112311-Final Order Denying Defendants' Motion To Dismiss

Case 8:10-cv-01299-AG-JCG Document 131
Filed 11/21/11 Page 1 of 15 Page ID #:5345
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL Case No. Title SACV 10-1299 AG (JCGx) Date November 21, 2011
KEXUAN YAO v. CRISNIC FUND, S.A., et al.
Present: The Honorable Lisa Bredahl Deputy Clerk
ANDREW J. GUILFORD Not Present Court Reporter / Recorder
Tape No.
Attorneys Present for Plaintiffs: Not Present Proceedings:
Attorneys Present for Defendants: Not Present
[IN CHAMBERS] ORDER DENYING MOTION TO DISMISS CLAIMS ONE THROUGH TEN; GRANTING MOTION TO DISMISS CLAIM ELEVEN
Plaintiff Kexuan Yao (Plaintiff or Yao) filed a complaint (Complaint) against Defendants Crisnic Fund, S.A. (Crisnic), Anthony Gentile, IFG Opportunity Fund (IFG) (together, Defendants), and Ed Furman, who has not appeared in this action so far. The Court previously dismissed the original complaint for failure to state a claim. Plaintiff then filed a First Amended Complaint (FAC), which alleges several federal claims for violations of the Securities Exchange Act, along with multiple state law claims. Defendants Crisnic and Gentile now move to dismiss the FAC (Motion to Dismiss or Motion), and IFG joins in the Motion. After considering all papers and arguments submitted, the Court DENIES the Motion to Dismiss as to Claims One through Ten. The Court GRANTS the Motion as to Claim Eleven. BACKGROUND The following facts are based on the FAC. As it must for the purposes of this Motion,
CIVIL MINUTES - GENERAL Page 1 of 15
this Court accepts those facts as true, and draws all reasonable inferences in favor of the Plaintiff. Plaintiff is the Chief Executive Officer of China Armco Metals (China Armco), a Nevada corporation. (FAC 1.) Defendant Gentile is the founder, president, and manager of Crisnic, a Costa Rican corporation. (Id. 5, 29.) This case arises from a Structured Transaction between Crisnic and Plaintiff. In sum, Plaintiff alleges that Crisnic fraudulently represented that the Structured Transaction was a loan utilizing Yaos restricted stock as collateral, when in fact Crisnic intended to illegally sell Yaos restricted stock and refund a portion of the sales as the purported loan. Plaintiff alleges that Crisnic held itself out as a self-funded entity with its own capital that could make loans secured by stock. (Id. 23.) Crisnics website specifically represented that restricted stock could serve as collateral for the loans, allowing the executive to retain ownership of the stock and avoid paying any capital gains taxes. (Id. 24; Ex. 1.) Yao owned more than 35% of China Armcos shares. (Id. 30.) Yaos shares are unregistered, restricted shares. (Id.) Thus, any party Yao sells his shares to must first register those shares with the United States Security and Exchange Commission (SEC) before selling those shares into the marketplace. (Id.) Yao could have legally sold the shares in a private transaction, but it would have to be at a substantial discount to the market price. (Id. 33.) In the spring of 2010, Yao was looking to borrow funds. (Id. 31.) Yao did not want to sell his shares because he did not want to (a) file a registration statement, (b) sell his stock too early, before the full value was reached, (c) pay capital gains taxes, (d) falsely signal to the market that he lacked faith in China Armco, (e) dilute China Armo and thus hurt the companys ability to obtain financing, as well as hurt Yao and other shareholders. (Id. 33.) Because Yaos stock was restricted, he could not obtain a traditional margin loan with a registered stock broker. (Id. 35-36.) In May 2010, Furman approached Yaos colleague and told him that Crisnic would make a loan to Yao, secured by Yaos restricted China Armco stock. (Id. 34, 36.) Furman
represented that Crisnic had hundreds of millions of dollars in capital. (Id. 34.) On June 9, 2010, Furman sent Yao a term sheet entitled Crisnic Fund, S.A., Non-Recourse Loan Proposed Terms (Term Sheet) (Id. 37.) The terms were a $2.8 million loan for 5 years, at 3% simple interest, collateralized with 1.3 million unregistered shares of China Armco stock. (Id. 38.) Yao signed the Term Sheet that same day. (Id.) On June 11, 2010, Furman sent Yao an email attaching the Loan Documents (formally titled Structured Transaction Agreement) and confirming that the wire will be sent within 24 hours after confirmation from our clearing firm that [Crisnics] collateral has been received. (Id. 39, Ex. 4.) The first paragraph of the Structured Transaction Agreement (Agreement) states that: This Agreement is made for the purpose of engaging the Fund to provide a structured lending transaction and custodial services to Borrower with respect to one of more publicly traded stocks to be pledged as security as part of a lending transaction. . . . . (Id. 41, Ex. 4.) The sole part of the Agreement mentioning the sale of Yaos shares states: Upon transferring Pledged Collateral to the designated account of the Fund as Collateral for the Transaction, the Borrower hereby grants the Fund the absolute right to pledge, transfer, assign, hypothecate, lend, encumber, sell short, or sell outright Pledged Collateral, as needed to procure a Transaction or hedge against adverse market movements. (Id. 56.) The Agreement also states that the China Armco stock was freely transferable (Ex. 4, 2c), and that the Borrower will abide by all regulations governing hedging transactions . . . and secured competent legal counsel certifying Borrowers compliance with such regulations. (Id. 2e.) Yao alleges that before transferring the shares to Crisnic, Crisnic demanded that Yao send his restricted shares free of any restrictive legends that are ordinarily placed on stock certificates to prevent the accidental sale of unregistered shares into the market place. (Id. 58..) Yao alleges that Crisnics purported reason was to allow a quick sale in the event of default by Yao pursuant to a securities registration exemption that allows a creditor to sell a limited amount of restricted stock necessary to cure a default, provided that the loan is a full recourse loan against the creditor. (Id.)
On June 28, 2010, Yao transferred 1.3 million shares of China Armcos shares. (Id. 60.) On June 30, 2010, Yao signed an Addendum A-1, which specified that he would receive approximately $2.5 million in five business days from the receipt of the collateral (July 3, 2010). (Id. 61, Ex. 5) On June 29, 2010, China Armcos general counsel noticed that a tremendous volume of China Armco stock was being dumped on the NYSE-Amex stock exchange. (Id. 62.) That day, the market volume in China Armco stock soared from 168,600 on June 28, 2010 to 2,199,500 on June 29. (Id. 63.) Yao alleges that he has confirmed that no other large holder was responsible for the sale, although Crisnic has still not admitted or disclosed any such sales. (Id. 63, 65.) Relevant records from the Depository Clearing Firm (DTC) establish that Crisnic was responsible for the stock dump, and very little of Yaos stock remain in the original account where Yao made the transfer. (Id. 66.) As of the date of the dump, Crisnic had still not funded the loan. (Id. 64.) Yaos counsel repeatedly contacted Crisnic and asked him to confirm that Yaos shares had not been sold. (Id. 68.) In reply, Crisnic stated that Crisnic refused to fund Yaos loan and would not rescind the transaction. (Id. 69.) On July 26, 2010, Crisnic did send Yao $1 million. (Id. 71.) On August 9, 2010, Crisnic published a press release accusing Yao of fraud by failing to disclose the true nature of the restricted shares. (Id. 69, Ex. 6.) LEGAL STANDARD A court should dismiss a complaint when its allegations fail to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A complaint need only include a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. R. Civ. P. 8(a)(2). [D]etailed factual allegations are not required. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1940 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007) (stating that a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations)). The Court must accept as true all factual allegations in the
complaint and must draw all reasonable inferences from those allegations, construing the complaint in the light most favorable to the plaintiff. Pollard v. Geo Group, Inc., 607 F.3d 583, 585 n.3 (9th Cir. 2010). But the complaint must allege sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 570). A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 129 S. Ct at 1940 (citing Twombly, 550 U.S. at 556). A court should not accept threadbare recitals of a cause of actions elements, supported by mere conclusory statements, id., or allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences, Speedwell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). The Ninth Circuit recently addressed post-Iqbal pleading standards in Starr v. Back, 652 F.3d 1202, 1204 (9th Cir. 2011). The Starr court held that allegations must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively . . . [and] plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation. Id. If the Court decides to dismiss a complaint, it must also decide whether to grant leave to amend. A district court may deny a plaintiff leave to amend if it determines that allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency . . . or if the plaintiff had several opportunities to amend its complaint and repeatedly failed to cure deficiencies. Telesaurus VPC, LLC v. Power, 623 F.3d 998, 1003 (9th Cir. 2010). A claim may be dismissed with prejudice if amendment would be futile. Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007) (citing Albrecht v. Lund, 845 F.2d 193, 197 (9th Cir. 1988)).
PRELIMINARY MATTERS
Both parties submit numerous requests for judicial notice of various documents. A court may take notice of documents under Federal Rule of Evidence 201(b). A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. Fed. R. Evid. 201. Courts may take judicial notice of undisputed matters of public record, but generally may not take judicial notice of disputed facts stated in public records. Lee v. City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001) (emphasis in original). Plaintiff also asks the Court to consider various documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994) (overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir.2002)). The Court did not rely on the majority of the evidence which the parties ask it to take notice of or consider. To the extent it did rely on evidence, the Court relied only on admissible evidence. See F.T.C. v. Neovi, Inc., 598 F. Supp. 2d 1104, 1118 n.5 (S.D. Cal. 2008) (The parties have each filed evidentiary objections. However, in deciding the present motions, the Court has only relied upon admissible evidence.). Defendants also ask the Court to disregard certain portions of the FAC because it contains conclusory phrases, unsupported hearsay, and legal conclusions that do not meet the standards of Rule 8, Rule 9, and the PSLRA. In construing Plaintiffs FAC for the purposes of this Motion, the Court followed the appropriate standard by accepting all of Plaintiffs factual allegations as true, drawing all reasonable inferences from those allegations, and construing the FAC in the light most favorable to the plaintiff. Pollard, 607 F.3d at 585 n.3.
ANALYSIS
Defendants seek to dismiss all eleven claims against them. The Court analyzes the federal claims first. 1. CLAIM ONE: SECURITIES FRAUD
To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege (1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss. In re Daou Sys. Inc., 411 F.3d 1006, 1014 (9th Cir. 2005) (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)); Metzler Inv. GMBH v. Corinthian Coll., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008). Under these standards, Defendants argue that Plaintiffs first claim fails for three separate reasons: (1) failure to allege a material misrepresentation; (2) failure to sufficiently allege scienter; and (3) failure to allege loss causation. 1.1 Material Misrepresentation
Section 10(b) and 10b-5 claims sound in fraud. Thus, [a]t the pleading stage, a complaint stating claims under 10(b) and Rule 10b5 must satisfy the dual pleading requirements for pleading fraud with particularity [under Federal Rule of Civil Procedure Rule 9(b)] and the Private Securities Litigation Reform Act (PSLRA). WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1047 (9th Cir. 2011). Under the pleading requirements laid out in Rule 9(b), a plaintiff must plead with particularity the time and place of the fraud, the statements made and by whom made, an explanation of why or how such statements were false or misleading when made, and the role of each defendant in the alleged fraud. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-49 & n.7 (9th Cir. 1994) (en banc); see also Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004) (holding that Rule 9(b) requires a plaintiff to state the time, place, and specific content of the false representations as well as the identities of the
parties to the misrepresentation). Where the allegations supporting a claim fail to satisfy the heightened pleading requirements of Rule 9(b), the claim is subject to dismissal. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003). Under the PLSRA, a plaintiff must plead with particularity the statements alleged to have been misleading and the reason or reasons why such statements are, in fact, misleading. 15 U.S.C. 78u-4(b)(1). Incorporating the particularity requirement of Federal Rule of Civil Procedure 9(b), the Reform Act further requires that where a complaints allegations are based on information and belief, a plaintiff must plead with particularity all facts on which that belief is formed. 15 U.S.C. 78u-4(b)(1)(B); see also Fed. R. Civ. P. 9(b). In other words, [t]he PSLRA requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter . . . . Tellabs, Inc. v. Makor Issues & Rights, Ltd. 551 U.S. 308, 313 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976)). Defendants claim that Plaintiffs misrepresentations are not sufficient to meet these standards. The Court disagrees. The basic premise of Yaos claim is that Crisnic fraudulently represented that the transaction would be structured as a loan, when in reality Crisnic intended to illegally sell all of Yaos unrestricted shares on the open market without Yaos knowledge. (See FAC 78.) The FAC identifies with particularity the source and time of the allegedly fraudulent statements (Crisnics website, Furmans statements, the Term Sheet, the Agreement). Defendant argues that the Agreement plainly conferred upon it the right to sell Yaos shares. Upon review of the FAC andadditional arguments, the Court is satisfied that, read in the light most favorable to Plaintiff, Defendants right to sell Plaintiffs shares was not unencumbered. Rather, Defendants could only sell the collateral on the loan to procure a Transaction or hedge against adverse market movements. (Id. 56.) Whether or not those conditions actually occurred is a question for the fact-finder. Defendants also argue that Yaos role in removing the restrictive legend from the stock gives him unclean hands and prevents him from stating a claim. Unclean hands is an affirmative defense and is not appropriate on a motion to dismiss. Even if Yao had removed the stock legends, it is not clear that would clear Defendants of any liability for
selling Yaos shares. 1.2 Scienter
Under the PSLRA, a securities fraud complaint must raise a strong inference' of scienter i.e., a strong inference that the defendant acted with an intent to deceive, manipulate, or defraud. Metzler, 540 F.3d at 1061 (quoting 15 U.S.C. 78u-4(b)(2)). This examination requires the court to survey the complaint in its entirety, not to simply scrutinize individual allegations in isolation. Id. [T]o plead scienter, the PSLRA requires the complaint to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.' Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1180 (9th Cir. 2009) (quoting 15 U.S.C. 78u-4(b)(2)). [I]n determining whether the pleaded facts give rise to a strong' inference of scienter, the court must take into account plausible opposing inferences. Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 310 (2007)) (brackets in Siracusano); Metzler, 540 F.3d at 1061 (In reviewing a complaint under this standard, the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs.') (quoting Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002)). The complaint will survive a motion to dismiss only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.' Siracusano, 585 F.3d at 1180 (quoting Tellabs, 551 U.S. at 324); Commc'ns Workers of Am. Plan for Employees' Pensions & Death Benefits v. CSK Auto Corp., 525 F. Supp. 2d 1116, 1120 (D. Ariz. 2007) (The Supreme Court has now made clear . . . that a tie goes to the Plaintiff.). In pleading scienter, a securities fraud plaintiff must allege that the defendants made false or misleading statements either intentionally or with deliberate recklessness. Siracusano, 585 F.3d at 1180 (quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009)); Daou, 411 F.3d at 1015. A court deciding a motion to dismiss must first determine whether any of the plaintiff's allegations, standing alone, are
Case 8:10-cv-01299-AG-JCG Document 131 Filed 11/21/11 Page 10 of 15 Page ID #:5354
sufficient to create a strong inference of scienter. Siracusano, 585 F.3d at 1180 (quoting Zucco, 552 F.3d at 991). If they do not, the court then conducts a holistic review of the complaints allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness. Id. (quoting Zucco, 552 F.3d at 991); South Ferry, 542 F.3d at 782 (recklessness meets the PSLRAs requirements to the extent it reflects some degree of intentional or conscious misconduct) (quoting Silicon Graphics, 183 F.3d at 976). In discussing scienter, the Ninth Circuit defined recklessness as: a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Siracusano, 585 F.3d at 1180 (quoting Silicon Graphics, 183 F.3d at 976). Here, the SACs allegations permit a strong inference of scienter under South Ferry. Defendants alleged misrepresentations, combined with the fact that Crisnic allegedly sold Yaos stock the very next day after the transfer, are sufficient to meet Plaintiffs burden. These allegations raise the strong inference that Defendants knew that it planned to sell Yaos shares almost immediately, but represented the transaction as a loan to Yao. 1.3 Loss Causation
[L]oss causation is the causal connection between the [defendants] material misrepresentation and the [plaintiffs] loss. Metzler, 540 F.3d at 1062 (quoting Dura, 544 U.S. at 342). To sufficiently allege loss causation, a complaint must allege that the defendants share price fell significantly after the truth became known. Id. (quoting Dura, 544 U.S. at 342). A complaint need not show that a misrepresentation was the sole cause for the decline in share price. Id. Nor must it prove loss causation at the pleading stage. Id. Rather, it must simply give the defendant notice of what the causal
connection might be between th[e] loss and the representation. Id. (quoting Dura, 544 U.S. at 347). Plaintiffs allegations meet these standards. Plaintiff alleges that he only entered into the Agreement because he believed it was a loan. He is injured by Crisnics secret sale of his shares in the following manner: being sued by an investor, loss of 1.3 million shares of stock and exposure to further action by regulators by his inability to timely and accurately report his stock ownership under Section 16 and for Defendants violation of Section 5. (FAC 85.) 1.4 Conclusion
Plaintiffs FAC withstands Defendants attack. The Court DENIES Defendants Motion to dismiss Claim One. 2. CLAIM TWO: CONTROL PERSON LIABILITY
To state a claim for control person liability under Section 20(A) of the Securities Exchange Act of 1934, a plaintiff must allege a primary violation of federal securities law and that the controlling person possessed, directly or indirectly, the power to direct or cause the direction of the management and policies of the individual allegedly liable for the primary violation. In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 1059 (N.D. Cal. 2000). Plaintiff adequately stated a primary violation of federal securities law, and alleged that Gentile acted as a control person within the meaning of the statute. The Court DENIES Defendants Motion to dismiss Claim Two. 3. CLAIM THREE: RESCISSION
Under Section 29(B) of the 1934 Act, any contract made in violation of the Act, or any rule or regulation under, shall be void. Since Plaintiff has stated a plausible claim for
violations of federal securities law, he adequately states a claim for rescission. The Court DENIES Defendants Motion to dismiss Claim Three. 4. CLAIM FOUR: BREACH OF CONTRACT
A breach of contract claim has four elements: (1) existence of a valid contract; (2) plaintiff's performance or excuse for non-performance; (3) defendant's breach; and (4) resulting damage. E.g., McDonald v. John P. Scripps Newspaper, 210 Cal. App. 3d 100, 104 (1989). Defendants allege that Plaintiffs claim fails because Plaintiff alleges that he is confused as to whether or not a contract was actually formed. (FAC 95-96.) But Plaintiff does allege the scope and terms of such contract [t]o the extent a contract exists . . . . (Id. 97.) Plaintiff argues that he was attempting to allege two causes of action alternatively or hypothetically, which is permitted under the Federal Rules. Fed. R. Civ. P. 8(d)(2). The Court finds that Plaintiffs FAC is sufficient to state a claim, and puts Defendant on notice of the facts supporting the allegations. The Court DENIES Defendants Motion to dismiss Claim Four. 5. CLAIM FIVE: FRAUD
Plaintiff alleges the same allegations to support his common law fraud claim as he did to support his Claim One for violations of 10(b)(5). Defendant argues that because Plaintiff fails on his federal claims, he fails on the state claims. To the contrary, because Plaintiff succeeds on his federal claims, he may also plausibly state a state claim for fraud. The Court DENIES Defendants Motion to dismiss Claim Five.
6.
CLAIM SIX: CONVERSION AND EMBEZZLEMENT

Defendants argue that Plaintiff cannot state a claim for conversion because they had an absolute right to sell Plaintiffs shares. As already stated, the FAC read in the light most favorable to Plaintiff does not grant Defendants the unequivocal right to sell Plaintiffs shares. The FAC plausibly states that the 1.3 million shares rightfully belonged to Yao, and Crisnic sold them without his permission and contrary to the terms of the Agreement. The Court DENIES Defendants Motion to dismiss Claim Six. 7. CLAIM SEVEN: CIVIL CONSPIRACY
Defendants argue that Plaintiff fails to state a claim for civil conspiracy because the FAC fails to state any facts sufficient to state an underlying tort. The Court has already found that in fact the FAC does state a plausible claim for several underlying torts. Thus, the FAC plausibly states a claim for conspiracy. The Court DENIES Defendants Motion to dismiss Claim Seven. 8. CLAIM EIGHT: UNJUST ENRICHMENT
Defendants argue that unjust enrichment is not a separate actionable tort under California law. Plaintiff disagrees, and cites several cases in support. See, e,g., Lectrodryer v. Seoul Bank, 77 Cal. App. 4th 723, 91 Cal. Rptr. 2d 881, 883 (Cal. Ct. App. 2000) (elements of unjust enrichment are receipt of a benefit and unjust retention of the benefit at the expense of another). While unjust enrichment can be a remedy, the Court finds that it can also be a claim, replacing breach of contract in the event of a quasi-contract. The Court DENIES Defendants Motion to dismiss Claim Eight.
9.
CLAIM NINE: DECLARATORY RELIEF

The Court previously found that there is an active dispute in this case. Declaratory relief is appropriate. 28 U.S.C. 2201(a) ([i]n a case of actual controversy within its jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such declaration.) The Court DENIES Defendants Motion to dismiss Claim Nine. 10. CLAIM TEN: LIBEL
Libel is a false and unprivileged publication by writing, printing, picture, effigy, or other fixed representation to the eye, which exposes any person to hatred, contempt, ridicule, or obloquy, or which causes him to be shunned or avoided, or which has a tendency to injure him in his occupation. Cal. Civ. Code 45. Under Cal. Civ. Code 48, malice is not inferred from the communication. Rather, actual facts showing malice must be alleged. Martin v. Kearney, 51 Cal. App. 3d 309, 312 (1975). Defendants argue that Plaintiff fails to allege malice. (Mot. 26:12.) Plaintiffs allegations regarding the publication of the press release accusing Yao of fraud, after Yao asked Defendants to rescind the transaction, are sufficient to establish malice. The Court DENIES Defendants Motion to dismiss Claim Ten. 11. CLAIM ELEVEN: CONSTRUCTIVE TRUST
Defendants argue that a constructive trust is a remedy, not a claim. Plaintiff responds that [w]hether or not California recognizes such a cause of action is not a relevant inquiry in federal court. (Opp., 24:25.) This time, Defendants are correct. Constructive trust is not a separate claim, but only a remedy for violations of other rights. The Court GRANTS Defendants Motion to dismiss Claim Eleven.
DISPOSITION The Court DENIES the Motion to Dismiss as to Claims One through Ten. The Court GRANTS the Motion as to Claim Eleven. The Court finds there is no possible way for Plaintiff to cure the deficiencies in the dismissed Claim, and denies leave to amend. Telesaurus , 623 F.3d at 1003. : Initials of Preparer lmb 0

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Case 8:10-cv-01299-AG-JCG Document 131

Filed 11/21/11 Page 1 of 15 Page ID #:5345

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

Present: The Honorable Lisa Bredahl Deputy Clerk

ANDREW J. GUILFORD Not Present Court Reporter / Recorder

Attorneys Present for Plaintiffs: Not Present Proceedings:

Attorneys Present for Defendants: Not Present

Case 8:10-cv-01299-AG-JCG Document 131

Filed 11/21/11 Page 2 of 15 Page ID #:5346

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

Case 8:10-cv-01299-AG-JCG Document 131

Filed 11/21/11 Page 3 of 15 Page ID #:5347

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

Case 8:10-cv-01299-AG-JCG Document 131

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

Case 8:10-cv-01299-AG-JCG Document 131

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

CIVIL MINUTES - GENERAL Page 5 of 15

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

selling Yaos shares. 1.2 Scienter

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

CLAIM SIX: CONVERSION AND EMBEZZLEMENT

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

CLAIM NINE: DECLARATORY RELIEF

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

KEXUAN YAO v. CRISNIC FUND, S.A., et al.

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