Foster v. Wilson

• Citation: 504 F.3d 1046
• Decision Date: 05 October 2007
• Docket Number: No. 05-56424.,No. 05-56743.,05-56424.,05-56743.
• Parties: Scott FOSTER; Neil Tremblay; Glenn Foley, Plaintiffs-Appellants, v. Peter WILSON, Defendant-Appellee. Scott Foster; Neil Tremblay; Glenn Foley; and Willenken Wilson Loh & Lieb LLP, Plaintiffs-Appellants, v. Peter Wilson, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

504 F.3d 1046 Scott FOSTER; Neil Tremblay; Glenn Foley, Plaintiffs-Appellants,
v.
Peter WILSON, Defendant-Appellee.
Scott Foster; Neil Tremblay; Glenn Foley; and Willenken Wilson Loh & Lieb LLP, Plaintiffs-Appellants,
v.
Peter Wilson, Defendant-Appellee. No. 05-56424. No. 05-56743. United States Court of Appeals, Ninth Circuit. Argued and Submitted June 7, 2007. Filed October 5, 2007.

[504 F.3d 1048]

William A. Delgado and Jason H. Wilson, Willenken Wilson Loh & Lieb LLP, Los Angeles, CA, for appellants Scott Foster, Neil Tremblay, and Glenn Foley in Case No. 05-56424.

Shaun P. Martin, University of San Diego Law School, San Diego, CA, for appellants Scott Foster, Neil Tremblay, and Glenn Foley and Willenken Wilson Loh & Lieb LLP in Case No. 05-56743.

Rick Augustini, Law Office of Rick Augustini, Irvine, CA, for appellee Peter Wilson in both cases.

Appeal from the United States District Court for the Central District of California; Dale S. Fischer, District Judge, Presiding. D.C. Nos. CV 04-9552 DSF(VBKx), CV 04-9552 DSF(VBKx).

Before: DANIEL M. FRIEDMAN,^* ALEX KOZINSKI, and RONALD M. GOULD, Circuit Judges.

FRIEDMAN, Circuit Judge:

The principal issue is whether the district court correctly dismissed, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief could be granted, a complaint alleging federal securities fraud. We affirm that dismissal, but reverse the district court's imposition of monetary sanctions against the appellants and their attorney.

The issues were presented in two separate appeals which were argued consecutively. We decide both appeals in a single opinion.

I

A. The background facts, as alleged in the first amended complaint ("amended complaint"), may be summarized as follows:

The appellants Foster and Foley hired the appellee Wilson "as a consultant to help with the business affairs of their then-employer, Precision Vascular Systems (`Precision Vascular')." "Wilson represented to [them] that he was a consultant for many different companies that would be profitable investments and that he would introduce Foster and Foley to such investments." Wilson subsequently extolled to the appellants the prospects of a company called Car Rental Direct ("CRD"), which was "in the business of renting cars to consumers on a long term basis." Wilson "held himself out as a consultant for the company" and stated that he "received an equivalent value in shares of CRD for every investment dollar he brought to CRD."

When the appellants "indicated to Wilson they were interested in purchasing shares of CRD and would seek out a broker," he told them that "they should not buy shares through a broker but that they should buy shares through him because of his special relationship with CRD. Wilson ultimately convinced Plaintiffs to buy shares through him by promising them: `I won't let you lose money on this deal.'"

504 F.3d 1049

Based on these many representations, in June 2002, Foster, Foley, and Tremblay provided Wilson with $100,000, $30,000, and $20,000, respectively, so that he could purchase CRD shares from CRD in an equivalent value on their behalf. Wilson represented he would immediately purchase shares of CRD from CRD for Plaintiffs and provide Plaintiffs with certificates.

Subsequent thereto, Wilson provided Foley with a certificate for shares in CRD Holdings, Inc. ("CRDH")—a holding company for CRD—made out to Scott Foster in the amount of 50,000 shares. However, the majority of these shares was to be returned to Wilson himself and did not represent the sum total of shares equivalent to Plaintiffs' $150,000 investment. As such, Wilson still had to provide Plaintiffs with more shares.

Shortly thereafter, CRD's fortunes began to decline, and in June 2003 the company became bankrupt.

The appellants' attempts to obtain the additional shares from Wilson were unsuccessful. On one occasion, after Wilson told the appellants that "he had finally received certificates for their shares of CRD stock and would overnight the certificates to Plaintiffs," he "subsequently informed Plaintiffs that CRD had `mistakenly' provided certificates in the name of Wilson's company."

"When Foster, Tremblay, and Foley confronted Wilson with CRD's bankruptcy, Wilson agreed to guarantee and reimburse Plaintiffs the full $150,000 lost by providing them with shares of Precision Vascular having an equivalent value." "Wilson never provided Plaintiffs with shares of Precision Vascular."

B. The amended complaint (like the original one) contained four claims. Claim 1 alleged federal securities law fraud. The three other claims were state law claims for California securities law fraud, common law deceit and breach of contract.

The federal securities fraud claim alleged that Wilson "used or employed, in connection with the purchase or sale of CRD shares, manipulative or deceptive devices or contrivances, within the meaning of 15 U.S.C. § 78j." It asserted:

After dissuading Plaintiffs from purchasing CRD stock from a broker, Defendant obtained from Plaintiffs $150,000 for the ostensible purpose of obtaining shares of CRD directly from CRD on their behalves. Plaintiffs provided Defendant with $150,000 to purchase shares in reliance on his statement that he had a special relationship with CRD and his assurances he would not "let them lose money" on the CRD investment.

. . . Defendant never provided all of Plaintiffs' money to CRD for the purpose of purchasing shares in CRD on Plaintiffs' behalf. Instead, Wilson purchased some shares from CRD on behalf of Foster but used the majority of Plaintiffs' investment to purchase shares on his own behalf and on behalf of his company, KPC.

C. The district court dismissed the amended complaint for failure to state a claim upon which relief could be granted.

The court dismissed Foley and Tremblay's securities fraud claim because Wilson's failure to deliver any securities to them meant that they were not purchasers of a security. The court dismissed Foster's securities fraud claim because the complaint did not sufficiently allege that Wilson's representations to Foster were false. The court, however, did not immediately dismiss the complaint, but allowed the appellants to amend it to correct the defects it had noted.

504 F.3d 1050

The appellants declined to amend and instead "elected to stand on their first amended complaint and on the sufficiency of the allegations alleged therein."

The court then dismissed the federal and state securities fraud claims with prejudice, and, "[t]he sole claim . . . arising under federal law having been dismissed," the court dismissed the remaining state claims without prejudice.

II

A. Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), prohibits the use "in connection with the purchase or sale of any security . . ., [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe. . . ." Commission Rule 10b-5 implements that provision by making it unlawful "(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or omit to state a material fact necessary in order to make the...