practices.
Id. at 1053. The warning letter did not have an immediate effect on stock price –
Gilead’s share price closed at higher prices than they opened on both August 7 and
August 8. Id. Plaintiffs, however, alleged that unbeknownst to the investing public, the
disclosure of the FDA’s warning letter detrimentally affected drug sales. Id.
The stock price eventually dropped a few months later, on October 29, 2003 – the
day after Gilead issued a press release detailing third quarter financial results. Id. at
1054. The public learned that the drug’s sales fell significantly below expectations. Id.
Plaintiffs attributed their losses to the 12% decline in stock price that occurred on
October 29. Id. at 1056.
The district court dismissed the complaint, concluding that “‘it could not make
‘the unreasonable inference that a public revelation on August 8 caused a price drop three

MEMORANDUM DECISION AND ORDER - 9

months later on October 28.’”5 Id. at 1057. Additionally, regarding the warning letter’s
alleged impact on drug sales, the district court found “‘a slowing increase in demand,
alone, too speculative to adequately demonstrate loss causation.’” Id.
The Ninth Circuit reversed, holding that “the October drop in stock price was
plausibly caused by the Warning Letter.” Id. at 1058. The court began its analysis with a
basic observation: “[A] district court ruling on a motion to dismiss is not sitting as a trier
of fact.” Id. The court acknowledged that a district court need not make unreasonable
inferences, but explained that “so long as the plaintiff alleges facts to support a theory
that is not facially implausible, the court’s skepticism is best reserved for later stages of
the proceedings when the plaintiff’s case can be rejected on evidentiary grounds.” Id.
(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)). The court further
explained that normally, loss causation will be a matter of proof at trial – not an issue to
be decided on a Rule 12(b)(6) motion. Id. (citing with approval McCabe v. Ernst &
Young, LLP, 494 F.3d 418, 427 n.4 (3d Cir. 2007) (“loss causation becomes most critical
at the proof stage) and Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343
F.3d 189, 197 (2d Cir. 2005) (loss causation is a matter of proof at trial and not to be
decided on a Rule 12(b)(6) motion to dismiss.”)).
Here, plaintiffs’ loss causation theory is less complex than was the Gilead
plaintiffs’. And while defendants have put forth a potential alternative explanation for
plaintiffs’ losses (the SEC’s conduct), this explanation by no means renders plaintiffs’
5

It appears that the district court was off by a day. The company issued the press release
on October 28, after the markets closed, and prices fell the next day, October 29. See 536 F.3d at
1056.
MEMORANDUM DECISION AND ORDER - 10

competing loss causation theory facially implausible.
B.

The Japanese Nuclear Disaster

In an extremely terse argument (four sentences), defendants argue that
“Fukushima Daiichi nuclear disaster” is a separate intervening cause that prevents
plaintiffs from pleading loss causation. Mot. Memo., at 16-17. This argument fails at the
outset because it requires the Court to judicially notice the “fact” that the disaster
“substantially altered the nuclear industry in the United States.” Id.
The Court may judicially notice the fact that an earthquake occurred in Japan on
March 11, 2011 and the fact that the earthquake triggered a disaster at the Fukushima
Daiichi nuclear power plant. These facts are not subject to reasonable dispute and are
either “generally known” in the community or “capable of accurate and ready
determination by resort to sources whose accuracy cannot be reasonably questioned.”
See Fed. R. Evid. 201(b). But the impact the disaster may have had on the American
nuclear power industry (and, more specifically, Alternate Energy’s stock price) is not the
sort of “fact” that is capable of judicial notice. Additionally, defendants have not
adequately explained why the March 11, 2011 nuclear disaster would make it impossible
for plaintiffs to prove that defendants’ alleged frauds caused their losses. As with the
defendants’ theory regarding the SEC’s “reckless” conduct, the Court is not required to
accept defendants’ theory of the case on a Rule 12(b)(6) motion.
In sum, the Court rejects defendants’ intervening cause arguments.

MEMORANDUM DECISION AND ORDER - 11

2.

Impact
Likewise, the Court is not persuaded that plaintiffs are improperly relying on an

“impact” theory to demonstrate causation. See Mot. Memo., at 12. Here, defendants rely
principally on two recent Ninth Circuit cases distinguishing between fraudulent conduct
and the “impact” of that conduct – Metzler Investment GMBH v. Corinthian Colleges,
Inc., 540 F.3d 1049 (9th Cir. 2008) and In re Oracle Corp. Securities Litigation, 627 F.3d
376 (9th Cir. 2010). Both cases are distinguishable.
In Oracle, a software company missed a quarterly earnings forecast by two cents.
Its stock price dropped. Plaintiffs, who had purchased common stock between quarters,
brought a securities fraud action alleging that the miss was caused by a scheme to defraud
the public about the quality of Oracle’s products. Id. at 382-83.
The majority of the Ninth Circuit’s “impact” discussion focused on plaintiffs’
allegation that defendants fraudulently concealed defects in a software product known as
Suite 11i. See id. at 392-94. Under plaintiffs’ theory, Oracle’s March 2001 earnings
miss revealed the “truth” about these previously concealed defects. Id. at 393. The Ninth
Circuit affirmed summary judgment, however, because the “overwhelming evidence”
indicated this was not so. The evidence showed that “the market understood Oracle’s
earnings miss to be a result of several deals lost in the final weeks of the quarter due to
customer concern over the declining economy.” Id. “In other words, the market reacted
to reports of Oracle’s “poor financial health generally.” Id. at 393 (citing Metzler, 540
F.3d at 1063).
The Oracle Court rejected plaintiffs’ argument that they should be able prove loss
MEMORANDUM DECISION AND ORDER - 12

causation by showing that the market learned of the purported “impact” of the alleged
fraud – the earnings miss – rather than the fraud itself. Id. at 392. As the court
explained, the loss causation analysis is more exacting: “Loss causation is established if
the market learns of a defendant’s fraudulent act or practice, the market reacts to the
fraudulent act or practice, and a plaintiff suffers a loss as a result of the market’s
reaction.” Id. (citing Metzler, 540 F.3d at 1063). Significantly, however, the Oracle
court delved into the evidence to ascertain precisely what the earnings miss (the
“impact”) revealed to the market. Ultimately, the earning miss could not serve as a
“corrective disclosure” because it did not reveal any previously concealed truth.
Although Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049
(9th Cir. 2008) was decided on a 12(b)(6) motion, it stands for a similar proposition –
namely, that any so-called “corrective disclosure” must teach the market about the
alleged frauds.
In Metzler, the plaintiff alleged that defendant Corinthian Colleges fraudulently
manipulated student enrollment records to boost federal funding. Metzler, 540 F.3d. at
1055. The plaintiff claimed that the truth was revealed in a June 24, 2004 Financial
Times story and an August 2, 2004 earnings announcement. Id. at 1063. Affirming a
Rule 12(b)(6) dismissal, the Ninth Circuit explained that the plaintiff had not alleged the
announcement “disclosed – or even suggested – to the market that Corinthian was
manipulating student enrollment figures[.]” Id. The court rejected the plaintiff’s argument
that it should simply infer that the August 2 announcement was “understood by the
market” as a “euphemism” for improper enrollment practices, because there were no facts
MEMORANDUM DECISION AND ORDER - 13

suggesting “that on August 2 the market became aware that Corinthian was manipulating
student records . . . .” Id. at 1064.
Oracle and Metzler are distinguishable. Defendants in this case argue that the
impact of their alleged fraud was the SEC’s conduct – and that that “impact” is what
caused the stock price to plummet. See Reply, Dkt. 37, at 5, 6. But unlike the earnings
miss in Oracle or the media story and earnings announcement in Metzler, it is plausible
here to infer that the SEC’s actions (the lawsuit, namely) revealed defendants’ alleged
fraud to the market. It is further plausible to infer that on December 16, 2010, the market
learned of defendants’ alleged frauds, and reacted to those frauds the next trading day –
December 29, 2010. The Court will deny defendants’ motion to dismiss.
ALTERNATIVE STAY REQUEST
The Court will also deny defendants’ alternative request to stay this action until
the SEC action is resolved. A district court “has broad discretion to stay proceedings as
an incident to its power to control its own docket.” Clinton v. Jones, 520 U.S. 681, 706707 (1997) (citing Landis v. N. Am. Co., 299 U.S. 248, 254 (1936)).
The Supreme Court long ago established that “[o]nly in rare circumstances will a
litigant in one cause be compelled to stand aside while a litigant in another settles the rule
of law that will define the rights of both.” Landis, 299 U.S. at 255. The party seeking a
stay “must make out a clear case of hardship or inequity in being required to go forward,
if there is even a fair possibility that the stay for which he prays will work damage to
someone else.” Id.

MEMORANDUM DECISION AND ORDER - 14

Consistent with this authority, the Ninth Circuit requires district courts to weigh
the following factors when evaluating whether a stay is appropriate because another,
similar lawsuit is pending:
(1) the possible damage that may result from granting a stay;
(2) the hardship or inequity that a party may suffer in being required to go
forward; and
(3) “the orderly course of justice measured in terms of the simplifying or
complicating of issues, proof, and questions of law which could be expected to
result from a stay.”
Lockyer v. Mirant Corp., 398 F.3d 1098, 1110 (9th Cir. 2005) (citation omitted).
More generally, district courts should not stay its proceedings “unless it appears
likely the other proceedings will be concluded within a reasonable time.” Leyva v.
Certified Grocers of Cal., Ltd, 593 F.2d 857, 864 (9th Cir. 1997). Further, if a stay is
granted, it should not be indefinite. Dependable Highway Express, Inc. v. Navigators
Ins. Co., 498 F.3d 1059, 1066 (9th Cir. 2007)
1.

Harm to Plaintiffs
Regarding the first specific factor – harm to plaintiffs – the Court finds, by a

narrow margin, that plaintiffs have shown a “fair possibility” they will be harmed if a
stay is imposed. They contend defendants do not have sufficient assets to satisfy a
judgment. Plaintiffs also indicate that available insurance funds would likely be used up
in the SEC action, potentially leaving nothing for them. Finally, plaintiffs contend that
the SEC is not obligated to turn over any monies it recovers to plaintiffs.

MEMORANDUM DECISION AND ORDER - 15

Defendants argue that plaintiffs’ asserted “harm” is based on speculation. The
Court agrees that a defendant’s ability to satisfy a judgment will almost always involve
some degree of speculation; but plaintiff’s concerns are accorded more weight because of
the nature of their allegations; among other things, they allege that Alternate Energy has
no revenue. FAC ¶ 38 (“Throughout the Class Periods, AEHI did not earn a single dollar
in revenue.”). Further, the language from the Supreme Court is a fair possibility of harm.
Landis, 299 U.S. at 255. Certainty is not required.
Defendants also point out that a mere delay in obtaining a monetary judgment is
not a sufficient harm. But the case defendants rely upon for this point – CMAX, Inc. v.
Hall, 300 F.2d 265 (9th Cir. 1962) – is distinguishable. In, CMAX the district court
properly stayed a federal action while the plaintiff in that action defended itself in a civil
enforcement proceeding. Id. at 266. But, unlike here, there was no suggestion that the
enforcement proceedings would somehow impact the defendants’ ability to pay any
judgment; the federal court defendant was not even involved in the enforcement
proceedings.
2.

Hardship or Inequity to Defendant
As for the second factor, defendants have failed to make out a “clear case” of

hardship or inequity. They indicate that plaintiffs might recover both in the SEC action
and this action, but any such double-dipping would be simple enough to resolve in a
damages calculation.
Defendants also indicate that if the two cases proceed together, they will be forced
to engage in duplicative discovery. The Court finds that duplicative discovery – standing
MEMORANDUM DECISION AND ORDER - 16

alone – is not enough to show a “clear case” of hardship or inequity, particularly where
defendants could seek to resolve these issues by requesting consolidated discovery
proceedings. See Fed. R. Civ. P. 42(a) (courts “may” consolidate actions that involve a
“common question of law or fact”).
3.

The Orderly Administration of Justice
As for the third factor – the orderly administration of justice – there is no denying

that the facts and issues in this case are substantially similar to those raised in the SEC
action. The Court agrees that this may give rise to the specter of inconsistent judgments.
But this does not necessarily mean this Court must stay this action. Defendants could
address these concerns by seeking consolidation. Further, the Court is not persuaded by
defendants’ argument that plaintiffs cannot possibly calculate their damages until after
the SEC action is over. See Mot. Memo., at 20.
4.

Reasonable Time
Finally, in practical terms, the defendants are requesting a lengthy stay. Trial in

the SEC action is not scheduled until October 2012. Additionally, while the parties in
that action have not requested an extension of the trial date, they have stipulated to the
extension of other, pre-trial deadlines, as well as a limited stay of discovery proceedings.
See Oct. 29 Order (SEC Action Dkt. 115) (discovery stayed until February 1, 2012).
Given these extensions, it seems possible that the trial date might ultimately be extended
as well. The Court is not willing to impose such a lengthy stay; even if trial begins as
scheduled, this matter would be stayed for nearly a year.

MEMORANDUM DECISION AND ORDER - 17

ORDER
Defendants’ Motion to Dismiss (Dkt. 31) is DENIED. Defendants’ alternative
request for a stay of this action pending resolution of the SEC action is also DENIED.
Plaintiffs’ unopposed Request for Judicial Notice (Dkt. 36) is GRANTED.

DATED: December 19, 2011

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

MEMORANDUM DECISION AND ORDER - 18