Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_14-cv-04717/USCOURTS-cand-3_14-cv-04717-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SPECIAL SITUATIONS FUND III QP, 

L.P., et al.,

 Plaintiffs,

 v.

H. RAVI BRAR, SUSIE HERRMANN, and MURRAY JONES,

 Defendants.

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Case No. 14-cv-04717-SC

ORDER GRANTING IN PART AND 

DENYING IN PART DEFENDANTS' MOTION TO DISMISS

I. INTRODUCTION

Now before the Court is Defendants H. Ravi Brar, Susie 

Herrmann, and Murray Jones' (collectively "Defendants") motion to 

dismiss. ECF No. 18. The motion is fully briefed.1

 Pursuant to 

Civil Local Rule 7-1(b), the Court finds this matter appropriate 

for disposition without oral argument. For the reasons set forth 

below, Defendants' motion is GRANTED in part and DENIED in part. 

Some of Plaintiffs' claims survive Defendants' motion and some are 

 

1 ECF Nos. 20 ("Opp'n"), 24 ("Reply").

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DISMISSED WITH LEAVE TO AMEND, as specified below.

II. BACKGROUND

At the motion to dismiss stage, the Court assumes the truth of 

Plaintiffs' well-pleaded factual allegations, so these facts come 

from Plaintiffs' complaint. ECF No. 1 ("Compl."). Defendants were 

all officers of ECOtality, Inc. ("ECOtality"), a company that 

designed, manufactured, and sold electric vehicle ("EV") charging 

systems. Compl. ¶¶ 3, 18-20. Mr. Brar was the Chief Executive 

Officer ("CEO"), Ms. Herrmann was the Chief Financial Officer 

("CFO"), and Mr. Jones was the Chief Operating Officer ("COO"). 

Id. ¶¶ 18-20. Plaintiffs are institutional investors that 

purchased $6.4 million worth of ECOtality common stock through a 

Securities Purchase Agreement ("SPA") on June 12, 2013. Id. ¶¶ 1, 

7. Plaintiffs made what is called a private investment in public 

equity deal ("PIPE deal"). Id. ¶ 1.

When Plaintiffs purchased their stock, ECOtality was almost 

entirely dependent on the United States Department of Energy's 

("DOE") Vehicle Technologies Program for its revenue. Id. ¶¶ 4-5. 

DOE had awarded ECOtality a $100 million grant to run a large 

deployment of EV charging infrastructure throughout the country

(the "EV Project"). Id. ¶ 4. The SPA, which Mr. Brar signed,

included several provisions intended to protect the PIPE investors: 

(1) ECOtality had not received any cure notice; (2) there were no 

outstanding material claims or disputes between ECOtality and any 

governmental authority; (3) ECOtality had not been under 

investigation or audit by any governmental authority; (4) ECOtality 

had not been requested to provide information under threat of legal 

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or administrative penalty; and (5) ECOtality had not made any 

disclosure to a governmental authority concerning any alleged noncompliance. Id. ¶ 6.

Plaintiffs allege that those representations were fraudulent. 

Id. ¶ 7. On June 9, 2013, three days before the SPA was executed, 

ECOtality informed DOE that ECOtality might be unable to meet the 

EV Project's September 30, 2013 target for completion of charging 

installations. Id. ¶ 8. On June 14, two days after the SPA was 

executed but four days before it closed, DOE sent ECOtality a cure 

notice explaining that DOE had found that ECOtality might be unable 

to complete the installation and data collection requirements of 

the EV Project and requiring ECOtality to submit a corrective 

action plan ("CAP"). Id. The PIPE deal closed on June 18. During 

closing, ECOtality reiterated its promises to the PIPE investors, 

including that it had not received any cure notice. Id.

On August 12, 2013, ECOtality revealed numerous problems with 

its business, including its inability to complete the EV project 

and DOE's suspension of all payments to the company. Id. ¶ 10. 

ECOtality also indicated that it might file for bankruptcy. Id. 

After the news broke, ECOtality's stock plummeted 79%, to $0.31 per 

share (it was $2.04 per share when the PIPE investors bought stock 

through the SPA). Id. ¶ 11. ECOtality filed for bankruptcy on 

September 16. Id.

A related case, In re ECOtality Securities Litigation ("In re 

ECOtality, No. 13-03791), is also currently before the Court. That 

case represents consolidated class actions against ECOtality, Mr. 

Brar, Ms. Hermann, and others. Plaintiffs in this case are members 

of the class alleged in In re ECOtality, but they have opted out of 

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that litigation to bring their own case instead. In September of 

last year, the Court granted the In re ECOtality defendants' motion 

to dismiss, dismissing some claims with prejudice and others with 

leave to amend. See In re ECOtality, Inc. Sec. Litig., No. 13-

03791-SC, 2014 WL 4634280 (N.D. Cal. Sept. 16, 2014).

In this action, Plaintiffs bring claims under Section 10(b) of 

the Securities Exchange Act of 1934 (the "Exchange Act") against 

Mr. Brar. They also bring claims against all Defendants as control 

persons under Section 20(a) of the Exchange Act. Additionally, 

Plaintiffs bring claims for violations of Sections 25401 and 25501 

of the California Corporations Code against Mr. Brar, and for 

violations of Section 25504 against all Defendants as control 

persons.

III. LEGAL STANDARD

A. Motion to Dismiss

A motion to dismiss under Federal Rule of Civil Procedure 

12(b)(6) "tests the legal sufficiency of a claim." Navarro v. 

Block, 250 F.3d 729, 732 (9th Cir. 2001). "Dismissal can be based 

on the lack of a cognizable legal theory or the absence of 

sufficient facts alleged under a cognizable legal theory." 

Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 

1988). "When there are well-pleaded factual allegations, a court 

should assume their veracity and then determine whether they 

plausibly give rise to an entitlement to relief." Ashcroft v. 

Iqbal, 556 U.S. 662, 679 (2009). However, "the tenet that a court 

must accept as true all of the allegations contained in a complaint 

is inapplicable to legal conclusions. Threadbare recitals of the 

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elements of a cause of action, supported by mere conclusory 

statements, do not suffice." Id. (citing Bell Atl. Corp. v. 

Twombly, 550 U.S. 544, 555 (2007)). The allegations made in a 

complaint must be both "sufficiently detailed to give fair notice 

to the opposing party of the nature of the claim so that the party 

may effectively defend against it" and "sufficiently plausible" 

such that "it is not unfair to require the opposing party to be 

subjected to the expense of discovery." Starr v. Baca, 652 F.3d 

1202, 1216 (9th Cir. 2011).

B. Section 10(b) and Rule 10(b)(5)

Section 10(b) of the Exchange Act makes it unlawful "[t]o use 

or employ, in connection with the purchase or sale of any security 

registered on a national securities exchange . . . any manipulative 

or deceptive device or contrivance in contravention of such rules 

and regulations as the [Securities and Exchange] Commission may

prescribe . . . ." 15 U.S.C. § 78j(b). One such rule prescribed 

by the SEC is Rule 10b-5. Rule 10b-5 makes it unlawful to (a) 

employ any device, scheme, or artifice to defraud; (b) make an 

untrue statement of material fact or omit a material fact necessary 

to make a statement not misleading; or (c) engage in an act, 

practice, or course of business which operates as a fraud or deceit 

in connection with the purchase or sale of any security. 17 C.F.R. 

§ 240.10b–5. To establish a violation of Section 10(b) or Rule 

10b–5, Plaintiffs must plead five elements: "(1) a material 

misrepresentation or omission of fact, (2) scienter, (3) a 

connection with the purchase or sale of a security, (4) transaction 

and loss causation, and (5) economic loss." In re Daou Sys., 411 

F.3d 1006, 1014 (9th Cir. 2005).

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Plaintiffs must also meet the heightened pleading standards of 

Federal Rule of Civil Procedure 9(b) and the Private Securities 

Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u–4. The 

PSLRA requires plaintiffs to "specify each statement alleged to 

have been misleading [and] the reason or reasons why the statement 

is misleading." 15 U.S.C. § 78u–4(b)(1). Additionally, the 

complaint must "state with particularity facts giving rise to a 

strong inference that the defendant acted with the required state 

of mind." Id. § 78u–4(b)(2). The "required state of mind" for 

establishing securities fraud is the knowing, intentional, or 

deliberately reckless disclosure of false or misleading statements. 

See Daou, 411 F.3d at 1014–15. "The stricter standard for pleading 

scienter naturally results in a stricter standard for pleading 

falsity, because falsity and scienter in private securities fraud 

cases are generally strongly inferred from the same set of facts, 

and the two requirements may be combined into a unitary inquiry 

under the PSLRA." Id. at 1015 (internal quotation marks omitted).

IV. DISCUSSION

A. Section 10(b) Claims

Defendants make a number of arguments that Plaintiffs' claims 

under Section 10(b) of the Exchange Act should be dismissed. The 

Court addresses these arguments first.

1. Mr. Brar as the "Maker" of Statements in the SPA

Defendants first argue that Mr. Brar cannot be held 

responsible for the contents of the SPA. Though Mr. Brar signed 

the SPA on behalf of ECOtality, Defendants argue that only 

ECOtality, and not Mr. Brar (or anyone else) was responsible for 

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those statements. See ECF No. 18-2 ("RJN I") Ex. 2 ("SPA") at 40. 

Defendants point to language in the SPA that implies that ECOtality 

made the representations in that document. See id. at 24. In 

support of this argument, Defendants cite to a recent Supreme Court 

case holding that an investment adviser did not "make" statements 

issued by its client, a business trust responsible for a family of 

mutual funds. See Janus Capital Grp., Inc. v. First Derivative 

Traders, 131 S. Ct. 2296, 2300-03 (2011). Defendants argue that 

only ECOtality "made" the statements in the SPA, and that the 

company's officers and directors are therefore insulated from them.

Unfortunately for Defendants, courts have routinely rejected 

their argument. "Courts have consistently held that the signer of 

a corporate filing is its 'maker,' because signing a filing implies 

'ultimate control' over its contents." SEC v. e-Smart Techs., 

Inc., 31 F. Supp. 3d 69, 80 (D.D.C. 2014); see also SEC v. Brown, 

878 F. Supp. 2d 109, 116 (D.D.C. 2012) ("Both before and after the 

decision in Janus, courts have consistently held that the signer of 

a corporate filing is its 'maker.'"). Speaking more generally, 

"Janus did not [ ] alter the well-established rule that a 

corporation can act only through its employees and agents." Brown, 

878 F. Supp. 2d at 116 (quoting In re Pfizer Inc. Sec. Litig., No. 

04 Civ. 9866, 2012 WL 983548, at *4 (S.D.N.Y Mar. 22, 2012)).

Indeed, Janus is wholly inapposite. The only principles from 

Janus important to this case are that only the maker of a statement 

can be liable for it, and that "the maker of a statement is the 

person or entity with ultimate authority over the statement, 

including its content and whether and how to communicate it." 

Janus, 131 S. Ct. at 2302. But the Court has found that Mr. Brar 

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was the "maker" of the SPA, because he signed it. The Supreme 

Court's analysis finding that the Janus defendants did not make the 

statements at issue in that case is not relevant, because the 

Supreme Court's analysis rested on the fact that the business 

trust, and not the defendant investment adviser, (which were two 

distinct business entities) had a statutory obligation to file, and 

did file, the allegedly misleading documents with the SEC. Janus, 

131 S. Ct. at 2304. No analogous situation is involved here.

Defendants retort that the SPA was a contract, not an SEC 

filing, so the rule that the signer of a statement is the maker of 

that statement should not apply. It is unclear to the Court why 

Defendants believe that a corporate officer's signature establishes 

him as the "maker" of statements in an SEC filing but not in a 

contract. Defendants rely on a well-established, but entirely 

irrelevant, rule to justify that distinction: corporate officers 

are generally not personally liable on contracts they sign on 

behalf of the corporation. That would matter if Plaintiffs were 

suing to enforce the terms of the SPA against Mr. Brar. If 

Plaintiffs sought to enforce the contract, they would likely only 

have a case against ECOtality, and not Mr. Brar. But Plaintiffs 

are not suing Mr. Brar to enforce the terms of the contract. They 

are suing him for fraud. The fact that the allegedly fraudulent 

statements were made in a contract that bound only ECOtality does

not absolve Mr. Brar from liability.2

 

2 To put it another way, Plaintiffs accuse Mr. Brar of fraudulently 

inducing them to enter into a contract. That the contract bound 

ECOtality, and not Mr. Brar individually, does not immunize Mr. 

Brar from liability for fraud. Corporate officers who execute 

contracts may not be personally liable for performing those 

contracts, but officers are liable for torts they direct or in 

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2. Falsity and Scienter

Defendants next argue that the complaint fails to plead facts 

giving rise to a strong inference that any defendant acted with 

scienter. The PSLRA requires a complaint to "state with 

particularity facts giving rise to a strong inference that the 

defendant acted with the required state of mind." 15 U.S.C. § 78u4. The Supreme Court has further explained how strong that 

inference must be:

The inference that the defendant acted with scienter need 

not be irrefutable . . . or even the most plausible of 

competing inferences. . . . 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.

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 310 

(2007) (internal quotation marks and citations omitted). The Ninth 

Circuit has also elucidated the pleading standard: "the complaint 

must contain allegations of specific contemporaneous statements or 

conditions that demonstrate the intentional or the deliberately 

reckless false or misleading nature of the statements when made." 

Ronconi v. Larkin, 253 F.3d 423, 432 (9th Cir. 2001) (internal 

quotations omitted). In other words, the defendant's knowledge or 

deliberately reckless disclosure of false or misleading information 

 

which they participate. See, e.g., Transgo, Inc. v. Ajac 

Transmission Parts Corp., 768 F.2d 1001, 1021 (9th Cir. 1985) ("A 

corporate officer or director is, in general, personally liable for 

all torts which he authorizes or directs or in which he 

participates, notwithstanding that he acted as an agent of the 

corporation and not on his own behalf." ) (internal quotation marks 

omitted).

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must be at least as compelling as any other inference that can be 

drawn from the facts in the complaint. The Supreme Court has 

further emphasized that the Court must "assess all the allegations 

holistically," and that "[t]he inquiry . . . is whether all of the 

facts alleged, taken collectively, give rise to a strong inference 

of scienter, not whether any individual allegation, scrutinized in 

isolation, meets that standard." Tellabs, 551 U.S. 308, 322-23, 

326. Defendants argue that the complaint fails to allege facts 

indicating that Mr. Brar knew the statements in the SPA to be false 

when made.

i. Knowledge of the DOE Letter

Many of Plaintiffs' allegations of falsity and scienter depend 

on Mr. Brar's knowledge of the contents of the letter DOE sent to 

ECOtality on June 14, 2014. Defendants argue that the complaint 

fails to plead that the letter arrived before June 18 or that any 

defendant saw the letter at any time. The proper question, though, 

is whether the facts in the complaint, taken together, raise a 

strong inference that Defendants knew about the information in the 

letter by June 18. Plaintiffs point out that the Ninth Circuit has 

in the past adopted a presumption that a letter was received three 

days after it was mailed. Payan v. Aramark Mgmt. Servs. Ltd. 

P'ship, 495 F.3d 1119, 1126 (9th Cir. 2007). Following that rule, 

it would be fair to presume that ECOtality received the cure notice 

by June 17.

More difficult is the issue of whether any individual 

defendant had knowledge of the letter. Generally speaking, 

allegations that "facts critical to a business's core operations or 

an important transaction generally are so apparent that their 

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knowledge may be attributed to the company and its key officers" 

are insufficient to raise a strong inference of scienter. Zucco 

Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1000 (9th Cir. 

2009), as amended (Feb. 10, 2009). There are two exceptions to 

that general rule.

First, "general allegations about management's role in a 

corporate structure and the importance of the corporate information 

about which management made false or misleading statements [may]

create a strong inference of scienter when these allegations are 

buttressed with detailed and specific allegations about 

management's exposure to factual information within the company." 

Id.

 Plaintiffs fail to plead any specific facts about Mr. Brar's 

exposure to factual information within the company. Plaintiffs 

apparently have evidence of his exposure to information: Mr. Brar 

was in direct contact with DOE, making it likely that such 

important correspondence from DOE would have been brought to his 

attention. See ECF No. 21 ("Hecht Decl.") Exs. A, C. That 

correspondence is not incorporated by reference into the complaint, 

however, and Plaintiffs fail to plead any facts regarding Mr. 

Brar's correspondence with DOE. Even if Plaintiffs had pleaded 

those facts, they might still have been insufficient to establish 

this exception. The Ninth Circuit's examples of allegations that 

would satisfy this exception are even more specific: (1) "specific 

admissions from top executives that they are involved in every 

detail of the company and that they monitored portions of the 

company's database;" (2) "a specific admission from a top executive 

that '[w]e know exactly how much we have sold in the last hour 

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around the world;'" or (3) "other particular details about the 

defendants' access to information within the company." Zucco 

Partners, 552 F.3d at 1000.

The second exception applies to cases "where the facts [are] 

prominent enough that it would be absurd to suggest that top 

management was unaware of them." Zucco Partners, 552 F.3d at 1001. 

At the time that ECOtality received the letter from DOE, ECOtality 

derived nearly all of its revenues from DOE, and specifically from 

the grant for the EV Project. The letter therefore constituted a 

warning that almost all of ECOtality's revenues (the source of its 

$100 million grant) were at risk. It would indeed be absurd to 

suggest that ECOtality's management was unaware that its critical 

revenue stream was at risk. A letter from DOE explaining that 

ECOtality's participation in the EV Project might be terminated 

absent immediate action (the letter set a three week deadline for 

proposing a corrective action plan) was the sort of information 

certain to go straight to top management.

The only reason the Court hesitates in applying this exception 

is the timing. Plaintiffs are required to raise a strong inference 

that Mr. Brar's statements were false when made, and the close 

proximity in time of ECOtality's receipt of the letter and the 

closing of the SPA are potentially problematic. If Mr. Brar lacked 

knowledge of the letter until its presumptive receipt on June 17, 

then he might still have lacked knowledge of the letter when the 

SPA closed -- so long as it took more than a day or so for the 

letter's contents to reach him. Given the importance of the 

letter, though, the Court finds even such a short delay unlikely. 

In this case, the inference that the DOE letter was immediately 

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brought to Mr. Brar's attention is at least as strong as any 

inference that ECOtality (intentionally or unintentionally) delayed 

in informing him about the letter. The length of time it took to 

the letter to reach Mr. Brar is precisely the sort of issue on 

which discovery is warranted. The Court finds that Plaintiffs have 

pleaded facts sufficient to establish that the absurdity exception 

applies. The facts in the complaint raise a strong inference that 

Mr. Brar was aware of the DOE letter by June 18.

ii. Cure Notice

The complaint alleges that Defendants represented in the SPA 

that ECOtality had not received any cure notice. Compl. ¶ 6. It 

further alleges that Defendants advised DOE at a meeting on June 

10, 20133 that ECOtality might be unable to meet a deadline for the 

EV Project, and that DOE sent a cure notice to ECOtality dated June 

14. Id. ¶ 8. The PIPE deal closed four days later on June 18. 

Id.

Defendants argue that the representation was not false because 

the letter ECOtality received from DOE was not a cure notice. 

Defendants do not explain exactly why they believe the letter was 

not a cure notice, but they do claim that the letter from DOE 

merely "'requests' a corrective action plan." Opp'n at 16 (bold 

and italic emphasis in original). Defendants are correct that the 

letter contains that language. However, in the sentence after 

"requesting" a corrective action plan ("CAP"), DOE goes on to say 

that the CAP "must provide the following in order to address DOE's 

 

3 The complaint and the DOE letter refer to a June 9, 2013 meeting, 

but DOE's memorandum on the meeting says the meeting was actually 

on June 10. See ECF No. 21 ("Hecht Decl.") Ex. B; Opp'n at 17. 

The Court will refer to the meeting by the June 10 date.

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concerns" and lists six very specific requirements. RJN I Ex. 15

("DOE Letter"). The letter also says that "[t]he corrective action 

plan must be submitted to my attention no later than twenty-one 

(21) days from receipt of this letter." Id. Finally, the letter 

threatens that "[f]ailure to provide and take corrective action

could lead to imposition of remedies, including suspension or 

termination, for non-compliance as outlined 10 CFR 600.352." Id.

The letter explicitly demands a CAP containing certain content 

by a certain date, and threatens sanctions (and potentially 

termination of ECOtality's grant) if the plan is not satisfactory. 

Given those facts, Defendants' contentions that the letter only 

"requests" corrective action is laughable. The letter lays out 

DOE's concern that ECOtality may be unable to complete the EV 

Project on time. It demands that ECOtality develop a plan to 

complete the project on time, and threatens potentially severe 

sanctions if ECOtality fails either to produce such a plan or to 

put it into effect. The content of the letter is sufficient to 

convince the Court that the letter from DOE was a cure notice.

Plaintiffs have pleaded facts sufficient to raise a strong 

inference that Mr. Brar knew about the cure notice by June 18. 

Plaintiffs have also pleaded facts sufficient to demonstrate that 

the letter was a cure notice. Combined with the SPA's

representation that ECOtality had never received a cure notice, 

these allegations state a claim for securities fraud. Defendants' 

motion to dismiss is DENIED as to Plaintiffs' Exchange Act claims

to the extent those claims are premised on Mr. Brar's 

representation that ECOtality had never received a cure notice.

///

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iii. Material Disputes Between ECOtality and 

Government

The next relevant representation in the SPA was that there 

were no outstanding material claims or disputes between ECOtality 

and any governmental authority. According to Plaintiffs, a 

"material dispute" existed between DOE and ECOtality regarding 

ECOtality's progress towards completion of the EV Project. 

Plaintiffs allege that during the June 10, 2013 meeting with DOE, 

ECOtality indicated to DOE that it might be unable to meet the 

September 30, 2013 milestone for completion of charging station 

installations. DOE had deemed the September 30 milestone 

"significant." Compl. ¶ 32. Additionally, the June 14 cure notice 

required ECOtality to develop a corrective action plan ("CAP") to 

resolve its noncompliance with the EV Project deadlines. Id. ¶ 33. 

For the reasons discussed previously, the Court finds that 

Plaintiffs have raised a strong inference that Defendants knew 

about these facts.

Defendants' primary argument here is that the exchange between 

DOE and ECOtality did not constitute a "material dispute." 

Instead, Defendants urge that ECOtality's relationship with DOE 

should be characterized as a "collaborative effort" and a 

"partnership" to "jointly navigat[e] challenges." Opp'n at 13-14. 

Defendants are simply arguing against the facts alleged in the 

complaint and presented in the incorporated documents. The letter 

from DOE is certainly sufficient, at the motion to dismiss stage, 

to establish the likelihood that a material dispute existed.4

 

4 The Court notes that the existence of a collaborative partnership 

does not necessarily preclude the existence of a material dispute 

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Defendants are free to argue that the true facts were otherwise at 

later stages of the litigation, but Plaintiffs' complaint states a 

claim. Defendants' motion is DENIED with respect to Plaintiffs' 

Exchange Act claims to the extent those claims are based on Mr. 

Brar's representation that no outstanding material dispute existed 

between ECOtality and any government agency.

iv. Investigation or Audit by Governmental 

Authority

Next, Plaintiffs allege that Defendants misrepresented that 

ECOtality had not been under investigation or audit by any 

governmental authority. Defendants argue that the complaint does 

not specify "who or what DOE was investigating, much less any facts 

that suggest Defendants knew about any purported investigation when 

the SPA closed." Opp'n at 14.

On this point, Defendants are correct. Plaintiffs' complaint 

focuses on an audit conducted by the DOE Office of the Inspector 

General ("OIG"). Compl. ¶¶ 42-44. But the OIG report makes clear 

that it was auditing DOE, not ECOtality. Specifically, OIG was 

investigating and assessing DOE's decisions regarding disbursement 

of funds to ECOtality. See RJN I Ex. 4 at 2-3. A DOE office's 

audit of the Department's own program cannot constitute an audit or 

investigation of ECOtality. As a result, the complaint fails to 

state facts alleging that ECOtality was under investigation or 

audit by a government agency when the SPA closed. Defendants' 

motion is GRANTED with respect to the Exchange Act claim predicated 

on the representation that ECOtality was not under audit or 

 

between the partners.

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investigation. That claim is DISMISSED WITH LEAVE TO AMEND; 

Plaintiffs may amend their complaint to add facts demonstrating 

that ECOtality was under audit or investigation when the SPA 

closed.

v. Request for Information

Next, the SPA represents that ECOtality had not been requested 

to provide information under threat of legal or administrative 

penalty. Defendants discuss this claim only briefly, stating that 

"there is neither a particularized allegation that such a request 

was made nor that any Defendant was aware of it." Mot. at 15. The 

complaint alleges that the DOE letter "demanded that ECOtality 

submit a corrective action plan" and "warned that failure to 

provide the requested information . . . could lead to imposition of 

sanctions . . . ." Compl. ¶ 8. The letter, which the complaint 

incorporates by reference, actually requests quite a lot of 

information, including, for example, "[a] list of all chargers 

procured under the project to date, the cost of each charger, the 

current location of each charger" and "[a] change document which 

identifies the changes to the project when compared to the most 

current approved project plan." DOE Letter at 1. The letter 

threatens administrative sanctions if that information is not 

provided. Id. at 2.

Indeed, it is difficult to understand how the letter could be 

read as not requesting information under threat of legal or 

administrative penalty, and Defendants do not seriously argue that 

it is not (they argue only that the complaint fails to plead that 

it is). The Court finds that the complaint and incorporated 

documents are sufficient to plead that ECOtality received a request 

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for information under threat of legal or administrative penalty. 

That request was the June 14, 2013 letter from DOE. For the 

reasons discussed above, the Court finds that the complaint raises 

a strong inference that Mr. Brar had knowledge of that letter by 

June 18. Thus Plaintiffs state an Exchange Act claim to the extent 

their claim is based on the representation in the SPA that

ECOtality had never received a request for information under threat 

of sanction. Defendants' motion is DENIED with respect to that 

claim against Mr. Brar.

vi. Disclosure Concerning Alleged NonCompliance

Next, the SPA represents that ECOtality had not made any 

disclosure to a governmental authority concerning any alleged noncompliance. The complaint alleges "that ECOtality had already [by 

June 18, 2013] made disclosures to the DOE with respect to its 

alleged non-compliance as recently as June 10, 2013 . . . ." 

Compl. ¶ 8. Though the complaint speaks of multiple "disclosures," 

the only specific disclosure alleged is the June 10 meeting, during 

which ECOtality informed DOE that the company might miss the 

September 30 milestone. Defendants are correct that that meeting 

does not seem to qualify as a disclosure concerning alleged noncompliance.

The relevant language from the SPA is, in its entirety:

[t]he Company and its Subsidiaries . . . have not during 

the past three years . . . with respect to any Government 

Contract, Government Bid or Government Assistance 

Agreement, conducted or initiated any investigation or 

made any disclosure to a Governmental Authority with 

respect to any alleged irregularity, misstatement, non- compliance or false claim . . . .

SPA at 21. From the facts alleged in the complaint, it is not 

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clear that any non-compliance had been alleged by June 10. The 

complaint does not plead facts demonstrating that the possibility 

of missing a future project milestone was considered "noncompliance" under the SPA. Second, even if Plaintiffs had pleaded 

such facts, it is not clear that any non-compliance had been 

alleged by June 10. The complaint suggests that DOE's first 

allegation of non-compliance (if it can even be called that) came 

in the June 14 letter. See Compl. ¶ 8.

Defendants' motion is GRANTED with respect to Plaintiffs' 

Exchange Act claims, to the extent those claims are based on the 

representation in the SPA that ECOtality had not made any 

disclosure with respect to alleged non-compliance. Those claims 

are DISMISSED WITH LEAVE TO AMEND. Plaintiffs may amend their 

complaint to include facts alleging that (1) non-compliance was 

alleged and (2) ECOtality made a disclosure to a governmental 

authority with respect to that alleged non-compliance before the 

closing of the SPA.

vii. Solvency

Finally, the SPA includes a statement that, "upon 

consummation of the [PIPE deal] . . . [ECOtality's] assets do not 

constitute unreasonably small capital to carry on its business as 

now conducted and as proposed to be conducted . . . ." Compl. ¶ 

45. Plaintiffs allege that that statement was false because 

ECOtality acknowledged in a Form 8-K submitted to the SEC on August 

12, 2013 (signed by Mr. Brar and Ms. Herrmann) that "[a]s we 

focused on our business plan for strong growth of our commercial 

businesses we were cognizant that fully executing on our plan would 

require us to raise additional capital to supplement our cash flows 

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from operations." RJN I Ex. 11 at 2; see also Compl. ¶ 51.

Plaintiffs acknowledge that the SPA also included a statement 

advising the PIPE investors that ECOtality "intends to raise 

additional capital . . . in order to fund operations and for the 

expansion of its network as required to fully execute its business 

plan." Compl. ¶ 47. However, Plaintiffs allege that they were 

deceived into believing that ECOtality had sufficient assets to 

complete the EV Project. Id. ¶¶ 48-49.

There are a number of problems with that allegation. The 

first is that falsity is not adequately pleaded because Plaintiffs 

have failed to plead facts demonstrating that the statement was 

false when made. ECOtality declared bankruptcy about two months 

after the SPA was signed, but Plaintiffs have not pleaded facts 

showing that ECOtality lacked sufficient capital when the PIPE deal 

closed. Second, Plaintiffs fail to plead facts sufficient to raise 

a strong inference of scienter. The supposedly incriminating 

statement from the Form 8-K repeats almost verbatim the 

qualification in the SPA. Both state that ECOtality intended raise 

additional capital to carry out its business plan. Moreover, the 

Form 8-K says ECOtality was "cognizant" of the need to raise 

capital to execute its "plan for strong growth of our commercial 

operations," not to complete its participation in the EV Project. 

That statement, therefore, provides no indication that ECOtality 

was aware that it lacked the capital required to complete the EV 

Project (rather than expand its commercial operations). Third, 

even if the Form 8-K had specified that ECOtality was aware that it 

needed more capital, it did not say when any defendant became 

cognizant of that need.

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Defendants' motion to dismiss is GRANTED with respect to the 

allegation that the Form 8-K misled the PIPE investors into 

believing that ECOtality did not need additional capital to 

complete the EV Project. This claim is DISMISSED WITH LEAVE TO 

AMEND. Plaintiffs may amend their complaint to plead facts 

demonstrating that (1) Defendants actually represented that they 

did not need more capital to complete the EV Project; (2) that 

representation was false; and (3) Defendants knew the 

representation was false when made.

3. Loss Causation

Defendants next argue that Plaintiffs fail to plead loss 

causation. The loss causation element of a securities fraud case 

requires the plaintiff to prove "a causal connection between the 

material misrepresentation and the loss." Dura Pharm., Inc. v. 

Broudo, 544 U.S. 336, 342 (2005). "Typically, to satisfy the loss 

causation requirement, the plaintiff must show that the revelation 

of that misrepresentation or omission was a substantial factor in 

causing a decline in the security's price, thus creating an actual 

economic loss for the plaintiff." Nuveen Mun. High Income 

Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir. 

2013) (internal quotation marks omitted). Alternatively, 

"plaintiffs will survive a motion to dismiss if they allege that 

the defendant's misstatements and omissions concealed the pricevolatility risk (or some other risk) that materialized and played 

some part in diminishing the market value of the security." Cement 

& Concrete Workers Dist. Council Pension Fund v. Hewlett Packard 

Co., 964 F. Supp. 2d 1128, 1145 (N.D. Cal. 2013) (internal 

quotation marks omitted).

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Here, the causal connection between the misrepresentation and 

the loss is obvious. Plaintiffs allege that Defendants concealed 

ECOtality's receipt of a cure notice, receipt of a request for 

information under threat of penalty, and material dispute with DOE 

regarding the EV Project. They further allege that the precipitous 

drop in ECOtality's value on August 12 was a result of ECOtality's 

public admission that it would be unable to complete the EV Project 

and that DOE had suspended all payments to the company. Compl. ¶¶

10-11. The very same issues that Defendants allegedly concealed --

issues with completion of the EV Project and ECOtality's problems 

with DOE -- allegedly resulted in a significant decline in the 

value of ECOtality's stock. The Court finds that Plaintiffs have 

sufficiently pleaded loss causation under a risk materialization 

theory.

Regarding the corrective disclosure theory, Defendants argue 

that "the Company's August 12 Form 8-K made no 'corrective 

disclosure,' or indeed any disclosure, about the Company's progress 

under the EV Project, an alleged 'cure notice,' or 'alleged noncompliance' under the EV Project award." Mot. at 21. That is 

simply incorrect. The Form 8-K states that "the Company notified 

the DOE that . . . the Company may not be able to fulfill its 

operational obligations, including under the EV Project" and that 

DOE "is suspending all payments under the EV Project while it 

investigates the situation and determines whether the award should 

continue." RJN I Ex. 11 at 2. The facts pleaded in the complaint 

allege that the EV Project was the source of "nearly all of" 

ECOtality's revenues. Compl. ¶ 4. Thus the disclosure that 

ECOtality had "been unable to obtain additional financing" combined 

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with the suspension of funding from the EV Project certainly 

represented a serious threat to ECOtality's future. The allegedly 

false representations in the SPA were necessary to assure the PIPE 

investors that ECOtality was making sufficient progress on the EV 

Project to satisfy DOE (by affirming that ECOtality had not 

received a cure notice) and that ECOtality's relationship with DOE 

was in good standing (no material dispute or request for 

information under threat). See id. ¶¶ 5-7. The Form 8-K included 

disclosures that corrected those allegedly misleading statements. 

The Court finds that the complaint adequately pleads loss causation 

under a corrective disclosure theory as well.

B. Section 20(a) Claims

Section 20(a) of the Exchange Act imposes liability on 

controlling persons for primary violations of federal securities 

laws. "In order to prove a prima facie case under § 20(a), 

plaintiff must prove: (1) a primary violation of federal securities 

laws . . . ; and (2) that the defendant exercised actual power or 

control over the primary violator . . . ." Howard v. Everex Sys., 

Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). Scienter is not an 

element of this claim, so long as the defendant "is a controlling 

person of an issuer with scienter . . . ." Id. "Whether [a 

defendant] is a controlling person is an intensely factual 

question, involving scrutiny of the defendant's participation in 

the day-to-day affairs of the corporation and the defendant's power 

to control corporate actions." Kaplan v. Rose, 49 F.3d 1363, 1382 

(9th Cir. 1994) (internal quotation marks omitted). "A director is 

not automatically liable as a controlling person, although director 

status is a red light to the court." Id. (internal quotation marks 

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omitted). "At the pleading stage, a plaintiff need only 

demonstrate that the defendant had the authority to exercise actual 

power, not the exercise itself." Bruce v. Suntech Power Holdings 

Co., No. CV 12-04061 RS, 2013 WL 6843610, at *8 (N.D. Cal. Dec. 26, 

2013).

Plaintiffs allege that Ms. Herrmann and Mr. Jones are liable 

for the Section 10(b) violations because they were control persons. 

Defendants' primary response is that Plaintiffs fail to plead a 

primary violation of federal securities law. Because some of 

Plaintiffs' claims are adequately pleaded, that argument fails.

Defendants also argue (very briefly) in two footnotes that 

Plaintiffs' allegations are insufficient to establish Ms. Herrmann 

or Mr. Jones as control persons. See Mot. at 23 n.20; Reply at 14 

n.12. The relevant allegations in the complaint are (1) "Brar, 

Herrmann and Jones, by reason of their management positions, were 

controlling persons of the Company;" (2) "Herrmann and Jones each 

had the power, influence and authority to cause, and did cause, 

directly or indirectly, others to engage in the wrongful conduct 

complained of herein, including the content and dissemination of 

the various statements which Plaintiffs contend are false and 

misleading;" and (3) "Herrmann and Jones were provided with or had 

unlimited access to copies of the SPA and the Company's documents 

and other statements alleged by Plaintiffs to be 

misleading . . . and had the ability to prevent the issuance of the 

statements or cause the statements to be corrected." Compl. ¶ 79. 

Additionally, Plaintiffs allege that the SPA itself acknowledges 

that the allegedly misleading representations were "made after 

consultation with ECOtality's directors and officers." Opp'n at 23-

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24; Compl. ¶¶ 31, 80.

For the most part, these are "boilerplate" allegations that 

courts have typically rejected. See In re Downey Sec. Litig., No. 

CV08-3261-JFW (RZX), 2009 WL 736802, at *15 (C.D. Cal. Mar. 18, 

2009) ("Plaintiff has failed to make any particularized 

allegations . . . . [T]he [complaint] merely alleges that the 

[Defendants], by reason of their position . . . had the power to 

cause . . . the alleged conduct. However, this boilerplate 

allegation is insufficient to state a claim for control person 

liability."). The only specific allegation is that the 

representations in the SPA were made "after consultation with" Ms. 

Herrmann and Mr. Jones. Perhaps Plaintiffs phrase their allegation 

that way (and never quote the SPA) because the language of the SPA 

reveals that the "consultation" does not demonstrate control person 

liability at all. The SPA states only that the representations 

relevant to this litigation were true "to the knowledge of the 

Company, their respective directors, officers, employees, agents or 

consultants . . . ." SPA at 21. Thus, if the Court were to accept

Plaintiffs' argument that the "consultation" specified in the SPA

establishes control person liability, every employee, agent, or 

consultant of ECOtality would be liable as a control person.

Apart from that statement in the SPA, the only allegations 

Plaintiffs make regarding control liability are Ms. Herrmann's and 

Mr. Jones' positions in the company, their access to copies of the 

SPA around the time it was made, and very general allegations that 

they had the ability to amend or correct the SPA. There are no 

particularized allegations at all regarding Ms. Herrmann's or Mr. 

Jones' participation in ECOtality's day-to-day affairs or any 

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specifics regarding their ability to control the corporation. The 

Court finds that the allegations in the complaint are insufficient 

to state a claim for control liability against either Ms. Herrmann 

or Mr. Jones. Defendants' motion is GRANTED as to Plaintiffs' 

control liability claims against Ms. Herrmann and Mr. Jones. Those 

claims are DISMISSED WITH LEAVE TO AMEND.

C. State Law Claims

Defendants do not make additional arguments against Mr. Brar's 

liability under Sections 25401 and 25501, California's analog to 

the Exchange Act. Accordingly, Plaintiffs' state law claims remain 

undisturbed or are dismissed with leave to amend, depending on the 

alleged misrepresentation at issue, for the reasons explained above 

regarding the Exchange Act claims. Plaintiffs' control person 

liability claims under Section 25504 are DISMISSED WITH LEAVE TO 

AMEND because Plaintiffs have not pleaded sufficient facts to 

establish Ms. Herrmann or Mr. Jones were control persons.

V. CONCLUSION

Defendants' motion to dismiss is GRANTED in part and DENIED in 

part. The Court hereby ORDERS as follows:

• Plaintiffs' Exchange Act and California Corporations Code

claims against Mr. Brar remain undisturbed to the extent they 

are premised on representations in the SPA that (1) ECOtality 

had never received a cure notice; (2) there were no 

outstanding material disputes between ECOtality and a 

government agency; and (3) ECOtality had never been asked to 

provide information under threat of legal or administrative 

sanction.

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• Plaintiffs' Exchange Act and California Corporations Code

claims against Mr. Brar are DISMISSED WITH LEAVE TO AMEND to 

the extent they are premised on representations in the SPA

that ECOtality (1) had not been under investigation or audit 

by any governmental authority; (2) had not made any disclosure 

to a governmental authority concerning any alleged noncompliance; and (3) did not need to raise more capital to 

complete the EV Project.

• Plaintiffs' control person claims under the Exchange Act and 

California Corporations Code against Ms. Herrmann and Mr. 

Jones are DISMISSED WITH LEAVE TO AMEND.

Plaintiffs may file an amended complaint adding allegations 

regarding (1) a governmental authority's investigation or audit of 

ECOtality prior to June 18, 2013; (2) ECOtality's disclosures to a 

governmental authority concerning alleged non-compliance before 

June 18, 2013; (3) ECOtality's representation that it needed to 

raise more capital to complete the EV Project; and (4) Ms. Herrmann 

and Mr. Jones' control person liability. If Plaintiffs wish to 

file an amended complaint, they must do so within thirty (30) days 

of the signature date of this Order. Failure to file an amended 

complaint before the deadline may result in dismissal with 

prejudice of those claims that were dismissed with leave to amend.

IT IS SO ORDERED.

Dated: March 25, 2015

UNITED STATES DISTRICT JUDGE

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