547 F.3d 1055 (9th Cir. 2008), 06-15515, Thompson v. Paul

Docket Nº:06-15515.
Citation:547 F.3d 1055
Party Name:Pamela THOMPSON, an individual as guardian of Gabriella, Matthew, Marcus and Michael Thompson and The Thompson Group P.C., an Arizona corporation, Plaintiff-Appellant, v. George PAUL; Karen Paul; Tom Morgan; Scott Dewald; Deborah Jamieson; Lewis and Roca LLP, an Arizona Limited Liability Partner; Capitol Detective Agency, Inc., Defendants-Appellees
Case Date:October 27, 2008
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 1055

547 F.3d 1055 (9th Cir. 2008)

Pamela THOMPSON, an individual as guardian of Gabriella, Matthew, Marcus and Michael Thompson and The Thompson Group P.C., an Arizona corporation, Plaintiff-Appellant,

v.

George PAUL; Karen Paul; Tom Morgan; Scott Dewald; Deborah Jamieson; Lewis and Roca LLP, an Arizona Limited Liability Partner; Capitol Detective Agency, Inc., Defendants-Appellees.

No. 06-15515.

United States Court of Appeals, Ninth Circuit

October 27, 2008

Argued and Submitted Jan. 17, 2008.

Page 1056

William M. Balin, Balin & Kotler, San Francisco, CA, James LaGanke, Phoenix, AZ, and Charles Weller, La Jolla, CA, for the appellant.

Hal Michael Clyde, Paul F. Eckstein, and Todd Kerr, Perkins Coie Brown & Bain, Phoenix, AZ, for appellee Lewis and Roca.

David S. Rosenthal, Rosenthal Law Office, Phoenix, AZ, and Gregory Alan Rosenthal, Arboleda Brechner, Phoenix, AZ, for appellee Capitol Detective Agency.

Appeal from the United States District Court for the District of Arizona; Mary H. Murguia, Distict Judge, Presiding. D.C. No. CV-05-00990-MHM.

Before: W. FLETCHER and CARLOS T. BEA, Circuit Judges, and JEFFREY T. MILLER,[*] District Judge.

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WILLIAM A. FLETCHER, Circuit Judge:

Plaintiff Pamela Thompson and her four children (collectively “ Thompson" ) sued defendants for alleged violations of 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, and various provisions of state law. The district court dismissed Thompson's Section 10(b) claim with prejudice under Federal Rule of Civil Procedure 12(b)(6). After the district court had entered final judgment of dismissal of all of her claims, including her state-law claims, Thompson asked the district court to certify a question of state law to the Arizona Supreme Court. The district court denied the request.

Thompson contends that the district court erred by applying state law rather than federal law in dismissing her claim under Section 10(b). We agree with this contention. We reverse and hold that under the federal law applicable to her Section 10(b) claim Thompson has stated a claim upon which relief can be granted. Thompson also contends that the district court erred in denying her request to certify the question to the Arizona Supreme Court. We disagree with this contention. We affirm the district court on this issue.

I. Factual Allegations

The following narrative is taken from the allegations in Thompson's complaint. Because the district court dismissed the complaint under Rule 12(b)(6), we assume that all of the allegations in the complaint are true.

From January 2001 through May 2002, Thompson worked as the Chief Financial Officer (“ CFO" ) of YP.Net, a publicly traded company. Thompson resigned from YP.Net in May 2002 because of “ highly questionable accounting and auditing practices at the company. More specifically, ... [she] resigned because of the refusal of YP.Net officers and directors to make proper disclosures to the Securities and Exchange Commission." Compl. ¶ 17. When Thompson resigned, “ she forwarded her resignation from YP.Net to the Securities and Exchange Commission Enforcement Division because of her concerns of illegal conduct at YP.Net." Id. ¶ 18.

Immediately after Thompson resigned as CFO in May 2002, YP.Net filed a civil suit against her. The suit was filed in an attempt to protect the Chief Executive Officer (“ CEO" ) of YP.Net, Angelo Tullo, who was then subject to criminal investigation by several federal agencies. Id. ¶ 34. Thompson filed counterclaims in September 2003. YP.Net and Tullo were both represented by the Arizona law firm Lewis and Roca (“ L & R" ).

In about June 2000, while representing an alter ego of YP.Net in an attempt to purchase assets of a company in bankruptcy, attorneys at L & R became aware “ that Tullo was a target of a criminal investigation with several federal law enforcement agencies." Id. ¶ 21. Tullo's “ criminal matters were never disclosed in any Securities and Exchange Commission filings." Id. ¶ 24. During the pendency of the civil litigation between Thompson and YP.Net, from May 2002 through April 2004, attorneys at L & R “ vehemently denied any and all knowledge of a criminal investigation targeted at Angelo Tullo." Id. ¶ 35. See id. ¶ 39.

Thompson and YP.Net entered into settlement negotiations to resolve YP.Net's civil suit against Thompson. On April 22, 2004, the parties “ entered into a settlement memorandum." Id. ¶ 37.Under the settlement, Thompson was to receive a substantial amount of common stock in YP.Net. In part, the agreement was “ based upon" the “ false representation" by L & R attorneys that “ [t]here in fact was no criminal investigation targeted at the

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CEO of YP.Net, Angelo Tullo." Id. Yet on April 22, 2004, L & R attorneys “ knew that there was a criminal investigation targeting Tullo." Id. ¶ 39. On that day, Thompson “ made it clear to all parties, including the LEWIS AND ROCA DEFENDANTS that she intended to sell as much of her stock as soon as possible." Id. ¶ 40. According to the memorandum, the settlement was to be executed on April 26, 2004.

“ Moments before the final settlement documents in the YP [civil] litigation could be executed," the L & R attorneys “ withdrew from the YP litigation due to an undisclosed conflict that they had purportedly just discovered." Id. ¶ 41. Because of the last-minute withdrawal of the L & R attorneys, YP.Net was required to obtain new counsel and to postpone the execution of the settlement. A settlement was “ ultimately finalized" on May 24, 2004, with the assistance of new YP.Net counsel. Three days later, on May 27, Tullo was “ indicted on 29 counts of fraud, conspiracy, money laundering, and orchestrating a ponzi scheme." Id. ¶ 43.As a result of Tullo's indictment, the value of the YP.Net common stock that Thompson received under the settlement “ plummeted in value." Id. ¶ 44.

The L & R attorneys made their false representations that Tullo was not subject to criminal investigation “ with knowledge of their falsity." Id. ¶ 50. However, Thompson “ did not know of the falsity of the communications and representations" by the L & R attorneys. Id. ¶ 51. “ [A]s a result, [she] relied upon the communications and representations of the [L & R attorneys] and thought they had been truthful." Id. If the stock Thompson received under the settlement had not lost value as a result of Tullo's indictment, it “ could have been valued at more than one million dollars." Id. ¶ 49.

II. Proceedings in the District Court

In April 2005, Thompson and her four children filed suit in federal district court against the law firm of Lewis and Roca, three individual partners in Lewis and Roca, and two spouses of those partners (collectively “ the L & R defendants" ), and against the Capitol Detective Agency. Thompson brought one federal claim under Section 10(b) and Rule 10b-5 (“ the Section 10(b) claim" ), and numerous claims under state law. The district court dismissed the Section 10(b) claim and several of the state-law claims with prejudice under Federal Rule of Civil Procedure 12(b)(6). The district court dismissed several other state-law claims without prejudice under Rule 12(b)(6). Finally, the district court dismissed the last remaining state law claim under 28 U.S.C. § 1367(c). Thompson v. Paul, 402 F.Supp.2d 1110, 1119 (D.Ariz.2005). After the district court had entered an order dismissing all of her claims but before entry of final judgment, Thompson moved for reconsideration asking the district court to certify a question of state law to the Arizona Supreme Court. The district court denied the motion.

Thompson raises two questions on appeal. These questions are relevant only to possible liability of the L & R defendants. No question relevant to liability of defendant Capitol Detective Agency is before us on appeal. First, Thompson contends that the district court erred in dismissing her claim under Section 10(b) because it incorrectly relied on state rather than federal law. Second, Thompson contends that the district court erred in denying her request to certify the question of state law. We discuss her contentions in...

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