Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_10-cv-01444/USCOURTS-casd-3_10-cv-01444-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

STEPHEN J. DONELL, Permanent

Receiver for Learn Waterhouse, Inc.,

its subsidiaries and affiliates,

Plaintiff,

CASE NO: 10-CV-1444 W (CAB)

 

ORDER DENYING

DEFENDANTS’ MOTION TO

DISMISS [DOC. 7]

v.

RANDY TEINERT, et al.,

Defendants.

On July 12, 2010, Plaintiff Stephen J. Donell, Permanent Receiver for Learn

Waterhouse, Inc., its subsidiaries and affiliates, (“Receiver”) filed this lawsuit against

Defendants Randy Teinert and Cathy Teinert. On November 29, 2010, Defendants

moved to dismiss. The Receiver opposes.

The Court decides the matter on the papers submitted and without oral. Civ.

L.R. 7.1(d)(1). For the following reasons, the Court DENIES Defendants’ motion to

dismiss. (Doc. 7.)

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1

 All references to the “MSJ Order” refer to this Court’s Order granting the SEC’s

Summary Adjudication Motion in the SEC Action, Case No. 04-CV-2037. The MSJ Order

is Docket No. 542 in the SEC Action.

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I. BACKGROUND

A. Overview of the Underlying Fraud

Learn Waterhouse, Inc. (“LWI”) was a purported investment company created

by Randall T. Treadwell. (Compl. ¶ 1 [Doc. 1].) From February 2001 to October 2004,

Treadwell and others raised over $82 million from over 1,900 investors nationwide by

selling unregistered securities in the form of nine-month promissory notes through

friends, family, and the internet. (See MSJ Order 2:17–20.1

)

LWI principals told investors that proceeds from the sale of the notes were pooled

and that it engaged in “buy/sell” transactions in a bank-trading program that yielded

alleged returns ranging from 5% to 50% per month, and 500% in just 60 days. (See MSJ

Order 2:20–23.) The principals further represented that investors’ funds were secured

by a “pre-funded, cash-back instrument” issued by a top U.S. bank, which purportedly

restricted LWI’s program to risk-free transactions. (Id. at 2:23–26.) However, these

representations were false.

B. The SEC’s Lawsuit and the Criminal Case

On October 12, 2004, after an extensive investigation by federal authorities, the

SEC filed a lawsuit against LWI, Treadwell, Rick D. Sluder, Larry C. Saturday, and

Arnulfo M. Acosta for violating federal securities laws (“SEC Action”). (Compl. ¶ 16.)

The complaint charged the defendants with unlawfully engaging in the offer and sale of

unregistered securities, and committing fraud in the purchase, offer and sale of

securities. (Id. ¶ 17.)

On the same day the SEC Action was filed, this Court granted the SEC’s motion

for a temporary restraining order and asset freeze against LWI and the defendants, and

appointed a temporary receiver for LWI. (See MSJ Order 3:17–19.) Then on November

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1, 2004, this Court granted the SEC’s preliminary-injunction motion, and issued orders

freezing assets and permanently appointing a receiver. (Compl. ¶ 19.)

On September 8, 2005, Treadwell, Sluder, Saturday, and Acosta were indicted

for conspiracy under 18 U.S.C. § 371, and wire fraud under 18 U.S.C. § 981(a)(1) and

28 U.S.C. § 2461(c). (Compl. ¶ 20.) As a result of the indictment, on September 21,

2005, Treadwell filed a motion to stay the SEC Action pending the conclusion of the

criminal case. (Id. ¶ 21.) In arguing for the stay, Treadwell acknowledged that the

charges in the criminal case were “mirror images of the [SEC]’s . . . civil allegations.”

(See MSJ Order 3:25–27.) The indictment charged, among other things, that Treadwell

and his co-conspirators intentionally concealed from investors that new investor funds

would be used to pay back earlier investors. (Compl. ¶ 24.) 

On May 10, 2007, Acosta pled guilty to conspiracy to commit wire fraud, and

making a false statement to the FBI. (MSJ Order 4:8–9.) Then on July 17, 2008,

Saturday, Sluder, and Treadwell were found guilty of conspiracy and wire fraud. (Id. at

4:9–11.) After the defendants were sentenced in the criminal case, this Court lifted the

stay in the SEC Action and, on March 20, 2009, granted the SEC’s summary-judgment

motion. (Compl. ¶ 28.)

C. Operation of LWI and Defendants

The defendants in the criminal case recruited their early investors to act as LWI

sales agents. (Compl. ¶ 30.) The sales agents solicited other investors in return for

commissions and referral fees, in addition to the returns on their own investments. (Id.

¶ 31.) Participants who invested in the early stages of LWI often received substantial

disbursements as ostensible returns on their investments. (Id. ¶ 32.) But LWI was a

Ponzi scheme, in which almost none of the participants’ funds were actually put into any

legitimate investments. (Id. ¶ 34.) Instead, any amounts paid to participants and sales

agents were obtained from later investors’ funds. (Id.)

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2

 The Complaint did not indicate the amount that Defendants invested into LWI.

Therefore, it is unclear exactly how much of the $1,923,800.00 paid to Defendants was in

excess of their principal investment.

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Defendants received payments from LWI and/or related entities totaling

$1,923,800.00. (Compl. ¶ 41.) These funds were derived from the Ponzi scheme and

were allegedly well in excess of the amount Defendants invested in LWI.2

 (Compl. ¶

37.)

On June 2, 2010, Mr. Teinert filed an action in the District of Minnesota against

his former attorneys, several United States Attorneys, and the Receiver’s counsel.

(Compl., Ex. A.) He asserted two causes of action: breach of attorney-client privilege

against, among others, the Receiver’s counsel; and selective prosecution against the

United States Attorneys. (Id.) The Receiver was not named as a party in this action.

(Id.) 

On July 12, 2010, the Receiver filed this lawsuit against Defendants claiming

relief for Avoidance and Recovery of Fraudulent Transfers under California Civil Code

§§ 3439.04(a)(1), 3439.04(a)(2) and 3439.05. On November 29, 2010, Defendants

moved to dismiss the complaint. (Doc. 7.) The Receiver opposes.

II. STANDARD

The court must dismiss a cause of action for failure to state a claim upon which

relief can be granted. Fed.R.Civ.P. 12(b)(6). A motion to dismiss under Rule 12(b)(6)

tests the complaint’s sufficiency. See N. Star Int’l v. Ariz. Corp. Comm’n., 720 F.2d

578, 581 (9th Cir. 1983). All material allegations in the complaint, “even if doubtful

in fact,” are assumed to be true. Id. The court must assume the truth of all factual

allegations and must “construe them in light most favorable to the nonmoving party.”

Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002); see also Walleri v. Fed.

Home Loan Bank of Seattle, 83 F.3d 1575, 1580 (9th Cir. 1996).

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As the Supreme Court has explained, “[w]hile a complaint attacked by a Rule

12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s

obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels

and conclusions, and a formulaic recitation of the elements of a cause of action will not

do.” Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964 (2007). Instead, the allegations

in the complaint “must be enough to raise a right to relief above the speculative level.”

Id. at 1964-65. A complaint may be dismissed as a matter of law either for lack of a

cognizable legal theory or for insufficient facts under a cognizable theory. Robertson v.

Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984).

Generally, courts may not consider material outside the complaint when ruling

on a motion to dismiss. Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d

1542, 1555 n.19 (9th Cir. 1990). However, courts may consider documents specifically

identified in the complaint whose authenticity is not questioned by parties. Fecht v.

Price Co., 70 F.3d 1078, 1080 n.1 (9th Cir. 1995) (superceded by statutes on other

grounds). Moreover, courts may consider the full text of those documents, even when

the complaint quotes only selected portions. Id. The court may also consider material

properly subject to judicial notice without converting the motion into one for summary

judgment. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994).

III. DISCUSSION

A. Defendants Were Properly Served with the Summons and Complaint.

The Federal Rules of Civil Procedure provide that an individual within a judicial

district of the United States may be served by “following state law for serving a summons

in an action brought in . . . the state where the district court is located or where service

is made.” Fed. R. Civ. P. 4(e)(1). Because this Court is located in California, the

Receiver is permitted to serve the summons and complaint according to California law.

Under the California Code of Civil Procedure, a person may be served by sending a copy

of the summons and complaint by first-class mail. Cal. Civ. Proc. Code § 415.40.

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Here, the Receiver served Defendants by certified mail. (Summons [Doc. 5].)

Defendants do not contest this fact. (Mot. to Dismiss 3:15 [Doc. 7].) Therefore, service

was proper. See Cal. Civ. Proc. § 415.40.

B. The Receiver’s Claims Are Not Compulsory Counterclaims to the

Minnesota Action.

“A counterclaim is a claim for affirmative relief asserted by a party (generally the

defendant) against an opposing party (i.e., plaintiff).” Chua v. Am.’s Wholesale Lender,

No. 09cv105-L(WVG), 2010 WL 5288151, at *1 n.1 (S.D. Cal. Dec. 17, 2010) (Lorenz,

J.) (citation and internal quotation marks omitted). A compulsory counterclaim is one

that “arises out of the transaction or occurrence that is the subject matter of the

opposing party’s claims.” Fed. R. Civ. P. 13(a)(1)(A). The Ninth Circuit applies the

“logical relationship test” to determine whether a counterclaim is compulsory. Pochio

v. Prudential Ins. Co., 827 F.2d 1246, 1249 (9th Cir. 1987). Applying the logical

relationship test, the court must examine “whether the essential facts of the various

claims are so logically connected that considerations of judicial economy and fairness

dictate that all the issues be resolved in one lawsuit.” Id.

Here, Defendants argue that the Receiver’s claims must have been raised as

compulsory counterclaims in the Minnesota action. (Mot. to Dismiss 5:1–5.) However,

the Receiver was not a party to that action. Thus, he did could not have raised his

claims in that action. 

Furthermore, Defendants claimed breach of attorney-client privilege and selective

prosecution in the Minnesota action. (Id., Ex. A.) The essential facts alleged pertaining

to the former include illegally obtained information, and to the latter include various

U.S. Attorneys engaging in “the practice of ‘setting people up’ via a civil action and

thereby gathering enough ‘evidence to take the case before a federal grand jury.’” (Id.,

Ex. A ¶¶ 30, 35.) The essential facts of these claims are not essential to the Receiver’s

claims for fraudulent transfers paid to Defendants in this lawsuit. The claims in this case

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involve transfers made to Defendants from a Ponzi scheme with the actual intent to

hinder, delay or defraud its creditors. Thus, the claims are not so logically connected

that considerations of judicial economy and fairness dictate that all the issues be

resolved in one lawsuit.

Accordingly, the Receiver’s claims not compulsory counterclaims to the

Minnesota action.

C. Defendants Fail to Demonstrate that the Receiver’s Claims are Time

Barred.

Defendants contend that the “statute of limitations has long since expired for any

claims pursuant to any action that could have been brought under 28 U.S.C. § 1367.”

(Mot. to Dismiss 6:1–2.) To support this contention, Defendants only state that “[t]his

should be self-evident.” (Id. at 6:3.) However, it is not. Defendants fail to cite any law

or identify any facts to support their contention that the claims are time barred. 

Accordingly, the Court rejects Defendants’ argument. 

D. This Court Has Jurisdiction Over the Receiver’s Claims.

Defendants also contend that the “other jurisdictional statutes invoked by the

Receiver, for the most part, do not apply.” (Mot. to Dismiss 6:4–5.) Specifically,

Defendants argue that this Court lacks jurisdiction because they live in Minnesota. (Id.

at 7:4–5.) The Court disagrees. 

Federal securities laws create exclusive federal jurisdiction over “all suits in equity

and actions at law brought to enforce any liability or duty created by” federal securities

laws. 15 U.S.C. §§ 77v(a), 78aa. The exercise of ancillary jurisdiction is appropriate

“over a broad range of supplementary proceedings involving third parties to assist in the

protection and enforcement of federal judgements—including attachment, mandamus,

garnishment, and the pre-judgment avoidance of fraudulent conveyances.” Peacock v.

Thomas, 516 U.S. 349, 356 (1996). In this case, this Court has supplemental

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jurisdiction over the Receiver’s claims because the claims are ancillary to the SEC

Action and the Receivership is pending before this Court. See Donell v. Kowell, 533

F.3d 762, 769 (9th Cir. 2008) (“Although the Receiver only filed suit under a California

statute, we have subject matter jurisdiction because this proceeding is ancillary to the

SEC enforcement action.”).

E. A More Definite Statement Is Not Appropriate.

“A party may move for a more definite statement of a pleading to which a

responsive pleading is allowed but which is so vague or ambiguous that the party cannot

reasonably prepare a response.” Fed. R. Civ. P. 12(e); see Bureerong v. Uvawas, 922 F.

Supp. 1450, 1461 (C.D. Cal. 1996) (“[A] motion for a more definite statement should

not be granted unless the defendant literally cannot frame a responsive pleading.”). “A

motion for a more definite statement is used to provide a remedy for an unintelligible

pleading rather than a correction for lack of detail.” N. Cnty. Commc’ns Corp. v. Sprint

Commc’ns Co., L.P., No. 09-cv-02685 BEN (WMc), 2010 WL 1499289, at *1 (S.D.

Cal. Apr. 12, 2010) (Benitez, J.). Furthermore, the motion may be denied where the

detail sought is obtainable through discovery. C.B. v. Sonora Sch. Dist., 691 F. Supp.

2d 1170, 1190-91 (E.D. Cal. 2010). Motions for a more definite statement are generally

viewed with disfavor and are rarely granted. Cellars v. Pac. Coast Packaging, Inc., 189

F.R.D. 575, 578 (N.D. Cal. 1999).

Here, Defendants argue that the complaint is deficient because “there is not a

word about what the Defendants did to violate the securities laws” and “the allegation

is so vague that a more definite statement is in order.” (Mot. to Dismiss 7:11–12.)

However, Defendants fail to realize that the Receiver is not asserting claims for

violations of securities laws, but rather claims for fraudulent transfers. The Receiver

supports these claims with clearly identified law and factual allegations in the complaint.

Specifically, the Receiver’s claims are based on the fact that Defendants invested in a

Ponzi scheme operated by LWI, and the transfers made to Defendants were made with

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the actual intent to hinder, delay or defraud its creditors. There is nothing vague or

ambiguous about these allegations.

Accordingly, a more definite statement is not appropriate.

IV. CONCLUSION & ORDER

In light of the foregoing, the Court DENIES Defendants’ motion to dismiss.

(Doc. 7.)

IT IS SO ORDERED.

DATED: April 26, 2011

Hon. Thomas J. Whelan

United States District Judge

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