Lopes v. Vieira (543 F. Supp. 2d 1149, 2008)

Citations

543 F. Supp. 2d 1149

Full opinion text

MEMORANDUM DECISION AND ORDER DENYING DEFENDANT GENSKE, MULDER & COMPANY’S MOTION TO STRIKE [Doc. 33] AND GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FIRST AMENDED COMPLAINT [Doc. 32] AND GRANTING IN PART AND DENYING IN PART DEFENDANT DOWNEY BRAND LLP’S MOTION TO DISMISS FIRST AMENDED COMPLAINT [Doc. 35]

OLIVER W. WANGER, District Judge.

Plaintiffs Manuel and Mariana Lopes dba Lopes Dairy; Raymond Lopes; Joseph Lopes and Michael Lopes, individually and dba Westside Holstein; Alvaro Ma-chado and Tony Estevan have filed a First Amended Complaint (“FAC”) pursuant to the Court’s Order filed on May 30, 2005 (May 30 Order). Defendants are George and Mary Vieira; California Milk Market, a California Corporation; Valley Gold, LLC, a California limited liability company; Genske, Mulder LLP, a California limited liability partnership; Anthony Cary; Downey Brand LLP, a California limited liability partnership; Central Valley Dairymen, Inc. (CVD), a California Food and Agricultural Nonprofit Cooperative Association; and Does 1-25.

Defendants Genske, Mulder & Company (“Genske”) and Downey Brand LLP (“Downey”) have each filed motions to dismiss pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, for failure to state a claim against them upon which relief can be granted. In addition, Genske has filed a motion to strike certain allegations of the FAC pursuant to Rule 12(f), Federal Rules of Civil Procedure.

A. GENSKE’S MOTION TO STRIKE.

Genske moves pursuant to Rule 12(f), Federal Rules of Civil Procedure, to strike the allegations in Paragraph 41 of the FAC, which names as Defendants Does 1-100, inclusive, and the allegations in Paragraphs 62-68, 70, 80, 82-83, and 85, wherein Does 1-10 and George Vieira are referred to collectively as the “Promoters”.

In moving to strike these allegations, Genske argues that Doe allegations are improper in the Ninth Circuit.

Gillespie v. Civiletti 629 F.2d 637, 642 (9th Cir.1980), holds:

As a general rule, the use of ‘John Doe’ to identify a defendant is not favored ... However, situations arise ... where the identity of alleged defendants will not be known prior to the filing of a complaint. In such circumstances, the plaintiff should be given an opportunity through discovery to identify the unknown defendants, unless it is clear that discovery would not uncover the identities, or that the complaint would be dismissed on other grounds.

Genske argues that Civiletti only allows Doe pleading “in limited circumstances: to protect the plaintiffs’ privacy [not applicable to this motion]; in civil rights cases where the name of the government agent is not known or readily knowable; and in cases filed by pro per plaintiffs.”

Genske cites no authority for such limitations on Doe pleading. While Doe pleading is disfavored, it is not prohibited in federal practice.

Plaintiffs contend that they have named Doe Defendants pursuant to California Code of Civil Procedure § 474 and note that “[t]he purpose of section 474 is to permit the plaintiff to avoid the bar of the statute of limitations.” Sobeck & Associates, Inc. v. B & R Investments No. 24, 215 Cal.App.3d 861, 867, 264 Cal.Rptr. 156 (1989). Plaintiffs also cite Rule 15(c)(1), Federal Rules of Civil Procedure:

An amendment of a pleading relates back to the date of the original pleading when

(1) relation back is permitted by the law that provides the statute of limitations applicable to the action ....

Plaintiffs argue that, when a claim is based on state law, the plaintiff must be allowed to include Doe Defendants, “for otherwise the policy of applying state law relation back rules would be thwarted.”

Does are alleged in causes of action for violation of federal law as well as in causes of action for violation of state law.

Genske further complains that Plaintiffs have had the benefit of discovery in Nunes v. Central Valley Dairymen, Merced County Superior Court case No. 147653. Genske contends that Plaintiffs know, or should know, the identities of the Doe Defendants.

Because the naming of Doe Defendants is only disfavored, the motion to strike is DENIED. Whether Plaintiffs will be able to substitute individuals for the Doe Defendants will depend on discovery and Rule 15, Federal Rules of Civil Procedure. Whether further amendment to substitute specific individuals for Doe Defendants to invoke relation back in order for purposes of applicable statutes of limitations under either federal or state law remains for further decision.

B. MOTIONS TO DISMISS.

1. BACKGROUND.

The FAC alleges that Plaintiffs are owners and operators of dairy farms located in Merced County, California. In the section of the FAC captioned “Summary”, Plaintiffs allege:

1. Plaintiffs are all owners and operators of dairy farms located in Merced County, California. Through the machinations of George Vieira and his wife, Mary Vieira, facilitated by the gross negligence and/or participation of accounting, managerial and legal professionals, more than several million dollars worth of milk produced by Plaintiffs’ farms was diverted from the proper supply channels into a criminal enterprise headquartered in New Jersey. As a result, Plaintiffs have unnecessarily incurred expenses and other damages, and Plaintiffs have not been paid for the milk that they supplied; rather, proceeds from the sale of them milk and related brokerage fees and commissions have been diverted to the criminal enterprise and to George Vieira and his wife, Mary Vieira, and their company California Milk Market, a California Corporation. George Vieira, Mary Vieira and California Milk Market, in turn, used the diverted proceeds to purchase real estate in at least Stanislaus County, San Joaquin County and Tuolumne County. They have more recently attempted to shelter and hide their ill-gotten proceeds by transferring parcels of real estate to third parties, either acting as nominees or without payment of fair value.

2. The criminal enterprise that George Vieira, Mary Vieira and California Milk Market conspired with and used to divert milk payments from plaintiffs to themselves consisted of an affiliation of cheese manufacturers, bulk buyers of cheese products, and milk product brokers, together with the officers and owners who ran these businesses.

3. The criminal enterprise centered upon a publicly traded company called Suprema Specialties, Inc., and a concerted scheme to inflate the size, profitability, growth and inventory value of Supre-ma Specialties, Inc. Indeed, from 1996 to 2002, Suprema Specialties, Inc. reported annual double-digit growth in sales and revenues, and it used that reported growth to raise more than $150 million from two public stock offerings and from bank loans. These funds were then largely diverted to individual members of the criminal enterprise.

4. Suprema Specialties, Inc. created the appearance of rapid and steady growth by using fictitious invoices and fictitious purchase orders, in a scheme that the Securities and Exchange Commission dubbed “Round-Tripping.” Under the Round-Tripping arrangements, Suprema Specialties, Inc. would pretend to purchase milk and milk products from milk product brokers, ostensibly to manufacture into cheese. Suprema Specialties, Inc. would then issue checks to pay for these orders, but no product was physically shipped. Instead, the milk product brokers and bulk cheese buyers who participated in the criminal enterprise would turn around and pretend to order manufactured cheese products from Suprema Specialties, Inc., which Suprema Specialties, Inc. would report on its books to inflate its sales and accounts receivable. The milk product brokers and bulk cheese consumers would then use the payments that were sent to them from Suprema Specialties, Inc., after deducting commission payments for themselves, to make payments on the fictitious orders, so that Suprema Specialties, Inc. could show regular payments on its fictitious accounts receivable and keep the receivables current — a condition required for Suprema Specialties, Inc.’s large bank loans.

5. In 2001, Suprema Specialties, Inc. reported $420 million in revenues; a substantial portion of those revenues was fictitious. The Securities and Exchange Commission’s investigation found that from 1998 to February of 2002, at least $135 million of Suprema Specialties, Inc.’s reported revenue was fictitious.

6. In order to maintain the pretense of growth and profitability, Suprema Specialties, Inc. manufactured cheese and cheese products and it maintained warehouses of inventory. But the actual inventory based upon the actual volume of cheese that Suprema Specialties, Inc. manufactured was too small in relation to its reported volume of sales, and Suprema Specialties, Inc. accordingly cut the cheese with starch fillers and affixed false labels to the inventory, thus fraudulently inflating both the size and the value of the inventory.

7. Additionally, to mask its fraudulent activities, Suprema Specialties, Inc. used the same milk product brokers for its legitimate purchases of milk as it used for its fictitious purchases. This practice, and other steps taken by the criminal enterprise, directly led to plaintiffs’ catastrophic loss. The loss primarily falls into four categories.

SUPREMAS BANKRUPTCY

8. Defendant George Vieira was retained by and controlled the day-to-day operations of and business planning for Central Valley Dairymen, an agricultural cooperative through which plaintiffs sold the milk produced by their dairy farms. From November 2001 through March 2002, Mr. Vieira was also the Chief Operating Officer of Suprema Specialties West, Inc., a wholly owned subsidiary of Suprema Specialties, Inc. In addition, Mr. Vieira and his wife Mary Vieira owned and controlled defendant California Milk Market, LLC, one of the milk product brokers that was a member of the criminal enterprise centered around Suprema Specialties, Inc.

9. As part of the criminal enterprise, Mr. Vieira regularly caused Central Valley Dairymen to sell its inventory of milk to Suprema Specialties, Inc., as well as to the related subsidiaries of Suprema Specialties, Inc., much of which was routed through California Milk Market, LLC.

10. For several years, Mr. Vieira actively hid from plaintiffs his involvement in the criminal enterprise. Indeed, Mr. Vieira represented to the plaintiffs that the bankruptcy of Suprema Specialties, Inc. created a great opportunity for plaintiffs to enter into the cheese manufacturing business and fill the market void left when Supreme Specialties, Inc. went out of business. Within the last year, plaintiffs have discovered the truth — that the milk they supplied to Central Valley Dairymen was diverted without payment to a criminal enterprise, that on January 7 of 2004, Mr. Vieira and other leaders of the criminal enterprise pled guilty to securities fraud and conspiracy to engage in mail fraud and bank fraud, and that the bankruptcy of Suprema Specialties, Inc. did not create any significant market void, since vast portions of Suprema Specialties, Inc.’s reported cheese sales were fictitious.

11. Because of the bankruptcy of Suprema Specialties, Inc. and Suprema Specialties West, Inc., caused by the criminal enterprise guided by Mr. Vieira, Plaintiffs have been denied payment for more than one million dollars in milk supplied through Central Valley Dairymen to California Milk Market, Suprema Specialties, Inc. and Suprema Specialties West, Inc.

LOSS OF FUND PROTECTION

12. In 1987, the State of California established the Milk Producers Trust Fund to provide protection to dairy farmers like Plaintiffs. The fund guarantees that California milk producers will be paid for their milk as long as the milk is sold to a bonded California processor. However, the Fund does not cover milk sales that are handled by a broker; and the Fund does not cover milk that is sold to a processor in which the producer holds a beneficial interest.

13. Mr. Vieira, while purporting to act as a fiduciary agent for Central Valley Dairymen and its dairy farm members (including Plaintiffs), routed a substantial portion of the agricultural cooperative’s supply of milk through California Milk Market, a milk brokerage owned and controlled by Mr. Vieira and his wife. By routing milk through California Milk Market, these defendants caused Plaintiffs to lose the protection of the Milk Producers Trust Fund. This loss of Trust Fund protection only added to Plaintiffs’ staggering losses. CHURNING

14. Additionally, as part of the Round-Tripping scheme centered around Suprema Specialties, Inc., California Milk Market engaged in the fictitious sale of milk to Suprema Specialties, Inc. or its subsidiary, Suprema Specialties West, Inc. As noted, California Milk Market also shipped legitimate milk produced by Central Valley Dairymen to Suprema Specialties, Inc. or its subsidiary, Suprema Specialties West, Inc. This milk was routed through California Milk Market rather than shipped directly from Central Valley Dairymen in order to enhance the appearance of California Milk Market’s legitimacy; but in the process, California Milk Market charged a brokerage fee on each such transaction.

15. To further mask the fraudulent Round-Tripping scheme, California Milk Market and the criminal enterprise prepared false paperwork stating that significant portions of Central Valley Dairymen’s milk that was routed through California Milk Market and shipped to Suprema Specialties, Inc. and its subsidiary failed to meet quality requirements, resulting in the milk being rejected by the processor and returned to California Milk Market. With the fictitious transaction masked in this fashion, California Milk Market and its owners and operators would then broker the milk to another legitimate processor.

16. With each transaction, however, California Milk Market collected a brokerage fee, and Plaintiffs are informed and believe, and thereon allege, that California Milk Market, George Vieira and Mary Vieira also created fictitious shipping invoices diverting to themselves payment for transport costs that in reality were never incurred. With the slew of fictitious transactions, California Milk Market accordingly collected fees that it had not earned, and diverted further sums that rightfully belonged to Plaintiffs into the hands of George Vieira and Mary Vieira.

CREATION OF VALLEY GOLD, LLC

17. In addition, the criminal enterprise centered around Suprema Specialties, Inc. was so lucrative and successful that Mr. Vieira decided in the winter of 2002, after the collapse of Suprema Specialties, Inc., to recreate the scheme. To do so, however, he needed to find or create a cheese manufacturer to replace Supre-ma Specialties’ role in the fraudulent scheme.

18. George Vieira thus proposed to Plaintiffs and other members of Central Valley Dairymen that they purchase a cheese manufacturing plant that he would be in charge of operating. Mr. Vieira first presented this proposal at or about the of the 2002 annual dinner held by the members of Central Valley Dairymen.

19. Mr. Vieira initially focused upon endeavoring to purchase a cheese plant in Manteca, California that had been operated by Suprema Specialties West, Inc., but in early 2003 recognized that it would not be possible to acquire that plant. By March of 2003, George Vieira shifted his focus and instead launched an effort to acquire a cheese plant located in Gustine, California that was for sale by Land-O-Lakes.

20. At this same time, in early 2003, George Vieira was already engaged in negotiations with the U.S. Attorney’s offices about pleading guilty to securities fraud for his participation in the criminal enterprise’s scheme to inflate the stock price of Suprema Specialties, Inc. through the use of fictitious Round-Tripping transactions. On March 28, 2003, the U.S. Attorneys Office sent a seven page letter to Mr. Vieira’s attorney stating the materials terms of the plea deal. Mr. Vieira signed the letter indicating his consent to the plea terms on August 26, 2003.

21. Mr. Vieira personally spearheaded the proposal to acquire the Gustine facility, and actively acted as promoter of the venture. On April 4, 2003, he caused Valley Gold, LLC to be formed as a California limited liability company and he shortly afterward supplied a $200,000 deposit of earnest money to Land-O-Lakes as a condition of negotiating an agreement to purchase the cheese facility, which he caused to be signed shortly afterward. In these tasks, and in seeking funding for the venture from Plaintiffs and others, George Vieira also enlisted the assistance of Anthony Cary, Genske-Mulder LLP and Downey Brand LLP. Anthony Cary is and remains a licensed attorney practicing in the Sacramento area. Genske-Mulder was and remains a professional partnership that specializes in providing complete accounting, tax and consulting services for he dairy industry. Their roster of clients included Central Valley Dairymen and many of its individual diary farm members, including Plaintiffs. They purportedly reviewed and helped prepare the business plan for Valley Gold, LLC, and recommended that Plaintiffs both invest in Valley Gold, LLC and supply Valley Gold, LLC with milk. Defendant Downey Brand LLP is a California law partnership, and it was retained by Mr. Vieira to assist in the formation of Valley Gold, LLC. Genske-Mulder and Downey Brand also prepared a business plan and Offering Memorandum to market and sell shares of Valley Gold, LLC, including detailed financial forecasts, a detailed business plan, and disclosures required by Federal Securities law. A true and correct copy of one of the business plans is attached hereto as Exhibit A. A true and correct copy of the Offering Memorandum is attached hereto as Exhibit B.

22. Plaintiffs, individually and through Central Valley Dairymen, were induced to invest more than $530,000 for the formation of Valley Gold, LLC; and Plaintiffs were also induced to supply milk to Valley Gold, LLC. The numerous representations made to Plaintiffs to induce this action, including those in the business plan and Offering Memorandum, were materially false and misleading. Defendants did not even notify the Plaintiffs that Valley Gold, LLC was not bonded, or that by becoming investors in Valley Gold, LLC, any sale of Plaintiffs’ milk to Valley Gold, LLC would not be covered by the Milk Producers Trust Fund.

23. On January 7, 2004, George Vieira concluded his negotiations with the U.S. Attorney’s office and pled guilty for his criminal involvement in the scheme to inflate the apparent profitability of Suprema Specialties, Inc., and he was shortly afterward barred from working in the dairy and cheese business, including being barred from his role as the chief operating officer of Valley Gold, LLC. In addition, Valley Gold, LLC defaulted on its purchase obligations for the Land-O-Lakes facility and defaulted in paying for milk supplied to it by Central Valley Dairymen. The facility was foreclosed and plaintiffs’ investments were entirely lost.

24. As a result, Plaintiffs again were left without payment for millions of dollars worth of milk and they lost their cash investment in Valley Gold, LLC.

25. Plaintiffs are unsophisticated dairy farmers, and they relied upon the professional advice and supposed expertise not only of Mr. Vieira, but also of Dow-ney Brand, Genske-Mulder and Anthony Cary. The professionals, however, all chose to parrot Mr. Vieira’s assurances that he was acting to protect Plaintiffs’ interests and maximize the value of their milk; and not a single professional had the courage to stand up and report the irregularities of Mr. Vieira’s proposals, the colossal and unnecessary risks involved in the proposed business venture, or even the fact that Mr. Vieira was actively negotiating with the U.S. Attorney’s office to plead guilty to securities and bank fraud.

26. Those who were charged with protecting Plaintiffs’ interests instead actively allowed Plaintiffs to be bilked out of more than $5 million.

The FAC alleges that Defendant Genske-Mulder “specializes in providing complete accounting, tax and consulting services for the dairy industry”; that “[t]he clients they serve produce approximately 17% of the milk in the Western United States and approximately 7% nationally”; that Genske-Mulder “provides the following services to its clients, including CVD, VALLEY GOLD, and many of the Plaintiffs: 1) Annual and long-term tax planning; 2) Cash flow management; 3) Breakeven analysis; 4) Industry standards; 5) Financial goal setting; 6) Financial Forecasts & Projections; 7) Management Advisory Services; 8) Investment Review; and 4) Cash flow analysis for expansion or restructuring”; that Genske-Mulder “provided accounting and consulting, management advisory and investment services to Plaintiffs”; that Genske-Mulder “closely and directly monitored the day-to-day operations, provided management advisory, investment review, general account, and consulting services” to Valley Gold and CVD; that, as result, Genske-Mulder directly received financial benefit from Plaintiffs, CVD and Valley Gold; that Genske-Mulder, with the assistance of Defendants Cary and George Vieira, “prepared financial projections for the purpose of attracting investors” to Valley Gold, and “actively participated in the preparation of a business plan to attract investors for Valley Gold, including the preparation of grossly negligent financial forecasts for the operations of Valley Gold.” The FAC further alleges that Genske-Mulder, George Vieira and Cary acted in an advisory capacity with regard to CVD’s investment in Valley Gold by Plaintiffs.

The FAC alleges that Downey Brand “was retained by CVD and/or Valley Gold, particularly to take the lead in preparing a business plan for the offering of securities for Valley Gold and thereafter in creating a (blatantly illegal) proposal for Plaintiffs to forego payment for milk supplied to Valley'Gold in exchange for worthless additional ownership interests in Valley Gold — at a time when it should have been clear to defendants that George Vieira’s plans for VALLEY GOLD were destined to fail.”

The FAC includes a section captioned “Derivative Rights”. This section of the FAC alleges in pertinent part:

43. As a non-profit cooperative association formed pursuant to the provisions of Chapter 1 of Division 20 of the California Food and Agricultural Code, the Capper-Volstead Act (7 U.S.C.A. §§ 291-292), and the Cooperative Marketing Act (7 U.S.C.A. § 451, et seq.), CVD operates on behalf of and for the benefit of its member dairies, collecting proceeds from the sale of milk for the member dairies, and holding those proceeds in trust and for the benefit of the member dairies. CVD and its managers, consultants and employees thus are fiduciary trustees owing duties of care and loyalty directly to the members of CVD, including Plaintiffs.

44. Moreover, as a non-profit agricultural cooperative association, and pursuant to section 54173 of the California Food and Agricultural Code, CVD acted as the agent for its member dairies in marketing, selling, storing and handling the milk produced by the member dairies; and the directors, officers, consultants and professionals retained by CVD were accordingly subagents, owing direct duties of care and trust to the member dairies, including Plaintiffs.

45. In providing services to CVD, defendants GENSKE-MULDER, CARY, GEORGE VIEIRA and DOWNEY BRAND therefore assumed duties of care and loyalty directly to Plaintiffs, and each of them.

46. To the extent that the claims asserted by Plaintiffs are derivative of the rights of CVD, then Plaintiffs pursue those rights on behalf of CVD and accordingly add CVD as an involuntary party to this lawsuit so that the full rights of CVD can be adjudicated and any recovery distributed, as the Court ultimately deems appropriate, to the members of CVD.

47. CVD continues to be controlled by GEORGE VIEIRA and/or his affiliates and those beholden to his desires, including Joe Machado who, at the time of the events described in this complaint, was simultaneously the President of Valley Gold and a board member of CVD and who continues as the president or a senior board member of CVD. It would thus be futile for Plaintiffs to make a demand upon CVD or its directors to pursue the relief sought in this lawsuit, as such a demand would be tantamount to asking the directors to investigate their own potential malfeasance. Indeed, another group of former CVD member dairies has previously instituted legal proceedings based upon the general criminal scheme described above, and CVD has demonstrated its hostility to its own former member dairies and its refusal to hold its managers, consultants, professionals and accountants responsible for their misdeeds and omissions by actively opposing the claims instead of cooperating in securing redress for its former members. In fact, in that litigation, CVD and George Vieira have retained the same attorney to represent them. Further, all or substantially all of the members of CVD who were damaged by the acts and omissions set forth herein have terminated their affiliation with CVD and joined other dairy cooperatives. The derivative relief sought in this complaint on behalf of CVD would thus wholly or substantially only benefit CVD’s former members and not its present membership, again rendering it futile to submit a demand upon CVD’s board of directors to pursue the relief sought in this lawsuit.

48. VALLEY GOLD also continues to be controlled by GEORGE VIEIRA, and it would likewise be futile for Plaintiffs to make a demand upon VALLEY GOLD to pursue the relief sought in this lawsuit. Apart from GEORGE VIEIRA, Plaintiffs know of no person or entity that presently has any control over the operations of VALLEY GOLD.

49. To the extent that the claims asserted by Plaintiffs are derivative of the rights of VALLEY GOLD, then Plaintiffs pursue those rights on behalf of VALLEY GOLD and accordingly add VALLEY GOLD as an involuntary party to this lawsuit so that the full rights of VALLEY GOLD can be adjudicated and any recovery distributed, as the Court ultimately deems appropriate, to the members of VALLEY GOLD.

2. GOVERNING STANDARDS.

A motion to dismiss under Rule 12(b)(6) tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). Dismissal of a claim under Rule 12(b)(6) is appropriate only where “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, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Dismissal is warranted under Rule 12(b)(6) where the complaint lacks a cognizable legal theory or where the complaint presents a cognizable legal theory yet fails to plead essentia] facts under that theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.1984). In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe all inferences from them in the light most favorable to the nonmoving party. Thompson v. Davis, 295 F.3d 890, 895 (9th Cir.2002). However, legal conclusions need not be taken as true merely because they are cast in the form of factual allegations. Ileto v. Glock, Inc., 349 F.3d 1191, 1200 (9th Cir.2003). Immunities and other affirmative defenses may be upheld on a motion to dismiss only when they are established on the face of the complaint. See Morley v. Walker, 175 F.3d 756, 759 (9th Cir.1999); Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir.1980). When ruling on a motion to dismiss, the court may consider the facts alleged in the complaint, documents attached to the complaint, documents relied upon but not attached to the complaint when authenticity is not contested, and matters of which the court takes judicial notice. Parrino v. FHP, Inc., 146 F.3d 699, 705-706 (9th Cir.1998).

3. THIRD CAUSE OF ACTION FOR SECURITIES FRAUD.

The Third Cause of Action is alleged by Plaintiffs individually and on behalf of Central Valley Dairymen, Inc. (“CVD”) against George Vieira, Anthony Cary, Genske, Downey and Does 21-40. The Third Cause of Action incorporates by reference all preceding allegations. Of importance to the resolution of the motions to dismiss are the following allegations in the Second Cause of Action for rescission, captioned “Violation of Registration Requirements”:

81. In addition to the misleading statements and omissions included in the business plan and Offering Memorandum, addressed in the following causes of action in this Complaint, Plaintiffs allege that VALLEY GOLD’S issuance of membership interests to them and to other members of CVD, both in April of 2003 and in September of 2003, violated the requirements of the Securities Act of 1933 because these offerings were not registered as required by applicable law.

82. For one, the number of offerees was too uncertain. At the outset, the PROMOTERS limited the proposed investors primarily to members of CVD. But as disclosed on the second to the last page of the business plan, attached hereto as Exhibit B, in the months after April 2003, the PROMOTERS continued to solicit investments in VALLEY GOLD and anticipated additional capital contributions of “an additional $400,000 to $800,000 by the end of August, 2003.” Plaintiffs are informed and believe, and thereon allege, that in the months between April of 2003 and August of 2003, the PROMOTERS widely distributed the business plan and approached a large number of potential investors in a fashion that constituted “general solicitation or advertising” within the meaning of safe harbor exemptions to the registration requirements, as promulgated by the Securities and Exchange Commission.

83. In addition, the offerees were not sufficiently sophisticated. Indeed, while Plaintiffs in April of 2003 met the net asset requirement to qualify as accredited investors under the safe harbor exemptions, by the time of the September 2003 offering they no longer did. Moreover, while Plaintiffs in April of 2003 met the net asset requirement, they were nonetheless not sophisticated and did not read English with ease; this was known to the PROMOTERS.

84. Plaintiffs are also informed and believe, and thereon allege, that one or more of the offerees who invested in VALLEY GOLD in April of 2003 were neither accredited nor sophisticated investors. Between the two main securities offerings in 2003, VALLEY GOLD raised well in excess of $5 million in capital, such that to qualify under Rule 506’s safe harbor exemption to registration, all investors were required to be either accredited or sophisticated.

85. In addition, the PROMOTERS did not provide reasonable time for the of-ferees to review the Offering Memorandum. The exemption from registration in section 4(2) of the Securities Act of 1933 applies only when offerees do not need protection, both because they are sophisticated and because they have available to them sufficient information to reasonably assess the risks of investing. By only allowing Plaintiffs and the other offerees less thanfé day to review the Offering Memorandum, the PROMOTERS precluded the offerees from having available to them sufficient information to reasonably assess the risks of the proposed investment.

The Third Cause of Action further alleges in pertinent part:

89.In or about May or June of 2003, these defendants prepared a business plan that was thereafter used to market and sell security interests in VALLEY GOLD, including to Plaintiffs. A true and correct copy of the business plan prepared and circulated by these defendants is attached hereto as Exhibit A. The terms of the business plan were largely taken from an Offering Memorandum that was prepared by these defendants in April of 2003, which was likewise provided to potential investors. A true and correct copy of the Offering Memorandum is attached hereto as Exhibit B.

90. The interests procured from Plaintiffs in the form of membership interests in VALLEY GOLD — a limited liability company formed under California law— constituted securities within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 because Plaintiffs were induced to invest their money (and later their rights to payment for milk) into a common enterprise from which they expected to earn profits through the efforts and acumen of others, namely GEORGE VIEIRA and the other officers and employees of VALLEY GOLD.

91. Defendants GEORGE VIEIRA, GENSKE-MULDER, DOWNEY BRAND and DOES 21 through 40 were “sellers” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 because the injury suffered by Plaintiffs by purchasing security interests in VALLEY GOLD flowed directly and proximately from the actions and representations of these defendants. These defendants also actively participated in the sale of ownership interests in VALLEY GOLD to Plaintiffs and were motivated by a desire to serve their own financial interests. GEORGE VIEIRA was motivated to secure the income from being an employee and the managing member of VALLEY GOLD as well as from his plan to use VALLEY GOLD as a vehicle to continue the fraudulent Round-Tripping transactions that he had so lucratively engaged in with the criminal RICO enterprise discussed above. GENSKE-MULDER was motivated by its anticipation of securing income as a paid consultant and as the primary accounting firm for VALLEY GOLD — an anticipation that was cemented by the close relationship between GEORGE VIEIRA and equity partners of GENSKE-MULDER. Defendant DOWNEY BRAND was motivated by the anticipation and promise that it would be attorneys for and be paid for the rendition of legal services to VALLEY GOLD and because GEORGE VIEIRA was using the funds of CVD to pay for the services in forming and soliciting investors for VALLEY GOLD, a payment source that could only be justified as a legitimate business expense for CVD if VALLEY GOLD was successfully formed, launched and sufficiently funded to begin operations.

92. In addition to the purchases of VALLEY GOLD as part of its initial formation, in or about late September of 2003, defendants GEORGE VIEIRA, GENSKE-MULDER, CARY and DOES 41 through 50 also induced Plaintiffs and CVD to enter into illegal and unlawful agreements to exchange milk (or accounts receivable owed to them for milk) for additional equity ownership interests in VALLEY GOLD.

93. The reason the “milk for equity” contracts were illegal and unlawful is because California Food and Agricultural Code sections 62191, 62196 and 62200 require (a) that milk producers be paid for milk solely in cash or with checks that are reduceable to cash in no more than one business day; (b) that payment be made in very short time periods (roughly 15 days); and (c) that failing to abide by these requirements and endeavoring to use any other payment arrangement is an unlawful business practice.

94. In inducing Plaintiffs to enter into contracts to exchange milk for equity (in the general form of the contribution agreement attached hereto as Exhibit C and the assignment agreement attached hereto as Exhibit D), defendants GEORGE VIEIRA, GENSKE-MULDER, CARY and DOES 41 through 50 falsely represented to Plaintiffs:

(a) that the contracts were proper and lawful;

(b) that CVD was contractually required to supply milk to VALLEY GOLD and if Plaintiffs stopped supplying their milk to CVD and switched to another agricultural cooperative, they would be violating the law and subject to substantial fines and penalties;

(c) that VALLEY GOLD was doing well and had sizeable orders that ensured that Plaintiffs would earn significantly more from their increased ownership in VALLEY GOLD than they were owed for their milk.

95. These representations were false, and were made be defendants in order to induce Plaintiffs and CVD to purchase additional equity ownership interests in VALLEY GOLD in exchange for milk.

96. Defendants GEORGE VIEIRA, CARY, GENSKE-MULDER, DOW-NEY BRAND and DOES 21 through 40 were also “sellers” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 because they actively solicited Plaintiffs to purchase interests in VALLEY GOLD.

97. In violation of the Securities Act of 1933, the Securities Exchange Act of 1934, Exchange Act Rule 10b-5 enacted under the regulatory authority of the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002, the business plan and the Offering Memorandum and the related materials and communications supplied by these defendants to Plaintiffs, including the materials used to induce plaintiffs to enter into the “milk for equity” contracts, contained material misrepresentations and omissions of material facts that caused the communications to Plaintiffs to be materially misleading, and constituted a fraudulent and deceitful manipulation and contrivance of the regulatory requirements enacted under the Federal Securities laws for the protection of parties like Plaintiffs.

98. The business plan and the Offering Memorandum and the related materials and communications supplied by these defendants to Plaintiffs, including the materials used to induce plaintiffs to enter into the “milk for equity” contracts contained, served as manipulative and deceptive devices and contrivances intended to contravene the rules and regulations of the Securities and Exchange Commission as necessary and appropriate for the protection of investors, and thus violated section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 788(b).)

99. Plaintiffs purchased securities in VALLEY GOLD, both individually and through CVD, in direct reliance upon the misleading, false, incomplete and deceptive business plan and Offering Memorandum and related communications supplied by these defendants, including the materials used to induce plaintiffs to enter into the “milk for equity” contracts, aquicint [sic] securities in VALLEY GOLD directly from VALLEY GOLD as the issuer of the securities.

100. Among other material misrepresentations and material omissions of material facts, these materials:

a.Stressed that VALLEY GOLD’S success was dependent upon the unique “experience and abilities of Mr. [George] Vieira [and two associates]” without disclosing that Mr. Vieira’s unique experience was not formed in the successful production of cheese products, but rather in the concoction of fictitious cheese products and cheese diluted with starch fillers manufactured not for commercial success with consumers, but rather to inflate the apparent inventory value and sales volume of a by then bankrupt cheese manufacturer, for the sole purpose of perpetuating a hundreds of million dollar securities fraud on securities investors situated similarly to Plaintiffs;

b. Disclosed that Mr. Vieira had been contacted by the U.S. Attorney’s Office as part of its investigation into the bankruptcy of Suprema Specialties, Inc., without disclosing that GEORGE VIEIRA was already actively involved in negotiations with the United States Attorney’s Office to plead guilty to securities and bank fraud;

c. Failed to disclose that VALLEY GOLD was unbonded and not qualified to participate in the Milk Producers Trust Fund, which was a standard requirement for securing rehable supplies of milk product — necessary for legitimate cheese production facilities (but less important for sham facilities organized to fleece investors and banks without ever achieving commercial success);

d. Failed to disclose that if Plaintiffs became investors in VALLEY GOLD, their supplies of milk to VALLEY GOLD would in any event fail to qualify for the protections of the Milk Producers Trust Fund;

e. Included financial projections supplied by GENSKE-MULDER that vastly exceeded the performance of any startup cheese manufacturer, with the possible exception of Suprema Specialties, Inc., whose dramatic reported growth was by then known in the financial community (but not to Plaintiffs) to have been the result of smoke, mirrors and a fraudulent Round-Tripping scheme orchestrated by a criminal enterprise headquartered in New Jersey. 101.Plaintiffs are informed and believe, and thereon allege, that GENSKE-MULDER, GEORGE VIEIRA and DOWNEY BRAND and DOES 21 through 40 all actively collaborated on preparing the business plan and the Offering Memorandum that was supplied to Plaintiffs and that were instrumental in inducing Plaintiffs and CVD to purchase initial equity interests in VALLEY GOLD. Indeed, these defendants participated in meetings and electronic communications to discuss the best way to conceal from Plaintiffs and CVD that GEORGE VIEIRA had, one month earlier, reached an agreement with the office of the United States Attorney to plead guilty to securities fraud and to a conspiracy to commit bank and mail fraud — the active criminal conspiracy centered on the Round-Tripping scheme that led to the collapse of Supre-ma Specialties, Inc. and its subsidiaries.

102. The terms of the negotiated plea bargain were spelled out in a seven-page letter dated March 28, 2003 from the U.S. Attorney’s Office to GEORGE VIEIRA’s attorney. And the plea deal (that was formally entered on January 4, 2004), barred GEORGE VIEIRA from acting as an officer or director of any company issuing registered securities under the Securities Exchange Act of 1934.

103. In the business plan, however, defendants disclosed none of this vital information. Indeed, in the business plan, defendants pretended that the implosion of Suprema Specialties, Inc. and its subsidiaries provided an advantage for the proposed business of VALLEY GOLD because as “one of the larger producers of rieotta in the state” a market void and thus a market opportunity was created when “Suprema Specialties, Inc. ceased operations in 2002.” The business plan failed to mention that Suprema Specialties ceased business because its fraudulent practices, inflated sales and falsified inventory forced it into bankruptcy; and the business plan failed to mention that as much as 87% of the purported cheese production by Suprema Specialties that led defendants to characterize it as a large producer was fictitious, as reported by the Securities and Exchange Commission’s investigation.

104. The Offering Memorandum provided a brief disclosure concerning Suprema Specialties’ bankruptcy, but did so in a way to minimize the importance of the information and in a manner that created the impression that GEORGE VIEIRA’s sole involvement with Suprema Specialties occurred because he “was, for a short period of time, an officer of Suprema West, Inc.... a subsidiary of Suprema Specialties, Inc.” The Offering Memorandum did not disclose that GEORGE VIEIRA was not just any officer, but was the Chief Operating Officer and was thus directly responsible for fraudulent financial transactions that government officials were investigating. The Offering Memorandum also did not disclose that GEORGE VIEIRA had reached an agreement with the United States Attorney’s Office to plead guilty to securities fraud and conspiracy to commit bank and mail fraud. And the Offering Memorandum did not disclose that in addition to being an officer of Suprema Specialties West, Inc., GEORGE VIEIRA and his wife MARY VIEIRA were also officers and owners of CMM, which was also a subject of the criminal investigation as well as a probable broker for any cheese produced by VALLEY GOLD.

105. The Offering Memorandum stated at page 7 that VALLEY GOLD was negotiating with a “cheese distributor in New Jersey” to produce substantially all of VALLEY GOLD’S production for its first two years. The Offering Memorandum then stated that the negotiations had resulted in a contract, and that “the total amount of cheese to be purchased under this contract [is estimated] to be between 14 and 25.5 million pounds.” The Offering Memorandum further disclosed that if the New Jersey distributor “for any reason [could] not fulfill its commitment to purchase the Company’s product, there is no assurance that the Company would be able to find an immediate customer ... and such a disruption could have a material adverse effect on the Company’s business, operations and finances.”

106. Plaintiffs are informed and believe, and thereon allege, that the New Jersey Cheese Distributor referred to in the Offering Memorandum was J.S.P. Marketing, LLC, an entity primarily owned and operated by Joseph S. Profa-ci. Mr. Profaci had refused to enter into any binding or comprehensive distributorship agreement, and this was known to defendants.

107. Despite mentioning that a “contract” and “commitment” had been reached with the New Jersey distributor, the Offering Memorandum failed to disclose the identity of that distributor. Plaintiffs are informed and believe that this omission was the result of a deliberate choice by defendants GENSKE-MULDER, GEORGE VIEIRA, DOW-NEY BRAND and DOES 21 through 40 to conceal the true nature of Mr. Profa-ci’s unwillingness to enter into a binding or comprehensive distributorship agreement.

108. In addition, and beginning in or about March of 2003, Defendants GEORGE VIEIRA with the assistance of GENSKE-MULDER and DOES 21 through 40, and knowing these representations to be false and with the intent to deceive the Plaintiffs, and to induce them into investing in VALLEY GOLD, further falsely and fraudulently represented to the Plaintiffs that:

(a)CVD had suffered financial difficulty and had defaulted on obligations to pay Plaintiffs for milk because there were limited markets for CVD’s milk (when in reality, the reason CVD had suffered financially was because of the Round-Tripping scheme and the churning of commissions by CMM);

(b) By investing in the formation of VALLEY GOLD, Plaintiffs and CVD would solve the problem of limited demand for CVD’s milk because VALLEY GOLD would purchase the bulk of CVD’s milk and process it into cheese, for which there was purportedly a strong market demand (when in reality, the apparent market demand for cheese was materially distorted by the Round-Tripping scheme and the fictitious cheese sales publicly reported by Supre-ma Specialties, Inc. and its subsidiaries, and the purported demand for cheese from the unnamed New Jersey distributor was illusory);

(d) GEORGE VIEIRA was “Chief Operating Officer” and was going to be responsible for the day-to-day management of VALLEY GOLD;

(e) VALLEY GOLD committed itself to selling only to reputable buyers with solid financial standing;

(f) GEORGE VIEIRA could use his contacts to “sell more cheese than VALLEY GOLD could ever produce”;

(g) With the ownership of VALLEY GOLD, Plaintiffs MANUEL LOPES, MARIANA LOPES, JOSEPH LOPES and RAYMOND LOPES would “hold all the keys to financial success”;

(h) VALLEY GOLD would not need to invest excessive resources to make the plant operable;

(i) VALLEY GOLD would make payments for milk received (from Plaintiffs MANUEL LOPES, MARIANA LOPES, JOSEPH LOPES and RAYMOND LOPES):

1. In accordance with the announced in-plant usage and pricing at the time of delivery

2. Producer payments would be made on or before the 28th day of the month for milk received during the first 15 days of the month, and on the 13th day of the month for milk received during the remainder of the month;

(j) Milk payments were dictated by the State of California and, as such, not negotiable;

(k) “By having owners that live in short proximity to the plant and with one of the owners (GEORGE VIEIRA) being the Chief Operating Officer, the personnel at VALLEY GOLD will see first hand the company’s commitment to quality”

(l) MANUEL LOPES, MARIANA LOPES, JOSEPH LOPES and RAYMOND LOPES’ individual ownership would not be diluted by allowing fellow members or others to contribute capital monies at any time; and

(m) In the event that VALLEY GOLD needed additional capital, it would offer additional ownership interest to existing members, first, and all other (outside) parties, second.

109.Defendants also actively encouraged Plaintiffs to invest individually in VALLEY GOLD and to agree to CVD’s investment in VALLEY GOLD, while the Defendants knew of GEORGE VIEIRA’s criminal activities outlined above. In addition, VALLEY GOLD never intended to and never committed itself to selling only to reputable buyers with solid financial standing. Instead, VALLEY GOLD dealt with members of the criminal RICO enterprise manipulated by GEORGE VIEIRA and with which he was affiliated, and whom Defendants knew were incapable of paying for millions of dollars worth of VALLEY GOLD cheese.

110. Further, GEORGE VIEIRA’s negative and toxic reputation in the cheese industry, which should have been disclosed to the investors, made it difficult for VALLEY GOLD to market and sell its cheese, and it made it difficult to obtain financing and quickly led to VALLEY GOLD’S collapse.

111. Plaintiffs were never aware of any facts that made them suspicious of the veracity of Defendants’ representations, and did not begin to discover the fraud, deceit and misrepresentations of Defendants as herein alleged until less than one year ago.

112. Plaintiffs only purchased equity interests in VALLEY GOLD because of the false and misleading representations contained in the business plan and the Offering Memorandum and the accompany false and misleading statements and omissions of defendants GEORGE VIERRA [sic] and GENSKE-MULDER and DOES 21 through 40. Further, Plaintiffs only consented to allow CVD to purchase equity interests, and CVD only purchased equity interests in VALLEY GOLD because of the false and misleading representations contained in the business plan, the Offering Memorandum and the accompany false and misleading statements and omissions of defendants GEORGE VIERRA [sic] and GENSKE-MULDER and DOES 21 through 40. Those equity interests are now worthless.

113. As a result of defendants’ violations of the Federal Securities Laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, Exchange Act Rule 10b-5 enacted under the regulatory authority of the Securities and Exchange Commission and the Oxley Sarbanes-Oxley Act of 2002, Plaintiffs have incurred damages by investing millions of dollars into a doomed enterprise and supplied millions more in milk to that enterprise — milk for which plaintiffs have not been paid, resulting in damages to Plaintiffs in a sum exceeding several million dollars.

INVOLVEMENT OF CARY, DOW-NEY BRAND AND GENSKE-MULDER

114. CARY, DOWNEY BRAND and GENSKE-MULDER are sued as authors of the Offering Memorandum of business plan [sic], with direct knowledge of three primary omissions or misstatements, and direct involvement in the drafting that led to these omissions or misstatements:

a. The Offering Memorandum and business plan did not disclose that milk shipped by CVD to VALLEY GOLD would not be protected by the milk producer’s trust fund;

b. The Offering Memorandum and business plan materially misstated the nature of negotiations with New Jersey cheese distributors; and

c. The Offering Memorandum materially and misleadingly disclosed the nature of the investigation of GEORGE VIEIRA’s criminal activity and his negotiations of a plea bargain to bank and securities fraud.

115. CARY knew that milk shipped by CVD to VALLEY would not be protected by the milk producer’s trust fund because in February of 2003, he negotiated a stipulation and order in pending proceedings before the Department of Food and Agriculture that stated: “Respondent acknowledges that Central Valley Dairymen milk processed by the new entity licensed to Respondent will not be eligible for Trust fund coverage.” CARY signed this stipulation on February 18, 2003 and on February 21, 2003 was mailed a copy of the order entered upon the stipulation.

116. At the time of this stipulation, the PROMOTERS were focused on acquiring a cheese plant in Manteca. To avoid any confusion, the Department of Food and Agriculture requested a further stipulation after the Gustine facility was purchased to make it clear that no trust fund coverage would be provided for milk shipped by CVD to VALLEY GOLD’S Gustine facility. CARY signed that stipulation on September 20, 2003, only days before Plaintiffs were asked to purchase additional interests in VALLEY GOLD with the “milk for equity” contracts.

117. The lack of trust fund coverage was never disclosed to Plaintiffs.

118. On numerous occasions throughout the early part of April of 2003, Curtis Colaw endeavored to negotiate a distributorship agreement with Mr. Profaci, including on April 1, 2003, April 2, 2003, April 17, 2003, April 18, 2003 and April 22, 2003. As of April 22, 2003 no agreement had been reached and Mr. Profaci’s reluctance to sign a binding or comprehensive distributorship agreement was apparent. Nonetheless, Defendants drafted the Offering Memorandum to make it appear that a firm deal was relatively certain and would provide for purchase of $100 million of cheese products per year for two years. This was materially false.

119. GEORGE VIEIRA’s plea negotiations, his involvement in the events that led to the collapse of Suprema Specialties and the nature of the investigation by the United States Attorney for New Jersey were well known to Defendants and were actively investigated by DOW-NEY BRAND. But, as alleged above, Defendants drafted the Offering Memorandum to minimize and conceal this information.

120. The partners at GENSKE-MULDER who primarily worked on preparing the Offering Memorandum and business plan were Peter Hoekstra and Paul Anema. From the information presently available to Plaintiffs, it appears that Peter Hoekstra had primary responsibility for overseeing those portions of the Offering Memorandum and business plan that dealt with the disclosure of risks associated with the dairy industry and in preparing the financial forecasts and projections. Paul Anema assisted in these matters, and both were involved in reviewing and revising the final forms of both documents.

121. The attorneys at DOWNEY BRAND who worked on preparing the Offering Memorandum (including those portions that were subsequently incorporated into the business plan) were Jeffrey Koewler, Silvio Reggiardo, Lisa Nixon, Joseph G. De Angeles, Bruce Dravis, Christopher A. Delfino, Ricardo D. Bordallo and Diane Oleson. Jeffrey Koewler had primary responsibility for preparing the Offering Memorandum and ensuring that it had all disclosures required by California law. Ricardo D. Bordallo researched the licensing requirements for a milk processing plants as part of his work on the Offering Memorandum, and thus recognized the materiality of the regulatory scheme and the need to disclose the lack of trust fund coverage for milk shipped by CVD to VALLEY GOLD. Diane Oleson, at the direction of Christopher A. Delfino, had primary responsibility for investigating GEORGE VIEIRA. ■

122. Plaintiffs are informed and believe, and thereon allege, that CARY prepared the initial draft to disclose the criminal investigation of GEORGE VIEIRA, but that he submitted the draft to DOWNEY BRAND and the other Defendants who revised the draft to its current form.

123. DOWNEY BRAND, GENSKE-MULDER and CARY were all acutely aware of the PROMOTER’S insistence that the VALLEY GOLD be funded by April 22, 2003. Their billing records show frantic activity in efforts to meet that date. These defendants were thus fully aware that Plaintiffs would not be provided an adequate amount of time to review the Offering Memorandum.

124. The Offering Memorandum itself discloses that $325,000 of the funds raised by the April 22, 2003 securities issuance would be used to pay the bills of CARY, GENSKE-MULDER and DOWNEY BRAND. These defendants thus knew that a successful securities issuance was in their own financial interests.

Defendants move to dismiss the Third Cause of Action on various grounds.

a. OFFERING NOT A PUBLIC OFFERING.

Section 12(2) of the Securities Act, 15 U.S.C. § 77l(a)(2), provides in pertinent part:

Any person who ... offers or sells a security ... by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements in light of the circumstances under which they are made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable ... to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, upon the tender of such security, or for damages if he no longer owns the security.

In the May 30 Order, the Court ruled in pertinent part:

To the extent that the Second Cause of Action purports to state a claim for violation of Section 12(2) of the Securities Act of 1933, Defendants’ motions to dismiss are GRANTED WITH LEAVE TO AMEND. Plaintiffs shall amend to allege either that the offering of securities was a public offering or that the offering of securities was subject to registration and that the offering was not registered as required by applicable law.

Genske moves to dismiss the Third Cause of Action on the ground that the allegations do not allege a “public offering” because the FAC does not allege any use of public media to solicit investments and does not allege that a seminar whose invitees are solicited through a “general solicitation or general advertising.” Genske refers to S.E.C. Rule 502:

Limitations on manner of offering. Except as provided in Rule 504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising

Plaintiffs respond by citing Western Federal Corp. v. Erickson, 739 F.2d 1439 (9th Cir.1984). There, the Ninth Circuit endorsed a flexible test for determining if the private offering exemption under Section 4(2) is available. Id. at 1442. The Ninth Circuit’s test considers: “(1) the number of offerees, (2) the sophistication of the offerees, (3) the size and manner of the offering, and (4) the relationship of the offerees to the issuer.” Id. “The party claiming the exemption must show that it is met not only with respect to each purchaser, but also with respect to each offer-ee.” Id. Plaintiffs argue that the FAC addresses each of these factors. Plaintiffs refer to Paragraphs 82-83 and 85: