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1 ELIZABETH S. BALFOUR, Cal. Bar No. 213994 SHEPPARD, MULLIN, RICHTER & HAMPTON LLP 2 A Limited Liability Partnership Including Professional Corporations 3 12275 El Camino Real, Suite 200 San Diego, California 92130-2006 4 Telephone: 858-720-8900 Facsimile: 858-509-3691 5 [email protected] 6 Attorneys for Defendants Winex Investments, LLC, William Krusheski, John Sullivan, Robert 7 B. Hydeman, and Emilio Pineda 8 9 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA Case No. 08 CV 0051 L CAB MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS THE AMENDED COMPLAINT AS TO DEFENDANT JOHN SULLIVAN PURSUANT TO 11 U.S.C. § 727; MOTION TO DISMISS THE FIRST, SECOND, THIRD, FOURTH, AND FIFTH CAUSES OF ACTION OF THE AMENDED COMPLAINT AS TO DEFENDANTS WINEX INVESTMENTS, LLC, WILLIAM KRUSHESKI, AND CRAIG PINEDO, PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(b)6; AND MOTION TO DISMISS THE AMENDED COMPLAINT AS TO DEFENDANT ROBERT HYDEMAN PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(b)6. Date: June 30, 2008 Time: 10:30 a.m. Ctrm: 14 Honorable James Lorenz Complaint Filed: December 5, 2007 Complaint Served: December 10, 2007 Complaint Removed: January 9, 2008 Amended Complaint Filed: April 3, 2008

10 JIM COLLINS and MARYANN COLLINS, 11 Plaintiffs, 12 v. 13 14 WINEX INVESTMENTS, LLC, a Wyoming limited liability company, 15 WILLIAM KRUSHESKI, an individual, JOHN SULLIVAN, an individual, 16 ROBERT B. HYDEMAN, an individual, EMILIO PINEDA, an 17 individual, DOES 1 through 100, inclusive, 18 Defendants. 19 20 21 22 23 24 25 26 27 28
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1 2 3 4 5 6 II. III. I.

TABLE OF CONTENTS Page INTRODUCTION .............................................................................................................. 1 SUMMARY OF PLAINTIFFS' ALLEGATIONS......................................................... 2 STANDARD ON A MOTION TO DISMISS ................................................................ 2 DEFENDANT JOHN SULLIVAN HAS RECEIVED A DISCHARGE UNDER 11 U.S.C. § 727 AND THEREFORE THIS COMPLAINT CANNOT BE MAINTAINED AGAINST HIM ............................................................ 3 PLAINTIFFS' FRAUD-BASED CLAIMS DO NOT SATISFY THE PLEADING REQUIREMENTS OF RULE 9(B) OR THE PSLRA ........................... 3 A. B. C. Rule 9(b) Requires Plaintiffs to Plead Fraud with Particularity....................... 3 PSLRA Requires Facts be Pled Showing Strong Circumstantial Evidence of Deliberately Reckless or Conscious Misconduct.......................... 5 The Court Should Dismiss the First, Second, Third, Fourth, and Fifth Causes of Action Against Mr. Krusheski, Mr. Pinedo, and Winex.................. 7 1. 2. 3. Plaintiff's Third Claim Under Rule 10b-5 Fails to Meet the Heightened Pleading Standard under PSLRA or FRCP 9(b) ................ 7 The Fourth Claim Under California Corporations Code § 25401 Fails to State a Claim ................................................................ 11 First, Second and Fifth Claims for Misrepresentation and Breach of Fiduciary Duty are Fraud-Based and Must Satisfy Rule 9(b) .................................................................................................... 12

7 IV. 8 9 V. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VI.

THE AMENDED COMPLAINT CONTAINS NO ALLEGATIONS AGAINST ROBERT HYDEMAN; ACCORDINGLY, HE SHOULD BE DISMISSED...................................................................................................................... 14

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1 2 CASES

TABLE OF AUTHORITIES

3 Activision Securities Litigation, 621 F. Supp. 415 (9th Cir. 1985) ....................................................................................2, 12 4 Admiralty Fund v. Hugh Johnson & Co., 5 677 F.2d 1301 (9th Cir. 1982).............................................................................................11 6 Binder v. Gillespie, 184 F.3d 1059 (9th Cir. 1999)...........................................................................................5, 8 7 Cahill v. Liberty Mutual Ins. Co., 8 80 F.3d 336 (9th Cir. 1996)................................................................................................... 2 9 Christiansen v. Roddy, 186 Cal. App. 3d 780 (1986)...............................................................................................13 10 DeMarco v. DepoTech Corp., 11 149 F. Supp. 2d 1212 (S.D. Cal. 2001)................................................................................ 4 12 Diasonics Securities Litigation, 559 F. Supp. 447 (C.D. Cal. 1984).............................................................................. 11, 12 13 Dura Pharmaceuticals, Inc. v. Broudo, 14 544 U.S. 336 (2005) ............................................................................................................... 8 15 Employees Teamsters Local Pension Trust Fund v. Clorox Co., 353 F.3d 1125 (9th Cir. 2004)............................................................................................... 6 16 Ernst & Ernst v. Hochfelder, 17 425 U.S. 185 (1976) ............................................................................................................... 5 18 Kamen v. Lindly, 94 Cal. App. 4th 197, Section 12(2)...................................................................................11 19 Kaplan v. Rose, 20 49 F.3d 1363 (9th Cir. 1994)................................................................................................. 4 21 Lazar v. Superior Court, 12 Cal. 4th 631 (1996) ..........................................................................................1, 3, 13, 15 22 McGonigle v. Combs, 23 968 F.2d 810 (9th Cir. 1992)................................................................................................. 8 24 Navarro v. Block, 250 F.3d 729 (9th Cir. 2001)................................................................................................. 2 25 No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West 26 Holding Corp., 320 F.3d 920 (9th Cir. 2003)........................................................................................... 9 27 Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151 (9th Cir. 1996)........................................................................................... 5 28 -iiW02-WEST:DEL\400804927.1

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1 In re Dura Pharmaceuticals, Inc. v. Sec. Litig., 452 F. Supp. 2d 1005 (S.D. Cal. 2006)....................................................................9, 10 2 In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999)...................................................................................5, 6, 8 3 In Re Storek, 4 355 B.R. 187 (Bankr. N.D. CA 2006)............................................................................ 3 In re Vantive Corp. Sec. Litig., 5 110 F. Supp. 2d at 1216 ...............................................................................................3, 9 In re Vantive Corp. Sec. Litig., 6 283 F.3d 1079 (9th Cir. 2002)......................................................................................... 6 7 Vess v. Ciba-Geigy Corp., U.S.A., 317 F.3d 1097 (9th Cir. 2003)......................................................................4, 10, 13, 15 8 Western Mining Council v. Watt, 9 643 F.618 (9th Cir. 1981) ................................................................................................ 3 Yourish v. California Amplifier, 10 191 F.3d 983 (9th Cir. 1999).....................................................................................4, 13 11 STATUTES 12 13 11 U.S.C. Section 727 .................................................................................................................. 3 14 15 U.S.C. Section 78j ................................................................................................................... 5 15 15 U.S.C. Section 78u-4(b)(1) .................................................................................................... 6 16 15 U.S.C. Section 78u-4(b)(2) .................................................................................................... 6 17 15 U.S.C. Section 78u-4(b)(3)(A) .............................................................................................. 7 18 15 U.S.C. Section 77l)................................................................................................................11 19 Private Securities Litigation Reform Act of 1995................................................................2, 6 20 Securities and Exchange Act Section 10b ................................................................................. 5 21 Securities and Exchange Act Rule 10b-5 .............................................................1, 2, 4, 5, 7, 8 22 California Corporate Securities Law of 1968 ........................................................................... 1 23 California Corporation Code § 25401.....................................................................2, 11, 14, 15 24 RULES 25 Federal Rules of Civil Procedure 9(b) .....................................................3, 4, 7, 10, 11, 12, 13 26 Federal Rule of Civil Procedure 12(b)(6).................................................................................. 2 27 28 -iiiW02-WEST:DEL\400804927.1

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1 REGULATIONS 2 17 C.F.R. § 240.10b-5..................................................................................................... 5, 11, 12 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -ivW02-WEST:DEL\400804927.1

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1

Defendants Winex Investments, LLC, William Krusheski, John Sullivan,

2 Robert B. Hydeman, and Emilio Pineda (collectively "Defendants") submit this 3 Memorandum of Points and Authorities in support of their Motion to Dismiss Plaintiffs' 4 Amended Complaint in its entirety as to Defendants John Sullivan and Robert Hydeman, 5 and their Motion to Dismiss Plaintiff's First (intentional misrepresentation), Second 6 (negligent misrepresentation), Third (violation of Rule 10b-5 of the Securities and 7 Exchange Act), Fourth (violation of the California Corporate Securities Law of 1968), and 8 Fifth (breach of fiduciary duty) causes of action as to Defendants Winex Investments, 9 LLC, William Krusheski, and Craig Pinedo. 10 11 12 13 I. 14 15 Plaintiffs Jim and MaryAnn Collins ("Plaintiffs") were looking for an INTRODUCTION MEMORANDUM OF POINTS AND AUTHORITIES

16 investment opportunity that had the potential to provide them with very high returns. 17 They transferred $50,000 to Winex Investments, LLC, pursuant to an offering made 18 through a private placement. (Amended Complaint ¶ 18.) Plaintiffs' funds, along with 19 those of other investors (including defendants John Sullivan and Robert Hydeman), were 20 combined in a Winex Investments, LLC brokerage account maintained by FC Stone. The 21 funds pooled in Winex Investments, LLC were to be traded on the foreign currency 22 exchange markets, in derivatives, and on margin. An error by a bank in executing a large 23 trade placed by the trading agent, Sonador Capital Management ("Sonador"), resulted in a 24 substantial decrease in the value of the Winex Investments, LLC account, to the detriment 25 of both Plaintiffs and the individual defendants. ( Amended Complaint ¶ 20.) 26 Plaintiffs now claim they would not have put their money into Winex

27 Investments, LLC had they known that the value of their investment would decrease the 28 way it did. Nor would the individual defendants. The fact that Plaintiffs did not achieve -1W02-WEST:DEL\400804927.1

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1 the high profit margin they were seeking does not mean that Defendants engaged in 2 securities fraud. The allegations in the Amended Complaint fail to state a claim under the 3 Private Securities Litigation Reform Act of 1995 or under California Corporation Code 4 § 25401, nor do they state a claim for intentional misrepresentation, negligent 5 misrepresentation, or breach of fiduciary duty. 6 7 II. 8 9 Plaintiffs allege that they invested $50,000 with Winex Investments, LLC. SUMMARY OF PLAINTIFFS' ALLEGATIONS

10 (Amended Complaint ¶ 18.) They allege that they were "promised daily internet access 11 with personal password protected account information." (Id. ¶ 23.) They also allege they 12 were told, in the Private Placement Memorandum ("PPM"), that the trading agent used by 13 Winex "will 'apply strict, systematic and non-negotiable discipline in exiting losses' 14 through several defensive measures, including 'conservative policies on margin.'" (Id. 15 ¶ 19.) Plaintiffs allege they relied on these promises made by the Defendants. (Id. ¶ 24.) 16 Plaintiffs allege they would not have invested in Winex had they known that the two 17 statements (about the daily internet access and future use of conservative trading policies) 18 were untrue. ( Id. ¶ 22). These fraud-based allegations are the only support for Plaintiffs' 19 claims under Rule 10b-5 and California Corporations Code § 25401, and for intentional 20 misrepresentation, negligent misrepresentation, and breach of fiduciary duty. 21 22 III. 23 24 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the STANDARD ON A MOTION TO DISMISS

25 sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In 26 reviewing a motion to dismiss under Rule 12(b)(6), the Court must assume the truth of all 27 factual allegations and must construe them in the light most favorable to the nonmoving 28 party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). However, -2W02-WEST:DEL\400804927.1

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1 legal conclusions need not be taken as true merely because they are cast in the form of 2 factual allegations. Western Mining Council v. Watt, 643 F.618, 624 (9th Cir. 1981). 3 4 IV. 5 6 7 8 This complaint was served on John Sullivan on or around December 10, DEFENDANT JOHN SULLIVAN HAS RECEIVED A DISCHARGE UNDER 11 U.S.C. § 727 AND THEREFORE THIS COMPLAINT CANNOT BE MAINTAINED AGAINST HIM

9 2007. On December 31, 2007, Mr. Sullivan filed for Chapter 7 bankruptcy. Request for 10 Judicial Notice ("RJN") at Exh. A. Mr. Sullivan identified on his bankruptcy schedules 11 Plaintiffs' claims against him. RJN Exh. B. Plaintiffs had notice of the bankruptcy filing 12 because they filed a motion for relief from stay on February 21, 2008. RJN Exh. C. On 13 April 8, 2008, the Court granted Mr. Sullivan a discharge. RJN Exh. D. Plaintiffs' pursuit 14 of any claims against Mr. Sullivan is prohibited by the discharge provisions of 11 U.S.C. 15 § 727. Where a lawsuit relates to conduct that occurred prior to the debtor's bankruptcy 16 petition, a discharge under Section 727 precludes continued pursuit of the claim. See In 17 Re Storek, 355 B.R. 187, 190 (Bankr. N.D. CA 2006). Accordingly, the Amended 18 Complaint should be dismissed as to John Sullivan. 19 20 V. 21 22 23 24 25 Plaintiffs allege that William Krusheski was the Chief Financial Officer of A. Rule 9(b) Requires Plaintiffs to Plead Fraud with Particularity PLAINTIFFS' FRAUD-BASED CLAIMS DO NOT SATISFY THE PLEADING REQUIREMENTS OF RULE 9(B) OR THE PSLRA

26 Winex, that he provided Plaintiffs with the PPM related to a possible investment in Winex, 27 and that he told Plaintiffs they would get internet access to their Winex account and that 28 the trading agent would use conservative policies on margin trading. (Amended -3W02-WEST:DEL\400804927.1

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1 Complaint ¶ ¶ 16, 22, 23, 25). Plaintiffs allege that Craig Pinedo was a "financial and 2 investment advisor" to Plaintiffs, that he persuaded them to refinance the debt on their 3 home in order to invest in Winex, and that he told them the trading agent would follow 4 "risk management policies" including conservative policies on margin calls. (Amended 5 Complaint ¶ ¶ 15, 16, 22, 25). These allegations are not sufficient to state a claim for 6 securities violations against Mr. Krusheski or against Mr. Pinedo. 7 Rule 9(b) states in relevant part that "[i]n all averments of fraud or mistake,

8 the circumstances constituting fraud or mistake shall be stated with particularity." 9 F.R.C.P. 9(b). Thus, Rule 9(b) requires that parties must "be specific enough to give 10 defendants notice of the particular misconduct . . . so that they can defend against the 11 charge and not just deny that they have done anything wrong." Vess v. Ciba-Geigy Corp., 12 U.S.A., 317 F.3d 1097, 1106 (9th Cir. 2003). 13 Under Ninth Circuit case law, Rule 9(b) imposes two requirements on

14 complaints alleging fraud, including securities fraud. First, the basic notice requirements 15 of Rule 9(b) require complaints pleading fraud to "state precisely the time, place, and 16 nature of the misleading statements, misrepresentations, or specific acts of fraud." 17 Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir. 1994); Vess, 317 F.3d at 1106 (A plaintiff 18 must set forth "the who, what, when, where and how" of the alleged misconduct."). 19 Second, the Rule requires that the complaint "set forth an explanation as to why the 20 statement or omission complained of was false and misleading." Yourish v. California 21 Amplifier, 191 F.3d 983, 993 (9th Cir. 1999). A complaint may demonstrate the false or 22 misleading character of a statement by identifying inconsistent contemporaneous 23 statements made by the defendants or inconsistent contemporaneous information that was 24 available to the defendants. Yourish, 191 F.3d at 994; DeMarco v. DepoTech Corp., 25 149 F.Supp.2d 1212,1223 (S.D. Cal. 2001). A complaint may not, however, demonstrate 26 that a statement was false or misleading when made "merely by pointing to later 27 inconsistent statements or conditions." DeMarco, 149 F.Supp.2d at 1223. 28 -4W02-WEST:DEL\400804927.1

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1 2 3 4

B.

PSLRA Requires Facts be Pled Showing Strong Circumstantial Evidence of Deliberately Reckless or Conscious Misconduct

Section 10(b) of the Securities and Exchange Act of 1934 makes it unlawful

5 to use in connection with the mails or facilities of interstate commerce any "manipulative 6 or deceptive device or contrivance in contravention of such rules and regulations as the 7 Commissioner may prescribe." 15 U.S.C. § 78j. SEC Rule 10b-5, promulgated under 8 Section 10(b), provides: 9 10 11 12 (a) To employ any device, scheme, or artifice to defraud, 13 14 15 16 17 18 19 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. In order to properly allege a claim under section 10(b) of the Exchange Act It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

20 and SEC Rule 10b-5, a plaintiff must state the following: (1) defendants made a false 21 statement or omission with regard to a material fact; (2) in connection with the purchase or 22 the sale of a security; (3) with scienter; (4) upon which plaintiff reasonably relied; (5) to 23 his/her harm or detriment. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999), cert. 24 denied, 528 U.S. 1154 (2000); Paracor Fin., Inc. v. General Elec. Capital Corp., 25 96 F.3d 1151, 1157 (9th Cir. 1996). Scienter is a "mental state embracing intent to 26 deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 27 (1976); In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 975 (9th Cir. 1999). With 28 respect to scienter claims under the Securities Act, the court may consider all inferences -5W02-WEST:DEL\400804927.1

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1 gleaned from the complaint, including inferences in favor of the moving party. Employees 2 Teamsters Local Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1134 (9th Cir. 2004). 3 Additional regulations governing security fraud claims include the Private

4 Securities Litigation Reform Act of 1995 ("PSLRA" or "Reform Act"), which was 5 established in 1995 to ensure uniform and stringent pleading requirements for securities 6 fraud actions. The PSLRA specifies the required pleading standard for securities fraud: 7 8 9 10 (A) made an untrue statement of a material fact; or 11 12 13 14 15 16 17 18 the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 15 U.S.C. §78u-4(b)(1). Thus, the PSLRA requires complaints alleging federal securities fraud to (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; (1) Misleading statements and omissions

In any private action arising under this chapter in which the plaintiff alleges that the defendant ­

19 "state with particularity facts giving rise to a strong inference that the defendant acted with 20 the required state of mind." 15 U.S.C. § 78u-4(b)(2). "The purpose of this heightened 21 pleading requirement was generally to eliminate abusive securities litigation and 22 particularly to put an end to the practice of pleading fraud by hindsight." In re Vantive 23 Corp. Sec. Litig., 283 F.3d 1079, 1084 (9th Cir. 2002). As interpreted by the Ninth 24 Circuit, this language requires a plaintiff to plead particular facts that constitute strong 25 circumstantial evidence of deliberately reckless or conscious misconduct. In re Silicon 26 Graphics, 183 F.3d at 977, 979. Recklessness satisfies the scienter requirement only 27 insofar as it reflects some degree of conscious or deliberate misconduct; i.e., "a degree of 28 recklessness that strongly suggests actual intent." Id. at 979. The PSLRA further provides -6W02-WEST:DEL\400804927.1

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1 that "the court shall, on the motion of any defendant, dismiss the complaint if the 2 requirements of paragraphs (1) and (2) are not met." 15 U.S.C. § 78u-4(b)(3)(A) . 3 4 5 6 7 8 9 10 Plaintiffs allege that Mr. Krusheski and Mr. Pinedo made two types of 1. Plaintiff's Third Claim Under Rule 10b-5 Fails to Meet the Heightened Pleading Standard under PSLRA or FRCP 9(b) C. The Court Should Dismiss the First, Second, Third, Fourth, and Fifth Causes of Action Against Mr. Krusheski, Mr. Pinedo, and Winex

11 statements to them which ultimately proved to be "untrue." These statements were (1) that 12 Plaintiffs would have "daily internet access with personal password protected account 13 information" and (2) that the trading agent, Sonador, would use conservative trading 14 policies. (Amended Complaint ¶ ¶ 19, 23). 15 16 17 18 19 The allegations that Defendants made false statements regarding providing a. The Allegations Regarding Daily Internet Access to Account Information Cannot State a Claim Under 10b-5

20 Plaintiffs with daily internet access cannot support a claim under Rule 10b-5 because 21 Plaintiffs have failed to allege that (1) the statements were false at the time they were made 22 and (2) that the false statements caused Plaintiffs' loss. 23 Plaintiffs allege that Winex, through the PPM and Mr. Krusheski, through

24 letters and in one or more meetings with Plaintiffs in January 2007, represented that 25 Plaintiffs would be provided "daily internet access with personal password protected 26 account information." (Amended Complaint ¶ 23). Plaintiffs allege that "Defendants 27 knew" that the statements regarding daily internet access were false at the time the 28 statements were made because the daily access was never provided. (Amended Complaint -7W02-WEST:DEL\400804927.1

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1 ¶ 26). An allegation that a corporate defendant failed to achieve results or deliver on 2 promises, does not, of itself, support 10b-5 liability. In re Silicon Graphics, Inc. Sec. 3 Litig., 183 F.3d at 988. 4 In order for the alleged misrepresentations to be actionable under Rule 10b-

5 5, Plaintiffs must demo nstrate loss causation, or "a causal connection between the material 6 misrepresentation and the loss." Dura Pharmaceuticals, Inc. v. Broudo 544 U.S. 336, 347 7 (2005). Loss causation is "equivalent to proximate causation in tort." Binder v. Gillespie, 8 184 F.3d 1059, 1066 (9th Cir. 1999), quoting McGonigle v. Combs, 968 F.2d 810, 821 (9th 9 Cir. 1992). To satisfy the requirement for loss causation, a plaintiff must show that the 10 misrepresentation or omission directly caused, "or had something to do with" plai ntiff's 11 damages. Id. Here, Plaintiffs allege only that they were told that they could obtain daily 12 internet access to their account. (Complaint ¶ 23). They also allege that the value of their 13 account declined. (Complaint ¶ 20). However, Plaintiffs do not allege (and cannot allege) 14 that the alleged misrepresentations regarding internet access caused the decline. 15 16 17 18 19 Plaintiffs allege that the PPM contained language stating that Sonador "will b. Allegations Regarding the Trading Agent's Plans to Use "Conservative Policies" Cannot State a Claim Under 10b-5

20 'apply strict, systematic and non-negotiable discipline in exiting losses' through several 21 defensive measures, including 'conservative policies on margin.'" (Amended Complaint 22 ¶ 19). Plaintiffs claim that Winex "through its controlled persons knew that conservative 23 policies on margin calls were not put in place at the time the statements were made and 24 had no intention to do so....This is evident because Sonador's heavy use of margin calls 25 would not have been possible had conservative policies on margin calls been put in 26 place..." (Amended Complaint ¶ 27). This purported causation argument makes little 27 sense. Plaintiffs do not allege that Winex or Mr. Krusheski or Mr. Pinedo had any control 28 over the way in which the trading agent handled margin calls or managed trades. Nor do -8W02-WEST:DEL\400804927.1

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1 Plaintiffs allege that Winex or Mr. Krusheski or Mr. Pinedo knew at the time the PPM was 2 prepared and distributed that Sonador would not implement conservative policies on 3 margin calls. It is just as plausible that, based on the allegations in the Amended 4 Complaint, Mr. Krusheski and Mr. Pinedo believed the representations to be true at the 5 time they were made, but ultimately, for reasons beyond their control, it was not possible 6 to provide Plaintiffs were daily internet access to their account or for the trading agent, 7 Sonador, to minimize losses on margin calls. 8 Thus, Plaintiffs have failed to properly allege Winex or Mr. Krusheski or Mr.

9 Pinedo knew, at the time the PPM was prepared or circulated, that Sonador would not 10 "apply strict, systematic, and non-negotiable discipline in exiting losses" in trading the 11 Winex funds. (Amended Complaint ¶ 19). In re Vantive Corp. Sec. Litig., 110 F. Supp.2d 12 at 1216. ("[T]he Reform Act forces plaintiffs to reveal whether they base their allegations 13 on an inference of earlier knowledge drawn from later disclosures or from 14 contemporaneous documents or other facts," preventing pleading fraud by hindsight.) 15 The representation that Sonador "will" execute trades in a particular way is a

16 "forward-looking statement," and therefore Plaintiffs must allege that Defendants made the 17 statement with knowledge of its falsity. No. 84 Employer-Teamster Joint Council Pension 18 Trust Fund v. America West Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003) (a "forward19 looking statement" is any statement regarding financial projections, management's plans 20 and objectives for future operations, or the assumptions underlying these issues). 21 In addition, Plaintiffs fail to allege with particularity what role Mr. Krusheski

22 or Mr. Pinedo had in making the representations to Plaintiffs about the trading policies that 23 would be implemented by Sonador. The fact that certain statements appear in the PPM 24 does not mean that particular individuals are responsible for them. In fact, Mr. Pinedo is 25 not alleged to have any had official role in Winex at all ­ the Complaint alleges only that 26 he was Plaintiffs' "financial advisor." And, e ven if Mr. Krusheski was the Chief Financial 27 Officer of Winex, this does not mean that he can be held responsible for the contents of the 28 PPM. Individuals may not be held responsible for unattributed corporate statements. In re -9W02-WEST:DEL\400804927.1

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1 Dura Pharmaceuticals, Inc. v. Sec. Litig., 452 F.Supp.2d 1005, 1030 (S.D. Cal. 2006). 2 The only other allegation about statements made by defendants regarding the

3 trading policies to be implemented by Sonador is: "Krusheski and Pineda represented to 4 the Plaintiffs that several risk management policies were in place, including conservative 5 policies on margin calls and constant review and analysis of trading and portfolio risks 6 exposure." (Amended Complaint ¶ 25). Rule 9(b) requires that Plaintiffs state the "who, 7 what, when, where and how" of the alleged fraudulent statements. Vess, 317 F.3d at 1106. 8 The Complaint fails to provide any of this detail as to the alleged statements. 9 Finally, Plaintiffs allege they would not have invested with Winex had they

10 known that conservative policies were not in place "due to the increased risk of their 11 investment money." (Amended Complaint ¶ ¶ 28, 37). Plaintiffs were well aware that this 12 investment involved trading on the high-risk foreign currency exchange markets, in 13 derivatives, and on margin. In the Amended Complaint, Plaintiffs quote selectively from 14 the 84-page PPM to give the impression the document emphasized "conservative policies." 15 (Amended Complaint ¶ 19). In fact, the PPM contains dozens of paragraphs that disclose 16 the risks of entering into the investment. For example, under the heading: "Risks Related 17 to the Company's Investment and Trading Strategy," are listed the following disclosures: 18 19 20 21 22 23 24 25 26 27 28 The Company may use leverage in its investment program, including the use of borrowed funds and investments in certain types of currencies, futures, and options on these instructions and others... Investors should be aware that an investment program utilizing leverage is inherently more speculative, with a greater potential for losses, than a program that does not utilize leverage." -10W02-WEST:DEL\400804927.1

Foreign securities often trade in currencies other than the U.S. dollar, and the Company may directly hold foreign currencies and purchase and sell foreign currencies through forward exchange contracts...Some foreign currencies are particularly volatile. The Forex or Derivatives may be more volatile than prices of securities such as stocks and bonds. As a result, the risk of loss in trading Forex or Derivative Instruments may be greater...

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1

The PPM also explains: "The units are highl y speculative, involve a very

2 high risk, and are suitable only for persons of substantial means who have no need for 3 liquidity in this investment..." It informs a potential investor that he or she must confirm 4 that he or she "can bear and is willing to accept the economic risk of losing the entire 5 investment." Plaintiffs entered into a speculative investment hoping to make money and 6 instead, they lost money. They now try to claim that Defendants misrepresented to them 7 the character of the investment and that Defendants knew at the time that Plaintiffs would 8 not be provided daily internet access and that Sonador would not exercise discipline in 9 trading to avoid heavy losses. Their allegations fail to satisfy the heightened pleading 10 standard of Rule 9(b) and the PSLRA. Accordingly, the Third Cause of Action for 11 violation of Rule 10b-5 should be dismissed. 12 13 14 15 16 California Corporations Code § 25401 prohibits the offer or sale of a security 2. The Fourth Claim Under California Corporations Code § 25401 Fails to State a Claim

17 by means of any oral or written communication which contains a materially false or 18 misleading statement. This provision is similar to Section 12(2) of the Securities Act of 19 1933 (15 U.S.C. § 77l). Where California law is modeled on federal laws, federal 20 decisions interpreting similar statutes are usually strong persuasive precedent on 21 construction of state laws. Kamen v. Lindly, 94 Cal.App.4 th 197, 209 (2001). Section 22 12(2) requires that the defendant be the "seller" of the security. The Ninth Circuit has held 23 that, to allege a violation of Section 25401, plaintiff must show the defendant was in strict 24 privity with plaintiff; liability is limited to sellers of the security. Admiralty Fund v. Hugh 25 Johnson & Co., 677 F.2d 1301, 1311 n.12 (9th Cir. 1982). In Diasonics Securities 26 Litigation, plaintiffs alleged that defendants were officers and directors of the company 27 and substantially participated in preparing the prospectus that was alleged to cont ain 28 misrepresentations. But, because the plaintiffs failed to allege actual involvement in the -11W02-WEST:DEL\400804927.1

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1 sales of the securities, plaintiffs could not state a claim for violation of Section 12(2). 2 Diasonics Securities Litigation, 559 F.Supp. 447, 458 (C.D. Cal. 1984). 3 Here, Plaintiffs have not alleged any participation by any of the individual

4 defendants in the drafting of the PPM or in the sale of any securities. A claim under 5 Section 25401 requires allegations that the defendants acted in a "seller status." Activision 6 Securities Litigation, 621 F.Supp. 415, 427 (9th Cir. 1985). Plaintiffs have not included 7 any such allegations in the Amended Complaint. The Amended Complaint alleges only 8 that Mr. Pinedo and Mr. Krusheski communicated with Plaintiffs about the possibility of 9 investing in Winex Investments; it does not allege they sold Plaintiffs a security. Thus , the 10 Fourth Cause of Action should be dismissed as against Mr. Krusheski and Mr. Pinedo. 11 The Fourth Cause of Action should also be dismissed as to Winex, because Plaintiffs 12 alleged only that the y "invested in" Winex, not that Winex issued them securities. 13 Moreover, even if the Court interprets the allegations in the Complaint to mean that Winex 14 directly sold securities to Plaintiffs, Plaintiffs have failed to allege that any material 15 misrepresentations were made by Winex in conjunction with the sale. 16 17 18 19 20 The first claim addressed in the Complaint is for "intentional 3. First, Second and Fifth Claims for Misrepresentation and Breach of Fiduciary Duty are Fraud-Based and Must Satisfy Rule 9(b)

21 misrepresentation." The basis for this claim is the same as that asserted as a violation of 22 Rule 10b-5: that Plaintiffs were told (1) they would have daily internet access to their 23 account and (2) that Sonador would implement conservative trading policies regarding 24 margin calls. (Amended Complaint ¶ ¶ 19, 23). The fact that Plaintiffs do not specifically 25 seek relief under the federal securities laws in this cause of action does not relieve them of 26 the obligation to plead fraud with particularity. Rule 9(b)'s pleading requirements apply 27 with equal force to Plaintiff's intentional misrepresentation claim. Indeed, t he pleading 28 standard under California common-law is consistent with this heightened requirement. -12W02-WEST:DEL\400804927.1

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1 Lazar v. Superior Court, 12 Cal.4 th 631, 645 (1996) (the particularity requirement 2 necessitates pleading facts which "show how, when, where, to whom, and by what means 3 the representations were tendered.") 4 Plaintiffs fail to plead any detail regarding the alleged intentional

5 misrepresentations. Although the Complaint states that certain meetings occurred during a 6 particular time period (Complaint ¶ 23), it does not state who attended what meetings, or 7 what transpired at particular meetings. A complaint, to properly allege a claim for 8 intentional misrepresentation, must still "set forth what is false or misleading about a 9 statement, and why it is false...[and] why the statement or omission complained of was 10 false or misleading." Yourish, 191 F.3d at 993. Rule 9(b), regardless of its application 11 towards securities claims, poses a heightened pleading standard to all fraud-based claims. 12 Accordingly, the Court should dismiss the first claim for intentional misrepresentation. 13 Plaintiffs also bring a claim for negligent misrepresentation. This second

14 cause of action is supported by only one allegation: "As a direct and proximate result of 15 Defendants' misrepresentation, Plaintiffs have been damaged in an amount in excess of 16 $100,000 according to proof at trial." (Complaint ¶ 32). There is no discussion of any of 17 the facts that would actually support a claim for negligent misrepresentation, such as what 18 specific representations were made, that Defendants made the representations without any 19 reasonable grounds for believing them to be true, that Plaintiffs reasonably relied, and that 20 there was a link between Plaintiffs' reliance and damages suffered. See Christiansen v. 21 Roddy, 186 Cal.App.3d 780, 785-86 (1986). Accordingly, the Second Cause of Action for 22 Negligent Misrepresentation fails to state a claim and should be dismissed. 23 Plaintiffs' fifth cause of action for breach of fiduciary duty is based on the

24 same fraud allegations intended to support the securities claims. Although fraud is not an 25 essential element of a claim for breach of fiduciary duty, a claim may nonetheless "sound 26 in fraud" if the claims specifically allege fraud or "alleg[e] facts that necessarily constitute 27 fraud (even if the word 'fraud' is not used)." Vess, 317 F.3d at 1105. 28 -13W02-WEST:DEL\400804927.1

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1 2 3 4 5 6

In cases where fraud is not a necessary element of the claim, a plaintiff may choose nonetheless to allege in the complaint that the defendant has engaged in fraudulent conduct. In some cases, the plaintiff may allege a unified course of fraudulent conduct and rely entirely on that conduct as the basis of a claim. In that event, the claim is said to be "grounded in fraud" or to "sound in fraud," and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b).

The theme and central allegations in the Complaint are that Plaintiffs were 7 promised daily internet access to their accounts and that Sonador would implement a 8 conservative policy on margin calls. The breach of fiduciary duty claim is also premised 9 on these fraud-based allegations. Indeed, the breach of fiduciary duty itself references 10 "fraud." (Amended Complaint ¶ 53). 11 Furthermore, the Complaint fails to allege any facts supporting the allegation 12 that there existed any relationship of trust and confidence based on each Defendants' 13 particular role or duty. The Complaint simply contains a conclusory allegation that 14 "Defendants owed Plaintiffs a fiduciary duty to account for the Plaintiffs' investment with 15 Winex." (Complaint ¶ 49). On a motion to dismiss, legal conclusions like this one are not 16 to be taken as true ; rather, Plaintiffs are required to plead factual allegations. Defendants 17 request that the Court dismiss the fifth cause of action for breach of fiduciary duty. 18 19 VI. 20 ROBERT HYDEMAN; ACCORDINGLY, HE SHOULD BE DISMISSED 21 22 The only time Mr. Hydeman is mentioned in the Complaint is in the 23 jurisdictional allegations, where Mr. Hydeman is described as "Chief Executive Officer of 24 Defendant Winex Investments, LLC" and Plaintiffs allege "he has availed himself of the 25 use of California for hosting his business." (Amended Complaint ¶ 4). Mr. Hydeman is 26 included in the First (Intentional Misrepresentation), Fourth (California Corporations Code 27 § 25401), and Fifth (Breach of Fiduciary Duty) Causes of Action. However, his name 28 -14W02-WEST:DEL\400804927.1

THE AMENDED COMPLAINT CONTAINS NO ALLEGATIONS AGAINST

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1 never once appears in any of the factual allegations for these claims. It is not sufficient, to 2 withstand a motion to dismiss, to assert claims generally against "all Defendants." 3 In order to properly allege that a defendant engaged in fraud, Plaintiffs must

4 set forth the role of each defendant in the alleged fraud because each defendant is entitled 5 to be informed of the specific acts or omissions which he must defend. Vess, 317 F.3d at 6 1106; Lazar, 12 Cal.4 th at 645. The Amended Complaint does not describe what role, if 7 any, Mr. Hydeman had in Winex, other than to allege he had the title of "Chief Executive 8 Officer." Nor does the Amended Complaint even allege that Plaintiffs have ever met or 9 had any communications at all with Mr. Hydeman. It is therefore absurd for them to be 10 able to assert causes of action against him for intentional misrepresentation under a 11 common law theory or under Section 25401, or for breach of fiduciary duty. Accordingly, 12 the Court should dismiss the claims in the Amended Complaint against Mr. Hydeman. 13 14 IV. 15 CONCLUSION For the foregoing reasons, Defendants respectfully request that the Court

16 dismiss the Amended Complaint in its entirety as to Defendants John Sullivan and Robert 17 Hydeman and dismiss Plaintiffs' First, Second, Third, Fourth, and Fifth claims for relief 18 against Winex, Mr. Krusheski, and Mr. Pinedo. 19 20 DATED: April 23, 2008 21 22 23 24 25 26 27 28 -15W02-WEST:DEL\400804927.1

SHEPPARD, MULLIN, RICHTER & HAMPTON LLP

By

/s/ Elizabeth Balfour
Attorneys for Defendants e-mail: [email protected]

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