Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_16-cv-02440/USCOURTS-casd-3_16-cv-02440-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 15:0078j(b)ss Stockholder Suit

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

CARL MELCHER; MELCHER 

FAMILY LIMITED 

PARTNERSHIP,

Plaintiff,

Case No. 16-cv-02440-BAS(BGS)

ORDER GRANTING 

DEFENDANT FRIED’S MOTION 

TO DISMISS

v. [ECF No. 24]

LANCE FRIED,

Defendant.

Plaintiffs Carl Melcher and Melcher Family Limited Partnership (“MFLP”) 

bring this action against Defendant Lance Fried. In their First Amended Complaint, 

Plaintiffs allege counts for federal and state securities fraud, breach of fiduciary duty, 

common law fraud, elder abuse, and rescission of contract. (First Am. Compl. 

(“FAC”), ECF No. 18.) Defendant moves to dismiss all of Plaintiff Melcher’s 

individual claims pursuant to Federal Rule of Civil Procedure 12(b)(1) and (6). 

(Motion to Dismiss (“Mot.”), ECF No. 24.) Plaintiffs oppose. (ECF No. 25.)

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The Court finds this motion suitable for determination on the papers submitted 

and without oral argument. See Fed. R. Civ. P. 78(b); Civ. L.R. 7.1(d)(1). For the 

following reasons, the Court GRANTS Defendant’s motion to dismiss.

I. BACKGROUND1

Plaintiff Carl Melcher is approximately eighty years old. (FAC ¶ 12.) He is 

the founder and one of the limited partners of Plaintiff MFLP. (Id.) MFLP is a 

California limited partnership that Melcher formed in 1989, and it “is used by [him] 

for investments in companies.” (Id. ¶ 11.)

This dispute arises from MFLP’s investment in Face It Corp. (See FAC ¶ 1.) 

At the time, Face It “was a privately held social engagement and mobile customer 

care solution provider.” (Id.) On October 18, 2011, MFLP purchased 30.875% of 

Face It’s stock for $3 million, and Melcher became a board member of the company. 

(Id. ¶ 15.) Defendant Fried was at all relevant times the Chief Executive Officer and 

Chairman of the Board of Face It. (Id. ¶ 1.) MFLP was the sole outside investor in 

the company; all of the remaining shareholders were founders of Face It. (Id. ¶ 16.)

In 2013, Face It began having financial difficulties and was failing to meet its 

revenue projections. (FAC ¶ 18.) In an attempt to rectify Face It’s financial status, 

Defendant asked Melcher for additional capital investments to keep the company 

afloat. (Id.) Melcher refused to do so until there was evidence that Face It was 

making greater sales or income. (Id.) 

Around September 2013, Face It was still struggling financially, and 

Defendant reached out to Five9, a corporation interested in utilizing Face It’s 

technology. (FAC ¶ 19.) The two companies discussed a potential sale of Face It to 

Five9 for an estimated value of $10 million. (Id. ¶ 21.) Then, without disclosing 

 1 All facts are taken from the First Amended Complaint. For this motion, the Court assumes 

all facts alleged in the pleading are true. See, e.g., Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 

337–38 (9th Cir. 1996).

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these negotiations, Defendant allegedly proposed to Melcher that Face It repurchase 

all of the shares in the company held by MFLP. (Id. ¶¶ 19, 22–23.) On September 

12, 2013, MFLP did so for $1.5 million, half of the amount it originally paid for these 

shares. (Id. ¶ 24.) 

The parties effectuated this transaction through a Redemption Agreement 

executed between MFLP and Face It. (Redemption Agreement, Carlson Decl. ¶ 2, 

Ex. A, ECF No. 24-2.)2 Melcher signed the Redemption Agreement as the President 

of the “Melcher Family Corporation,” which is identified as the “General Partner of 

Melcher Family Limited Partnership.” (Id.) The day after MFLP and Face It 

executed the Redemption Agreement, Five9 allegedly signed a term sheet for the 

acquisition of Face It, and on October 18, 2013, the sale was finalized. (FAC ¶¶ 25–

26.)

A few years later in 2016, Melcher became aware of this acquisition timeline 

and brought suit against Defendant.3

 (ECF No. 1.) On July 10, 2017, Melcher and 

MFLP filed the First Amended Complaint alleging the following counts against 

Defendant: (1) & (2) violations of Federal securities laws; (3) violations of California 

securities laws; (4) fraud; (5) breach of fiduciary duty; (6) elder abuse; and (7) 

 2 “Although generally the scope of review on a motion to dismiss for failure to state a claim 

is limited to the Complaint, a court may consider evidence on which the ‘complaint “necessarily 

relies” if: (1) the complaint refers to the document; (2) the document is central to the plaintiff’s 

claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion.’” 

Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010) (citation omitted). Plaintiffs’ 

First Amended Complaint refers to the Redemption Agreement, the document is central to 

Plaintiffs’ claims, and no party questions the authenticity of the agreement. (See FAC ¶¶ 24, 37, 

55, 61–63; see also ECF No. 7-1.) Therefore, the Court considers the Redemption Agreement in 

adjudicating this motion. See Daniels-Hall, 629 F.3d at 998.

3 Plaintiffs’ original complaint also brought claims against Five9, the successor in interest 

to Face It. The Court stayed these claims due to an arbitration provision in the Redemption 

Agreement. (ECF No. 7-1 at 8.) Ultimately, after Plaintiffs and Five9 reached a confidential 

settlement, the Court lifted the stay. (ECF No. 11.) Plaintiffs then filed their First Amended 

Complaint, which removed Five9 but retained Lance Fried as the sole defendant in this dispute.

(ECF No. 18.) 

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rescission. (Id.) Defendant now moves to dismiss only Melcher’s individual causes 

of action.4

II. LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil 

Procedure “tests the legal sufficiency” of the claims asserted in the complaint. 

Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court must accept all 

factual allegations pleaded in the complaint as true and must 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). To avoid a Rule 12(b)(6) 

dismissal, a complaint need not contain detailed factual allegations; rather, it must 

plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. 

Corp. v. Twombly, 550 U.S. 544, 570 (2007). “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 (2009) (citing Twombly, 550 U.S. at 556). “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.’” Id. (quoting 

Twombly, 550 U.S. at 557).

“[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.” Twombly, 550 U.S. at 555 (alteration in 

original) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). A court need not 

 4 Although Defendant moves to dismiss pursuant to both Rule 12(b)(1) and 12(b)(6), he 

does not differentiate between the two dismissal standards in his motion. Because Rule 12(b)(6) is 

better suited to resolve Defendant’s arguments, the Court applies only this standard. See, e.g., 

Lindsey v. Starwood Hotels & Resorts Worldwide Inc., 409 F. App’x 77, 78 (9th Cir. 2010) 

(“Whether a plaintiff possesses legally enforceable rights under a contract is a question on the 

merits rather than a question of constitutional standing. Such a plaintiff fails to state a claim on 

which relief can be granted.).

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accept “legal conclusions” as true. Iqbal, 556 U.S. at 678. Despite the deference the 

court must pay to the plaintiff’s allegations, it is not proper for the court to assume 

that “the [plaintiff] can prove facts that it has not alleged or that the defendants have 

violated the . . . law[] in ways that have not been alleged.” Assoc. Gen. Contractors 

of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983).

As a general rule, a court freely grants leave to amend a complaint that has 

been dismissed. Fed. R. Civ. P. 15(a); Schreiber Distrib. Co. v. Serv-Well Furniture 

Co., 806 F.2d 1393, 1401 (9th Cir. 1986). However, leave to amend may be denied 

when “the court determines that the allegation of other facts consistent with the 

challenged pleading could not possibly cure the deficiency.” Schreiber Distrib. Co., 

806 F.2d at 1401 (citing Bonanno v. Thomas, 309 F.2d 320, 322 (9th Cir. 1962)).

III. DISCUSSION

Defendant challenges Melcher’s ability to bring individual claims for 

violations of federal securities laws, violations of California securities laws, fraud, 

breach of fiduciary duty, financial elder abuse, and rescission. The Court will address 

these claims in turn.

A. Federal Securities Claims

1. Securities Exchange Act Section 10(b) and SEC Rule 10b-5

In Count I, both Melcher and MFLP allege that Defendant violated Section 

10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. (FAC ¶¶ 29–32.) 

Defendant argues that “the only party with standing to bring a claim is MFLP, the 

entity which bought and then sold the stock,” and moves to dismiss Melcher as a 

plaintiff. (Mot. 4:5–7.)

The plaintiffs who may bring a private damages action pursuant to Section 

10(b) and Rule 10b-5 are “limited to actual purchasers and sellers of securities.” Blue 

Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731 (1975) (quoting Birnbaum v. 

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Newport Steel Corp., 193 F.2d 461, 463 (2nd Cir. 1952)). This purchaser-seller 

notion is frequently interpreted as a “standing” requirement. E.g., Mount Clemens 

Indus., Inc. v. Bell, 464 F.2d 339, 343 (9th Cir. 1972); see also Eason v. General 

Motors Acceptance Corp., 490 F.2d 654, 657 (7th Cir. 1973).

Here, Plaintiffs argue Melcher is a proper plaintiff because he “is the general 

partner of MFLP” and “signed the September 9, 2013, Redemption Agreement 

between MFLP and Face It.” (Opp’n 3:27–28.) The First Amended Complaint 

alleges Melcher “is the founder and one of the limited partners of MFLP and . . . is 

the individual responsible for negotiating the purchase and sale by MFLP of Face It 

stock.” (FAC ¶ 12.) 

The Court is not convinced that Melcher is a proper plaintiff. The Redemption 

Agreement demonstrates that the sale of stock at issue was between Face It and 

MFLP—not Melcher. Moreover, according to the Redemption Agreement’s 

signature page, the “Melcher Family Corporation” is the general partner of MFLP—

not Melcher. (Id.) Regardless, even if Melcher is the general partner of MFLP, the 

only parties to the Redemption Agreement are MFLP and Face It. Melcher cannot 

bring in his individual capacity “claims belonging to the partnership.” See Lindsey, 

409 F. App’x at 78 (citing Cal. Corp. Code §§ 16201, 16203, 16401(g)).

Consequently, because Melcher is not a purchaser or seller of the implicated 

securities, the Court will dismiss Melcher’s Count I with leave to amend. See Blue 

Chip Stamps, 421 U.S. at 731.

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2. Securities Exchange Act Section 20(a) and Rule 10b-5

Plaintiffs’ second claim invokes Section 20(a) of the Securities Exchange Act, 

which “provides for derivative liability of those who ‘control’ others found to be 

primarily liable under the 1934 Act.” In re Ramp Networks, Inc. Sec., 201 F. Supp. 

2d 1051, 1063 (N.D. Cal. 2002) (citing 15 U.S.C. § 78(t)(a)). This claim is derivative 

of Plaintiffs’ first claim for violation of Section 10(b) and similarly fails unless each 

Plaintiff can state a claim under that section. See Heliotrope Gen., Inc. v. Ford Motor 

Co., 189 F.3d 971, 978 (9th Cir. 1999) (“To be liable under section 20(a) the 

defendants must be liable under another section of the Exchange Act.”); see also In 

re Ramp Networks, Inc. Sec., 201 F. Supp. 2d at 1063 (finding that the pleading 

requirements for violations of Sections 20(a) and 10(b) of the 1934 Act are the same).

Given that Melcher has not stated a claim under Section 10(b), his derivative 

count under Section 20(a) also fails to state a plausible claim. Hence, the Court will 

dismiss Melcher’s Count II with leave to amend.

B. California Corporations Code §§ 25401, 25402, and 25501

In Count III, Plaintiffs allege that Defendant violated California Corporations 

Code §§ 25401, 25402, and 25501. (FAC ¶¶35–39.) Again, Defendant challenges 

Melcher’s ability to bring this count in an individual capacity. (Mot. 5:19–20.)

California Corporations Code § 25401 prohibits misrepresentations in 

connection with the purchase or sale of securities, and § 25402 forbids insider 

trading. The third provision Plaintiffs’ pleading identifies, § 25501, establishes a 

private remedy for damages and rescission based on § 25401 liability. See Cal. 

Amplified Inc. v. RLI Ins. Co, 94 Cal. App. 4th 103, 109 (2001). These state 

provisions are patterned after federal securities laws. See People v. Schock, 152 Cal. 

App. 3d 379, 387 (1984); see also Mueller v. San Diego Entm’t Partners, LLC, No. 

16-cv-2997-GPC(NLS), 2017 WL 3387732, at *9 (S.D. Cal. Aug. 7, 2017). 

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Because the Court has concluded above that Melcher does not have the ability 

to bring federal securities fraud claims on behalf of himself, so too does he lack the 

ability to bring comparative claims for California securities fraud. See Mausery v. 

Marketbyte LLC, No. 12-cv-2461-JM(NLS), 2013 WL 12072832, at *12 (S.D. Cal. 

Jan. 4, 2013) (applying the same analysis to the plaintiff’s federal and California 

securities claims because the elements of federal securities fraud are similar to 

California securities fraud). Further, although Melcher invokes California’s insider 

trading provision, he is not a purchaser or seller of stock who can show he has been 

“harmed by virtue of insider trading” and would therefore have “a right of action 

against violators of section 25402.” See Friese v. Superior Court, 134 Cal. App. 4th 

693, 697 (2005). Thus, the Court will dismiss Melcher’s individual Count III with 

leave to amend.

C. Financial Elder Abuse

Melcher brings a claim for financial elder abuse under California’s Elder 

Abuse Act, California Welfare and Institutions Code § 15610.30. (FAC ¶¶ 56–58.)

Defendant argues this claim must be dismissed because Melcher “did not personally 

own or sell the stock” and an “elder abuse action cannot lie when the elder’s interest 

is held in a supposedly injured entity.” (Mot. 7:11–15.) 

An elder becomes the victim of financial abuse when a person or entity 

“[t]akes, secretes, appropriates, obtains, or retains . . . property of an elder . . . for a 

wrongful use or with intent to defraud, or both.” Cal. Welf. & Inst. Code § 

15610.30(a)(1). An elder must be an individual residing in California who is at least 

65 years of age or older.5

 Id. § 15610.27. For purposes of § 15610.30, an individual 

 5 Plaintiffs’ pleading may be interpreted as providing that both Melcher and MFLP are 

seeking to bring claims for elder abuse. (See FAC ¶¶ 53, 57.) MFLP, however, is a limited 

partnership—not an individual. Thus, it is not “any person residing in this state, 65 years of age or 

older.” See Cal. Welf. & Inst. Code § 15610.27. Accordingly, to the extent that Plaintiffs’ pleading 

raises an elder abuse claim on behalf of MFLP, this claim is dismissed with prejudice.

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“takes, secretes, appropriates, obtains, or retains . . . property when an elder . . . is 

deprived of any property right, including by means of an agreement.” Id. § 

15610.30(c). A deprivation under this provision does not require “the direct taking 

by one person of the property of another,” nor does it necessitate the satisfaction of 

“some kind of privity requirement.” Mahan v. Charles W. Chan Ins. Agency, Inc., 

14 Cal. App. 5th 841, 861–62 (2017).

Defendant’s challenge to Melcher’s claim focuses on whether Melcher was 

“deprived of any property right,” see Cal. Welf. & Inst. Code § 15610.30(c), when 

MFLP sold the “Face It stock back to Face It for $1.5 million,” (see FAC ¶ 55).

Typically, “individual partners may not sue for damages to the partnership or their 

interests in the partnership.” See O’Flaherty v. Belgum, 115 Cal. App. 4th 1044, 

1062 (2004). Because MFLP owned the stock that Defendant allegedly appropriated, 

Defendant believes Melcher cannot bring an elder abuse claim based on the 

deprivation of this property. (See Mot. 7:11–15.) See also Sonoma Foods, Inc. v. 

Sonoma Cheese Factory, LLC, 634 F. Supp. 2d 1009, 1023 (N.D. Cal. 2007).

The California Court of Appeal considered a similar argument in Mahan v. 

Charles W. Chan Insurance Agency, Inc., 14 Cal. App. 5th 841, 862 (2017). There, 

the plaintiff elders—the Mahans—“purchased two life insurance policies, naming 

their children as beneficiaries.” Id. at 846. They placed these policies into a 

revocable living trust and “made enough money available to the Trust, in advance, 

so that it would be self-sustaining ‘for many years to come,’ with no need for 

additional cash infusions from them for ongoing premium costs.” Id. More than two 

decades later, when the Mahans were in cognitive decline, the defendant insurance 

agents allegedly engaged in a manipulative scheme to surrender one of the trust’s life 

insurance policies and replace the second one. Id. This scheme resulted in $100,000 

in commissions to the defendants, along with drastically higher life insurance 

premium costs for the trust. Id. The trust and the Mahans brought claims against the 

defendants, and the defendants demurred to the Mahans’ financial elder abuse cause 

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of action. Id. at 847. The defendants argued they did not deprive the Mahans of any 

property under the Elder Abuse Act because the trust owned the life insurance 

policies at issue. Id. The trial court agreed and sustained the demurrers. Id.

The California Court of Appeal reversed. Mahan, 14 Cal. App. 5th at 869. It 

concluded the Mahans sufficiently alleged they were deprived of their property on 

several grounds. Id. at 862–65. For example, the court noted the Mahans alleged 

that—due to the defendants’ conduct—they “had to reach into their pockets and sell 

assets to provide more cash to the Children’s Trust than they ever planned to do” to 

cover the premium costs of the more expensive replacement insurance coverage. Id.

at 864. The Court of Appeal reasoned that this allegation stated a deprivation of 

property because the Mahans alleged that “by manipulation and use of the Children’s 

Trust as an instrument, the [defendants] managed to separate the Mahans from their 

money.” Id. 

Here, the First Amended Complaint does not plausibly state that Defendant 

deprived Melcher of his property. The pleading commingles the ownership of the 

shares of Face It, alleging simply that Plaintiffs owned the Face It Stock and that 

Defendant “acquired the property of Melcher, which was held in MFLP.” (FAC ¶¶ 

16, 19, 24, 56.) Plaintiffs therefore allege Defendant “deprived Melcher of his 

personal property.” (Id. ¶ 58.) But the Redemption Agreement demonstrates MFLP 

owned the shares, not Melcher. See Mahan, 14 Cal. App. 5th at 855 (noting that if

the plaintiffs had adopted a theory that one of the elders “was the ‘real owner’ of the 

[life insurance policy]” in the trust, that approach would have been “in many respects 

. . . inconsistent with the documentary evidence attached to” the elders’ complaint). 

And, although the California Court of Appeal adopted an expansive view of 

“property of an elder” in Mahan, Plaintiffs’ pleading lacks comparable allegations to 

sustain an analogous theory of liability. For example, the pleading has no allegations

regarding the ownership structure of MFLP, how MFLP was capitalized, whether 

MFLP is used for estate planning purposes, and whether Melcher has been forced to 

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invest additional capital into the entity due to Defendant’s alleged conduct. See 

Mahan, 14 Cal. App. 5th at 855. The First Amended Complaint simply alleges that 

Melcher is “one of the limited partners of MFLP.” (FAC ¶ 12.)

In their opposition, Plaintiffs request leave to amend to “clarify that Melcher 

is the general partner of MFLP, MFLP was created for estate planning purposes, and 

Melcher has personally funded the entirety of MFLP.” (Opp’n 7:9–14.) 

Accordingly, the Court will dismiss this claim with leave to amend. The Court 

cautions Plaintiffs, however, that they need to provide sufficient detail to allow the 

Court to determine whether Defendant’s purported conduct plausibly deprived 

Melcher of any property right.

D. Breach of Fiduciary Duty and Fraud

Both Melcher and MFLP allege breach of fiduciary duty and fraud against 

Defendant. (FAC ¶¶ 40–52.) Defendant seeks dismissal of Melcher’s individual 

claims on the same rationale as above: Melcher did not personally own the shares of 

Face It. In Mahan, the elder plaintiffs also brought these two claims. 14 Cal. App. 

5th at 868. After the California Court of Appeal concluded the Mahans successfully 

alleged that the defendants deprived them of property, the court noted that “[t]he 

analysis of injury is, in substance, the same” for the elders’ breach of fiduciary duty 

and fraud claims. Id.

Here, the analysis is also the same. Thus, because the Court has already 

concluded that Melcher has not sufficiently alleged he was deprived of his property 

to support his financial elder abuse claim, the Court will also dismiss these two 

claims with leave to amend. See Mahan, 14 Cal. App. 5th at 868.

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E. Rescission of Contract

Last, Plaintiffs bring a claim for rescission of the Redemption Agreement. 

(FAC ¶¶ 60–63.) Defendant moves to dismiss Melcher’s rescission claim on the 

same basis as his other claims. (Mot. 3:9–10.)

The Court agrees that Melcher’s rescission claim is subject to dismissal 

because he was not a party to the Redemption Agreement. Further, the Court notes 

that rescission under California law is not a claim, but a remedy. E.g., Reyes v. Wells 

Fargo Bank, N.A., No. C-10-01667 JCS, 2011 WL 30759, at *17 (N.D. Cal. Jan. 3, 

2011) (agreeing that in California “there is no standalone claim for . . . 

rescission”); see also Nakash v. Superior Court, 196 Cal. App. 3d 59, 70 

(1987) (“Rescission is not a cause of action; it is a remedy.”). Thus, the Court will 

dismiss Melcher’s Count VII of the First Amended Complaint.

IV. CONCLUSION

In light of the foregoing, the Court GRANTS Defendant’s motion to dismiss 

Melcher’s individual claims. Melcher is granted leave to amend his first, second, 

third, fourth, fifth, and six claims. Further, provided Melcher can state a cognizable 

and appropriate underlying claim, he may pursue rescission as a remedy in an 

amended pleading. If Plaintiffs choose to file a Second Amended Complaint, it must 

be filed no later than June 12, 2018. 

IT IS SO ORDERED.

DATED: May 29, 2018

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