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UNITED STATES DISTRICT COURT 

WESTERN DISTRICT OF WASHINGTON 

AT SEATTLE 

SECURITIES AND EXCHANGE COMMISSION, 

Plaintiff, 

v. 

C. PAUL SANDIFUR, JR., THOMAS G. TURNER, 

ROBERT A. NESS, THOMAS R. MASTERS, DAN 

W. SANDY, DAVID R. SYRE, and TRILLIUM 

CORPORATION, 

Defendants. 

CASE NO. C05-1631C 

ORDER 

 

I. INTRODUCTION 

 This matter has come before the Court on the following motions: (1) Defendant Ness’s motion to 

dismiss, or for a more definite statement and to strike request for disgorgement (Dkt. No. 23); 

(2) Defendant Masters’s joinder in Defendant Ness’s motion (Dkt. No. 34); (3) Defendant Sandy’s motion 

to dismiss (Dkt. No. 27); and (4) Defendants Trillium Corporation and David Syres’s motion to dismiss 

(Dkt. No. 26). Having carefully considered the papers filed by the parties in support of and in opposition 

to the motions, the Court has determined that no oral argument shall be necessary. For the reasons that 

follow, Defendant Ness’s motion to dismiss is DENIED in part and GRANTED in part, Defendant 

The Honorable John C. Coughenour

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Masters’s motion to dismiss is DENIED, and Defendants Trillium, Syre, and Sandy’s motions to dismiss 

are GRANTED in part and DENIED in part. 

II. BACKGROUND 

 Plaintiff, the Securities & Exchange Commission (“SEC”), filed a complaint alleging that 

Defendants, several former executives and business associates of Metropolitan Mortgage & Securities Co. 

(“Metropolitan”), participated in a fraudulent scheme to mislead investors about the company’s financial 

performance. (Compl. ¶ 1.) 

 In February 2004, Metropolitan, a real estate sales and finance company with $2 billion in assets, 

went into bankruptcy. (Compl. ¶ 1.) The complaint alleges that the bankruptcy caused about 10,000 

investors in the Pacific Northwest holding approximately $450 million in Metropolitan securities to lose 

all, or a substantial portion, of their investments. (Id.) 

 The complaint alleges that prior to the bankruptcy, Metropolitan and the defendants in this action 

schemed to improperly boost the company’s revenues through four real estate transactions conducted in 

the third and fourth quarters of Metropolitan’s fiscal year 2002. (Id. ¶ 3.) The transactions are alleged to 

be improper in that Metropolitan recognized an immediate gain in each of the transactions despite having 

financed the entire purchase price itself through a variety of mechanisms. (Id. ¶ 2.) Under Generally 

Accepted Accounting Principles (“GAAP”), “a seller may not recognize an immediate gain on the sale of 

undeveloped real estate unless the buyer makes an independent initial investment of at least 20% of the 

purchase price.” (Id.) 

The complaint asserts the following claims against Defendant Ness: 

(1) violations of Section 17(a) of the Securities Act; 

(2) violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; 

(3) aiding and abetting Metropolitan’s violations of Section 10(b) of the Exchange Act and Rule 

10b-5 thereunder; 

(4) aiding and abetting Metropolitan’s filing of false annual reports in violation of Section 13(a) of 

the Exchange Act and Rules 12b-20 and 13a-1 thereunder; 

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(5) aiding and abetting Metropolitan’s filing of false quarterly reports in violation of Section 13(a) 

of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; 

(6) circumventing internal accounting controls in violation of Section 13(b)(5) of the Exchange Act 

and Rule 13b2-1 thereunder; 

(7) aiding and abetting Metropolitan’s failure to keep accurate books and records in violation of 

Section 13(b)(2)(A) of the Exchange Act; 

(8) aiding and abetting Metropolitan in failing to maintain adequate internal accounting controls in 

violation of Section 13(b)(2)(B) of the Exchange Act; 

(9) making or causing to be made false statements and omissions to accountants in violation of 

Rule 13b2-2 under the Exchange Act; and 

(10) making false Sarbanes-Oxley certifications in violation of Rule 13a-14 under the Exchange 

Act. 

 Claims (1), (2), (3), (4), (6), (7), and (8) are also asserted against Defendant Masters. Claims (3) 

and (4), alleging aiding and abetting violations of Sections 10(b) and 13(a) of the Exchange Act, are 

asserted also against Defendants Sandy, Syre and Trillium. Each of the pending motions to dismiss seeks 

to dismiss all of the claims against its respective defendant. 

III. ANALYSIS 

A. Applicable standard

 FED. R. CIV. P. 12(b)(6) provides that an action will be dismissed for failure to state a claim upon 

which relief may be granted. A court will grant dismissal only if “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). While a court must accept all material allegations in the complaint as 

true and construe them in the light most favorable to the nonmoving party, conclusory allegations of law 

or unwarranted inferences of fact urged by the nonmoving party are insufficient to defeat a motion to 

dismiss. Ove v. Gwinn, 264 F.3d 817, 821 (9th Cir. 2001). In addition, a court’s obligation to construe 

allegations in the light most favorable to the nonmoving party does not mean that those allegations must 

be construed in a light favorable to the nonmoving party, if such a construction cannot reasonably be 

made. 

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B. Defendant Ness’s motion to dismiss

 Defendant Ness moves to dismiss the claims against him on the grounds that they do not comply 

with the particularity requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) 

requires that “[i]n all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with 

particularity.” FED. R. CIV. P. 9(b). The Ninth Circuit has held that “allegations of fraud [must be] 

specific enough to give defendants notice of the particular misconduct which is alleged to constitute the 

fraud charged so that they can defend against the charge and not just deny that they have done anything 

wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). The parties agree that the requirements 

of Rule 9(b) are satisfied if the complaint provides the who, what, where, when and how of the alleged 

fraud. (See SEC Opp’n 3 (citing SEC v. Buntrock, 2004 WL 1179423 at *3 (N.D. Ill. May 25, 2004)); 

Ness Mot. 2 (citing In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994)).) Failure to satisfy 

Rule 9(b) will result in dismissal of the claims. Moore v. Kayport Package Express, Inc., 885 F.2d 531, 

540 (9th Cir. 1989). 

 Rule 9(b) applies not only to claims in which fraud is an essential element, but also to claims 

grounded in allegations of fraudulent conduct. Vess v. Ciba-Geigy Corp., 317 F.3d 1097, 1103–1104 (9th

Cir. 2003). In the case at bar, the SEC’s first and second claims allege violations of Section 17(a) of the 

Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Fraud is an essential 

element of both of these claims. Therefore, these claims are subject to the requirements of Rule 9(b). 

The SEC’s sixth, ninth and tenth claims are based on the same course of allegedly fraudulent conduct as 

the first and second claims, and are therefore, pursuant to the Ninth Circuit’s holding in Vess, also subject 

to the requirements of Rule 9(b). 317 F.3d at 1103–1104 (explaining that where a plaintiff alleges “a 

unified course of fraudulent conduct and rel[ies] entirely on that course of conduct as the basis of a claim . 

. . the claim is said to be ‘grounded in fraud’ or to ‘sound in fraud’ and the pleading of that claim as a 

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whole must satisfy . . . Rule 9(b)”). 

 1. First and second claims 

 The SEC’s first and second claims allege that Defendant Ness violated Section 17(a) of the 

Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder by making false 

statements or omissions in connection with the offer or sale of Metropolitan securities. These are the 

antifraud provisions of the Securities Acts. SEC v. Rubera, 350 F.3d 1084, 1094 (9th Cir. 2003) (citing 

SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001)). These antifraud provisions prohibit the 

making of material misstatements or omissions. Dain Rauscher, 254 F.3d at 856. In addition to alleging 

the falsity and materiality of a statement, the SEC must adequately allege scienter. “A showing of 

scienter is an element of an enforcement action pursuant to the antifraud provisions of the Securities 

Acts.” Rubera, 350 F.2d at 1094 (citing Aaron v. SEC, 446 U.S. 680, 701–02 (1980)). “Scienter is ‘a 

mental state embracing intent to deceive, manipulate, or defraud.’” Id. (citing Ernst & Ernst v. 

Hochfelder, 425 U.S. 185, 194 n.12 (1976)). 

 For the reasons that follow, the Court DENIES Defendant Ness’s motion as to all but the alleged 

misstatements in the Form S-2. 

 a. Fraud and misstatements 

 i. Misstatements 

 Paragraphs 24, 25, 58, 59 and 60 of the complaint collectively allege that Defendant Ness made 

material misstatements in two public documents, the Form 10-Q for the third quarter of fiscal 2002 and 

the Form 10-K for fiscal 2002. The alleged material false statements were about Metropolitan’s pre-tax 

net income. According to the complaint, Metropolitan (and Defendant Ness) improperly recognized gains 

on four real estate transactions, referred to as the Trillium/Jeff Properties, Grand Hills, Neighborhood I 

and Neighborhood II transactions, allowing Metropolitan to report pre-tax net income in the millions of 

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dollars for the third quarter of fiscal 2002 and for fiscal 2002, rather than a loss. (Compl. ¶¶ 24, 25, 58, 

59.) Both the 10-Q and the 10-K containing the alleged false reports of pre-tax net income are alleged to 

have been, and were in fact, signed by Defendant Ness. Defendant Ness’s signature on these documents 

is sufficient to expose him to potential liability as a primary violator under § 10(b). Howard v. Everex 

Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000). Because the complaint specifically alleges that the 10-Q 

and the 10-K misstated Metropolitan’s pre-tax net income, the Court finds that the complaint identifies 

with sufficient particularity the alleged misstatements made by Defendant Ness in these documents. 

 In addition to the 10-Q and the 10-K, the complaint identifies a third public filing, a Form S-2 filed 

in March 2003, which contained the allegedly false financial results for fiscal 2002. Unlike its allegations 

regarding the 10-Q and the 10-K, however, the complaint neglects to connect Defendant Ness to the 

alleged misstatements in the Form S-2. Therefore, to the extent that the SEC’s complaint seeks to state a 

claim against Defendant Ness holding him accountable for the alleged misstatements in the Form S-2, this 

portion of the complaint is dismissed without prejudice. 

ii. Fraud

The complaint alleges that Defendant Ness acted fraudulently in the Trillium/Jeff Properties, 

Neighborhood I, and Neighborhood II transactions. 

Trillium/Jeff Properties

Paragraph 27 of the complaint alleges: 

Given the size of the [sale of the property to Trillium], Metropolitan asked its outside 

auditors, Ernst & Young, LLP (“E&Y”), whether Metropolitan would be able to recognize 

an immediate gain on the sale. However, E&Y rejected gain treatment, and advised 

Turner and Ness that it would violate GAAP to record a gain on a real estate sale where 

Metropolitan and a company related to it supplied 100% of the financing. 

(Compl. ¶ 27.) This paragraph thus alleges that Ness was informed of the pertinent GAAP rule and its 

prohibition on the recognition of gains on sales where Metropolitan and companies related to it supplied 

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100% of the financing. 

Paragraphs 28 through 31 explain how Defendants Sandifur, Turner, and Sandy worked to 

restructure the deal, allegedly finally deciding on the following: 

[T]he parties decided to use a new shell company, to be formed by Sandy, to make the 

purchase. The shell company would get 80% financing from Metropolitan. Meanwhile, 

Old Standard would make a loan to Trillium, which would be funneled to the shell 

company so that the shell could make a 20% down payment. . . .Sandy would later transfer 

the property to Trillium. 

(Compl. ¶ 30.) Although the complaint does not allege that Ness was involved in the engineering of the 

deal, it does allege that “Sandifur, Turner and Ness discussed the restructured deal and they each knew 

that Sandy would establish a shell company, which would hide the fact that Trillium was the real 

purchaser of the property, and that Metropolitan and a related company were providing 100% financing 

for Trillium’s acquisition.” (Id. ¶ 32.) These two paragraphs thus allege that Ness knew that in the 

restructured deal, (1) Trillium was allegedly still the “real” purchaser; and (2) Metropolitan and a related 

company were providing 100% financing for the transaction. 

When Defendant Ness later communicated with Ernst & Young about the restructured deal, though 

he did inform them that “Sandy, through the shell company, would purchase the properties,” he failed to 

inform them that “Metropolitan and a company related to it were providing 100% financing for Sandy’s 

purchase.” (Id. ¶ 33.) In addition to this omission, the complaint alleges that Defendant Ness “falsely 

stated that Sandy was unrelated to Trillium and was purchasing the properties independently for his own 

development purposes.” (Id.) Thus, these assertions together with ¶ 27 allege that Defendant Ness, 

despite knowing that Ernst & Young had previously expressly rejected Metropolitan’s attempt to 

recognize a gain on a sale to Trillium in which Metropolitan and a related entity provided 100% of the 

financing, knowingly concealed from Ernst & Young that in the restructured deal, Trillium was still the 

purchaser and that Metropolitan and/or a related company were still providing 100% financing for the 

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transaction. 

According to these allegations, the conduct constituting the alleged fraud is not that Defendant 

Ness’s misstatements violated a GAAP rule, nor that Defendant Ness was associated with a transaction 

involving a shell company, but that Defendant Ness allegedly knowingly concealed information he knew 

was critical to Ernst & Young’s approval of the deal. For these reasons, the Court finds that the SEC’s 

allegations are sufficient to state the fraud element of the securities fraud claim against Defendant Ness 

with respect to his alleged involvement in the Trillium/Jeff Properties transaction. 

Neighborhood I

The Neighborhood I transaction was completed by the end of June 2002 and reported in 

Metropolitan’s financial results for the third quarter of 2002. (Compl. ¶ 54.) Similar to the Trillium/Jeff 

Properties transaction, 100% of the financing for Neighborhood I was alleged to have been provided by 

Metropolitan and its related companies. (Id. ¶ 55.) 

GAAP violations (including overstatement of revenues) may provide the underpinning for a 

securities fraud claim. In re Daou Sys., Inc., 411 F.3d 1006, 1016 (9th Cir. 2005). However, “the plaintiff 

must show with particularity how the adjustments affected the company’s financial statements and 

whether they were material in light of the company’s overall financial position.” Id. at 1018. This 

showing may be made by alleging “(1) such basic details as the approximate amount by which revenues 

and earnings were overstated; (2) the products involved in the contingent transaction; (3) the dates of any 

of the transactions; or (4) the identities of any of the customers or company employees involved in the 

transactions.” Id. at 1016 (quotations and citations omitted). In the present case, all of the suggested 

allegations have been made as follows: (1) revenues of $2 million and an improperly recognized gain of 

$930,0001

 (Compl. ¶ 54); (2) an undeveloped property (id.); (3) third quarter of 2002 (id.); and (4) 

 

1

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Neighborhood I, is irrelevant. Paragraph 2 of the complaint sets forth the allegedly applicable GAAP rule. Paragraph 55’s 

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Defendants Turner, Ness and Sandifur structured the deal (id ¶ 56) and the buyer was a developer called 

Neighborhood (id. ¶ 54). The $2 million in revenues represents over 30% of the real estate sales revenues 

in the quarter, and 5.7% of total revenues for the quarter. 

In light of the above, and because Defendant Ness did not contest the materiality of the alleged 

overstatement, the Court finds that the SEC’s allegations are sufficient to state the fraud element of a 

claim for securities fraud against Defendant Ness with respect to Neighborhood I.2

Neighborhood II

Neighborhood II allegedly transpired on or about September 30, 2002. (Compl. ¶ 48.) The 

structure of the deal was substantially similar to the Neighborhood I and Trillium/Jeff Properties deals in 

that it was allegedly 100% financed by Metropolitan and its related companies. (Id. ¶ 49, 50.) Defendant 

Ness, along with Defendant Sandifur, Turner, and Masters, allegedly structured the deal. (Id. ¶ 50.) The 

transaction yielded $3.5 million in revenues and a reported gain of $1.4 million. Because the SEC’s 

allegations regarding Neighborhood II contain all of the information suggested by Daou as sufficient, the 

Court finds that the SEC’s allegations are sufficient to state the fraud element of a claim for securities 

fraud against Defendant Ness with respect to Neighborhood II. 

b. Materiality

In the context of a Rule 10b-5 claim, “a misrepresentation or omission is material if there is a 

substantial likelihood that a reasonable investor would have acted differently if the misrepresentation had 

 description of Neighborhood I clearly demonstrates that Neighborhood I falls into the ambit of the GAAP rule identified in 

¶ 12. 

2

 Though Defendant Ness argues that his individual and specific role in the alleged fraud was not alleged with sufficient 

specificity, none of the cases he cites support his argument in the context of the present case. Riley v. Brazeau involved a 

complaint alleging facts on information and belief. 612 F. Supp. 674, 677 (D. Or. 1985). Unlike in Hokama v. E.F. Hutton Co., 

where the complaint was found to be deficient because it conclusorily alleged “participation” and “substantial assistance,” 566

F. Supp. 636, 646 (C.D. Cal. 1983) the present complaint alleges “[t]he transaction was structured by Sandifur, Turner, Ness 

and Masters” (Compl. ¶ 56). In other words, rather than merely alleging participation in some unspecified manner, the 

complaint alleges that Defendant Ness, together with others, structured the deal (a specific act). Finally, unlike the complaint in 

Newman v. Comprehensive Care Corp., which referred generically to “defendants”, 794 F. Supp. 1513, 1527 (D. Or. 1992), the 

present complaint specifically names Defendant Ness. 

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not been made or the truth had been disclosed.” Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 

F.3d 940, 947 (9th Cir. 2005). “[T]o fulfill the materiality requirement[,] there must be a substantial 

likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as 

having significantly altered the total mix of information made available.” Basic Inc. v. Levinson, 485 

U.S. 224, 231–32 (1988). Basic emphasized that the inquiry to be undertaken is a fact-specific one. Id. at 

240. The Ninth Circuit has held that materiality is only appropriately determined as a matter of law if it is 

“so obvious that reasonable minds could not differ.” Fecht v. Price Co., 70 F.3d 1078, 1081 (9th Cir. 

1995). 

 In the present case, Defendant Ness challenges the materiality of the alleged misstatement relating 

to the Neighborhood II transaction. According to the complaint, Metropolitan improperly recognized a 

gain of $1.4 million in the fourth quarter of fiscal 2002 on the Neighborhood II transaction. (Compl. 

¶ 48.) In their attempts to demonstrate the materiality of the transaction, the parties calculate the gain 

and/or revenue as a percentage of various aggregate results, including total pre-tax net income for fiscal 

2002 of $6.1 million (Opp’n 12:7 (yielding 22.9%)), total allegedly fraudulent gain reported in fiscal 2002 

(Reply 7: 11 (yielding 10%)), and total revenue for fiscal 2002 (id. 7:18 (yielding 2%)). While the Court 

is inclined to agree that calculating the $1.4 million as a percentage of pre-tax net income (thereby 

arriving at the significant-seeming 22.9%) is a rather arbitrary and meaningless exercise, the Court is also 

wary of drawing a bright-line rule regarding what percent is to be considered material as a matter of law. 

Although Defendant Ness cites many cases involving numbers, the Court is mindful that the materiality 

inquiry is a fact-specific one. Basic Inc., 485 U.S. at 240. Moreover, one of the cases cited by Defendant 

Ness found that 2% of quarterly revenue was not material as a matter of law. Shuster v. Symmetricon, 

Inc., 1997 WL 269490, at *8 (N.D. Cal. Feb. 25, 1997). Here, the $3.5 million in revenue associated with 

the Neighborhood II transaction, though only 2% of annual revenue, could have represented roughly 8% 

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of quarterly revenue.3 Thus, even the Shuster Court might have hesitated to make a similar 

pronouncement in the present case. For the foregoing reasons, and because the dispute between the 

parties amply demonstrates the ease with which reasonable minds could differ as to the materiality of the 

Neighborhood II transaction, the Court declines to find that the Neighborhood II transaction is immaterial 

as a matter of law. 

c. Scienter

 Scienter is a necessary element of alleged violations of Section 17(a), Section 10(b) and Rule 10b5. Aaron v. SEC, 446 U.S. at 701–02. This element may be satisfied by recklessness. Dain Rauscher, 

254 F.3d at 856. 

Reckless conduct is conduct that consists of a highly unreasonable act, or omission, that is 

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 is so obvious that the 

actor must have been aware of it. 

Id. (quotes omitted). The SEC is correct that the more stringent pleading requirements set forth in the 

Private Securities Litigation Reform Act of 1995 (“PSLRA”) do not apply to enforcement actions brought 

by the Commission. Thus, to satisfy Fed. R. Civ. P. 9(b), the SEC need only state that scienter existed. 

Fecht, 70 F.3d at 1082 (citing In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547 (9th Cir. 1994)). 

 The allegations recited in the Court’s discussion of the Trillium/Jeff Properties transaction allege 

scienter with the necessary degree of particularity (Defendant Ness allegedly knowingly concealed 

information he knew was critical to Ernst & Young’s approval of the deal). In addition to those 

allegations already discussed, the complaint also states “Ness knew, or [was] reckless in not knowing, that 

it was improper for Metropolitan to recognize” the gain on the Trillium/Jeff Properties transaction. 

(Compl. ¶ 36.) Since an allegation of recklessness is enough to allege the scienter element, Dain 

 

3

 In the absence of actual data in the record, the Court calculated the 8% figure by dividing Metropolitan’s annual revenue into

4 equal quarterly amounts. The Court recognizes that Metropolitan’s fourth quarter revenues might actually have been more or 

less than one-fourth of its total annual revenues. 

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Rauscher, 254 F.3d at 856, the Court finds that the SEC’s complaint successfully alleges scienter with 

respect to the Trillium/Jeff Properties transaction. 

 Unlike in the Trillium/Jeff Properties transaction, which did not take place until the fourth quarter 

of 2002, there are no allegations that Defendant Ness had been told that the transaction would violate 

GAAP. Instead, the complaint relies on allegations regarding Defendant Ness’s training and position in 

the company (Compl. ¶ 12) to support its allegation that he “knew or was reckless in not knowing” that it 

was improper for Metropolitan to recognize revenue on the Neighborhood I transaction (id. ¶ 56) and that 

it was improper to recognize the gain in Metropolitan’s 10-Q for that quarter (id. ¶ 57). Nevertheless, this 

specific aspect of the complaint removes it from that class of dismissible complaints seeking to infer 

scienter from the alleged GAAP violations. See Daou, 411 F.3d at 1016 (discussing how violations of 

GAAP may provide “powerful indirect evidence of scienter”). In other words, rather than arguing that 

scienter may be inferred from an alleged GAAP violation, the present complaint directly alleges that 

Defendant Ness either knew or was reckless in not knowing that it was improper to recognize a gain on 

Neighborhood I. 

Defendant Ness argues that the Neighborhood I scienter allegations are deficient because they do 

not mention GAAP by name. However, the complaint alleges that Defendant Ness knew or was reckless 

in not knowing the principle of the rule. Whether or not Defendant Ness knew the name of the rule is not 

important if he knew or was reckless in not knowing that what he was doing was wrong, and yet persisted 

in doing it. 

For these reasons, the Court finds that the SEC’s complaint successfully alleges scienter with 

respect to the Neighborhood I transaction. For the same reasons, the SEC’s complaint successfully 

alleges scienter with respect to the Neighborhood II transaction. 

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2. Sixth, ninth and tenth claims

The sixth, ninth and tenth claims allege that Defendant Ness violated three provisions of Section 13 

of the Exchange Act and rules promulgated under that section by the Commission. As already stated 

above, because these three claims rest on the same allegations of fraudulent conduct as the first and 

second claims, they are subject to the pleading standards of FED. R. CIV. P. 9(b). Also as already stated 

above, the parties agree that the requirements of Rule 9(b) are satisfied if the complaint provides the who, 

what, where, when and how of the alleged fraud. (See SEC Opp’n 3 (citing SEC v. Buntrock, 2004 WL 

1179423 at *3 (N.D. Ill. May 25, 2004)); Ness Mot. 2 (citing In re GlenFed, Inc. Sec. Litig., 42 F.3d 

1541, 1548 (9th Cir. 1994)).) 

As Defendant Ness himself points out, the sixth and the tenth claims contain no factual allegations 

in addition to the conduct alleged to be securities fraud. Similar to the Court’s findings with respect to the 

first and second claims, the Court finds that the sixth claim is pled with sufficient particularity as to the 

10-Q and the 10-K, but not as to the Form S-2. Defendant Ness’s motion as to this claim is DENIED. 

The tenth claim alleges that Defendant Ness signed a false Sarbanes-Oxley certification that was included 

in Metropolitan’s 2002 10-K. (Compl. ¶ 94.) In addition to this specific allegation, the claim also relies 

on and incorporates the complaint’s other preceding allegations. Like in the first, second and sixth 

claims, the Court finds that the allegations adding up to the tenth claim provide the who (Defendant 

Ness), what (false certification), when (filed December 31, 2002), where (in the 2002 10-K), and how (by 

signing it) necessary to allow Defendant Ness to prepare his defense. Therefore, the tenth claim is pled 

with sufficient particularity and Defendant Ness’s motion as to this claim is DENIED. 

The ninth claim alleges that Defendant Ness violated Rule 13b2-2 by making false statements and 

omissions to outside auditors. The Court discussed Defendant Ness’s alleged misstatements and 

omissions above in its analysis of the Trillium/Jeff Properties transaction. In that analysis, the Court 

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concluded that the SEC had pled with sufficient particularity that Defendant Ness (who) had knowingly 

concealed information he knew was critical to Ernst & Young’s approval of the deal (what). In addition 

to these core details, the complaint specifies that the communications occurred in September 2002. The 

Court finds that these allegations provide sufficient detail and information for Defendant Ness to prepare 

his defense with respect to his September 2002 communications with E&Y about the Trillium/Jeff 

Properties transaction. 

The complaint also alleges that two other false statements were made by Defendant Ness to E&Y: 

(1) a written statement provided to E&Y in or about December 2002 representing that Jeff Properties had 

a successful history in commercial property development and that Jeff Properties intended to develop the 

properties and pay off the loan to Metropolitan (Compl. ¶ 38); and (2) a letter to E&Y dated December 

27, 2002, representing that “Metropolitan’s consolidated financial statements for fiscal 2002 were 

presented in conformity with GAAP, and that [he] was not aware of fraudulent conduct by any officer or 

employee with a significant role in the company’s system of internal controls” (id. ¶ 39). 

Defendant Ness contends that his alleged representation that Jeff Properties had a successful 

history in commercial property development is not fraudulent because Jeff Properties was controlled by 

Defendant Sandy (a detail allegedly disclosed to E&Y (Compl. ¶ 33)) and because Defendant Sandy “was 

experienced with commercial real estate ventures” (Def. Ness’s Mot. 18 (citing to Compl. ¶ 16)). 

However, ¶ 16 does not support the latter assertion –– rather, ¶ 16 says only that Defendant Sandy “owns . 

. . some real estate ventures.” Paragraph 16 makes no assertions as to the type of real estate ventures 

owned or what Defendant Sandy’s involvement in them entailed. In addition, even if Defendant Sandy 

had been alleged to have experience in commercial real estate ventures, this is not the same as Jeff 

Properties having that experience, and certainly not the same as Jeff Properties having a successful 

history in property development. Indeed, the complaint alleges that Jeff Properties was formed for the 

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purpose of taking part in the Trillium/Jeff Properties deal (Compl. ¶¶ 33, 34), necessarily meaning that 

Jeff Properties had no history of commercial property development. For these reasons, the Court does not 

find that the complaint contains internal inconsistencies regarding Jeff Properties. In addition, the Court 

finds that the SEC’s allegations regarding Defendant Ness’s (who) provision of the December 2002 

(when) written statement (what) to E&Y (who) provide the necessary detail to enable Defendant Ness to 

prepare his defense. 

Finally, Defendant Ness’s objections to the December 27, 2002 letter are covalent with his 

objections to the underlying allegations regarding fraudulent conduct and false financial statements. 

(Mot. 18.) Since the Court found that the SEC has pled the underlying conduct and false financial 

statements with the requisite degree of particularity, the Court also finds that the ninth claim is adequately 

pled as to the December 27, 2002 letter. 

Though Defendant Ness argues that the allegations “lump” him together with Defendant Turner in 

such a manner that he cannot be expected to know what allegations pertain to him, the Court has already 

addressed and rejected this argument. See n.2. In conclusion, the Court finds that the ninth claim is pled 

with sufficient particularity as to all three alleged misstatements and omissions to allow Defendant Ness 

to prepare his defense. Accordingly, Defendant Ness’s motion as to this claim is DENIED. 

 3. Third, fourth, fifth, seventh and eight claims 

 The third, fourth, fifth, seventh and eighth claims assert that Defendant Ness aided and abetted 

violations of the securities laws. Defendant Ness’s objections to these claims are covalent with his 

objections to the SEC’s first and second claims regarding primary violations. For the same reasons as 

stated above in its discussion of the first and second claims, the Court finds that the aiding and abetting 

claims are alleged with sufficient particularity. Therefore, Defendant Ness’s motion as to these claims is 

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DENIED.4 

 4. Disgorgement claim

Defendant Ness moves to strike the SEC’s disgorgement claim pursuant to FED. R. CIV. P. 12(f), 

which provides that a court “may order stricken from any pleading any insufficient defense or any 

redundant, immaterial, impertinent, or scandalous matter.” Disgorgement is a remedy. See, e.g., SEC v. 

Rind, 991 F.2d 1486, 1490 (9th Cir. 1993). “The theory behind the remedy is deterrence.” Id. 

In the present case, where the Court has found that the SEC’s complaint presents sufficiently 

detailed allegations of fraudulent conduct against Defendant Ness, it would appear that the remedy is 

available, see SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998), and would be appropriate 

if the SEC prevails. One line of cases cited to by Defendant Ness refers to situations in which the 

requested remedy is simply unavailable as a matter of law. The other line of cases cited involved 

situations in which courts found that the SEC had failed to establish that disgorgement was warranted. 

Thus, none of these cases supports the argument that the SEC’s disgorgement claim should be stricken at 

the pleading stage, when all that is necessary at that stage is that the Court find that disgorgement would 

be appropriate if the SEC prevails in its case-in-chief. Accordingly, Defendant Ness’s motion as to the 

disgorgement claim is DENIED. 

C. Defendant Masters’s joinder in Defendant Ness’s motion to dismiss

Defendant Masters filed his answer to the complaint on December 1, 2005. On December 9, 2005, he 

filed a notice of joinder in Defendant Ness’s motion to dismiss. The SEC opposes the motion as 

untimely. It is true that according to the provisions of Rule 12(b)(6), a motion to dismiss on a 12(b) basis 

is untimely if it is made after an answer has been filed. FED. R. CIV. P. 12(b) (“A motion making any of 

 

4

 Defendant Ness’s argument that allegations naming defendants other than and in addition to Defendant Ness and stating that 

they “reviewed,” “commented on,” or “signed” documents are insufficiently particular is not supported by the case he cites. 

The complaint in Morgan v. Prudential Group, Inc. alleged that a defendant “participated in drafting, preparation and review”. 

81 F.R.D. 418, 425 (S.D.N.Y. 1978). Here, the allegation is not that Defendant Ness took some unspecified participatory action

related to these action verbs, but that he actually “reviewed,” “commented on,” and “signed” documents. 

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these defenses shall be made before pleading.”). However, 12(h) and 12(c) together preserve a party’s 

ability to make the 12(b)(6) defense at any time. These sections provide that “a defense of failure to state 

a claim upon which relief can be granted . . . may be made . . . by motion for judgment on the pleadings”, 

FED. R. CIV. P.12(h), and that “after the pleadings are closed but within such time as not to delay the trial, 

any party may move for judgment on the pleadings,” FED. R. CIV. P.12(c). See also 5C WRIGHT &

MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL 3D § 1361 at 95 (2004). Therefore, though 

Defendant Masters would be precluded from filing a motion called a 12(b)(6) motion to dismiss, he was 

not precluded from filing a motion to dismiss for failure to state a claim. For these reasons, the Court will 

allow Defendant Masters to join in Defendant Ness’s 12(b)(6) motion. 

The complaint’s allegations regarding Defendant Masters are quite limited in comparison to the 

allegations regarding Defendant Ness. Regarding Defendant Masters, the complaint alleges in pertinent 

part: (1) he “was Metropolitan’s Vice President for property sales and development from March 2002 

through February 2003 and reported directly to Sandifur” (Compl. ¶ 13); (2) he knew or was reckless in 

not knowing the applicable GAAP rule (id. ¶ 23); (3) together with Defendants Sandifur, Turner and 

Ness, he structured the Neighborhood II transaction (id. ¶ 50); (4) he knew or was reckless in not knowing 

that the Neighborhood II sale was to be 100% financed by Metropolitan and a related company (id. ¶ 51); 

and (5) he knew or was reckless in not knowing that Western United’s cost basis in the Neighborhood II 

land was materially higher than reported (id. ¶ 53). 

As with Defendant Ness, the Court finds that with respect to Defendant Masters, the complaint 

states with sufficient particularity the who, what, when, where, and how of the alleged fraudulent conduct. 

Most of these required details have already been addressed by the Court in its discussion of Defendant 

Ness’s motion. See supra at 9. As for Defendant Masters’s specific participation, the complaint alleges 

that he “structured” the Neighborhood II deal, an allegation that satisfies the requirements of Rule 9(b). 

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See supra note 2. 

Similarly, the complaint alleges the scienter element with sufficient particularity as to Defendant 

Masters. See supra at 11–12. 

For these reasons, and the reasons already set forth in the Court’s discussion of Defendant Ness’s 

motion, Defendant Masters’s motion to dismiss for failure to state a claim is hereby DENIED. 

D. Defendants Trillium/Syre and Sandy’s motions to dismiss

Claims (3) and (4), alleging aiding and abetting violations of Sections 10(b) and 13(a) of the 

Exchange Act, are asserted against Defendants Trillium, Syre and Sandy. All three of these defendants 

were alleged to be involved in the transaction referred to as the Trillium/Jeff Properties transaction. Since 

the allegations regarding these three defendants are substantially similar in all important respects, the 

Court will treat their motions to dismiss together. 

The parties agree that in order to state a claim for aiding and abetting, the SEC must allege that a 

defendant “knowingly provide[d] substantial assistance to another person in violation” of the federal 

securities laws. 15 U.S.C. § 78t(e). However, the parties disagree as to whether “recklessness” may 

satisfy this requirement of “knowing” assistance. The Ninth Circuit, in SEC v. Fehn, commented that the 

PLSRA revived the SEC’s ability to bring injunctive actions for aiding and abetting violations and 

“restore[d] the pre-Central Bank status quo with respect to SEC injunctive actions.” 97 F.3d 1276, 1288 

(9th Cir. 1996) (referring to Central Bank of Denver of Denver v. First Interstate Bank of Denver, 511 

U.S. 164 (1994) (abrogating aiding and abetting liability under the securities laws)). However, the Fehn

Court recognized in a footnote that the PSLRA differed from the pre-Central Bank jurisprudence in one 

significant way — expressly requiring “knowledge” as an element of aiding and abetting, rather than 

permitting reckless disregard to support an aiding and abetting claim. Id. n.11. See also United States v. 

Tarallo, 380 F.3d 1174, 1184 (9th Cir. 2004) (recognizing that to prove liability on an aiding and abetting 

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theory, the government had to show that the defendant “intentionally aided” his co-workers “in 

committing their own frauds”). Accordingly, the Court must determine whether the SEC has sufficiently 

alleged that Defendants Trillium, Syre, and Sandy had actual knowledge that they were providing 

substantial assistance to Metropolitan in executing the alleged fraud. 

Although the parties make some show of disputing what the pertinent alleged fraud is, it is fairly 

clear that the alleged fraud in question is Metropolitan’s recognition and reporting of the gain on the 

Trillium/Jeff Properties transaction. (See, e.g., Defs. Trillium/Syre’s Reply 2–3 (recognizing that the 

alleged fraud related to incorrect accounting treatment and/or defrauding or investors).) Thus, in order to 

have stated a claim against these defendants for aiding and abetting violations, the complaint must allege 

that they had actual knowledge that the Trillium/Jeff Properties transaction was structured in such a way 

as to permit the improper reporting of the gain from the transaction. The complaint does not do so. 

Defendants Trillium and Syre’s reply succinctly and accurately describes the complaint’s allegations thus: 

(i) Trillium and Metropolitan reached a tentative agreement for Trillium to borrow money 

from Metropolitan and to buy two properties from Metropolitan; (ii) Ernst & Young 

identified some “accounting snags” with the proposed transaction, and Metropolitan 

sought to restructure the transaction in order to address Ernst & Young’s concerns; (iii) the 

parties agreed to restructure the transaction so that the properties would be sold to a 

company formed by Sandy; (iv) all the material facts about the transaction were disclosed 

to Metropolitan; (v) Ernst & Young found that the restructured transaction remedied the 

problems and approved Metropolitan’s plan to recognize income from the restructured 

sale; and (vi) the parties closed the transaction. 

(Defs. Trillium/Syre’s Reply 2.) Though the SEC’s opposition characterizes the Trillium/Jeff Properties 

transaction as “highly atypical,” the actual allegations of the complaint neither expressly make this 

statement, nor are they sufficient to support such a conclusion. Moreover, even if Defendants Trillium, 

Syre, and Sandy knew that the transaction was “highly atypical,” atypicality does not, by itself, establish 

that a transaction is fraudulent or improper. See, e.g., Neilson v. Union Bank of Cal., 290 F.Supp.2d 1101, 

1120–21 (C.D. Cal. 2003) (allowing circumstantial allegations including atypicality to suffice in alleging 

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the knowledge element). 

Most important, however, is the total lack of any alleged connection between these defendants’ 

involvement in structuring the transaction and their knowledge that it was being done for allegedly illegal 

purposes. Of these three defendants, only Defendant Syre is alleged to have had any knowledge about 

why the deal had to be restructured. However, even his alleged knowledge that the deal had to be 

restructured because of “accounting snags” (Compl. ¶ 28) does not lead to an inference that he knew that 

the restructured deal was improper or fraudulent. If Defendant Sandifur used only the term “accounting 

snags” to explain the situation to Defendant Syre, without additional allegations asserting that Defendant 

Syre knew what the snags were and why they were a problem for Metropolitan, the Court cannot impute 

to Defendant Syre any knowledge regarding Metropolitan’s intended improper or fraudulent conduct. As 

to the other two defendants, Trillium and Sandy, the complaint contains no allegations that would support 

an inference that they knew the allegedly improper or fraudulent purpose of the restructured deal. (See, 

e.g., Compl. ¶ 29, 30, 31 (alleging only that Defendant Turner negotiated with a Trillium Vice President 

and Defendant Sandy, and not referring to any communications regarding the reason for the continued 

negotiations).) Similarly, the facts that Defendant Sandy set up a shell company and that Jeff Sandy was 

allegedly given a motorcycle in exchange for his participation as the sole shareholder of the shell 

company, while perhaps unusual, are not necessarily indicative of improper or fraudulent behavior. 

For these reasons, the Court finds that the SEC’s complaint fails to allege the necessary knowledge 

element of an aiding and abetting claim. Accordingly, the SEC’s aiding and abetting claims against 

Defendants Trillium, Syre, and Sandy must be DISMISSED. 

Defendants Trillium, Syre, and Sandy urge that the dismissal of the claims against them be a 

dismissal with prejudice. FED. R. CIV. P. 15(a) provides that leave to amend a complaint or pleading 

“shall be freely given when justice so requires.” The Ninth Circuit has directed district courts to consider 

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the presence of bad faith, undue delay, prejudice to the opposing party, and futility, “with all inferences in 

favor of granting the motion [to amend].” Griggs v. Pace Am. Group, Inc., 170 F.3d 877, 880 (9th Cir. 

1999); Howey v. United States, 481 F.2d 1187, 1190 (9th Cir. 1973). 

 Although Defendants emphasize that the SEC has had ample opportunity to conduct discovery and 

to compose better allegations, Defendants do not contend that the insufficiency of the complaint is due to 

bad faith. More importantly, Defendants have not shown that prejudice will result from amendment, see, 

e.g., DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987) (requiring that the party 

opposing amendment bear the burden of demonstrating prejudice), only reiterating their unsupported 

assertion that the SEC, as “no ordinary litigant,” ought not to receive the benefit of Rule 15(a). 

 Dismissal without leave to amend is not appropriate where it appears that plaintiffs have “a 

reasonable chance of successfully stating a claim if given another opportunity.” Eminence Capital, LLC 

v. Aspeon, Inc., 316 F.3d 1048, 1053 (9th Cir. 2003) (remanding a case in which “plaintiffs’ allegations 

were not frivolous, plaintiffs were endeavoring in good faith to meet the heightened pleading 

requirements and to comply with court guidance . . . and, most importantly, [where] it appears that 

plaintiffs had a reasonable chance of successfully stating a claim”). Here, although the deficiencies in 

Plaintiffs’ complaint were not mere technicalities, they are not of an incurable nature. Therefore, 

amendment may not be futile. 

Finally, the Court does not find that delay is a factor in this case. 

For these reasons, the Court’s dismissal of the third and fourth claims against Defendant Trillium, 

Syre, and Sandy is without prejudice. 

IV. CONCLUSION 

 In accordance with the foregoing, Defendant Ness’s motion to dismiss is DENIED in part and 

GRANTED in part, Defendant Masters’s motion to dismiss is DENIED, and Defendants Trillium, Syre, 

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and Sandy’s motions to dismiss are GRANTED in part and DENIED in part. Claims (3) and (4) against 

Defendants Trillium, Syre, and Sandy are DISMISSED without prejudice. The SEC is directed to file an 

amended complaint within 45 days of the date of this order. 

 

Dated this 2nd day of March, 2006. 

UNITED STATES DISTRICT JUDGE 

A

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