1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 1–

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

ITI INTERNET SERVICES, INC., a

Washington corporation; et al.,

Plaintiffs,

v.

SOLANA CAPITAL PARTNERS, INC., a

California corporation; et al.,

Defendants.

No. C05-2010Z

ORDER

This matter comes before the Court on Defendants’ motion to dismiss, docket no. 51,

and Plaintiffs’ motion to strike, docket no. 65. Having reviewed the briefs, supporting

declarations and exhibits of the parties, the Court enters the following Order. 

BACKGROUND

This case and a related state court case concern the purported merger of two

Washington corporations, ITI Internet Services, Incorporated (“ITI”), and HIMC Corporation

(“HIMC”). The Amended Complaint lists five named Plaintiffs as well as John Doe

Plaintiffs 1-15. The named plaintiffs are: (1) ITI; (2) RPE Family Trust (“RPE”), a HIMC

shareholder; (3) Ronald Ehli, the founder of ITI; (4) Pamela Ehli, Ronald Ehli’s spouse and a

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 1 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26 1

 Virgil Llapitan has since been removed as a party to this case. See Order Granting Mot. to

Dismiss Virgil Llapitan as a Party Plaintiff, docket no. 64.

ORDER 2–

director, at times, for both ITI and HIMC; and (5) Virgil Llapitan,1 former director and

president of HIMC and an HIMC shareholder. Am. Compl. at ¶¶ 5-9. The Amended

Complaint also lists unknown HIMC shareholder Does 1-15 as Plaintiffs. Id. at ¶ 10. 

Although the Amended Complaint lists 34 named Defendants and unknown

Defendant Roes 1-15, this motion to dismiss is brought only on behalf of the following

Defendants: (1) Henry Gurley (“Gurley”), an employee, associate or affiliate of Grant

Bettingen, Incorporated; (2) Jerry Cornwell (“Cornwell”), managing member of XXX

Enterprises, LLC; (3) K. Mitchell Wiggins (“Wiggins”), managing partner of Western

Clearing Corporation, LLC; (4) Judy Morton Johnston, spouse of the deceased Defendant

Clifford Johnston (“Johnston”); (5) 4 Points Lake, LLC (“4 Points Lake”), a Minnesota

company with its principal place of business in Washington; and (6) Luke D’Angelo

(D’Angelo”), (collectively, “Moving Defendants”). See Am. Compl., docket no. 41, ¶¶ 13,

18, 29, 30, 33 and 36. The Moving Defendants’ motion to dismiss does not apply to the

remaining 28 Defendants.

Broadly stated, Plaintiffs seek a declaratory judgment that the Business Combination

Agreement (the “Agreement”) entered into by ITI and HIMC is invalid because it was never

filed with the Secretary of State of the State of Washington. Id. at ¶¶ 53, 83. Plaintiffs also

allege that several of the Defendants’ acts constitute securities fraud violations under § 10(b)

of the Exchange Act and Rule 10b-5. Finally, Plaintiffs allege that several of the

Defendants’ acts constitute civil violations of the Racketeer Influenced and Corrupt

Organizations Act (“RICO Act”), 18 U.S.C. § 1962.

1. Merger of ITI and HIMC

ITI is “in the business of facilitating the processing of Internet on-line payments.” 

Am. Compl. at ¶ 47. In November 2001, ITI contracted with Valhalla Financial Group

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 2 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 3–

(“Valhalla”), owned by Defendants Johnston and Cornwell, to find a public company with

which ITI could merge to accomplish ITI’s goal of becoming a public company. Id. at ¶ 48. 

Valhalla located HIMC, a publicly held company incorporated under Washington law. Id. at

¶¶ 48-49. HIMC was a shell corporation with “no meaningful business operations.” Id. at ¶

46. In December 2001, HIMC and ITI entered into the Agreement. Id. at ¶ 49. Pursuant to

the Agreement, HIMC purchased 100% of ITI’s common stock in return for 5,000,000 shares

of HIMC common stock. See Compl., docket no. 1, Ex. B. Ron Ehli received 4,500,000 of

the HIMC shares (subject to the community property interests of Pam Ehli) and Steve

Wohlend received the remaining 500,000 shares as a fee for facilitating the merger. Id. at ¶

50. Despite the Agreement, no articles of merger or exchange were ever filed with the

Washington Secretary of State. Id. at ¶ 53.

Prior to the Agreement, Defendants’ Clifford Johnston, Judy Morton Johnston, and

Jerry Cornwell comprised the directors and officers of HIMC. Id. at ¶ 51. There were

2,941,002 shares of HIMC outstanding before the Agreement and 7,941,002 shares

outstanding after the Agreement. Id. at ¶ 52. Once the Agreement was executed, the HIMC

Board of Directors (the “Board”) resigned and Jon Wiles, Pam Ehli and Virgil Llapitan were

appointed to the Board effective December 31, 2001. Id. at ¶ 54.

2. Factual Allegations for Plaintiffs’ Securities Fraud and RICO Act Claims

Plaintiffs’ specific allegations fall into three general categories: (1) a “gypsy swap”

scheme to raise capital; (2) fraudulent press releases to artificially support the market price of

HIMC stock (known as a “pump and dump” scheme); and (3) the hostile takeover and proxy

fight for control of HIMC.

A. “Gypsy Swap” Scheme

Plaintiffs allege that starting in September 2003, after ITI and HIMC entered into the

Agreement, various Defendants engaged in a scheme to raise capital using a technique

commonly known as a “gypsy swap.” Id. at ¶ 56. Defendants Johnston and Millard created

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 3 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 4–

the Millard Escrow account, an “escrow trust” with “the knowledge of Defendants Cornwell,

Judy Johnston, Wiggins, Western and others” to facilitate a “gypsy swap” scheme. Id. ¶ 57. 

Plaintiffs allege that HIMC entered into an agreement with the Millard Escrow Account to

purchase 2,163,265 shares of HIMC stock at a price of $0.49 per share. Id. at ¶ 59. The

Millard Escrow Account subsequently entered into an agreement with Defendant Solana

Capital Partners, Inc. (“Solana”) to sell the HIMC stock Solana had acquired for prices

ranging from $0.60 to $0.90 per share. Id. at ¶ 61. Plaintiffs allege that these transactions

resulted in the unjust enrichment of the Millard Escrow Account to the detriment of HIMC. 

See Am. Compl., docket no. 41, ¶ 65. Western, 4 Points Lake and XXX are alleged to have

been involved in the scheme because they transferred HIMC stock to the escrow account. 

See id. ¶ 58. Moving Defendant Gurley’s involvement with the “gypsy swap” scheme in the

Amended Complaint is limited to his participation in an agreement between HIMC and

Bettingen, Incorporated to give financial advice and raise capital for HIMC. Id. ¶ 64.

B. Pump and Dump” Scheme - Fraudulent Press Releases by HIMC to

Artificially Inflate Stock Prices

Plaintiffs allege that Defendant Aaron McCann issued false and misleading press

releases in an attempt to create the appearance of business growth, progress and prosperity. 

Id. at ¶ 68. Plaintiffs further allege that these fraudulent press releases artificially inflated

the market price of HIMC common stock. Id. at ¶¶ 69-70. Although Plaintiffs generally

allege that the fraudulent press releases were distributed “at the request and with full

knowledge of the other Defendants,” the only Defendants specifically alleged to have

knowledge of the press releases are Mr. McCann, CCG/Coffin and Sage, none of whom are

party to the present motion to dismiss. Id. at ¶¶ 68.

C. Hostile Takeover of HIMC and Proxy Fight

Plaintiffs next allege that certain Defendants planned a hostile takeover of HIMC

through a proxy fight for control of the HIMC board of directors. Id. at ¶ 75. These efforts

culminated at the Annual Meeting of Shareholders on July 19, 2005. Id. ¶ 78. Plaintiffs

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 4 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 5–

allege that Defendants were “loud, rude and otherwise obnoxious” at the meeting and “did

everything in their power . . . to disrupt the meeting.” Id. Plaintiffs do not describe the

result of the meeting. Soon thereafter Defendants initiated a law suit in Pierce County

Superior Court claiming that Plaintiffs Ron Ehli and Pam Ehli violated their fiduciary duties

as board members of HIMC. Id. ¶ 79; see also Johnston v. HIMC Corp., Cause No. 05-2-

10424-0, Superior Court of Pierce County, Washington. 

The portion of the Amended Complaint concerning the hostile takeover contains

general allegations that Defendants solicited proxies of HIMC shareholders and engaged in

improper behavior at the shareholders meeting. Id. ¶¶ 74-78. Plaintiffs also generally allege

that some Defendants at the meeting did not own stock in HIMC. Id. ¶ 80. Moving

Defendant D’Angelo informed Llapitan, a board member of HIMC at the time, that a hostile

takeover was imminent if HIMC management did not resign and install Mr. McCann and

other unnamed Defendants on the board. Id. ¶ 74. Defendant Johnston planned the proxy

fight with the aid of Defendant’s counsel, David Adler, and participated in rude and

obnoxious behavior at the shareholders meeting. Id. ¶¶ 75, 78.

3. Related State Court Action

There is a related case pending in state court wherein Defendants in this case filed suit

claiming that Plaintiffs Ron Ehli and Pam Ehli violated their fiduciary duties as board

members of HIMC. See Johnston v. HIMC Corp., Cause No. 05-2-10424-0, Superior Court

of Pierce County, Washington. Judge Felnagle of Pierce County Superior Court made a

partial summary judgment ruling and issued a contempt order against Plaintiffs Ron and

Pamela Ehli in the state court action. Id. (granting partial summary judgment against

defendants). The state court judge ordered a special shareholder meeting to re-elect the

board. See Adler Decl., docket no. 29, Ex. 2 (Partial Summary Judgment of January 6,

2006). On February 10, 2006, Judge Felnagle held Pam and Ron Ehli in contempt for

violating his order that the board and officers not engage in acts outside the ordinary course

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 5 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

2

 Plaintiffs also move to strike Defendants’ Reply brief in its entirety as “hopelessly tainted”

by its references to the letter. Because the Court does not rely on any references to the letter

in Defendants’ Reply in ruling on the present motion, the Court will not strike Defendants’

Reply in its entirety.

ORDER 6–

of business in an attempt to sever ITI from HIMC. See Third Alder Decl., docket no. 52, Ex.

1 (Order of Contempt). Judge Felnagle concluded that “the purported disassociation of ITI

Internet Services from HIMC Corporation was an action not in the ordinary course of

business and such action should be immediately rescinded by Ron Ehli.” Id.

4. Plaintiffs’ Motion to Strike

Plaintiffs move to strike references from the Moving Defendants’ Reply brief to a

letter dated April 10, 2006, from Defendant Judy Johnston to Plaintiffs’ counsel Tracy Shier

and the Otto Law Group. Pls.’ Mot. to Strike, docket no. 65. In the letter in question,

Johnston represents herself as the Chairman of ITI’s Board of Directors and orders Otto to

remove ITI as a party to this lawsuit. Caffer Decl., docket no. 62, Ex. 1. Plaintiffs contend

that the letter is inadmissible as evidence for lack of foundation and because Johnston’s

authority over ITI is the central issue of this case. Plaintiffs are correct in that Defendants

have not established that Ms. Johnston is the Chairman of ITI’s Board of Directors. 

Plaintiffs’ motion to strike is GRANTED. Exhibit 1 of the Declaration of Kenneth Caffer

and all references to the April 10, 2006, letter in Defendants’ Reply, docket no. 61, are

STRICKEN from the record.2

DISCUSSION

A complaint should not be dismissed for failure to state a claim unless it appears

beyond doubt that the plaintiff can prove no set of facts in support of the claim that would

entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); No. 84

Employee-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320

F.3d 920, 931 (9th Cir. 2003), cert denied, 540 U.S. 966 (2003). All allegations of material

fact are taken as true and construed in the light most favorable to the nonmoving party. 

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 6 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 7–

America West, 320 F.3d at 931; In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 983

(9th Cir. 1999). To survive a Rule 12(b)(6) motion to dismiss, Plaintiffs must “allege

sufficient facts from which the court can discern the elements of an injury resulting from an

act forbidden by the [] laws.” Cost Mgmt. Servs., Inc. v. Washington Natural Gas Co., 99

F.3d 937, 950 (9th Cir. 1996). The Moving Defendants seek dismissal of each of Plaintiffs’

claims pursuant to Rule 12(b)(6). 

1. Securities Fraud Claim

The elements of a 10b-5 claim include: (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. See In re Daou Sys., Inc., Sec. Litig. (Daou II),

411 F.3d 1006, 1014 (9th Cir. 2005). In this case, the Moving Defendants first contend that

the Plaintiffs’ securities fraud claims fail in part because there is no allegation that several of

the Plaintiffs purchased or sold HIMC stock during the relevant period. The Moving

Defendants also argue that, for those Plaintiffs that did allegedly acquire HIMC stock during

the relevant period, the securities fraud claims fail to meet the heightened pleading

requirements.

A. Purchase and Sale Requirement

As stated in Dauo Systems, one element of a securities fraud claim is that a plaintiff

must have been harmed by a material misrepresentation or omission of fact in connection

with the purchase or sale of a security. 411 F.3d at 1014. Similarly, the Supreme Court has

noted that Rule 10b-5 can “only be invoked by a purchaser or seller of securities to remedy

fraud associated with his or her own sale or purchase of securities, and [does] not protect

those who neither purchased nor sold the securities in question but were instead injured by

corporate insiders’ sales to third parties.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Dabit, 126 S. Ct. 1504, 1509-10 (2006) (citing Birnbaum v. Newport Steel Corp., 193 F.2d

461 (2d Cir. 1952)). 

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 7 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 8–

The Moving Defendants contend that the majority of the securities fraud claims in the

Amended Complaint fail to allege that the Plaintiffs purchased or sold shares of HIMC “in

connection with” a material misrepresentation made by any Defendant. Specifically, the

Moving Defendants contend that the Amended Complaint fails to allege: (1) that ITI is, or

ever was, a shareholder of HIMC; (2) the dates on which RPE and Does 1-15 purchased or

sold HIMC shares, making it impossible to determine whether a connection exists to the

alleged fraud; and (3) whether or when Plaintiffs Ronald and Pamela Ehli sold the 4,500,000

shares of HIMC they acquired in December 2001. 

The Moving Defendants’ characterization of the “purchase and sale” allegation

deficiencies is correct. The Amended Complaint fails to identify ITI as an HIMC

shareholder, fails to specify purchase and sale dates for the Plaintiffs other than the Ehlis,

and fails to allege whether or when the Ehlis sold their 4.5 million shares after acquiring

those shares as part of the Agreement. Moreover, the Plaintiffs’ conclusory and superficial

Response brief fails to address the Moving Defendants’ argument as to this issue. Plaintiffs

state only that the Amended Complaint repeatedly asserts “numerous acts of Securities Fraud

on the part of Defendants, while Defendants’ Motion to Dismiss attempts to ‘muddle’ the

Plaintiffs’ claims by making several arguments which have no bearing on matters related to

this cause of action, but instead, seek to confuse the issues at the heart of this matter.” Pls.’

Resp., docket no. 60, at 3-4. Because this response is entirely inadequate, the Court

presumes that the Moving Defendants’ argument has merit. See LR 7(b)(2) (failure to file an

opposition to a motion may be considered by the court as an admission that the motion has

merit). Accordingly, the Court GRANTS the Moving Defendants’ motion to dismiss the

securities fraud claims of ITI, RPE, Does 1-15, and (post-Agreement) the Ehlis for failure to

adequately allege violations of § 10(b) of the Exchange Act and Rule 10b-5.

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 8 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 9–

B. PSLRA Heightened Pleading Requirements

The only securities fraud claims alleged to have been “in connection with” the

purchase or sale of securities are based on those statements that occurred before and during

the execution of the Agreement and relate to the Ehlis acquisition of 4.5 million shares of

HIMC stock. The Moving Defendants argue that these allegedly false or misleading

statements regarding the Agreement have not been plead with sufficient particularity under

the heightened pleading requirements of the Exchange Act. The statements are listed in

paragraph 85(A)-(C), as follows:

The following representations or omission [sic] of Defendants were materially

false and misleading:

A. Defendants Clifford Johnston, Judy Johnston, Cornwell, 4 Point Lake and [sic]

failed to represent that merger agreement would not be filed or that it had not been

filed;

B. Represented and continued to represent that ITI was a wholly owned

subsidiary of HIMC;

C. Defendants Clifford Johnston, Judy Johnston, Cornwell, 4 Point Lake falsely

represented that the merger would qualify as a Type B merger under the Internal

Revenue Code of 1954, as amended[.]

Am. Compl. at ¶ 85(A)-(C). 

In a securities fraud case, a heightened pleading standard applies for a motion to

dismiss under FED. R. CIV. P. 12(b)(6). FED. R. CIV. P. 9(b) generally requires that pleadings

of fraud must state the circumstances constituting fraud with particularity. The Private

Securities Litigation Reform Act of 1995 (“PSLRA”) amended the 1934 Act, and imposed

heightened pleading requirements for private securities fraud claims. Silicon Graphics, 183

F.3d at 974. The PSLRA requires that a complaint alleging securities fraud must “specify

each statement alleged to have been misleading, the reason or reasons why the statement is

misleading, and, if an allegation . . . is made on information and belief, the complaint shall

state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). 

Plaintiffs must also “state with particularity facts giving rise to a strong inference that the

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 9 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 10–

defendant acted with the required state of mind.” Id. § 78u-4(b)(2) (emphasis added). 

Plaintiffs “must plead, in great detail, facts that constitute strong circumstantial evidence of

deliberately reckless or conscious misconduct.” Silicon Graphics, 183 F.3d at 974 (emphasis

added). 

The PSLRA provides that a complaint must be dismissed if a plaintiff fails to plead

the alleged misleading statements or scienter with particularity. 15 U.S.C. § 78u-4(b)(3)(A). 

The Ninth Circuit has merged the PSLRA’s dual pleading requirements for scienter and

falsity into “a single inquiry” because falsity and scienter are “generally strongly inferred

from the same set of facts.” Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001). “In

considering whether a private securities fraud complaint can survive dismissal under Rule

12(b)(6), [the Court] must determine whether particular facts in the complaint, taken as a

whole, raise a strong inference that defendants intentionally or [with] deliberate recklessness

made false or misleading statements.” Id. (internal quotation marks and citations omitted).

The Moving Defendants are correct that paragraphs 85(A)-(C) of the Amended

Complaint fall far short of the heightened pleading requirements under the PSLRA. First,

Plaintiffs’ allegation in paragraph 85(A) that four of the Moving Defendants “failed to

represent that merger agreement would not be filed or that it had not been filed” is not

supported by any particularized allegation of materiality or scienter. The Amended

Complaint does not allege who knew the alleged omission was false or misleading, when

they knew it, why the omission was material, or the circumstances that created a duty for

Clifford Johnston, Judy Johnston, Cornwell, and 4 Point Lake to make the disclosure. The

Amended Complaint includes only conclusory and blanket assertions that all of the 16

allegedly false or misleading statements and omissions in paragraphs 85(A)-(P) “were in all

respects material” and “were made under circumstances in which the Defendants knew the

falseness of their statements.” Am. Comp. ¶ 87, 89. Such allegations are insufficient to

survive a motion to dismiss under the PSLRA pleading requirements. Second, the allegation

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 10 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 11–

in paragraph 85(B) that the Defendants “represented and continued to represent that ITI was

a wholly owned subsidiary of HIMC” fails to state with particularity when the

representations were made, to whom they were made, and why they were material. Finally,

the allegation in paragraph 85(C) that four of the Moving Defendants “falsely represented

that the merger would qualify as a Type B merger under the Internal Revenue Code of 1954,

as amended,” also fails to state with particularity when the representation was made, to

whom it was made, why it was material, and why Plaintiffs were entitled to rely on

Defendants’ opinion about a legal matter that was independently verifiable. 

In sum, each of the securities fraud allegations in the Amended Complaint related to

the Ehlis’ acquisition of HIMC shares via the Agreement fail to satisfy the heightened

pleading requirements of the PSLRA. In most cases, courts should freely grant leave to

amend when a viable case may be presented. FED. R. CIV. P. 15(a). When the allegations in

a securities fraud complaint are inadequate to establish a strong inference of scienter,

dismissal with leave to amend is the most prudent course of action, unless it is clear that the

pleading could not be saved by amendment. Eminence Capital, LLC v. Aspeon, Inc., 316

F.3d 1048, 1052-53 (9th Cir. 2003). Accordingly, the Court GRANTS the motion and

dismisses Plaintiff’s Second Claim for securities fraud as to the Moving Defendants without

prejudice.

 2. Civil RICO Claims

Plaintiffs’ third claim alleges that Defendants violated the RICO Act, 18 U.S.C. §

1962. Am. Compl. at ¶¶ 94-127. In relevant part, 18 U.S.C. § 1962 prohibits the following

conduct and activities:

(a) It shall be unlawful for any person who has received any income derived,

directly or indirectly, from a pattern of racketeering activity or through collection

of an unlawful debt in which such person has participated as a principal within the

meaning of section 2, title 18, United States Code, to use or invest, directly or

indirectly, any part of such income, or the proceeds of such income, in acquisition

of any interest in, or the establishment or operation of, any enterprise which is

engaged in, or the activities of which affect, interstate or foreign commerce.

. . . 

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 11 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 12–

(b) It shall be unlawful for any person through a pattern of racketeering activity

or through collection of an unlawful debt to acquire or maintain, directly or

indirectly, any interest in or control of any enterprise which is engaged in, or the

activities of which affect, interstate or foreign commerce.

(c) It shall be unlawful for any person employed by or associated with any

enterprise engaged in, or the activities of which affect, interstate or foreign

commerce, to conduct or participate, directly or indirectly, in the conduct of such

enterprise's affairs through a pattern of racketeering activity or collection of

unlawful debt.

(d) It shall be unlawful for any person to conspire to violate any of the provisions

of subsection (a), (b), or (c) of this section.

The RICO Act defines “racketeering activity” as any act chargeable under several

generically described state criminal laws, any act indictable under numerous specific federal

criminal provisions, including wire and mail fraud, or any offense involving bankruptcy or

securities fraud or drug-related activities that is punishable under federal law. See 18 U.S.C.

§ 1961(a); see also Sodomy v. Ambrose Co., 473 U.S. 479, 481-82 (1985) (establishing the

scope of racketeering activities under RICO). In the present case, Plaintiffs allege that

Defendants engaged in the predicate acts of wire fraud, mail fraud, and securities fraud. See

Am. Compl. at ¶¶ 94-127.

A. Reliance on Securities Fraud Allegations Insufficient in Civil Actions

The Moving Defendants contend, among several other arguments, that the Plaintiffs’

RICO Act claim is precluded by 18 U.S.C. 1964(c), which establishes a civil cause of action

to private parties injured through RICO Act violations but expressly provides “that no person

may rely upon any conduct that would have been actionable as fraud in the purchase or sale

of securities to establish a violation of section 1962.” The Ninth Circuit has recognized this

restriction in affirming the dismissal of similar suits. In Howard v. America Online, the

plaintiffs argued that § 1964(c)’s prohibition on private suits based on securities fraud claims

did not apply to their case because they lacked standing to bring the securities fraud claims. 

See 208 F.3d 741, 749 (9th Cir. 2000). The Ninth Circuit concluded otherwise, holding that

§ 1964(c) bars the relying on any conduct as a “predicate act” that would have been

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 12 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 13–

actionable as securities fraud, regardless of whether a party has standing to bring securities

fraud claims. Id.; see also Powers v. Wells Fargo Bank NA, 439 F.3d 1043 (9th Cir. 2006)

(§ 1964(c)’s prohibition applies to individual and class action suits alike). 

Here, the Moving Defendants argue that all of Plaintiffs’ purported RICO claims are

fundamentally based on allegations in the nature of securities fraud claims. The Moving

Defendants are correct. Although the grounds for the RICO Act claims are not entirely clear,

there are multiple references to the alleged “gypsy swap” scheme, the issuance of allegedly

false press releases to increase the market value of HIMC stock, and the alleged use of a

“pump and dump” scheme that harmed “unwary and misinformed investors.” See Am.

Compl. at ¶¶ 102-105, 111-114, 119-123. Also, while the Amended Complaint does include

allegations of mail and wire fraud in relation to the stock allegations, the substance of the

RICO Act claims is clearly based on the same allegations underlying the securities fraud

claims. Id. at ¶¶ 76, 96, 101. The Court also notes that Plaintiffs offer only a conclusory

response to the Moving Defendants’ contention that the RICO Act claims are based on

securities fraud allegations. See Pls.’ Opp. at 4 (“Plaintiffs’ RICO claims are not based on

general securities law violations, but rather on specific instances of acts committed by

Defendants which are in violation of broader RICO laws”).

B. Pleading Requirements for Wire Fraud and Mail Fraud

The elements of wire and mail fraud include: (1) a scheme or an artifice to defraud;

(2) use of the U.S. mails or wires in furtherance of the said scheme; and (3) use of the mails

or wires with the specific intent to deceive or defraud. See Schreiber Dist. v. Serv-Well

Furniture, 806 F.2d 1393 (9th Cir. 1986). Allegations of wire and mail fraud used to

establish RICO violations under § 1962(a)-(c) must be pled with the particularity required by

FED. R. CIV. P. 9(b). See Moore v. Bayport Package Express, Inc., 885 F.2d 531, 541 (9th

Cir. 1989) (“We have applied the particularity requirements of Rule 9(b) to RICO claims);

see also Lewis v. Spark, 612 F. Supp. 1316, 1325 (N.D. Cal. 1985) (“Under Section 1962(a)-

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 13 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 14–

(c) . . . allegations must identify the time, place, and manner of each fraud, plus the role of

each defendant in the scheme”). Such allegations must define the specific involvement of

the individual defendants. See Lewis v. Spark, 612 F. Supp. at 1325 (finding that

indictments establishing the time, place, and manner of alleged fraud but failing to list the

involvement of individual defendants does not adequately plead fraud under the RICO Act). 

The Moving Defendants contend that, to the extent the Amended Complaint alleges

some wire and mail fraud allegations, those allegations do not plead fraud with sufficient

particularity to survive this motion to dismiss. For example, paragraph 76 of the Amended

Complaint alleges: “Defendants and each of them engaged in a proxy solicitation effort

whereby they contacted by telephone and use of the mail shareholders of HIMC, including

Defendants, in order to obtain their signatures on a proxy prepared by them granting certain

of the Defendants power to vote the shares owned by the solicited shareholders.” This

allegation fails to note the role or conduct of any particular Defendant. See Lewis v. Spark,

612 F. Supp. at 1325 (complaint must adequately inform each defendant what they are

alleged to have done). The Amended Complaint fails to give the time, place, or manner of

the alleged fraud, nor does it allege the circumstances under which the conduct was illegal. 

For all of these reasons, the allegations of wire and mail fraud in paragraph 76 fail to meet

the heightened pleading requirements of Rule 9(b) and do not establish a predicate act under

RICO. 

The allegations of wire and mail fraud in paragraphs 96 and 101 fail to establish

predicate acts for similar reasons. Paragraph 96 alleges: “In furtherance of their scheme,

Defendants used the facilities of the US Postal Service or private interstate post carrier to

deliver materially misleading documents or other communications in furtherance of their

scheme to defraud.” Paragraph 101 alleges: “Defendants committed multiple acts of Mail

and Wire Fraud as identified above, and released multiple misleading press releases in an

attempt to artificially inflate HIMC’s stock price.” These allegations do not establish the

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 14 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 15–

time, place, or manner of the alleged fraud. The allegations in paragraphs 96 and 101 fail to

establish any illegal conduct constituting “racketeering activities” as is necessary to support a

RICO claim and do not meet the heightened pleading requirements of FED. R. CIV. P. 9(b). 

Accordingly, the motion to dismiss the RICO Act claims is GRANTED and the claims are

DISMISSED without prejudice as to the Moving Defendants.

3. Plaintiffs’ Claim for a Declaratory Judgment of Merger Invalidity

Plaintiffs’ first cause of action requests a declaratory judgment that the business

entities HIMC and ITI are not merged as a matter of law. See Am. Compl., ¶ 83. Plaintiffs

allege that “[t]here is no dispute that the Business Combination Agreement first alleged in

paragraph 49 above was never filed with the Secretary of State of the State of Washington

and, accordingly, Plaintiffs request this Court to grant them judgment that the business

entities HIMC and ITI are not now nor were they ever merged or otherwise combined as a

matter of law.” Id. Defendants request that the Court dismiss this cause of action for three

reasons: (1) the Court does not have jurisdiction to hear the claim under the Declaratory

Judgment Act; (2) the issue has already been addressed in state court such that this Court is

precluded from ruling on the issue pursuant to 18 U.S.C. § 1738 (codification of the Full

Faith and Credit clause); and (3) the Court has the discretion, which it should exercise, to

refuse to hear claims under the Declaratory Judgment Act, 28 U.S.C. § 2201.

Because it is dispositive, the Court need only address one of the three bases for the

Moving Defendants’ motion to dismiss Plaintiffs’ Declaratory Judgment Act claim. The

Ninth Circuit has held that “[d]eclaratory relief is in the discretion of the district court” and

the “exercise of that discretion will allow the rejection of cases” that are properly before

other courts. See Cheesebrough-Pond’s, Inc. v. Faberge, Inc., 666 F.2d 393, 396 (9th Cir.

1982). Moreover, unlike general principles of abstention, no showing of “exceptional

circumstances” is required to support a district court’s decision to abstain from hearing a

declaratory relief action. Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995) (“Distinct

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 15 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

ORDER 16–

features of the Declaratory Judgment Act . . . justify a standard vesting district courts with

greater discretion in declaratory judgment actions than that permitted under the “exceptional

circumstances” test of Colorado River.”); Golden Eagle Ins. Co. v. Travelers Cos., 103 F.3d

750, 753 (9th Cir. 1996) (the existence of a parallel state proceeding would be a major factor

in the district court’s consideration of “practicality and wise judicial administration”),

overruled on other grounds, Government Employees Ins. Co. v. Dizol, 133 F.3d 1220 (9th

Cir. 1998). Here, the declaratory relief sought by Plaintiffs is closely related to the issues

that are, or should be, before the Pierce County Superior Court in Case No. 05-2-10424-0. 

Taking that factor into account, along with the dismissal of the securities fraud and RICO

Act claims, the Court exercises its discretion and GRANTS the motion to dismiss the

declaratory judgment claim as to the Moving Defendants.

CONCLUSION

The Moving Defendants’ motion to dismiss, docket no. 51, is GRANTED. The

following Defendants are DISMISSED WITHOUT PREJUDICE: (1) Henry Gurley; (2)

Jerry Cornwell; (3) K. Mitchell Wiggins; (4) Judy Morton Johnston; (4) 4 Points Lake, LLC;

and (6) Luke D’Angelo.

Plaintiffs’ motion to strike, docket no. 65, is GRANTED IN PART to the extent it

seeks to strike references to the letter of Judy Johnston attached as Exhibit 1 to the Caffer

Declaration. 

IT IS SO ORDERED.

DATED this 27th day of June, 2006.

AThomas S. Zilly

United States District Judge

Case 2:05-cv-02010-TSZ Document 68 Filed 06/27/06 Page 16 of 16