World Surveillance Group Inc. v. La Jolla Cove Investors, Inc.
2014 U.S. Dist. LEXIS 122795
N.D. Cal.2014Background
- This case involves allegations of breaches of investment agreements between World Surveillance Group Inc. (WSGI) and La Jolla Cove Investors, Inc. (La Jolla).
- In a prior round, the court dismissed WSGI’s intentional misrepresentation, fraud in the inducement, and securities fraud claims for failure to meet Rule 9(b) pleading, and dismissed breach of fiduciary duty without prejudice.
- WSGI amended the complaint but the amendments do not save the dismissed claims; the court dismisses those claims with prejudice.
- Breach of contract, breach of the covenant of good faith and fair dealing, and California Unfair Competition Law (UCL) claims will proceed.
- The court reviews fiduciary-duty, misrepresentation, and securities-fraud theories under California law and federal pleading standards, then issues rulings on each claim.
- The outcome consolidates the prior rulings and clarifies which claims will continue against La Jolla.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Fiduciary duty exists in the parties’ relationship? | WSGI alleges La Jolla undertook fiduciary duties. | La Jolla’s role was an ordinary arms-length deal with no fiduciary duties. | Dismissed with prejudice; no fiduciary-duty exists from the pleadings. |
| Intentional misrepresentation and fraud in the inducement satisfy Rule 9(b)? | New allegations show misrepresentations and reliance. | Allegations lack time/place/identity and are pre/post-contract assurances. | Dismissed with prejudice; failure to plead with specificity and reliance. |
| Securities fraud under §10(b) and PSLRA with strong inference of scienter? | La Jolla manipulated shares and engaged in scheme to defraud investors. | Allegations do not show a proper §10(b) scheme or short-sale mechanics; scienter absent. | Dismissed with prejudice; claims do not meet §10(b) and PSLRA standards. |
| Rule 9(b) pleading sufficiency for alleged fraud details after amended complaint? | Amendments add specifics about dates and meetings. | Allegations still fail to provide concrete details and reliance. | Dismissed with prejudice; pleading remains defective. |
Key Cases Cited
- City of Hope Nat. Med. Ctr. v. Genentech, Inc., 43 Cal.4th 375 (Cal. 2008) (fiduciary duties require special relationship and utmost good faith)
- Comm. On Children’s Television, Inc. v. Gen. Foods Corp., 35 Cal.3d 197 (Cal. 1983) (fiduciary relationship rarely arises from arms-length deals)
- Manderville v. PCG & S Group, Inc., 146 Cal.App.4th 1486 (Cal. App. 2007) (exclusive facts needed to show reliance and fraud level of detail)
- Julius Castle Restaurant Inc. v. Payne, 216 Cal.App.4th 1423 (Cal. App. 2013) (reliance and pre-contract assurances must be shown as to fraud in inducement)
- Stoneridge Investment Partners v. Scientific-Atlanta, 552 U.S. 146 (Sup. Ct. 2008) (scheme liability under §10(b) not extend beyond public deception)
- United States v. Deeb, ? (?) (short sale mechanics discussed (not a reporter-required case))
- Marine Bank v. Weaver, 455 U.S. 551 (Sup. Ct. 1982) (securities fraud scope and intent discussed)
- Zueco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (No. 84 Employer-Teamster logic cited for strong inference of scienter)
- VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694 (9th Cir. 2012) (PSLRA pleading requirements for securities fraud)
- WPP Luxembourg Gamma Three Sari v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011) (post-PSLRA pleading standards for scienter)