Ventura, Inc. v. Sharkansky, LLP
| Decision Date | 21 July 2014 |
| Docket Number | Civil Action No. 13-cv-01486-RBJ-KMT |
| Court | U.S. District Court — District of Colorado |
| Parties | VENTURA, INC., JOHN R. BUTLER, KEITH WEGEN, JJJ FOUNDATION, INC., and TRIANGLE RIVER 401, LLC, Plaintiffs, v. SHARKANSKY, LLP, SCOTT ESTABROOKS, HOLLAND & KNIGHT, LLP, and RICHARD J. HINDLIAN, Defendants. |
ORDER AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
This case comes before the court on "Holland & Knight LLP's and Richard J. Hindlian's Motion to Dismiss Complaint" (Doc. No. 43, filed Sept. 13, 2013 [Mot. Dismiss]) and "Plaintiffs' Motion for Leave to Supplement Response and Brief in Opposition to Holland & Knight LLP's and Richard J. Hindlian's Motion to Dismiss" (Doc. No. 76, filed Dec. 17, 2013 [Mot. Suppl.]). For the following reasons, it is ORDERED that the Motion to Supplement is GRANTED and RECOMMENDED that the Motion to Dismiss be GRANTED.
The following factual background is derived from Plaintiffs' "Amended Complaint and Jury Demand" (Doc. No. 8 [Am. Compl.]) and the parties' briefing with respect to this Recommendation. At the outset, the court notes that the 67-page Amended Complaint includes factual allegations as to all of the defendants, including several who have since been dismissed. For sake of brevity and focus, this background is limited to the facts pertinent to Plaintiffs' claims against Defendants Holland & Knight LLP ("Holland & Knight") and Richard Hindlian ("Hindlian").
Plaintiff alleges that Holland & Knight and Hindlian were complicit in a scheme by Inofin, Inc., a Massachusetts automotive finance company, to materially mislead investors, including Plaintiffs, as to Inofin's financial standing and worth. More specifically, despite the fact that Inofin had a negative net worth and a progressively deteriorating financial condition, Inofin and its principal officers allegedly continued to offer and sell Inofin securities, knowingly or recklessly misrepresenting to investors that Inofin was a profitable business and a sound investment. (Am. Compl ¶ 3.)
Holland & Knight, and its predecessor firm, Sherbourne, Powers & Needham, have been Inofin's outside counsel since the early 1990's.1 (Id. ¶ 101.) In August 2006, Inofin's President, Michael Cuomo, approached and retained Holland & Knight to advise Inofin regarding its license from the Massachusetts Division of Banks. (Id. ¶ 102.) Cuomo conveyed to Hindlian, apartner in Holland & Knight's Boston office, that the Division of Banks license was essential to Infofin's ability to conduct its business. (Id.)
At or around the time Holland & Knight was retained by Inofin, Hindlian learned from Cuomo that Inofin effectively had a negative net worth.2 (See id. ¶¶ 102-103.) Hindlian began researching regulation pertinent to the Division of Banks licensing process and spoke with Division of Banks personnel. (Id. ¶ 103.) Based on this research, as well as prior experience, Hindlian allegedly recognized that Inofin's negative net worth presented a clear risk that it would lose its license from the Division of Banks. (Id.) Nevertheless, Hindlian allegedly never advised Inofin to disclose its negative net worth to investors or the risk this posed to Inofin's license with the Division of Banks. (Id.)
In late 2008, Inofin was attempting to raise additional financing to meet its needs for additional cash. (Id. ¶ 107.) Hindlian advised Infofin that if it were to sell additional notes to investors, it should do so in the form of a private placement that would be exempt from registration under SEC Regulation D. (Id.) To qualify for this registration exemption, a private placement memorandum ("PPM") that included proper disclosures to investors was required. (Id. ¶ 108.)
Around that same time, an Inofin investor, Robert Downing, also approached Inofin management regarding the need to distribute a PPM to investors. Mr. Downing apparently recognized that SEC regulations required a PPM for Inofin's investment scheme. (Id. ¶ 153.)
On or around January 31, 2009, Hindlian, with Inofin's authorization, drafted a PPM for an offering of up to $5 million in notes to be sold to investors. (Id. ¶ 109-108.) However, even though Hindlian allegedly knew that Inofin was insolvent, the PPM drafted by Hindlian did not disclose Inofin's negative net worth or its association with the two related entities which were the source of its negative net worth. (Id. ¶ 111.)
After receiving the PPM from Hindlian, Cuomo instructed Hindlian to stop work on the PPM because Inofin had elected to raise money only from "family and friends." (Id. ¶ 113.) Plaintiffs allege that Hindlian should have known that Inofin's potential investors were not limited to "friends and family" as Inofin had upwards of 275 investors and was actively using and paying promoters to seek out investors. (Id. ¶ 114.) In response to Mr. Downing's inquiry about the need for a PPM, Inofin's CEO, Kevin Mann, and Cuomo, represented to investors, including Plaintiffs, that Holland & Knight advised that a PPM was not required. (Id. ¶ 156.)
In the summer of 2009, Hindlian authored a May 22, 2009 memorandum to Inofin, in which the first itemized topic was "[h]iding losses and financing needs." (Id. ¶ 117.) Holland &Knight and Hindlian continued to represent Inofin, despite knowing that Inofin was raising money from investors without disclosing its dire financial condition and without issuing a PPM in compliance with Regulation D. (Id. ¶ 118.)
In September 2009, the SEC commenced an investigation and issued a subpoena to Inofin. (Id. ¶ 119.) Holland & Knight represented Inofin in connection with the SEC investigation and subpoena. (Id.) Holland & Knight allegedly argued to the SEC that the notesissued to investors were not securities, even though Hindlian previously prepared a PPM pursuant to Regulation D for the sale of the same notes. (Id.)
In October 2009, Holland & Knight allegedly "acquiesced" to Inofin issuing 2008 financial statements that failed to reflect Inofin's negative net worth. (Id. ¶ 121.) In addition, Plaintiff alleges that Holland & Knight failed to ensure that Inofin disclosed the existence of the SEC investigation to investors. (Id. ¶ 122.)
Plaintiffs assert that, because of Holland & Knight and Hindlian's actions and omissions, they rolled over notes that they had purchased from Inofin, reinvested accrued interest in Inofin, and made new investments. (Id. ¶¶ 124, 157.) On February 9, 2011, a group of Inofin investors filed an involuntary petition for bankruptcy proceedings against Inofin, pursuant to Chapter 7 of the United States Bankruptcy Code. (Id. ¶ 100.) On February 16, 2011, the United States Bankruptcy Court for the District of Massachusetts appointed a Chapter 7 trustee, who continues to oversee Inofin and its assets. (Id.)
Plaintiffs' Amended Complaint, filed June 28, 2013, asserts fifteen claims for relief. With respect to Holland & Knight and Hindlian, Plaintiff alleges a claim for violations of Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiffs also assert state law claims against Holland & Knight and Hindlian for fraud, negligent misrepresentation, civil conspiracy, breach of fiduciary duty, and violations of the Colorado Securities Act, Colo Rev. Stat. § 11-51-501 et seq.
Holland & Knight and Hindlian's Motion to Dismiss was filed on September 13, 2013. (See Mot. Dismiss.) They argue that Plaintiff's Section 10(b) claim fails to state a claim for relief and that, in the absence of that claim, the court lacks personal jurisdiction over Holland & Knight and Hindlian.3
Pursuant to the mandatory stay provision contained in the Private Securities Litigation Reform Act, 15 U.S.C. § 77z-1(b)(1), the court stayed all discovery and proceedings in this action, with the exception of limited jurisdiction discovery necessary to respond to Holland & Knight and Hindlian's Motion to Dismiss. (See Courtroom Minutes, Doc. No. 51, filed Oct. 2, 2013.) After receiving an extension of time to conduct such jurisdictional discovery (see Minute Order, Doc. No. 59), Plaintiffs' Response was filed on November 12, 2013 (Doc. No. 67) and Holland & Knight and Hindlian's Reply was filed on November 22, 2013 (Doc. No. 72.)
A few weeks after Holland & Knight and Hindlian filed their Reply in Support of their Motion to Dismiss, Plaintiffs filed their Motion to Supplement. Holland & Knight and Hindlian filed a Response on December 24, 2013 (Doc. No. 78 [Resp. Mot. Suppl.]), and Plaintiffs filed a reply on January 7, 2014 (Doc. No. 79 [Reply Mot. Suppl.]). Accordingly, this matter is ripe for the court's review and recommendation.
Federal Rule of Civil Procedure 12(b)(6) provides that a defendant may move to dismiss a claim for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). "The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted." Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003) (citations and quotation marks omitted).
"A court reviewing the sufficiency of a complaint presumes all of plaintiff's factual allegations are true and construes them in the light most favorable to the plaintiff." Hall v. Bellmon, 935 F.2d 1106, 1198 (10th Cir. 1991). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pleaded facts...
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