Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 1 of 21

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

ERWIN GRAMPP, derivatively on behalf of JBI, INC., Plaintiff, Civil Action No.: 1:12-cv-10495-MLW vs. JOHN BORDYNUIK, DR. JACOB SMITH, RONALD C. BALDWIN, JR., AMY BRADSHAW, JOHN M. WESSON, ROBIN BAGAI, GREGORY GOLDBERG, and THEODORE J. HENRY, Defendants, and JBI, INC. Nominal Defendant.

THE INDIVIDUAL DEFENDANTS REPLY IN SUPPORT OF THEIR MOTION TO DISMISS THE COMPLAINT

[Proposed Reply Brief]

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 2 of 21

INTRODUCTION In their memorandum supporting their motion to dismiss, the Individual Defendants demonstrated that the Complaint must be dismissed for failure to plead demand futility, failure to state a claim for breach of fiduciary duty, and failure to plead the required element of damages. In addition, seven of the Individual Defendants demonstrated that they are not subject to personal jurisdiction in Massachusetts on these claims. As discussed below, nothing in Plaintiffs Opposition brief compels contrary conclusions as to these points. Thus, dismissal is warranted. ARGUMENT I. PLAINTIFF HAS NOT ADEQUATELY ALLEGED THAT DEMAND ON JBIS BOARD WAS FUTILE PURSUANT TO RULE 23.1. In their opening brief, the Individual Defendants demonstrated that Plaintiff has failed to establish demand futility under the rigorous standard that governs under Nevada law. (Individual Defendants Mem., 12-20.) Plaintiff responds by citing Delaware case law (Plaintiffs Opp., 1113), but his reliance is obviously misplaced, since the law of Nevadanot Delawareapplies (as JBI is a Nevada corporation). 1 The difference between the two states laws is significant in this regard. Under Delaware law, corporations may not limit liability for conduct that breaches the duty of loyalty or is not performed in good faith. Del. Code Ann. tit. 8, 102(b)(7). Nevada law, by contrast, strictly
1

Nevada has adopted Delawares Aronson test, as modified by Rales, for assessing demand futility. Shoen v. SAC Holding Corp., 137 P.3d 1171, 1184 (Nev. 2006). That is because the two states rules are consistent with respect to pleading demand futility. Compare Del. Chancery R. 23.1 (The complaint shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and the reasons for the plaintiffs failure to obtain the action or for not making the effort.) with Nev. R. Civ. P. 23.1 (The complaint shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and the reasons for the plaintiffs failure to obtain the action or for not making the effort.). As explained herein, however, the two states statutes are materially different with respect to the standard for director liability for breach of fiduciary duty.

-1-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 3 of 21

limits liability to breaches of fiduciary duty that involve intentional misconduct, fraud or a knowing violation of law. Nev. Rev. Stat. 78.138(7); see also Shoen v. SAC Holding Corp., 137 P.3d 1171, 1184 (Nev. 2006) (directors and officers may only be found personally liable for breaching their fiduciary duty of loyalty if that breach involves intentional misconduct, fraud, or a knowing violation of the law) (emphasis added). Accordingly, Delawares so-called Caremark standard for evaluating potential liability of directors under Del. Code Ann. tit. 8, 102(b)(7), i.e., whether there was a sustained or systemic failure of the board to exercise oversight, is wholly inapplicable to the conduct of the Individual Defendants. Indeed, Plaintiff has not cited to a single Nevada case that has applied the Caremark standard or otherwise adopted Delaware law governing director oversight liability. 2 Therefore, even if Plaintiff had adequately pleaded facts satisfying the Delaware standard, dismissal of his Complaint would be required because he does not allege that they acted knowingly or intentionally. Moreover, even under the less rigorous standard advocated (wrongly) by Plaintiff, Plaintiff has nevertheless failed to plead particularized facts demonstrating that a majority of the board faces a substantial likelihood of liability under a failure of oversight theory. As previously noted by the Individual Defendants, Messrs. Wesson and Bagai constitute a majority of the JBI board for demand purposes. Plaintiff has failed to state with particularity that demand on the board would have been futile, as required by Rule 23.1. Plaintiff essentially concedes that his allegations against director Bagai are insufficient, as his Opposition brief makes no argument
As the Supreme Court of Delaware has observed, the Delaware statute distinguishes between intentional misconduct and a knowing violation of law (both examples of subjective bad faith) on the one hand, and acts . . . not in good faith, on the other. In re Walt Disney Co., 906 A.2d 27, 67 (Del. 2006). In consequence, the court held that the statutory denial of exculpation for acts . . . not in good faith encompasses an intermediate category of misconduct that lies between gross negligence and intentional misconduct. Id. The Nevada statute, in contrast, does not extend liability to any intermediate category of misconduct that does not rise to the level of intentional misconduct or knowing violation of the law.
2

-2-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 4 of 21

that demand on Bagai would have been futile. Plaintiffs failure to respond to the Individual Defendants arguments concerning Dr. Bagai (Individual Defendants Mem., 24-26) waives Plaintiffs claim against him. See In re Compact Disc Minimum Advertised Price Antitrust Litig., 456 F. Supp. 2d 131, 152-153 (D. Me. 2006) (A partys failure to oppose specific arguments in a motion to dismiss results in waiver of those issues.) (citing Collins v. MarinaMartinez, 894 F.2d 474, 481 n.9 (1st Cir. 1990) (It is settled beyond peradventure that issues mentioned in a perfunctory manner, unaccompanied by some effort at developed argumentation are deemed waived.)). Although Plaintiff argues that director John Wesson faces a substantial likelihood of liability (based on his purported failure to take action with regard to the Media Credits valuation), Plaintiffs allegations are woefully inadequate to show a sustained or systemic failure of oversight, much less knowing or intentional misconduct, as required under Nevada law. While Plaintiff argues in his opposition that Wesson failed to take any action whatsoever to correct the false and inaccurate valuation of the Media Credits (Plaintiffs Opp., 14), his argument is directly contradicted by his own allegations. As alleged in the Complaint, three months after Mr. Wesson was appointed to the board of directors, and less than two months after the Form 10-K at issue was filed, JBI filed a Form 8-K notifying shareholders that its previously issued financial statements could no longer be relied upon. (Compl. 17, 41, 70.) Within the next six months, the company restated its financial statements, thereby writing down the value of the Media Credits to zero. (Compl. 70.) These allegations do not demonstrate Mr. Wessons sustained or systemic failure to monitor the companys operations, particularly with respect to any alleged overvaluation of the Media Credits, and they certainly do not establish that he engaged in intentional misconduct, fraud or knowing violation of law. Rather, they establish that

-3-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 5 of 21

JBI, through its board, took appropriate remedial action after learning that the credits were overstated. Furthermore, even if the more lenient liability standard were applied, Plaintiff has not alleged any particularized red flags that might suffice to support liability under Delaware law. See Guttman v. Huang, 823 A.2d 492, 507 n.36 (Del. Ch. 2003) (to excuse demand in a director oversight case, plaintiff must plead particularized facts that support an inference that the director[] did possess knowledge of facts suggesting potential accounting improprieties . . . and took no action to respond to them) (internal quotation marks and citation omitted). The Complaint fails to identify any information that would reasonably have alerted Mr. Wesson to problems with JBIs accounting or internal controls, much less the Media Credits themselves. In a transparent attempt to circumvent the deficiencies in his faulty Complaint, Plaintiff suggests that Wesson was aware of problems based on alleged events that transpired before he was even appointed to the board. First, Plaintiff claims he has alleged that Wesson participated in a concerted effort to ensure the Media Credits valuation was audit proof. (Plaintiffs Opp., 13.) In support, Plaintiff cites Paragraph 56 of the Complaint. That paragraph, however, makes no mention of Mr. Wesson, but instead relates to an alleged conversation between Bordynuik and an unnamed business consultant that took place prior to the Form 10-Q filing on November 16, 2009 (i.e., prior to Wesson joining the JBI board). (See Compl. 56, 57.) Second, Plaintiff asserts that Wesson knew that the Company had no professional accounting firm to assist with its financial reporting and instead was relying on consultants to ensure compliance with GAAP. (Plaintiffs Opp., 14.) This allegation erroneously presupposes that it is negligent not to hire a professional accounting firm to help a companys internal financial reporting. More importantly, Paragraph 50 of the Complaint, cited by Plaintiff in

-4-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 6 of 21

support of this assertion, not only does not even refer to Mr. Wesson, it describes events that occurred prior to October 5, 1999, when the company was still called 310 Holdings, well before February 12, 2010, when Wesson joined the JBI board. 3 (See Compl. 17, 41 and 50; see also Exhibit A, depicting when each Individual Defendant was an officer or director in relation to the publication of the financial statements at issue, the corrective disclosure, and the filing of the Complaint.) Third, Plaintiffs Opposition claims that Wesson also knew that the so called auditor was a sham auditor, whose reputation and problems with the Public Company Accounting Oversight Board (PCAOB) were known as far back as 2006. (Plaintiffs Opp., 14.) In support, Plaintiff cites to Paragraphs 58 and 59 of the Complaint, which likewise make no mention of Mr. Wesson or how he was supposedly aware of the alleged eventual problems involving the auditor, the timing of which is not specified,4 and do not identify any specific events that occurred after Wesson became a director. Further, the Public Company Accounting Oversight Board inspection report described in Paragraph 59 suggests that any auditor criticisms contained therein were immaterial and inconclusive, stating that any references to violations or potential violations of law, rules, or professional standards . . . are not a result of an adversarial adjudicative process and do not constitute conclusive findings of fact or of violations for purposes of imposing legal liability. 5

3 4

See Complaint 41 (alleging that 310 Holdings changed its name to JBI on that date).

The Complaint alleges that the audit firm was barred by the PCAOB, but does not state when this occurred, leaving open the possibility that decisions regarding the Media Credits valuation preceded this event.

See http://pcaobus.org/Inspections/Reports/Documents/2006_Gately.pdf. In deciding a motion under Rule 12(b)(6), the Court may consider documents appended to the complaint or documents incorporated by reference therein. Trans-Spec Truck Serv., Inc. v. Caterpillar Inc., 524 F.3d 315, 321 (1st Cir. 2008); see also Schnall v. Marine Midland Bank, 225 F.3d 263, 266 (2d Cir. 2000); Breliant v. Preferred Equities
(footnote continued)

-5-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 7 of 21

Fourth, Plaintiff asserts that Mr. Wesson should have known that the valuation of the Media Credits was being manipulated to the Companys advantage in violation of GAAP because the Board was informed of the concerns raised by the Companys consultants as early as November 2009. (Plaintiffs Opp., 14.) Notably, this allegation is deficient under Nevada law because it does not suggest that Mr. Wesson actually knew of these concerns. Indeed, in support of his assertion Plaintiff cites to Paragraphs 53, 54, 56 and 57 of the Complaint, which allege that an unidentified consultant expressed concerns to Bordynuik about the valuation of the Media Credits in the fall of 2009, prior to Mr. Wessons appointment to the board. 6 Among other things, the Complaint does not allege how Mr. Wesson would have known the substance of discussions with Bordynuik that took place before Mr. Wesson became a director. Finally, Plaintiff asserts that Mr. Wesson should have known about the personal issues of JBIs auditor (Plaintiffs Opp., 14), but cites only to paragraphs in the Complaint alleging that Bordynuik, not Mr. Wesson, knew about the auditors drinking problems and related

_________________________________
(footnote continued from previous page)

Corp., 858 P.2d 1258, 1261 (Nev. 1993). When a plaintiff chooses not to attach to the complaint or incorporate by reference a document upon which it relies and which is integral to the complaint, the court may nevertheless take that document into consideration in deciding the defendants motion to dismiss, without converting the motion into one for summary judgment. Clorox Co. Puerto Rico v. Proctor & Gamble Commercial Co., 228 F.3d 24, 32 (1st Cir. 2000) (in deciding a motion to dismiss, the court may properly consider the relevant entirety of a document integral to or explicitly relied upon in the complaint, even though not attached to the complaint, without converting the motion into one for summary judgment) (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.1996)); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991). Were the rule otherwise, a plaintiff could maintain a claim . . . by excising an isolated statement from a document and importing it into the complaint. Clorox Co. Puerto Rico, 228 F.3d at 32 (quoting Shaw, 82 F.3d at 1220).
6

See Complaint 53 (alleging that a consultant advised Bordynuik prior to September 30, 2009 about concerns relating to the Media Credits), 54 (alleging that the consultant advised Bordynuik about a suspect relationship relating to the Media Credits by mid-September 2009), 56 (describing Bordynuiks response to these expressed concerns), and 57 (describing Bordynuiks actions in valuing the Media Credits in JBIs third-quarter 2009 Form 10-Q filed on November 16, 2009).

-6-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 8 of 21

incarceration during an unspecified time that apparently preceded Mr. Wessons appointment to the board. 7 Instead, Plaintiff simply makes the cursory allegation that Mr. Wesson knew and/or should have known that the financials and presentation materials for JBI that listed the Media Credits at a value of $9.997 million were false statements not reflecting their actual value and inconsistent with GAAP and standard independent auditing standards. (Compl. 67.) Conclusory allegations that a director knew and/or should have known of an accounting problem are insufficient to support a breach of duty claim even under the more lenient Delaware standard for director liability. See, e.g., In re Sonus Networks, Inc., 499 F.3d 47, 54, 71 (1st Cir. 2007) (allegations that directors participated in wrongdoing because they knew of the accounting problems held insufficient to plead demand futility under Delaware law); Stiegele v. Bailey, 2007 WL 4197496, at *10 (D. Mass. Aug. 23, 2007) (rejecting allegation that each defendant knew the adverse non-public information which made the representations made by [the company] false and misleading); Guttman, 823 A.2d at 496-498 (allegation that defendants were in a position to know of . . . improper accounting practices did not constitute particularized allegation of fact demonstrating knowledge of accounting improprieties); Rattner v. Bidzos, 2003 WL 22284323, at *10 n.53 (Del. Ch. Oct. 7, 2003) (rejecting conclusory allegations regarding directors knowledge and how they acquired such knowledge). In the absence of any particularized red flags, the Court should reject Plaintiffs suggestion that Mr. Wesson was obliged to investigate the companys accounting treatment of the Media Credits during the mere six weeks he was a director before the company filed its Form
7

See Complaint 60 (alleging that Bordynuik was aware of auditors drinking problem), 61 (alleging that Bordynuik was aware of auditors related incarceration); and 62 (alleging that Bordynuik and JBI nonetheless allowed the auditor to audit JBIs Form 10-K).

-7-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 9 of 21

10-K. In the words of the Supreme Court of Delaware, absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists. Stone v. Ritter, 911 A.2d 362, 368 (Del. 2006) (quoting Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963)); see also In re Goldman Sachs Group, Inc., 2011 WL 4826104, at *13 (Del. Ch. Oct. 12, 2011) (Conscious disregard involves an intentional dereliction of duty which is more culpable than simple inattention or failure to be informed of all facts material to the decision.). Rather, Mr. Wesson was entitled to rely on the companys financial statements, particularly given that the valuation of the Media Credits in its Form 10-K was a continuation of the valuation set forth in its Form 10-Q filed before his affiliation with JBI. (Compl. 42.) See Nev. Rev. Stat. 78.138(2) (providing that directors are entitled to rely on the companys books, financial statements, etc., unless the director has knowledge that would make reliance unwarranted). II. PLAINTIFF HAS NOT ALLEGED COGNIZABLE DAMAGES. Plaintiff concedes that the only damages he claims JBI has incurred are the costs and expenses associated with the SEC suit and prior [related] investigation. (Plaintiffs Opp., 19) It is undisputed that the SEC suit has not concluded; indeed, it has barely even begun, since a Rule 26(f) conference has not been held, and discovery therefore has not commenced. (See Docket Nos. 12 and 13, indicating that no substantive pleadings have been filed in the case subsequent to the Defendants answers). As the Individual Defendants demonstrated in their opening brief, allegations concerning other pending lawsuits are insufficient to plead damages as a matter of well-established law. (Individual Defendants Mem., 21-23.) Courts dismiss derivative claims for breach of fiduciary duty where the only injury alleged is that additional lawsuits are pending against the company concerning the same alleged misconduct as in the derivative suit, and that the company is spending money to defend against those actions. (Id.) -8-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 10 of 21

Plaintiff attempts to distinguish the overwhelming case law directly on point by arguing in a footnote that here, there are very real costs, fees and expenses associated with both the completed [SEC] investigation and the current pending SEC suit that JBI has already suffered. (Plaintiffs Opp., 19 n.14.) But that is not a distinguishing factor. As an initial matter, this allegation does not even appear in the Complaint, and therefore amounts to mere speculation. (See Compl. 90.) For the purposes of deciding whether a plaintiffs factual allegations are sufficient in the context of a motion to dismiss under Rule 12(b)(6), the court may not look beyond the complaint to facts alleged solely in a plaintiffs moving papers. Klein v. MHM Corr. Servs., 2010 U.S. Dist. LEXIS 83818, at *4-5 (D. Mass. Aug. 16, 2010) (Wolf, J.). Moreover, the courts in the cases cited by the Individual Defendants specifically rejected Plaintiffs new theory that he may recover as damages in a derivative action the expenses that JBI has incurred in defending against other pending lawsuits. In In re Cray Inc. Derivative Litig., 431 F. Supp. 2d 1114 (W.D. Wash. 2006), for example, plaintiff similarly argued that his breach of fiduciary duty claim was based on allegations that Cray sustained damages in the form of . . . costs incurred to carry out internal investigations of, and defend against, potential legal liability from the pending class action lawsuit. Id. at 1133. The court held that such damages allegations were insufficient to state a claim for relief. Id. at 1133-1134. Likewise, the In re Isolagen Inc. Sec. & Derivative Litig., 2007 U.S. Dist. LEXIS 26905 (E.D. Pa. Apr. 10, 2007) court rejected a plaintiffs identical argument that [t]he Defendants misconduct has caused the Company to incur the costs of internal investigations, including accounting fees and legal fees, and the costs and legal fees for defending the related securities class action lawsuits, because such costs cannot be recovered prior to a finding of liability in the separate litigation. Id. at *7-8; see also Dollens v. Zionts, 2002 U.S. Dist. LEXIS 13511, at *27-28 (N.D. Ill. July

-9-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 11 of 21

22, 2002) ([P]laintiffs cannot bring a derivative action to recover expenses from a pending securities action involving Westell until the case has proceeded to final judgment or settlement.) (emphasis added). Therefore, the Complaint should be dismissed for failure to allege cognizable damages, in addition to the other grounds cited in the Individual Defendants memorandum. III. PLAINTIFF HAS NOT PLED INTENTIONAL MISCONDUCT, FRAUD, OR A KNOWING VIOLATION OF THE LAW BY DEFENDANTS HENRY, BAGAI, SMITH, BRADSHAW, WESSON, OR GOLDBERG. A. Rule 9(b) Applies To The Complaint.

Plaintiff agrees that in order to state a claim for breach of fiduciary duty he was required by Nevada statute to plead facts against each Individual Defendant indicating that he or she engaged in intentional misconduct, fraud, or a knowing violation of the law. (Plaintiffs Opp., 16 (citing Nev. Rev. Stat. 78.138(7)).) For the reasons discussed in the Individual Defendants opening brief, Plaintiff failed to do. (Individual Defendants Mem. 23-28.) Plaintiffs argument that in the circumstances of this case he may simply plead in a vague and conclusory fashion that the defendants engaged in a knowing violation of the law without satisfying the heightened pleading standards of Rule 9(b)or even the Rule 8 pleading requirements clarified by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)is incorrect. (Plaintiffs Opp., 16 & n.11.) Although Plaintiff argues that he has merely pleaded a breach of duty claim to which Rule 9(b) does not apply (Plaintiffs Opp., 16-17 and n.11), the Nevada Supreme Court has held that allegations that defendants knowingly signed misleading and incomplete public filings, which are the essential allegations here, do trigger application of the rule. Kahn v. Dodds, 252 P.3d 681, 701 (Nev. 2011). Likewise, the First Circuit has held that statutes that require a knowing violation of law trigger Rule 9(b) particularity requirements. See United States ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 226-228 (1st Cir. 2004) (holding that -10-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 12 of 21

False Claims Act claims must satisfy Rule 9(b) because they require a knowing submission of a false claim). Therefore, the rule applies even if, as Plaintiff asserts, his Complaint merely implicates knowing or intentional, but not fraudulent, conduct. (Plaintiffs Opp., 17-18). In addition, apart from Nev. Rev. Stat. 78.138(7), which requires breach of duty claims against directors to be knowing or intentional, the Complaint sounds in fraud, thereby requiring satisfaction of Rule 9(b). Plaintiff alleges, for example, that Mr. Bordynuik and Mr. Baldwin knew the valuation was false and inaccurate when they certified the 10-Q and 10-K, and they did so with the intent to mislead and deceive JBI investors as to the true net worth of the Company. (Compl. 43 (emphasis added); see also id. at 45 (JBI deliberately misled investors and the public by using the purported face value of the Media Credits, rather than their actual cost.) (emphasis added).) Similarly, Plaintiff alleges that Defendants Bordynuik, Bradshaw, Wesson, Henry, and Goldberg refused to write off the value of the Media Credits as of September 30, 2009 because they knew that without inflating JBIs assets they would be unable to attract the level of investment they desired for the company to purportedly expand its operations and increase the share price of JBI. (Id. at 48.) Such allegations clearly implicate fraud. Breach of fiduciary duty claims sounding in fraud must satisfy the particularity standards of Rule 9(b). See Individual Defendants Mem., 24 (citing, inter alia, Gerber v. Bowditch, 2006 U.S. Dist. LEXIS 27552, at *41-44 (D. Mass. May 8, 2006)). Plaintiff was therefore required to plead his breach of fiduciary duty claim with particularity in compliance with Rule 9(b), but failed to do so. B. Plaintiff Waives His Claims Against Defendants Henry and Dr. Bagai.

Plaintiff does not even attempt to defend his patently insufficient allegations against Mr. Henry and Dr. Bagai. (See Plaintiffs Opp., 17 & n.17 (defending allegations against only

-11-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 13 of 21

Baldwin, Smith, Bradshaw, Goldberg, Bordynuik, and Wesson); Individual Defendants Mem., 24-25.) That is because Mr. Henry was a JBI board member for only six weeks, from February 12, 2010 to March 24, 2010 (Compl. 21), during which time no financial statements were filed with the SEC. (Ex. A.) Dr. Bagai did not become a JBI director until April 30, 2010, which was after the financial statements at issue were already so filed. (Compl. 18; Ex. A.) As noted above (pages 2-3, supra), by failing to respond to the Individual Defendants arguments and failing to point to any facts indicating that Dr. Bagai or Mr. Henry breached their fiduciary duties with respect to any public statement made while they were JBI directors, at a minimum the claims against them should be dismissed, even if the court concludes that Plaintiffs faulty allegations are sufficient as to certain other Individual Defendants. C. Plaintiff Fails To Allege Intentional Misconduct, Fraud, or a Knowing Violation of the Law By Defendants Smith, Bradshaw, Baldwin or Goldberg.

The claims against Messrs. Smith, Baldwin and Goldberg and Ms. Bradshaw should also be dismissed because Plaintiff misrepresents in his Opposition brief his actual allegations concerning these defendants. Plaintiff claims that Paragraph 41 of his Complaint alleges that these defendants knowingly participated in the dissemination of materially false misleading statements. (Plaintiffs Opp., 18.) But that is not what the Complaint alleges; rather, it alleges only that those defendants signed or certified the companys December 31, 2009 Form 10-K. (Compl. 41.) There are no facts pled in the Complaint that would suggest that these Individual Defendants had actual knowledge that the Form 10-K contained false statements; indeed, the majority of these defendants were either directors for a brief period (Bradshaw and Goldberg) or operational officers (Smith) who would not be reasonably expected to know or understand accounting issues, and the fourth defendant (Baldwin) was a brand-new chief financial officer when the form, which merely continued the existing accounting treatment for the Media Credits, -12-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 14 of 21

was filed. Similarly, Plaintiff claims in his Opposition brief that the Complaint sets forth particular allegations as to the . . . widespread cover-up and conspiracy that all the Individual Defendants engaged in to further Bordynuiks aspirations for Plastic2Oil. (Plaintiffs Opp., 18.) But none of the cited paragraphs allege anything of the sort, much less allege any facts supporting an inference of such a purported conspiracy. Finally, Plaintiff falls back on his conclusory allegations that these individuals failed to monitor and oversee the Companys financial and accounting controls. (Plaintiffs Opp., 18.) But as set forth above, supra at pages 1-2, Nevada law does not recognize such conduct as an actionable breach of fiduciary duty. It is quite clear that only actual knowledge, or intentional misconduct states a claim for breach of fiduciary duty under Nevada law. Nev. Rev. Stat. 78.138(7). Moreover, even under less stringent Delaware law, Plaintiff has not pled any specific facts or red flags necessary to support a Caremark claim against them. IV. PLAINTIFF HAS NOT MADE A PRIMA FACIE SHOWING OF PERSONAL JURISDICTION OVER THE INDIVIDUAL DEFENDANTS OTHER THAN DEFENDANT BORDYNUIK. All Individual Defendants other than Mr. Bordynuik submitted Declarations with the Individual Defendants opening brief establishing that this Court lacks personal jurisdiction over them. (See Individual Defendants Mem., Exs. F-L.) Plaintiff has not presented any contrary evidence. 8 Instead, Plaintiff suggests that the submission of declarations in support of a Rule

After the Individual Defendants filed their opening brief, Plaintiff informally requested jurisdictional discovery. The Individual Defendants stated that such discovery was not appropriate because Plaintiff has not identified facts that would establish a colorable claim of personal jurisdiction. See U.S. v. Swiss American Bank, Ltd., 274 F.3d 610, 625-26 (1st Cir. 2001). Rather than separately brief a motion for jurisdictional discovery, the parties filed a Joint Motion to Postpone Consideration of Fed. R. Civ. P. 12(b)(2) Motion To Dismiss Pending Resolution of Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 23.1 Grounds for Dismissal. (See Dkt. No. 25.) That motion remains pending. However, in his Opposition brief, Plaintiff nevertheless presented argument and made unsubstantiated factual claims in purported support of personal jurisdiction. While continuing to believe that several non-jurisdictional grounds for
(footnote continued)

-13-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 15 of 21

12(b)(2) motion to dismiss is somehow improper and inadmissible (Plaintiffs Opp., 20 n.15); argues that his vague and conclusory allegations in the Complaint must be accepted as true to establish personal jurisdiction (id. at 20); and even invents out of whole cloth supposed contacts with Massachusetts that are not just unsubstantiated, but are directly contrary to the evidence before the Court (id. at 20-26). Plaintiff misstates the law, and has failed to carry his burden to make a prima facie showing of personal jurisdiction. Plaintiff wrongly claims that in evaluating whether he has carried his burden of proving personal jurisdiction, the Court, must accept the uncontroverted allegations in the plaintiffs complaint as true. (Plaintiffs Opp., 20 (citing Elecs. For Imaging, Inc. v. Coyle, 340 F.3d 1344, 1349 (Fed. Cir. 2003)).) To the contrary, in the First Circuit, the plaintiff must go beyond the pleadings and make affirmative proof. . . . It has long been the rule of this circuit . . . that plaintiffs may not rely on unsupported allegations in their pleadings to make a prima facie showing of personal jurisdiction. Boit v. Gar-Tec Products, Inc., 967 F.2d 671, 675 (1st Cir. 1992) (quotation omitted). Because evidence is considered in determining whether a plaintiff has made a prima facie showing, the Court may properly consider declarations in deciding a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction. See e.g., Sawtelle v. Farrell, 70 F.3d 1381, 1385 (1st Cir. 1995) (holding that in considering whether plaintiff has made a prima facie showing of personal jurisdiction, the court draws the facts from the pleadings and the parties supplementary filings, including affidavits); Ticketmaster-New York v. Alioto, 26 F.3d 201, 203 (1st Cir. 1994) (Inasmuch as the district court dismissed this suit for failure of the plaintiff

_________________________________
(footnote continued from previous page)

dismissing the Complaint exist, the moving Individual Defendants respond to those arguments in this Section.

-14-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 16 of 21

to make a prima facie jurisdictional showing . . . we draw the facts from the pleadings and the parties supplementary filings, including affidavits.). The Individual Defendants demonstrated in their opening brief that the Complaints allegations regarding personal jurisdiction are woefully deficient. Those allegations are based solely on the fact that the Individual Defendants are directors or officers of a company that had its principal office in Massachusetts when the financial statements at issue were published. (Compl. 9, 13-21). Such allegations are insufficient as a matter of law. (See Individual Defendants Mem., 9-10, citing, inter alia, Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902, 906 (1st Cir. 1980); Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613, 617 (1st Cir. 1988); and American Freedom Train Found. v. Spurney, 747 F.2d 1069, 1074 (1st Cir. 1984).) Plaintiff does not contest this authority. Instead, he simply invents contacts with Massachusetts that are unsupported by any evidence and cannot be plausibly inferred from his faulty Complaint. For example, Plaintiff states in his Opposition brief that [a]s directors, the Individual Defendants, were responsible for attending board meetings in Massachusetts. (Plaintiffs Opp., 23.) That is not true. The Individual Defendants did not attend board meetings in Massachusetts; in fact, each has averred that during the time I was a JBI director, I did not perform any of my duties in Massachusetts, and never traveled to the companys Massachusetts office. (See Individual Defendants Mem., Exs. F-L, 3.) Plaintiff cites no evidenceor even Complaint allegationsfor his inconsistent factual statement. But statements made in an opposition brief do not constitute evidence that can support a prima facie showing of personal jurisdiction. As the First Circuit stated in this precise context: In order to defeat a motion to dismiss for want of in personam jurisdiction, a plaintiff must do more than simply surmise the existence of a favorable factual scenario; he must verify the facts alleged through materials of evidentiary quality. . . . Thus, allegations in

-15-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 17 of 21

a lawyers brief or legal memorandum are insufficient, even under the relatively relaxed prima facie standard, to establish jurisdictional facts. Barrett v. Lombardi, 239 F.3d 23, 27 (1st Cir. 2001) (emphasis added); see also Goldberg v. Reeves, 2010 U.S. Dist. LEXIS 86955, at *2 (D. Mass. Aug. 24, 2010) (refusing to consider for jurisdictional purposes assertions made in an opposition brief because they were wholly unsupported by any evidence, affidavit or otherwise). Plaintiffs assertion that the Individual Defendants communications directed at Massachusetts are systematic and continuous is another invention of Plaintiff, again unsupported by any evidence. (Plaintiffs Opp., 23-24.) The Declarations executed by these defendants state the opposite. Most Individual Defendants had no communications at all with the Massachusetts office. (See Individual Defendants Mem., Exs. F, H, I, J, L, 3.) The communications with that office by Mr. Smith and Mr. Baldwin were completely unrelated to the subject matter of the Complaint. Mr. Smith had possible occasional calls with a single employee relating to computer problems in the Philadelphia Pak-It, LLC office. (Id. at Ex. K, 3.) And Mr. Baldwin had infrequent telephone calls with . . . a programmer who worked in [the Massachusetts] office, relating to software issues at JBI subsidiary Pak-It, LLC. (Id. at Ex. G, 3.) Plaintiff makes no attempt to show how these unrelated communications regarding technology issues could conceivably establish personal jurisdiction over Messrs. Smith and Baldwin. See, e.g., LaVallee v. Parrot-Ice Drink Prods. of Am., Inc., 193 F. Supp. 2d 296, 303 (D. Mass. 2002) (holding that to satisfy the relatedness requirement as it concerns communications with persons in the forum state, plaintiff must also demonstrate that these communications caused the plaintiffs injury, constituting in-forum acts sufficient to establish specific personal jurisdiction in Massachusetts).

-16-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 18 of 21

Plaintiff next baldly states that the SEC filings that certain of the Individual Defendants signed or certified emanated from the Company, i.e., from Massachusetts. (Plaintiffs Opp., 25.) Plaintiff even states that the 2009 Form 10-K originated in the District of Massachusetts. (Id.) There is no evidence that this is true. Plaintiff offers no evidence that any work or review performed by any Individual Defendant on any financial statement was performed in Massachusetts. Indeed, to the contrary, the Individual Defendants at issue each submitted a Declaration verifying that their work was not performed in Massachusetts. (Individual Defendants Mem., Exs. F-L, 3.) Nor does the authority Plaintiff cites support the novel theory that all financial statements of a company are deemed by operation of law to issue from the state containing its principal office, regardless of where the work was actually performed. 9 Finally, Plaintiff invents the fact that the Individual Defendants have been paid by JBI, a Massachusetts based company. (Plaintiffs Opp., 26.) Once again, Plaintiff cites no evidence other than the unsupported, conclusory allegation in his Complaint. That is not sufficient. See Boit, 967 F.2d at 674-75. The Declarations submitted by the Individual Defendants establish that they were not paid by JBI or any Massachusetts company. (Individual Defendants Mem., Exs. F-L.) Therefore, the Complaint should be dismissed as to all Individual Defendants other than Mr. Bordynuik for failure to prove personal jurisdiction for the reasons discussed in the Individual Defendants opening brief.

Johnson v. Witkowski, 30 Mass. App. Ct. 697 (Mass. App. Ct. 1991) concerned the operation of a trust that was formed in Massachusetts and was funded by the estate of a Massachusetts resident; the defendant signed the trust in Massachusetts and has continued to manage and administer the trust while maintaining numerous contacts with the plaintiff in Massachusetts. Id. at 714. The other cases cited by Plaintiff, In re DaimlerChrysler AG Sec. Litig., 197 F. Supp. 2d 86, 95-96 (D. Del. 2002), and Itoba Ltd. v. LEP Group PLC, 930 F. Supp. 36, 40-41 (D. Conn. 1996), both concerned the exercise of personal jurisdiction over a foreign defendant, and are therefore inapposite.

-17-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 19 of 21

V.

IN THE ALTERNATIVE, THE COURT SHOULD STAY THIS ACTION BECAUSE THERE IS A SIMILAR CLASS ACTION SECURITIES CASE PENDING IN NEVADA. Plaintiff does not deny that his Complaint substantially overlaps with the conduct at issue

in the pending Nevada class action against JBI and certain officers and directors. (Compare Compl. with Individual Defendants Mem., Exhibit N.) Nor does Plaintiff deny that in that case, JBI will be relying upon the testimony of Messrs. Bordynuik and Baldwin, who are named as individual defendants therein, while Plaintiff here would be attempting to prove they breached fiduciary duties to the company based on the same conduct. Because permitting this derivative case to proceed simultaneously with the securities class action based on the same allegations could harm the companyostensibly the entity that the derivative claim aims to benefitthis case should be stayed if it is not dismissed. See, e.g., In re Ormat Techs., Inc. Derivative Litig., 2011 U.S. Dist. LEXIS 96891, at *10-15 (D. Nev. Aug. 29, 2011) (staying federal derivative case for this reason); Brudno v. Wise, 2003 Del. Ch. LEXIS 35, at *12-13 (Del. Ch. Apr. 1, 2003) (same). CONCLUSION For the forgoing reasons and those stated in the Individual Defendants opening brief, the Complaint should be dismissed as to the Individual Defendants, with prejudice, or in the alternative, stayed pending resolution of the SEC and class actions.

Dated: November 7, 2012 Respectfully submitted, /s/John G. Wheatley John G. Wheatley, BBO #670989 MELICK & PORTER LLP 28 State Street Boston, MA 02109 617 523-6200 (tel) -18-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 20 of 21

617 523-8130 (fax) jwheatley@melicklaw.com

Michael R. MacPhail Leif T. Simonson Matthew B. Kilby FAEGRE BAKER DANIELS LLP 1700 Lincoln Street Suite 3200 Wells Fargo Center Denver, CO 80202 303-607-3692 and 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-3901 (612) 766-7000 (612) 766-1600 fax Michael.MacPhail@faegrebd.com Leif.Simonson@faegrebd.com Matthew.Kilby@faegrebd.com Counsel for John Bordynuik, Dr. Jacob Smith, Ronald C. Baldwin, Jr., Amy Bradshaw, John M. Wesson, Dr. Robin Bagai, Gregory Goldberg, and Theodore J. Henry

-19-

Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 21 of 21

CERTIFICATE OF SERVICE I hereby certify that this document filed through the ECF system will be sent electronically to the registered participants as identified on the Notice of Electronic Filing and paper copies will be sent via U.S. first class mail to those indicated as non-registered participants on November 7, 2012. /s/ John G. Wheatley

-20-