FSP Stallion 1, LLC et al

Filing 390

ORDER that Defendants Clay Womack, TIC Capital Markets, Inc., and Direct Capital Securities, Inc.s Motion to Dismiss Plaintiffs First Amended Complaint 372 is DENIED. Defendants Clay Womack, TIC Capital Markets, Inc., and Direct Capital Securities, Inc.s Motion to Compel Arbitration 371 is GRANTED. Signed by Judge Philip M. Pro on 6/25/10. (Copies have been distributed pursuant to the NEF - ECS)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 P re se n tly before the Court is Defendants Clay Womack, TIC Capital Markets, In c ., and Direct Capital Securities, Inc.'s Motion to Dismiss Plaintiffs' First Amended C o m p la in t (Doc. #372), filed on March 21, 2010. Plaintiffs filed an Opposition (Doc. # 3 7 7 ) on April 23, 2010. Defendants filed a Reply (Doc. #384) on May 6, 2010. Also b e f o re the Court is Defendants' fully briefed Motion to Compel Arbitration (Doc. #371), f ile d on March 21, 2010. The Court conducted a hearing regarding the foregoing motions o n June 24, 2010. I . MOTION TO DISMISS (Doc. # 372) Plaintiffs are twenty-six separate and independent limited liability companies. (Am. Compl. at 4.) Plaintiffs were investment vehicles which invested in tenant-inc o m m o n ("TIC") interests in the Stallion Mountain Country Club ("Stallion Mountain"). (Id. at 7-8.) Plaintiffs allege that in 2005, certain Defendants conspired to fraudulently in d u c e investors to purchase Stallion Mountain at an inflated price through a private p la c e m e n t of TIC interests in the property. (Id.) To effectuate the scheme, Defendants d e v e lo p e d a private placement memorandum ("PPM") which offered up to $24.4 million in v. M IC H A E L F. LUCE, et al., Defendants. F S P STALLION 1, et al., P la in tif f s , UNITED STATES DISTRICT COURT D IS T R IC T OF NEVADA *** ) ) ) ) ) ) ) ) ) ) )

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ORDER

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T IC interests. (Id.) Plaintiffs allege the PPM contained false statements and/or omissions. (Id. at 12-16.) Based on these and other allegations, Plaintiffs brought suit against the sponsors o f the TIC offerings, the prior owners of Stallion Mountain, and other entities related to the s a le , and the post-sale operation of the golf course. (Compl.) In August 2009, Plaintiffs a m e n d e d the Complaint to add federal securities and related state law claims against D e f e n d a n ts Direct Capital Securities, TIC Capital Markets, Inc., and Clay Womack (" B ro k e r Defendants"). (Am. Compl.) Plaintiffs allege Broker Defendants participated in d ra f tin g the PPM and failed to make material disclosures in relation to the TIC offering, d e s p ite their possession of contrary information in the form of an internal operating budget a n d an outside appraisal. (Id. at 10-11, 13-15, 22-23.) B ro k e r Defendants now move to dismiss, arguing Plaintiffs fail to plead fraud w ith particularity, fail to allege scienter, and fail to state a claim because of the "bespeaks c a u tio n " rule. Plaintiffs contend this Court already rejected similar arguments from other D e f e n d a n ts in a prior Order. T h is Court previously ruled that Plaintiffs adequately pled fraud with p a rtic u la rity. (Order (Doc. #70) at 5-7.) The Court also rejected the argument that the b e s p e a k s caution doctrine barred Plaintiffs' claims. (Id. at 9-11.) The Court therefore will d e n y Broker Defendants' motion on these bases. T h e Court's prior Order also concluded that Plaintiffs adequately alleged scienter a s to the original Defendants. (Id. at 8-9.) Broker Defendants contend, however, that they a re not similarly situated to the original Defendants, and Plaintiffs have not adequately a lle g e d scienter as to them. Plaintiffs adequately have alleged scienter as to the Broker Defendants. The C o u rt set forth the applicable law in its prior Order. (Id. at 8-9.) Plaintiffs allege Broker D e f e n d a n ts substantially participated in drafting the PPM and were paid a due diligence fee. 2

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A defendant who substantially participates in drafting and preparing a statement may be lia b le as a primary violator, assuming all elements of a Rule 10b-5 claim are met. See M c G a n n v. Ernst & Young, 102 F.3d 390, 394, 397 (9th Cir. 1996); In re Software T o o lw o rk s Inc., 50 F.3d 615, 625 (9th Cir. 1994). As set forth in detail in the Court's prior O rd e r, Plaintiffs have identified specific documents, in the form of the internal operating b u d g e t and the third party appraisal, which Plaintiffs allege Broker Defendants had in their p o s s e s s io n while preparing the PPM. Additionally, Plaintiffs have identified what specific m a te ria l within those documents suggested either that the PPM's forward looking s ta te m e n ts ' veracity were questionable or that Broker Defendants had contrary information b a s e d on factors known only to Defendants. Allegations that a defendant possessed " in c o n s is te n t contemporaneous statements or information (such as internal reports)" is a m e a n s of establishing scienter. In re GlenFed Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1 9 9 4 ) (en banc). Plaintiffs therefore adequately have alleged scienter as to the Broker D e f e n d a n ts . B ro k e r Defendants also argue the alleged statements or omissions are not m a te ria l. Whether an omission is material is "fact-specific" and thus ordinarily is a q u e s tio n for the jury. In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996). The C o u rt cannot say as a matter of law that reasonable investors would conclude the omitted m a te ria l would not have "altered the total mix of information made available." U.S. v. R e ye s , 577 F.3d 1069, 1075 (9th Cir. 2009) (quotation omitted). Plaintiffs have identified a lle g e d misleading omissions in financial data and data regarding the trends associated with th e property's business. While the PPM suggests positive trends, Plaintiffs allege Broker D e f e n d a n ts failed to disclose negative trends regarding income growth, net operating in c o m e , golf rounds, and membership. Reasonable minds could differ on whether investors in a golf course would find such a difference in trend analysis on such factors material. Consequently, the Court will deny Defendants' motion on this basis. 3

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II.

MOTION TO COMPEL ARBITRATION (Doc. #71) W h e n making their investments, eighteen of the twenty-six Plaintiffs signed New

A c c o u n t Applications or Update Forms which require them to arbitrate disputes with the B ro k e r Defendants. The Court rejects Plaintiffs' argument that the Broker Defendants have w a iv e d their right to invoke the arbitration clause by engaging in discovery. Indeed, the re c o rd supports a finding that the Broker Defendants have attempted to reach a stipulation w ith the eighteen Plaintiffs regarding arbitration, and timely filed the instant motion when th e y were unable to do so. Additionally, Plaintiffs have not shown how they would be p re ju d ic e d by engaging in the arbitration process to which they agreed. The Court will th e re f o re enforce the arbitration clause as to the eighteen specified Plaintiffs with regard to th e ir claims against the Broker Defendants. I I I . CONCLUSION IT IS THEREFORE ORDERED that Defendants Clay Womack, TIC Capital M a rk e ts , Inc., and Direct Capital Securities, Inc.'s Motion to Dismiss Plaintiffs' First A m e n d e d Complaint (Doc. #372) is hereby DENIED. IT IS FURTHER ORDERED that Defendants Clay Womack, TIC Capital M a rk e ts , Inc., and Direct Capital Securities, Inc.'s Motion to Compel Arbitration (Doc. # 3 7 1 ) is GRANTED.

D A T E D : June 25, 2010

_______________________________ PHILIP M. PRO United States District Judge

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