McCauley v. Najafi, 2:16-cv-03461

Plaintiffs McCauley and Kendler (class representatives) sued individual defendants tied to SkyMall and Xhibit after the 2013 merger of Xhibit Corporation and SkyMall, alleging securities fraud that rendered Xhibit stock worthless following its 2015 bankruptcy.
After the merger, Plaintiffs allege Defendants changed Xhibit’s business model, sold SkyMall Ventures, made leadership changes (Weiss as CEO, Wiley as CFO, Najafi on the board), and concealed SkyMall’s poor finances to inflate Xhibit’s value.
Plaintiffs purchased nearly $3 million of Xhibit stock post-merger and assert claims under Arizona securities statutes: A.R.S. § 44-1991(A)(2), (A)(3), and § 44-1999(B) on behalf of purchasers between May 16, 2013 and September 10, 2014.
Defendants removed the case to federal court under CAFA; plaintiffs amended their complaint and defendants moved to dismiss for failure to state a claim and for inadequate fraud pleading under Rule 9(b) and state heightened pleading statutes.
The complaint alleged specific misstatements/omissions in merger press releases and financial statements and alleged overvaluation of intangible assets and omissions about business-line changes.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether plaintiffs stated a claim under A.R.S. § 44-1991(A)(2) (fraud in connection with purchase/sale of securities)	Defendants made false/misleading statements and omissions that caused plaintiffs to buy overvalued Xhibit stock	Allegations show only post-merger conduct affecting value, not fraud "in connection with" a purchase or sale	Dismissed: plaintiffs failed to allege fraud connected to a purchase/sale as required by the statute
Whether plaintiffs pleaded a claim under A.R.S. § 44-1991(A)(3) (manipulative practices)	Plaintiffs alleged a course of conduct and manipulative scheme that operated as fraud/deceit	Allegations are a bare statutory recitation and fail to plead distinct manipulative conduct apart from omissions/representations	Dismissed: claim is conclusory and fails to satisfy the state’s heightened pleading rules
Whether plaintiffs alleged control-person liability under A.R.S. § 44-1999(B)	Plaintiffs point to same facts supporting primary violations and assert joint and several liability	Without a primary violation under § 44-1991, control-person claims cannot stand	Dismissed: derivative control-person claim fails because primary claims fail
Whether leave to amend should be granted	Plaintiffs had already amended and could try again	Defendants opposed further amendment as futile	Denied: court finds further amendment futile and dismisses with prejudice

Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (application of plausibility standard to factual allegations)
Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) (Rule 9(b) requires who, what, when, where, how for fraud allegations)
Yourish v. California Amplifier, 191 F.3d 983 (9th Cir. 1999) (requirement to explain why statements were untrue or misleading)
Balistreri v. Pacifica Police Department, 901 F.2d 696 (9th Cir. 1990) (failure to state a cognizable legal theory or insufficient facts justifies dismissal)
Owens v. Kaiser Foundation Health Plan, 244 F.3d 708 (9th Cir. 2001) (factors for leave to amend: bad faith, undue delay, prejudice, futility)