Rentea v. Janes

BOGDAN RENTEA

v.DEAN JANES

CAUSE NO. A-11-CV-031 LY

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS AUSTIN DIVISION

SIGNED: July 22, 2011

REPORT AND RECOMMENDATION

OF THE UNITED STATES MAGISTRATE JUDGE

TO: THE HONORABLE LEE YEAKEL

UNITED STATES DISTRICT JUDGE

Before the Court are: Defendant's Motion to Dismiss and Motion to Change Venue (Clerk's Doc. No. 6); Plaintiff's Response (Clerk's Doc. No. 7); Defendant's Reply (Clerk's Docket No. 10); Defendant's Supplement to Motion to Change Venue (Clerk's Doc. No. 13); and Plaintiff's Response (Clerk's Docket No. 14). The District Court referred the above-motion to the undersigned Magistrate Judge for a Report and Recommendation pursuant to 28 U.S.C. § 636(b)(1)(B), Federal Rule of Civil Procedure 72, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas, Local Rules for the Assignment of Duties to United States Magistrate Judges. After reviewing the parties' briefs, relevant case law, as well as the entire case file, the undersigned issues the following Report and Recommendation to the District Court.

I. GENERAL BACKGROUND

Plaintiff Bogdan Rentea ("Plaintiff"), a Texas resident, is a shareholder in Imaging3, Inc., a California company that develops 3D medical imaging devices. Plaintiff alleges that the Chairman and Chief Executive Officer of Imaging3, Dean Janes ("Defendant"), made false and misleading statements to his shareholders regarding his ability to obtain approval from the FDA for the sale of the Dominion VI Scanner, a 3D medical imaging device being developed by his company. Plaintiffclaims that Defendant repeatedly misled public investors about his ability to obtain FDA approval through "market communication mechanisms, including, but not limited to conference calls, press releases and personal appearances by Defendant on Money TV," and via public filings. Plaintiff's Second Amended Complaint at ¶ 11. Plaintiff contends that these false statements caused Imaging3's stock to artificially rise until the day the FDA rejected approval of the device which caused the stock to plummet. Plaintiff claims that he detrimentally relied on Defendant's false statements by purchasing stock in the company and suffering economic losses.

Plaintiff filed this lawsuit against Defendant on January 11, 2011, and alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as SEC Rule 10-b-5. In response to Plaintiff's Complaint, Defendant filed the instant Motion to Dismiss, or in the alternative to dismiss or transfer venue to the Central District of California. Defendant argues that Plaintiff's Complaint should be dismissed because it does not meet the pleading requirements of Federal Rules of Civil Procedure 9(b) and 12(b)(6). Alternatively, Defendant requests that the case be dismissed or transferred to Californian for improper venue under 28 U.S.C. § 1406(a), or transferred under 28 U.S.C. § 1404(a) for the convenience of the parties and witnesses.

II. ANALYSIS

A. Improper Venue under § 1406(a)

Defendant argues that the Court should either dismiss this case under Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. § 1406(a) for improper venue, or transfer the case to the Central District of California. Plaintiff contends that venue is proper in this District because "the Defendant directed his statements to all shareholders wherever located" and "Defendant should have anticipated that his statements could be directed to a shareholder in this District." Amended Complaint at ¶ 6.

Under § 1406(a), if a case has been filed in the "wrong division or district," the district court has the authority to either dismiss the case or transfer the case "to any district or division in which it could have been brought." 28 U.S.C. § 1406(a). Although the federal courts are divided on which party bears the burden of proof on a motion to dismiss for improper venue,¹ 'the better view" is that once a proper venue objection has been raised, the burden is on the plaintiff to establish that the district she has chosen is a proper venue since it is the plaintiff's general duty to prove that a case is properly before a particular tribunal. 14D Charles Alan Wright, Arthur Miller & Edward Cooper, Federal Practice & Procedure § 3826 (3rd ed. 2007). Thus, for the purposes of this Motion, the Court will assume that the burden of proof is on the Plaintiff to prove venue is proper in the instant District.

Defendant argues that Plaintiff has not satisfied the specific venue provision contained in the Securities Exchange Act of 1934 ("Exchange Act"). This venue provision provides that civil actions to enforce any liability or duty under that Act may be brought in the district "wherein the defendant is found or is an inhabitant or transacts business" or "wherein any act or transaction constituting the violation occurred." 15 U.S.C. § 78aa. See also, 14D Charles Alan Wright, Arthur Miller & Edward Cooper, Federal Practice & Procedure § 3824 (3rd ed. 2007).²

It is undisputed that Defendant - a resident of California - is not an inhabitant of this district and has never owned any property or maintained any business offices in Texas. See Exhibit A to Defendant's Motion. Defendant's company, Imaging3, is located in Burbank, California and does not maintain any business offices outside of California. Thus, for venue to be proper within this District, Plaintiff must demonstrate that "any act or transaction constituting the violation occurred" in the Western District of Texas. 15 U.S.C. § 78aa.

The "act" or "transaction" contemplated by the statute "need not be crucial, nor must 'the fraudulent scheme be hatched in the forum district.'" Hilgeman v. Nat'l Ins. Co. of Am., 547 F.2d 298, 301 (5th Cir. 1977) (quoting Hooper v. Mountain State Sec. Corp., 282 F.2d 195, 204 (5th Cir. 1960), cert. denied, 365 U.S. 814 (1961)). Nonetheless, the act must be "of material importance to the consummation of the scheme." Id.³ However, "the defendant need not be physically present in the forum district nor need he commit more than a single act in the district if that act is important to the consummation of the scheme." Id. at 302 n. 11.

Janes argues that no materially important part of the alleged fraud occurred in this district. He argues that the only act "identified with any particularity" by Plaintiff in his Complaint is the Form 10-K filed with the SEC and available on the SEC's website. Defendant's Motion at p. 5.Janes relies on case law finding that venue is lacking where the only contact with the Plaintiff's forum is the availability of a passive website. E.g., Equidyne Corp. v. Does 1-21, 279 F. Supp.2d 481, 488-89 (D. Del. 2003); Miller v. Asensio, 101 F. Supp.2d 395, 405 (D.S.C. 2000). These cases, however, can be easily distinguished from the instant case. First, Equidyne and Miller's holdings were based on the fact that the only connection between the defendant and the requested forum was a posting of allegedly misleading material on a passive website accessed by the plaintiff. See Miller, 101 F. Supp.2d at 406 (distinguishing its ruling from other cases based upon the fact that the Defendant merely posted information on a passive site and no information could be exchanged with the host computer); Equidyne, 279 F. Supp.2d at 488-89 (finding venue improper where only act was posting of information on a website which was not highly interactive). This is not the situation in the case at bar. Although Janes did not send any communications directly to Plaintiff, Plaintiff alleges that Janes did much more than maintain a passive website; specifically, Plaintiff alleges that Janes made false and misleading statements during advertised conference calls and announced appearances on Money TV "to which Plaintiff was invited to attend and view" and that reached into this district. Plaintiff's Response at 3. In addition, Plaintiff contends that Janes was an "active participant" on Investors Hub and posted over 262 messages beginning on April 28, 2006. Id. These alleged "acts" are sufficient to demonstrate that this Court has venue over this action. See Texas Gulf Sulphur Co. v. Ritter, 371 F.2d 145, 149 (10th Cir. 1967) (holding that press releases and acts incident to the sale of the stock were enough to lay venue there); SEC v. Rizvi, 2010 WL 2949311 at * 4-6 (E.D. Tex. July 2, 2010) (holding that misleading statements made through the offeringcircular, press release, telephone calls, website, oral presentation and e-mails were sufficient to show venue under § 78aa).⁴

Based upon the foregoing, the Court finds that Plaintiff has alleged sufficient facts to show that Defendant's allegedly false and misleading statements were transmitted into this district. Accordingly, venue is proper in this district under 15 U.S.C. § 78 aa and Defendant's Motion to Dismiss for improper venue should be denied.⁵

B. Should the case be transferred under § 1404(a)?

28 U.S.C. § 1404(a) provides that "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." 28 U.S.C. § 1404(a) (emphasis added). It is well-settled that the party seeking the transfer of venue bears the burden of demonstrating that the case should be transferred. Time, Inc. v. Manning, 366 F.2d 690, 698 (5th Cir. 1966) ("plaintiffs privilege of choosing venue places the burden on the defendant to demonstrate why the forum should be changed"). The decision whether to transfer a case under § 1404(a) is a matter within the district court's sound discretion.In re Volkswagen of America, Inc., 545 F.3d 304, 311 (5th Cir. 2008) (en banc), cert. denied, 129 S.Ct. 1336 (2009); Jarvis Christian College v. Exxon Corp., 845 F.2d 523, 528 (5th Cir. 1988).

The preliminary question under § 1404 is whether the lawsuit "might have been brought" in the...