Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_14-cv-00542/USCOURTS-casd-3_14-cv-00542-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

KATHRYN AYERS, et al.,

Plaintiff,

CASE NO. 14cv542-LAB (WVG)

ORDER DENYING MOTION TO

STAY AND MOTION TO DISMISS

[DOCKET NUMBERS 34, 35.]

vs.

JAMES YIU LEE, et al.,

Defendant.

Motion to Stay

Defendants have moved to stay this action because of a civil action against Lee (and

others) is pending in this Court, and because criminal charges were initiated against Lee. 

Circumstances have changed since Defendants filed their motion, however. Since that time,

civil case 14cv347, SEC v. Lee, et al. has been terminated. Another related civil case,

14cv1737-LAB (BGS), SEC v. Lee, has proceeded to judgment. And in the criminal case,

United States of America v. Lee, 14cr2937-BEN, Lee has pled guilty. (See Docket no. 28 in

that case.)

The Court understands Lee may wish to exercise his Fifth Amendment rights at the

sentencing hearing, and in this case. But sentencing is expected to occur soon, and once

that is done, he will have little reason to exercise those rights in this case. See Kastigar v.

United States, 406 U.S. 441, 444–45 (1972) (holding that Fifth Amendment privilege can be

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asserted in both criminal and civil proceedings, and offers protection against disclosures the

witness reasonably believes could be used in a criminal prosecution against him or lead to

other evidence that could be so used).

The motion to stay cites the factors outlined in Federal Savings & Loan Ins. Corp. v.

Molinaro, 889 F.2d 889, 902–03 (9th Cir. 1989) and Keating v. Office of Thrift Supervision,

45 F.3d 322, 325 (9th Cir. 1994). In light of the changed circumstances, these factors do not 

favor a stay. There appears to be no real danger that allowing this case to proceed would

prejudice Defendants. It would, however, prejudice Plaintiffs, since it would force them to wait

for relief. The public interest does not favor a stay, and the Court’s convenience is unaffected

either way. 

Motion to Dismiss

Plaintiffs have sued Connie Castellanos, Lee’s secretary; and Larissa Ettore, his

girlfriend, under the provisions in Nev. Rev. Stat. § 90.660(4). Section 90.660(1) provides

that a person who offers or sells securities in violation of certain provisions of law is liable to

the person who purchases the security. Section 90.660(4) provides for the liability of several

other classes of people, including "an agent of the person liable" under section 90.660(1),

and "an employee of the person liable if the employee materially aids in the act, omission or

transaction constituting the violation . . . ." Under § 90.660(4), "it is a defense that the person

did not know, and in the exercise of reasonable care could not have known, of the existence

of the facts by which the liability is alleged to exist." Agents or employees liable under this

section are liable jointly and severally with the principal wrongdoer.

Castellanos and Ettore have moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6),

for failure to state a claim. Although Lee nominally joined in the motion, the argument focuses

on claims against Castellanos and Ettore. A Fed. R. Civ. P. 12(b)(6) motion tests the

sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). When

determining whether a complaint states a claim, the Court accepts all allegations of material

fact in the complaint as true and construes them in the light most favorable to the non-moving

party. Cedars-Sinai Medical Center v. National League of Postmasters of U.S., 497 F.3d 972,

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975 (9th Cir. 2007) (citation omitted). But the Court is “not required to accept as true

conclusory allegations which are contradicted by documents referred to in the complaint,”

and does “not . . . necessarily assume the truth of legal conclusions merely because they are

cast in the form of factual allegations.” Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136,

1139 (9th Cir. 2003) (citations and quotation marks omitted).

Under Fed. R. Civ. P. 8(a)(2), only “a short and plain statement of the claim showing

that the pleader is entitled to relief,” is required, in order to “give the defendant fair notice of

what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly,

550 U.S. 544, 554–55 (2007). “Factual allegations must be enough to raise a right to relief

above the speculative level. . . .” Id. at 555. “[S]ome threshold of plausibility must be crossed

at the outset” before a case is permitted to proceed. Id. at 558 (citation omitted). The

well-pleaded facts must do more than permit the Court to infer “the mere possibility of

conduct”; they must show that the pleader is entitled to relief. Ashcroft v. Iqbal, 556 U.S. 662,

679 (2009).

Plaintiffs’ claims arise out of an allegedly fraudulent scheme to sell securities.

According to the complaint, Lee induced Plaintiffs to invest with him by misstating material

facts regarding the investments he touted, falsely promising to shoulder 50% off any losses,

and concealing his criminal past and a cease and desist order entered against him by the

Securities and Exchange Commission for violations of securities laws. (Compl., ¶ 1.)

Specifically, Lee is alleged to have recommended a trading strategy that was purportedly low

risk, and generated large and unmerited management fees for himself. (Id., ¶¶ 2–4.) As a

result, Plaintiffs allege they lost nearly $6 million. (Id., ¶ 5.) The complaint also alleges Lee

failed to obtain the required Nevada broker-dealer license. (Id., ¶ 75.) Unlicensed dealing

in securities gives rise to liability under § 90.660(1)(a).

The motion does not contend that these allegations fail to state a claim against Lee,

or that Lee would not qualify as a principal wrongdoer under Nev. Rev. Stat. § 90.660(1).

Instead, it argues the allegations are inadequate to state a claim against Castellanos or

Ettore under § 90.660(4).

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Castellanos

The motion argues that the complaint fails to cite any misrepresentations Castellanos

made, any investor meetings she attended, or any reason why she should have known about

Lee’s background and warned investors.

The motion, however, misses some of the allegations, and misreads the statute.

Under § 90.660(4), agents or employees, as well as people in certain other roles relative to

the principal wrongdoer, can themselves be liable if they "materially aid[ ] in the act,

omission, or transaction constituting the violation . . . ." In other words, Castellanos herself

need not have made misleading statements or omitted to make disclosures necessary to

avoid misleading investors, or actively misled investors herself in some other way. It is

enough if she aided Lee when he misled them, or if she materially aided in his unlicensed

sale of securities. The agent’s or employee’s actual or constructive knowledge of facts

underlying the liability is not an element of the claim; rather, absence of such actual or

constructive knowledge is a defense. 

The complaint identifies Castellanos as Lee’s secretary and alleges she aided Lee in

his "fraudulent investment and trading scheme." (Compl., ¶¶ 9–10.) It alleges she lent the

scheme an "air of legitimacy" by serving as the scheme’s secretary, that she did all billing for

Lee’s management fees from the scheme, and that she did payroll for traders affiliated with

the scheme. (Id., ¶¶ 12, 190, 191.) It alleges she accessed Plaintiffs’ investment accounts

without authorization, reporting information from those accounts to Lee and using it to

calculate Lee’s management fees. (Id., ¶¶ 13, 192.) It alleges she prepared the management

fee invoices for investors, and told investors to pay the fees to two shell corporations instead

of to Lee himself. (Id., ¶¶ 99, 195–97.) It also alleges she assisted in Lee’s violation of state

licensing requirements by serving as director and sole officer for one of these shell

corporations controlled by Lee, and allowing the corporation’s bank account to be used as

a depository for Lee’s management fees, making it hard for authorities to discover his

activities or track his income. (Id., ¶¶ 15, 45, 197, 199–202.) 

/ / /

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The complaint also makes two ambiguous allegations involving Castellanos. It alleges

that Lee "devised a scheme to defraud plaintiff investors, with the assistance of," inter alia

Castellanos. (Compl., ¶ 69.) This might be read to mean Lee devised a scheme on his own,

and that his plan was to defraud investors with the help of Castellanos and others. It could

also be read to mean Castellanos and others assisted Lee in devising the scheme.

Construing this allegation in Plaintiffs’ favor, as the Court must on a motion for summary

judgment, see Cedars-Sinai, 497 F.3d at 975, the Court reads this allegation to mean

Castellanos assisted Lee in formulating his plan. Second, the complaint alleges Castellanos

met with Lee and other employees "regarding the investment and trading business in

December, 2010." (Compl., ¶ 44.) This allegation does not, by itself, show why Castellanos

is liable, because it does not say whom she met with or what was said at the meeting(s). 

Plaintiffs’ opposition to the motion to dismiss argues she met with Lee and investors, and

also with traders who worked for Lee. (Opp’n to Mot. for Summ. J. at 3:1–7.) The opposition

also argues that Lee either affirmatively or by omission made misrepresentations during the

meeting(s) with investors, which Castellanos failed to correct. (Id. at 10:19–23.) While the

complaint does not allege any of these details, the Court understands the opposition to mean

Plaintiffs could allege these particular facts if given an opportunity to amend.

While the complaint does not allege as much as Plaintiffs’ opposition suggests, it does

allege enough, if accepted as true, to establish Castellanos’ liability. She is alleged to have

helped Lee collect management fees from investors, and hide them from authorities so that

his fraudulent securities sales would go unnoticed. She is also alleged to have served as a

front, inducing investors to trust Lee. While her collection of fees was not a part of the sale

itself, if the Court accepts the factual allegations as true, she did materially aid the violation

by making it profitable and by helping Lee avoid detection, which in turn allowed him to

perpetuate it. In addition, when she helped Lee communicate with investors, and possibly

had direct contact with them herself, she avoided informing them they were being misled

about the securities deal, even though she knew or should have known they were. 

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Accepting this as true, she would be liable for materially aiding Lee’s misleading sales

pitches.

The complaint adds that Castellanos knew or should have known about Lee’s history

with the SEC, because she worked at Lee’s company when the he and the company were

given the SEC’s Cease and Desist order. (Compl., ¶ 205.) It also alleges that she did not tell

any of the Plaintiffs about Lee’s history with the SEC. (Id., ¶ 206.) This is relevant, because

it is alleged she helped Lee communicate with investors by preparing fee invoices that were

given to them. Although not specifically alleged, it is reasonable to infer that as Lee’s

secretary, Castellanos would have had access to information pertaining to matters she was

helping him with. This inference supports the allegations regarding what she knew or should

have known.

Assuming all these alleged facts to be true, Castellanos would be liable under Nev.

Rev. Stat. § 90.660(4) for materially aiding violations of § 90.660(1)(a) and (d). The

complaint therefore meets the required pleading standard.

Ettore

As it did with regard to claims against Castellanos, the motion to dismiss argues

Larissa Ettore’s contact with investors was minimal and that she was never alleged to have

made any misrepresentations herself to investors. As with the other claim, the motion

misreads the statute and misses some of the allegations.

Larissa Ettore is alleged to be Lee’s girlfriend, and the sister of a trader who worked

for Lee. (Compl., ¶ 7.) She is alleged to have been Lee’s agent (id., ¶ 16), aiding and abetting

his fraud in two main ways. First, the complaint alleged that she recruited investors and

attended investor meetings. (Id., ¶¶ 17, 48, 209, 242–248, 341) and that although she knew

or should have known about his history with the SEC and that his claims regarding his

credentials were false, she never corrected his misrepresentations. (Id., ¶¶ 18, 210–11.)

Second, the complaint alleges that Ettore served as the head for a second shell corporation,

different from the one Castellanos headed, into which Lee’s management fees were also

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funneled, effectively hiding them from authorities in the same way Castellanos had done. (Id.,

¶¶ 19, 164, 212–14.)

Although the complaint does not allege it, Plaintiffs assert that they have learned that

Ettore originally incorporated and initially headed the shell corporation that Castellanos later

headed. (Opp’n at 12:14–17.) The complaint also makes the same ambiguous allegation that

Lee "devised a scheme to defraud plaintiff investors, with the assistance of," inter alia Ettore.

(Compl., ¶ 69.) 

While an allegation, standing alone, that someone is an "agent" would be conclusory,

the allegations here are fleshed out by more specific allegations, namely that she recruited

investors in Lee’s behalf, attended investor meetings, and headed a shell corporation on his

behalf. While the complaint does not specifically explain how or why Ettore knew or should

have known Lee was making misrepresentations regarding the investments or his own

qualifications, it is reasonable to infer that as his long-time girlfriend who was invited to and

attended investor meetings, and who recruited investors, she had an opportunity to know the

truth about his qualifications and also to know the truth about the investment deal he was

touting. 

The factual allegations, taken as true, are enough to show that Ettore materially

helped Lee mislead investors regarding the investments and his qualifications. Even though

she herself did not mislead them, it is alleged that she materially helped Lee as he misled

them, and that she knew or should have known he was misleading them. The complaint also

alleges that she served as head of a shell corporation into which Lee’s fees were paid,

helping him his income from authorities, thus escaping detection and keeping the fraud going

longer. This is enough to render the claims against her plausible, and to meet the pleading

standards.

Conclusion and Order

For the reasons discussed above, the motion to stay, and the motion to dismiss, are

both DENIED. Defendants shall promptly answer or otherwise respond to the complaint. This 

/ / /

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matter is referred to Magistrate Judge William Gallo to hold a scheduling conference and

issue a scheduling order in this case.

IT IS SO ORDERED.

DATED: March 13, 2015

HONORABLE LARRY ALAN BURNS

United States District Judge

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