MARGARET M. MORROW, District Judge.
On May 22, 2014, ScripsAmerica, Inc. ("Scrips") filed this action against Ironridge Global LLC d/b/a Ironridge Global IV, Ltd., John Kirkland, and Brendan O'Neil (collectively "Ironridge"), as well as certain fictitious defendants.
On June 25, 2014, defendants filed a motion to dismiss, or alternatively to stay.
This action arises out of an allegedly fraudulent scheme devised by Ironridge. Scrips is a pharmaceuticals distributor whose stock is publicly traded on the over-the-counter ("OTC") market. Ironridge's purported scheme involved the issuance of Scrips' common stock to Ironridge in exchange for an undertaking by Ironridge to pay Scrips' outstanding accounts payable.
During the calls, Ironridge requested that the contract memorializing the transaction include a provision for an adjustment to protect it in the event of a decline in Scrips' stock price.
On October 4, 2013, Schneiderman, Kirkland, and O'Neil purportedly discussed the potential effect Ironridge's sale of the stock it received might have on Scrips' share price. Unlike other entities that had funded Scrips in exchange for stock, Ironridge allegedly represented that it would not act to manipulate or otherwise affect Scrips' stock price.
Because the shares were unregistered, Ironridge and Scrips had to obtain court approval under California and federal securities laws before a transfer of the stock could take place.
The stipulation stated the shares had to be capable of being "immediately resold . . . without restriction,"
The stipulation also memorialized the adjustment mechanism the parties had previously discussed. First, Scrips would immediately issue and deliver to Ironridge 8,690,000 shares of its common stock; the issuance, however, was subject to certain "adjustments, issuances, returns, and ownership limitations."
The stipulation also provided that if at any point during the calculation period the shares issued to Ironridge dropped below "any reasonably possible [f]inal [a]mount" or if Scrips shares closed below 80% of the closing price on the trading day prior to entry of an order on the stipulation, Ironridge was entitled to request the issuance of additional shares.
On November 8, 2013, the parties filed a joint ex parte application in state court for an order approving the stipulation; they argued that ex parte relief was necessary because the stipulation addressed the issuance of "shares of [Scrips] stock with a substantially fluctuating market price."
On November 8, 2013, Superior Court Judge Rolf M. Treu entered an order on the parties' stipulation.
Based on the decline in Scrips' share price, Ironridge filed an ex parte application for an order compelling the issuance of additional shares pursuant to the May 6, 2014 stipulation.
On May 6, 2014, Judge Treu implicitly rejected each of Scrips' arguments. He entered an order enforcing the order that had approved the stipulation ("enforcement order"), and directing that Scrips issue an additional 1,646,008 shares of common stock to Ironridge pursuant to the adjustment mechanism set forth in the stipulation.
On May 22, 2014, eight days after appealing the enforcement order, Scrips filed this action, alleging claims for breach of contract, tortious bad faith, violation of Rule 10b-5, and declaratory relief. Scrips seeks a declaration that it need not issue the additional 1,646,008 shares that the Superior Court has ordered it to issue. Scrips maintains that Ironridge intentionally engaged in post-stipulation trading activity to manipulate the market and reduce the price of Scrips' stock in order to increase the number of shares it was to receive pursuant to the stipulation's calculation formula.
Ironridge asks that the court take judicial notice of various documents related to the state court action.
In addition, the court can consider matters that are proper subjects of judicial notice under Rule 201 of the Federal Rules of Evidence. Id. at 688-89; 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); Hal Roach Studios, Inc. v. Richard Feiner and Co., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ("[C]ourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice").
Ironridge asks that the court take judicial notice of nine documents filed in the state court action.
The parties' state court stipulation, moreover, which is Exhibit B to Ironridge's request for judicial notice, is attached to the complaint and therefore need not be judicially noticed to be considered in deciding the motion. See Lee, 250 F.3d at 688 ("a court may consider `material which is properly submitted as part of the complaint' on a motion to dismiss without converting the motion to dismiss into a motion for summary judgment," quoting Branch, 14 F.3d at 453). Finally, as Ironridge notes, the state court order approving the parties' stipulation, which is Exhibit F to Ironridge's request for judicial notice, is referenced in the complaint, and can be considered under the incorporation by reference doctrine. See United States v. Ritchie, 342 F.3d 903, 908 (9th Cir.2003) (acknowledging that a district court may assume that the contents of a document incorporated by reference "are true for purposes of a motion to dismiss"); In re Downey Sec. Litig., No. CV 08-3261-JFW,
A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint. A Rule 12(b)(6) dismissal is proper only where there is either a "lack of a cognizable legal theory," or "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). The court must accept all factual allegations pleaded in the complaint as true, and construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996); Mier v. Owens, 57 F.3d 747, 750 (9th Cir. 1995).
The court need not, however, accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ("While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do"). Thus, a complaint must "contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.' . . . A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ("Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)" (citations omitted)); Moss v. United States Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) ("[F]or a complaint to survive a motion to dismiss, the non-conclusory `factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief," citing Iqbal and Twombly).
Under the Rooker-Feldman doctrine, which takes its name from the Supreme Court's decisions in Rooker v. Fidelity Trust Co., 263 U.S. 413, 416, 44 S.Ct. 149, 68 L.Ed. 362 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 476, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983), a federal district court does not have subject matter jurisdiction to hear a direct appeal from a final judgment of a state court. See Noel v. Hall, 341 F.3d 1148, 1155 (9th Cir. 2003). A losing party in state court is thus barred from seeking what in substance would be appellate review of a state judgment in federal district court, even if the party contends the state judgment violated his or her federal rights. Johnson v. DeGrandy, 512 U.S. 997, 1005-06, 114 S.Ct. 2647, 129 L.Ed.2d 775 (1994); Allah v. Superior Court, 871 F.2d 887, 891 (9th Cir. 1989) (stating that Rooker-Feldman doctrine "applies even though the direct challenge is anchored to alleged deprivations of federally protected due process and equal protection rights"), superseded by statute
The rationale behind the Rooker-Feldman doctrine is threefold. First, the only federal court with the power to hear appeals from state courts is the United States Supreme Court. Bennett v. Yoshina, 140 F.3d 1218, 1223 (9th Cir. 1998). Second, state courts are as competent as federal courts to decide federal constitutional issues. Worldwide Church of God, 805 F.2d at 891. Third, "any other rule would result in a waste of judicial resources and unnecessary friction between state and federal courts." Id.
"When there is parallel state and federal litigation, Rooker-Feldman is not triggered simply by the entry of judgment in state court. Th[e] [Supreme] Court has repeatedly held that `the pendency of an action in the state court is no bar to proceedings concerning the same matter in the [f]ederal court having jurisdiction.'" Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 292, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). "Proceedings end for Rooker-Feldman purposes when the state courts finally resolve the issue that the federal court plaintiff seeks to relitigate in a federal forum, even if other issues remain pending at the state level." Mothershed v. Justices of Supreme Court, 410 F.3d 602 (9th Cir. 2005) (emphasis added). Thus, where a federal action is filed "while the state court action continue[s] in the appeals process in state court, the state proceedings ha[ve] not ended." Nicholson v. Shafe, 558 F.3d 1266, 1278 (11th Cir. 2009); Guttman v. Khalsa, 446 F.3d 1027, 1032 (10th Cir. 2006) ("In this case, Guttman filed his federal suit while his petition for certiorari to the New Mexico Supreme Court was pending. His state suit was not final. As such, the Rooker-Feldman doctrine does not bar his federal suit and the district court does have subject matter jurisdiction to hear the case"); Federacion de Maestros de Puerto Rico v. Junta de Relaciones del Trabajo de Puerto Rico, 410 F.3d 17, 24 (1st Cir. 2005) ("Exxon Mobil tells us when a state court judgment is sufficiently final for operation of the Rooker-Feldman doctrine: when `the state proceedings [have] ended.' If federal litigation is initiated before state proceedings have ended, then—even if the federal plaintiff expects to lose in state court and hopes to win in federal court—the litigation is parallel, and the Rooker-Feldman doctrine does not deprive the court of jurisdiction").
In determining whether a plaintiff's federal claims are "inextricably intertwined" with a state court decision, a court cannot simply "compare the issues involved in the state-court proceeding to those raised in the federal-court plaintiff.'" Id. at 900 (quoting Kenmen Engineering v. City of Union, 314 F.3d 468, 476 (10th Cir. 2002)). Rather, it must "`pay close attention to the relief sought by the federal-court plaintiff.'" Id. As the Ninth Circuit explained in Worldwide Church of God,
Ironridge argues that Scrips' complaint should be dismissed for lack of subject matter jurisdiction because it is a de facto appeal from a final state court judgment and is thus barred by the Rooker-Feldman doctrine.
While the complaint contains allegations that Ironridge executed a scheme to defraud that induced Scrips to enter into the agreement and stipulation, these allegations appear to form the basis for its Rule 10b-5 claim, as opposed to its breach of contract and breach of the implied covenant/tortious bad faith claims. The Rule 10b-5 claim does not seek to invalidate the parties' agreement or the state court order approving the stipulation that embodied it. Rather, it seeks damages for securities fraud. This is an "independent" claim that is not barred by Rooker-Feldman. See Exxon Mobil, 544 U.S. at 293, 125 S.Ct. 1517 ("If a federal plaintiff `present[s] some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party . . ., then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion,'" quoting GASH Assocs. v. Rosemont, 995 F.2d 726, 728 (7th Cir. 1993), and citing Noel, 341 F.3d at 1163-64); Great Western Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 173 (3d Cir. 2010) (holding, in a case where plaintiff alleged that adverse judgments entered against it in state court were the result of a conspiracy between defendants and the Pennsylvania judiciary, that Rooker-Feldman did not bar the claim because "while Great Western's claim for damages may require review of state-court judgments and even a conclusion that they were erroneous, those judgments would not have to be rejected or overruled for Great Western to prevail").
Similarly, Scrips' breach of contract and breach of the implied covenants claims do not seek to invalidate the parties' agreement, or the stipulated order the state court entered approving the stipulation that embodied it. Rather, they seek damages based on Ironridge's purported breach of the express or implied terms of the agreement and stipulation.
Scrips' declaratory relief claim, however, is of a different character. That claim requests that the court declare that Scrips "has no obligation to meet [Ironridge's] demands [for additional stock] because
Scrips disputes this, arguing that it does not seek to have the court review the state court stipulated judgment, but rather Ironridge's "post-settlement abuse of [that] judgment."
For the reasons stated, the court denies Ironridge's motion to dismiss Scrips' Rule 10b-5, breach of contract, and breach of the covenant/tortious bad faith claims under the Rooker-Feldman doctrine. It also denies Ironridge's request to dismiss Scrips' declaratory relief claim to the extent it seeks a declaration that it is not obligated to issue 1.6 million additional shares of stock to Ironridge as directed by the state court's enforcement order currently on appeal. It grants Ironridge's motion to the extent Scrips seeks a declaration that it be excused altogether from performing under the terms of the stipulated judgment.
Under the doctrine first articulated in Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), federal courts must abstain from hearing cases that would interfere with pending state court proceedings that implicate important state interests. Potrero Hills Landfill, Inc. v. County of Solano, 657 F.3d 876, 881 (9th Cir.2011) (citing Middlesex County Ethics Comm. v. Garden State Bar Ass'n, 457 U.S. 423, 432, 102 S.Ct. 2515, 73 L.Ed.2d 116 (1982)). The doctrine is justified by considerations of comity; "a proper respect for state functions, a recognition of the fact that the entire country is made up of a Union of separate state governments, and a continuance of the belief that the National Government will fare best if the States and their institutions are left free to perform their separate functions in their separate ways." Younger, 401 U.S. at 44, 91 S.Ct. 746.
"Absent `extraordinary circumstances,' abstention in favor of state judicial proceedings is required if the state
While the Supreme Court has never directly addressed the subject, the Ninth Circuit has held "that Younger principles apply to actions at law as well as for injunctive or declaratory relief." Gilbertson, 381 F.3d at 968 (reasoning that "a determination that the federal plaintiff's constitutional rights have been violated would have the same practical effect as a declaration or injunction on pending state proceedings"). If, in a case in which the plaintiff seeks damages, the court determines that the Younger abstention is appropriate, it should stay the matter until the state court proceedings are concluded, rather than dismissing the action. Id. at 981-82.
Ironridge argues that the court should dismiss Scrips' complaint under Younger because this action is "a blatant attempt to interfere with the enforcement of the stipulated judgment."
Ironridge argues that the second threshold requirement is met as well, because the state court enforcement proceeding implicates an important state interest, i.e., the state's "interest in enforcing the orders and judgments of its courts." See Sprint Communications, Inc. v. Jacobs, ___ U.S. ___, 134 S.Ct. 584, 588, 187 L.Ed.2d 505 (2013) (citing Pennzoil Co. v. Texaco Inc., 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987)). Scrips counters that this action does not involve the type of matters that
As the Ninth Circuit has cautioned, however, "[t]aken out of context, these statements suggest that California's interest in enforcing the judgment in this particular case is of sufficient importance to meet Younger's second threshold element." See AmerisourceBergen, 495 F.3d at 1150 (emphasis original). That court has "made it clear that `[t]he importance of the [state's] interest is measured by considering its significance broadly, rather than by focusing on the state's interest in the resolution of an individual case.'" Id. (quoting Baffert v. Cal. Horse Racing Bd., 332 F.3d 613, 618 (9th Cir.2003)); see also Champion Int'l Corp. v. Brown, 731 F.2d 1406, 1408 (9th Cir.1984) ("[A] challenge[ ] [to] only one ... order, not the whole procedure" is "not a substantial enough interference with [a state's] administrative and judicial processes to justify abstention"). "Accordingly, binding [Ninth Circuit] precedent prevents the court from finding that California's interest in enforcing this one particular judgment—as opposed to a state's wholesale interest in preserving its procedure for posting an appeal bond [see Pennzoil Co., 481 U.S. at 12-14, 107 S.Ct. 1519], or its interest in retaining a particular contempt of court scheme [see Juidice v. Vail, 430 U.S. 327, 330, 335, 97 S.Ct. 1211, 51 L.Ed.2d 376 (1977)],—qualifies as sufficiently `important' to satisfy Younger's second threshold element." Id. For this reason, the court cannot dismiss Scrips' complaint based on Younger abstention.
Ironridge next asserts that the action should be dismissed or stayed under Colorado River Water Conservation District v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), which applies "in situations involving the contemporaneous exercise of concurrent jurisdictions [.]" "In Colorado River, the Supreme Court was concerned with the problem posed by the contemporaneous exercise of concurrent jurisdiction by state and federal courts." Smith v. Central Ariz. Water Conservation Dist., 418 F.3d 1028, 1032-33 (9th Cir.2005) (citing Gilbertson, 381 F.3d at 982 n. 17). "In such cases, the Court recognized there may be circumstances in which traditional abstention principles do not apply, yet considerations of wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation, nonetheless justify a decision to stay or dismiss federal proceedings pending resolution of concurrent state court proceedings." Smith, 418 F.3d at 1033 (internal quotation marks and citations omitted). "Such circumstances are, however, exceedingly rare. As [the Ninth Circuit] previously observed, the Colorado River doctrine is a narrow exception to the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." Id.
"To decide whether a particular case presents the exceptional circumstances that warrant a Colorado River stay or dismissal, the district court must carefully consider `both the obligation to exercise jurisdiction and the combination of factors counseling against that exercise.'" R.R. Street & Co. Inc. v. Transport Ins. Co., 656 F.3d 966, 978 (9th Cir. 2011) (quoting Colorado River, 424 U.S. at 818, 96 S.Ct. 1236). The Ninth Circuit has identified eight factors useful in assessing the propriety of a stay or dismissal under Colorado River. These are: "(1) which
As an initial matter, Ironridge seeks a Colorado River stay only as to Scrips' breach of contract, breach of implied covenant/tortious bad faith, and declaratory relief claims. It acknowledges that the state court has no concurrent jurisdiction to hear Scrips' Rule 10b-5 claim, and thus does not seek to have the court should stay that claim. See Intel Corp. v. Advanced Micro Devices, Inc., 12 F.3d 908, 913 n. 7 (9th Cir.1993) ("the circuit courts, and the Ninth Circuit in particular, have uniformly held that a district court may not grant a stay in [cases involving claims subject to exclusive federal jurisdiction]"); Minucci v. Agrama, 868 F.2d 1113, 1115 (9th Cir. 1989) ("the Colorado River doctrine only applies to claims under the concurrent jurisdiction of the federal and state courts");
Silberkleit v. Kantrowitz, 713 F.2d 433, 436 (9th Cir.1983) ("the district court has no discretion to stay proceedings as to claims within exclusive federal jurisdiction under the wise judicial administration exception"); Krieger v. Atheros Communications, Inc., 776 F.Supp.2d 1053, 1058 (N.D.Cal.2011) (holding Colorado River did not apply to claims under the Securities Exchange Act because such claims fall within the exclusive jurisdiction of federal courts).
The Ninth Circuit has not addressed the propriety of issuing a partial Colorado River stay. District courts in the Ninth Circuit have repeatedly found partial stays permissible, however, "where some, but not all, of a federal plaintiff's claims are pending in a parallel state action." Krieger, 776 F.Supp.2d at 1060-61 (staying plaintiff's state law class action claims while permitting federal securities law claims to proceed); see also Taylor v. AlliedBarton Sec. Servs. LP, No. 13-CV-01613-AWI, 2014 WL 1329415, *5 n. 6 (E.D.Cal. Apr. 1, 2014) (observing that "[c]ourts in the Ninth Circuit have [] held that a partial stay of proceedings is authorized under the Colorado River doctrine," and staying state law claims while permitting a Fair Labor Standards Act claim to proceed); Sperber-Porter v. Kell, No. CV-08-01424-PHX-GMS, 2009 WL 1600689, *5 (D.Ariz. June 8, 2009) ("Finally, Plaintiffs do not disagree that the Court's stay of the declaratory judgment claim was proper. Plaintiffs confine their motion to arguing that the Court should not have stayed the breach of contract claim, and Plaintiffs have never disputed that their declaratory judgment claim regarding the meaning of paragraph fifteen of the settlement agreement is identical to
"The threshold question in deciding whether Colorado River abstention is appropriate is whether there are parallel federal and state suits." Chase Brexton Health Services, Inc. v. Maryland, 411 F.3d 457, 463 (4th Cir.2005). In the Ninth Circuit, "exact parallelism [between the two suits] ... is not required. It is enough if the two proceedings are `substantially similar.'" Nakash v. Marciano, 882 F.2d 1411, 1416 (9th Cir.1989); see also County of Marin v. Deloitte Consulting LLP, No. C 11-00381 SI, 2011 WL 3903222, *1 (N.D.Cal. Sept. 6, 2011) ("The threshold for applying the Colorado River doctrine is whether the two cases are substantially similar. Substantial similarity does not mean that the cases must be identical"). This inquiry examines whether the suits involve the same parties and the same claims. See Nakash, 882 F.2d at 1416 ("The present parties are all named in the California suit"); see also Illinois School Dist. Agency v. Pacific Ins. Co., Ltd., 471 F.3d 714, 718 (7th Cir.2006) ("The court also rejected Pacific's argument that the district court should abstain
In determining whether two suits are substantially similar, if the district court has "a substantial doubt as to whether the state proceedings will resolve the federal action [the doubt] precludes the granting of a [Colorado River] stay." Intel Corp. v. Advanced Micro Devices, Inc., 12 F.3d 908, 913 (9th Cir.1993). As the Supreme Court has noted,
For this reason, "[a] district court may enter a Colorado River stay order only if it has `full confidence' that the parallel state proceeding will end the litigation." Intel, 12 F.3d at 913 (citing Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 277, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988)).
The state court action and this action involve the same parties; their respective positions as plaintiff and defendant are simply reversed. The state action does not involve the federal securities claim; as noted, however, the court will not stay that claim. As for the claims that are subject of Ironridge's Colorado River motion—Scrips' breach of contract, breach of implied covenant/tortious bad faith, and declaratory relief claims—the court concludes that the claims are, if not exactly parallel, certainly substantially similar, as the factual basis for all of the claims is nearly identical. Specifically, Scrips' claims in this action assert that Ironridge breached the stipulation's express and implied terms; these are the same claims it raised as a defense to Ironridge's application for an order enforcing the stipulation
The relief Scrips seeks, moreover, also appears to be the substantially identical in both actions. In state court, Scrips seeks, inter alia, to avoid having to issue more shares of stock pursuant to the stipulation. This is what Scrips seeks here as well, in addition to damages for securities fraud and breach of express and implied terms of the parties' agreement. Consequently, it appears the actions are substantially similar, and that the federal action is a "spin-off" of more comprehensive state litigation. See Nakash, 882 F.2d at 1416 (noting that courts "should be particularly reluctant to find that ... actions [a]re not parallel when the federal action [was] but a `spin off' of more comprehensive state litigation"). Because there is substantial overlap between the factual allegations, legal issues, and relief sought in the state and federal actions, the court concludes that the threshold requirement of parallel federal and state actions is met.
"Piecemeal litigation occurs when different tribunals consider the same issue, thereby duplicating efforts and possibly reaching different results." Am. Int'l Underwriters, (Philippines), Inc. v. Continental Ins. Co., 843 F.2d 1253, 1258 (9th Cir.1988). "The mere possibility of piecemeal litigation does not constitute an exceptional circumstance." R.R. Street & Co. Inc., 656 F.3d at 980. Rather, "the case must raise a `special concern about piecemeal litigation,' which can be remedied by staying or dismissing the federal proceeding." Id. (quoting Travelers Indem. Co. v. Madonna, 914 F.2d 1364, 1369 (9th Cir.1990)).
The parties dispute whether the state and federal actions raise the same issues. Ironridge contends that the issues are essentially identical. The state court ordered Scrips to issue 1.6 million shares of stock to Ironridge, and Scrips now seeks declaratory relief, inter alia, that it need not do so; its damages claims, moreover, are based on the fact that it had to
Adjudication of the federal case will unquestionably involve addressing many of the same, if not all of the same, issues that are being litigated in state court. These include whether (1) Ironridge's trading activity was a breach of the express or implied terms of the stipulation; and (2) whether Scrips was required to issue additional shares as contemplated by the contractual formula set forth in the stipulation.
This factor addresses the sequence in which the courts obtained jurisdiction over the action, and examines the relative progress of each case. See R.R. Street & Co., Inc., 656 F.3d at 980; see also Moses H. Cone Mem. Hospital, 460 U.S. at 21, 103 S.Ct. 927 (holding that courts should apply this factor "in a pragmatic, flexible manner with a view to the realities of the case at hand"). "[P]riority should not be measured exclusively by which complaint was filed first, but rather in terms of how much progress has been made in the two actions." Moses H. Cone Mem. Hospital, 460 U.S. at 21, 103 S.Ct. 927.
The state court action was filed on October 11, 2013;
The court addresses these factors in tandem, as they raise overlapping issues. While "the presence of federal-law issues must always be a major consideration weighing against surrender" of jurisdiction, Ironridge does not seek a stay of Scrips' Rule 10b-5 claim. Moses H. Cone Mem. Hospital, 460 U.S. at 25, 103 S.Ct. 927. Scrips' breach of contract, breach of the covenant/tortious bad faith, and declaratory relief claims arise under state law. State law will therefore provide the rule of decision with respect to these claims. The existence of state law issues, by itself, does not outweigh the federal court's obligation to provide a prompt resolution of all the claims before it, state and federal. See Travelers Indem., 914 F.2d at 1370 (stating that the presence of state law issues weighs against jurisdiction only in "`in some rare circumstances,'" and that the fact that the case raised only "routine issues of state law—misrepresentation, breach of fiduciary duty, and breach of contract—which the district court [was] fully capable of deciding" did not reflect such "rare circumstances"). Since Scrips' state law claims involve routine issues of state law that this court is fully capable of deciding, there are no "rare circumstances" here that would justify a stay. See Travelers Indem., 914 F.2d at 1370; Melt Franchising, LLC, 2008 WL 4811097, at *3 (finding this factor weighed against dismissal or stay because state law claims were routine). Accordingly, this factor weighs against staying the federal action.
The next factor asks whether the state court proceeding can adequately protect the rights of the federal litigants. "A district court may not stay or dismiss the federal proceeding if the state proceeding cannot adequately protect the rights of the federal litigants. For example, if there is a possibility that the parties will not be able to raise their claims in the state proceeding, a stay or dismissal is inappropriate." R.R. Street & Co. Inc., 656 F.3d at 981; see also Holder, 305 F.3d at 871 (stating that the state forum was inadequate because the "state court proceedings [would] not reach the key issues that must be adjudicated to get relief"); Travelers Indem., 914 F.2d at 1370 ("This factor involves the state court's adequacy to protect federal rights, not the federal court's adequacy to protect state rights," and "`is more important when it weighs in favor of federal jurisdiction,'" quoting Bethlehem Contracting Co. v. Lehrer/McGovern, Inc., 800 F.2d 325, 328 (2d Cir.1986)); compare American Intern. Underwriters, 843 F.2d at 1259 ("[T]he state court procedure in this case that AIU labels inadequate is nothing more than a set of evidentiary rules AIU does not like. As Continental
Here, Scrips does not contend it is inadequately protected in state court. The Court of Appeal and Superior Court can unquestionably adequately protect its rights. However, the Ninth Circuit "has not applied this factor against the exercise of federal jurisdiction, only in favor of it." Travelers Indem., 914 F.2d at 1370. It has suggested, moreover, that "the possibility that the state court proceeding might adequately protect the interests of the parties is not enough to justify the district court's deference to the state action. This factor, like choice of law, is more important when it weighs in favor of federal jurisdiction." Id. (quoting Bethlehem Contracting Co., 800 F.2d at 328). Thus, because these claims involve state law issues, this factor is of little or no weight here. See id. ("Thus, this factor is of little or no weight here; `unhelpful' is an apt characterization.").
"To avoid forum shopping, courts may consider `the vexatious or reactive nature of either the federal or the state litigation.'" R.R. Street & Co. Inc., 656 F.3d at 981 (quoting Moses H. Cone Mem. Hospital, 460 U.S. at 17 n. 20, 103 S.Ct. 927); see also American Intern. Underwriters, 843 F.2d at 1259 ("After two-and-a-half years, AIU is abandoning its state court case solely because it believes that the Federal Rules of Evidence are more favorable to it than the state evidentiary rules. This epitomizes forum shopping").
Ironridge portrays this action as an egregious example of forum shopping by Scrips. Scrips does not respond directly, but asserts that it filed in federal court because the court has exclusive jurisdiction over its securities fraud claim. As respects Scrips' breach of contract, breach of implied covenant/tortious bad faith, and declaratory relief claims, the reactive nature of the suit suggests forum shopping, as Scrips filed this action only days after it appealed the state court's enforcement order that implicitly rejected claims that Ironridge breached the stipulation's express and implied terms and that required it to issue 1.6 million additional shares of stock. It thus appears that Scrips may have concluded it does not have a good chance of prevailing on appeal and opted to pursue its claims in a new venue. See Conte v. Aargon Agency, Inc., No. 2:12-cv-02811-MCE-DAD, 2013 WL 1907722, *5 (E.D.Cal. May 7, 2013) ("Plaintiff's filing of her class action complaint in this Court appears to be an attempt to forum shop and avoid the state court's adverse ruling. The `reactive nature' of the federal litigation is quite clear because Plaintiff filed her federal action shortly after the state court's ruling denying Plaintiff leave to amend her complaint to add a Section 632 claim.... Thus, it is obvious to the Court that Plaintiff, like [the] plaintiff in Nakash, has become dissatisfied with the state court's decision on the merits of her claim and now seeks a new forum to litigate that claim. The Ninth Circuit and this Court alike have no interest in encouraging Plaintiff's forum shopping practice. Thus, the seventh factor—the desire to avoid forum shopping—weighs strongly in favor of dismissal of the instant federal action"); see also Hume v. Bankhead, 108 F.3d 1385, 1997 WL 121202, *2 (9th Cir. Mar. 17, 1997) (Unpub.Disp.) ("Finally, the nature and timing of Hume's federal action indicates that Hume impermissibly sought to avoid the adverse state court ruling by forum shopping. Here, the state court
The fact Scrips pled a Rule 10b-5 claim in addition to state law claims tempers this conclusion somewhat. See R.R. Street & Co., 656 F.3d at 982 ("Prior to filing the Federal Action, Street/National Union had not previously asserted their claims against Transport, and we are cautious about labeling as `forum shopping' a plaintiff's desire to bring previously unasserted claims in federal court"). Nonetheless, particularly given the timing of the suit, the court concludes that this factor weighs slightly in favor of staying the case.
The last, and most important, factor is whether state court proceedings will conclusively resolve all issues pending in federal court. "[T]he existence of a substantial doubt as to whether the state proceedings will resolve the federal action precludes the granting of a [Colorado River] stay." Intel Corp., 12 F.3d at 913. "When a district court decides to dismiss or stay under Colorado River, it presumably concludes that the parallel state-court litigation will be an adequate vehicle for the complete and prompt resolution of the issues between the parties. If there is any substantial doubt as to this, it would be a serious abuse of discretion to grant the stay or dismissal at all...." Id. (quoting Moses H. Cone Memorial Hospital, 460 U.S. at 28, 103 S.Ct. 927).
The only critical difference the court perceives between the state and federal actions is the presence of a securities fraud claim that cannot be adjudicated in state court. Scrips' declaratory relief claim seeks a declaration that it need not issue any additional shares (including the 1.6 million shares the state court has ordered it to issue) to Ironridge; as respects the 1.6 million shares Scrips is required to issue pursuant to the enforcement order, there is absolute identity between the actions. To the extent the declaratory relief claim seeks a declaration that Scrips need not issue other shares in the future, its claim in this court is not identical to its position in the state court action. Despite this fact, a determination as to whether Ironridge's trading conduct was a breach of the express or implied terms of the stipulation will resolve whether Scrips need issue additional shares as required by the formula set forth in the stipulation, since its only argument that it should not be compelled to do so is that Ironridge breached the express and/or implied contract terms. While Scrips has not asserted counterclaims for breach of contract or breach of the implied covenant in state court, it has raised and litigated all of the issues those claims present—i.e., that Ironridge acted unlawfully under the stipulated judgment. As Ironridge puts it, Scrips "has simply repackaged [its] defenses to the enforcement order as claims for fraud, breach of contract, and bad faith."
"`Res judicata' describes the preclusive effect of a final judgment on the merits. Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them. Collateral estoppel, or issue preclusion, `precludes relitigation of issues argued and decided in prior proceedings.'" Mycogen Corp. v. Monsanto Co., 28 Cal.4th 888, 896, 123 Cal.Rptr.2d 432, 51 P.3d 297 (2002) (quoting Lucido v. Superior Court, 51 Cal.3d 335, 341, 272 Cal.Rptr. 767, 795 P.2d 1223 (1990)). "In the case of issue preclusion, it must appear that the first matter presented some issue that is necessary to the later claim or defense, and that the issue was actually litigated and necessarily decided." See In re Fireside Bank Cases, 187 Cal.App.4th 1120, 1127, 115 Cal.Rptr.3d 80 (2010). Issue preclusion bars later claims based on issues that were raised or could have been raised as affirmative defenses in the former action. See Sutphin v. Speik, 15 Cal.2d 195, 202 (1940) ("[Issue preclusion] also operates to demand of a defendant that all his defenses to the cause of action urged by the plaintiff be asserted under the penalty of forever losing the right to thereafter so urge them," quoting Price v. Sixth District, 201 Cal. 502, 511, 258 P. 387 (1927)); Anolik v. Deatsch, No. C060331, 2010 WL 3002793, *4 (Cal.App. Aug. 2, 2010) (Unpub.Disp.) (affirming the trial court's determination that a retaliatory eviction claim was precluded because in a prior unlawful detainer action, plaintiff, as the defendant, asserted retaliatory eviction as a defense); Snyder v. Ashkenazy Enterprises, Inc., 277 Cal.Rptr. 788, 802 (Cal.App. Jan. 30, 1991) (Unpub.Disp.) (finding that a claim related to compliance with a rent stabilization ordinance had been actually litigated and decided in prior actions because it had been raised as affirmative defense, and holding alternatively that even if the claim "had not been raised as an affirmative defense [in the prior suit], the issue would now be barred since it could have been raised in the prior actions").
Here, Scrips asserted defenses to the enforcement order that included breach of contract and breach of the implied covenant. It argued that Ironridge had violated the "express terms of the settlement" by, inter alia, "short selling, dumping, and/or through other tactics ... artificially depress[ing] the value of Scrips stock, which, in turn, has resulted in larger share issuances to Ironridge under the adjustment feature of the stipulation."
Colorado River and its progeny permit abstention "if [the court] has full confidence that the parallel state proceeding will `be an adequate vehicle for the complete and prompt resolution of the issues between the parties.'" Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 277, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988) (quoting Moses H. Cone Memorial Hospital, 460 U.S. at 28, 103 S.Ct. 927). The court concludes that this standard is met. The appellate court will either affirm the enforcement order, barring relitigation here of Scrips' claims that Ironridge breached the express or implied contract terms, or reverse, holding that Scrips has no obligation to issue the shares because of Ironridge's breach. The state court's determination will also resolve Scrips' declaratory relief claim, which is premised on allegations that Ironridge breached the stipulation. The state court will expressly decide whether Scrips must issue the 1.6 million shares that are the subject of the enforcement order, and the basis for this decision will control whether Scrips must perform according to the formula in the stipulation in the future as well. Thus, the issues underlying the federal claims will be fully and finally resolved by the state court. For this reason, there is no substantial doubt that the state court action will resolve all of the issues raised by Scrips' breach of contract, breach of the covenant/tortious bad faith, and declaratory relief claims.
In sum, Scrips' state law claims in this action are nearly identical to the issues it raised in opposition to Ironridge's application for an order enforcing the stipulation and compelling the issuance of 1.6 million additional shares of Scrips stock. That application was filed, was decided on the merits in the trial court, and was appealed before this action was commenced. Final decision of the state court action will resolve whether Ironridge breached the express terms of the stipulation and/or the covenant of good faith and fair dealing implied therein. That determination will resolve whether Scrips must issue the additional 1.6 million shares that are the subject of the enforcement order, and/or other shares in the future pursuant to the formula in the stipulation. Exercising jurisdiction over Scrips' breach of contract, breach of implied covenant/tortious bad faith and declaratory relief claims would therefore result in needlessly duplicative effort and present the potential for conflicting state and federal judgments on the same issues. While there is no strong federal policy against piecemeal litigation in this instance, there is some indication that Scrips filed this action to forum shop following an adverse ruling by the state trial court. On balance, therefore, the court concludes that it is appropriate to stay Scrips' claims for breach of contract, breach of the covenant/tortious bad faith, and declaratory relief under the Colorado River doctrine.
Ironridge argues that Scrips' Rule 10b-5 claim fails for several reasons. First, it
"A securities fraud complaint under § 10(b) and Rule 10b-5 must satisfy the dual pleading requisites of Federal Rule of Civil Procedure 9(b) and the [Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4]." In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir.2012). Rule 9(b) of the Federal Rules of Civil Procedure provides that the "circumstances constituting fraud or mistake shall be stated with particularity." FED. R. CIV. PROC. 9(b). "Generally, 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." See Cirulli v. Hyundai Motor Co., No. SACV 08-0854 AG (MLGx), 2009 WL 5788762, *4 (C.D. Cal. June 12, 2009) (citing In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1547-49 (9th Cir. 1994) (en banc); Lancaster Community Hospital v. Antelope Valley Hosp. Dist., 940 F.2d 397, 405 (9th Cir.1991)); see also Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir.2007) ("Generally, a plaintiff must plead the "time, place, and specific content" of allegedly fraudulent conduct to satisfy Rule 9(b)").
Thus, a securities fraud claim cannot survive a motion to dismiss merely by alleging that certain statements were false. Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 2008) ("A litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false, does not meet th[e Rule 9(b)] standard"); see also In re Oracle Corp. Securities Litigation, 627 F.3d 376, 390 (9th Cir.2010) ("Plaintiffs must `demonstrate that a particular statement, when read in light of all the information then available to the market, or a failure to disclose particular information, conveyed a false or misleading impression,'" quoting In re Convergent Technologies Securities Litigation, 948 F.2d 507, 512 (9th Cir. 1991)). Rather, the complaint must allege "why the disputed statement was untrue or misleading when made." In re Glen-Fed Inc. Securities Litigation, 42 F.3d 1541, 1549 (9th Cir.1994) (en banc) (emphasis added). It must also provide specifics concerning who made the statement and when it was made.
In 1995, Congress passed the PSLRA, which amended the Securities Exchange Act of 1934. The PSLRA modified Rule 9(b)'s particularity requirement, "providing that a securities fraud complaint [must] identify: (1) each statement alleged to have been misleading; (2) the reason or reasons why the statement is misleading; and (3) all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); see In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 996 (9th Cir.1999). The statute requires that, in pleading that each allegedly misleading statement or omission was made with scienter, the plaintiff "state with particularity ... facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). If the complaint does not contain such allegations, it must be dismissed. 15 U.S.C. § 78u-4(b) (3)(A).
Rule 10b-5, promulgated by the Securities and Exchange Commission pursuant to section 10(b) of the 1934 Act, makes it unlawful for any person to use "manipulative or deceptive device[s]" in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b). Specifically, one cannot "(a) ... employ any device, scheme, or artifice to defraud; (b) ... make any untrue statement of a material fact or 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) ... 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.
"Regardless of whether a § 10(b) plaintiff alleges a misrepresentation, omission, or manipulation, he must plead and prove the following elements: (1) ... use or employ[ment of] a[ ] manipulative or deceptive device or contrivance; (2) scienter, i.e.[,] [a] wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to ... as transaction causation; (5) economic loss; and (6) loss causation, i.e. [,] a causal connection between the manipulative or deceptive device or contrivance and the loss." Desai v. Deutsche Bank Secs. Ltd., 573 F.3d 931, 939 (9th Cir.2009) (internal quotation marks omitted); see also Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1047 (9th Cir.2006), vacated on other grounds by Avis Budget Group, Inc. v. Cal. State Teachers' Ret. Sys., 552 U.S. 1162, 128 S.Ct. 1119, 169 L.Ed.2d 945 (2008).
In addition to pleading falsity adequately, the pleading must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). "Scienter" refers to "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The Ninth Circuit has articulated a "two-part inquiry for scienter: first, [the court must] determine
The Ninth Circuit has emphasized that, to allege scienter, "plaintiffs `must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.'" Middlesex Retirement System v. Quest Software Inc., 527 F.Supp.2d 1164, 1179 (C.D.Cal.2007) (quoting Silicon Graphics, 183 F.3d at 974); see also Silicon Graphics, 183 F.3d at 977 ("recklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct"). The requisite state of mind must be a "`departure from the standards of ordinary care [that] presents a danger of misleading buyers that is either known to the defendant or so obvious that the actor must have been aware of it.'" Zucco Partners, 552 F.3d at 991 (quoting Silicon Graphics, 183 F.3d at 984). If plaintiff relies on allegations of recklessness, the pleading standard requires that it "state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent." Silicon Graphics, 183 F.3d at 979. Allegations of mere negligence are insufficient. Glazer Capital Management, LP v. Magistri, 549 F.3d 736, 748 (9th Cir.2008) ("At most, it creates the inference that he should have known of the violations. This is not sufficient to meet the stringent scienter pleading requirements of the PSLRA"); Police Retirement Systems of St. Louis v. Intuitive Surgical, Inc., No. 10-CV-03451-LHK, 2011 WL 3501733, *7 (N.D.Cal. Aug. 10, 2011) ("[T]he Ninth Circuit defines `recklessness' as a highly unreasonable omission [or misrepresentation], 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").
"To qualify as `strong' within the intendment of ... the PSLRA ... an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 314, 127 S.Ct. 2499 (emphasis added). "[C]ourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss.... The inquiry ... is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 322-23, 127 S.Ct. 2499 (emphasis original).
In determining whether a plaintiff has alleged facts giving rise to a strong inference of scienter, the court must draw all reasonable inferences from the allegations presented, including inferences unfavorable to plaintiffs. Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002). "However, the `inference that the defendant acted with scienter need not be irrefutable, i.e., of the "smoking-gun" genre, or even the "most plausible of competing inferences." ... [T]he inference of scienter must be more than merely "reasonable" or "permissible[,]" [however]—it
The Ninth Circuit often treats the falsity and scienter analyses as "a single inquiry, because falsity and scienter are generally inferred from the same set of facts." In re New Century, 588 F.Supp.2d 1206, 1227 (C.D.Cal.2008) (citing In re Read-Rite Corp., 335 F.3d 843, 846 (9th Cir.2003), abrogated by Tellabs on other grounds, as recognized in South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir.2008), and Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir.2001)). The court therefore analyzes Scrips' falsity and scienter allegations in tandem below.
Ironridge argues that Scrips fails to identify any false or misleading statements, or to explain why its actions or statements were purportedly false.
Scrips does not respond to these arguments; it contends instead that its allegations concern market manipulation.
Scrips pleads only that Ironridge sold more shares than it purportedly agreed to sell within a given period, which violated an alleged oral agreement not to sell an amount of Scrips stock that exceeded 10 % of the total shares traded on any given day. Deception arises when an investor is erroneously led to believe that the price of the security in question is driven by the "`natural interplay of supply and demand, not rigged by manipulators.'" Desai, 573 F.3d at 944 (quoting Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir.1999)). "[N]ondisclosure is usually essential to the success of a manipulative scheme." Santa Fe Indus., Inc., 430 U.S. at 477, 97 S.Ct. 1292; see also In re UBS Auction Rate Sec. Litig., No. 08-CV-2967(LMM), 2010 WL 2541166, *17 (S.D.N.Y. June 10, 2010) (same). Thus, "[t]he market is not mis[led] when a transaction's terms are fully disclosed." See In re Bank of Am. Corp., No. 09-MD-02014 JSW, 2011 WL 740902, *7 (N.D.Cal. Feb. 24, 2011) (citing In re Merrill Lynch Auction Rate Sec. Litig., 704 F.Supp.2d 378, 390 (S.D.N.Y.2010) (internal quotation marks omitted)).
Here, the terms of the parties' agreement were disclosed in filings in the state court action—specifically, the stipulated judgment. As a result, Scrips—whose board approved the agreement and stipulation, and whose CEO stated that the terms of the stipulated agreement were fair cannot contend that the transaction's terms were not fully disclosed. The parties' agreement, and hence the stipulated judgment, placed no cap on the number of Scrips shares Ironridge could sell in any given period; it provided, in fact, that the shares were "unrestricted" and "freely tradable," and that Ironridge could "sell any of its shares of [Scrips] common stock issued pursuant to the [settlement] at any time."
S.E.C. v. Ficeto, 839 F.Supp.2d 1101 (C.D.Cal.2011), and S.E.C. v. Masri, 523 F.Supp.2d 361 (S.D.N.Y.2007), cited by Scrips, do not compel a different result. In Ficeto, the SEC alleged that defendants had engaged in "matched orders," "marking the close" transactions, and wash trades—techniques that are "intended to mislead investors by artificially affecting market activity." 839 F.Supp.2d at 1104. The SEC asserted that defendants carried out matched orders and wash trades by directing traders to execute buy and sell orders for stocks at specific times and in specific quantities; they used multiple brokers to buy and sell the same shares, and then reported the trades to FINRA, which publicly disseminated the trading price and volume to the market. This, in turn, gave the false impression of high trading volume when in fact the shares remained in the same hands. As a result of their actions, defendants allegedly made millions of dollars from stock sales, sales credits, commissions, and fees. Id. By contrast, here, Scrips alleges only that it was misled by Ironridge's statements and assurances regarding the amount of stock it would sell in a given period—statements that were not contained in the stipulated judgment or known to the market trading in its stock. Scrips does not complain that investors in its stock were misled as to the effect of Ironridge's trading activity. See
Masri is no more helpful. First, it is an out-of-circuit district court case that is not binding on the court. Second, Scrips' allegations are quite different than those the SEC made in Masri. There, the SEC pled facts showing that defendants had engaged in "marking the close" transactions, i.e., "the practice of repeatedly executing the last transaction of the day in a security in order to affect its closing price." Masri, 523 F.Supp.2d at 369. After surveying the law, the court concluded "that if an investor conducts an open—market transaction with the intent of artificially affecting the price of the security, and not for any legitimate economic reason, it can constitute market manipulation." Id. at 372. The court therefore held that "[a]llegations of other deceptive conduct or features of the transaction are only required to the extent that they render plausible allegations of manipulative intent." Id. It noted that "the SEC alleged that (1) defendants conducted activity within several minutes of the close of trade; (2) the transactions constituted a large majority of the purchases that day; (3) [an individual defendant] had outstanding put options expiring that day that he did not wish to be assigned; and (4) by purchasing 200,000 shares, he was able to avoid . . . assignment of these options." Id. It found these allegations sufficiently indicative of manipulative intent to state a claim for market manipulation. Scrips does not allege similar facts indicative of manipulative intent here. It merely alleges that Ironridge sold more shares of its stock than it represented it would sell before the parties entered into the stipulation. Absent additional factual allegations, the court cannot conclude that Scrips has adequately alleged that Ironridge engaged in market manipulation. This is particularly true in light of the fact that the stipulated judgment disclosed the fact that Ironridge could sell any of its Scrips stock at any time. Masri, therefore, is inapposite. Because Scrips does not allege with particularity conduct constituting market manipulation, as that term is defined for purposes of securities fraud claims, its Rule 10b-5 claim must be dismissed as inadequately pled.
Ironridge also contends that Scrip fails adequately to allege reliance. "Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action. It ensures that, for liability to arise, the `requisite causal connection between a defendant's misrepresentation and a plaintiff's injury' exists as a predicate for liability." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)); Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1159 (9th Cir.1996) ("Justifiable reliance `is a limitation on a rule 10b-5 action which insures that there is a causal connection between the misrepresentation and the plaintiff's harm,'" quoting Atari Corp. v. Ernst & Whinney,
Ironridge maintains that Scrips cannot plead reliance because it admitted in the stipulation on which the state court entered judgment that it was "advised as to the terms and legal effects" of the stipulation, and that Ironridge did not "make or has not made any representations or warranties other than those specifically set forth [in the stipulation]."
The court agrees that Scrips cannot plead reliance based on the facts alleged. The stipulation states that it contains all relevant representations and warranties; none of its provisions restricts Ironridge from selling the shares Scrips issued to it. For that reason, Scrips cannot plead reliance on Ironridge's allegedly fraudulent statements. See Bank of the West v. Valley Nat'l Bank of Arizona, 41 F.3d 471, 476 (9th Cir.1994) (concluding that plaintiff had not shown reasonable reliance where plaintiff represented in an agreement that it had "independently and without reliance upon any representations of [the lead bank] made . . . relied upon [its] own credit analysis and judgment" because such language "implie[d] that, to the extent that it did rely on [the lead bank's conflicting representations], [the participating bank's] reliance was not justifiable," and holding that "the contract could and did control whether such reliance would be justifiable' for purposes of a fraud claim" (emphasis added));
The same is true with respect to Scrips' contention that Ironridge engaged in market manipulation. To plead reliance adequately for purposes of a market manipulation claim, plaintiff must allege that it relied on "an assumption of an efficient market free of manipulation." See ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101 (2d Cir.2007) ("Market manipulation requires a plaintiff to allege (1) manipulative acts; (2) damage (3) caused by reliance on an assumption of an efficient market free of manipulation; (4) scienter; (5) in connection with the purchase or sale of securities; (6) furthered by the defendant's use of the mails or any facility of a national securities exchange."); see also In re Bank of America Corp., No. 09-md-02014 JSW, 2011 WL 740902, *7 (N.D.Cal. Feb. 24, 2011) ("Deception arises when an investor is erroneously lead to believe that the prices for the security in question are driven by the `natural interplay of supply and demand, not rigged by manipulators'" (citations and quotation marks omitted)). Scrips does not allege that it was damaged because it assumed and relied on an efficient market free of manipulation; it contends it was defrauded by Ironridge and suffered damages as a result of Ironridge's breach of the stipulation and tortious bad faith. For that reason, the court concludes that Scrips does not adequately plead reliance under either a misrepresentation or manipulation theory. Its Rule 10b-5 claim must be dismissed for this reason as well.
Ironridge next contends that Scrips' scienter allegations are entirely conclusory. Specifically, it asserts that Scrips does not plead any facts giving rise to a strong inference of fraudulent intent, and that it cannot do so given the content of the stipulated judgment. In response, Scrips does not cite any allegations of scienter, or particular facts giving rise to a strong inference of scienter, as required by PSLRA. See Tellabs, 551 U.S. at 314, 127 S.Ct. 2499 ("A complaint will survive only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any plausible opposing inference one could draw from the facts alleged"); Oklahoma Firefighters Pension & Ret. Sys. v. IXIA, No. CV 13-08440 MMM-SHX, 50 F.Supp.3d 1328, 1352,
The complaint is replete with allegations of a "scheme to defraud and manipulate,"
The few facts Scrips pleads regarding scienter, even in combination, do not support a strong inference of scienter. Given the disclosures in the stipulation, the more compelling inherence is that Ironridge did not intend to deceive, and that Scrips knew—or should have known—the nature of the transaction into which it had entered. Holistic review therefore does not demonstrate that it has sufficiently pled scienter. See In re Verifone Holdings, Inc. Sec. Litig., No. CV 07-06140 MHP, 2009 WL 1458211, *10 (N.D.Cal. May 26, 2009) ("There are many allegations in this case, but they fare no better when read in combination than when read independently").
For the reasons stated, the court denies Ironridge's motion to dismiss Scrips' claims for breach of contract and breach of the implied covenant/tortious bad faith under the Rooker—Feldman doctrine. It grants Ironridge's motion to dismiss Scrips' claim for declaratory relief under Rooker—Feldman to the extent Scrips seeks a declaration that it is excused from performing generally under the stipulation. It denies the motion as to the balance of the declaratory relief claim. The court denies Ironridge's motion to dismiss based on Younger abstention in its entirety. The court grants Ironridge's motion to stay Scrips' breach of contract, breach of implied covenant/tortious bad faith, and declaratory relief claims under Colorado River, and grants Ironridge's motion to dismiss Scrips' Rule 10b-5 claim.
As this is the first time the court has had an opportunity to pass on the adequacy of Scrips' Rul 10b-5 claim, and Scrips may be able to amend the claim to allege a plausible claim for relief, the court grants Scrips leave to amend that claim. See Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1051 (9th Cir.2008) ("Dismissal without leave to amend is proper if it is clear that the complaint could not be saved by amendment"); California ex rel. California Department of Toxic Substances Control v. Neville Chemical Co., 358 F.3d 661, 673 (9th Cir.2004) ("[D]enial of leave to amend is appropriate if the amendment
Scrips may not plead additional claims or add allegations except those intended to cure the defects identified in its Rule 10b-5 claim. Should Scrips' amended complaint exceed the scope of leave to amend granted by this order, the court will strike the offending portions from the pleading under Rule 12(f). See FED.R.CIV.PROC. 12(f) ("The court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. The court may act: (1) on its own; or (2) on motion made by a party either before responding to the pleading or, if a response is not allowed, within 21 days after being served with the pleading."); see also Barker v. Avila, No. 2:09-cv-00001-GEB-JFM, 2010 WL 3171067, *1-2 (E.D.Cal. Aug. 11, 2010) (striking an amendment to federal law claim where the court had granted leave to amend only state law claims).
Scrips' request for a declaration that it need not issue the additional 1.6 million shares that are the subject of the enforcement order, by contrast, would be the type of federal court involvement of which Younger disapproves. See Alsager v. Bd. of Osteopathic Med. & Surgery, 573 Fed.Appx. 619, 621 (9th Cir.2014) ("Alsager's federal complaint seeks a declaration that the investigatory component of Washington's disciplinary process is unconstitutional and an injunction barring the use of certain information in the disciplinary proceedings. Either form of relief would `enjoin, declare invalid, or otherwise involve the federal courts' in the proceedings against him"). Because the stipulation does not implicate an important state interest, however, Ironridge's motion to dismiss on Younger abstention grounds must be denied.
Ironridge contends that Scrips' only allegation concerning loss causation is that "[a]s a direct and proximate result of the wrongful conduct of [Ironridge], [Scrips] suffered damages." (Complaint, ¶ 40.) Scrips, however, also alleges that Ironridge's scheme "successfully reduced the market price of [Scrips stock], which had been in the range of 15 cents ($.15) on day of delivery of stock, to the range of ten cents ($.10) and below in April 2014." (Id., ¶ 23.) It also alleges that there "was no economic basis for this reduction" and that it was "purely generated" by Ironridge's sales. (Id.) Had Scrips adequately alleged any of the other elements of a Rule 10b-5 claim, the court could not say that this allegation fails to "provide[ ] [Ironridge] with notice of what the relevant economic loss might be or of what the causal connection might be between that loss and the misrepresentation." Metzler, 540 F.3d at 1062. For that reason, the court declines to dismiss Scrips' Rule 10b-5 claim on this basis. Because the claim is not adequately pled for other reasons, however, it must nonetheless be dismissed.
