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McCauley v. Najafi

United States District Court, D. Arizona

September 29, 2017

Bill McCauley, et al., Plaintiffs,
Jahm J. Najafi et al., Defendants.


          Honorable Steven P. Logan United States District Judge.

         Before the Court is Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint. (Doc. 28.) For the reasons set forth below, the motion will be granted.

         I. Background

         Plaintiffs Bill McCauley and Edward J. Kendler, individually and on behalf of all others similarly situated (“Plaintiffs”), bring this securities class action suit against Defendants Jahm Najafi, Kevin Weiss, David Franke, James Staudohar, and Scott Wiley, and each of their respective spouses (collectively, “Defendants”), for claims arising from the 2013 merger of Xhibit Corporation (“Xhibit”) and SkyMall Holdings Corporation (“SkyMall”).

         Prior to declaring bankruptcy in 2015 (Doc. 19 ¶ 79-80), Xhibit Corporation was a publicly traded company that specialized in internet marketing and nutraceutical products. (Doc. 19 ¶ 55.) Xhibit reported a net worth of $3 million in April 2013. (Doc. 19 ¶ 43.) During the spring of 2013, Xhibit's management was approached by Defendant Najafi to discuss a proposed merger between Xhibit and Defendant Najafi's company, SkyMall Holdings Corporation[1] (“SkyMall”). (Doc. 19 ¶ 44.) While presented “as a way for SkyMall and Xhibit to join their businesses and mutually strengthen one another, ” (Doc. 19 ¶ 44) Plaintiffs contend that Defendants intended to use the merger as a means to create “a materially fraudulent and deceptive public market for SkyMall-an insolvent, previously private company with a history of operating losses.” (Doc. 19 ¶ 2.) The Xhibit-SkyMall merger was finalized on May 16, 2013. (Doc. 19 ¶ ¶ 16, 51.)

         After the merger, Plaintiffs allege that Defendants made numerous adjustments to Xhibit's business model including: (1) the termination of Xhibit's original business lines; (2) the sale of SkyMall Ventures-SkyMall's profitable loyalty business line-to repay Defendant Najafi's affiliates that had extended credit to SkyMall; and (3) numerous leadership changes including the appointments of Defendants Weiss as CEO and Defendant Wiley as CFO, as well as the addition of Defendant Najafi to the Board of Directors. (Doc. 19 ¶¶ 45-76.) It is furthered alleged that during this time, Defendants were “deceptively inflating the value of Xhibit . . . overstating Xhibit's assets and net worth by tens of millions of dollars and deceptively understating Xhibit's operating expenses by hundreds of millions of dollars.” (Doc. 19 ¶¶ 5-6.) Plaintiffs maintain that Defendants orchestrated this fraud on Xhibit investors and the public through a series of filings with the U.S. Securities and Exchange Commission (“SEC”) that were deliberately untimely so as to conceal the fluctuating-and ultimately, declining-value of Xhibit. (Doc. 19 ¶¶ 45-76.)

         Xhibit and SkyMall LLC filed for bankruptcy on January 22, 2015 (Doc. 19 ¶ 79), “effectively rendering Xhibit's stock worthless.” (Doc. 19 ¶ 11.) On August 23, 2016, Plaintiffs McCauley and Kendler, who between them bought nearly $3 million worth of Xhibit stock after the merger (Docs. 19-1, 19-2), filed the present action in the Maricopa County Superior Court. Plaintiffs bring claims pursuant to Arizona Securities laws, Ariz. Rev. Stat. §§ 44-1991(A)(2), 44-1991(A)(3), and 44-1999(B), on behalf of themselves and all persons who purchased or held securities issued by Xhibit Corporation between May 16, 2013 and September 10, 2014. (Doc. 19 ¶¶ 85-106.) Defendants removed the case on October 11, 2016 pursuant to the Class Action Fairness Act of 2005 and 28 U.S.C. §§ 1332(d), 1441, 1446, and 1453. (Doc. 1 at 3.) Plaintiffs McCauley and Kendler were appointed to serve as Lead Plaintiffs. (Doc. 24.) Defendants have moved to dismiss Plaintiff's First Amended Complaint. (Doc. 28.)

         II. Standard of Review

         To survive a motion to dismiss, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief” such that the defendant is given “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007) (quoting Fed.R.Civ.P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 47 (1957)). The Court may dismiss a complaint for failure to state a claim under Federal Rule 12(b)(6) for two reasons: (1) lack of a cognizable legal theory, and (2) insufficient facts alleged under a cognizable legal theory. Balistreri v. Pacificia Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

         A complaint must “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citation omitted). Facial plausibility requires the plaintiff to plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Id. (quoting Twombly, 550 U.S. at 557). Although a complaint “does not need detailed factual allegations, ” a plaintiff must “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. This requires “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action.” Id.

         In deciding a motion to dismiss the Court must “accept as true all well-pleaded allegations of material fact, and construe them in the light most favorable to the non-moving party.” Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). In comparison, “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences” are not entitled to the assumption of truth, id., and “are insufficient to defeat a motion to dismiss for failure to state a claim.” In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010) (internal citation omitted). A plaintiff need not prove the case on the pleadings to survive a motion to dismiss. OSU Student All. v. Ray, 699 F.3d 1053, 1078 (9th Cir. 2012).

         Fraud claims are subject to Rule 9(b) of the Federal Rules of Civil Procedure, which requires that a plaintiff “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). Rule 9(b) requires that the pleader “state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation.” Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). The plaintiff must also “set forth . . . an explanation as to why the disputed statement was untrue or misleading when made.” Yourish v. Cal. Amplifier, 191 F.3d 983, 993 (9th Cir. 1999); see also Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (“Averments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged.”) (citation and quotation marks omitted). “Rule 9(b) does not allow a complaint to merely lump multiple defendants together but requires plaintiffs to differentiate their allegations . . . and inform each defendant separately of the allegations surrounding his alleged participation in the fraud.” United States v. Corinthian Colls., 655 F.3d 984, 997-98 (9th Cir. 2011) (citation omitted). The plaintiff must identify each defendant's role in the “fraudulent scheme.” Id. at 998.

         III. Discussion

         In its amended complaint, Plaintiffs allege that Defendants violated the following sections of Arizona Securities law: § 44-1991(A)(2), § 44-1991(A)(3), and § ...

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