ESG Capital Partners, LP v. Stratos

• Decision Date: 11 July 2016
• Docket Number: No. 13-56684,13-56684
• Citation: 828 F.3d 1023
• Parties: ESG Capital Partners, LP, a Delaware Limited Partnership and Limited Partners, Plaintiff-Defendant, v. Troy Stratos, aka Ken Dennis, Defendant, and Venable LLP; David Meyer, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

828 F.3d 1023

ESG Capital Partners, LP, a Delaware Limited Partnership and Limited Partners, Plaintiff-Defendant

v. Troy Stratos, aka Ken Dennis, DefendantandVenable LLP; David Meyer, Defendants-Appellees.

No. 13-56684

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 7, 2015—Pasadena, California

Filed July 11, 2016

Margaret A. Grignon (argued) and Paula M. Mitchell, Reed Smith LLP, Los Angeles, California; William C. Nystrom, Michael Paris, and Jack I. Siegal, Nystrom Beckman & Paris LLP, Boston, Massachusetts; for Plaintiffs-Appellants.

Kevin S. Rosen (argued), Matthew S. Kahn, and Bradley J. Hamburger, Gibson, Dunn & Crutcher LLP, Los Angeles, California, for Defendant-Appellee Venable LLP.

David K. Willingham (argued) and Arwen Johnson, Caldwell Leslie & Proctor, PC, Los Angeles, California; for Defendant-Appellee David Meyer.

Before: Harry Pregerson, Dorothy W. Nelson, and Consuelo M. Callahan, Circuit Judges.

OPINION

PREGERSON, Circuit Judge:

INTRODUCTION

In this case we are dealing with the sufficiency of pleadings to survive a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss. We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1291, and we affirm in part, reverse in part, and remand.

We conclude that appellant's federal securities fraud claim is sufficiently pled under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. 15 U.S.C. § 78j(b) ; 17 C.F.R. § 240.10b–5.

Appellant's state law fraud claim, which parallels the federal securities fraud claim, is sufficiently pled under Federal Rule of Civil Procedure 9(b). Appellant's nonfraud state law claims for conversion, unjust enrichment, unfair competition, aiding and abetting fraud, and conspiracy to commit fraud are sufficiently pled under Federal Rule of Civil Procedure 8(a)(2).

Only one of appellant's state law claims—breach of fiduciary duty—is barred by Cal. Civ. Proc. Code § 340.6's one-year statute of limitations.

Neither the aiding and abetting fraud claim nor the conspiracy to commit fraud claim is barred by Cal. Civ. Code § 1714.10 's Agent's Immunity Rule.

BACKGROUND¹

ESG Capital Partners, L.P. (“ESG Capital”) was a group of investors formed to purchase pre-Initial Public Offering (“pre-IPO”) Facebook shares. Timothy Burns (“managing agent Burns”) was ESG Capital's managing agent. Managing agent Burns negotiated the purchase of pre-IPO Facebook stock with a man he believed to be “Ken Dennis.” In fact, “Ken Dennis” was an alias for Troy Stratos, an alleged con artist.

Venable LLP is a law firm with nine offices throughout the country, including Los Angeles. Venable LLP represented “Dennis” (aka Stratos) in the Facebook deal, which is the subject of this securities fraud suit. One of the partners in Venable LLP's Los Angeles office, David Meyer (“attorney Meyer”), was “Dennis's” principal contact at Venable LLP throughout the Facebook deal. At the time Venable LLP was representing “Dennis” in the Facebook deal, Venable LLP, but not attorney Meyer, also represented Stratos in an unrelated suit for the theft of $7 million.

Attorney Meyer assisted Stratos in creating Soumaya Securities, LLC (“Soumaya Securities”)—a company that Stratos could use to conduct business without detection. Attorney Meyer and Stratos named the company Soumaya Securities after billionaire Carlos Slim's late wife, Soumaya, and attorney Meyer told managing agent Burns that “Dennis” was affiliated with Slim. “Dennis” was not actually affiliated with Slim. And Soumaya Securities was not authorized to do business in California, had no bank accounts, and filed no tax returns.

Stratos, the alleged con artist, masqueraded as “Ken Dennis” in connection with all Soumaya Securities transactions, yet Soumaya Securities' operating documents, which attorney Meyer prepared, listed Stratos as Soumaya Securities' manager and sole member and “Kenneth Dennis” as its CEO. Attorney Meyer maintained a client trust account only for Stratos. As “Dennis,” the CEO of Soumaya Securities, Stratos negotiated the sale of pre-IPO Facebook stocks to ESG Capital from March to April 2011.

Between February and November 2011, attorney Meyer met with Stratos 25 times in person and spoke to Stratos at least 100 times on the phone. Managing agent Burns had questions before confirming the deal and called attorney Meyer on April 18, 2011, to verify “Dennis's” representations. During their phone conversation, attorney Meyer informed managing agent Burns that “Dennis” was in contact with Facebook executives and had access to millions of Facebook shares. Attorney Meyer told managing agent Burns that “Dennis” “is who he says he is.” In addition, attorney Meyer assured managing agent Burns that “Dennis” and Soumaya Securities were Slim's affiliates, that the sale was legitimate, that attorney Meyer represented “Dennis” and Soumaya Securities in the sale, and that attorney Meyer would provide deal documentation. ESG Capital pled that, without attorney Meyer's assurances, ESG Capital would not have gone through with the deal.

The day after the April 18 phone call, ESG Capital wired $2.8 million into Venable LLP's trust account as a deposit. Attorney Meyer called managing agent Burns to confirm receipt of the funds and that the “deal is on.” That day, the entire $2.8 million was deposited into Stratos's personal client trust fund account, not to any account for Soumaya Securities. Also that day, attorney Meyer had an all-day meeting with Stratos at Venable LLP's offices. ESG Capital pled that, had managing agent Burns known that the $2.8 million would not be held in trust pending the sale's completion, he would not have authorized attorney Meyer to release it.

Throughout the negotiations, managing agent Burns communicated with “Dennis” through Stratos's wpacquisitions@gmail.com email address—the same email address that attorney Meyer used with Stratos. Attorney Meyer was copied on some of managing agent Burns's emails to “Dennis” at the email address that attorney Meyer knew belonged to Stratos. Venable LLP interacted with Stratos often while Stratos negotiated his deal with ESG Capital, and Venable LLP performed various nonlegal tasks for Stratos, such as purchasing office supplies and car insurance.

In early May 2011, after ESG Capital had made its $2.8 million deposit, Stratos needed a bank account to deposit the funds. Stratos had been “black listed” from Citi and Wells Fargo due to his notoriety, his poor credit, and outstanding judgments against him. Venable LLP opened a bank account for Soumaya Securities at Bank of America. In early July 2011, “Dennis” told managing agent Burns that the deal was imminent and that managing agent Burns needed to wire Soumaya Securities an additional $7.2 million. Again, attorney Meyer provided purchase documentation to managing agent Burns.

At managing agent Burns's request, documentation of the deposit stated that the funds were refundable, “in the event the pending transaction does not close as a result of the fault of the seller or the issuer.” Managing agent Burns emailed confirmation to attorney Meyer and wired the money to Soumaya Securities' Bank of America account on July 12, 2011. Later that day, attorney Meyer emailed managing agent Burns to confirm receipt of the wire transfer, to which managing agent Burns responded, “Thanks David, Let's close a deal now!” Days after the wire transfer, Bank of America froze the Soumaya Securities account and then closed it on July 26. Venable LLP arranged to transfer the funds to a third party but never told ESG Capital.

In August 2011, “Dennis” told managing agent Burns that the deal was closing, and that he needed an additional $1.25 million to secure ESG Capital's shares. To receive this transfer, attorney Meyer opened a new bank account at UBS. Venable LLP listed Stratos—and not “Dennis”—as Soumaya Securities' “Beneficial Owner” on the UBS account. With this final transfer, ESG Capital's payments to Stratos totaled $11.25 million.

By December 22, 2011, ESG Capital still had not received the Facebook shares, and managing agent Burns threatened “Dennis” and attorney Meyer with legal action if its funds were not returned. In response, managing agent Burns received an email from Venable LLP's counsel, Stewart Webb, stating that “Venable received no such transfer and has no knowledge of the alleged transfer.” Managing agent Burns responded by identifying each of ESG Capital's wire transfers made at Venable LLP's direction, along with the email address for “Dennis.” Webb replied that the contact information managing agent Burns provided for “Dennis” was filed at Venable LLP under the name Troy Stratos, whom Venable LLP believed to be related to “Dennis.”² Webb told managing agent Burns that Venable LLP did not represent any party in the transactions between managing agent Burns and Soumaya Securities. Attorney Meyer was terminated by Venable LLP in 2012.

After learning that ESG Capital had been defrauded, managing agent Burns panicked and hid the news from ESG Capital. ESG Capital claims it did not learn of the alleged fraud and that their money had been stolen until November 2012.

ESG Capital filed suit against Stratos and Venable LLP and attorney Meyer on March 6, 2013, alleging eight causes of action: federal securities fraud, state law fraud, and six nonfraud state claims for conversion, breach of fiduciary duty, unjust enrichment, unfair competition, aiding and abetting fraud, and conspiracy to commit fraud. On May 23, 2013, the United States issued a superseding indictment against Stratos in connection with the Facebook fraud. On the defendants' motion, the district court dismissed ESG Capital's complaint without prejudice on June 26, 2013. The district court then dismissed ESG Capital's first amended complaint (“FAC”) with prejudice on August 15, 2013, denying leave to amend.

STANDARD OF REVIEW

Rule 12(b)(6) and 9(b) dismissals are reviewed de novo. In re Daou Sys. , 411...