Case 2:1 0-cv-05491-JHN -MAN Document 47 Filed...

Case 2:1 0-cv-05491-JHN -MAN Document 47 Filed 02/04/11 of 16 Page ID #:587

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8UNITED STATES DISTRICT COURT

9CENTRAL DISTRICT OF CALIFORNIA

10OMAR G. SCARBOROUGH and ) Case No. 2:10-cv-05491-JHN-MANx

11 GAY E. SCARBOROUGH Trustees )of The Scarborough Family Trust

12 dated 1/5/07, on behalf of themselves ) ORDER (1) GRANTINGand all others similarly situated, ) DEFENDANTS GENEVA

13 ) EXCHANGE, INC., GENEVAPlaintiffs, ) EXCHANGE LLC, AND DUANE H.

14) LUND’S MOTION TO DISMISS-vs.) AND (2) GRANTING DEFENDANT

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) BERTHEL FISHER & COMPANYBERTHEL FISHER & COMPANY ) FINANCIAL SERVICES, INC.’S

16 FINANCIAL SERVICES, INC., an ) MOTION TO DISMISSIowa corporation GENEVA

17 EXCHANGE NC., a Minnesotacooration, GENEVA EXCHANGE,)Judge: Honorable Jacqueline H. Nguyen

18 LLC, a Minnesota limited liability )company, DUANE H. LUND, an )

19 individual; and DOES 1–10, ))

20 Defendants. ))

21 )

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23The matter is before the Court on Defendants Geneva Exchange, Inc.,

24 Geneva Exchange, LLC, and Duane H. Lund’s Motion to Dismiss the First Class

25 Action Complaint (“Geneva Motion”; docket no. 33) and Defendant Berthel

26Fisher & Company Financial Services., Inc.’s Motion to Dismiss the First

27 Amended Class Action Complaint (“Berthel Motion”; docket no. 35). 1 The matter

281 The Court refers herein to Geneva Exchange, Inc., and Geneva Exchange,

LLC, as “Geneva,” to Duane H. Lund as “Lund,” and to Berthel Fisher & Company


1 came on regularly for hearing on January 31, 2011. The Court has considered the

2 briefs filed in this matter and counsel’s arguments at hearing. For the reasons

3 herein, the Court GRANTS the Geneva Motion and the Berthel Motion.

4 I.

5 BACKGROUND

6 Plaintiffs’ First Amended Complaint (“FAC”) asserts that Defendants

7 engaged in an investment scheme involving the sale of tenant-in-common

8 interests in an apartment complex called the Beamer Place Apartments (“Beamer

9 Place”), located in Houston, Texas (FAC ¶¶ 1, 25.) As part of this scheme,

10 Plaintiffs allege, Defendants “intentionally and with deliberate recklessness

11 sought to inflate the value of Beamer Place and conceal certain highly undesirable

12 financing terms, by misrepresenting and/or concealing material facts.” ( Id. at ¶ 1.)

13 Geneva was the promoter and issuer of the Beamer Place interests; Lund

14 was Geneva’s sole owner. (Id.) Berthel Fisher is a registered broker-dealer, which

15 underwrote the Beamer Place offering. (Id. at ¶¶ 1, 12, 27.) Plaintiffs are the

16 trustees of the Scarborough Family Trust. (Id. at ¶ 11.)

17 According to the FAC, Geneva formed an entity (“Geneva VI”) to purchase

18 Beamer Place, closing escrow on May 15, 2007. 2 (Id. at ¶ 26.) The purchase was

19 done as part of a “portfolio” acquisition, in which Geneva also purchased two

20 other apartment complexes in the Houston area. (Id. at ¶ 34.) The total purchase

21 price was $25,650,000, of which the seller allocated $14,255,000 to Beamer

22 Place. (Id.) The purchase of Beamer Place was partly financed through a short-

23 term loan of $13,027,000. (Id. at ¶¶ 35, 62.) That loan included a cross-default

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25Financial Services, Inc., as “Berthel Fisher.”

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272 More precisely, Geneva accepted the assignment of a purchase agreement

between the seller and a third party, which was executed on January 15, 2007. ( Id. at28 ¶ 26.)

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1 and cross-collateralization agreement (the “cross-collateralization agreement”)

2 that allowed the lender to foreclose on Beamer Place in the event of a default on

3 the loan for one of the other two properties in the portfolio purchased by Geneva

4 VI. (Id. at ¶¶ 35, 58.)

5 Defendants then offered the interests in Beamer Place through a

6 Confidential Private Placement Memorandum (“PPM”), which was provided to

7 potential investors in approximately March 2008. 3 (Id. at ¶¶ 2–4.) Geneva VI

8 retained a 10% interest in Beamer Place. ( Id. at ¶ 30.) The “total offering

9 amounted to approximately $16,567,120,” including both cash proceeds and the

10 value of mortgage debt assumed by investors. (Id. at ¶ 2.) In May 2008, Plaintiffs

11 invested in Beamer Place, making an equity investment of $438,000 and

12 assuming a loan amount of $534,253. (Id. at ¶ 11.)

13 On September 18, 2009, the lender on the short-term loan sent Beamer

14 Place investors a notice of default on the loans for the other two properties in the

15 portfolio, claiming $133,524.29 in missed payments. ( Id. at ¶¶ 43–44.) As a

16 result, the lender foreclosed on Beamer Place, selling it for significantly lower

17 than what the investors had paid. (Id. at ¶ 45.) The investors, including Plaintiffs,

18 lost their entire investment and face the possibility that the lender may seek a

19 deficiency judgment against them. (Id. at ¶¶ 8, 45.)

20 Plaintiffs allege that Defendants “misrepresented and omitted highly

21 material facts in the PPM.” (Id. at ¶ 4.) First, Defendants concealed the cross-

22 collateralization agreement. According to the FAC, the PPM included only a

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253 The FAC refers extensively to the PPM, but the PPM was not included as an

attachment to the FAC. However, the PPM was submitted to the Court as an exhibit26 to the Geneva Motion. (Geneva Mot. Ex. A, docket no. 34-1.) The Court therefore has27 considered the PPM in reaching its decision in this matter. See Tellabs, Inc. v. Makor

Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Lee v. City of L.A., 250 F.3d 668,28 688–89 (9th Cir. 2001).

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1 single reference to the agreement, “[b]uried in the summary portion of the one-

2 hundred page small-print PPM.” (Id. at ¶ 35.) The PPM in reality refers to the

3 agreement twice, though in identical wording: “The Short-Term Loan is also

4 currently subject to a cross-default and cross-collateralization agreement with two

5 other loans taken in connection with the portfolio[’]s purchase described above,

6 but the Company is in the process of obtaining a release from such agreement.”

7 (PPM 7, 31.) The FAC asserts that the PPM misled investors as to the import of

8 the cross-collateralization agreement by (1) referring to the agreement in a single

9 sentence; (2) failing to discuss the status and likelihood of the release being

10 sought; (3) failing to mention the agreement in its discussion of risk factors,

11 which discussed other risk factors in detail; and (4) failing to provide disclosures

12 about the other properties, such as their appraised values and revenues. (FAC ¶¶

13 37–40, 55–56.)

14 Second, the FAC alleges that the PPM included “an inflated appraised

15 value for Beamer Place of $18.5 million” and that “Defendants misled investors

16 by presenting this figure as an accurate and timely value.” ( Id. at ¶ 7.) According

17 to the FAC, the PPM’s reference to the appraised value was misleading because it

18 “overstated the value of Beamer Place by more than $4,000,000 relative to the

19 assigned value of only $14,255,000 at the time of sale in January 2007.” (Id. at ¶

20 50.) Additionally, the appraisal was completed in January 2007, about thirteen

21 months before the PPM was issued, and its inclusion in the PPM was misleading

22 because it led investors to believe the appraisal was still accurate at the time of

23 the PPM’s issuance. (Id. at ¶¶ 51–52.) The FAC alleges that an appraisal at the

24 time of foreclosure in about September 2009 valued Beamer Place at

25 approximately $10 million. (Id. at ¶ 41.)

26 The FAC also presents many allegations related to Defendants’ scienter

27 with respect to the PPM’s misrepresentations and omissions. In sum, Lund’s

28 motive was profit, as well as avoiding the losses related to his loan guarantee and

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1 an inability to sell Beamer Place, and Berthel Fisher’s motive was the

2 commissions and fees it stood to earn. ( Id. at ¶¶ 62–63.) Defendants knew that the

3 $18.5 million appraisal was inflated, partly based on their knowledge that the real

4 estate market had declined since January 2007, partly based on the fact that

5 Beamer Place was allocated a portion of the total purchase price that was more

6 than $4 million less than this appraisal, and partly based on the fact that in

7 seeking to refinance the short-term loan, Defendants were unable to find a

8 replacement loan for the full value, requiring Geneva to make a loan for the

9 “shortfall” amount of $527,000. (Id. at ¶¶ 7, 65, 66.) Finally, Defendants all were

10 involved in the PPM’s creation, with Berthel Fisher drafting it and Geneva and

11 Lund approving what information was included and excluded, and with all

12 consciously deciding not to disclose information about the cross-collateralization

13 agreement and not to include an updated appraised value. ( Id. at ¶¶ 3, 64–65.)

14 On the basis of these allegations, Plaintiffs originally filed suit on July 26,

15 2010. After Berthel Fisher filed a previous motion to dismiss, Plaintiffs opted to

16 file their FAC, which they did on October 25, 2010. The FAC brings six claims in

17 a putative class action: 4 (1) violation of Section 10(b) and Rule 10b-5 of the

18 Securities Exchange Act of 1934 (“Exchange Act”); (2) violation of Section 20 of

19 the Exchange Act; (3) violation of Section 12 of the Securities Act of 1933

20 (“Securities Act”); (4) controlling person liability under Section 15 of the

21 Securities Act; (5) professional negligence; and (6) violation of Minnesota Blue

22 Sky Law, Minn. Stat. § 80A.76. These claims are brought against all Defendants

23 except the second and fourth, which are brought only against Lund, and the fifth,

24 which is brought only against Berthel Fisher.

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274 The putative class includes all Beamer Place tenant-in-common investors, with

28 some exclusions. (Id. at ¶ 69.)

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1 Defendants filed their two motions on November 19, 2010, each motion

2 seeking to dismiss all claims against the moving Defendants. Plaintiffs filed a

3 single Opposition, and Defendants filed separate Replies.

4 II.

5 LEGAL STANDARDS

6 Rule 12(b)(6) permits a defendant to seek dismissal of a complaint that

7 “fail[s] to state a claim upon which relief can be granted.” Fed. R. Civ. P.

8 12(b)(6). In evaluating a motion to dismiss, the Court generally cannot consider

9 material outside the complaint, unless the material is attached to the complaint,

10 the complaint necessarily relies on the material and its authenticity is not in

11 question, or it is a judicially noticed matter of public record. Lee v. City of L.A.,

12 250 F.3d 668, 688–89 (9th Cir. 2001). The Court must accept as true all material

13 factual allegations in the complaint and construe them in the light most favorable

14 to the plaintiff. Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380

15 F.3d 1226, 1229 (9th Cir. 2004). However, this tenet is inapplicable to legal

16 conclusions. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). The Court need not

17 accept as true “[t]hreadbare recitals of the elements of a cause of action,

18 supported by mere conclusory statements.” Id. Instead, a complaint must contain

19 sufficient factual matter to make its allegations plausible. Bell Atl. Corp. v.

20 Twombly, 550 U.S. 544, 556 (2007). The Court, based on judicial experience and

21 common sense, must determine whether a complaint plausibly states a claim for

22 relief. Iqbal, 129 S. Ct. at 1950.

23 Dismissal is also warranted where a complaint alleging fraud fails to meet

24 the heightened pleading standards of Federal Rule of Civil Procedure 9(b).

25 Although “[m]alice, intent, knowledge, and other conditions of a person’s mind

26 may be alleged generally,” a complaint “must state with particularity the

27 circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “Averments of

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

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1 misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th

2 Cir. 2003) (citation omitted). This includes allegations as to particular statements

3 and why they were false or misleading. Id.

4 Additionally, claims for violations of the federal securities laws are subject

5 to additional pleading requirements imposed by the Private Securities Litigation

6 Reform Act of 1995 (“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737. Under the

7 PSLRA, a plaintiff must “state with particularity both the facts constituting the

8 alleged violation, and the facts evidencing scienter.” Tellabs, Inc. v. Makor Issues

9 & Rights, Ltd., 551 U.S. 308, 313 (2007). A securities complaint must “specify

10 each statement alleged to have been misleading, the reason or reasons why the

11 statement is misleading, and, if an allegation regarding the statement or omission

12 is made on information and belief, the complaint shall state with particularity all

13 facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). A complaint must

14 also “state with particularity facts giving rise to a strong inference that the

15 defendant acted with the required state of mind.” Id. at (b)(2)(A). “[T]he

16 complaint must allege that the defendants made false or misleading statements

17 either intentionally or with deliberate recklessness.” Gompper v. VISX, Inc., 298

18 F.3d 893, 895 (9th Cir. 2002). If these requirements are not both met, the

19 complaint must be dismissed. Id. at (b)(3)(A).

20 If a complaint is dismissed, leave to amend is liberally granted. Fed. R. Civ.

21 P. 15(a); Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th

22 Cir. 1990). However, it is proper to deny leave to amend if the amendment would

23 be futile or the complaint has previously been amended. AmerisourceBergen

24 Corp. v. Dialysist West, Inc., 465 F.3d 946, 951 (9th Cir. 2006); Ascon Props.,

25 Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989).

26 III.

27 DISCUSSION

28 A. Plaintiffs’ First Claim: Exchange Act Section 10(b) and Rule 10b-5

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1 Section 10(b) of the Exchange Act, 15 U.S.C. 78j, and Rule 10b-5

2 promulgated thereunder, 17 C.F.R. § 240.10b-5, “prohibit[] any person from

3 using or employing any manipulative or deceptive device in connection with the

4 sale of a security.” In re VeriFone Sec. Litig., 11 F.3d 865, 868 (9th Cir. 1993)

5 (internal quotation marks omitted).

6 In a typical § 10(b) private action a plaintiff must prove (1) amaterial misrepresentation or omission by the defendant; (2)

7 scienter; (3) a connection between the misrepresentation or omissionand the purchase or sale of a security; (4) reliance upon the

8 misrepresentation or omission; (5) economic loss; and (6) losscausation.

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10Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008). As

11noted previously, the first two elements of the prima facie case are subject to the

12 heightened pleading standards of the PSLRA. The Court concludes that Plaintiffs

have failed to meet this standard for both elements. 5

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141. Misrepresentation or Omission

15Plaintiffs assert two main violations of Section 10(b) and Rule 1 0b-5. The

16first of these involves the cross-collateralization agreement. Plaintiffs contend

17 that Defendants misled investors by burying the reference to the agreement in a

18single sentence within the 100-page PPM, and by not disclosing basic terms and

19 risks of the agreement while simultaneously making “lengthy risk disclosures”

20about other risks, giving the impression that the risk disclosures are complete.

21(Pls.’ Opp’n 4–5.)

22As an initial matter, the PPM refers to the cross-collateralization agreement

23 in two locations, not one. The same language is repeated both in the summary

24 section of the PPM and in the “Acquisition Terms and Financing” section’s

25subsection regarding the short-term loan and the planned refinance loan. (PPM 7,

2631.) Additionally, though the cross-collateralization agreement is not directly

275 The Court does not reach Defendants’ arguments regarding the other elements

28 of the prima facie case.

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1 addressed in the “Risk Factors” section, that section contains a subsection

2 addressing the need to refinance the short-term loan, which observes, “If the

3 Company is unable to refinance the Short-Term Loan for any reason, the

4 continued ownership of the Property by the Co-Owners may be jeopardized.” (Id.

5 at 17.) This statement puts investors on notice of the larger risks related to the

6 short-term loan.

7 Plaintiffs further argue that the reference to the cross-collateralization

8 agreement was misleading because that reference mentions efforts to obtain a

9 release from the agreement. (Pls.’ Opp’n 10.) Plaintiffs assert that a potential

10 investor reading that statement “would be led to believe [the agreement] was

11 being released.” (Id.) The Court disagrees with this assertion. In the face of the

12 discussion of the larger risks of the short-term loan, as well as the statement’s

13 lack of reference to any commitment that the agreement had been or would be

14 released, a reasonable potential investor would recognize the prospective nature

15 of this statement and would not take it as an established fact.

16 The Court finds similar deficiencies in Plaintiffs’ assertion that the PPM

17 misled potential investors as to the value of Beamer Place. Plaintiffs argue that by

18 including the appraised value in the PPM, Defendants “falsely led investors to

19 believe that the $18.5 million appraised value was still accurate when they sold

20 Beamer Place [interests] to investors.” (Id. at 5.) However, the PPM clearly stated

21 that the appraisal was “at the time of the Property Purchase,” on January 15,

22 2007. (PPM 6–7.) Plaintiffs make much of Defendants’ knowledge of the decline

23 in the real estate market. (Pls.’ Opp’n 13.) However, that decline was widely

24 known, and potential investors could not reasonably believe that an appraisal

25 from more than a year before had remained static. The PPM made it clear that the

26 appraisal was not up to date and therefore did not mislead investors.

27 Plaintiffs also stress the difference between the appraised value and the

28 allocated price of Beamer Place in the January 2007 purchase transaction, which

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Case 2:10-cv-05491-JHN -MAN Document 47 Filed 02/04/11 of 16 Page ID#:596

1 was more than $4 million lower. (FAC ¶ 50.) However, the PPM included both

2 amounts in the discussion of the property acquisition, demonstrating that the true

3 market value was not necessarily $18.5 million and in fact was likely lower.

4 (PPM 7.)

5 As further evidence that the information about the cross-collateralization

6 agreement and appraised value were not misleading, the PPM as a whole

7 contained several warnings that the investment was speculative and carried

8 significant risk. For example, the first page of the PPM contained, as its fourth

9 paragraph and the only text set off in full capital letters, the following statement:

10 “THE INTERESTS OFFERED HEREBY ARE HIGHLY SPECULATIVE,

11 ILLIQUID, INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE

12 PURCHASED ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE

13 INVESTMENT. SEE ‘RISK FACTORS.’” (PPM I.) A similar warning appears in

14 the summary section’s three-paragraph discussion of risk factors. The last

15 paragraph of that discussion states, “Prospective Investors should be able to bear

16 a complete loss of their investment.” (Id. at 11.) Another similar warning appears

17 in the first paragraph of the section titled “Risks Relating to Private Offering.”

18 Under the subheading “Speculative Investment,” the PPM noted, “A purchase of

19 the Interests is [a] highly speculative investment. Investors may not realize any

20 return on their investment. In fact, Investors could lose their entire investment.”

21 (Id. at 20.)

22 Moreover, the PPM specifically “ urged and invited [potential investors] to

23 ask questions of and obtain additional information from the Company” regarding

24 the investment and “urged [them] to retain their own counsel, accountant or

25 business advisor as to legal, tax and related matters.” (Id. at ii, iii (emphasis

26 omitted).) The PPM stated, “Investors must rely on their own examination of the

27 property, including the merits and risks involved in owning an interest.” ( Id. at iii

28 (emphasis omitted).)

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1 These repeated warnings and admonitions put potential investors on notice

2 that the investment was highly risky and that they should investigate as needed to

3 determine that the investment was right for them. In the context of this overall

4 message, the Court cannot find that Defendants misled Plaintiffs to believe the

5 cross-collateralization agreement was not a risk or that the $18.5 million appraisal

6 was a certain statement of Beamer Place’s current value.

7 2. Scienter

8 In evaluating allegations of scienter for securities fraud, a court must

9 consider all facts alleged in the complaint and other documents appropriately

10 examined on a motion to dismiss, to determine whether a strong inference of

11 scienter exists. Tellabs, 551 U.S. at 322–23. “A complaint will survive . . . only if

12 a reasonable person would deem the inference of scienter cogent and at least as

13 compelling as any opposing inference one could draw from the facts alleged.” Id.

14 at 324.

15 Here, Plaintiffs assert that Defendants acted with scienter in that they

16 “intentionally disseminated or approved the false statements [regarding the cross-

17 collateralization agreement and appraisal] which they knew or recklessly

18 disregarded were misleading.” (FAC ¶ 77.) However, the Court finds it more

19 likely that Defendants acted as they did without the scienter required for a

20 violation of Section 10(b) and Rule 10b-5.

21 First, it is more likely that Defendants provided no additional information

22 about the cross-collateralization agreement because they believed the agreement

23 to be a minor issue. Defendants likely discussed other risks in more detail because

24 they found those other risks to be of greater concern than this agreement. This

25 conclusion is supported by the fact that Defendants were both seeking release

26 from that agreement and seeking to refinance so that the short-term loan would no

27 longer be in force. Defendants recognized and disclosed that the attempt to

28 refinance might not be successful and stressed, in the first paragraph of its

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1 discussion of risks related to financing, that “[i]f the Company is unable to

2 refinance the Short-Term Loan for any reason, the continued ownership of the

3 Property by the Co-Owners may be jeopardized.” (PPM 17.) This statement

4 indicates that Defendants believed a failure to refinance in general was a great

5 risk, and suggests that the cross-collateralization agreement was only a subset of

6 this larger concern.

7 Second, the PPM’s discussion of the appraised value indicates that

8 Defendants did not make “false or misleading statements either intentionally or

9 with deliberate recklessness.” Gompper, 298 F.3d at 895. As discussed above, the

10 presentation of the information lays out clearly that the appraised value was “at

11 the time of the Property Purchase” and presents an alternate measure of value in

12 the same sentence. (PPM 7.)

13 Moreover, taken as a whole, the PPM does not “give rise to a strong

14 inference of scienter.” Tellabs, 551 U.S. at 323. The PPM’s repeated warnings

15 that investors must be prepared to lose their entire investment, which the Court

16 identified above, strongly indicate that Defendants did not possess the required

17 scienter. Additionally, the fact that Geneva VI retained a 10% interest in Beamer

18 Place supports an inference that Defendants did not act with scienter. (FAC ¶ 30;

19 PPM 40.) Plaintiffs discount this point by noting that Geneva VI is not a named

20 defendant in this action and that Geneva VI’s “retained ownership interest was a

21 risk-free proposition.” (Pls.’ Opp’n 17.) However, Geneva VI was affiliated with

22 the other Geneva entities, so the fact that it is not itself a named defendant is not

23 dispositive. Geneva and Lund stood to gain from Geneva VI’s stake in the

24 Beamer Place investment if the investment did not fail; this fact suggests that

25 Geneva and Lund believed that the investment was sound.

26 Accordingly, the Court concludes that the FAC does not sufficiently allege

27 Defendants made false or misleading statements with intent or deliberate

28 recklessness as to the falsity. The Court therefore dismisses Plaintiffs’ first claim.

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1 During oral argument, Plaintiff was unable to point to additional facts that

2 would cause the Court to believe the Section 10(b) and Rule 10b-5 claims could

3 be made viable in an amended pleading. First, Plaintiffs offered no new facts that

4 would indicate Defendants made false or misleading statements or omissions.

5 Second, the Court discerned in Plaintiffs’ proffer no new facts that might

6 establish scienter. Because amendment would therefore be futile and Plaintiff has

7 already had an opportunity to amend after the filing of a motion to dismiss on

8 similar grounds, the dismissal is with prejudice.

9 B. Plaintiffs’ Third Claim: Securities Act Section 12

10 Section 12(a) of the Securities Act, 15 U.S.C. § 77 l(a), imposes civil

11 liability on a person who uses an instrumentality of interstate commerce to offer

12 or sell a security “by means of a prospectus or oral communication, which

13 includes an untrue statement of a material fact or omits to state a material fact

14 necessary in order to make the statements . . . not misleading.” 15 U.S.C. §

15 77 l(a)(2). Defendants argue that Plaintiffs fail to allege a Section 12 violation

16 because (1) the PPM is not a prospectus within the meaning of the section; and

17 (2) Plaintiffs do not establish that Defendants made false or misleading statements

18 or omissions. (Berthel Mot. 14–16; Geneva Mot. 21–23.)

19 In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the Supreme Court held

20 that “the word ‘prospectus’ is a term of art referring to a document that describes

21 a public offering of securities by an issuer or controlling shareholder.” Id. at 584.

22 Plaintiffs assert that there is a factual dispute here regarding whether the PPM

23 qualifies as a prospectus, because the FAC alleges that the Beamer Place interests

24 were “offered to the public” via the PPM, which “constitutes a prospectus within

25 the meaning of Section 12.” (Pls.’ Opp’n 20; FAC ¶ 87.) However, the PPM

26 clearly establishes that it is not a prospectus within the meaning of Section 12.

27 First, the PPM makes repeated reference to the fact that it presents a private

28 offering. The document is headed with the wording, “CONFIDENTIAL

13


1 PRIVATE PLACEMENT MEMORANDUM,” and it notes that the Beamer Place

2 interests “are offered only to person who qualify as ‘accredited investors’ as

3 described under Rule 501(a) promulgated under the [Securities] Act.” (PPM I,

4 39.) It also contains the explicit statements, “no public market exists for the

5 Interests” and “this is not a public offering.” ( Id. at 39.)

6 Second, the Gustafson opinion indicates that a “prospectus” must include

7 information contained in a security’s registration statement and that this

8 requirement signals that a prospectus must be related to registered securities. 513

9 U.S. at 569. The PPM, however, notes that “[t]he interests offered hereby have

10 not been registered under the Act or the securities laws of any state.” (PPM iii

11 (emphasis omitted).)

12 Based on the foregoing, the Court concludes that the PPM is not a

13 prospectus within the meaning of Section 12(a). 6 Accordingly, the Court

14 dismisses Plaintiffs’ third claim. Because Plaintiffs have previously amended and

15 further amendment would be futile, the dismissal is with prejudice.

16 C. Plaintiffs’ Second and Fourth Claims: Controlling Person Liability

17 Plaintiffs’ second and fourth claims are based on statutes that impose

18 liability on a person who controls another person found liable for an underlying

19 violation of the securities laws. The second claim is brought under Section 20 of

20 the Exchange Act, 15 U.S.C. § 78t, which provides for joint and several liability

21 for “[e]very person who, directly or indirectly, controls any person liable under

22 any provision of this chapter or of any rule or regulation thereunder.” Section 20

23 therefore creates liability for a controlling person related to a violation of

24 Exchange Act Section 10(b) and Rule 10b-5. The fourth claim is brought under

25 Section 15 of the Securities Act, 15 U.S.C. § 77 o , which provides for joint and

26

276 As noted in the preceding discussion of Plaintiffs’ first claim, the Court also

agrees with Defendants that Plaintiffs have failed to establish that Defendants made28 false or misleading statements or omissions.

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1 several liability for “[e]very person who . . . controls any person liable under

2 sections 77k or 77 l of this title.” Section 15 therefore creates liability for a

3 controlling person related to a violation of Securities Act Section 12(a).

4 As discussed in the preceding sections, the Court has concluded that no

5 claim was stated under Section 10(b) and Rule 10b-5, nor under Section 12(a),

6 and that amendment of those claims would be futile. Accordingly, the claims

7 under Sections 20(a) and 15, which are dependent on these claims, are also

8 dismissed with prejudice.

9 D. Plaintiffs’ Fifth and Sixth Claims: State-Law Claims

10 Federal courts are courts of limited jurisdiction, and federal district courts

11 have original jurisdiction over claims raising federal questions or involving

12 parties with diverse citizenship. Exxon Mobil Corp. v. Allapattah Servs., Inc., 545

13 U.S. 546, 552 (2005). “[O]nce a court has original jurisdiction over some claims

14 in the action, it may exercise supplemental jurisdiction over additional claims that

15 are part of the same case or controversy” pursuant to 28 U.S.C. § 1367(a). See id.

16 However, a district court may decline to exercise supplemental jurisdiction over

17 state-law claims under various circumstances, including if the court “has

18 dismissed all claims over which it has original jurisdiction.” 28 U.S.C. § 1367(c).

19 Here, Plaintiffs’ remaining claims are based on state law, and no federal

20 question jurisdiction exists over them. The Court also does not have jurisdiction

21 over these claims based on diversity jurisdiction. See 28 U.S.C. § 1332; Exxon

22 Mobil, 545 U.S. at 552; see also Johnson v. Columbia Props. Anchorage, LP, 437

23 F.3d 894, 899 (9th Cir. 2006) (noting that a limited liability company “is a citizen

24 of every state of which its owners/members are citizens”). The Court therefore

25 has only supplemental jurisdiction over these claims. However, because the Court

26 has determined that it must dismiss Plaintiffs’ federal security law claims, the

27

28

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1 Court concludes that it must decline to exercise supplemental jurisdiction over

2 Plaintiffs’ state-law claims. 7

3 IV.

4 CONCLUSION

5 For the foregoing reasons, the Court GRANTS the Geneva Motion (docket

6 no. 33) and the Berthel Motion (docket no. 35). The Court DISMISSES Plaintiffs’

7 FAC in its entirety with prejudice.

8 IT IS SO ORDERED.

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10 Dated: February 4, 2011

11 HonX able a ;ueline H. Nguyen

12E D ST^ TES DISTRICT COURT

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277 Even if the Court were to reach the merits of these claims, the claims would

prove inadequate based on Plaintiffs’ failure to allege false or misleading statements28 or omissions.

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Case 2:1 0-cv-05491-JHN -MAN Document 47 Filed...

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