Zazzali v. Ellison
2013 U.S. Dist. LEXIS 139578
D. Idaho2013Background
- Trustee James T. Zazzali (ELT and PAT) sues former DBSI general counsel Mark Ellison alleging RICO, securities fraud, common-law fraud, fiduciary breaches, malpractice, unjust enrichment and related claims arising from the collapse of DBSI and alleged misuse/commingling of investor "Accountable Reserve" funds.
- Complaint (500+ paragraphs) alleges Ellison drafted/signed-off on Private Placement Memoranda (PPMs), attended board/finance meetings, prepared term sheets, and knew reserves were not segregated; many allegations are grouped with other "Insiders."
- Defendant moved to dismiss under Fed. R. Civ. P. 8(a), 9(b), and PSLRA; magistrate judge issued an R&R recommending dismissal of certain claims and leave to amend others; Trustee filed limited objections only to negligent misrepresentation dismissal.
- District court adopted the R&R mostly, granted motion in part and denied in part: dismissed some negligence/misappropriation/negligent-misrepresentation claims (Idaho claims) and punitive damages claims under state law (subject to I.C. § 6-1604), while allowing RICO, securities, common-law fraud, unjust enrichment, and certain fiduciary and conspiracy claims to proceed or be repled with specificity.
- Court held pleading standards: Rule 8(a) not fatal despite length/group pleading; Rule 9(b) and PSLRA apply to fraud/securities claims; scienter adequately alleged (especially re: Accountable Reserve commingling and GAAP violations) to survive dismissal for many fraud-based claims.
Issues
| Issue | Plaintiff's Argument (Zazzali) | Defendant's Argument (Ellison) | Held |
|---|---|---|---|
| Whether complaint violates Rule 8(a) | Complaint sufficiently alleges Ellison-specific and conspiracy facts; length justified by complexity | Complaint is overlong, contains group pleading and irrelevant historical facts | Court: Not dismissed on 8(a); verbosity excused given related cases and conspiracy allegations |
| Whether fraud/RICO claims meet Rule 9(b)/PSLRA | Allegations tie Ellison to false PPMs, Accountable Reserve misstatements, GAAP violations—scienter pled | Claims lack particularity as to who, when, how; insufficient scienter and specific acts by Ellison | Court: RICO, common-law fraud, securities claims survive; scienter inference cogent re: Accountable Reserve and GAAP violations |
| Whether federal RICO barred by securities-fraud exception (18 U.S.C. §1964(c)) | Trustee distinguishes TIC investments (some offerings were real-estate, not securities) and pleads alternative theories | Ellison argues TIC offerings are securities; if so, RICO predicated on same conduct barred | Court: Characterization of TICs is fact-specific; RICO claims not dismissed on this basis now (may be addressed at summary judgment) |
| Negligent misrepresentation under Idaho law (Count 15) | Trustee: premature—misrepresentations may have occurred outside Idaho where claim exists | Ellison: Idaho law does not recognize negligent misrepresentation here | Court: Dismiss Count 15 as to Idaho claims without leave; allow repleading as to specific out-of-state allegations where claim is recognized |
Key Cases Cited
- United States v. Reyna-Tapia, 328 F.3d 1114 (9th Cir. 2003) (district court must review magistrate judge R&R de novo as to objections)
- Peretz v. United States, 501 U.S. 923 (1991) (de novo review not required unless requested by parties to satisfy Article III)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for Rule 8)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must contain factual content permitting reasonable inference of liability)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (PSLRA scienter inference must be cogent and at least as compelling as nonfraudulent inference)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (holistic scienter analysis and use of management access allegations)
- In re Daou Systems, Inc., 411 F.3d 1006 (9th Cir. 2005) (GAAP violations can support scienter when described with particularity)
- Odom v. Microsoft Corp., 486 F.3d 541 (9th Cir. 2007) (elements and pleading requirements for substantive RICO claims)