Securities And Exchange Commission v. Imran Husain et al

NOTICE OF MOTION AND MOTION to Dismiss Case Complaint Pursuant to Fed.R.Civ.P. 12

C.D. Cal.August 10, 2016

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 GEORGE B. NEWHOUSE, JR. (SBN 107036) george.newhouse@dentons.com KELLY R. GRAF (SBN 301325) kelly.graf@dentons.com DENTONS US LLP 601 South Figueroa Street, Suite 2500 Los Angeles, California 90017-5704 Telephone: (213) 623-9300 Facsimile: (213) 623-9924 Attorneys for Defendant IMRAN HUSAIN UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. IMRAN HUSAIN and GREGG EVAN JACLIN, Defendants. No. CV 16-03250 ODW (Ex) DEFENDANT IMRAN HUSAIN’S NOTICE OF MOTION AND MOTION TO DISMISS COMPLAINT PURSUANT TO FED.R.CIV.P 12(b)(6); AND MOTION TO STRIKE PURSUANT TO FED.R.CIV.P 12(f); MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT Hearing Date: September 26, 2016 Time: 1:30pm Courtroom: 11 Complaint Served: May 12, 2016 Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 1 of 21 Page ID #:97 - ii - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 TO THE COURT, ALL PARTIES AND THEIR COUNSEL OF RECORD: Take notice that on September 26, 2016 before the Honorable Otis D. Wright, II, in Courtroom 11 of the Spring Street Courthouse of the United States Central District of California, 312 N Spring St, Los Angeles, CA 90012 at 1:30 p.m., or as soon thereafter as counsel may be heard, Defendant Imran Husain will and hereby does respectfully move the Court to dismiss Claims Two, Three, Five and Six of the Securities and Exchange Commission’s Complaint pursuant to Federal Rules of Civil Procedure and 12(b)(6) for failure to state a claim upon which relief can be granted. Pursuant to Fed.R.Civ.P. 12(f), Mr. Husain also respectfully moves to strike all allegations in the complaint pertaining to conduct that occurred before May 12, 2011 because such transactions are barred by the statute of limitations, and therefore may not be the subject of an action seeking fines, forfeiture or disgorgement under applicable law. Pursuant to Local Rule 7-3 and this Court’s Standing Order, counsel for Mr. Husain met and conferred via phone with counsel for the Securities and Exchange Commission at least five days prior to the last day for filing the motion, on August 1, 2016. Both the substance and potential resolutions to this motion were discussed, but the discussion with opposing counsel did not resolve the issues presented by this motion. As set forth in the accompanying memorandum of points and authorities, there is good cause for the relief requested. The SEC in the Complaint fails to describe the alleged fraudulent conduct with the requisite specificity, leaving questions as to who exactly was defrauded, when exactly the supposed fraudulent misrepresentations took place, where they took place, the specific nature of the supposed fraudulent misrepresentations, how the supposed misrepresentations were made, and, most importantly, what actions or omissions Mr. Husain allegedly committed. Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 2 of 21 Page ID #:98 - iii - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 This motion is based on this Notice of Motion and Motion to Dismiss; the accompanying Memorandum of Points of Authorities; the pleadings and papers filed in this action; and such further argument and matters as may be offered at the time of the hearing of this Motion. Dated: August 10, 2016 Respectfully Submitted, DENTONS US LLP By: /s/George R. Newhouse, Jr. George B. Newhouse, Jr. Attorneys for Defendant IMRAN HUSAIN Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 3 of 21 Page ID #:99 -i- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 TABLE OF CONTENTS I. INTRODUCTION..................................................................................................1 II. FACTUAL BACKGROUND: ALLEGATIONS IN COMPLAINT RELEVANT TO THIS MOTION....................................................................3 III. ARGUMENT.......................................................................................................9 A. Counts II, III, V and VI of the Complaint Should Be Dismissed for Failure to State a Claim Pursuant to Rule 12(b)(6) and Failing to Comply with Rule 9(b)’s Pleading Standards .......................9 1. 12(b)(6) Legal Standard...............................................................9 2. Rule 9(b) Pleading Standard........................................................9 B. Counts II, III, V & VI of the Complaint Must Be Dismissed as the Allegations of the Complaint Make Clear That Any Fraud or Deceit Was Directed Solely at the SEC In Connection with the S-1 Registration Statements; the Defendants Did Not Engage in Acts or Practices or a Course of Conduct Which Operated as a Fraud or Deceit With Respect to or in Connection with the Sales or Offering of Shares of the So-Called Shell Companies....................10 1. Elements of Second Claim - Section 17(a) of the Securities Act ...................................................................................................10 2. Elements of Third Claim - Section 10(b) of the Exchange Act 10 3. Elements of Fifth and Sixth Claims - Aiding and Abetting Violations of Anti-Fraud Provisions of the Securities Laws.....11 4. In the Second, Third, Fifth, and Sixth Claims, the SEC Fails to Allege Facts Sufficient To Justify an Inference that Mr. Husain Engaged in Acts, Practices or Course of Business that Operated as a Fraud or Deceit in Connection with the Offer or Sales of Shares of the So-Called Shell Companies .................................11 C. The Court Should Strike Allegations Relating to Transactions that Occurred Prior to May 12, 2011 Because the SEC’s Claims for Civil Penalties and Disgorgement Are Subject to the Limitations Period Imposed by 28 U.S.C. § 2462 and Cannot Be Tolled by the Discovery Rule. .............................................................12 D. The Court Should Dismiss With Prejudice and Without Leave to Amend Because There Is No Reason to Believe That the SEC Has Not Pleaded All Possible Facts to Support Its Claims or That Further Discovery Will Reveal More Factual Support ...............14 IV. CONCLUSION .................................................................................................15 Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 4 of 21 Page ID #:100 - ii - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 TABLE OF AUTHORITIES Cases Page(s) Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009) ........................................................................................... 9 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .............................................................................................. 9 Chill v. Gen Elec., 101 F.3d 263 (2d Cir. 1996) ................................................................................ 15 Clegg v. Cult Awareness Network, 18 F.3d 752 (9th Cir. 1994) ................................................................................... 9 Dura Pharm v. Broudo, 544 U.S. 336 (2005) ............................................................................................ 12 Fantasy, Inc. v . Fogerty, 984 F. 2d 1524 (9th Cir. 1993)............................................................................ 13 In re Fin. Corp. of Am. S’holder Litig., 796 F.2d 1126 (9th Cir. 1986)............................................................................. 12 Gabelli v. SEC, 133 S. Ct. 1216 (2013) .................................................................................... 2, 13 Gebhart v. SEC., 595 F.3d 1034 (9th Cir. 2010)............................................................................. 11 Jarvis v. Regan, 833 F.2d 149 (9th Cit. 1987) ............................................................................... 14 Ponce v. SEC, 345 F.3d 722 (9th Cir.2003) ................................................................................ 11 Reddy v. Litton Indus., 912 F.2d 291 (9th Cir. 1990) ............................................................................... 15 SEC v. Daifotis, No. C 11-00137-WHA, 2011 WL 3295139 (N.D.Cal. Aug.1, 2011)................. 10 SEC v. Fehn, 97 F.3d 1276 (9th Cir. 1996) ............................................................................... 11 Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 5 of 21 Page ID #:101 - iii - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 SEC v. Fraser, 2009 WL 2450508 (D. Ariz. 2009) ..................................................................... 10 SEC v. Graham, 2016 WL 3033605 (11th Cir. 2016)................................................................ 2, 14 SEC v. McCarthy, 322 F.3d 650 (9th Cir. 2003) ............................................................................... 14 SEC v. Sands, 902 F. Supp. 1149 (C.D. Cal. 1995).................................................................... 13 Vess v. Ciba-Geigy Corp., U.S.A., 317 F.3d 1097 (9th Cir. 2003) .............................................................................. 10 Statutes 15 U.S.C.A. § 77(e)(a), 77(e)(c), and 77q(a) .................................................2, 10, 12 15 U.S.C.A. § 77q..................................................................................................... 10 15 U.S.C.A. § 78j...................................................................................................... 11 15 U.S.C.A. § 78j(b), 78t(a) ....................................................................................... 2 15 U.S.C. § 78u(a)(1), (b)......................................................................................... 15 28 U.S.C. § 2462....................................................................................................... 13 Other Authorities 17 C.F.R. § 240.10b-5.............................................................................................. 11 17 C.F.R. § 240.10b-5(a)-(c) ................................................................................ 2, 11 Fed. R. Civ. P. 8(a)(2)................................................................................................. 9 Fed.R.Civ. P. 9(b) .............................................................................................1, 9, 10 Fed.R. Civ.P. 12(b)(6) ................................................................................1, 9, 10, 15 Fed.R.Civ.P. 12(f)...........................................................................................2, 13, 15 Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 6 of 21 Page ID #:102 -1- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION Defendant Imran Husain respectfully moves to dismiss Claims Two, Three, Five and Six of the Securities and Exchange Commission’s (“SEC”) Complaint pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). The Complaint alleges, in considerable detail, that Mr. Husain, engaged in a so-called “fraudulent ‘shell factory’ enterprise” in which he, along with co-defendant attorney Gregg Evan Jaclin (“Attorney Jaclin”) “creat[ed] and [sold] public ‘shell’ companies to people who, for whatever reason, need[ed] publicly-traded companies . . .[without a] real business or purpose.” (Complaint ¶4.)1 The persons or entities who acquired the so- called “Shell Companies” were not deceived by any conduct or statement made by defendants Husain or Attorney Jaclin, and were not made in connection or associated with, any offer, purchase or sale of a security, a necessary predicate for liability under the anti-fraud provisions charged in the Complaint. 1 Defendant does not admit or concede that the allegations in the Complaint are true, but for the purpose of this motion Defendant must assume the truth of well- plead allegations. The Complaint alleges in copious detail the “the defendants’ shell factory scheme followed a routine pattern” which involved the creation of a sham business plan, appointment of a “puppet CEO” to run each company, creation of sham shareholders (called “Straw Shareholders”) and formulation of a “sham private” placement offering of the company’s shares to approximately 35 purchasers (e.g. the “Straw Shareholders”), followed by bogus filing with the SEC of a S-1 Registration Statement. (Complaint ¶ 5.) The Complaint makes clear that the S-1’s and subsequent public filings with the SEC contained “misleading statements concerning the company’s management, business plans[s] and Straw Shareholders.” (Id. at 6). The upshot of the “fraud” was on the SEC not the investing public. Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 7 of 21 Page ID #:103 - 2 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 Accordingly, the claims Mr. Husain moves to dismiss for failure to state a claim on which relief can be granted are as follows:  Claim Two (violations antifraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. §§ 77(e)(a), 77(e)(c), and 77q(a));  Claim Three (violations of the antifraud provisions of the Section 10(b) and the control person provisions of Section 20(a), of the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a) and Rule 10b-5(a)-(c) thereunder, 17 C.F.R. § 240.10b-5(a)-(c));  Claim Five (aiding and abetting the public shell companies’ violations of Section 17(a) of the Securities Act);  Claim Six (aiding and abetting the shell company purchasers’ violations of Sections 10(b) of the Exchange Act and Rule 10b-5). In the Complaint, the SEC seeks disgorgement, pre-judgment interest, civil penalties, and injunctive relief. As for certain transactions, however, two of the Shell Companies involved acts, occurrences and omissions that occurred after the expiration of the applicable five year statute of limitations.2 References to those “Shell Companies” therefore are subject to being stricken under Fed.R.Civ.P. 12(f) as such transactions are irrelevant, “impertinent “ and “immaterial” to any relief sought by the SEC against Mr. Husain. See SEC v. Graham, 2016 WL 3033605 (11th Cir. 2016) (section 2462’s statute of limitations applies to actions by SEC seeking disgorgement); see also Gabelli v. SEC, 133 S. Ct. 1216 (2013). In short, the anti-fraud provisions of the Securities laws that form the basis for Claims Two, Three, Five & Six fail because there is no credible allegation that any fraud, deceit or “devices, schemes or artifices to defraud” implemented by the 2 All references to companies created or sold by Mr. Husain before May 12, 2011 should be stricken from the complaint because they are outside the applicable statute of limitations for any type of damages the SEC is seeking in this action. See discussion at p. 15-17, infra. Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 8 of 21 Page ID #:104 - 3 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 Defendants were made in connection with “an offer or sale of securities.” The SEC’s Complaint is quite clear that the “fraud” allegedly committed by Attorney Jaclin and Husain was a fraud on the regulatory agency, the SEC, not any purchaser or seller of a security, or even on the markets in general. To the extent that there exists a bare-bones allegation about sales of shares of one or more of the Shell Companies (see e.g. Complaint ¶ 92), the allegations are vague, highly ambiguous and fatally unspecific. In short, Plaintiff SEC cannot maintain these claims against Mr. Husain because they have failed to plead that any fraud alleged occurred in connection with the sale of securities because the defrauded party in this case was the SEC, not any shareholder or prospective purchaser or seller of securities. The anti-fraud provisions simply do not apply, and the counts alleging such violations therefore must be dismissed. II. FACTUAL BACKGROUND: ALLEGATIONS IN COMPLAINT RELEVANT TO THIS MOTION The Complaint arises from an alleged fraud on a regulatory agency, the SEC, to induce SEC to approve various S-1 registration statements filed with the Commission by Attorney Jaclin, acting as counsel, for purposes of allowing several small, closely held corporations (the “Shell Companies”), allegedly controlled by Husain to trade their shares of stock on pubic exchanges. (Complaint ¶¶ 5-6.) 3 The SEC alleges that Husain “is in the business of starting [or acquiring] companies, taking them public, and selling them to purchasers seeking to acquire public companies.” (Complaint ¶ 12.) There is nothing illegal or wrong with that. In order to obtain regulatory approval, however, to take the companies public under the securities laws, the Complaint alleges that the S-1 “registration statements 3 As stated above, for purposes of this motion to dismiss, the well pleaded facts alleged in the Complaint are presumed true, and defendant acknowledges that presumption without admitting the truth of the allegations. Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 9 of 21 Page ID #:105 - 4 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 [prepared by Husain and co-conspirator, Attorney Greg Jaclin] made materially false and misleading statements concerning the companies’ management, business plan and Straw Shareholders.” (Complaint ¶ 6.) The principal “fraud” however, as alleged by the Complaint, was Husain’s failure to disclose in the S-1’s or subsequent SEC filings by and on behalf of the Shell corporations on whose behalf Husain acted as a “controlling person,” that Husain’s role underlying the organization and operations of each company was significant and undisclosed. The Complaint alleges, for example that each Shell Company falsely asserted that a “puppet CEO” was running the company, and that, by design, “there was no mention of Husain’s role as the control person and promoter of the shell company, or the puppet CEO was the CEO in name only.” (Complaint ¶59.) Between 2006 and 2013, Husain and Attorney Jaclin created nine such Shell Companies subsequently selling seven of them to persons or entities in the market for a shell company that was able to sell its stock “publicly,” and that shortly after acquiring the Shell Company, the acquiring company would effect a “reverse merger” with the larger, non-public corporation. (Id.) Husain would create a business plan, and convince a friend, friend of a friend, relative or acquaintance to be a puppet CEO for the Shell Company. (Complaint ¶¶ 5, 33-34.) Husain would select a business plan for the Shell Company, and then Attorney Jaclin would incorporate the company. (Complaint ¶ 36.) After the company was incorporated, Husain would organize a private placement of the company’s stock to a group of about 35 purchasers, the so-called “Straw Shareholders”. (Complaint ¶¶ 5, 39.) The Straw Shareholders either did not exist, or they used cash supplied by Husain to “buy” the shares. So the Straw Shareholders were not, in fact, actual shareholders who were interested in investing in an actual company. (Complaint ¶¶ 5, 41-43.) The fact that the companies’ shares were purportedly sold to and held by the Straw Shareholders gave the appearance that third parties actually owned the companies, Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 10 of 21 Page ID #:106 - 5 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 when, in fact, Husain retained ultimate control over them, with Attorney Jaclin’s advice and assistance. (Complaint ¶ 49.) Once the company was established and its shares had been “sold” to the Straw Shareholders, Husain worked with Attorney Jaclin to file a Form S-1 registration statement with the SEC, seeking approval from the SEC for the company to go “public” so the company’s shares could be traded on public exchanges. (Complaint ¶¶ 6, 51-58.) In doing so, the S-1 registration statements made materially false and misleading statements concerning the companies’ management, business plan, and Straw Shareholders. (Complaint ¶¶ 59-61.) Once the registration statement was effective, the shell company would file periodic reports on Forms 10-K and 10-Q in accordance with SEC regulations. (Complaint ¶¶ 28, 72-78.) The Shell Company would then work with a market maker to obtain clearance from FINRA to publish stock price quotations on the OTC Bulletin Board or OTC Link. (Complaint ¶ 29.) Once FINRA provided clearance, the company would work with a market maker and a transfer agent to obtain Depository Trust Clearing (“DTC”) eligibility so that trades of its stock could be settled electronically and thereby reduce costs and time when a share of stock is traded. (Complaint ¶ 30.) Once the shell company was approved by the SEC as a publically-traded company, Husain and Attorney Jaclin would try to sell it. (Complaint ¶ 7.) That of course was the object of the “Shell Factory.” Ultimately the Complaint alleges that the defendants sold seven of the nine public shell companies they created. (Complaint ¶¶ 7, 79.) The sales of the shell companies were accomplished through “reverse merger” transactions with private purchasers, whereby the shareholders of the purchaser would acquire a majority of the shares of the public shell company (i.e., the Straw Shareholders’ shares) and the public shell company would then be reverse-merged into the purchasing entity. (Complaint ¶ 88.) After the sale of each shell company, the shell company’s puppet CEO resigned and new management Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 11 of 21 Page ID #:107 - 6 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 was installed. (Complaint ¶ 90.) New management changed the shell company’s name and business model, as announced in Form 8-K reports publicly filed with the SEC. (Complaint ¶ 91.) Following the quotation clearance by FINRA and the establishment of the stock’s DTC eligibility, the stock in at least three shell companies-New Image, Health Directory and Movie Trailer-were publicly traded before these three were sold to the shell company purchasers. (Complaint ¶ 92.)4 The following are the Shell Companies created by Husain and Attorney Jaclin, using the method described above:  New Image Concepts, Inc., nka5 Car Charging Group, Inc. (“New Image”), was incorporated in Nevada on October 23, 2006. (Complaint ¶ 14.) On March 18, 2008, New Image filed a Form S-1 registration statement. (Id.) New Image filed periodic reports with the SEC from May 13, 2008 through November 12, 2009. On December 7, 2009, New Image was sold, through a reverse merger, and following the merger, New Image changed its name to Car Charging Group, Inc. It’s stock was sold to the public beginning on December 14, 2009. (Id.)  PR Complete Holdings, Inc., nka YesDTC Holdings, Inc. (“PR complete”), was incorporated in Nevada on May 22, 2008. (Complaint ¶ 15.) On November 7, 2008, PR Complete filed a Form S-1 registration statement. (Id.) From March 23, 2009 through November 16, 2009, PR Complete filed periodic reports with the SEC. (Id.) PR Complete was sold through a reverse merger on December 4, 2009. (Id.) After the merger, PR Complete changed its name to 4 The Complaint fails to allege that the stock transfers were anything but in very modest amounts. (In fact, the stock transfers were in immaterial amounts. 5 The Complaint uses the shorthand “nka” which presumably means “now known as.” Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 12 of 21 Page ID #:108 - 7 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 YesDTC. Common stock of YesDTC Holdings was offered and sold to the public beginning on January 21, 2010. (Id.)6  Ciglarette, Inc., nka Kirin International Holding, Inc. (“Ciglarette”), which was incorporated in Nevada on December 23, 2009. (Complaint ¶ 16.) On April 28, 2010, Ciglarette filed a Form S-1 registration statement and filed periodic reports with the SEC from July 20, 2010 through January 10, 2011. (Id.) Ciglarette was sold on March 1, 2011 through a reverse merger. (Id.) After the merger, Ciglarette changed its name to Kirin International Holding, Inc. and the common stock of Kirin International Holding, Inc. was offered and sold to the public beginning on March 14, 2011. (Id.)  Resume In Minutes, Inc., nka MEDL Mobile Holdings Inc. (“Resume”) was incorporated in Nevada on May 22, 2008. (Complaint ¶ 17.) On May 11, 2010, Resume filed a Form S-1 registration statement, and from August 31, 2010 through May 16, 2011, Resume filed periodic reports with the SEC. (Id.) Resume was sold through a reverse merger on June 24, 2011. (Id.)  Rapid Holdings, Inc., nka Izea, Inc. (“Rapid”) was incorporated in Nevada on March 22, 2010. (Complaint ¶ 18.) Rapid filed a Form S-1 registration statement on July 2, 2010 and on August 31, 2010 through May 16, 2011, Rapid filed periodic reports with the SEC. (Id.) On May 11, 2011, Rapid was sold through a reverse merger. (Id.) 6 The Complaint alleges subsequent events concerning PR Complete that does not affect Mr. Husain, as it post-dates his involvement with the company. Nonetheless the Complaint does allege: “On November 17, 2014, the SEC suspended trading of YesDTC pursuant to Section 12(k) of the Exchange Act and on December 15, 2014, each class of its registered securities was revoked pursuant to Securities 12(j) of the Exchange Act, which became final on January 27, 2015. Id. On February 25, 2015, a final judgment was entered as to YesDTC’s CEO Joseph Noel, for a pump and dump scheme involving YesDTC’s stock. Id.” Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 13 of 21 Page ID #:109 - 8 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 Following the merger, Rapid changed its name to Izea, Inc. and common stock of the company was offered and sold to the public beginning on June 7, 2011. (Id.)  Movie Trailer Galaxy, nka Broadcast Live Digital Corp. (“Movie Trailer”) was incorporated in Nevada on April 27, 2010. Complaint ¶ 19. Movie Trailer filed a S-1 registration statement on October 15, 2010 and filed periodic reports with the SEC from May 9, 2011 through November 29, 2011. (Id.) On September 11, 2012, Movie Trailer was sold through a reverse merger. (Id.) Following the merger, it was offered and sold to the public on October 23, 2012. (Id.)  Health Directory Inc., nka Sollensys Corp. (“Health Directory”) was incorporated in Nevada on September 29, 2010. (Complaint ¶ 20.) Health Directory filed a Form S-1 registration statement and from November 19, 2011 through June 28, 2012 filed periodic reports with the SEC. (Id.) Health Directory was sold through a reverse merger on July 20, 2012. (Id.) After the merger, Health Directory changed its name to Sollensys Corp. and sold common stock beginning on October 15, 2012. (Id.)  Comp. Services, Inc. (“Comp Services”) was incorporated in Nevada on June 17, 2011. (Complaint ¶ 21.) On December 2011 Comp Services filed a Form S-1 registration statement and from June 14, 2012 through September 23, 2013, Comp Services filed periodic reports with the SEC. (Id.) On April 23, 2014, while a post-effective amendment was pending, the SEC issued a stop order suspending the effectiveness of its registration statement, because of the company’s failure to disclose its control person/promoter. (Id.) Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 14 of 21 Page ID #:110 - 9 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0  Counseling International, Inc. (“Counseling International”) was incorporated on September 30, 2011 and filed a Form S-1 registration statement on August 8, 2012. (Complaint ¶ 22.) III. ARGUMENT A. Counts II, III, V and VI of the Complaint Should Be Dismissed for Failure to State a Claim Pursuant to Rule 12(b)(6) and Failing to Comply with Rule 9(b)’s Pleading Standards 1. 12(b)(6) Legal Standard In evaluating Mr. Husain’s motion to dismiss, the Court must accept well- pleaded allegations as true, but need not accept legal conclusions if such conclusions cannot be drawn from the facts alleged. Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994). Even under the “notice-pleading” standard of Fed. R. Civ. P. 8(a)(2), “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements,” do not suffice. Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). Rather, the complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). This standard “asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.’” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555) (internal citations omitted). 2. Rule 9(b) Pleading Standard The SEC has alleged fraud, so its complaint must satisfy the heightened pleading standard under Fed. R. Civ. P. 9(b). Rule 9(b) requires that a complaint “must state with particularity the circumstances constituting fraud.” To meet that heightened standard, the SEC must allege the “who, what, where, when, and how” Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 15 of 21 Page ID #:111 - 10 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 of the fraudulent conduct. Vess v. Ciba-Geigy Corp., U.S.A., 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1997)). “Rule 9(b) does not allow a complaint to merely lump multiple defendants together by require[s] plaintiffs to differential their allegations when suing more than one defendant and inform each defendant separately of the allegations surrounding his alleged participation in the fraud.” SEC v. Fraser, 2009 WL 2450508, *6 (D. Ariz. 2009) (quoting Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir. 2007)). “Because a dismissal of a complaint or claim grounded in fraud for failure to comply with Rule 9(b) has the same consequence as a dismissal under Rule 12(b)(6), dismissals under the two rules are treated in the same manner.” Vess, 317 F.3d. at 1107. B. Counts II, III, V & VI of the Complaint Must Be Dismissed as the Allegations of the Complaint Make Clear That Any Fraud or Deceit Was Directed Solely at the SEC In Connection with the S-1 Registration Statements; the Defendants Did Not Engage in Acts or Practices or a Course of Conduct Which Operated as a Fraud or Deceit With Respect to or in Connection with the Sales or Offering of Shares of the So-Called Shell Companies 1. Elements of Second Claim - Section 17(a) of the Securities Act Section 17(a) makes it unlawful for any person (a)“in the offer or sale of any securities;”(b) to employ any device, scheme, or artifice to defraud, to obtain money or property by means of any untrue statement or omission of a material fact; or (c) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. See Securities Act of 1933, § 17(a); 15 U.S.C.A. § 77q; SEC v. Daifotis, No. C 11-00137-WHA, 2011 WL 3295139 (N.D.Cal. Aug.1, 2011). 2. Elements of Third Claim - Section 10(b) of the Exchange Act The SEC’s Third claim alleges violations of the antifraud provisions of the Section 10(b) and Rule 10b-5(a)-(c) thereunder, 17 C.F.R. § 240.10b-5(a)-(c)). Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 16 of 21 Page ID #:112 - 11 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 In an enforcement action under § 10(b) and Rule 10b-5 promulgated thereunder, the SEC generally must prove that a defendant: (1) made a material misrepresentation or omission of fact, (2) with scienter (or a guilty state of mind), (3) in a connection with the purchase or sale of a security. See Securities Exchange Act of 1934, § 10, 15 U.S.C.A. § 78j; 17 C.F.R. § 240.10b-5(a, b). Gebhart v. SEC., 595 F.3d 1034 (9th Cir. 2010); SEC v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996) (fraud must be made “in connection with the purchase or sale of any security”). 3. Elements of Fifth and Sixth Claims - Aiding and Abetting Violations of Anti-Fraud Provisions of the Securities Laws The aiding and abetting claims brought here have three elements: (1) a primary violation of the relevant securities law; (2) actual knowledge by the alleged aider and abettor of the primary violation and of his or her role in furthering it; and (3) substantial assistance in commission of the primary violation. See Ponce v. SEC, 345 F.3d 722, 737 (9th Cir.2003). 4. In the Second, Third, Fifth, and Sixth Claims, the SEC Fails to Allege Facts Sufficient To Justify an Inference that Mr. Husain Engaged in Acts, Practices or Course of Business that Operated as a Fraud or Deceit in Connection with the Offer or Sales of Shares of the So-Called Shell Companies The Complaint does not allege that any shareholder of the Shell Companies was defrauded, misled or deceived about the nature of their “investment” in the Shell Corporation. As to the initial “shareholders” of the Shell Companies, no one was defrauded in any respect. Indeed, the Complaint makes clear that the Straw Shareholders were themselves, to the extent they had any awareness about Husain’s and Attorney Jaclin’s alleged plan, simply part of the scheme. The Complaint further alleges that the Straw Purchasers held no actual stake in the respective companies with which they were affiliated, but were controlled and financed by Husain and Attorney Jaclin. (Complaint ¶¶ 5, 35,41-49.) Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 17 of 21 Page ID #:113 - 12 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 In any event, an essential element of the SEC’s fraud claims is that the alleged misstatement must be made “in connection with” the offer or sale of a security. In re Fin. Corp. of Am. S’holder Litig., 796 F.2d 1126, 1129-30 (9th Cir. 1986) (“[t]o state a claim for relief under section 10(b) … the plaintiff must set out facts to support, among other things, the requirement that the fraud was “in connection with” a securities transaction”). Private plaintiffs must plead a “causal link between the alleged misconduct and economic harm ultimately suffered by the plaintiff.” Dura Pharm v. Broudo, 544 U.S. 336 (2005). Although the SEC is not required to plead loss causation in the way private plaintiffs are, it stands to reason that for any claim for violations of Sections 17(a) or 10(b) anti-fraud provisions to stand, there must be some connection between the fraud and an offer or sale of a security. Here, there was no misstatement or omission to any Straw Shareholder or investor. Not only were they not defrauded, under the SEC’s theory, the Straw Shareholders were in on it. Nor was there a misstatement to purchasers of the Shell Companies because, as pleaded in the Complaint, the entities who acquired the Shell Companies received exactly what they bargained for: a shell corporation with freely trading stock, into which a reverse merger could be effected. The entirety of the alleged “fraud,” in this case, is upon the SEC-the misstatements in the Form S-1s, and in the subsequent public filings, the 10-Ks, and 10-Qs. That claim is subsumed in Count One, which alleges a failure to file “valid” registration statements with the SEC. To hold Husain liable for fraud based merely on misstatements made to the SEC is not consistent with the goal of the securities laws to protect investors and shareholders from fraudulent securities. C. The Court Should Strike Allegations Relating to Transactions that Occurred Prior to May 12, 2011 Because the SEC’s Claims for Civil Penalties and Disgorgement Are Subject to the Limitations Period Imposed by 28 U.S.C. § 2462 and Cannot Be Tolled by the Discovery Rule. Pursuant to Federal Rule of Civil Procedure 12(f), a court may “strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 18 of 21 Page ID #:114 - 13 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 scandalous matter.” Rule 12(f). Courts often require a showing of prejudice by the moving party. SEC v. Sands, 902 F. Supp. 1149, 1166 (C.D. Cal. 1995). The Ninth Circuit has stated that prejudice can arise from allegation that either causes delay or confusion of the issues. Fantasy, Inc. v . Fogerty, 984 F. 2d 1524, 1528 (9th Cir. 1993), rev’d on other grounds, 510 U.S. 517 (1994). In this case, Husain respectfully moves the Court to strike ¶¶ 14, 15 and 93 of the Complaint, as such paragraphs contain statements regarding transactions that took place outside of the statute of limitations covered by § 2462 and are therefore immaterial to the SEC claims and damages. Section§ 2462 expressly bars “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” unless such suit is “commenced within five years from the date when the claim first accrued.” The table depicting the “sales of the seven shell companies” shows clearly that both New Image and PR Complete were sold by Mr. Husain to the entities that acquired these companies on December 7, 2009 (NewImage) and December 4, 2009 (PR Complete) respectively. Since the Complaint was not filed until May 12, 2016 (with the statute effectively tolled from March 1, 2016), New Image and PR Complete are both time barred. (See Complaint ¶ 93.) The statute of limitations under Section § 2462 begins to run when the alleged fraud occurs, not when it is discovered. Gabelli, 133 S. Ct. 1216. All of damages sought by the SEC in this action are covered by Section § 2462, including disgorgement. The Eleventh Circuit has squarely addressed the issue of whether disgorgement falls within the scope of a “civil fine, penalty, or forfeiture” and therefore barred by Section § 2462. In SEC v. Graham, No. 14-13562, 2016 WL 3033605, at *4 (11th Cir. May 26, 2016), the Eleventh Circuit held that disgorgement was tantamount to forfeiture and this barred by the statute of limitations. The Court stated that “forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing,” noting there is “no Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 19 of 21 Page ID #:115 - 14 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 meaningful difference in the definitions of disgorgement and forfeiture.” The Eleventh Circuit categorically rejected the SEC’s argument that “disgorgement cannot be forfeiture because the two terms refer to fundamentally different things: disgorgement only includes direct proceeds from wrongdoing, whereas forfeiture can include both ill-gotten gains and any additional profit earned on those ill-gotten gains (i.e., secondary profits)” because “even under the definitions the SEC puts forth, disgorgement is imposed as redress for wrongdoing and can be considered a subset of forfeiture.” Any contrary interpretation would be contrary to the plain meaning of Section § 2462. See also, SEC v. McCarthy, 322 F.3d 650, 655 (9th Cir. 2003) (“[T]he plain meaning of a statute is always controlling “unless that meaning would lead to absurd results.”). For this reason, the Court should strike any references to the first two Shell Companies in the Complaint, New Image and PR Complete, as the “Sale Date” for those two companies were December 7, 2009 and December 4, 2009 respectfully. D. The Court Should Dismiss With Prejudice and Without Leave to Amend Because There Is No Reason to Believe That the SEC Has Not Pleaded All Possible Facts to Support Its Claims or That Further Discovery Will Reveal More Factual Support The Court should deny any request by the SEC for leave to amend the Complaint to replead the deficient alleged causes of action because such amendment would be futile. See, e.g., Jarvis v. Regan, 833 F.2d 149, 155 (9th Cit. 1987) (futility of amendment a recognized basis for denying motion to amend); Reddy v. Litton Indus., 912 F.2d 291, 296 (9th Cir. 1990). Unlike class action plaintiffs, the SEC had broad subpoena powers to obtain documents and testimony to develop facts in anticipation of supporting its claims. 15 U.S.C. § 78u(a)(1), (b). The SEC began its investigation of Husain several years ago, and had the ability to issue subpoenas for testimony and documents from the various companies, Straw Shareholders, Attorney Jaclin, and other third parties. As a result, the SEC has had the opportunity to engage in extensive non-public discovery. There is no reason to Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 20 of 21 Page ID #:116 - 15 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 100394513 believe the SEC would be able to plead additional facts sufficient to establish all of the elements of securities fraud. Chill v. Gen Elec., 101 F.3d 263 (2d Cir. 1996) (the district court properly denied leave to further amend Section 10(b) claim where plaintiffs had been permitted document discovery, had ample opportunity to collect facts in order to attempt to show scienter, and had already used documents in drafting amended complaint and responding to motion to dismiss). IV. CONCLUSION For the foregoing reasons, Defendant Imran Husain respectfully requests that the Court grant this motion pursuant to Rule 12(b)(6) and dismiss with prejudice (without leave to amend) the anti-fraud claims, Counts II, III, V & VI as those counts have failed to state a claim upon which relief can be granted, and also, pursuant to Rule 12(f), strike any and all references to two of the seven Shell Companies, New Image and PR Complete based on the statute of limitations. Dated: August 10, 2016 Respectfully Submitted, DENTONS US LLP By: /s/George R. Newhouse, Jr. George B. Newhouse, Jr. Attorneys for Defendant IMRAN HUSAIN Case 2:16-cv-03250-ODW-E Document 18 Filed 08/10/16 Page 21 of 21 Page ID #:117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 D E N T O N S U S L L P 6 0 1 S O U T H F IG U E R O A S T R E E T ,S U IT E 2 5 00 L O S A N G E L E S ,C A L IF O R N IA 9 00 17 -5 7 04 (2 13 ) 62 3 -9 30 0 100878915\V-1 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. IMRAN HUSAIN and GREGG EVAN JACLIN, Defendants. No. CV 16-03250 ODW (Ex) [PROPOSED] ORDER ON DEFENDANT IMRAN HUSAIN’S NOTICE OF MOTION AND MOTION TO DISMISS COMPLAINT PURSUANT TO FED.R.CIV.P 12(b)(6); AND MOTION TO STRIKE PURSUANT TO FED.R.CIV.P 12(f) Hearing Date: September 26, 2016 Time: 1:30pm Courtroom: 11 Complaint Served: May 12, 2016 At the above-captioned date and time, the Court held a hearing on the above- referenced matter. After consideration of the moving and opposing papers and any oral argument, the Court rules as follows: Defendant Imran Husain’s Motion to Dismiss and Motion to Strike is GRANTED in its entirety without leave to amend. IT IS SO ORDERED. Dated:______________, 2016 _________________________________ OTIS T. WRIGHT U.S. DISTRICT COURT JUDGE Case 2:16-cv-03250-ODW-E Document 18-1 Filed 08/10/16 Page 1 of 1 Page ID #:118