Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_06-cv-01243/USCOURTS-caed-1_06-cv-01243-7/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1964 Racketeering (RICO) Act

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

MANUEL LOPES, et al., )

)

)

)

Plaintiff, )

)

vs. )

)

)

GEORGE VIEIRA, et al., )

)

)

Defendant. )

)

)

No. CV-F-06-1243 OWW/SMS 

MEMORANDUM DECISION AND

ORDER DENYING DEFENDANT

GENSKE, MULDER & COMPANY'S

MOTION TO STRIKE [Doc. 33)

AND GRANTING IN PART AND

DENYING IN PART MOTION TO

DISMISS FIRST AMENDED

COMPLAINT [Doc. 32] AND

GRANTING IN PART AND DENYING

IN PART DEFENDANT DOWNEY

BRAND LLP'S MOTION TO

DISMISS FIRST AMENDED

COMPLAINT [Doc. 35] 

Plaintiffs Manuel and Mariana Lopes dba Lopes Dairy; Raymond

Lopes; Joseph Lopes and Michael Lopes, individually and dba

Westside Holstein; Alvaro Machado and Tony Estevan have filed a

First Amended Complaint (“FAC”) pursuant to the Court’s Order

filed on May 30, 2005 (May 30 Order). Defendants are George and

Mary Vieira; California Milk Market, a California Corporation;

Valley Gold, LLC, a California limited liability company; Genske,

Mulder LLP, a California limited liability partnership; Anthony

Cary; Downey Brand LLP, a California limited liability

partnership; Central Valley Dairymen, Inc. (CVD), a California

Food and Agricultural Nonprofit Cooperative Association; and Does

Case 1:06-cv-01243-JLT Document 67 Filed 03/13/08 Page 1 of 102
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On October 4, 2007, Plaintiffs filed a notice of voluntary 1

dismissal of Defendant Anthony Cary. The Order dismissing Anthony

Cary without prejudice was filed on October 10, 2007. Because

Plaintiffs will be required to file a Second Amended Complaint, all

references to Anthony Cary should be deleted from any Second

Amended Complaint.

 Defendants George and Mary Vieira and California Milk Market

filed an Answer to the FAC on July 26, 2007. 

2

1-25. 

1

Defendants Genske, Mulder & Company (“Genske”) and Downey

Brand LLP (“Downey”) have each filed motions to dismiss pursuant

to Rule 12(b)(6), Federal Rules of Civil Procedure, for failure

to state a claim against them upon which relief can be granted. 

In addition, Genske has filed a motion to strike certain

allegations of the FAC pursuant to Rule 12(f), Federal Rules of

Civil Procedure.

A. GENSKE’S MOTION TO STRIKE.

Genske moves pursuant to Rule 12(f), Federal Rules of Civil

Procedure, to strike the allegations in Paragraph 41 of the FAC,

which names as Defendants Does 1-100, inclusive, and the

allegations in Paragraphs 62-68, 70, 80, 82-83, and 85, wherein

Does 1-10 and George Vieira are referred to collectively as the

“Promoters”.

In moving to strike these allegations, Genske argues that

Doe allegations are improper in the Ninth Circuit.

Gillespie v. Civiletti, 629 F.2d 637, 642 (9 Cir.1980), th

holds:

As a general rule, the use of ‘John Doe’ to

identify a defendant is not favored ...

However, situations arise ... where the

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identity of alleged defendants will not be

known prior to the filing of a complaint. In

such circumstances, the plaintiff should be

given an opportunity through discovery to

identify the unknown defendants, unless it is

clear that discovery would not uncover the

identities, or that the complaint would be

dismissed on other grounds.

Genske argues that Civiletti only allows Doe pleading “in

limited circumstances: to protect the plaintiffs’ privacy [not

applicable to this motion]; in civil rights cases where the name

of the government agent is not known or readily knowable; and in

cases filed by pro per plaintiffs.” 

Genske cites no authority for such limitations on Doe

pleading. While Doe pleading is disfavored, it is not prohibited

in federal practice.

Plaintiffs contend that they have named Doe Defendants

pursuant to California Code of Civil Procedure § 474 and note

that “[t]he purpose of section 474 is to permit the plaintiff to

avoid the bar of the statute of limitations.” Sobeck &

Associates, Inc. v. B & R Investments No. 24, 215 Cal.App.3d 861,

867 (1989). Plaintiffs also cite Rule 15(c)(1), Federal Rules of

Civil Procedure:

An amendment of a pleading relates back to

the date of the original pleading when

(1) relation back is permitted by 

the law that provides the statute of

limitations applicable to the action ....

Plaintiffs argue that, when a claim is based on state law, the

plaintiff must be allowed to include Doe Defendants, “for

otherwise the policy of applying state law relation back rules

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would be thwarted.” 

Does are alleged in causes of action for violation of

federal law as well as in causes of action for violation of state

law. 

Genske further complains that Plaintiffs have had the

benefit of discovery in Nunes v. Central Valley Dairymen, Merced

County Superior Court case No. 147653. Genske contends that

Plaintiffs know, or should know, the identities of the Doe

Defendants.

Because the naming of Doe Defendants is only disfavored, the

motion to strike is DENIED. Whether Plaintiffs will be able to

substitute individuals for the Doe Defendants will depend on

discovery and Rule 15, Federal Rules of Civil Procedure. Whether

further amendment to substitute specific individuals for Doe

Defendants to invoke relation back in order for purposes of

applicable statutes of limitations under either federal or state

law remains for further decision. 

B. MOTIONS TO DISMISS.

1. BACKGROUND.

The FAC alleges that Plaintiffs are owners and operators of

dairy farms located in Merced County, California. In the section

of the FAC captioned “Summary”, Plaintiffs allege:

1. Plaintiffs are all owners and operators

of dairy farms located in Merced County,

California. Through the machinations of

George Vieira and his wife, Mary Vieira,

facilitated by the gross negligence and/or

participation of accounting, managerial and

legal professionals, more than several

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million dollars worth of milk produced by

Plaintiffs’ farms was diverted from the

proper supply channels into a criminal

enterprise headquartered in New Jersey. As a

result, Plaintiffs have unnecessarily

incurred expenses and other damages, and

Plaintiffs have not been paid for the milk

that they supplied; rather, proceeds from the

sale of their milk and related brokerage fees

and commissions have been diverted to the

criminal enterprise and to George Vieira and

his wife, Mary Vieira, and their company

California Milk Market, a California

Corporation. George Vieira, Mary Vieira and

California Milk Market, in turn, used the

diverted proceeds to purchase real estate in

at least Stanislaus County, San Joaquin

County and Tuolumne County. They have more

recently attempted to shelter and hide their

ill-gotten proceeds by transferring parcels

of real estate to third parties, either

acting as nominees or without payment of fair

value. 

2. The criminal enterprise that George

Vieira, Mary Vieira and California Milk

Market conspired with and used to divert milk

payments from plaintiffs to themselves

consisted of an affiliation of cheese

manufacturers, bulk buyers of cheese

products, and milk product brokers, together

with the officers and owners who ran these

businesses.

3. The criminal enterprise centered upon a

publicly traded company called Suprema

Specialties, Inc., and a concerted scheme to

inflate the size, profitability, growth and

inventory value of Suprema Specialties, Inc. 

Indeed, from 1996 to 2002, Suprema

Specialties, Inc. reported annual doubledigit growth in sales and revenues, and it

used that reported growth to raise more than

$150 million from two public stock offerings

and from bank loans. These funds were then

largely diverted to individual members of the

criminal enterprise.

4. Suprema Specialties, Inc. created the

appearance of rapid and steady growth by

using fictitious invoices and fictitious

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purchase orders, in a scheme that the

Securities and Exchange Commission dubbed

“Round-Tripping.” Under the Round-Tripping

arrangements, Suprema Specialties, Inc. would

pretend to purchase milk and milk products

from milk product brokers, ostensibly to

manufacture into cheese. Suprema

Specialties, Inc. would then issue checks to

pay for these orders, but no product was

physically shipped. Instead, the milk

product brokers and bulk cheese buyers who

participated in the criminal enterprise would

turn around and pretend to order manufactured

cheese products from Suprema Specialties,

Inc., which Suprema Specialties, Inc. would

report on its books to inflate its sales and

accounts receivable. The milk product

brokers and bulk cheese consumers would then

use the payments that were sent to them from

Suprema Specialties, Inc., after deducting

commission payments for themselves, to make

payments on the fictitious orders, so that

Suprema Specialties, Inc. could show regular

payments on its fictitious accounts

receivable and keep the receivables current –

a condition required for Suprema Specialties,

Inc.’s large bank loans.

5. In 2001, Suprema Specialties, Inc.

reported $420 million in revenues; a

substantial portion of those revenues was

fictitious. The Securities and Exchange

Commission’s investigation found that from

1998 to February of 2002, at least $135

million of Suprema Specialties, Inc.’s

reported revenue was fictitious.

6. In order to maintain the pretense of

growth and profitability, Suprema

Specialties, Inc. manufactured cheese and

cheese products and it maintained warehouses

of inventory. But the actual inventory based

upon the actual volume of cheese that Suprema

Specialties, Inc. manufactured was too small

in relation to its reported volume of sales,

and Suprema Specialties, Inc. accordingly cut

the cheese with starch fillers and affixed

false labels to the inventory, thus

fraudulently inflating both the size and the

value of the inventory.

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7. Additionally, to mask its fraudulent

activities, Suprema Specialties, Inc. used

the same milk product brokers for its

legitimate purchases of milk as it used for

its fictitious purchases. This practice, and

other steps taken by the criminal enterprise,

directly led to plaintiffs’ catastrophic

loss. The loss primarily falls into four

categories.

SUPREMA’S BANKRUPTCY

8. Defendant George Vieira was retained by

and controlled the day-to-day operations of

and business planning for Central Valley

Dairymen, an agricultural cooperative through

which plaintiffs sold the milk produced by

their dairy farms. From November 2001

through March 2002, Mr. Vieira was also the

Chief Operating Officer of Suprema

Specialties West, Inc., a wholly owned

subsidiary of Suprema Specialties, Inc. In

addition, Mr. Vieira and his wife Mary Vieira

owned and controlled defendant California

Milk Market, LLC, one of the milk product

brokers that was a member of the criminal

enterprise centered around Suprema

Specialties, Inc.

9. As part of the criminal enterprise, Mr.

Vieira regularly caused Central Valley

Dairymen to sell its inventory of milk to

Suprema Specialties, Inc., as well as to the

related subsidiaries of Suprema Specialties,

Inc., much of which was routed through

California Milk Market, LLC. 

10. For several years, Mr. Vieira actively

hid from plaintiffs his involvement in the

criminal enterprise. Indeed, Mr. Vieira

represented to the plaintiffs that the

bankruptcy of Suprema Specialties, Inc.

created a great opportunity for plaintiffs to

enter into the cheese manufacturing business

and fill the market void left when Supreme

Specialties, Inc. went out of business. 

Within the last year, plaintiffs have

discovered the truth – that the milk they

supplied to Central Valley Dairymen was

diverted without payment to a criminal

enterprise, that on January 7 of 2004, Mr.

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Vieira and other leaders of the criminal

enterprise pled guilty to securities fraud

and conspiracy to engage in mail fraud and

bank fraud, and that the bankruptcy of

Suprema Specialties, Inc. did not create any

significant market void, since vast portions

of Suprema Specialties, Inc.’s reported

cheese sales were fictitious.

11. Because of the bankruptcy of Suprema

Specialties, Inc. and Suprema Specialties

West, Inc., caused by the criminal enterprise

guided by Mr. Vieira, Plaintiffs have been

denied payment for more than one million

dollars in milk supplied through Central

Valley Dairymen to California Milk Market,

Suprema Specialties, Inc. and Suprema

Specialties West, Inc.

LOSS OF FUND PROTECTION

12. In 1987, the State of California

established the Milk Producers Trust Fund to

provide protection to dairy farmers like

Plaintiffs. The fund guarantees that

California milk producers will be paid for

their milk as long as the milk is sold to a

bonded California processor. However, the

Fund does not cover milk sales that are

handled by a broker; and the Fund does not

cover milk that is sold to a processor in

which the producer holds a beneficial

interest.

13. Mr. Vieira, while purporting to act as a

fiduciary agent for Central Valley Dairymen

and its dairy farm members (including

Plaintiffs), routed a substantial portion of

the agricultural cooperative’s supply of milk

through California Milk Market, a milk

brokerage owned and controlled by Mr. Vieira

and his wife. By routing milk through

California Milk Market, these defendants

caused Plaintiffs to lose the protection of

the Milk Producers Trust Fund. This loss of

Trust Fund protection only added to

Plaintiffs’ staggering losses.

CHURNING

14. Additionally, as part of the RoundCase 1:06-cv-01243-JLT Document 67 Filed 03/13/08 Page 8 of 102
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Tripping scheme centered around Suprema

Specialties, Inc., California Milk Market

engaged in the fictitious sale of milk to

Suprema Specialties, Inc. or its subsidiary,

Suprema Specialties West, Inc. As noted,

California Milk Market also shipped

legitimate milk produced by Central Valley

Dairymen to Suprema Specialties, Inc. or its

subsidiary, Suprema Specialties West, Inc. 

This milk was routed through California Milk

Market rather than shipped directly from

Central Valley Dairymen in order to enhance

the appearance of California Milk Market’s

legitimacy; but in the process, California

Milk Market charged a brokerage fee on each

such transaction. 

15. To further mask the fraudulent RoundTripping scheme, California Milk Market and

the criminal enterprise prepared false

paperwork stating that significant portions

of Central Valley Dairymen’s milk that was

routed through California Milk Market and

shipped to Suprema Specialties, Inc. and its

subsidiary failed to meet quality

requirements, resulting in the milk being

rejected by the processor and returned to

California Milk Market. With the fictitious

transaction masked in this fashion,

California Milk Market and its owners and

operators would then broker the milk to

another legitimate processor.

16. With each transaction, however,

California Milk Market collected a brokerage

fee, and Plaintiffs are informed and

believe, and thereon allege, that California

Milk Market, George Vieira and Mary Vieira

also created fictitious shipping invoices

diverting to themselves payment for

transport costs that in reality were never

incurred. With the slew of fictitious

transactions, California Milk Market

accordingly collected fees that it had not

earned, and diverted further sums that

rightfully belonged to Plaintiffs into the

hands of George Vieira and Mary Vieira.

CREATION OF VALLEY GOLD, LLC

17. In addition, the criminal enterprise

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centered around Suprema Specialties, Inc.

was so lucrative and successful that Mr.

Vieira decided in the winter of 2002, after

the collapse of Suprema Specialties, Inc.,

to recreate the scheme. To do so, however,

he needed to find or create a cheese

manufacturer to replace Suprema Specialties’

role in the fraudulent scheme.

18. George Vieira thus proposed to

Plaintiffs and other members of Central

Valley Dairymen that they purchase a cheese

manufacturing plant that he would be in

charge of operating. Mr. Vieira first

presented this proposal at or about the time

of the 2002 annual dinner held by the

members of Central Valley Dairymen.

19. Mr. Vieira initially focused upon

endeavoring to purchase a cheese plant in

Manteca, California that had been operated

by Suprema Specialties West, Inc., but in

early 2003 recognized that it would not be

possible to acquire that plant. By March of

2003, George Vieira shifted his focus and

instead launched an effort to acquire a

cheese plant located in Gustine, California

that was for sale by Land-O-Lakes.

20. At this same time, in early 2003,

George Vieira was already engaged in

negotiations with the U.S. Attorney’s

offices about pleading guilty to securities

fraud for his participation in the criminal

enterprise’s scheme to inflate the stock

price of Suprema Specialties, Inc. through

the use of fictitious Round-Tripping

transactions. On March 28, 2003, the U.S.

Attorneys Office sent a seven page letter to

Mr. Vieira’s attorney stating the materials

terms of the plea deal. Mr. Vieira signed

the letter indicating his consent to the

plea terms on August 26, 2003.

21. Mr. Vieira personally spearheaded the

proposal to acquire the Gustine facility,

and actively acted as promoter of the

venture. On April 4, 2003, he caused Valley

Gold, LLC to be formed as a California

limited liability company and he shortly

afterward supplied a $200,000 deposit of

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earnest money to Land-O-Lakes as a condition

of negotiating an agreement to purchase the

cheese facility, which he caused to be

signed shortly afterward. In these tasks,

and in seeking funding for the venture from

Plaintiffs and others, George Vieira also

enlisted the assistance of Anthony Cary,

Genske-Mulder LLP and Downey Brand LLP. 

Anthony Cary is and remains a licensed

attorney practicing in the Sacramento area. 

Genske-Mulder was and remains a professional

partnership that specializes in providing

complete accounting, tax and consulting

services for he dairy industry. Their

roster of clients included Central Valley

Dairymen and many of its individual diary

farm members, including Plaintiffs. They

purportedly reviewed and helped prepare the

business plan for Valley Gold, LLC, and

recommended that Plaintiffs both invest in

Valley Gold, LLC and supply Valley Gold, LLC

with milk. Defendant Downey Brand LLP is a

California law partnership, and it was

retained by Mr. Vieira to assist in the

formation of Valley Gold, LLC. GenskeMulder and Downey Brand also prepared a

business plan and Offering Memorandum to

market and sell shares of Valley Gold, LLC,

including detailed financial forecasts, a

detailed business plan, and disclosures

required by Federal Securities law. A true

and correct copy of one of the business

plans is attached hereto as Exhibit A. A

true and correct copy of the Offering

Memorandum is attached hereto as Exhibit B.

22. Plaintiffs, individually and through

Central Valley Dairymen, were induced to

invest more than $530,000 for the formation

of Valley Gold, LLC; and Plaintiffs were

also induced to supply milk to Valley Gold,

LLC. The numerous representations made to

Plaintiffs to induce this action, including

those in the business plan and Offering

Memorandum, were materially false and

misleading. Defendants did not even notify

the Plaintiffs that Valley Gold, LLC was not

bonded, or that by becoming investors in

Valley Gold, LLC, any sale of Plaintiffs’

milk to Valley Gold, LLC would not be

covered by the Milk Producers Trust Fund. 

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23. On January 7, 2004, George Vieira

concluded his negotiations with the U.S.

Attorney’s office and pled guilty for his

criminal involvement in the scheme to

inflate the apparent profitability of

Suprema Specialties, Inc., and he was

shortly afterward barred from working in the

dairy and cheese business, including being

barred from his role as the chief operating

officer of Valley Gold, LLC. In addition,

Valley Gold, LLC defaulted on its purchase

obligations for the Land-O-Lakes facility

and defaulted in paying for milk supplied to

it by Central Valley Dairymen. The facility

was foreclosed and plaintiffs’ investments

were entirely lost.

24. As a result, Plaintiffs again were left

without payment for millions of dollars

worth of milk and they lost their cash

investment in Valley Gold, LLC.

25. Plaintiffs are unsophisticated dairy

farmers, and they relied upon the

professional advice and supposed expertise

not only of Mr. Vieira, but also of Downey

Brand, Genske-Mulder and Anthony Cary. The

professionals, however, all chose to parrot

Mr. Vieira’s assurances that he was acting

to protect Plaintiffs’ interests and

maximize the value of their milk; and not a

single professional had the courage to stand

up and report the irregularities of Mr.

Vieira’s proposals, the colossal and

unnecessary risks involved in the proposed

business venture, or even the fact that Mr.

Vieira was actively negotiating with the

U.S. Attorney’s office to plead guilty to

securities and bank fraud.

26. Those who were charged with protecting

Plaintiffs’ interests instead actively

allowed Plaintiffs to be bilked out of more

than $5 million.

The FAC alleges that Defendant Genske-Mulder “specializes

in providing complete accounting, tax and consulting services for

the dairy industry”; that “[t]he clients they serve produce

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approximately 17% of the milk in the Western United States and

approximately 7% nationally”; that Genske-Mulder “provides the

following services to its clients, including CVD, VALLEY GOLD,

and many of the Plaintiffs: 1) Annual and long-term tax planning;

2) Cash flow management; 3) Breakeven analysis; 4) Industry

standards; 5) Financial goal setting; 6) Financial Forecasts &

Projections; 7) Management Advisory Services; 8) Investment

Review; and 4) Cash flow analysis for expansion or

restructuring”; that Genske-Mulder “provided accounting and

consulting, management advisory and investment services to

Plaintiffs”; that Genske-Mulder “closely and directly monitored

the day-to-day operations, provided management advisory,

investment review, general account, and consulting services” to

Valley Gold and CVD; that, as result, Genske-Mulder directly

received financial benefit from Plaintiffs, CVD and Valley Gold;

that Genske-Mulder, with the assistance of Defendants Cary and

George Vieira, “prepared financial projections for the purpose of

attracting investors” to Valley Gold, and “actively participated

in the preparation of a business plan to attract investors for

Valley Gold, including the preparation of grossly negligent

financial forecasts for the operations of Valley Gold.” The FAC

further alleges that Genske-Mulder, George Vieira and Cary acted

in an advisory capacity with regard to CVD’s investment in Valley

Gold by Plaintiffs.

The FAC alleges that Downey Brand “was retained by CVD 

and/or Valley Gold, particularly to take the lead in preparing a

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business plan for the offering of securities for Valley Gold and

thereafter in creating a (blatantly illegal) proposal for

Plaintiffs to forego payment for milk supplied to Valley Gold in

exchange for worthless additional ownership interests in Valley

Gold – at a time when it should have been clear to defendants

that George Vieira’s plans for VALLEY GOLD were destined to

fail.” 

The FAC includes a section captioned “Derivative Rights”. 

This section of the FAC alleges in pertinent part:

43. As a non-profit cooperative

association formed pursuant to the

provisions of Chapter 1 of Division 20 of

the California Food and Agricultural Code,

the Capper-Volstead Act (7 U.S.C.A. §§291-

292), and the Cooperative Marketing Act (7

U.S.C.A. §451, et seq.), CVD operates on

behalf of and for the benefit of its member

dairies, collecting proceeds from the sale

of milk for the member dairies, and holding

those proceeds in trust and for the benefit

of the member dairies. CVD and its

managers, consultants and employees thus are

fiduciary trustees owing duties of care and

loyalty directly to the members of CVD,

including Plaintiffs.

44. Moreover, as a non-profit agricultural

cooperative association, and pursuant to

section 54173 of the California Food and

Agricultural Code, CVD acted as the agent

for its member dairies in marketing,

selling, storing and handling the milk

produced by the member dairies; and the

directors, officers, consultants and

professionals retained by CVD were

accordingly subagents, owing direct duties

of care and trust to the member dairies,

including Plaintiffs.

45. In providing services to CVD,

defendants GENSKE-MULDER, CARY, GEORGE

VIEIRA and DOWNEY BRAND therefore assumed

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duties of care and loyalty directly to

Plaintiffs, and each of them. 

46. To the extent that the claims asserted

by Plaintiffs are derivative of the rights

of CVD, then Plaintiffs pursue those rights

on behalf of CVD and accordingly add CVD as

an involuntary party to this lawsuit so that

the full rights of CVD can be adjudicated

and any recovery distributed, as the Court

ultimately deems appropriate, to the members

of CVD.

47. CVD continues to be controlled by

GEORGE VIEIRA and/or his affiliates and

those beholden to his desires, including Joe

Machado who, at the time of the events

described in this complaint, was

simultaneously the President of Valley Gold

and a board member of CVD and who continues

as the president or a senior board member of

CVD. It would thus be futile for Plaintiffs

to make a demand upon CVD or its directors

to pursue the relief sought in this lawsuit,

as such a demand would be tantamount to

asking the directors to investigate their

own potential malfeasance. Indeed, another

group of former CVD member dairies has

previously instituted legal proceedings

based upon the general criminal scheme

described above, and CVD has demonstrated

its hostility to its own former member

dairies and its refusal to hold its

managers, consultants, professionals and

accountants responsible for their misdeeds

and omissions by actively opposing the

claims instead of cooperating in securing

redress for its former members. In fact, in

that litigation, CVD and George Vieira have

retained the same attorney to represent

them. Further, all or substantially all of

the members of CVD who were damaged by the

acts and omissions set forth herein have

terminated their affiliation with CVD and

joined other dairy cooperatives. The

derivative relief sought in this complaint

on behalf of CVD would thus wholly or

substantially only benefit CVD’s former

members and not its present membership,

again rendering it futile to submit a demand

upon CVD’s board of directors to pursue the

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relief sought in this lawsuit. 

48. VALLEY GOLD also continues to be

controlled by GEORGE VIEIRA, and it would

likewise be futile for Plaintiffs to make a

demand upon VALLEY GOLD to pursue the relief

sought in this lawsuit. Apart from GEORGE

VIEIRA, Plaintiffs know of no person or

entity that presently has any control over

the operations of VALLEY GOLD.

49. To the extent that the claims asserted

by Plaintiffs are derivative of the rights

of VALLEY GOLD, then Plaintiffs pursue those

rights on behalf of VALLEY GOLD and

accordingly add VALLEY GOLD as an

involuntary party to this lawsuit so that

the full rights of VALLEY GOLD can be

adjudicated and any recovery distributed, as

the Court ultimately deems appropriate, to

the members of VALLEY GOLD.

2. GOVERNING STANDARDS.

A motion to dismiss under Rule 12(b)(6) tests the

sufficiency of the complaint. Novarro v. Black, 250 F.3d 729,

732 (9 Cir.2001). Dismissal of a claim under Rule 12(b)(6) is th

appropriate only where “it appears beyond doubt that the

plaintiff can prove no set of facts in support of his claim which

would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-

46 (1957). Dismissal is warranted under Rule 12(b)(6) where the

complaint lacks a cognizable legal theory or where the complaint

presents a cognizable legal theory yet fails to plead essential

facts under that theory. Robertson v. Dean Witter Reynolds,

Inc., 749 F.2d 530, 534 (9 Cir.1984). In reviewing a motion to th

dismiss under Rule 12(b)(6), the court must assume the truth of

all factual allegations and must construe all inferences from

them in the light most favorable to the nonmoving party. 

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Thompson v. Davis, 295 F.3d 890, 895 (9 Cir.2002). However, th

legal conclusions need not be taken as true merely because they

are cast in the form of factual allegations. Ileto v. Glock,

Inc., 349 F.3d 1191, 1200 (9 Cir.2003). Immunities and other th

affirmative defenses may be upheld on a motion to dismiss only

when they are established on the face of the complaint. See

Morley v. Walker, 175 F.3d 756, 759 (9 Cir.1999); Jablon v. th

Dean Witter & Co., 614 F.2d 677, 682 (9 Cir. 1980). When th

ruling on a motion to dismiss, the court may consider the facts

alleged in the complaint, documents attached to the complaint,

documents relied upon but not attached to the complaint when

authenticity is not contested, and matters of which the court

takes judicial notice. Parrino v. FHP, Inc., 146 F.3d 699, 705-

706 (9 Cir.1988). th

3. THIRD CAUSE OF ACTION FOR SECURITIES FRAUD.

The Third Cause of Action is alleged by Plaintiffs

individually and on behalf of Central Valley Dairymen, Inc.

(“CVD”) against George Vieira, Anthony Cary, Genske, Downey and

Does 21-40. The Third Cause of Action incorporates by reference

all preceding allegations. Of importance to the resolution of

the motions to dismiss are the following allegations in the

Second Cause of Action for rescission, captioned “Violation of

Registration Requirements”:

81. In addition to the misleading

statements and omissions included in the

business plan and Offering Memorandum,

addressed in the following causes of action

in this Complaint, Plaintiffs allege that

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VALLEY GOLD’s issuance of membership

interests to them and to other members of

CVD, both in April of 2003 and in September

of 2003, violated the requirements of the

Securities Act of 1933 because these

offerings were not registered as required by

applicable law.

82. For one, the number of offerees was too

uncertain. At the outset, the PROMOTERS

limited the proposed investors primarily to

members of CVD. But as disclosed on the

second to the last page of the business

plan, attached hereto as Exhibit B, in the

months after April 2003, the PROMOTERS

continued to solicit investments in VALLEY

GOLD and anticipated additional capital

contributions of “an additional $400,000 to

$800,000 by the end of August, 2003.” 

Plaintiffs are informed and believe, and

thereon allege, that in the months between

April of 2003 and August of 2003, the

PROMOTERS widely distributed the business

plan and approached a large number of

potential investors in a fashion that

constituted “general solicitation or

advertising” within the meaning of safe

harbor exemptions to the registration

requirements, as promulgated by the

Securities and Exchange Commission.

83. In addition, the offerees were not

sufficiently sophisticated. Indeed, while

Plaintiffs in April of 2003 met the net

asset requirement to qualify as accredited

investors under the safe harbor exemptions,

by the time of the September 2003 offering

they no longer did. Moreover, while

Plaintiffs in April of 2003 met the net

asset requirement, they were nonetheless not

sophisticated and did not read English with

ease; this was known to the PROMOTERS.

84. Plaintiffs are also informed and

believe, and thereon allege, that one or

more of the offerees who invested in VALLEY

GOLD in April of 2003 were neither

accredited nor sophisticated investors. 

Between the two main securities offerings in

2003, VALLEY GOLD raised well in excess of

$5 million in capital, such that to qualify

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under Rule 506’s safe harbor exemption to

registration, all investors were required to

be either accredited or sophisticated.

85. In addition, the PROMOTERS did not

provide reasonable time for the offerees to

review the Offering Memorandum. The

exemption from registration in section 4(2)

of the Securities Act of 1933 applies only

when offerees do not need protection, both

because they are sophisticated and because

they have available to them sufficient

information to reasonably assess the risks

of investing. By only allowing Plaintiffs

and the other offerees less than 1⁄2 day to

review the Offering Memorandum, the

PROMOTERS precluded the offerees from having

available to them sufficient information to

reasonably assess the risks of the proposed

investment.

The Third Cause of Action further alleges in pertinent part:

89. In or about May or June of 2003, these

defendants prepared a business plan that was

thereafter used to market and sell security

interests in VALLEY GOLD, including to

Plaintiffs. A true and correct copy of the

business plan prepared and circulated by

these defendants is attached hereto as

Exhibit A. The terms of the business plan

were largely taken from an Offering

Memorandum that was prepared by these

defendants in April of 2003, which was

likewise provided to potential investors. A

true and correct copy of the Offering

Memorandum is attached hereto as Exhibit B.

90. The interests procured from Plaintiffs

in the form of membership interests in

VALLEY GOLD -- a limited liability company

formed under California law – constituted

securities within the meaning of the

Securities Act of 1933 and the Securities

Exchange Act of 1934 because Plaintiffs were

induced to invest their money (and later

their rights to payment for milk) into a

common enterprise from which they expected

to earn profits through the efforts and

acumen of others, namely GEORGE VIEIRA and

the other officers and employees of VALLEY

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GOLD.

91. Defendants GEORGE VIEIRA, GENSKEMULDER, DOWNEY BRAND and DOES 21 through 40

were “sellers” within the meaning of the

Securities Act of 1933 and the Securities

Exchange Act of 1934 because the injury

suffered by Plaintiffs by purchasing

security interests in VALLEY GOLD flowed

directly and proximately from the actions

and representations of these defendants. 

These defendants also actively participated

in the sale of ownership interests in VALLEY

GOLD to Plaintiffs and were motivated by a

desire to serve their own financial

interests. GEORGE VIEIRA was motivated to

secure the income from being an employee and

the managing member of VALLEY GOLD as well

as from his plan to use VALLEY GOLD as a

vehicle to continue the fraudulent RoundTripping transactions that he had so

lucratively engaged in with the criminal

RICO enterprise discussed above. GENSKEMULDER was motivated by its anticipation of

securing income as a paid consultant and as

the primary accounting firm for VALLEY GOLD

– an anticipation that was cemented by the

close relationship between GEORGE VIEIRA and

equity partners of GENSKE-MULDER. Defendant

DOWNEY BRAND was motivated by the

anticipation and promise that it would be

attorneys for and be paid for the rendition

of legal services to VALLEY GOLD and because

GEORGE VIEIRA was using the funds of CVD to

pay for the services in forming and

soliciting investors for VALLEY GOLD, a

payment source that could only be justified

as a legitimate business expense for CVD if

VALLEY GOLD was successfully formed,

launched and sufficiently funded to begin

operations.

92. In addition to the purchases of VALLEY

GOLD as part of its initial formation, in or

about late September of 2003, defendants

GEORGE VIEIRA, GENSKE-MULDER, CARY and DOES

41 through 50 also induced Plaintiffs and

CVD to enter into illegal and unlawful

agreements to exchange milk (or accounts

receivable owed to them for milk) for

additional equity ownership interests in

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VALLEY GOLD.

93. The reason the “milk for equity”

contracts were illegal and unlawful is

because California Food and Agricultural

Code sections 62191, 62196 and 62200 require

(a) that milk producers be paid for milk

solely in cash or with checks that are

reduceable to cash in no more than one

business day; (b) that payment be made in

very short time periods (roughly 15 days);

and (c) that failing to abide by these

requirements and endeavoring to use any

other payment arrangement is an unlawful

business practice.

94. In inducing Plaintiffs to enter into

contracts to exchange milk for equity (in

the general form of the contribution

agreement attached hereto as Exhibit C and

the assignment agreement attached hereto as

Exhibit D), defendants GEORGE VIEIRA,

GENSKE-MULDER, CARY and DOES 41 through 50

falsely represented to Plaintiffs:

(a) that the contracts were proper

and lawful;

(b) that CVD was contractually

required to supply milk to VALLEY

GOLD and if Plaintiffs stopped

supplying their milk to CVD and

switched to another agricultural

cooperative, they would be

violating the law and subject to

substantial fines and penalties;

(c) that VALLEY GOLD was doing

well and had sizeable orders that

ensured that Plaintiffs would earn

significantly more from their

increased ownership in VALLEY GOLD

than they were owed for their

milk.

95. These representations were false, and

were made be defendants in order to induce

Plaintiffs and CVD to purchase additional

equity ownership interests in VALLEY GOLD in

exchange for milk.

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96. Defendants GEORGE VIEIRA, CARY, GENSKEMULDER, DOWNEY BRAND and DOES 21 through 40

were also “sellers” within the meaning of

the Securities Act of 1933 and the

Securities Exchange Act of 1934 because they

actively solicited Plaintiffs to purchase

interests in VALLEY GOLD. 

97. In violation of the Securities Act of

1933, the Securities Exchange Act of 1934,

Exchange Act Rule 10b-5 enacted under the

regulatory authority of the Securities and

Exchange Commission and the Sarbanes-Oxley

Act of 2002, the business plan and the

Offering Memorandum and the related

materials and communications supplied by

these defendants to Plaintiffs, including

the materials used to induce plaintiffs to

enter into the “milk for equity” contracts,

contained material misrepresentations and

omissions of material facts that caused the

communications to Plaintiffs to be

materially misleading, and constituted a

fraudulent and deceitful manipulation and

contrivance of the regulatory requirements

enacted under the Federal Securities laws

for the protection of parties like

Plaintiffs.

98. The business plan and the Offering

Memorandum and the related materials and

communications supplied by these defendants

to Plaintiffs, including the materials used

to induce plaintiffs to enter into the “milk

for equity” contracts contained, served as

manipulative and deceptive devices and

contrivances intended to contravene the

rules and regulations of the Securities and

Exchange Commission as necessary and

appropriate for the protection of investors,

and thus violated section 10(b) of the

Securities Exchange Act of 1934 (15 U.S.C.

§78j(b).)

99. Plaintiffs purchased securities in

VALLEY GOLD, both individually and through

CVD, in direct reliance upon the misleading,

false, incomplete and deceptive business

plan and Offering Memorandum and related

communications supplied by these defendants,

including the materials used to induce

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plaintiffs to enter into the “milk for

equity” contracts, aquicint [sic] securities

in VALLEY GOLD directly from VALLEY GOLD as

the issuer of the securities. 

100. Among other material misrepresentations

and material omissions of material facts,

these materials:

a. Stressed that VALLEY GOLD’s

success was dependent upon the unique

“experience and abilities of Mr. [George]

Vieira [and two associates]” without

disclosing that Mr. Vieira’s unique

experience was not formed in the successful

production of cheese products, but rather in

the concoction of fictitious cheese products

and cheese diluted with starch fillers

manufactured not for commercial success with

consumers, but rather to inflate the

apparent inventory value and sales volume of

a by then bankrupt cheese manufacturer, for

the sole purpose of perpetuating a hundreds

of million dollar securities fraud on

securities investors situated similarly to

Plaintiffs;

b. Disclosed that Mr. Vieira had

been contacted by the U.S. Attorney’s Office

as part of its investigation into the

bankruptcy of Suprema Specialties, Inc.,

without disclosing that GEORGE VIEIRA was

already actively involved in negotiations

with the United States Attorney’s Office to

plead guilty to securities and bank fraud;

c. Failed to disclose that

VALLEY GOLD was unbonded and not qualified

to participate in the Milk Producers Trust

Fund, which was a standard requirement for

securing reliable supplies of milk product –

necessary for legitimate cheese production

facilities (but less important for sham

facilities organized to fleece investors and

banks without ever achieving commercial

success);

d. Failed to disclose that if

Plaintiffs became investors in VALLEY GOLD,

their supplies of milk to VALLEY GOLD would

in any event fail to qualify for the

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protections of the Milk Producers Trust

Fund;

e. Included financial

projections supplied by GENSKE-MULDER that

vastly exceeded the performance of any

startup cheese manufacturer, with the

possible exception of Suprema Specialties,

Inc., whose dramatic reported growth was by

then known in the financial community (but

not to Plaintiffs) to have been the result

of smoke, mirrors and a fraudulent RoundTripping scheme orchestrated by a criminal

enterprise headquartered in New Jersey.

101. Plaintiffs are informed and believe,

and thereon allege, that GENSKE-MULDER, 

GEORGE VIEIRA and DOWNEY BRAND and DOES 21

through 40 all actively collaborated on

preparing the business plan and the Offering

Memorandum that was supplied to Plaintiffs

and that were instrumental in inducing

Plaintiffs and CVD to purchase initial

equity interests in VALLEY GOLD. Indeed,

these defendants participated in meetings

and electronic communications to discuss the

best way to conceal from Plaintiffs and CVD

that GEORGE VIEIRA had, one month earlier,

reached an agreement with the office of the

United States Attorney to plead guilty to

securities fraud and to a conspiracy to

commit bank and mail fraud – the active

criminal conspiracy centered on the RoundTripping scheme that led to the collapse of

Suprema Specialties, Inc. and its

subsidiaries.

102. The terms of the negotiated plea

bargain were spelled out in a seven-page

letter dated March 28, 2003 from the U.S.

Attorney’s Office to GEORGE VIEIRA’s

attorney. And the plea deal (that was

formally entered on January 4, 2004), barred

GEORGE VIEIRA from acting as an officer or

director of any company issuing registered

securities under the Securities Exchange Act

of 1934.

103. In the business plan, however,

defendants disclosed none of this vital

information. Indeed, in the business plan,

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defendants pretended that the implosion of

Suprema Specialties, Inc. and its

subsidiaries provided an advantage for the

proposed business of VALLEY GOLD because as

“one of the larger producers of ricotta in

the state” a market void and thus a market

opportunity was created when “Suprema

Specialties, Inc. ceased operations in

2002.” The business plan failed to mention

that Suprema Specialties ceased business

because its fraudulent practices, inflated

sales and falsified inventory forced it into

bankruptcy; and the business plan failed to

mention that as much as 87% of the purported

cheese production by Suprema Specialties

that led defendants to characterize it as a

large producer was fictitious, as reported

by the Securities and Exchange Commission’s

investigation.

104. The Offering Memorandum provided a

brief disclosure concerning Suprema

Specialties’ bankruptcy, but did so in a way

to minimize the importance of the

information and in a manner that created the

impression that GEORGE VIEIRA’s sole

involvement with Suprema Specialties

occurred because he “was, for a short period

of time, an officer of Suprema West, Inc. .

. . a subsidiary of Suprema Specialties,

Inc.” The Offering Memorandum did not

disclose that GEORGE VIEIRA was not just any

officer, but was the Chief Operating Officer

and was thus directly responsible for

fraudulent financial transactions that

government officials were investigating. 

The Offering Memorandum also did not

disclose that GEORGE VIEIRA had reached an

agreement with the United States Attorney’s

Office to plead guilty to securities fraud

and conspiracy to commit bank and mail

fraud. And the Offering Memorandum did not

disclose that in addition to being an

officer of Suprema Specialties West, Inc.,

GEORGE VIEIRA and his wife MARY VIEIRA were

also officers and owners of CMM, which was

also a subject of the criminal investigation

as well as a probable broker for any cheese

produced by VALLEY GOLD.

105. The Offering Memorandum stated at page

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7 that VALLEY GOLD was negotiating with a

“cheese distributor in New Jersey” to

produce substantially all of VALLEY GOLD’s

production for its first two years. The

Offering Memorandum then stated that the

negotiations had resulted in a contract, and

that “the total amount of cheese to be

purchased under this contract [is estimated]

to be between 14 and 25.5 million pounds.” 

The Offering Memorandum further disclosed

that if the New Jersey distributor “for any

reason [could] not fulfill its commitment to

purchase the Company’s product, there is no

assurance that the Company would be able to

find an immediate customer . . . and such a

disruption could have a material adverse

effect on the Company’s business, operations

and finances.”

106. Plaintiffs are informed and believe,

and thereon allege, that the New Jersey

Cheese Distributor referred to in the

Offering Memorandum was J.S.P. Marketing,

LLC, an entity primarily owned and operated

by Joseph S. Profaci. Mr. Profaci had

refused to enter into any binding or

comprehensive distributorship agreement, and

this was known to defendants. 

107. Despite mentioning that a “contract”

and “commitment” had been reached with the

New Jersey distributor, the Offering

Memorandum failed to disclose the identity

of that distributor. Plaintiffs are

informed and believe that this omission was

the result of a deliberate choice by

defendants GENSKE-MULDER, GEORGE VIEIRA,

DOWNEY BRAND and DOES 21 through 40 to

conceal the true nature of Mr. Profaci’s

unwillingness to enter into a binding or

comprehensive distributorship agreement.

108. In addition, and beginning in or about

March of 2003, Defendants GEORGE VIEIRA with

the assistance of GENSKE-MULDER and DOES 21

through 40, and knowing these

representations to be false and with the

intent to deceive the Plaintiffs, and to

induce them into investing in VALLEY GOLD,

further falsely and fraudulently represented

to the Plaintiffs that:

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(a) CVD had suffered financial

difficulty and had defaulted on obligations

to pay Plaintiffs for milk because there

were limited markets for CVD’s milk (when in

reality, the reason CVD had suffered

financially was because of the RoundTripping scheme and the churning of

commissions by CMM);

(b) By investing in the formation

of VALLEY GOLD, Plaintiffs and CVD would

solve the problem of limited demand for

CVD’s milk because VALLEY GOLD would

purchase the bulk of CVD’s milk and process

it into cheese, for which there was

purportedly a strong market demand (when in

reality, the apparent market demand for

cheese was materially distorted by the

Round-Tripping scheme and the fictitious

cheese sales publicly reported by Suprema

Specialties, Inc. and its subsidiaries, and

the purported demand for cheese from the

unnamed New Jersey distributor was

illusory);

(c) GEORGE VIEIRA was a “handson” owner of VALLEY GOLD; 

(d) GEORGE VIEIRA was “Chief

Operating Officer” and was going to be

responsible for the day-to-day management of

VALLEY GOLD; 

(e) VALLEY GOLD committed itself

to selling only to reputable buyers with

solid financial standing; 

(f) GEORGE VIEIRA could use his

contacts to “sell more cheese than VALLEY

GOLD could ever produce”;

(g) With the ownership of VALLEY

GOLD, Plaintiffs MANUEL LOPES, MARIANA

LOPES, JOSEPH LOPES and RAYMOND LOPES would

“hold all the keys to financial success”; 

(h) VALLEY GOLD would not need to

invest excessive resources to make the plant

operable; 

(i) VALLEY GOLD would make

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payments for milk received (from Plaintiffs

MANUEL LOPES, MARIANA LOPES, JOSEPH LOPES

and RAYMOND LOPES): 

1. In accordance with

the announced inplant usage and

pricing at the time

of delivery 

2. Producer payments

would be made on or

before the 28 day th

of the month for

milk received

during the first 15

days of the month,

and on the 13 day th

of the month for

milk received

during the

remainder of the

month; 

(j) Milk payments were dictated

by the State of California and, as

such, not negotiable; 

(k) “By having owners that live

in short proximity to the plant

and with one of the owners (GEORGE

VIEIRA) being the Chief Operating

Officer, the personnel at VALLEY

GOLD will see first hand the

company’s commitment to quality”

(l) MANUEL LOPES, MARIANA LOPES,

JOSEPH LOPES and RAYMOND LOPES’

individual ownership would not be

diluted by allowing fellow members

or others to contribute capital

monies at any time; and

(m) In the event that VALLEY GOLD

needed additional capital, it

would offer additional ownership

interest to existing members,

first, and all other (outside)

parties, second.

109. Defendants also actively encouraged

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Plaintiffs to invest individually in VALLEY

GOLD and to agree to CVD’s investment in

VALLEY GOLD, while the Defendants knew of

GEORGE VIEIRA’s criminal activities outlined

above. In addition, VALLEY GOLD never

intended to and never committed itself to

selling only to reputable buyers with solid

financial standing. Instead, VALLEY GOLD

dealt with members of the criminal RICO

enterprise manipulated by GEORGE VIEIRA and

with which he was affiliated, and whom

Defendants knew were incapable of paying for

millions of dollars worth of VALLEY GOLD

cheese.

110. Further, GEORGE VIEIRA’s negative and

toxic reputation in the cheese industry,

which should have been disclosed to the

investors, made it difficult for VALLEY GOLD

to market and sell its cheese, and it made

it difficult to obtain financing and quickly

led to VALLEY GOLD’s collapse. 

111. Plaintiffs were never aware of any

facts that made them suspicious of the

veracity of Defendants’ representations, and

did not begin to discover the fraud, deceit

and misrepresentations of Defendants as

herein alleged until less than one year ago.

112. Plaintiffs only purchased equity

interests in VALLEY GOLD because of the

false and misleading representations

contained in the business plan and the

Offering Memorandum and the accompany false

and misleading statements and omissions of

defendants GEORGE VIERRA [sic] and GENSKEMULDER and DOES 21 through 40. Further,

Plaintiffs only consented to allow CVD to

purchase equity interests, and CVD only

purchased equity interests in VALLEY GOLD

because of the false and misleading

representations contained in the business

plan, the Offering Memorandum and the

accompany false and misleading statements

and omissions of defendants GEORGE VIERRA

[sic] and GENSKE-MULDER and DOES 21 through

40. Those equity interests are now

worthless.

113. As a result of defendants’ violations

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of the Federal Securities Laws, including

the Securities Act of 1933, the Securities

Exchange Act of 1934, Exchange Act Rule 10b5 enacted under the regulatory authority of

the Securities and Exchange Commission and

the Oxley Sarbanes-Oxley Act of 2002,

Plaintiffs have incurred damages by

investing millions of dollars into a doomed

enterprise and supplied millions more in

milk to that enterprise – milk for which

plaintiffs have not been paid, resulting in

damages to Plaintiffs in a sum exceeding

several million dollars.

INVOLVEMENT OF CARY, DOWNEY BRAND AND

GENSKE-MULDER

114. CARY, DOWNEY BRAND and GENSKE-MULDER

are sued as authors of the Offering

Memorandum of business plan [sic], with

direct knowledge of three primary omissions

or misstatements, and direct involvement in

the drafting that led to these omissions or

misstatements:

a. The Offering Memorandum and

business plan did not disclose that milk

shipped by CVD to VALLEY GOLD would not be

protected by the milk producer’s trust fund;

b. The Offering Memorandum

and business plan materially misstated the

nature of negotiations with New Jersey

cheese distributors; and

c. The Offering Memorandum

materially and misleadingly disclosed the

nature of the investigation of GEORGE

VIEIRA’s criminal activity and his

negotiations of a plea bargain to bank and

securities fraud.

115. CARY knew that milk shipped by CVD to

VALLEY would not be protected by the milk

producer’s trust fund because in February of

2003, he negotiated a stipulation and order

in pending proceedings before the Department

of Food and Agriculture that stated: 

“Respondent acknowledges that Central Valley

Dairymen milk processed by the new entity

licensed to Respondent will not be eligible

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for Trust fund coverage.” CARY signed this

stipulation on February 18, 2003 and on

February 21, 2003 was mailed a copy of the

order entered upon the stipulation.

116. At the time of this stipulation, the

PROMOTERS were focused on acquiring a cheese

plant in Manteca. To avoid any confusion,

the Department of Food and Agriculture

requested a further stipulation after the

Gustine facility was purchased to make it

clear that no trust fund coverage would be

provided for milk shipped by CVD to VALLEY

GOLD’s Gustine facility. CARY signed that

stipulation on September 20, 2003, only days

before Plaintiffs were asked to purchase

additional interests in VALLEY GOLD with the

“milk for equity” contracts.

117. The lack of trust fund coverage was

never disclosed to Plaintiffs.

118. On numerous occasions throughout the

early part of April of 2003, Curtis Colaw

endeavored to negotiate a distributorship

agreement with Mr. Profaci, including on

April 1, 2003, April 2, 2003, April 17,

2003, April 18, 2003 and April 22, 2003. As

of April 22, 2003 no agreement had been

reached and Mr. Profaci’s reluctance to sign

a binding or comprehensive distributorship

agreement was apparent. Nonetheless,

Defendants drafted the Offering Memorandum

to make it appear that a firm deal was

relatively certain and would provide for

purchase of $100 million of cheese products

per year for two years. This was materially

false. 

119. GEORGE VIEIRA’s plea negotiations, his

involvement in the events that led to the

collapse of Suprema Specialties and the

nature of the investigation by the United

States Attorney for New Jersey were well

known to Defendants and were actively

investigated by DOWNEY BRAND. But, as

alleged above, Defendants drafted the

Offering Memorandum to minimize and conceal

this information.

120. The partners at GENSKE-MULDER who

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primarily worked on preparing the Offering

Memorandum and business plan were Peter

Hoekstra and Paul Anema. From the

information presently available to

Plaintiffs, it appears that Peter Hoekstra

had primary responsibility for overseeing

those portions of the Offering Memorandum

and business plan that dealt with the

disclosure of risks associated with the

dairy industry and in preparing the

financial forecasts and projections. Paul

Anema assisted in these matters, and both

were involved in reviewing and revising the

final forms of both documents.

121. The attorneys at DOWNEY BRAND who

worked on preparing the Offering Memorandum

(including those portions that were

subsequently incorporated into the business

plan) were Jeffrey Koewler, Silvio

Reggiardo, Lisa Nixon, Joseph G. De Angeles,

Bruce Dravis, Christopher A. Delfino,

Ricardo D. Bordallo and Diane Oleson. 

Jeffrey Koewler had primary responsibility

for preparing the Offering Memorandum and

ensuring that it had all disclosures

required by California law. Ricardo D.

Bordallo researched the licensing

requirements for a milk processing plants as

part of his work on the Offering Memorandum,

and thus recognized the materiality of the

regulatory scheme and the need to disclose

the lack of trust fund coverage for milk

shipped by CVD to VALLEY GOLD. Diane

Oleson, at the direction of Christopher A.

Delfino, had primary responsibility for

investigating GEORGE VIEIRA.

122. Plaintiffs are informed and believe,

and thereon allege, that CARY prepared the

initial draft to disclose the criminal

investigation of GEORGE VIEIRA, but that he

submitted the draft to DOWNEY BRAND and the

other Defendants who revised the draft to

its current form.

123. DOWNEY BRAND, GENSKE-MULDER and CARY

were all acutely aware of the PROMOTER’s

insistence that the VALLEY GOLD be funded by

April 22, 2003. Their billing records show

frantic activity in efforts to meet that

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Genske complains that the Third Cause of Action combines 2

allegations pertaining to a “1933 Act Claim (presumably § 12(2))

with a 1934 10b-5 claim.” Genske argues that this defect was

present in the Complaint and has not been corrected in the FAC.

Plaintiffs respond that they can separate the two claims into

separate causes of action but, because the Court did not

specifically direct that they do so in the May 30 Order directing

them to file a First Amended Complaint, they did not do so.

Further, Plaintiffs assert, when the same conduct supports multiple

causes of action, the conduct need only be alleged once.

Plaintiffs argue that Genske places form over substance and resorts

to the formalities of code pleading. This may be, however,

Defendants should be fairly apprised that two separate claims are

alleged.

33

date. These defendants were thus fully

aware that Plaintiffs would not be provided

an adequate amount of time to review the

Offering Memorandum.

124. The Offering Memorandum itself

discloses that $325,000 of the funds raised

by the April 22, 2003 securities issuance

would be used to pay the bills of CARY,

GENSKE-MULDER and DOWNEY BRAND. These

defendants thus knew that a successful

securities issuance was in their own

financial interests.

Defendants move to dismiss the Third Cause of Action on

various grounds.2

a. OFFERING NOT A PUBLIC OFFERING.

Section 12(2) of the Securities Act, 15 U.S.C. §

77l(a)(2), provides in pertinent part:

Any person who ... offers or sells a

security ... by the use of any means or

instruments of transportation or

communication in interstate commerce or of

the mails, by means of a prospectus or oral

communication, which includes an untrue

statement of a material fact or omits to

state a material fact necessary in order to

make the statements in light of the

circumstances under which they are made, not

misleading (the purchaser not knowing of

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such untruth or omission), and who shall not

sustain the burden of proof that he did not

know, and in the exercise of reasonable care

could not have known, of such untruth or

omission, shall be liable ... to the person

purchasing such security from him, who may

sue either at law or in equity in any court

of competent jurisdiction, to recover the

consideration paid for such security with

interest thereon, upon the tender of such

security, or for damages if he no longer

owns the security.

In the May 30 Order, the Court ruled in pertinent part:

To the extent that the Second Cause of

Action purports to state a claim for

violation of Section 12(2) of the Securities

Act of 1933, Defendants’ motions to dismiss

are GRANTED WITH LEAVE TO AMEND. Plaintiffs

shall amend to allege either that the

offering of securities was a public offering

or that the offering of securities was

subject to registration and that the

offering was not registered as required by

applicable law.

Genske moves to dismiss the Third Cause of Action on the

ground that the allegations do not allege a “public offering”

because the FAC does not allege any use of public media to

solicit investments and does not allege that a seminar whose

invitees are solicited through a “general solicitation or general

advertising.” Genske refers to S.E.C. Rule 502:

Limitations on manner of offering. Except

as provided in Rule 504(b)(1), neither the

issuer nor any person acting on its behalf

shall offer or sell the securities by any

form of general solicitation or general

advertising, including, but not limited to,

the following:

1. Any advertisement, article, notice or

other communication published in any

newspaper, magazine, or similar media or

broadcast over television or radio; and

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2. Any seminar or meeting whose attendees

have been invited by any general

solicitation or general advertising ....

Plaintiffs respond by citing Western Federal Corp. v.

Erickson, 737 F.2d 1439 (9 Cir. 1984). There, the Ninth th

Circuit endorsed a flexible test for determining if the private

offering exemption under Section 4(2) is available. Id. at 1442. 

The Ninth Circuit’s test considers: “(1) the number of offerees,

(2) the sophistication of the offerees, (3) the size and manner

of the offering, and (4) the relationship of the offerees to the

issuer.” Id. “The party claiming the exemption must show that

it is met not only with respect to each purchaser, but also with

respect to each offeree.” Id. Plaintiffs argue that the FAC

addresses each of these factors. Plaintiffs refer to Paragraphs

82-83 and 85:

82. For one, the number of offerees was too

uncertain. At the outset, the PROMOTERS

limited the proposed investors primarily to

members of CVD. But as disclosed on the

second to the last page of the business

plan, attached hereto as Exhibit B, in the

months after April 2003, the PROMOTERS

continued to solicit investments in VALLEY

GOLD and anticipated additional capital

contributions of “an additional $400,000 to

$800,000 by the end of August, 2003.” 

Plaintiffs are informed and believe, and

thereon allege, that in the months between

April of 2003 and August of 2003, the

PROMOTERS widely distributed the business

plan and approached a large number of

potential investors in a fashion that

constituted “general solicitation or

advertising” within the meaning of safe

harbor exemptions to the registration

requirements, as promulgated by the

Securities and Exchange Commission.

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83. In addition, the offerees were not

sufficiently sophisticated. Indeed, while

Plaintiffs in April of 2003 met the net

asset requirement to qualify as accredited

investors under the safe harbor exemptions,

by the time of the September 2003 offering

they no longer did. Moreover, while

Plaintiffs in April of 2003 met the net

asset requirement, they were nonetheless not

sophisticated and did not read English with

ease; this was known to the PROMOTERS.

...

85. In addition, the Promoters did not

provide reasonable time for the offerees to

review the Offering Memorandum. The

exemption from registration in section 4(2)

of the Securities Act of 1933 applies only

when offerees do not need protection, both

because they are not sophisticated and

because they have available to them

sufficient information to reasonably assess

the risks of investing. By only allowing

Plaintiffs and the other offerees less than

1⁄2 day to review the Offering Memorandum, the

PROMOTERS precluded the offerees from having

available to them sufficient information to

reasonably assess the risks of the proposed

investment.

Plaintiffs argue that Genske’s focus on the two examples

in Rule 502 ignores the language “including, but not limited to”

set forth in that Rule.

Genske replies that the FAC gives no description of the

number of offerees or the manner in which the Promoters

approached a wide number of investors. Genske argues that the

May 30 Order

directed Plaintiffs to plead the manner in

which the Business Plan and the Offering

Memorandum were ‘widely distributed’ and the

manner in which a ‘large number of potential

investors’ were solicited. Such information

should be readily available to Plaintiffs. 

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If Plaintiffs are aware of mass mailings,

mass advertisements, or use of the general

media, then Plaintiffs should reasonably be

expected to plead such general solicitation. 

At the very least, Plaintiffs should be

required to allege the basis for their

‘information and belief” (FAC ¶¶ 82, 8) and

the facts which support this information and

belief.

Given the standards governing a Rule 12(b)(6) motion to

dismiss and the requirements of notice pleading, Genske’s motion

to dismiss on this ground is DENIED. Whether Plaintiffs can

satisfy the legal requirements of the law presents factual issues

that cannot be resolved at the pleading stage.

b. OFFERING HAD TO BE REGISTERED.

Genske further argues that the allegations in Paragraphs

81-85 quoted above do not suffice to allege that the offering had

to be registered. Genske complain that the FAC fails to include

as an exhibit the subscription agreements signed by Plaintiffs in

which Plaintiffs affirmed that they met the asset test and made

other representations. Genske contends that the FAC also fails

to allege that the Offering was not exempt by complying with Rule

505, Rule 506 or Section 4(2) of the 1933 Act. Genske further

argues:

Most importantly, the FAC fails to

acknowledge that because Plaintiffs were

accredited investors, they are excluded from

the number of investor limits in Rule 505

and 506 (see, Rule 501e. for the method of

calculating the number of investors and the

exclusion of accredited investors.) The FAC

also does not take into account the

‘materiality’ provisions of compliance with

RULE 505 or 506 safe harbor exemption as

allowed by RULE 508. 

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Plaintiffs are not required to allege that the offering

failed to meet the safe harbor requirements of Rules 505 or 506

because the burden of claiming an exemption to the registration

requirements falls on the Defendants, not the Plaintiffs. See

Western Federal Corp. v. Erickson, 739 F.2d 1439, 1442 (9th

Cir.1984).

Plaintiffs further assert that Rule 505 only applies to

offerings totaling up to $5 million for any 12-month period. 

Paragraph 84 of the FAC alleges that Valley Gold raised in excess

of $5 million for the two 2003 offerings. Plaintiffs contend

that Rule 506 requires that all non-accredited investors be

sophisticated and asserts that the FAC alleges that Valley Gold

failed this test as well.

The motion to dismiss on the ground that the offering had

to be registered is DENIED.

c. DOWNEY AND GENSKE NOT “SELLERS”.

Downey notes that Paragraph 114 of the FAC alleges that

Downey, Genske and Cary “are sued as joint authors of the

Offering Memorandum and/or business plan, with direct knowledge

of at least three primary omissions or misstatements ....” 

Downey contends that this allegation negates any liability under

Section 12(2). Downey cites Moore v. Kayport Package Exp., Inc.,

885 F.2d 531, 536-537 (9 Cir.1989): th

Under the Pinter standard, we now turn to a

review of the specific allegations in the

investors’ second amended complaint. First,

they alleged the accountants drafted

financial documents and allowed Celini and

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Binder to use these documents in selling the

unregistered securities. Second, they

alleged that the lawyers, each of whom was

retained by the principal defendants,

drafted or approved the drafting of false or

misleading prospectuses and financial

documents, and directed the issuance of the

securities. Specifically, the investors

alleged that (1) all the lawyers

participated in meetings where the

prospectuses and other promotional materials

were drafted; (2) lawyers Ellis and Uhrman

gave advice and counsel to the owner

defendants in preparing prospectuses and

other promotional materials, (3) lawyer

Minkow drafted tax opinions and allowed

these opinions to be included in various

promotional materials, and (4) lawyer Spolin

allowed his name to be used on promotional

materials as general counsel to CCA.

Based on Pinter, we conclude that the

investors failed to state a claim under

section 12(2) against the accountant and

lawyer defendants. Under the Pinter

analysis, these professionals are only

subject to section 12(2) liability if they

solicited the purchases and were motivated,

at least in part, by financial gain. 

Pinter, 108 S.Ct. at 2079. Here, the

investors did not allege that the lawyers or

accountants played any role at all in

soliciting the purchases. Rather, the

investors alleged that these defendants

performed their professional services in

their respective capacities as accountants

and lawyers. As the Court stated in Pinter,

‘[t]he buyer does not, in any meaningful

sense, “purchas[e] the security from” such a

person.’ Id. at 2081 ....

The district court did not err in dismissing

the section 12(2) claim against the

accountant and lawyer defendants.

Although Paragraph 91 of the FAC alleges that Downey and

Genske were “sellers”, there are no allegations that either of

these defendants solicited the purchases of the securities. 

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Although Plaintiffs asserted at the hearing that these Defendants

are sellers because the FAC alleges a “collaborative effort”, the

specific allegations against these Defendants pertain to the

preparation of the business plan and the Offering Memorandum, not

the solicitation of investments. Drafting documents is merely

the “performance of professional services” and receiving part of

the consideration is irrelevant to the issue of solicitation. 

See Rocchio v. Eagle Mission, Inc., 1991 WL 51193 (9 Cir.1993). th

Defendants’ motion to dismiss the Third Cause of Action

to the extent it alleges a violation of any 12(2) of the

Securities Act, 15 U.S.C. § 77l(a)(2) is GRANTED WITHOUT LEAVE TO

AMEND. Plaintiffs have had two opportunities to allege seller

liability against Genske and Downey and have been unable to do

so.

d. JURISDICTION OVER RULE 10b-5 CLAIM.

Downey moves to dismiss this cause of action to the

extent that it alleges violations of Section 10b of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5,

on the ground fails to adequately allege the jurisdictional

element.

15 U.S.C. § 78j(b) provides:

It shall be unlawful for any person,

directly or indirectly, by the use of any

means or instrumentality of interstate

commerce or of the mails, or of any facility

of any national securities exchange -

...

(b) To use or employ, in connection with the

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purchase or sale of any security registered

on a national securities exchange or any

security not so registered, any manipulative

or deceptive device or contrivance in

contravention of such rules and regulations

as the Commission may prescribe as necessary

or appropriate in the public interest or for

the protection of investors.

Rule 10b-5, promulgated under Section 10b, provides: 

It shall be unlawful for any person ... [t]o

make any untrue statement of a material fact

or to 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.”

In the section of the FAC captioned “Use of

Instrumentalities of Interstate Commerce”, it is alleged:

71. In preparing the business plan and

Offering Memorandum, and in soliciting

Plaintiffs’ investments in VALLEY GOLD, the

defendants made use of the instrumentalities

of interstate commerce. DOWNEY BRAND took

the lead in preparing the Offering

Memorandum, with input from GENSKE-MULDER,

CARY, GEORGE VIEIRA and Curtis D. Colaw, an

attorney who regular represented CVD and

GEORGE VIEIRA.

72. On April 1 and 2 of 2003, Anthony Colaw

made several telephone calls to GEORGE

VIEIRA and to a New Jersey cheese

distributor concerning the distributor’s

refusal to execute a binding or

comprehensive distributorship agreement, and

the best way to spin that issue in the

Offering Memorandum and make it appear in

the Offering Memorandum that a solid

distributor existed to purchase all of the

cheese that VALLEY GOLD could manufacture. 

Curtis Colaw communicated with DOWNEY BRAND

on this issue by e-mail, transmitted over

the interstate instrumentalities of the

Internet.

73. During the first few days of April

2003, DOWNEY BRAND attorney Christopher

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Delfino used the interstate

instrumentalities of the Internet known as

the world wide web to research diary risk

disclosures, and he used the telephone for a

conference with GENSKE-MULDER partner Paul

Anema to discuss the financial and other

disclosures in the Offering Memorandum.

74. On April 7, 2003, Curtis Colaw and

DOWNEY BRAND attorney Jeffrey Koewler had an

extended telephone conference regarding the

disclosures for the Offering Memorandum. 

And on April 11, 2003, the two exchanged

telephone calls regarding disclosure issues

related to GEORGE VIEIRA, apparently

including how to disclose the investigation

by the United States Attorney for the

District of New Jersey into GEORGE VIEIRA’s

participation in bank and mail fraud

relating to Suprema Specialties, as well as

GEORGE VIEIRA’s negotiations for a plea

agreement which negotiations had by then

concluded. Indeed, on March 28, 2003, the

plea bargain negotiations were reduced to a

seven-page agreement by the United States

Attorney for the District of New Jersey and

mailed that day to GEORGE VIEIRA’s criminal

defense attorney.

75. At some point apparently between April

11, 2003 and April 17, 2003, CARY was

assigned the task of drafting the initial

disclosure language concerning GEORGE VIEIRA

and the criminal investigation involving him

to be included in the Offering Memorandum. 

And on April 17, 2003, Curtis Colaw

telephoned CARY to discuss CARY’s

preparation of this portion of the Offering

Memorandum disclosures. 

76. Also on April 17, 2003, DOWNEY BRAND

attorney Christopher Delfino discussed these

disclosure issues with Jeffrey Koewler, and

Christopher Delfino then assigned to DOWNEY

BRAND attorney Diane Oleson the task of

investigating further. Jeffrey Koewler also

telephoned Curtis Colaw and Paul Anema to

discuss these disclosure issues on that same

day.

77. On April 17, 2003, Diane Oleson

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accordingly conducted online research using

the interstate instrumentality of the

Internet to investigate GEORGE VIEIRA. She

was not satisfied with the results, however,

and on April 18, 2003 telephoned a customer

service representative with the LEXIS

database service (made available to DOWNEY

BRAND over the interstate instrumentality of

the Internet). On April 21, 2003, Diane

Oleson received a return message from LEXIS

regarding its Accurint database, a database

targeted to law enforcement agencies with

information about criminal citations,

indictments, convictions and the like. On

April 21, 2003, Diane Oleson used the

interstate instrumentality of the Internet

to access the Accurint database in order to

further investigate GEORGE VIEIRA.

78. DOWNEY BRAND, GENSKE-MULDER and CARY

all met with the PROMOTERS that same day,

April 21, 2003, and that evening and the

next morning, April 22, 2003, finalized the

disclosures and other terms of the Offering

Memorandum.

79. On April 22, 2003, the Offering

Memorandum and subscription agreements were

delivered to Plaintiffs and other members of

CVD for execution and return that day. 

Plaintiff MANUAL LOPES showed the Offering

Memorandum to Susan Tomsha-Miguel, who

provided tax and accounting services to the

LOPES DAIRY, and she telephoned one or more

of the Defendants around noon with some

questions about the financial projections in

the Offering Memorandum. Shortly afterward,

Plaintiffs delivered signed subscription

agreements and checks, using the interstate

instrumentality of the interstate highway

system.

80. On or about September 22, 2003, the

PROMOTERS mailed the “milk for equity”

contracts to Plaintiffs, in the form

attached hereto as Exhibit C. Plaintiffs

are informed and believe, and thereon

allege, that they were returned by use of

the interstate mail system as well.

In Errion v. Connell, 236 F.2d 447, 455 (9 Cir.1956), th

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cited by Plaintiffs, the Ninth Circuit held:

This court held in Fratt v. Robinson ...,

203 F.2d 627, 634 ... that:

‘... the crookedness need not

appear at all in the

instrumentality used’,

but it was sufficient if it were shown that

fraud was used or employed in connection

with the use of instruments of interstate

commerce or the mails. Therefore, all that

is required is a showing that instruments of

interstate commerce or the mails were used

and in connection with that use a fraudulent

act occurred within the Western District of

Washington ... [W]e think it sufficient to

point out that counsel for appellants

stipulated at the trial that instruments of

interstate commerce were used when Amy

Errion sold the stock at Merrill, Lynch,

Fenner and Beane in Seattle, Washington. An

interstate teletype was used. Portions of

the securities sold consisted of General

Motors stock which was sold on the New York

Stock Exchange.

In Matheson v. Armbrust, 284 F.2d 670, 673 (9th

Cir.1960), cert. denied, 365 U.S. 870 (1961), Matheson, a

resident of Oregon, was the owner of all of the corporate stock

of Williamette Hauling Company. In April 1954 Armbrust, also a

resident of Oregon, inquired of Matheson at Portland, Oregon of

the possibility of purchasing this stock. Negotiations were

undertaken but broken off. On May 6, 1954, Matheson at Portland,

Oregon, telephoned to Armbrust in Pasco, Washington. During this

conversation Matheson stated that he would make Armbrust a better

price and furnish more complete financial data than during the

original negotiations if Armbrust would return to Portland and

resume negotiations. Armbrust returned to Portland following

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this telephone call and resumed negotiations which led to the

sale of the securities to Armbrust on May 22, 1954. In

connection with this transaction, Matheson intentionally

undertook and practiced a scheme to defraud Armbrust by making

gross misstatements concerning the financial condition and

earnings of the company, which Armbrust relied on. 284 F.2d at

671-672. The Ninth Circuit held:

The finding of fact upon which appellant

relies is somewhat ambiguous, since it

recites that the use of the long-distance

telephone constituted a direct use of an

instrumentality of interstate commerce ‘in’

the fraudulent scheme ‘thereafter’ practiced

upon Armbrust. But this ambiguity is

completely resolved by the court’s further

finding that ‘commencing with the said longdistance telephone call by Matheson on May

6, 1954, and continuing to the culmination

of the transaction on or about May 22, 1954,

at Portland, Oregon, Matheson intentionally

undertook and practiced a scheme to defraud

Armbrust. ...’

As so clarified it must be held that the

trial court expressly found that the fraud

was practiced in connection with the use of

the long-distance telephone between Oregon

and Washington. It follows that in so far

as the requirements of section 10(b) are

concerned, the findings of fact establish

jurisdiction in the district court over the

subject matter of the action.

Id. at 673.

Plaintiffs rely on the holding in Matheson to argue that

the Ninth Circuit found it irrelevant that the single phone call

was not used to convey the misleading information; rather, all

that mattered was that the phone call was part of the process

that led to the face-to-face negotiations. Plaintiffs argue:

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Here, we have alleged extensive use of the

telephone and internet by the defendants in

preparing the offering memorandum,

exchanging drafts and discussing how to spin

unfavorable information. And, indeed, the

telephones were used on the very day of the

stock sale, when Manual Lopes’ agent called

with questions about the financial

projections in the offering memorandum. 

(First Amended Complaint at ¶ 79.) Downey

Brand tries to minimize this last use of the

phones by noting that the call was initiated

by a plaintiff, not a defendant. But the

one who initiates a telephone call is not

the only one who ‘uses’ the phone. The

recipient uses the phone just as much.

In addition, Plaintiffs argue, the allegations in Paragraphs 71-

80 disclose at least 14 occasions when the defendants used the

phones and internet in connection with the offering of equity

interests in Valley Gold.

Downey replies that Matheson is not controlling, arguing

that “[t]he governing principle is that while an instrumentality

must be used to effect the sale, it need not be used to

communicate a fraudulent statement to the plaintiff.”

Downey refers to the jurisdictional element set forth in 

9 Cir.Civ.Jury Instr. 18.1 (2007): th

3. The defendant [used] [caused the use of]

an [instrumentality of interstate commerce,

such as mail or telephone] ... in connection

with the [purchase] [sale] of securities,

regardless whether the [instrumentality] ...

itself was used to make an untrue statement

or a material omission ....

Downey contends that Plaintiffs’ argument that Defendants’ use of

instrumentalities of interstate commerce to gather information

for the Offering Memorandum confers jurisdiction even if the

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documents and statements about the investment are delivered in

person, is contrary to the law. 

Downey cites Burke v. Triple A Machine Shop, Inc., 438

F.2d 978, 979 (9 Cir.1971): th

It is not contended that the mails were

used. There was no interstate negotiation

or purchase of the plaintiff’s stock. We

conclude that there was also no use of an

‘instrumentality of interstate commerce’

within the contemplation of the statute by

reason of two local telephone calls to the

companies’ counsel who was also an assistant

secretary.

But see Spilker v. Shayne Laboratories, Inc., 520 F.2d 523, 526

(9 Cir.1975)(“[W]e join the Fifth, Sixth, Eighth, and Tenth th

Circuits holding expressly that the intrastate use of the

telephone confers federal jurisdiction under s 10 [sic] of the

Securities Exchange Act of 1934 and S.E.C. Rule 10b-5 where the

telephone calls in question are connected to the transaction of

which there is complaint”).

Downey also cites Boone v. Baugh, 308 F.2d 711 (8th

Cir.1962). However, neither of the cases cited by Downey are

persuasive. A Ninth Circuit case cited by neither party, Hilton

v. Mumaw, 522 F.2d 588 (9 Cir.1975), held in pertinent part: th

Mumaws first argue that Hiltons have failed

to show that the allegedly fraudulent acts

involved ‘the use of any means or

instrumentality of interstate commerce, or

of the mails ... We cannot agree.

A draft of the 1957 contract was mailed by

Cohasset’s attorney to Henry Mumaw. The

jurisdictional requirement of Rule 10b-5 is

satisfied even if the use of the mails is

not itself a fraudulent act. It suffices if

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Mumaws used the mails in furtherance of the

alleged fraud. Errion v. Connell, 236 F.2d

447, 450, 454-55 (9 Cir.1956); Boone v. th

Baugh, 308 F.2d 711, 713-14 (8 Cir.1962). th

From the fact that the draft was mailed with

a covering letter to Henry Mumaw, it may

reasonably be inferred that the draft was

prepared at his request. Preparation of the

draft was clearly in furtherance of the

allegedly fraudulent scheme. We conclude

that the use of the mails by Cohasset’s

attorney satisfies the jurisdictional

requirement of Rule 10b-5.

522 F.2d at 602. See also Hazen, 5 The Law of Securities

Regulation, § 17.2, pp. 198-199:

While a face-to-face conversation, standing

alone, will not satisfy the jurisdictional

requirements, there may be jurisdiction

under Rule 10b-5, if the conversations are

part of a transaction that utilizes an

instrumentality of interstate commerce. 

Thus, for example, a face-to-face

conversation followed by a transaction

utilizing an instrumentality of interstate

commerce generally has been held to subject

the speaker to Rule 10b-5 scrutiny. 

Nevertheless, it can be argued that the

language of section 10(b) and Rule 10b-5

requires that the materially misleading

statement be communicated through an

instrumentality of interstate commerce. For

example, Rule 10b-5 makes it unlawful ‘for

any person, directly or indirectly, by the

use of any means or instrumentality of

interstate commerce ... to make any untrue

statement of a material fact or to omit to

state a material fact ....’ This language

seems to contemplate that the communication

will be made through the use of the

jurisdictional means. On the other hand,

Rule 10b-5(c) prohibits conduct that

operates as a fraud. Similarly, the

statutory language in section 10(b) of the

Exchange Act prohibits the use of the

jurisdictional means to employ a

‘manipulative or deceptive devise or

contrivance.’ Thus, it is arguable that

where a face-to-face communication is part

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of a transaction that operates as a fraud,

the jurisdictional means can be satisfied by

other steps in the transaction. It appears

to be the majority rule that it is not

necessary that the misrepresentation be

communicated through an instrumentality of

interstate commerce, so long as there is a

connection between the use of the

jurisdictional means and the fraud.

The FAC alleges that one of the Plaintiffs’ agents used

the telephone after the Offering Memorandum was disseminated by

face to face meetings to question certain information in the

Offering Memorandum. In addition, the FAC alleges, similarly to

Hilton, that drafts of the Offering Memorandum were exchanged

through instrumentalities of interstate commerce.

Downey’s motion to dismiss the alleged violation of

Section 10b of the Securities Exchange Act of 1934, 15 U.S.C. §

78j, and Rule 10b-5 for failure to adequately alleged the

jurisdictional element is DENIED WITHOUT PREJUDICE.

e. DOWNEY MADE NO STATEMENTS AND HAD NO DUTY

TO DISCLOSE. 

Downey argues that the FAC contains no allegations that

Downey was a “seller” of the securities. Downey argues that,

unless they directly market securities, attorneys are liable only

for statements they “make” - statements directly attributed to

the attorneys in an offering. 

In so arguing, Downey cites Herpich, Relying on ClientSupplied Information: An Attorney’s Liability Exposure Under Rule

10b-5, 43 U.Kan.L.Rev. 661, 670-671 (1995):

Traditionally, lawyers are accountable only

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to their clients for the sufficiency of

their legal opinions. It is well understood

in the legal community that any significant

increase in attorney liability to third

parties could have a dramatic effect upon

out entire system of legal ethics. An

attorney required by law to disclose

‘material facts’ to third parties might thus

breach his or her duty, required by good

ethical standards, to keep attorney-client

confidences. Similarly, an attorney

required to declare publicly his or her

legal opinion of a client’s actions and

statements may find it impossible to remain

as loyal to the client as legal ethics

properly require. Cognizant of these risks,

the law, as a general rule, only rarely

allows third parties to maintain a cause of

action against lawyers for the insufficiency

of their legal opinions. In general, the

law recognizes such suits only if the nonclient plaintiff can prove that the attorney

prepared specific legal documents that

represent explicitly the legal opinion of

the attorney preparing them, for the benefit

of the plaintiff.

In practice, this rule has meant that an

attorney is rarely liable to any third party

for his or her legal work unless the

attorney has prepared a signed ‘opinion’

letter designed for the use of a third

party.

See also Abell v. Potomac Ins. Co., 858 F.2d 1104, 1124 (5th

Cir.1988)(quoted by the law review article).

Plaintiffs, characterizing Downey’s argument as an “aider

and abetter” contention, assert that Downey is not being sued as

an aider and abetter “but as a direct participant in the

preparation and drafting of the misleading offering memorandum.” 

Plaintiffs cite In re Software Toolworks, Inc., 50 F.3d

615 (9 Cir.1994) and Simpson v. AOL Time Warner Inc., 452 F.3d th

1040 (9 Cir.2006), as authority that a “professional’s” role in th

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drafting and editing a misleading disclosure renders the

professional directly liable for the violation.

At issue in In re Software Toolworks was the scienter

requirement in Rule 10b-5 on the part of auditors Deloitte &

Touche and underwriters Montgomery Securities and Paine Webber,

Inc. In affirming summary judgment for DeLoitte & Touche on this

issue, the Ninth Circuit noted:

The district court analyzed this issue in

terms whether Deloitte was liable for

‘aiding and abetting’ Toolworks’ primary

violation of section 10(b) ... After the

district court issued its opinion, however,

the Supreme Court concluded that aiding and

abetting liability does not exist under

section 10(b). See Central Bank v. First

Interstate Bank, ___ U.S. ___, 114 S.Ct.

1439 ... (1994).

Despite Central Bank, we nevertheless

consider this issue because the plaintiffs’

complaint clearly alleges that Deloitte is

primarily liable under section 10(b) for the

SEC letters. In fact, the July 1 SEC letter

stated that it ‘was prepared after extensive

review and discussions with ... Deloitte’

and actually referred the SEC to two

Deloitte partners for further information

... Similarly, the plaintiffs presented

evidence that Deloitte played a significant

role in drafting and editing the July 4 SEC

letter ... This evidence is sufficient to

sustain a primary cause of action under

section 10(b) and, as a result, Central Bank

does not absolve Deloitte on these issues.

50 F.3d at 628 n.3.

In Simpson v. AOL Time Warner Inc., the Ninth Circuit

stated:

Since Central Bank, it is the duty of courts

to determine what constitutes a ‘primary

violation’ of § 10(b). With respect to the

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making of false statements or omissions, we

have held that ‘substantial participation or

intricate involvement in the preparation of

fraudulent statements is grounds for primary

liability even though that participation

might not lead to the actor’s actual making

of the statements.’ Howard v. Everex Sys.,

Inc., 228 F.3d 1057, 1061 n.5 (9th

Cir.2000); see id. at 1061 (holding that

signing and attesting to a statement, such

that for all intents and purposes the

signor-attestor made the statement, is

sufficient to be considered a primary

violator); see also In re Software Toolworks

Inc. Sec. Litig., 50 F.3d 615, 628-29 & n.3

(9 Cir.1994) (holding that drafting or th

editing false statements that the draftereditor knows will be publicly disseminated

is sufficient to be considered a primary

violator).

452 F.3d at 1048. 

Downey argues that this Ninth Circuit authority is not

controlling because the cases did not involve attorneys. Downey

contends that cases involving accountants have little application

to Rule 10b-5 claims against attorneys. Downey cites Haft &

Hudson, Liability of Attorneys and Accountants for Securities

Transactions § 3.2 (2007):

The differences between the professions

become most stark in connection with the

disclosure obligations to nonclients, i.e.,

investors. As a first (and very simplistic)

‘cut,’ consider that attorneys have the

ethical duty not to disclose confidences of

the client and that the attorney’s role

usually consists of advising on disclosure

issues and often (but not always) drafting,

for the client’s consideration and

modification, the offering documents to be

issued in final form under the client’s (not

attorney’s) name; in contrast, the

accountant’s status in a typical securities

offering is as an independent public

accountant whose role usually consists of

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issuing a certificate under its name as to

the accuracy, completeness, consistency and

fairness of the financial statements, which

certificate is issued only after it has

undertaken an investigation (i.e., audit) of

these matters. That some courts have

decided that the ‘duty’ to disclose material

facts to nonclient investors is usually (not

always) different for accountants and

attorneys is not surprising.

Downey asserts that it has found no Ninth Circuit authority

holding attorneys liable to investors for Rule 10b-5 violations

contrary to “the majority view”.

Downey raises a serious concern. However, the Supreme

Court in Central Bank stated:

The absence of § 10(b) aiding and abetting

liability does not mean that secondary

actors in the securities markets are always

free from liability under the securities

Acts. Any person or entity, including a

lawyer, accountant, or bank, who employs a

manipulative device or makes a material

misstatement (or omission) on which a

purchaser or seller of securities relies may

be liable as a primary violator under 10b-5,

assuming all of the requirements for primary

liability under Rule 10b-5 are met.

511 U.S. at 191. It is apparent that liability of an attorney or

law firm under Section 10(b) will depend on whether a duty to the

investors exists. See very generally 256 F.3d 1194 and 1997 WL

139829. The May 30 Order recognized that the existence of a duty

on the part of Downey will depend upon the facts. Therefore,

Downey’s contention cannot be resolved at the pleading stage. 

The recent Supreme Court opinion in Stoneridge Inv. Partners, LLC

v. Scientific-Atlanta, ___ U.S. ___, 2008 WL 123801 (2008), does

not change this result. The Supreme Court held that a

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corporation’s vendors and suppliers, who are secondary actors or

aiders and abetters, are not liable in Section 10b actions,

unless the secondary actor’s conduct satisfies each of the

elements for liability.

Downey’s motion to dismiss the alleged violation of

Section 10b of the Securities Exchange Act of 1934, 15 U.S.C. §

78j, and Rule 10b-5 on the ground that Downey made no statements

and had no duty to disclose is DENIED WITHOUT PREJUDICE.

f. FAILURE TO PLEAD SCIENTER WITH REQUISITE

PARTICULARITY.

To the extent the Third Cause of Action alleges a

violation of Section 10b of the Securities Exchange Act of 1934,

15 U.S.C. § 78j, and Rule 10b-5, Defendants move for dismissal on

the ground that the required element of scienter is not pleaded

with sufficient particularity.

15 U.S.C. § 78j(b) provides:

It shall be unlawful for any person,

directly or indirectly, by the use of any

means or instrumentality of interstate

commerce or of the mails, or of any facility

of any national securities exchange -

...

(b) To use or employ, in connection with the

purchase or sale of any security registered

on a national securities exchange or any

security not so registered, any manipulative

or deceptive device or contrivance in

contravention of such rules and regulations

as the Commission may prescribe as necessary

or appropriate in the public interest or for

the protection of investors.

Rule 10b-5, promulgated under Section 10b, provides:

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It shall be unlawful for any person ... [t]o

make any untrue statement of a material fact

or to omit to state a material fact in order

to make the statements made, in the light of

the circumstances under which they were

made, not misleading

17 C.F.R. § 240.10b-5. The Private Securities Litigation Reform

Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b)(2), provides:

In any private action arising under this

chapter in which the plaintiff may recover

money damages only on proof that the

defendant acted with a particular state of

mind, the complaint shall, with respect to

each act or omission alleged to violate this

chapter, state with particularity facts

giving rise to a strong inference that the

defendant acted with the required state of

mind. 

In the May 30 Order, the Court addressed the adequacy of

pleading fraud and scienter for purposes of Rule 10b-5:

A fair reading of the Complaint supports the

inference that the Complaint alleges each

professional services firm had actual

knowledge of Vieira’s prior fraudulent

conduct, criminal wrongdoing, and plea

bargain; knew that the new venture involved

the same business practices and would be

managed by Vieira in a comparable manner,

and they intended to deceive the investing

dairy participants. What has not been

alleged is who the firms’ individual

participants were, what they contributed,

and how and when they accomplished it. This

is insufficient as to the two firms. The

allegations are otherwise sufficiently

pleaded. The motions to dismiss on this

ground are GRANTED WITH LEAVE TO AMEND.

For purposes of Section 10(b), the required state of mind

is the scienter requirement. In re Silicon Graphics Inc.

Securities Litigation, 183 F.3d 970, 975 (9 Cir.1999). The th

Supreme Court has defined ‘scienter’ in the context of § 10(b) as

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a “mental state embracing intent to deceive, manipulate, or

defraud.” Ernst & Ernst v. Hocfelder, 425 U.S. 185, 193-194 n.12

(1976). In the Ninth Circuit, scienter may be established by

recklessness. In re Silicon Graphics, id. at 977. As explained

in S.E.C. v. Rubera, 350 F.3d 1084, 1094 (9 Cir.2003): th

Scienter may be established by recklessness,

defined as a highly unreasonable omission,

involving not merely simple, or even

inexcusable negligence, but an extreme

departure from the standards of ordinary

care, and which presents a danger of

misleading buyers or sellers that is either

known to the defendant or so obvious that

the actor must have been aware of it ...

Reckless conduct must be something more

egregious than even ‘white heart/empty head’

good faith and represents an extreme

departure from the standards of ordinary

care such that the defendant must have been

aware of it ... Recklessness satisfies the

scienter requirement only ‘to the extent

that it reflects some degree of intentional

or conscious misconduct.

On June 21, 2007, the United States Supreme Court decided

Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127

S.Ct. 2499 (2007); which addresses the adequacy of pleading

scienter in a Section 10(b) action following the enactment of the

PSLRA, which “requires [federal securities fraud] plaintiffs to

state with particularity both the facts constituting the alleged

violation, and the facts evidencing scienter, i.e., the

defendant’s intention ‘to deceive, manipulate, or defraud.” Id.

as 2504. The Supreme Court held:

We establish the following prescriptions:

First, faced with a Rule 12(b)(6) motion to

dismiss a § 10(b) action, courts must, as

with any motion to dismiss for failure to

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plead a claim on which relief can be

granted, accept all factual allegations as

true ....

Second, courts 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 ... The

inquiry, as several Courts of Appeals have

recognized, 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 ....

Third, in determining whether the pleaded

facts give rise to a ‘strong’ inference of

scienter, the court must take into account

plausible opposing inferences. The Seventh

Circuit expressly declined to engage in such

a comparative inquiry. A complaint could

survive, that court said, as long as it

‘alleges facts from which, if true, a

reasonable person could infer that the

defendant acted with the required intent’;

in other words, only ‘[i]f a reasonable

person could not draw such an inference from

the alleged facts’ would the defendant

prevail on a motion to dismiss ... But in §

21D(b)(2), Congress did not merely require

plaintiffs to ‘provide a factual basis for

[their] scienter allegations,’ ..., i.e., to

allege facts from which an inference of

scienter rationally could be drawn. 

Instead, Congress required plaintiffs to

plead with particularity facts that give

rise to a ‘strong’ - i.e., a powerful or

cogent - inference ....

The strength of an inference cannot be

decided in a vacuum. The inquiry is

inherently comparative: How likely is it

that one conclusion, as compared to others,

follows from the underlying facts? To

determine whether the plaintiff has alleged

facts that give rise to the requisite

‘strong inference’ of scienter, a court must

consider plausible nonculpable explanations

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for the defendant’s conduct, as well as

inferences favoring the plaintiff. 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,’ ...

Recall in this regard that § 21D(b)’s

pleading requirements are but one constraint

among many the PSLRA installed to screen out

frivolous suits, while allowing meritorious

actions to move forward ... Yet the

inference of scienter must be more than

merely ‘reasonable’ or ‘permissible’ - it

must be cogent and compelling, thus strong

in light of other explanations. A complaint

will survive, we hold, only if a reasonable

person would deem the inference of scienter

cogent and at least as compelling as any

opposing inference one could draw from the

facts alleged.

127 S.Ct. at 2509-2510. 

Downey argues that the FAC’s “bald allegations of failure

to disclose and knowledge of falsity” do not properly plead

scienter. Downey claims to the extent the FAC alleges details,

it fails to “connect the dots or retreat[s] behind information

and belief.” Downey refers to the following allegations in the

FAC:

72. On April 1 and 2 of 2003, Anthony Colaw

made several telephone calls to GEORGE

VIEIRA and to a New Jersey cheese

distributor concerning the distributor’s

refusal to execute a binding or

comprehensive distributorship agreement, and

the best way to spin that issue in the

Offering Memorandum and make it appear in

the Offering Memorandum that a solid

distributor existed to purchase all of the

cheese that VALLEY GOLD could manufacture. 

Curtis Colaw communicated with DOWNEY BRAND

on this issue by e-mail, transmitted over

the interstate instrumentalities of the

Internet.

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...

74. On April 7, 2003, Curtis Colaw and

DOWNEY BRAND attorney Jeffrey Koewler had an

extended telephone conference regarding the

disclosures for the Offering Memorandum. 

And on April 11, 2003, the two exchanged

telephone calls regarding disclosure issues

related to GEORGE VIEIRA, apparently

including how to disclose the investigation

by the United States Attorney for the

District of New Jersey into GEORGE VIEIRA’s

participation in bank and mail fraud

relating to Suprema Specialties as well as

GEORGE VIEIRA’s negotiations for a plea

agreement which negotiations had by then

concluded. Indeed, on March 28, 2003, the

plea bargain negotiations were reduced to a

seven-page agreement by the United States

for the District of New Jersey and mailed

that day to GEORGE VIEIRA’s criminal defense

attorney.

75. At some point apparently between April

11, 2003 and April 17, 2003, CARY was

assigned the task of drafting the initial

disclosure language concerning GEORGE VIEIRA

and the criminal investigation involving him

to be included in the Offering Memorandum. 

And on April 17, 2003, Curtis Colaw

telephoned CARY to discuss CARY’s

preparation of this portion of the Offering

Memorandum disclosure.

...

122. Plaintiffs are informed and believe,

and thereon allege, that CARY prepared the

initial draft to disclose the criminal

investigation of GEORGE VIEIRA, but that he

submitted the draft to DOWNEY BRAND and the

other Defendants who revised the draft to

its current form.

Downey asserts that, although the FAC alleges that Curtis

Colaw knew there was no distribution contract, the FAC does not

allege that Colaw conveyed that knowledge to Downey. Downey

further contends that the FAC does not describe a source where

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Downey could learn of Vieira’s activities with Suprema

Specialties or the status of the criminal investigation, other

than Vieira himself, characterized by Plaintiffs as a congenital

liar. 

Plaintiffs respond that Paragraphs 114-124 of the FAC

“reveal[] a collaborative team approach with regular meetings and

discussions about the drafting of the offering memorandum - a

team approach led by Downey Brand.” Plaintiffs contend “[i]t is

incredulous to presume that Downey Brand could complete that

process and still know nothing.” With regard to Downey’s

knowledge of Vieira’s criminal problems, Plaintiffs refer to

Paragraph 77 of the FAC:

77. On April 17, 2003, Diane Oleson [of

Downey Brand] ... conducted online research

using the interstate instrumentality of the

Internet to investigate GEORGE VIEIRA. She

was not satisfied with the results, however,

and on April 18, 2003 telephoned a customer

service representative with the LEXIS

database service (made available to DOWNEY

BRAND over the interstate instrumentality of

the Internet). On April 21, 2–3, Diane

Oleson received a return message from LEXIS

regarding its Accurint database, a database

targeted to law enforcement agencies with

information about criminal citations,

indictments, convictions and the like. On

April 21, 2003, Diane Oleson used the

interstate instrumentality of the Internet

to access the Accurint database in order to

further investigate GEORGE VIEIRA.

Plaintiffs contend that Downey’s use of the Accurint database

alleges the source of Downey’s knowledge of Vieira’s criminal

case.

Downey, accepting Plaintiffs’ characterization of the

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Accurint database as true, requests that the Court take judicial

notice that an information in United States v. Vieira, No. 2:04-

CR-00111 SRC, charging Vieira with two counts of conspiracy to

defraud the United States was not filed in the United States

District Court for the District of New Jersey until January 4,

2004, nine months after the Offering Memorandum was distributed. 

The docket in No. 2:04-CR-00111 SRC, shows that an application

for permission to enter plea of guilty, and a plea agreement were

filed on January 7, 2004 and “entered” on January 12, 2004. 

Although there is no minute order indicating that Vieira entered

a plea of guilty pursuant to the plea agreement, the docket shows

that sentencing initially was set for August 15, 2007 and

thereafter continued three times. Sentencing is now set for

March 19, 2008. 

Genske argues that the allegations of the FAC do not meet

the standard articulated in Tellabs. Genske refers to the

allegations in paragraph 37 that Genske “prepared financial

projections for the purpose of attracting investors to VALLEY

GOLD, and ... actively participated in the preparation of a

business plan to attract investors for VALLEY GOLD, including the

preparation of grossly negligent financial forecasts for the

operations of VALLEY GOLD”. Genske also refers to the

allegations in paragraph 120:

120. The partners at GENSKE-MULDER who

primarily worked on preparing the Offering

Memorandum and business plan were Peter

Hoekstra and Paul Anema. From the

information presently available to

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Plaintiffs, it appears that Peter Hoekstra

had primary responsibility for overseeing

those portions of the Offering Memorandum

and business plan that dealt with the

disclosure of risks associated with the

dairy industry and in preparing the

financial forecasts and projections. Paul

Anema assisted in these matters, and both

were involved in reviewing and revising the

final forms of both documents.

Genske contends that the FAC does not allege any fraud by it in

connection with the financial projections or the risks associated

with the dairy industry and argues that the absence of any

specific allegations of misconduct compel dismissal because there

is no strong inference of scienter. 

Plaintiffs respond that the May 30 Order concluded that

the Complaint alleged sufficient facts supporting an inference

that Genske intended to defraud. See supra. The May 30 Order,

however, was issued before the Supreme Court decided Tellabs. 

Genske further argues that scienter cannot be inferred

from the allegation in paragraph 124:

124. The Offering Memorandum itself

discloses that $325,000 of the funds raised

by the April 22, 2003 securities issuance

would be used to pay the bill of CARY,

GENSKE-MULDER and DOWNEY BRAND. These

defendants knew that a successful securities

issuance was in their own financial

interests.

Genske contends that the “payment of professional fees, without

any contextual facts, does not establish an inference that

Genske-Mulder has acted with ‘scienter’ much less a ‘strong’

inference that Genske-Mulder acted with intent to defraud

Plaintiffs.”

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Genske argues that, taken as a whole, the FAC does not

plead facts sufficient to give rise to a strong inference of

scienter or facts which “establish nonculpatory explanations for

Genske’s conduct of scienter when taking out plausible opposing

inferences.” Genske notes that the Offering Memorandum contains

the following cautionary statements:

OTHER INVESTMENT FACTORS

...

Ability to Accept Risks.

Participation in the Company will be offered

solely to prospective Investors who are

willing and can afford to accept and bear

for an indefinite period of time the

substantial risks described herein, who do

not require an immediate income from their

capital contributions in the Company, and

who are ‘accredited Investors’ as such term

is defined under the Securities Act and

Exhibit B. 

...

TERMS OF THE OFFERING

...

Qualifications of Investors

An investment in the Company involves a high

degree of risk and is suitable only for

Investors of substantial financial means who

have no need for liquidity in their

investments. Accordingly, this Offering is

being made only to a limited number of

Investors that meet these and other

requirements and that purchase Membership

Interests without a view to public

distribution or resale. In order to assure

the Company of a prospective Investor’s

suitability to purchase Membership

Interests, each prospective Investor will be

required to represent that the person is an

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‘accredited investor’ as defined in SEC Rule

501 and in Exhibit B. In addition, all

Investors must make certain representations

in connection with their purchase of

Membership Interests.

...

Method of Subscription

...

Each person desiring to purchase Membership

Interests also will be required, among,

[sic] other things to (a) agree not to sell

or transfer any Membership Interest at any

time to any person if, in the opinion of the

Company, such sale or transfer would violate

applicable federal or state securities laws;

(b) agree not to sell or transfer any

Membership Interest at any time to any

person unless the Company has been offered

the right to purchase the Membership

Interest upon the terms and conditions set

forth in the Operating Agreement; (c)

represent that (i) such person can bear the

economic risk of the purchase of the

Membership Interest including the total loss

of such person’s investment and (ii) such

person has sufficient knowledge and

experience in business and financial

matters, including the analysis of or

participation in cheese production

investment programs, as to be capable of

evaluating the merits and risks of any

investment in the Company, or that such

person is being advised by others with such

knowledge and experience such that such

persons and they are capable of making such

evaluation; and (d) represent that such

person is purchasing the Membership Interest

for such person’s own account without a view

to public distribution or resale. Each

subscriber also may be required to provide

current financial and other information to

the Company to enable it to determine

whether such subscriber is qualified to

purchase a Membership Interest in this

Offering.

[Confidential Private Offering Memorandum, pages 16, 18-19, Exh.

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B to FAC]. In addition, Genske notes that the Offering

Memorandum at pages 6-17 details risks specific to Valley Gold as

risks related to the cheese processing industry. Included in the

risks specific to Valley Gold are the following categories: (1)

no operating history; (2) insufficient operating capital; (3)

need for additional financing; (4) heavy debt load; (5) lack of

diversification; (6) distribution of Company products; (7)

Company’s supply requirements; (8) union contracts, reduction in

labor costs; (9) competition in food industry; (10) competition

with other cheese manufacturers; (11) market acceptance; (12)

geographic concentration; (13) unknown delivery capacity, delays

in delivery of products; (14) limited trademark protection; (15)

proprietary knowledge and absence of patent protection; (16)

dependency on key personnel; and (17) management committee,

conflicts of interest. Included in the risks related to the

cheese processing industry are the following categories: (1) low

margin business; (2) change in consumer preferences and healthrelated concerns; (3) effect of adverse medical research relating

to milk products and demand for milk products; (4) limited

production capacity; (5) product liability; (6) limitation of

insurance coverage; (7) risks associated with perishable food

production; (8) dairy products have a limited shelf life; (9)

company-specific regulation; (10) other regulatory matters; (11)

possible volatility of raw milk costs; (12) environmental; (13)

investors’ ownership interest in Company; (14) no payment of

distributions; (15) ability to accept risks; (16) restriction on

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resale of Membership Interests; (17) tax matters; (18) tax

classification of the Company; and (18) overall risk. 

Genske argues that the FAC does not allege facts that, in

April 2003, Genske knew about the March 2003 “plea letter”. 

The FAC alleges in Paragraph 100(b) that the “material

misrepresentations and material omissions of material facts”

included disclosing that Vieira “had been contacted by the U.S.

Attorney’s Office as part of its investigation into the

bankruptcy of Suprema Specialties, Inc., without disclosing that

GEORGE VIEIRA was already actively involved in negotiations with

the United States Attorney’s Office to plead guilty to securities

and bank fraud.” The FAC alleges in pertinent part:

102. The terms of the negotiated plea

bargain were spelled out in a seven-page

letter dated March 28, 2003 from the U.S.

Attorney’s Office to GEORGE VIEIRA’s

attorney. And the plea deal (that was

formally entered on January 4, 2004), barred

GEORGE VIEIRA from acting as an officer or

director of any company issuing registered

securities under the Securities Exchange Act

of 1934.

103. In the business plan, however,

defendants disclosed none of this vital

information. Indeed, in the business plan,

defendants pretended that the implosion of

Suprema Specialties, Inc. and its

subsidiaries provided an advantage for the

proposed business of VALLEY GOLD because as

“one of the larger producers of ricotta in

the state” a market void and thus a market

opportunity was created when “Suprema

Specialties, Inc. ceased operations in

2002.” The business plan failed to mention

that Suprema Specialties ceased business

because its fraudulent practices, inflated

sales and falsified inventory forced it into

bankruptcy; and the business plan failed to

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mention that as much as 87% of the purported

cheese production by Suprema Specialties

that led defendants to characterize it as a

large producer was fictitious, as reported

by the Securities and Exchange Commission’s

investigation.

104. The Offering Memorandum provided a

brief disclosure concerning Suprema

Specialties’ bankruptcy, but did so in a way

to minimize the importance of the

information and in a manner that created the

impression that GEORGE VIEIRA’s sole

involvement with Suprema Specialties

occurred because he “was, for a short period

of time, an officer of Suprema West, Inc. .

. . a subsidiary of Suprema Specialties,

Inc.” The Offering Memorandum did not

disclose that GEORGE VIEIRA was not just any

officer, but was the Chief Operating Officer

and was thus directly responsible for

fraudulent financial transactions that

government officials were investigating. 

The Offering Memorandum also did not

disclose that GEORGE VIEIRA had reached an

agreement with the United States Attorney’s

Office to plead guilty to securities fraud

and conspiracy to commit bank and mail

fraud. And the Offering Memorandum did not

disclose that in addition to being an

officer of Suprema Specialties West, Inc.,

GEORGE VIEIRA and his wife MARY VIEIRA were

also officers and owners of CMM, which was

also a subject of the criminal investigation

as well as a probable broker for any cheese

produced by VALLEY GOLD.

Genske notes that Paragraph 119 of the FAC alleges:

119. GEORGE VIEIRA’s plea negotiations, his

involvement in the events that led to the

collapse of Supreme Specialties and the

nature of the investigation by the United

States Attorney for New Jersey were well

known to Defendants and were actively

investigated by DOWNEY BRAND. But, as

alleged above, Defendants drafted the

Offering Memorandum to minimize and conceal

this information.

Genske argues that the FAC fails to allege that Genske drafted

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any portion of the Offering Memorandum relating to the Vieira

disclosure or how Genske even knew of the “plea letter” or plea

negotiations. Genske contends that, taken as a whole, the FAC

merely conclusorily alleges in paragraph 114 that Genske, along

with Downey Brand and Cary

114. ... are sued as joint authors of the

Offering Memorandum and/or business plan,

with direct knowledge of at least three

primary omissions or misstatements, was well

as direct involvement in the drafting that

led to those omissions or misstatements:

a. The Offering Memorandum and

business plan did not disclose

that milk shipped by CVD to VALLEY

GOLD would not be protected by the

milk producer’s trust fund;

b. The Offering Memorandum and

business plan materially misstated

the nature of negotiations with

New Jersey cheese distributors;

and 

c. The Offering Memorandum

materially and misleadingly

disclosed the nature of the

investigation of GEORGE VIEIRA’S

criminal activity and his

negotiations of a plea bargain to

bank and securities fraud.

Genske notes that the Offering Memorandum, in the section

detailing “Risks Specific to Company”, states in pertinent part:

Dependency on Key Personnel

...

Mr. Vieira, one of the principal organizers

of the Company and this transaction is

currently the chief executive officer of

CVD. George Vieira, was, [sic] for a short

period of time, an officer of Supreme West,

Inc. (‘Supreme West’). Suprema West is a

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subsidiary of Supreme Specialties, Inc.

(‘Suprema’). Suprema and Suprema West are

in bankruptcy. Suprema is also the subject

of an investigation being conducted by the

Securities and Exchange Commission and the

U.S. Attorney’s Office. Assertions have

been made that financial data for Suprema

was misrepresented. Mr. Vieira has been

contacted by the U.S. Attorney’s Office and

may be a subject of this investigation. No

formal charges have been brought against Mr.

Vieira ....

Downey argues that this statement in the Offering

Memorandum is not misleading and that there was no duty to

disclose the offer made in the “plea letter.” Downey requests

the Court take judicial notice of the March 28, 2003 letter from

the United States Attorney, District of New Jersey, to John

Azzarello and James Cecchi, counsel for George Vieira, attached

to Downey’s motion as Exhibit 4. The letter states in pertinent

part:

This letter sets forth the full and complete

agreement between your client, George

Vieira, and the United States Attorney for

the District of New Jersey .... 

...

Conditioned on the understandings specified

below, this Office will accept a guilty plea

from George Vieira to both counts of a twocount information ....

Downey cites 17 C.F.R. § 229.401(f)(2):

(f) Involvement in certain legal

proceedings. Describe any of the following

events that occurred during the past five

years and that are material to an evaluation

of the ability or integrity of any director,

person nominated to become a director or

executive officer of the registrant:

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...

(2) Such person was convicted in a criminal

proceeding or is a named subject of a

pending criminal proceeding (excluding

traffic violations and other minor offenses)

....

Downey also cites a district court decision, In re Boston

Scientific Corp. Securities Litigation, 490 F.Supp.2d 142

(D.Mass.2007). 

In Boston Scientific, a pleading case, the DOJ began an

investigation of the NORS recall concerning whether Boston

Scientific Corp. (BSC) took an improper risk in marketing its

NORS stents and whether BSC officials knowingly released

adulterated medical devices into the marketplace. The

investigation continued for many years and both BSC and two of

its senior officers were named as targets of the investigation. 

490 F.Supp.2d at 147. The Lead Plaintiff alleged that, as part

of the DOJ investigation, grand jury proceedings during the Class

Period revealed that senior officials at BSC knew that the NORS

stents had experienced a catastrophic failure rate in clinical

trials, but continued shipping them, in disregard of public

safety. Id. The Lead Plaintiff alleged that Defendants misled

the investment community by downplaying the gravity and merits of

the DOJ investigation. Id. During the Class Period, the DOJ

investigation and the risk of an adverse outcome were mentioned

in BSC’s 10-K filings, which also disclosed that “‘[t]here can be

no assurance that the [DOJ] investigation will result in an

outcome favorable to the Company ....’” Id. BSC’s SEC filings

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stated that the outcome of the DOJ investigation “may” adversely

affect the company. Id. at 147-148. The District Court held in

pertinent part:

Lead Plaintiff charges that Defendants

misled the investment community about the

ongoing DOJ investigation. This claim fails

... BSC fulfilled its obligation by

disclosing the potential risk of an adverse

outcome in the DOJ investigation in BSC’s

10-K filings during the class period. The

form 10-K stated that ‘[t]here could be no

assurance that the investigation will result

in an outcome favorable to the Company ....’ 

The public filings also stated that ‘two

senior officials have been advised that they

are targets of the federal grand jury

investigation’ and that ‘the Company’s

performance may be affected by: ... the

ultimate outcome of the U.S. Department of

Justice investigation.

Defendants had no duty to confess guilt. 

‘The federal securities laws do not require

a company to accuse itself of wrongdoing.’ 

BSC had a duty to disclose the

investigation, which it did. Although

Defendants had a duty to disclose all

underlying material facts that would

adversely affect its business, that duty did

not extend to pronouncing wrongdoing while

the DOJ investigation was ongoing.

BSC’s disclosures of the ongoing DOJ

investigation were also consistent with SEC

regulations. SEC proxy rules require

additional disclosures where a director or

executive officer was convicted in a

criminal proceeding or is a named subject of

a pending criminal proceeding. But neither

of these scenarios was present. And as

another district court has noted, ‘the SEC’s

proxy disclosures do not require a company’s

management to confess guilt to uncharged

crimes or to accuse itself of antisocial or

illegal policies ... There is no reason why

a different rule should apply under §

10(b).’ 

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490 F.Supp.2d at 156-157. 

Downey also cites Ballan v. Wilfred American Educational

Corporation, 720 F.Supp. 241, 248-249 (E.D.N.Y.1989):

Rule 10b-5 speaks of omissions to state a

‘material fact’ necessary to make the

statements made not ‘misleading.’ Thus it

is only ‘facts’ that an issuer of securities

and its officer must disclose. Defendants

contend that the critical omissions of which

plaintiff complains are not omissions of

fact but speculations about the future or

legal conclusions amounting to confessions

to uncharged crimes.

Defendants do not dispute that in 1985 and

1986 they had to reveal, as they did, the

investigations of Wilfed or that they were

obligated to disclose, as they did, the

October 21, 1986 indictments. But they

dispute plaintiff’s contention that while

Wilfred was under investigation and before

the 1988 indictments issued, § 10(b)

required defendants to tell shareholders the

likelihood that Wilfred would be indicted,

the consequent likelihood of its suspension

from the aid programs, the likelihood that

it would be charged under RICO and its

assets forfeited, and the imminence of

further indictments.

Wilfred was not required to disclose

information of which it had no knowledge or

about which it could only speculate ... 

Indeed, it would be misleading to do so.

Grand juries operate in secret. Government

investigations do not typically advise their

targets of the likelihood of indictment. 

The ‘imminent’ indictments of Wilfred and

Jakeway did not materialize until a year and

a half after plaintiff’s purchase. The

outcome of legal proceedings is inevitably

uncertain .... 

Therefore defendants were not bound to

predict as the ‘imminent’ or ‘likely’

outcome of the investigations that

indictments of Wilfred and its chief officer

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would follow, with financial disaster in

their train.

Defendants also contend that they need not

have made confessions of guilt to uncharged

crimes or disclosed facts that tended to

incriminate them ....

...

Cases in this circuit have held ... that the

SEC’s proxy disclosure rules do not require

a company’s management to confess guilt to

uncharged crimes ....

See also Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th

Cir.2002)(“If the challenged statement is not false or

misleading, it does not become actionable merely because it is

incomplete”).

Plaintiffs refer to the allegation in Paragraph 104 of

the FAC that “[t]he Offering Memorandum ... did not disclose that

GEORGE VIEIRA had reached an agreement with the United States

Attorney’s Office to plead guilty to securities fraud and

conspiracy to commit bank and mail fraud.” 

The allegations of the FAC are inconsistent. Paragraph

104 alleges in pertinent part that “[t]he Offering Memorandum

also did not disclose that GEORGE VIEIRA had reached an agreement

with the United States Attorney’s Office to plead guilty to

securities fraud and conspiracy to commit bank and mail fraud.” 

Paragraph 100(b) alleges that material misrepresentations and

omissions in the Offering Memorandum and business plan included: 

“Disclosed that Mr. Vieira had been contacted by the U.S.

Attorney’s Office as part of its investigation into the

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bankruptcy of Suprema Specialties, Inc., without disclosing that

GEORGE VIEIRA was already actively involved in negotiations with

the United State’s Attorney’s Office to plead guilty to

securities and bank fraud.” 

In any event, Plaintiffs argue, the statement in the

Offering Memorandum is misleading because “Mr. Vieira had not

just been ‘contacted’ but had been engaged in extensive plea

negotiations; and it is not true that Mr. Vieira ‘may’ be a

subject of the investigation - he clearly was a subject of the

investigation.”

Genske and Downey rejoin that the New Jersey cheese

distribution negotiations were accurately disclosed in the

Offering Memorandum. They note that the Offering Memorandum and

subscription agreements are alleged to have been provided to

Plaintiff Manual Lopes on April 22, 2003. (FAC ¶ 79). The

Offering Memorandum, in the section captioned “Risks Specific to

Company”, states:

Distribution of Company Products.

The Company is negotiating with a cheese

distributor in New Jersey for the

distributor to purchase substantially all of

the Company’s product over a two-year period

beginning as soon as Company begins

producing cheese. At this time, the Company

estimates that the total amount of cheese to

be purchased under this contract to be

between 14 and 25.5 pounds. The purchase

price for the cheese under the agreement

will be tied to the price of that particular

cheese as listed on the Chicago Cheddar

Block Market except for Ricotta cheese which

will have a price set for the 30 pound bags. 

Though many factors will affect the overall

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value of the agreement, a rough estimate of

the value of the proposed agreement is

approximately $1,000,000 per year and

$200,000,000 over the two-year term of the

commitment. If any agreement is not reached

shortly to provide a purchaser of products

produced at the Cheese Plant, the Company

will not succeed and the Investors could

lose their investment. In addition, should

the Company not be able to produce the

quality or quantity of cheese as described

in this Memorandum and as may be required by

the cheese distributor, or should the cheese

distributor for any reason not fulfill its

commitment to purchase the Company’s

product, there is no assurance that the

Company would be able to find an immediate

customer for all or a portion of its

product. As a result, the Company would

have to deal with the competitive

marketplace for cheese as described below

and could face significant disruption to its

sales with the possibility that such a

disruption could have a material adverse

effect on the Company’s business, operations

and finances. Further, the Company will

face these competitive forces should it

decide to expand its operations or, at the

end of any arrangement it may reach with a

cheese distributor, should the arrangement

not be continued.

(FAC, Ex. B, pp.7-8). The disclaimers in the Offering

Memorandum, Defendants contend, create a strong inference that

they did not intend to make a material misrepresentation or

omission concerning the distribution negotiations because

Plaintiffs were informed that no deal was done.

Plaintiffs respond that the fraud “was in pretending that

a deal was highly likely when, in point of fact, it was already

dead in the water.” Plaintiffs refer to paragraph 118 of the

FAC:

118. On numerous occasions throughout the

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early part of April of 2003, Curtis Colaw

[an attorney who regularly represented CVD

and Vieira - see Paragraph 71] endeavored to

negotiate a distributorship agreement with

Mr. Profaci, including on April 1, 2003,

April 2, 2003, April 17, 2003, April 18,

2003 and April 22, 2003. As of April 22,

2003 no agreement had been reached and Mr.

Profaci’s reluctance to sign a binding or

comprehensive distributorship agreement was

apparent. Nonetheless, Defendants drafted

the Offering Memorandum to make it appear

that a firm deal was relatively certain and

would provide for purchase of $100 million

of cheese products per year for two years. 

This was materially false.

Again, the allegations in the FAC are inconsistent. 

Paragraph 105 alleges in pertinent part: 

The Offering Memorandum stated at page 7 that

VALLEY GOLD was negotiating with a ‘cheese

distributor’ in New Jersey’ to produce

substantially all of VALLEY GOLD’s production for

its first two years. The Offering Memorandum

then stated that the negotiations had resulted in

a contract, and that ‘the total amount of cheese

to be purchased under this contract [is

estimated] to be between 14 and 25.5 million

pounds.’ The Offering Memorandum further

disclosed that if the New Jersey distributor ‘for

any reason [could] not fulfill its commitment to

purchase the Company’s product, there is no

assurance that the Company would be able to find

an immediate customer ... and such a disruption

could have a material adverse effect on the

Company’s business, operations and finances.

The allegation in Paragraph 105 of the FAC that the Offering

Memorandum “stated that the negotiations are resulted in a

contract” are contradicted by the language of the Offering

Memorandum itself. 

Plaintiffs argue that Defendants knew when they prepared

the Offering Memorandum that the distributor was reluctant to

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sign a distributorship agreement but that Defendants did not

disclose that a distributorship agreement “was unlikely,

uncertain and far too speculative to quantify with a monetary

value. Plaintiffs contend:

Instead, defendants indicated that the deal

was anticipated and that it was sufficiently

final and precise to provide for

quantification at $100 million per year. 

And note the phrasing of the final quoted

sentence: that many factors will affect the

value of the contract. This use of the term

‘will’ as opposed to would or might or may

or hypothetically could or any other

conditional language deliberately masked the

truth.

This disclosure was intentionally written to

spin a huge negative and make it sound like

a positive. Defendants had unsuccessfully

tried on numerous occasions to get a

commitment from the distributor ... And they

knew he was reluctant to proceed. In

nonetheless stating that a deal was

anticipated, defendants intentionally lied.

Plaintiffs’ “spin” contention is without merit. There is

nothing in the Offering Memorandum stating that a contract with

the cheese distributor was “anticipated” and the Offering

Memorandum clearly states that, in the absence of the distributor

contract, the investment will fail. The disclaimers quoted above

negate any strong inference of fraud with respect to the

representations concerning the distributor contract.

Referring to the allegation in Paragraph 114(a) that the

Offering Memorandum and business plan failed to disclose that

milk shipped by CVD to Valley Gold would not be protected by the

milk producer’s trust fund, Genske argues that the FAC fails to

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explain, when read in totality, how the April 2003 investment in

Valley Gold is affected by the protection or lack of protection

by the milk producer’s trust fund: “The FAC simply does not

connect the April 2003 investment with the alleged lack of Trust

Fund protection.” 

Defendants argue that ineligibility for the milk

producer’s trust fund is publically known and not material.

California Food & Ag. Code § 62580(h) provides:

Except as otherwise provided by this

chapter, milk shipped by a producer to a

handler which meets the following criteria

shall be considered for coverage pursuant to

this chapter:

...

(h) The producer does not have a beneficial

ownership interest in the handler to whom

the shipments are made.

Defendants cite Roeder v. Alpha Industries, Inc., 814

F.2d 22, 27 (1 Cir.1987): “[T]he fraud on the market theory st

does not dispense with the requirement that there must be a duty

to disclose before there can be liability.” In Sailors v.

Northern States Power Co., 4 F.3d 610, 613 (8 Cir.1993), the th

Eighth Circuit held:

We further question Sailors’ assertion that

much of the information he seeks was not

public. As we have stated, having alerted

the market to the existence of regulatory

proceedings, NSP had no duty to inform them

of each of the steps required in that

process ... ‘The securities laws require

disclosure of information that is not

otherwise in the public domain.’ ... We have

held that Rule 10b-5 does not protect

‘nondisclosed facts equally known or

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available to both parties.’ ....

See also Ward v. Succession of Freeman, 854 F.2d 780, 793 (5th

Cir.1988), cert. denied, 390 U.S. 951 (1989)(Because passage of a

statute is “as a matter of law in the public domain,” there is no

duty of disclosure). 

Downey also refers to the definition of “material” set

forth in 17 C.F.R. § 230.405:

Material. The term material, when used to

qualify a requirement for the furnishing of

information as to any subject, limits the

information required to those matters to

which there is a substantial likelihood that

a reasonable investor would attach

importance in determining whether to 

purchase the security registered.

Defendants argue that Valley Gold’s ability to pay suppliers was

material and was disclosed in the Offering Memorandum. In the

section captioned “Risks Specific to Company”, the Offering

Memorandum stated:

Insufficient Operating Capital

The Offering will not provide the Company

with sufficient operating capital. The

Company’s requirements for operating capital

will be significant. The total amount of

funds raised through this Offering will be a

significant factor in determining the amount

of operating capital the Company will have

to begin operating the Cheese Plant. Should

the maximum amount of $4,000,000 be raised,

the Company will use approximately One

Million Six Hundred Seventy-Five Thousand

Dollars ($1,675,000), forty-two percent

(42%) of the proceeds of this Offering, to

fund a portion of this operating capital. 

However, if the Company only raises the

minimum amount of $2,800,000 the operating

capital from the Offering will be only Four

Hundred Seventy-Five Thousand Dollars

($475,000). In either event, the operating

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capital generated from this Offering will

not be sufficient to sustain the Company or

its operations. The Company anticipates

that the proceeds of this Offering will be

sufficient to satisfy the Company’s

contemplated cash requirements for

approximately 15 to 45 days following the

consummation of this Offering.

Need for Additional Financing

Beyond this initial capital, the Company

will be required to obtain additional

operating capital and expects to do so by

obtaining a $4,000,000 line of credit. The

Company also will need to obtain equipment

lease financing in an amount estimated to be

$4,000,000 necessary for the purchase or

lease of equipment to produce its cheese

products. The line of credit and the

equipment lease have not been secured as of

the date of this Memorandum and if they

cannot be secured, the Company may be

required to terminate its operations or

significantly alter its operations as

described in this Memorandum. In the event

that the Company’s plans or assumptions

change, its assumptions prove to be

inaccurate, or if the proceeds of this

Offering, other capital resources and cash

flow otherwise prove to be insufficient to

fund operations (due to the possible lack of

market acceptance, other unanticipated

expenses, delays, problems or otherwise),

the Company would be required to seek

additional financing or may be required to

curtail its activities. The Company has no

current arrangements with respect to, or

sources of, additional financing such as the

line of credit or equipment lease mentioned

above and there can be no assurance that any

additional financing will be available to

the Company on acceptable terms, or at all. 

Any inability to obtain additional financing

would have a material adverse effect on the

Company, including requiring the Company to

postpone, limit or cancel future marketing

activities or curtail or cease its

operations. 

Defendants contend that a supplier’s inability to obtain

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indemnity is not a fact material to an investment in Valley Gold. 

Defendants further contend that ineligibility for the milk

producers trust fund is a “risk belonging to CVD if CVD decides

to sell the milk to Valley Gold” and that, if Plaintiffs have a

quarrel, it is with CVD, not Valley Gold, the Offering Memorandum

or Defendants.

Plaintiffs refer to the allegations in Paragraphs 115-116

of the FAC:

115. CARY knew that milk shipped by CVD to

VALLEY [sic] would not be protected by the

milk producer’s trust fund because in

February of 2003, he negotiated a

stipulation and order in pending proceedings

before the Department of Food and

Agriculture that stated: ‘Respondent

acknowledges that Central Valley Dairymen

milk processed by the new entity licensed to

Respondent will not be eligible for Trust

fund coverage.’ CARY signed this

stipulation on February 18, 2003 and on

February 21, 2003 was mailed a copy of the

order entered upon the stipulation.

116. At the time of this stipulation, the

PROMOTERS were focusing on acquiring a

cheese plant in Manteca. To avoid any

confusion, the Department of Food and

Agriculture requested a further stipulation

after the Gustine facility was purchased to

make it clear that no trust fund coverage

would be provided for milk supplied by CVD

to VALLEY GOLD’s Gustine facility. CARY

signed that stipulation on September 20,

2003, only days before Plaintiffs were asked

to purchase additional interests in VALLEY

GOLD with the ‘milk for equity’ contracts.

117. The lack of trust fund coverage was

never disclosed to Plaintiffs.

Defendants’ contentions that the absence of trust fund coverage

is not relevant to the claims of securities fraud “rings hollow”,

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Plaintiffs argue:

Suppliers are naturally reluctant to sell

their milk outside the protected channels

that guaranty payment. Not only are such

sales subject to a greater risk premium, but

producers who do not get paid on time are

more likely to halt deliveries. And the

plaintiffs to whom defendants were pitching

the investments in Valley Gold were not just

any investors, they were themselves the milk

suppliers; and the business plan on which

the venture was premised called for the

plaintiffs to sell their milk to Valley

Gold. Any material flaw in that business

plan was directly material to the deal, and

defendants knew it. In hiding from

plaintiffs that they would not be protected

by the milk producers’ trust fund, GenskeMulder [and Downey] again demonstrated its

scienter.

Plaintiffs’ argument ignores the cases cited by

Defendants. California Food & Ag. Code § 62580(h) is a statute

in the public domain and is very clear. The statutory provision

coupled with case law cited above negate any strong inference of

fraud with respect to the failure to disclose ineligibility for

the milk producer’s trust fund. The Supreme Court’s most recent

limitation of suppliers-customers’ liability in Section 10(b)

cases also limits the effect of professionals’ alleged omissions. 

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, supra, 

Genske argues that the FAC fails to allege any facts from

which it may be inferred that Peter Hoekstra and/or Paul Anema,

who are alleged to have been involved in the drafting of the

Offering Memorandum and/or business plan had any knowledge of the

three misstatements or omissions alleged in Paragraph 114 of the

FAC. Genske refers to Paragraph 120:

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120. The partners at GENSKE-MULDER who

primarily worked on preparing the Offering

Memorandum and business plan were Peter

Hoekstra and Paul Anema. From the

information presently available to

Plaintiffs, it appears that Peter Hoekstra

had primary responsibility for overseeing

those portions of the Offering Memorandum

and business plan that dealt with the

disclosure of risks associated with the

dairy industry and in preparing financial

forecasts and projections. Paul Anema

assisted in these matters, and both were

involved in reviewing and revising the final

forms of both documents.

Genske argues that the FAC does not allege any facts known to

Hoekstra or Anema but undisclosed by either of them which would

give rise to a reasonable inference that they knew of Vieira’s

criminal background, that they knew that the negotiations for the

cheese distribution deal had broken down, that they hid this

breakdown from Plaintiffs, that they had any knowledge of the CVD

stipulations executed by Cary with the Department of Food and

Agriculture or were responsible for including this knowledge in

the Offering Memorandum or business plan. 

Genske moves to dismiss allegations that it had any

involvement in the conduct alleged in Paragraph 94 of the FAC

pertaining to the “milk for equity” contracts. Paragraph 94

alleges:

94. In inducing Plaintiffs to enter into

contracts to exchange milk for equity (in

the general form of the contribution

agreement attached hereto as Exhibit C and

the assignment agreement attached hereto as

Exhibit D), defendants GEORGE VIEIRA,

GENSKE-MULDER, CARY and DOES 41 through 50

falsely represented to Plaintiffs:

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(a) that the contracts were proper and

lawful;

(b) that CVD was contractually required to

supply milk to VALLEY GOLD and if Plaintiffs

stopped supplying their milk to CVD and

switched to another agricultural

cooperative, they would be violating the law

and subject to substantial fines and

penalties;

(c) that VALLEY GOLD was doing well and had

sizeable orders that ensured that Plaintiffs

would earn significantly more from their

increased ownership in VALLEY GOLD than they

were owed for their milk.

Genske contends that the FAC cites no documents nor does it state

when it allegedly made these misrepresentations to Plaintiffs. 

Genske acknowledges that Paragraph 100 expands these allegations

but does not state facts which strongly infer that Genske

intended to defraud Plaintiffs in connection with the September

2003 “milk for equity” transactions. 

Genske refers to the allegations set forth in Paragraph

108 of the FAC that, beginning in March of 2003, Vieira, “with

the assistance of GENSKE-MULDER” made the misrepresentations

alleged in Paragraphs 108(a)-(m). Genske complains that the FAC

fails to state when and how Genske allegedly participated in

making these misrepresentations.

Plaintiffs have not pleaded the scienter required for

Section 10(b)(5) with the sufficient particularity required by

Tellabs with regard to the cheese distribution negotiations or to

the failure to disclose that milk shipped by CVD to Valley Gold

would not be protected by the milk producer’s trust fund. 

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Plaintiffs have had two opportunities to satisfy the pleading

requirements. These allegations are DISMISSED WITH PREJUDICE

from the Section 10(b) cause of action. In all other regards,

the allegations, albeit inconsistent with regard to the

disclosure of the status of George Vieira’s criminal situation,

suffice to state a claim upon which relief can be granted. 

Defendants’ motions to dismiss with regard to these other

allegations are DENIED. 

g. FAILURE TO PLEAD LOSS CAUSATION.

Downey moves to dismiss the FAC because it does not

allege that Plaintiffs lost their investment because the Offering

Memorandum omitted to disclose that CVD sales were not protected

by the Milk Producers Trust Fund; that Valley Gold had no

distributor; and that Vieira had been offered a plea bargain. 

Because Plaintiffs fail to plead “loss causation”, the Second

Cause of Action fails to state a claim upon which relief can be

granted.

Plaintiffs, citing In re Worlds of Wonder Securities

Litigation, 35 F.3d 1407, 1421-1423 (9 Cir.1994), cert. denied,

th

516 U.S. 868 & 909 (1995), respond that “loss causation” is an

affirmative defense with the burden of proof on the defendants.

In re Worlds of Wonder discussed “loss causation” in connection

with a claim under Section 11 of the 1933 Act. 

In Binder v. Gillespie, 184 F.3d 1059 (9 Cir.1999), th

cert. denied, 528 U.S. 1154 (2000), the Ninth Circuit explained:

The causation requirement in Rule 10b-5

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At the hearing, Plaintiffs correctly argued that this action 3

does not involve “fraud on the market” causation. “Fraud on the

market” causation applies only to a security that is actively

traded in an efficient market. Binder v. Gillespie, supra, 183

F.3d at 1064.

86

securities fraud cases includes ‘both

transaction causation, that the violations

in question caused the plaintiff to engage

in the transaction, and loss causation, that

the misrepresentation or omissions caused

the harm.’ ... The requirement of

transaction causation is equivalent to the

element of reliance, or, in tort liability

terms, but-for causation ... The loss

causation requirement, equivalent to

proximate causation in tort, is satisfied if

the plaintiff shows that ‘the

misrepresentation touches upon the reasons

for the investment’s decline in value.’ ...

That is, the plaintiff must show that the

fraud caused, or at least had something to

do with, the decline in the value of the

investment after the securities transaction

took place.

183 F.3d at 1065-1066. In Dura Pharmaceuticals, Inc. v. Broudo,

3

544 U.S. 336 (2005), a private securities fraud claim under

Section 10(b), the Supreme Court held that the statute requires

“that a plaintiff prove that the defendant’s misrepresentation

(or other fraudulent conduct) proximately caused the plaintiff’s

economic loss.” Id. at 346. The Supreme Court further ruled:

Our holding about plaintiffs’ need to prove

proximate causation and economic loss leads

us also to conclude that the plaintiffs’

complaint here failed to adequately allege

these requirements. We concede that the

Federal Rules of Civil Procedure require

only ‘a short and plain statement of the

claim showing that the pleader is entitled

to relief.’ Fed. Rule Civ. P. 8(a)(2). And

we assume, at least for argument’s sake,

that neither the Rule nor the securities

statutes impose any special further

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requirement in respect to the pleading of

proximate causation or economic loss. But,

even so, the ‘short and plain statement’

must provide the defendant with ‘fair notice

of what the plaintiff’s claim is and the

grounds upon which it rests. Conley v.

Gibson, 355 U.S. 41, 47 (1957) ....

...

We concede that ordinary pleading rules are

not meant to impose a great burden upon a

plaintiff. Swierkiewicz v. Sorema N.A., 534

U.S. 506, 513-515 (2002). But it should not

prove burdensome for a plaintiff who has

suffered an economic loss to provide a

defendant with some indication of the loss

and the causal connection that the plaintiff

has in mind. At the same time, allowing a

plaintiff to forgo giving any indication of

the economic loss and proximate cause that

the plaintiff has in mind would bring about

harm of the very sort the statutes seek to

avoid. Cf. H.R. Conf. Rep. No. 104-369, p.

31 (1995)(criticizing ‘abusive’ practices

including ‘the routine filing of lawsuits

... with only [a] faint hope that the

discovery process might lead eventually to

some plausible cause of action’). It would

permit a plaintiff ‘with a largely

groundless claim to simply take up the time

of a number of other people, with the right

to do so representing an in terrorem

increment of the settlement value, rather

than a reasonably founded hope that the

[discovery] process will reveal relevant

evidence.’ Blue Chip Stamps, 421 U.S. at

741. Such a rule would tend to transform a

private securities action into a partial

downside insurance policy.

544 U.S. at 346-348. See also In re Daou Systems, Inc., 411 F.3d

1006, 1025 (9 Cir.2005), cert. denied, 546 U.S. 1172 (2006), th

citing Dura Pharmaceuticals, Inc.:

Thus, to prove transaction causation, the

plaintiff must show that, but for the fraud,

the plaintiff would not have engaged in the

transaction at issue; to prove loss

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causation, the plaintiff must demonstrate a

causal connection between the deceptive acts

that form the basis for the claim of

securities fraud and the injury suffered by

the plaintiff ... A plaintiff is not

required to show ‘that a misrepresentation

was the sole reason for the investment’s

decline in value’ in order to establish loss

causation ... ‘[A]s long as the

misrepresentation is one substantial cause

of the investment’s decline in value, other

contributing forces will not bar recovery

unless the loss causation requirement’ but

will play a role ‘in determining recoverable

damages.’ ....

Defendants argue that is “no readily discernable causal

relationship” between the failure to disclose ineligibilty of the

investors for the milk producers trust fund, the allegedly

misleading disclosure that Valley Gold did not have a contract

with a cheese distributor, and failing to disclose that Vieira

was discussing a plea bargain with the United States Attorney and

the losses allegedly suffered by Plaintiffs.

Plaintiffs have in effect plead that the alleged

cumulative non-disclosures caused them to invest monies which

were lost as a result of alleged individual actions or omissions

which caused the failure of the enterprise. Whether this can be

proved is not yet to be decided. The motions to dismiss on this

ground are DENIED.

4. FOURTH CAUSE OF ACTION FOR VIOLATION OF

CALIFORNIA SECURITIES LAW.

Genske argues that the Fourth Cause of Action fails to

allege fraud with the specificity required by Rule 9(b). See

discussion infra.

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5. SIXTH CAUSE OF ACTION FOR INTENTIONAL

MISREPRESENTATION.

Genske argues that the Sixth Cause of Action fails to

allege fraud with the specificity required by Rule 9(b). See

discussion supra.

7. SEVENTH CAUSE OF ACTION FOR NEGLIGENT

MISREPRESENTATION.

Genske moves to dismiss the Seventh Cause of Action for

negligent misrepresentation on the grounds that the FAC fails to

allege which matters were materially false or wrongfully

withheld, and that reliance, proximate causation and damages are

conclusorily alleged.

Negligent misrepresentation is simply a species of

negligence. No more is required to state a claim. As Plaintiffs

note, the May 30 Order, in the context of Rule 10b-5, ruled that

the pleading of these elements are subject to the notice pleading

requirements of Rule 8.

The motion to dismiss the Seventh Cause of Action is

DENIED. 

8. TONY ESTEVAN.

Genske moves to dismiss any claims alleged against it by

Plaintiff Tony Estevan for negligence or negligent

misrepresentation because Tony Estevan is not listed as a client

of Genske in Paragraph 38 of the FAC. Paragraph 38 alleges:

38. At all times material herein, GENSKEMULDER, GEORGE VIEIRA and CARY, acted in an

advisory capacity with regard to CVD’s

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investment in VALLEY GOLD, and the

individual investments made in VALLEY GOLD

by Plaintiffs MANUAL LOPES, MARIANA LOPES,

JOSEPH LOPES, MICHAEL LOPES, WESTSIDE

HOLSTEIN, ALVARO MACHADO, and RAYMOND LOPES.

Plaintiffs concede that Tony Estevan was not a client of

Genske. With regard to negligent misrepresentation, Plaintiffs

argue that liability does not depend on a contractual or

professional relationship. Plaintiffs cite Murphy v. BDO

Seidman, LLP, 113 Cal.App.4th 687 (2003).

In Murphy, the Court of Appeal summarized the California

Supreme Court’s holding in Bily v. Arthur Young & Co., 3 Cal.4th

370 (1992):

Bily can thus be briefly summarized as

follows: (1) ordinary negligence - no duty

to third parties; (2) negligent

misrepresentation - duty to third parties

who would be known with substantial

certainty to rely on the misrepresentation;

and (3) intentional misrepresentation - duty

to third parties who could be reasonably

foreseen to rely on the misrepresentation.

113 Cal.App.4th at 694. Plaintiffs also cite Cabanas v. Gloodt

Associates, 962 F.Supp. 1295, 1308-1309 (E.D.Cal.1996), which

sets forth the six factors described in Biakanja v. Irving, 49

Cal.2d 647, 650 (1958) for determining whether a “special

relationship” exists to impose a duty. 

Plaintiffs argue that, through discovery, the extent of

the contacts and relationship between Tony Estevan and Genske

will be determined, but for purposes of Rule 12(b)(6), the FAC

adequately alleges that Genske owed a duty of care to all

Plaintiffs. This is perilously close to the case the [CAN’T

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READ] seeks to avoid; i.e., file a lawsuit and hope discovery

will reveal as basis for suit.

Although Genske replies that it owes no duty to Estevan,

this cannot be determined at the pleading stage given the holding

in Bily as summarized by Murphy.

Genske’s motion to dismiss on this ground is DENIED

WITHOUT PREJUDICE.

9. FAILURE TO STATE A DERIVATIVE CLAIM ON BEHALF OF

CVD.

The FAC alleges a derivative claim on behalf of CVD. In

pertinent part, the FAC alleges in Paragraph 47:

47. CVD continues to be controlled by

GEORGE VIEIRA and/or his affiliates and

those beholden to his desires, including Joe

Machado who, at the time of the events

described in this complaint, was

simultaneously the President of Valley Gold

and a board member of CVD and who continues

as the president or a senior board member of

CVD. It would thus be futile for Plaintiffs

to make a demand upon CVD or its directors

to pursue the relief sought in this lawsuit,

as such a demand would be tantamount to

asking the directors to investigate their

own potential malfeasance. Indeed, another

group of former CVD member dairies has

previously instituted legal proceedings

based upon the general criminal scheme

described above, and CVD has demonstrated

its hostility to its own former member

dairies and its refusal to hold its

managers, consultants, professionals and

accountants responsible for their misdeeds

and omissions by actively opposing the

claims instead of cooperating in securing

redress for its former members. In fact, in

that litigation, CVD and George Vieira have

retained the same attorney to represent

them. Further, all or substantially all of

the members of CVD who were damaged by the

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acts and omissions set forth herein have

terminated their affiliation with CVD and

joined other dairy cooperatives. The

derivative relief sought in this complaint

on behalf of CVD would thus wholly or

substantially only benefit CVD’s former

members and not its present membership,

again rendering it futile to submit a demand

upon CVD’s board of directors to pursue the

relief sought in this lawsuit.

Genske moves to dismiss the derivative action on behalf

of CVD, arguing that the FAC fails to allege that each specific

director of CVD could have been contacted and was hostile to the

prosecution of a lawsuit such as this one. 

Corporations Code § 800(b) provides:

No action may be instituted or maintained in

right of any domestic ... corporation by any

holder of shares or of voting trust

certificates of the corporation unless both

of the following conditions exist:

(1) The plaintiff alleges in the complaint

that plaintiff was a shareholder, of record

or beneficially, or the holder of voting

trust certificates at the time of the

transaction or any part thereof of which

plaintiff complains or that plaintiff’s

shares or voting trust certificates

thereafter devolved upon plaintiff by

operation of law from a holder who was a

holder at the time of the transaction or any

part thereof complained of; provided, that

any shareholder who does not meet these

requirements may nevertheless be allowed in

the discretion of the court to maintain the

action on a preliminary showing to and

determination by the court, by motion and

after a hearing, at which the court shall

consider such evidence, by affidavit or

testimony, as it deems material, that (i)

there is a strong prima facie case in favor

of the claim asserted on behalf of the

corporation, (ii) no other similar action

has been or is likely to be instituted,

(iii) the plaintiff acquired the shares

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before there was disclosure to the public or

to the plaintiff of the wrongdoing of which

plaintiff complains, (iv) unless the action

can be maintained the defendant may retain a

gain derived from defendant’s willful breach

of a fiduciary duty, and (v) the requested

relief will not result in unjust enrichment

of the corporation or any shareholder of the

corporation; and 

(2) The plaintiff alleges in the complaint

with particularity plaintiff’s efforts to

secure from the board such action as

plaintiff desires, or the reasons for not

making such effort, and further alleges that

plaintiff has either informed the

corporation or the board in writing of the

ultimate facts of each cause of action

against each defendant or delivered to the

corporation or the board a true copy of the

complaint which plaintiff proposes to file.

Rule 23.1, Federal Rules of Civil Procedure, provides:

In a derivative action brought by one or

more shareholders or members to enforce a

right of a corporation or of an

unincorporated association, the corporation

or association having failed to enforce a

right which may properly be asserted by it,

the complaint shall be verified and shall

allege (1) that the plaintiff was a

shareholder or member at the time of the

transaction of which the plaintiff complains

or that the plaintiff’s share or membership

thereafter devolved on plaintiff by

operation of law, and (2) that the action is

not a collusive one to confer jurisdiction

on a court of the United States which it

would not otherwise have. The complaint

shall also allege with particularity the

efforts, if any, made by the plaintiff to

obtain the action the plaintiff desires from

the directors or comparable authority and,

if, necessary, from the shareholders or

members, and the reasons for the plaintiff’s

failure to obtain the action or for not

making the effort. The derivative action

may not be maintained if it appears that the

plaintiff does not fairly and adequately

represent the interests of the shareholders

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or members similarly situated in enforcing

the right of the corporation or association. 

The action shall not be dismissed or

compromised without the approval of the

court, and notice of the proposed dismissal

or compromise shall be given to shareholders

or members in such manner as the court

directs.

A shareholder seeking to vindicate the interests of a corporation

through a derivative suit must first demand action from the

corporation’s directors or plead with particularity the reasons

why such demand would have been futile. In re Silicon Graphics

Inc. Sec. Litig., 183 F.3d 970, 989 (9 Cir.1999). Rule 23.1, th

however, does not establish the circumstances under which demand

would be futile. See Kamen v. Kemper Fin. Serv., Inc., 500 U.S.

90, 96 (1991). The law of the state of incorporation determines

these standards. In re Silicon Graphics, id. at 990. As

explained in Country National Bank v. Mayer, 788 F.Supp. 1136,

1144 (E.D.Cal.1992):

A derivative action is a suit brought on

behalf of a corporation in order to redress

a grievance suffered by the corporation ...

Under California law, such an action

ordinarily must be instituted by the

directors of the corporation ... The socalled ‘business judgment rule’ provides

that the judgment of shareholders and courts

cannot supplant the decisions of the

directors of a corporation relative to the

day-to-day management of the corporation ...

‘Under this rule, a director is not liable

for a mistake in business judgment which is

made in good faith and in what he or she

believes to be the best interests of the

corporation, where no conflict of interest

exists.’ ....

‘The business judgment rule applies to all

discretionary decisions by the board,

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including the decision not to pursue a cause

of action.’ ... Because of the rule, a

shareholder must plead and prove that he has

made a demand upon the directors to act and

that they refused or failed to act ... If

the board refuses in good faith and in the

reasonable exercise of its business judgment

to commence the action, the shareholder may

not institute the action.

In Reed v. Norman, 152 Cal.App.2d 892, 898 (1957), the Court of

Appeals holds:

While it is the general rule that in a

derivative action the plaintiff must plead a

demand upon and refusal by the directors to

act, it is equally well settled that such

demand and refusal need not be alleged if

the facts pleaded demonstrate such a demand

would have been futile.

Judge Karlton in Country National Bank explains:

The precomplaint demand requirement may be

excused when the plaintiff demonstrates that

demand would be ‘futile’ ... Many decisions

by the California courts interpreting the

futility exception to the demand requirement

are of little assistance in disposing of the

matter at bar since they discuss the

substantive requirements in light of

California’s pleading standard. 

Nonetheless, upon close examination of

California decisions, certain standards

emerge. Without question, futility is

demonstrated under California’s substantive

law where the directors are involved or not

disinterested in the actions for which

plaintiff seeks relief ... Moreover, a case

which preceded California’s current pleading

requirement reveals that allegations of

domination of the board by a president of a

corporation who is adverse to plaintiff’s

position suffice to demonstrate futility. 

See Wickersham v. Crittenden, 106 Cal. 329

... (1895)(it was ‘averred in the complaint,

as a reason for not making a request of the

directors of the bank to bring this action

that the directors were all under the

control of Crittenden and acting in

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conjunction with him’); see also Miles v.

McFarland, 104 Cal.App. 513, 519 ...

(1930)(demand futile where plaintiff alleges

corporation is in hands of hostile

representative). When demand is excused,

the court suspends deference to the

directors’ business judgment because the

board as a unit is unable to fulfill its

role as the corporation’s decisionmaker.

788 F.Supp. at 1144-1145. In Shields v. Singleton, 15

Cal.App.4th 1611, 1622 (1993), the Court of Appeals explained:

[T]he general allegations which plaintiff

here indiscriminately levels against all the

directors of the Company are insufficient to

establish that demand on the board would

have been futile. As the court below noted,

in order to evaluate the demand futility

claim, the court must be apprised of facts

specific to each director from which it can

conclude that that particular director could

or could not be expected to fairly evaluate

the claims of the shareholder plaintiff. 

‘The task of demanding action ... is not

onerous. No policy recommends eviscerating

the demand requirement as plaintiff would

have us do.’ (Greenspun v. Del E. Webb

Corp. (9 Cir.1980) 634 F.2d 1204, 1210). th

The May 30 Order, after reciting this authority, ruled in 

pertinent part:

The allegations in Paragraph 48 concerning

the futility of a demand on Valley Gold

satisfy the requirements of California law

and Rule 23.1. It is alleged that Valley

Gold is controlled by Defendant Vieira and

that “Plaintiffs know of no other person or

entity that presently has any control over

the operations of VALLEY GOLD.” 

However, the allegations in Paragraph 47 do

not satisfy the requirements of California

law and Rule 23.1 concerning futility. The

allegations are conclusory. Plaintiffs must

allege with specificity facts with regard to

each director of CVD from which it may be

inferred that the particular director could

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or could not be expected to fairly evaluate

the claims that Plaintiffs seek to prosecute

in a derivative action on behalf of CVD, and

Plaintiffs must describe with more

particularity the lawsuit allegedly brought

by other members of CVD which CVD allegedly

actively opposed.

The motion to dismiss the Complaint to the

extent that Plaintiffs purport to bring

derivative actions on behalf of CVD is

GRANTED WITH LEAVE TO AMEND.

Genske notes that an action is pending in the Merced

County Superior Court, Nunes, et al. v. Central Valley Dairymen,

Inc., et al., No. 147653. Genske attaches as an exhibit a copy

of the Third Amended Complaint filed in the Nunes action and

asserts that directors of CVD are plaintiffs in that action. 

Genske argues that Paragraph 47 of the FAC quoted above fails to

allege with specificity why they should be allowed to prosecute a

derivative action on behalf of CVD, particularly where other

directors are plaintiffs in the Nunes action and in effect have

done so. Genske further complains that the FAC fails to state

any details about the Nunes action and that the allegations

remain conclusory and do not satisfy the requirements concerning

futility. 

Plaintiffs respond that Paragraph 47 of the FAC

adequately alleges futility. Plaintiffs contend that the fact

that directors of CVD are plaintiffs in the Nunes action

demonstrates futility:

Even though they themselves had been damaged

by defendants’ acts, these directors were

unable to convince CVD to join in the

litigation; instead, the directors had to

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Because of this ruling, Downey’s contention that the FAC does 4

not “clearly allege” that Downey caused injury to CVD is not

discussed. 

98

sue on their own, and they had to sue their

own cooperative.

Paragraph 47 of the FAC fails to provide the information

required by the May 30 Order and the legal authority cited

therein. There are no allegations of the number of directors of

CVD, what approach, if any, was made to them by the Plaintiffs in

this action, or which of the CVD directors are parties to the

Nunes action.

Defendants’ motion to dismiss the derivative claim

against CVD is GRANTED WITHOUT LEAVE TO AMEND, as prior leave to

amend was granted.4

10. FAILURE TO STATE A DERIVATIVE CLAIM ON BEHALF OF

VALLEY GOLD.

The FAC alleges a derivative action on behalf of Valley

Gold. Paragraphs 48-49 of the FAC allege:

48. VALLEY GOLD also continues to be

controlled by GEORGE VIEIRA, and it would

likewise be futile for Plaintiffs to make a

demand upon VALLEY GOLD to pursue the relief

sought in this lawsuit. Apart from GEORGE

VIEIRA, Plaintiffs know of no person or

entity that presently has any control over

the operations of VALLEY GOLD.

49. To the extent that the claims asserted

by Plaintiffs are derivative of the rights

of VALLEY GOLD, then Plaintiffs pursue those

rights on behalf of VALLEY GOLD and

accordingly add VALLEY GOLD as an

involuntary party to this lawsuit so that

the full rights of VALLEY GOLD can be

adjudicated and any recovery distributed, as

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the Court ultimately deems appropriate, to

the members of VALLEY GOLD.

The only cause of action in the FAC brought on behalf of

Valley Gold, as well as the other Plaintiffs, is the Fifth Cause

of Action for Negligence. The Fifth Cause of Action, after

incorporating all preceding allegations, alleges in pertinent

part:

...

136. As the managing member of VALLEY GOLD,

and as the founder and beneficial owner of

Premio Investment Company, the largest

single owner of VALLEY GOLD, and because he

exercised nearly complete control over the

operations of VALLEY GOLD, defendant GEORGE

VIEIRA further owed a duty of care and

loyalty to the minority investors of VALLEY

GOLD, including Plaintiffs, as well as to

VALLEY GOLD itself.

...

139. As a professional law partnership

retained by CVD and VALLEY GOLD to assist in

the formation of VALLEY GOLD and in the

marketing of securities for VALLEY GOLD,

including the preparation of the business

plan and Offering Memorandum, and because

CVD was an agricultural cooperative

operating as a trust and agent for the

direct benefit of its member dairies so that

DOWNEY BRAND was operating as a subagent,

and because DOWNEY BRAND knew with

reasonable certainty that Plaintiffs would

rely upon its statements, opinions and work

product, including the business plan and

Offering Memorandum, in acquiring ownership

interests in VALLEY GOLD, DOWNEY BRAND owed

to Plaintiffs a duty of care and loyalty.

140. As professionals, managers, officers,

employees and consultants retained by CVD

and/or VALLEY GOLD, acting as subagents and

for the direct benefit of the beneficial

owners of CVD, including Plaintiffs, as well

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as for the benefit of VALLEY GOLD and all of

its members, DOES 51 through 60 owed to

Plaintiffs a duty of care and loyalty.

141. GEORGE VIEIRA, CARY, GENSKE-MULDER,

DOWNEY BRAND and DOES 51 through 60 failed

to adequately discharge their duties to

Plaintiffs, to CVD and to VALLEY GOLD, and

failed to act with reasonable care, failed

to meet the standards of care of similar

professionals acting in the community, and

failed to conduct themselves with reasonable

business judgment or prudence.

...

146. After learning of the government’s

investigations of GEORGE VIEIRA’s criminal

conduct and after learning in or about the

Spring of 2003 of GEORGE VIEIRA’s agreement

to plead guilty to securities fraud and

conspiracy to commit bank and mail fraud,

GENSKE-MULDER, in the exercise of reasonable

diligence, should have disclosed the

information to CVD’s Board, to VALLEY GOLD’s

Board, and to Plaintiffs; and GENSKE-MULDER

should have undertaken a thorough

investigation of the extent to which GEORGE

VIEIRA had used CVD and CMM as

instrumentalities of the criminal scheme for

which he was being investigated and for

which he had agreed to plead guilty.

...

148. In preparing financial projections of

VALLEY GOLD’s anticipated business for CVD

and VALLEY GOLD, GENSKE-MULDER failed to act

with reasonable care and failed to follow

standard accounting practices.

149. In its work on the preparation of the

business plan and Offering Memorandum,

GENSKE-MULDER failed to act with reasonable

care. 

150. In failing to investigate the viability

and reputation of the New Jersey distributor

that GEORGE VIEIRA proposed as the main

buyer of cheese produced by VALLEY GOLD, and

in failing to compare the terms contained in

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the purchase contract with that distributor

against industry standards, GENSKE-MULDER

failed to act with reasonable care.

... 

156. These and other negligent acts and

omissions by defendants directly caused

injury to Plaintiffs and to CVD and VALLEY

GOLD, in a sum exceeding $20 million.

Genske argues that the FAC fails to explain how Valley

Gold, which is alleged to have made numerous misrepresentations

and omissions in the Offering Memorandum and the business plan,

is the victim of any fraud. Genkse contends that Plaintiffs’

attempt to assert claims derivatively on behalf of Valley Gold

because Valley Gold made misrepresentations and thereby obtained

money and milk from Plaintiffs “simply turns the legal and

financial relationships on their head.” 

The derivative claims on behalf of Valley Gold in the FAC

are not alleged in connection with the negligent

misrepresentation and intentional misrepresentation causes of

action. As Plaintiffs assert, a derivative claim for negligence

is asserted because Valley Gold was Genske’s client on whose

behalf Genske prepared financial forecasts and other work. 

Plaintiffs argue with regard to the negligence claim:

[T]he damage to Valley Gold did not occur

from raising funds, but in how it chose to

invest those funds. Relying upon GenskeMulder’s grossly negligent financial

projections and business plan, Valley Gold

decided to buy a cheese plant. That

investment choice was poor, and as a result,

Valley Gold lost all of its capitalization.

Defendant’s motion to dismiss the derivative claim on

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behalf of Valley Gold is DENIED. Resolution of this claim for

relief must await summary judgment or trial.

CONCLUSION

For the reasons stated above:

1. Defendant Genske, Mulder & Company’s motion to strike

is DENIED;

2. Defendants Genske, Mulder & Company and Downey Brand

LLP’s motions to dismiss pursuant to Rule 12(b)(6) are GRANTED IN

PART WITHOUT LEAVE TO AMEND, GRANTED IN PART WITH LEAVE TO AMEND,

AND DENIED IN PART;

3. Plaintiffs shall file a Second Amended Complaint in

accordance with the rulings made herein within 20 days of service

of this Memorandum Decision and Order. Defendants shall respond

within 20 days thereafter.

IT IS SO ORDERED.

Dated: March 12, 2008 /s/ Oliver W. Wanger 

668554 UNITED STATES DISTRICT JUDGE

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