Kerr et al v. Exobox Technologies Corp. et al

Filing 59

MEMORANDUM AND ORDER GRANTING 46 MOTION to Dismiss, GRANTING IN PART 17 MOTION to Dismiss 16 Amended Complaint/Counterclaim/Crossclaim etc.,,, GRANTING 53 MOTION for Leave to File Response to Exobox Motion to Dismiss, DENYING 45 MOTION for More Definite Statement, GRANTING IN PART 47 MOTION to Dismiss for Failure to State a Claim Upon Which Relief Can be Granted.(Signed by Judge Keith P Ellison) Parties notified.(sloewe) (Main Document 59 replaced on 1/23/2012) (sloewe, ).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
JAMES P. KERR, et al.,
Plaintiffs,
v.
EXOBOX TECHNOLOGIES
CORPORATION, et al.,
Defendants.

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§ CIVIL ACTION NO. H-10-4221
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§

MEMORANDUM AND ORDER
Pending before the Court are the following motions:
(1) Defendant Robert L. Sonfield, Jr.’s Motion to Dismiss Plaintiffs’ First Amended
Class Action Complaint for Failure to State a Claim upon which Relief Can Be
Granted (“Sonfield’s Motion to Dismiss”) (Doc. No. 17);
(2) Defendant Jason Landess’ Motion to Dismiss under Rule 12(b)(6) (“Landess’ Motion
to Dismiss”) (Doc. No. 46);
(3) Defendant Exobox Technologies Corp.’s Motion to Dismiss Plaintiffs’ First
Amended Class Action Complaint for Failure to State a Claim upon which Relief Can
Be Granted (“Exobox’s Motion to Dismiss”) (Doc. No. 47);
(4) Defendant Exobox Technologies Corp.’s Motion for a More Definite Statement
(“Exobox’s Motion for a More Definite Statement”) (Doc. No. 45); and
(5) Plaintiffs’ Motion for Leave to Extend Time to File Response to Exobox’s Motion to
Dismiss (“Plaintiffs’ Motion for Leave”) (Doc. No. 53).
After considering the Motions, all responses thereto, and the applicable law, the Court
finds that:
(1) Sonfield’s Motion to Dismiss should be granted in part;
(2) Landess’ Motion to Dismiss should be granted;
(3) Exobox’s Motion to Dismiss should be granted in part;

1

(4) Exobox’s Motion for a More Definite Statement should be denied; and
(5) Plaintiffs’ Motion for Leave should be granted.
I.

BACKGROUND1
Plaintiffs, investors of Exobox Technologies Corporation (“Exobox”), bring claims

against Exobox and the individual defendants for fraud and misrepresentation; violations of
Texas and federal securities laws; and conspiracy and aiding and abetting fraud and violations of
securities laws. Plaintiffs allege that Defendants engaged in a scheme involving the issuance and
sale of securities in violation of state and federal securities laws. (Id. ¶ 1.) Since filing their
Amended Complaint, Plaintiffs have voluntarily dismissed many of the individual defendants.2
(Doc. No. 48.) Therefore, the defendants that remain in this case are Robert L. Sonfield, Donald
C. Bradley, Jeffrey W. Bradley, Jason Landess, Marc Lane, Roger Brewer, Alexanderia K.
Blankenship, and Exobox Technologies Corporation.
Defendants Donald and Jeffrey Bradley established Kilis in 1999, which was designed as
a shell corporation and never conducted any business operations. (Id. ¶ 27.) In 2000, the
Bradleys caused Kilis to issue 22 certificates representing 1,915,000 shares of Kilis common
stock (the “founders’ certificates”), which were not encumbered with restrictive legends warning
against reselling the shares into the public market. (Id. ¶ 28.) Many of the founders’ certificates
were issued to nominees who paid no consideration, did not receive the certificates, and were not
aware the certificates had been issued in their own name. (Id. ¶ 29.) However, the Bradleys
falsified Kilis’ corporate records to indicate that the nominees had paid consideration and
attended annual meetings, and further forged signatures on stock powers issued to them by

1

The facts are taken from Plaintiffs’ Amended Complaint (Doc. No. 16), and are accepted as true for purposes of
the pending motions.
2
Plaintiffs voluntarily dismissed Robert Dillon, Reginald Goodman, Michael Wittenburg, Marc Pernia, Michael
Wirtz, Richard Evans, M.D., William Sklar, Leslie Danyel Owens-Swint, Scott Copeland, Sydney Barrett, and
James L. Jimmerman.

2

various nominees to give them complete control over the Kilis stock. (Id. ¶ 30.) The Bradleys
retained control over all of the founders’ certificates until they were delivered to Defendant
Sonfield in June 2005. (Id. ¶ 31.) Sonfield had knowledge of the Bradleys’ complete control
over the certificates and the methodology employed to obtain such control. (Id.)
Sonfield began discussing with Defendants Lane and Brewer his intent to create, obtain
control over, and sell stock in a company to make substantial sums of money. (Id. ¶ 32.) In June
2005, Sonfield proposed to Defendants Landess and the Bradleys that Kilis merge with JinPin,
Inc., one of Sonfield’s clients. (Id.) Landess and the Bradleys were to receive 10% of the stock
in the resulting company. (Id.)
Sonfield took possession and control of Kilis shortly thereafter. (Id. ¶ 33.) In June and
September 2005, additional Kilis shares of unrestricted stock, which were fraudulently backdated
to March 1, 2003, were issued in a series of transactions designed by Sonfield to “distribute”
shares and hide the fact that he retained sole control over all the stock. (Id. ¶ 34.) Sonfield
issued 100,000 shares of Kilis stock in the name of Jason Landess’ step-brother for no
consideration, but retained control over these shares by receiving a blank stock power from
Landess’ step-brother. (Id.) He issued another 100,000 shares to his legal assistant, who also
paid no consideration for the stock, and issued 300,000 shares to an individual claiming to have
been appointed as JinPin’s principal. (Id.)
Landess also filed documents with the Nevada Secretary of State reporting that Kilis had
changed its name to JinPin and that the principal of JinPin had become Kilis’ sole officer and
director.

(Id. ¶ 35.)

Plaintiffs allege that Sonfield had knowledge of these filings and

representations because the JinPin merger never closed and Sonfield retained control of virtually
all of the outstanding shares of Kilis stock. (Id.)

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In August 2005, Sonfield, while still in control of the Kilis stock certificates, began
representing Exobox and orchestrated transactions whereby Exobox would enter into a reverse
merger with JinPin. (Id. ¶ 36.) Exobox ultimately agreed to enter the reverse merger with
JinPin, based on Sonfield’s advice. (Id. ¶ 37.) However, Sonfield failed to disclose: (1) his
earlier transactions with Landess and the Bradleys; (2) that he would own and/or control virtually
all of Exobox’s outstanding common stock upon completion of the reverse merger; and (3) and
that certain share certificates were fraudulently backdated to March 1, 2003 to allow the shares to
be freely traded under certain safe harbor provisions. (Id.) The reverse merger was finalized on
September 15, 2005, and Exobox emerged as the surviving entity.

(Id. ¶ 38.)

Sonfield

controlled over 88% of Exobox’s public float. (Id.)
Sonfield engaged an expert to value Exobox in order to place the shares of stock for sale
on the market. (Id. ¶ 39.) When Sonfield and others, including Landess, failed to provide
requested information and data to the expert to aid him in his valuation, the expert concluded that
Exobox had no readily ascertainable value. (Id.) Sonfield, Landess, and others fraudulently tried
to convince the expert to provide a significant value to Exobox and suggested certain numbers
that they admitted did not represent Exobox’s true value. (Id.)
Despite their knowledge that Exobox had no value and that the shares of stock could not
be sold to the general public, Sonfield and Landess undertook steps to facilitate the public
trading of Exobox stock.

(Id. ¶ 40.)

Although he knew the stock certificates had been

fraudulently backdated, Sonfield prepared and submitted a tradability opinion letter to the Pink
Sheets, LLC on October 7, 2005, which stated that virtually all the shares of Exobox “may be
sold immediately in the public market . . . on the safe harbor of Rule 144(k) under the Securities
Act.” (Id.)

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On or about October 14, 2005, Exobox stock began trading in the Over-the-Counter
Bulletin Board. (Id. ¶ 41.) Defendants began manipulating the stock prices through the sales of
Exobox stock; Exobox’s share price reached a high of $22.00 and stabilized at approximately
$15.00 on very limited volume. (Id.)
On or about October 15, 2005, Sonfield instructed his legal assistant to sell her shares,
which had become 450,000 shares of stock in Exobox after the reverse merger. (Id. ¶¶ 42–43.)
Until mid-January 2006, Sonfield directed or was aware of the sale of 12,200 Exobox shares
from his legal assistant’s account, for total gross proceeds of approximately $19,600. (Id. ¶ 43.)
Sonfield told his legal assistant in January that he was “parking” the shares in her account and
that they belonged to Defendants Lane and Brewer. (Id. ¶ 44.) On January 17, 2006, he directed
her to transfer the remaining 437,800 shares of Exobox stock and $18,829 in Exobox proceeds to
a brokerage account in Blankenship’s name. (Id.) Sonfield had written, discretionary trading
authority over this account, and sold 68,996 of these shares into the market for proceeds of
approximately $628,486. (Id.) $25,000 of the proceeds was transferred by Sonfield and/or
Blankenship to Landess, and wire transfers totaling $616,027 were made from the Blankenship
brokerage account to a bank account in her name and then to an offshore entity controlled by
Lane and Brewer.

(Id. ¶ 45.)

After the SEC began investigating Exobox, approximately

$621,570 was returned to Blankenship’s account. (Id.) No registration statement was filed and
no other disclosure was made to the general public concerning these transactions. (Id. ¶ 46.)
On four occasions between October 2005 and July 2006,3 Sonfield delivered 19 of the
original Kilis’ founders’ certificates to Exobox’s transfer agent for re-issuance as approximately

3

On October 12, 2005, 35.19% of Exobox stock was transferred to these offshore entities; 12.42% was transferred
on February 17, 2006; 18.63% on July 10, 2006; and 12% on July 31, 2006. (Id. ¶ 47.)

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8.5 million post-split Exobox shares. (Id. ¶ 47.) Sonfield directed these certificates to be issued
as unrestricted stock in the names of nine offshore entities controlled by Lane and Brewer. (Id.)
Defendants Lane and Brewer directed the sale of approximately 8 million Exobox shares
from these accounts, from which they obtained approximately $2.78 million that was transferred
to their overseas bank accounts. (Id. ¶ 48.) Lane and Brewer used $500,000 of the above
proceeds to pay to Sonfield for the benefit of Exobox for the preferred stock payment. (Id. ¶ 50.)
No registration statement or notice of proposed sale was ever filed for any of these securities
transactions. (Id. ¶¶ 49, 50.)
Similarly, the Bradleys and Landess sold many shares of Exobox stock in 2006 and early
2007 for substantial sums of money. (Id. ¶¶ 51, 52.) No one filed a registration statement or
publicly disclosed those transactions.
Additionally, Sonfield prepared and filed a Form 10-SB registration statement on behalf
of Exobox on December 21, 2005, which he subsequently amended by filing Form 10-SB/A on
February 3, 2006. (Id. ¶ 53.) These filings omitted facts necessary to make the statements
contained in the filings not misleading, including:
•

Sonfield’s control of at least 9.6 million shares or 88% of the company’s outstanding
common stock, which was purportedly unrestricted float;

•

Sonfield’s transfer of approximately 35% of Exobox’s common stock to Lane and
Brewer’s entities;

•

Sonfield’s agreement to provide 10% of Exobox’s common stock to the Bradleys and
to Landess; and

•

The fact that Exobox had no product, no operations, and no value.

(Id.)

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Sonfield additionally prepared and filed two post-effective amendments to the Form-SB
on March 8 and 9, 2006. (Id. ¶ 54.) These filings:
•

Failed to disclose Sonfield, Lane, and Brewer’s control of the Kilis certificates;

•

Failed to disclose Sonfield’s disposition of virtually all of Exobox’s common stock
after the Exobox merger;

•

Failed to correct Exobox’s ownership although Sonfield had transferred 47.61% of
Exobox’s stock prior to the filing of this document; and

•

Erroneously continued to report that the principal of JinPin owned 1,350,000 shares
of Exobox common stock even though Sonfield had directed the sale of 300,000 of
those shares to a Lane and Brewer offshore entity, and Sonfield received blank stock
powers for the sale of the remaining shares; and

•

Stated that “as of the closing date [of the Exobox merger], Exobox Nevada was a
non-operating blank check or shell corporation controlled by Donald C. Bradley, his
wife, Shirlene Bradley, and their son, Jeff Bradley.” However, Sonfield’s tradability
letter of October 7, 2005 stated that the Bradleys affiliation with the company ceased
as of June 22, 2005.

(Id.)
Sonfield also prepared and filed Exobox’s Form 10-KSB for the fiscal year ending on
July 31, 2006. (Id. ¶ 55.) This filing:
•

Failed to disclose that Lane and Brewer controlled the vast percentage of the
company’s common stock; and

•

Failed to disclose that Sonfield, Lane, and Brewer controlled and had beneficial
ownership of the reportable percentages of Exobox’s common stock.

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(Id.)
Each of these filings deprived investors of material information, including the fact that
Sonfield, Lane, and Brewer controlled the company’s purportedly unrestricted common stock
float. (Id.)
In addition to the facts enumerated in their Amended Complaint, Plaintiffs “incorporate
by reference, as if set forth verbatim herein, the factual allegations as set forth in Civil Action H08-2351; Securities and Exchange Commission vs. Robert L. Sonfield, et al., filed In the United
States District Court for the Southern District of Texas, Houston Division.” (Id. ¶ 26.)
II.

LEGAL STANDARD FOR MOTION TO DISMISS
A court may dismiss a complaint for “failure to state a claim upon which relief can be

granted.” FED. R. CIV. P. 12(b)(6). “To survive a Rule 12(b)(6) motion to dismiss, a complaint
‘does not need detailed factual allegations,’ but must provide the plaintiff’s grounds for
entitlement to relief—including factual allegations that when assumed to be true ‘raise a right to
relief above the speculative level.’” Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007) (citing
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). That is, “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at
570). A claim has facial plausibility “when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Id. (citing Twombly, 550 U.S. at 556). The plausibility standard is not akin to a “probability
requirement,” but asks for more than a sheer possibility that a defendant has acted unlawfully.
Id. A pleading need not contain detailed factual allegations, but must set forth more than “labels

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and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Twombly, 550 U.S. at 555 (citation omitted).
Ultimately, the question for the court to decide is whether the complaint states a valid
claim when viewed in the light most favorable to the plaintiff. The court must accept wellpleaded facts as true, but legal conclusions are not entitled to the same assumption of truth.
Iqbal, 129 S. Ct. at 1950 (citation omitted). The court should not “‘strain to find inferences
favorable to the plaintiffs’” or “accept ‘conclusory allegations, unwarranted deductions, or legal
conclusions.’” R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005) (quoting Southland
Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004)). A district court can
consider the contents of the pleadings, including attachments thereto, as well as documents
attached to the motion, if they are referenced in the plaintiff’s complaint and are central to the
claims. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 499 (5th Cir. 2000). Furthermore,
a Court may refer to matters of public record when deciding a motion to dismiss. Funk v. Stryker
Corp., 631 F.3d 777, 783 (5th Cir. 2011). Importantly, the court should not evaluate the merits of
the allegation, but must satisfy itself only that a plaintiff adequately pleads a legally cognizable
claim. United States ex rel. Riley v. St. Luke’s Episcopal Hosp., 355 F.3d 370, 376 (5th Cir.
2004). “Motions to dismiss under Rule 12(b)(6) are viewed with disfavor and are rarely granted.”
Lormand v. US Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009) (citation omitted); Duke Energy
Intern., L.L.C. v. Napoli, 748 F. Supp. 2d 656, 664–65 (S.D. Tex. 2010). The Court should
generally “afford plaintiffs at least one opportunity to cure pleading deficiencies before
dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court
that they are unwilling or unable to amend in a manner that will avoid dismissal.” Great Plains
Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir. 2002).

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III. STATE LAW CLAIMS
Plaintiffs assert claims of fraud and misrepresentation under the Texas common law.
(Am. Compl. ¶¶ 87–88.) Plaintiffs also include civil conspiracy claims in Count III.4 (Id. ¶ 90.)
Moreover, Plaintiffs assert that “[t]he claims at issue concern . . . violation[s] of state . . .
securities laws,” and that “there are pendent claims for damages and injuries resulting from
statutory and common law fraud, misrepresentation, gross negligence, and conspiracy to commit
the violations of law.” (Id. ¶ 1.)
A. Legal Standard
The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. §
78bb(f)(2) and 15 U.S.C. § 77p(c), precludes maintenance of a securities class action in state or
federal court if: (1) the action is a “covered class action;” (2) the claims are based on state law;
(3) the action involves one or more “covered securities;” and (4) the claims allege a
misrepresentation or omission of material fact “in connection with the purchase or sale” of the
security. In re Enron Corp. Securities, 535 F.3d 325, 338–39 (5th Cir. 2008); 15 U.S.C. §
78bb(f). Congress enacted SLUSA “to ensure that all causes of action involving allegations of
misrepresentation or omission in connection with covered securities would be subject to the
requirements of the Private Securities Litigation Reform Act of 1995.” Miller v. Nationwide Life
Ins. Co., 391 F.3d 698, 702 (5th Cir. 2004).
B. Analysis
Plaintiffs agree that “case law is clear that such claims are preempted at the federal
level.” (Resp. to Sonfield’s Mot. to Dismiss ¶ 4.) Similarly, Plaintiffs do not respond to this

4

The Court assumes that Plaintiffs’ conspiracy claim is brought under state law, as Plaintiffs have not asserted any
other basis for this claim.

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allegation in Landess’ Motion to Dismiss. As Plaintiffs fail to advance any arguments that their
claims do not fit the test articulated above, these claims must be dismissed.5
IV. AIDING AND ABETTING CLAIMS
In Count III, Plaintiffs bring claims for aiding and abetting fraud and violations of
securities laws.
A. Legal Standard
In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164,
177 (1994), the Supreme Court determined that section 10(b) liability did not extend to aiders
and abettors. Subsequently, Congress declined to extend the section 10(b) private right of action
to claims against secondary actors, and instead, in the PSLRA, directed prosecution of aiders and
abettors by the SEC. Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148,
158 (2008). Accordingly, a secondary actor is not liable for violations unless he satisfies all the
requirements for liability under section 10(b).
B. Analysis
In their responses, Plaintiffs do not argue that aiding and abetting liability is appropriate.
Instead, they argue that Sonfield is a primary actor and therefore must be held responsible for the
acts and statements identified in the Complaint. Similarly, Plaintiffs do not address aiding and
abetting liability in response to Landess’ or Exobox’s Motions to Dismiss. Therefore, the Court
finds that all aiding and abetting claims must be dismissed.6

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Although Plaintiffs agree that their state law claims are precluded under SLUSA, Landess’ Motion to Dismiss
states that Plaintiffs have a remaining “federal common law claim for fraud under FRCP Rule 9(b)” and cites the
elements of fraud under Texas law (Landess Mot. to Dismiss at ¶¶ 14–15.) The Court wishes to make clear that
Plaintiffs claims of fraud are claims under state common law, and therefore are dismissed under the SLUSA
preclusion argument articulated by Sonfield, Exobox, and Landess.
6
Count III also includes claims of conspiracy. In Part III, supra, the Court found that these claims should be
dismissed because they are state common law claims.

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V. FEDERAL SECURITIES LAW CLAIMS
Plaintiffs also bring claims under section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and Rule 10b–5, 17 C.F.R. § 240.10b–5.
A. Legal Standard
Under section 10(b) of the Securities Exchange Act of 1934,
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce or of the mails, or of any facility of any
national securities exchange ... (b) To use or employ, in connection with the
purchase or sale of any security registered on a national securities exchange or
any security not so registered, ... any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [Securities and
Exchange] Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
15 U.S.C. § 78j(b).
Pursuant to this section, the SEC promulgated Rule 10b–5, which provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange, (a) To employ any device, scheme, or artifice to
defraud, (b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, or (c) To engage in
any act, practice, or course of business which operates or would operate as a fraud
or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b–5. To state a private 10(b) claim, a plaintiff must allege (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, 552 U.S. at
157; Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005); R2 Invs., 401 F.3d at 641.
A plaintiff pleading a false or misleading statement or omission as the basis of a 10(b)
claim must: (1) specify each statement alleged to have been misleading; (2) identify the speaker;

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(3) state when and where the statement was made; (4) plead with particularity the contents of the
false representation; (5) plead with particularity what the person making the misrepresentation
obtained thereby; and (6) explain the reason or reasons why the statement is misleading, i.e., why
the statement is fraudulent. ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 350 (5th
Cir. 2002); Indiana Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d
527, 533 (5th Cir. 2008). These allegations constitute the “who, what, when, where, and how”
required under Rule 9(b) and the PSLRA. ABC Arbitrage, 291 F.3d at 350. The PSLRA’s
particularity requirement incorporates, at a minimum, the pleading standard for fraud actions
under Rule 9(b). Rosenzweig v. Azurix, 332 F.3d 854, 866 (5th Cir. 2003).
To be actionable, a misrepresentation or omission of a fact must be material. The
Supreme Court recently reaffirmed its long-standing holding that there is no “bright-line rule”
for determining whether information withheld from a company’s filings is material as a matter of
law. Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1318–23 (2011). Unwilling to
allow materiality to be reduced to a test of “statistical significance,” the Court held instead that
assessing materiality involves a “fact-specific inquiry . . . that requires consideration of the
source, content, and context” of the allegedly omitted information. Id. at 1321. Under Fifth
Circuit construction, the appropriate inquiry is whether, under all the circumstances, the
statement or omitted fact is one that a reasonable investor would consider significant in making
the decision to invest, “such that it alters the total mix of information available about the
proposed investment.” Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1445 (5th Cir. 1993); see
also Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988). Materiality is not judged in the abstract,
but in light of the surrounding circumstances. Rubenstein v. Collins, 20 F.3d 160, 168 (5th Cir.
1994).

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In order to state a claim under section 10(b), a plaintiff also must have relied on the
defendants’ acts or statements. Stoneridge, 552 U.S. at 159. Requiring a plaintiff to plead
reliance ensures “the requisite causal connection between a defendant’s misrepresentation and a
plaintiff’s injury.” Id. (citing Basic, 485 U.S. at 243). A rebuttable presumption of reliance
exists in two circumstances: (1) when a plaintiff was owed a duty to disclose, or (2) when the
statements become public, as the public information is reflected in the market price of the
security. Id. However, no reliance is presumed when a defendant’s specific acts were not
disclosed to the investing public, even when information about a defendant’s deceptive
transactions is later incorporated into a false public statement. Id. at 161.
Furthermore, section 10(b) and Rule 10b–5 do not protect investors against negligence or
corporate mismanagement. Shaw Group, Inc., 537 F.3d at 535. Under the PSLRA, it is not
enough to particularize false statements or fraudulent omissions made by a defendant. Rather, to
establish a section 10(b) claim, a private plaintiff must prove that the defendant acted with
scienter, a mental state embracing intent to deceive, manipulate, or defraud. Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007). Scienter, in the context of securities
fraud, is defined as “an intent to deceive, manipulate, or defraud or that severe recklessness in
which the danger of misleading buyers or sellers is either known to the defendant or is so
obvious that the defendant must have been aware of it.” Flaherty & Crumrine Preferred Income
Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir. 2009).
A plaintiff may meet his scienter pleading obligation by pleading facts giving rise to a
strong inference of reckless or conscious misconduct. Nathenson v. Zonagen, Inc., 267 F.3d 400,
425 (5th Cir. 2001). Under the PSLRA, the Court considers whether all the facts and
circumstances, taken together, give rise to a strong inference of scienter. Tellabs, Inc., 551 U.S.

14

at 322–23; Abrams v. Baker Hughes Inc., 292 F.3d 424, 431 (5th Cir. 2002). To qualify as
“strong” within the meaning of the statute, an inference of scienter must be more than merely
plausible or reasonable—it must be cogent and at least as compelling as any opposing inference
of non-fraudulent intent. Tellabs, Inc., 551 U.S. at 309.
Moreover, the Fifth Circuit does not allow a “group pleading approach” to establishing
scienter. Southland, 365 F.3d at 363–65. The court must look only to the state of mind of the
individual who made or issued the statement or furnished information for use in the statement,
and not to the collective knowledge of the corporation’s officers and employees acquired in the
course of their employment. See Shaw Group, 537 F.3d at 534. The complaint must specifically
connect individual defendants to the statements or omissions, otherwise it will fail under the
PSLRA’s heightened pleading standard. Fin. Aquisition Partners LP v. Blackwell, 440 F.3d 278,
287 (5th Cir. 2006).
The Supreme Court’s recent decision in Janus Capital Group v. First Derivative Traders,
564 U.S. --, 131 S. Ct. 2296 (2011), defined who can “make” a statement in the context of Rule
10b–5. The Court rejected the plaintiffs’ argument that “make” should be defined as “create,”
and held that “the maker of a statement is the person or entity with ultimate authority over the
statement, including its content and whether and how to communicate it.” Janus, 131 S. Ct. at
2302. The Court held that Janus Capital Management (JCM) could not be held liable for
statements in prospectuses filed by Janus Investment Fund. JCM was the investment advisor and
administrator of Janus Investment Fund and a wholly-owned subsidiary of Janus Management
Group, which also created Janus Investment Fund as a separate legal entity owned by mutual
fund investors. The Court observed that “it is undisputed that the corporate formalities were
observed here,” and JCM and Janus Investment Fund remained legally separate entities.    Id. at

15

2304. Therefore, JCM’s participation in the writing and dissemination of the prospectuses was
not sufficient, as JCM did not retain “ultimate authority” over the statement.

The Court

compared this situation to the relationship between a speech and a speechwriter, noting that
“[e]ven when a speechwriter drafts a speech, the content is entirely within the control of the
person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately
said.” Id. at 2302. The Supreme Court further attempted to distinguish liability under Rule 10b–
5 from liability under section 20(a), 15 U.S.C. § 78t(a). The Court found that the plaintiffs’
theory of liability too closely resembled, and would expand, the liability Congress already
created under section 20(a). Id. at 2304 (“Congress also has established liability in § 20(a) for
‘[e]very person who, directly or indirectly, controls any person liable’ for violations of the
securities laws.” (citing 15 U.S.C. § 78t(a))).
B. Analysis
1. Claims against Defendant Sonfield
In Plaintiffs’ Response, Plaintiffs identify the statements and actions that form the basis
of their claims against Sonfield, which the Court believes can be placed into three categories: (1)
Sonfield’s actions and misrepresentations to others, such as statements made in the process of
orchestrating the reverse merger of Exobox and JinPin, engaging the expert to value Exobox,
and issuing and ultimately transferring shares to his legal assistant, the Bradleys, Lane, and
Brewer; (2) Sonfield’s tradability opinion letter to Pink Sheets; and (3) Exobox’s public filings
with the SEC, which were prepared by Sonfield.
a. Statements to Others
Plaintiffs fail to plead sufficient reliance to state a claim based on the first category
outlined above. Plaintiffs do not claim that they knew about these acts at the time they occurred

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or relied on them in any way. Sonfield’s misrepresentations in this category were not made to
the public, but rather only to the parties involved in these transactions. Therefore, Plaintiffs fail
to state a claim for section 10(b) or Rule 10b–5 liability based on these statements and actions.
b. Sonfield’s Tradability Letter to Pink Sheets
Additionally, Plaintiffs assert that “Sonfield prepared and submitted a tradability opinion
letter to the Pink Sheets, LLC claiming that virtually all shares of Exobox ‘may be sold
immediately in the public market by [sic] . . . on the safe harbor of Rule 144(k) under the
Securities Act.’” (Am. Compl. ¶ 40.) Plaintiffs plead scienter adequately. Plaintiffs allege that
Sonfield himself was involved in fraudulently backdating the shares, and therefore, that he knew
the statements in the tradability letter were false. (Am. Compl. ¶¶ 34, 40, 42.) Plaintiffs aver
that this was just one part of his scheme to issue and sell securities to make substantial sums of
money for himself and the other defendants.
Plaintiffs’ Amended Complaint also provides enough information to conclude that this
misstatement is material. The Court finds that a signed statement of a lawyer, representing that
the shares were subject to the safe harbor of Rule 144(k) and could therefore be sold without
registration, would be significant to a potential investor in deciding whether to buy Exobox
shares, as “it alters the total mix of information available about the proposed investment.”
Krim, 989 F.2d at 1445.
In the fact section of the complaint in Securities and Exchange Commission v. Robert L.
Sonfield, et al., 08-cv-2351 (S.D. Tex.) (“SEC Complaint”), the SEC notes that Sonfield’s letter
was “posted on the Pink Sheets website.” (SEC Compl. ¶ 33.) Because Sonfield’s statements
about Exobox’s tradability were public, Plaintiffs are entitled to a presumption of reliance. See
Basic, 485 U.S. at 247. The factual allegations of the SEC Complaint were incorporated by

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reference into Plaintiffs’ Complaint in the present action. (Am. Compl. ¶ 26.) Federal Rule of
Civil Procedure Rule 10(c) provides that “[a] statement in a pleading may be adopted by
reference elsewhere in the same pleading or in any other pleading or motion.” Sonfield also
acknowledges Plaintiffs’ incorporation of the factual allegations from SEC Complaint in his
motion. (Sonfield’s Mot. to Dismiss ¶¶ 4, 22 n.8.) While the Court notes that the Fifth Circuit
has been reluctant to allow an incorporation by reference to another case, these cases involved
plaintiffs who were trying to incorporate claims from complaints in other cases, rather than mere
allegations. See Texas Water Supply Corp. v. R. F. C., 204 F.2d 190, 197 (5th Cir. 1953); see
also Muttathottil v. Gordon H. Mansfield, 381 Fed. Appx. 454, 456–58 (5th Cir. 2010).
Defendants were on notice of the factual claims asserted in the SEC Complaint, as this case was
filed in the same court against many of the same defendants sued in this action, including
Sonfield. However, in light of the Fifth Circuit’s hesitation to allow incorporation by reference
to another case, even where defendants clearly had notice, see Muttahottil, 381 Fed. Appx. at
457, the Court finds it appropriate to allow Plaintiffs to replead this allegation in order to state a
claim.
c. Exobox’s Public Filings
Plaintiffs also allege that Sonfield violated Rule 10b–5 by making misstatements in
Exobox’s filings with the SEC.

Sonfield argues that, under Janus, he did not make any

statements for purposes of Rule 10b–5. Sonfield notes that, at a minimum, “attribution is
necessary” to “find that a person or entity made a statement.” Janus, 131 S. Ct. at 2305. The
filings at issue were submitted by Exobox and signed by Robert Dillon, Exobox’s President and
Chief Executive Officer. Form 10-KSB was additionally signed by Michael G. Wirtz, Exobox’s
Chief Financial Officer. Sonfield did not sign the filings himself.

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Plaintiffs assert that this case can be distinguished from Janus because Sonfield was in
“control of” Exobox, as he owned 100% or 88% of Exobox at the relevant times, whereas Janus
Investment Fund was a separate legal entity from JCM. (Resp. to Sonfield’s Suppl. Reply ¶ 2.)
Even assuming that Sonfield did control Exobox, as Plaintiffs assert,7 Plaintiffs fail to show that
Sonfield had “ultimate control” over the statements, as Janus requires. The Supreme Court held
that “the maker of a statement is the person or entity with ultimate authority over the statement”;
just because a person or entity may “control” the company filing the document does not mean
that the control person can be liable under 10b–5 for making the statements. Janus, 131 S. Ct. at
2302 (emphasis added). In their response to Sonfield’s supplemental reply, Plaintiffs appear to
be quoting Janus in asserting that “[t]he Supreme Court looked to whether such a person/entity
had ‘control’ over the entity making the statement such that the statement would become that
‘controlling person’s’ statement.” (Response to Supp. Reply ¶ 1.) However, the only time the
Supreme Court used the phrase “controlling person” was to reference liability under section
20(a). Janus, 131 S. Ct. at 2301. The Court rejected the argument Plaintiffs assert here,
distinguishing liability under 10b–5 from liability under section 20(a). Id. at 2304 (declining to
“read into Rule 10b–5 a theory of liability similar to—but broader in application than—what
Congress has already created expressly elsewhere.” (internal citations omitted)). Plaintiffs’
Amended Complaint does not contain a claim under section 20(a). Therefore, under the facts
contained in the Amended Complaint, Sonfield may not be held liable for statements in
Exobox’s registration filings, even if he supplied Exobox with the false statements at issue.

7

Sonfield disputes that he owned all the common stock in question. However, even if this allegation were true, he
claims this would be equivalent to a mere 3% voting interest. (Sonfield Second Supplemental Reply ¶ 5.) The
officers and directors controlled 97% of the voting power. (Id.) The Court need not resolve this factual dispute at
this stage of the litigation.

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Sonfield notes that his name appears in certain transaction documents attached as exhibits
to Exobox’s filings. (Sonfield’s Mot. to Dismiss ¶ 6 n.5.) These pages note that Sonfield
received copies of various notices and transmitted correspondence to the SEC identifying the
revisions to the statements. (Doc. No. 18-3, Form 10-SB12G/A No. 1 at 56–58; Doc. No. 18-4,
Form 10-SB12G/A No. 2 at 57.) Exobox’s Form 10-SB12G form additionally contains an
opinion letter signed by Sonfield, which notes the availability of an exemption from registration
under the 1933 Act.

(Doc. No. 18-1, Form 10-SB12G, at 201, 252–55.) However, Plaintiffs’

Amended Complaint does not identify any misstatements or omissions from the pages signed by
Sonfield. Sonfield was not a signatory to the public filings; they were signed by Exobox’s
President and CEO as well as Exobox’s CFO in one instance. The attached statements signed by
Sonfield appear to be separate from the substantive registration filings, merely notifying the SEC
of the updates. Thus, the Court finds that Plaintiffs’ Amended Complaint does not provide
sufficient allegations about the letters and attachments to support a finding that Sonfield “made”
any statements in Exobox’s public filings.
The Court grants Plaintiffs leave to amend their Complaint on this narrow basis—to show
which, if any, misstatements or omissions in the public filings forming the basis of Plaintiffs’
10b–5 claims were “made” by Sonfield, pursuant to Janus and this Order. The Court believes
that leave to amend is appropriate because Plaintiffs’ previous amendment to their complaint
came before the Supreme Court’s decision in Janus provided this narrow interpretation of the
word “make.”

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2. Claims against Defendant Landess
Plaintiffs’ claims against Defendant Landess under section 10(b) and Rule 10b–5 must be
dismissed, as Plaintiffs do not plead these claims with the particularity required under the
PSLRA.
Plaintiffs assert that Landess “filed certain documents with the Nevada Secretary of State
reporting Kilis had changed its name to JinPin and the principal of JinPin had become Kilis’ sole
officer and director.” (Am. Compl. ¶ 35.) That paragraph asserts that Sonfield knew that these
filings and representations were false, as the JinPin merger never closed, but the Complaint says
nothing about Landess’ scienter with respect to this filing. (Id.) Additionally, under Janus, the
Court cannot conclude that Landess made the statement in this filing with the Nevada Secretary
of State. Plaintiffs did not provide a copy of this document for the Court’s review or assert why
they believe Landess made this statement, which appears to be a corporate filing for Kilis or
JinPin. Furthermore, Plaintiffs fail to assert why this name change is material and would affect
Plaintiffs’ investment decisions.
Plaintiffs also assert that Landess “undertook steps to facilitate the public trading of
Exobox stock.” (Am. Compl. ¶ 40.) The Complaint does not specify what any of these “steps”
are. That paragraph asserts that Sonfield issued a tradability letter, but does not provide any
information suggesting that Landess also contributed to that statement. While the Complaint
alleges that Landess tried to convince the valuation expert to provide a false value to Exobox, the
expert elected to do nothing, stating that he could not make such a valuation. (Id. ¶ 39.)
Plaintiffs have failed to plead any specific statements or actions of Landess that could form the
basis of their federal securities law claims.

21

In Plaintiffs’ Response, they also assert that Landess should be held liable for violations
of section 10(b) and Rule 10b–5 based on “the actions undertaken by Sonfield with the full
knowledge of Landess so that Landess was/is a co-conspirator.” (Response to Landess’ Mot. to
Dismiss ¶ 10.) However, as noted in Part III, supra, Plaintiffs’ claim of conspiracy has been
dismissed as a state law claim.

Therefore, all claims against Defendant Landess must be

dismissed.
3. Claims against Defendant Exobox
Exobox’s Motion for a More Definite Statement alleges that Plaintiffs have not
adequately established which actions can be attributed to Defendant Exobox. “The allegations in
Part IV [containing the factual background] as to Exobox are either innocuous, mention Exobox
only in passing, or make vague allegations without any supporting basis.” (Exobox’s Mot. for a
More Definite Statement ¶ 4.) Additionally, Exobox’s Motion to Dismiss alleges that Plaintiffs’
federal securities law claims are not alleged with the specificity required by the PSLRA. Exobox
incorporates Sonfield’s Memorandum in support of his Motion to Dismiss. (Exobox’s Mot. to
Dismiss ¶ 8.)
Similarly, Plaintiffs’ late-filed response refers the Court to the arguments contained in
their Response to Sonfield’s Motion. (Resp. to Exobox’s Mot. to Dismiss ¶ 2.)8 Indeed,
Plaintiffs’ Response alleges Exobox’s liability only with respect to actions taken by Sonfield,
with one exception—Plaintiffs also assert that Exobox should be held liable for Landess’ “false
filings with the Nevada Secretary of State at a time when Sonfield retained control of virtually all
of the outstanding Kilis shares of stock.” (Id. ¶ 4 (citing Am. Compl. ¶ 34).) As noted above,

8

The Court grants Plaintiffs’ Motion for Leave to File (Doc. No. 53) and will allow the late-filed response, as it
consists primarily of arguments made in its Response to Sonfield’s Motion. The Court finds that Exobox’s
substantial rights are not affected by this late filing. See Garza v. Laredo Independent School Dist., 309 Fed. Appx.
806, 811 (5th Cir. 2009) (quoting Fed. R. Civ. P. 61).

22

Plaintiffs fail to provide any explanation as to why this name change is material and could affect
investment decisions. Moreover, the basis for Exobox’s liability for alleged misstatements
involving Kilis and JinPin is unclear, especially because, in the same paragraph, Plaintiffs
alleged that the “JinPin merger never closed.” (Am. Compl. ¶ 35.)
a. Statements to Others
As the Court stated in Part V.B.1.a., supra, Plaintiffs fail to plead sufficient reliance to
state a claim based on Sonfield’s private statements to individuals such as his legal assistant, the
expert, and others. Accordingly, these misrepresentations must be dismissed.
b. Sonfield’s Tradability Letter to Pink Sheets
Plaintiffs believe that Exobox should be liable for Sonfield’s tradability opinion letter,
because it “was done by Sonfield at a time when he still owned and controlled more than a mere
majority of the Exobox stock.” (Resp. to Exobox’s Mot. to Dismiss ¶ 5.) However, Plaintiffs
point to no theory of liability to support their argument that Exobox should be held liable for any
misrepresentations made by Sonfield based solely on Sonfield’s control of a majority of the
Exobox stock.9 Plaintiffs also argue that “Exobox adopted these statements, and is, thus, also
responsible for such misrepresentation[s].” (Id.) On the basis of the facts contained in the
Amended Complaint, however, Exobox cannot be said to have “made” the statements contained
in the tradability letter under Janus. There is no indication that this letter was submitted or filed
by Exobox; the fact that Plaintiffs called it an “opinion letter” implies that the letter expressed
Sonfield’s own opinion as an attorney. Even before the Supreme Court’s decision in Janus,
courts found that corporations generally were not liable for statements made by third parties on

9

This argument is akin to control person liability under section 20(a). However, while Section 20(a) provides that a
control person is liable for the violations of the entity it controls, the converse is not true—the controlled entity is
not liable for every action taken by the control person. 15 U.S.C. § 78t(a). Moreover, as noted above, Plaintiffs’
Amended Complaint does not contain a claim for control person liability under section 20(a).

23

their behalf.

See Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir. 1993) (“The

securities laws require [a company] to speak truthfully to investors; they do not require the
company to police statements made by third parties for inaccuracies, even if the third party
attributes the statement to [the company].”) Without allegations that Exobox had ultimate
authority over the statement, the Court may not determine that Exobox made the statement and
thus can be liable under section 10(b) and Rule 10b–5.
c. Exobox’s Public Filings
Plaintiffs also assert that Sonfield, acting on behalf of Exobox, made material
misrepresentations in its registration filings. The Court has already found that, under Janus,
Sonfield did not make the representations at issue. See Part V.B.1.c., supra. In contrast, Exobox
was the entity with ultimate authority over the statement, Janus, 131 S. Ct. at 2302, and Exobox
is listed as the “filer” of the registration forms and amendments at issue. Id. at 2304–05. (Doc.
No. 18-1, Form 10-SB12G, at 1.) Therefore, Exobox “made” the statements at issue.
The question thus becomes whether Exobox had scienter when it made the statements
contained in its registration filings and amendments. In determining whether the Complaint
adequately pleads scienter with respect to Exobox, the Court must look to see if any of the
corporate officials who made or prepared the statement acted with scienter. The standard
articulated by the Fifth Circuit in Southland, and repeated in many subsequent cases, provides
that it is appropriate to look at the state of mind not only of the individual corporate official or
officials who made the statement, but also those who “order or approve it or its making or
issuance, or who furnish information or language for inclusion therein or the like.” Id; see also
Shaw Group, 537 F.3d at 533 (repeating this standard post-Stoneridge). The Court finds no
reason to read Janus to limit the liability of the corporation on grounds of scienter. Exobox

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“made” the statements contained in the public filings under Janus; Plaintiffs need only assert that
Sonfield furnished the information or language for inclusion in order to attribute his scienter to
Exobox.
On the facts alleged, Sonfield was a corporate official. Plaintiffs assert that Sonfield was
in “control of” Exobox, as he owned 100% or 88% of Exobox at the relevant times (Response to
Sonfield’s Suppl. Reply ¶ 2). He served as Exobox’s lawyer and prepared the filing statements
at issue. Thus, Sonfield certainly qualifies as an “official,” as he was “authorized to act” for
Exobox in drafting its filing statements. Black’s Law Dictionary 1119 (9th ed. 2009); see also
Teachers’ Retirement System of LA v. Hunter, 477 F.3d 162, 184 (4th Cir. 2007) (“[T]he plaintiff
must allege facts that support a strong inference of scienter with respect to at least one authorized
agent of the corporation.” (emphasis added) (citing Southland, 365 F.3d at 363–67)). Thus,
Sonfield’s scienter may be attributed to Exobox under Southland.
Plaintiffs allege adequately that Sonfield had the requisite state of mind when making
false statements in the registration filings. The misrepresentations and information that Exobox
failed to disclose largely involved Sonfield’s ownership interests and transactions that Sonfield
made with others. (Am. Compl. ¶¶ 53–55.) Additionally, Plaintiffs plead that Sonfield was
aware, through his dealings with the expert that he hired, that Exobox had no product, no
operations, and no value. (Id. ¶¶ 39, 53(d).) The filings also directly contradicted a statement
that Sonfield made in his tradability letter. (Id. ¶ 54(a).) Each of these allegations fits within the
scheme that Plaintiffs allege, and the Court finds sufficient facts to give rise to a strong inference
that Sonfield committed this misconduct recklessly or consciously.
Moreover, the misstatements contained in the filings satisfy the materiality requirement.
Plaintiffs aver that the filings “deprived investors of material information, including the fact that

25

[Sonfield], Lane[,] and Brewer controlled the company’s purportedly unrestricted common stock
float.” (Id. ¶ 55.) Because the filings were public, Plaintiffs are also entitled to a presumption of
reliance. See Basic, 485 U.S. at 247. Therefore, the Court finds that Plaintiffs’ Amended
Complaint states a claim against Exobox for violation of section 10(b) and rule 10b–5 with
respect to the statements in Exobox’s public filings.
Accordingly, the Court finds it appropriate to deny Exobox’s Motion for a More Definite
Statement. Plaintiffs’ claims against Exobox are limited to the misstatements contained in
Exobox’s public filings, which the Amended Complaint clearly, and appropriately, attributes to
Exobox.

(See Am. Compl. ¶ 53 (“Sonfield prepared and filed a Form 10-SB registration

statement on behalf of Exobox.”).)
4. Amendment
The Court previously allowed Plaintiffs the opportunity to amend their complaint. (See
Minute Entry for proceedings held before Judge Keith P. Ellison, 12/14/2010.) Plaintiffs did not
request leave to amend in connection with any of the pending motions to dismiss, and they failed
to respond to Exobox’s Motion for a More Definite Statement. Therefore, the Court will allow
Plaintiffs leave to amend only on the narrow bases identified in this order: 1) to add factual
allegations relating to the public disclosure of Sonfield’s tradability letter; and 2) to plead any
additional facts showing that, under Janus, Sonfield “made” any misstatements in Exobox’s
public filings.
VI.

CONCLUSION
For the reasons discussed in this order:
(1) Sonfield’s Motion to Dismiss (Doc. No. 17) is GRANTED IN PART;
(2) Landess’ Motion to Dismiss (Doc. No. 46) is GRANTED;

26

(3) Exobox’s Motion to Dismiss (Doc. No. 47) is GRANTED IN PART;
(4) Exobox’s Motion for a More Definite Statement (Doc. No. 45) is DENIED; and
(5) Plaintiffs’ Motion for Leave (Doc. No. 53) is GRANTED.
Plaintiffs may file an amended complaint within 20 days in accordance with the Court’s
aforementioned instructions.

IT IS SO ORDERED.
SIGNED in Houston, Texas, on this the 23rd day of January, 2012.

KEITH P. ELLISON
UNITED STATES DISTRICT JUDGE

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