Special Situations Fund III QP, L.P. v. Brar

• Decision Date: 25 March 2015
• Docket Number: Case No. 14-cv-04717-SC
• Court: U.S. District Court — Northern District of California
• Parties: SPECIAL SITUATIONS FUND III QP, L.P., et al., Plaintiffs, v. H. RAVI BRAR, SUSIE HERRMANN, and MURRAY JONES, Defendants.

SPECIAL SITUATIONS FUND III QP, L.P., et al., Plaintiffs, v. H. RAVI BRAR, SUSIE HERRMANN, and MURRAY JONES, Defendants.

Case No. 14-cv-04717-SC

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

March 25, 2015

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

I. INTRODUCTION

Now before the Court is Defendants H. Ravi Brar, Susie Herrmann, and Murray Jones' (collectively "Defendants") motion to dismiss. ECF No. 18. The motion is fully briefed.¹ Pursuant to Civil Local Rule 7-1(b), the Court finds this matter appropriate for disposition without oral argument. For the reasons set forth below, Defendants' motion is GRANTED in part and DENIED in part. Some of Plaintiffs' claims survive Defendants' motion and some areDISMISSED WITH LEAVE TO AMEND, as specified below.

II. BACKGROUND

At the motion to dismiss stage, the Court assumes the truth of Plaintiffs' well-pleaded factual allegations, so these facts come from Plaintiffs' complaint. ECF No. 1 ("Compl."). Defendants were all officers of ECOtality, Inc. ("ECOtality"), a company that designed, manufactured, and sold electric vehicle ("EV") charging systems. Compl. ¶¶ 3, 18-20. Mr. Brar was the Chief Executive Officer ("CEO"), Ms. Herrmann was the Chief Financial Officer ("CFO"), and Mr. Jones was the Chief Operating Officer ("COO"). Id. ¶¶ 18-20. Plaintiffs are institutional investors that purchased $6.4 million worth of ECOtality common stock through a Securities Purchase Agreement ("SPA") on June 12, 2013. Id. ¶¶ 1, 7. Plaintiffs made what is called a private investment in public equity deal ("PIPE deal"). Id. ¶ 1.

When Plaintiffs purchased their stock, ECOtality was almost entirely dependent on the United States Department of Energy's ("DOE") Vehicle Technologies Program for its revenue. Id. ¶¶ 4-5. DOE had awarded ECOtality a $100 million grant to run a large deployment of EV charging infrastructure throughout the country (the "EV Project"). Id. ¶ 4. The SPA, which Mr. Brar signed, included several provisions intended to protect the PIPE investors: (1) ECOtality had not received any cure notice; (2) there were no outstanding material claims or disputes between ECOtality and any governmental authority; (3) ECOtality had not been under investigation or audit by any governmental authority; (4) ECOtality had not been requested to provide information under threat of legalor administrative penalty; and (5) ECOtality had not made any disclosure to a governmental authority concerning any alleged non-compliance. Id. ¶ 6.

Plaintiffs allege that those representations were fraudulent. Id. ¶ 7. On June 9, 2013, three days before the SPA was executed, ECOtality informed DOE that ECOtality might be unable to meet the EV Project's September 30, 2013 target for completion of charging installations. Id. ¶ 8. On June 14, two days after the SPA was executed but four days before it closed, DOE sent ECOtality a cure notice explaining that DOE had found that ECOtality might be unable to complete the installation and data collection requirements of the EV Project and requiring ECOtality to submit a corrective action plan ("CAP"). Id. The PIPE deal closed on June 18. During closing, ECOtality reiterated its promises to the PIPE investors, including that it had not received any cure notice. Id.

On August 12, 2013, ECOtality revealed numerous problems with its business, including its inability to complete the EV project and DOE's suspension of all payments to the company. Id. ¶ 10. ECOtality also indicated that it might file for bankruptcy. Id. After the news broke, ECOtality's stock plummeted 79%, to $0.31 per share (it was $2.04 per share when the PIPE investors bought stock through the SPA). Id. ¶ 11. ECOtality filed for bankruptcy on September 16. Id.

A related case, In re ECOtality Securities Litigation ("In re ECOtality, No. 13-03791), is also currently before the Court. That case represents consolidated class actions against ECOtality, Mr. Brar, Ms. Hermann, and others. Plaintiffs in this case are members of the class alleged in In re ECOtality, but they have opted out ofthat litigation to bring their own case instead. In September of last year, the Court granted the In re ECOtality defendants' motion to dismiss, dismissing some claims with prejudice and others with leave to amend. See In re ECOtality, Inc. Sec. Litig., No. 13-03791-SC, 2014 WL 4634280 (N.D. Cal. Sept. 16, 2014).

In this action, Plaintiffs bring claims under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") against Mr. Brar. They also bring claims against all Defendants as control persons under Section 20(a) of the Exchange Act. Additionally, Plaintiffs bring claims for violations of Sections 25401 and 25501 of the California Corporations Code against Mr. Brar, and for violations of Section 25504 against all Defendants as control persons.

III. LEGAL STANDARD

A. Motion to Dismiss

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). "When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of theelements of a cause of action, supported by mere conclusory statements, do not suffice." Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). The allegations made in a complaint must be both "sufficiently detailed to give fair notice to the opposing party of the nature of the claim so that the party may effectively defend against it" and "sufficiently plausible" such that "it is not unfair to require the opposing party to be subjected to the expense of discovery." Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).

B. Section 10(b) and Rule 10(b)(5)

Section 10(b) of the Exchange Act makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe . . . ." 15 U.S.C. § 78j(b). One such rule prescribed by the SEC is Rule 10b-5. Rule 10b-5 makes it unlawful to (a) employ any device, scheme, or artifice to defraud; (b) make an untrue statement of material fact or omit a material fact necessary to make a statement not misleading; or (c) engage in an act, practice, or course of business which operates as a fraud or deceit in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. To establish a violation of Section 10(b) or Rule 10b-5, Plaintiffs must plead five elements: "(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss." In re Daou Sys., 411 F.3d 1006, 1014 (9th Cir. 2005).

Plaintiffs must also meet the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. The PSLRA requires plaintiffs to "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). Additionally, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. § 78u-4(b)(2). The "required state of mind" for establishing securities fraud is the knowing, intentional, or deliberately reckless disclosure of false or misleading statements. See Daou, 411 F.3d at 1014-15. "The stricter standard for pleading scienter naturally results in a stricter standard for pleading falsity, because falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts, and the two requirements may be combined into a unitary inquiry under the PSLRA." Id. at 1015 (internal quotation marks omitted).

IV. DISCUSSION

A. Section 10(b) Claims

Defendants make a number of arguments that Plaintiffs' claims under Section 10(b) of the Exchange Act should be dismissed. The Court addresses these arguments first.

1. Mr. Brar as the "Maker" of Statements in the SPA

Defendants first argue that Mr. Brar cannot be held responsible for the contents of the SPA. Though Mr. Brar signed the SPA on behalf of ECOtality, Defendants argue that only ECOtality, and not Mr. Brar (or anyone else) was responsible forthose statements. See ECF No. 18-2 ("RJN I") Ex. 2 ("SPA") at 40. Defendants point to language in the SPA that implies that ECOtality made the representations in that document. See id. at 24. In support of this argument, Defendants cite to a recent Supreme Court case holding that an investment adviser did not "make" statements issued by its client, a business trust responsible for a family of mutual funds. See Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2300-03 (2011). Defendants argue that only ECOtality "made" the statements in the SPA, and that the company's officers and directors are therefore insulated from them.

Unfortunately for Defendants, courts have routinely rejected their argument. "Courts have consistently held that the signer of a corporate filing is its 'maker,' because signing a filing implies 'ultimate control' over its contents." SEC v. e-Smart Techs., Inc., 31 F. Supp. 3d 69, 80 (D.D.C. 2014); see also SEC v. Brown, 878 F. Supp. 2d 109, 116 (D.D.C. 2012) ("Both...