FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SCOTT FOSTER; NEIL TREMBLAY; 

GLENN FOLEY, No. 05-56424

Plaintiffs-Appellants, D.C. No.  v. CV 04-9552

PETER DSF(VBKx) WILSON,

Defendant-Appellee. 

SCOTT FOSTER; NEIL TREMBLAY; 

GLENN FOLEY; AND WILLENKEN No. 05-56743

WILSON LOH & LIEB LLP, D.C. No.

Plaintiffs-Appellants,  CV 04-9552

v. DSF(VBKx)

PETER WILSON, OPINION

Defendant-Appellee. 

Appeal from the United States District Court

for the Central District of California

Dale S. Fischer, District Judge, Presiding

Argued and Submitted

June 7, 2007—Pasadena, California

Filed October 5, 2007

Before: Daniel M. Friedman,* Alex Kozinski, and

Ronald M. Gould, Circuit Judges.

*Daniel M. Friedman, Senior United States Circuit Judge for the Federal Circuit, sitting by designation. 

13553
Opinion by Judge Friedman

13554 FOSTER v. WILSON
COUNSEL

William A. Delgado and Jason H. Wilson, Willenken Wilson

Loh & Lieb LLP, Los Angeles, California, for appellants

Scott Foster, Neil Tremblay, and Glenn Foley in Case No. 05-

56424. 

Shaun P. Martin, University of San Diego Law School, San

Diego, California, for appellants Scott Foster, Neil Tremblay,

and Glenn Foley and Willenken Wilson Loh & Lieb LLP in

Case No. 05-56743. 

Rick Augustini, Law Office of Rick Augustini, Irvine, California, for appellee Peter Wilson in both cases.

OPINION

FRIEDMAN, Circuit Judge: 

The principal issue is whether the district court correctly

dismissed, pursuant to Rule 12(b)(6) of the Federal Rules of

Civil Procedure for failure to state a claim upon which relief

could be granted, a complaint alleging federal securities fraud.

We affirm that dismissal, but reverse the district court’s imposition of monetary sanctions against the appellants and their

attorney.

The issues were presented in two separate appeals which

were argued consecutively. We decide both appeals in a single opinion.

I

A. The background facts, as alleged in the first amended

complaint (“amended complaint”), may be summarized as follows: 

13556 FOSTER v. WILSON
The appellants Foster and Foley hired the appellee Wilson

“as a consultant to help with the business affairs of their thenemployer, Precision Vascular Systems (‘Precision Vascular’).” “Wilson represented to [them] that he was a consultant

for many different companies that would be profitable investments and that he would introduce Foster and Foley to such

investments.” Wilson subsequently extolled to the appellants

the prospects of a company called Car Rental Direct (“CRD”),

which was “in the business of renting cars to consumers on

a long term basis.” Wilson “held himself out as a consultant

for the company” and stated that he “received an equivalent

value in shares of CRD for every investment dollar he brought

to CRD.” 

When the appellants “indicated to Wilson they were interested in purchasing shares of CRD and would seek out a broker,” he told them that “they should not buy shares through

a broker but that they should buy shares through him because

of his special relationship with CRD. Wilson ultimately convinced Plaintiffs to buy shares through him by promising

them: ‘I won’t let you lose money on this deal.’ ” 

Based on these many representations, in June

2002, Foster, Foley, and Tremblay provided Wilson

with $100,000, $30,000, and $20,000, respectively,

so that he could purchase CRD shares from CRD in

an equivalent value on their behalf. Wilson represented he would immediately purchase shares of

CRD from CRD for Plaintiffs and provide Plaintiffs

with certificates. 

Subsequent thereto, Wilson provided Foley with a

certificate for shares in CRD Holdings, Inc.

(“CRDH”)—a holding company for CRD—made

out to Scott Foster in the amount of 50,000 shares.

However, the majority of these shares was to be

returned to Wilson himself and did not represent the

sum total of shares equivalent to Plaintiffs’ $150,000

FOSTER v. WILSON 13557
investment. As such, Wilson still had to provide

Plaintiffs with more shares. 

Shortly thereafter, CRD’s fortunes began to decline, and in

June 2003 the company became bankrupt. 

The appellants’ attempts to obtain the additional shares

from Wilson were unsuccessful. On one occasion, after Wilson told the appellants that “he had finally received certificates for their shares of CRD stock and would overnight the

certificates to Plaintiffs,” he “subsequently informed Plaintiffs

that CRD had ‘mistakenly’ provided certificates in the name

of Wilson’s company.” 

“When Foster, Tremblay, and Foley confronted Wilson

with CRD’s bankruptcy, Wilson agreed to guarantee and

reimburse Plaintiffs the full $150,000 lost by providing them

with shares of Precision Vascular having an equivalent

value.” “Wilson never provided Plaintiffs with shares of Precision Vascular.” 

B. The amended complaint (like the original one) contained four claims. Claim 1 alleged federal securities law

fraud. The three other claims were state law claims for California securities law fraud, common law deceit and breach of

contract. 

The federal securities fraud claim alleged that Wilson “used

or employed, in connection with the purchase or sale of CRD

shares, manipulative or deceptive devices or contrivances,

within the meaning of 15 U.S.C. § 78j.” It asserted: 

After dissuading Plaintiffs from purchasing CRD

stock from a broker, Defendant obtained from Plaintiffs $150,000 for the ostensible purpose of obtaining

shares of CRD directly from CRD on their behalves.

Plaintiffs provided Defendant with $150,000 to purchase shares in reliance on his statement that he had

13558 FOSTER v. WILSON
a special relationship with CRD and his assurances

he would not “let them lose money” on the CRD

investment. 

. . . Defendant never provided all of Plaintiffs’

money to CRD for the purpose of purchasing shares

in CRD on Plaintiffs’ behalf. Instead, Wilson purchased some shares from CRD on behalf of Foster

but used the majority of Plaintiffs’ investment to

purchase shares on his own behalf and on behalf of

his company, KPC. 

C. The district court dismissed the amended complaint for

failure to state a claim upon which relief could be granted. 

The court dismissed Foley and Tremblay’s securities fraud

claim because Wilson’s failure to deliver any securities to

them meant that they were not purchasers of a security. The

court dismissed Foster’s securities fraud claim because the

complaint did not sufficiently allege that Wilson’s representations to Foster were false. The court, however, did not immediately dismiss the complaint, but allowed the appellants to

amend it to correct the defects it had noted. 

The appellants declined to amend and instead “elected to

stand on their first amended complaint and on the sufficiency

of the allegations alleged therein.” 

The court then dismissed the federal and state securities

fraud claims with prejudice, and, “[t]he sole claim . . . arising

under federal law having been dismissed,” the court dismissed

the remaining state claims without prejudice. 

II

A. Section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78j(b), prohibits the use “in connection with the

purchase or sale of any security . . . , [of] any manipulative

FOSTER v. WILSON 13559
or deceptive device or contrivance in contravention of such

rules and regulations as the [Securities and Exchange] Commission may prescribe . . . .” Commission Rule 10b-5 implements that provision by making it unlawful “(a) To employ

any device, scheme, or artifice to defraud, (b) To make any

untrue statement of a material fact or omit to state a material

fact necessary in order to make the statements made . . . not

misleading, or (c) To engage in any act, practice, or course of

business which operates or would operate as a fraud or deceit

upon any person, in connection with the purchase or sale of

any security.” 17 CFR § 240.10b-5. 

In addition to these substantive provisions, Congress has

provided, in the Private Securities Litigation Reform Act, 15

U.S.C. § 78u-4, special pleading requirements for federal

securities fraud claims. “The Act requires [federal securities

fraud] plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing

scienter, i.e., the defendant’s intention ‘to deceive, manipulate, or defraud.’ ” Tellabs, Inc. v. Makor Issues & Rights,

Ltd., 127 S. Ct. 2499, 2504 (2007). 

[1] Federal securities fraud, like its common law fraud

ancestor, requires knowingly making a false statement with

intent to deceive, reliance upon which injures the victim. See

Provenz v. Miller, 102 F.3d 1478, 1483 (9th Cir. 1996). The

amended complaint’s federal securities fraud charge does not

adequately or properly state such a claim. The district court

therefore correctly dismissed that count of the complaint for

failure to state a claim upon which relief could be granted.

Although our ground of decision is not that of the district

court, we may affirm the district court’s judgment on any

ground the record supports. See Engleson v. Burlington

Northern R.R. Co., 972 F.2d 1038, 1044 (9th Cir. 1992). 

[2] The federal securities fraud claim in the amended complaint, after reiterating the statutory language of § 10(b),

states that “[a]fter dissuading Plaintiffs from purchasing CRD

13560 FOSTER v. WILSON
stock from a broker, Defendant obtained from Plaintiffs

$150,000 for the ostensible purpose of obtaining shares of

CRD directly from CRD on their behalves,” and that the

plaintiffs gave the defendant $150,000 “to purchase shares in

reliance on his statement that he had a special relationship

with CRD and his assurances he would not ‘let them lose

money’ on the CRD investment.” There is no allegation that

either of these two statements attributed to the defendant was

false. 

[3] The complaint then alleges that the “Defendant never

provided all of Plaintiffs’ money to CRD for the purpose of

purchasing shares in CRD on Plaintiffs’ behalf. Instead, Wilson purchased some shares from CRD on behalf of Foster but

used the majority of Plaintiffs’ investment to purchase shares

on his own behalf and on behalf of his company, KPC.” There

is no allegation that when Wilson accepted the $150,000 from

the appellants, he intended not to purchase shares for them.

All that the complaint alleges is that Wilson agreed to purchase shares for the appellants with the money he received

from them, but did not do so. At most, the claim alleges a

breach of contract. Such a breach, however, does not constitute federal securities fraud under § 10(b). See, e.g., Gurary

v. Winehouse, 190 F.3d 37, 44 (2d Cir. 1999) (“The failure to

carry out a promise made in connection with a securities

transaction is normally a breach of contract.”) (internal quotation marks omitted). 

The federal securities fraud claim’s failure to allege that

Wilson intended not to purchase the stock when he accepted

the appellants’ payment for it stands in stark contrast to that

explicit allegation in the appellants’ state common law deceit

claim. That claim states: 

Defendant’s representation that he would purchase

$150,000 worth of shares of CRD from CRD on

Plaintiffs’ behalves was false. At the time that the

representations and each of them were made, DefenFOSTER v. WILSON 13561
dant knew the representation was false because he

intended to use the majority of Plaintiffs’ investment

to purchase shares in CRD for himself and his company, KPC. Defendant, and each of them, made the

representations and each representation with the

intent to deceive Plaintiffs and with the intent to

induce Plaintiffs’ action in reliance thereon. 

In view of these allegations in the state law claim, it must

be assumed that the lack of a similar allegation in the federal

claim reflects the appellants’ decision not to base their federal

claim upon that theory of intentional misrepresentation. That

the omission of that allegation from the federal fraud claim

was not inadvertent but was intentional is further suggested

by the appellants’ declining the district court’s invitation to

amend their complaint and electing to “stand on . . . the sufficiency of the allegations alleged [in] . . . their first amended

complaint.” 

This fatal deficiency in the federal securities fraud claim

goes far beyond a failure to satisfy the enhanced pleading

requirements of the Private Securities Litigation Reform Act.

If the defect were merely a failure “to state with particularity

both the facts constituting the alleged violation, and the facts

evidencing scienter,” Tellabs, 127 S. Ct. at 2504, consideration of the allegations in the state law claim might be appropriate. See Tellabs, 127 S. Ct. at 2509-11 (in determining

whether a federal securities fraud claim adequately alleges

scienter under the Litigation Reform Act, “[t]he inquiry . . .

is whether all of the facts alleged, taken collectively, give rise

to a strong inference of scienter, not whether any individual

allegation, scrutinized in isolation, meets that standard”;

“faced with a Rule 12(b)(6) motion to dismiss a § 10(b)

action, courts must . . . consider the complaint in its entirety”).

[4] Here the flaw in the federal securities fraud claim is not

a failure to allege sufficient facts, but a failure to state a tenable theory upon which the claim could be established. This

13562 FOSTER v. WILSON
defective claim cannot be saved by incorporating into it a different theory set forth in a state law claim contained in the

same complaint. 

B. The district court dismissed the three state law claims

because, having dismissed the sole federal claim, it “decline[d] to exercise supplemental jurisdiction” over the

remaining claims. The decision whether to continue to exercise supplemental jurisdiction over state law claims after all

federal claims have been dismissed lies within the district

court’s discretion. See 28 U.S.C. § 1367(c)(3); Fang v. United

States, 140 F.3d 1238, 1243-44 (9th Cir. 1998). 

[5] The district court did not abuse its discretion in dismissing without prejudice those state law claims. We affirm the

district court’s dismissal of the sole federal claim, and we also

affirm its dismissal of the three state law claims. 

III

A. The facts relating to the sanctions issue are as follows:

In their original complaint, the appellants’ federal securities

fraud claim was based upon Wilson’s alleged oral and written

misrepresentations about Car Rental Direct, and his failure to

disclose “material facts” that adversely affected that company.

The appellants alleged that those actions constituted “manipulative or deceptive devices or contrivances” “in connection

with the purchase or sale of CRD shares.” In ruling on Wilson’s motion to dismiss that complaint, the district court

stated: 

Plaintiffs have not pleaded falsity or scienter with

the particularity required by the PSLRA. Therefore,

Plaintiffs’ first claim for relief must be dismissed.

However, because Plaintiffs may be able to plead

falsity and scienter with the requisite particularity,

the Court grants Plaintiffs leave to amend. 

FOSTER v. WILSON 13563
In the securities fraud claim of the amended complaint, the

appellants did not plead “falsity and scienter with the requisite

particularity.” Instead, they asserted a different theory of

securities fraud, which we have discussed and rejected in Part

II: that Wilson accepted money from them to be used to purchase stock in CRD for them, but failed to do so and instead

used the money to purchase such shares for himself. 

After the district court dismissed the amended complaint,

Wilson moved for sanctions against the appellants and their

lawyers. He sought $25,871.45, representing his alleged legal

fees and expenses in defending against the lawsuit, which he

contended had been filed in violation of Rule 11(b) of the

Federal Rules of Civil Procedure. 

In a detailed memorandum, the district court rejected all the

grounds upon which Wilson had sought sanctions. The court

then ruled that three statements made in the original complaint were inconsistent with statements in the amended complaint, and that “there was a ‘substantial’ failure to comply

with Rule 11 in that false allegations of misrepresentations

formed the basis for the claims in the Initial Complaint, and

are precisely the kind of allegations the PSLRA meant to prevent.” The court awarded $7,028 as the “reasonable and

appropriate” fees Wilson incurred “relating to” the original

complaint. 

[6] B. As this court has recognized, before sanctions may

be imposed upon a party there must be “sufficient, advance

notice of exactly which conduct was alleged to be sanctionable.” In re DeVille, 361 F.3d 539, 549 (9th Cir. 2004) (quoting Fellheimer, Eichen & Braverman v. Charter Techs., 57

F.3d 1215 (3d Cir. 1995). See also Mackler Prods., Inc. v.

Cohen, 225 F.3d 136, 144 (2d Cir. 2000) (“The purpose of

particularized notice is to put counsel on notice as to the particular factors that he must address if he is to avoid sanctions.”) (internal quotation marks omitted). 

13564 FOSTER v. WILSON
[7] The only notice the appellants received of the proposed

sanctions was Wilson’s motion and its attachments. The district court, however, rejected all of the grounds for sanctions

asserted in that motion. The court then imposed sanctions on

three other grounds not included in the motion. The appellants

did not receive notice of those three additional grounds, and

had no opportunity to be heard in opposition to them before

sanctions were imposed. 

[8] A district court may impose sanctions sua sponte. See

In re Itel Sec. Litig., 791 F.2d 672, 675 (9th Cir. 1986).

Before doing so, however, the persons against whom the

sanctions were imposed must have been given the same notice

and opportunity to respond that are required for sanctions

generally. See Navellier v. Sletten, 262 F.3d 923, 943 (9th Cir.

2001) (“When a court imposes sanctions sua sponte, the general rule is that it must first issue an order to show cause why

sanctions should not be imposed to give the lawyer or party

an opportunity to explain his or her conduct.”). That did not

occur in this case. The sanctions therefore cannot stand. Our

reversal of the sanctions, however, does not preclude the district court from conducting further proceedings on the sanctions issue if it deems such action appropriate.

CONCLUSION

In No. 05-56424, the judgment of the district court dismissing the complaint is affirmed. In No. 05-56743, the order of

the district court awarding sanctions of $7,028 is reversed. 

AFFIRMED IN PART, REVERSED IN PART 

FOSTER v. WILSON 13565