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7/30/2019 UNOPPOSED MOTION OF INDIVIDUAL DEFENDANTS FOR LEAVE TO FILE REPLY MEMORANDUM IN SUPPORT OF THEI
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UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
ERWIN GRAMPP, derivatively on behalf ofJBI, INC.,
Plaintiff,
vs.
JOHN BORDYNUIK, DR. JACOB SMITH,RONALD C. BALDWIN, JR., AMYBRADSHAW, JOHN M. WESSON, ROBINBAGAI, GREGORY GOLDBERG, and
THEODORE J. HENRY,
Defendants,
and
JBI, INC.Nominal Defendant.
Civil Action No.: 1:12-cv-10495-MLW
THE INDIVIDUAL DEFENDANTS REPLY IN SUPPORT
OF THEIR MOTION TO DISMISS THE COMPLAINT
[Proposed Reply Brief]
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INTRODUCTION
In their memorandum supporting their motion to dismiss, the Individual Defendants
demonstrated that the Complaint must be dismissed for failure to plead demand futility, failure to
state a claim for breach of fiduciary duty, and failure to plead the required element of damages.
In addition, seven of the Individual Defendants demonstrated that they are not subject to personal
jurisdiction in Massachusetts on these claims. As discussed below, nothing in Plaintiffs
Opposition brief compels contrary conclusions as to these points. Thus, dismissal is warranted.
ARGUMENT
I.
PLAINTIFF HAS NOT ADEQUATELY ALLEGED THAT DEMAND ON JBISBOARD WAS FUTILE PURSUANT TO RULE 23.1.
In their opening brief, the Individual Defendants demonstrated that Plaintiff has failed to
establish demand futility under the rigorous standard that governs under Nevada law. (Individual
Defendants Mem., 12-20.) Plaintiff responds by citing Delaware case law (Plaintiffs Opp., 11-
13), but his reliance is obviously misplaced, since the law of Nevadanot Delawareapplies
(as JBI is a Nevada corporation).1
The difference between the two states laws is significant in this regard. Under Delaware
law, corporations may not limit liability for conduct that breaches the duty of loyalty or is not
performed in good faith. Del. Code Ann. tit. 8, 102(b)(7). Nevada law, by contrast, strictly
1 Nevada has adopted Delawares Aronson test, as modified by Rales, for assessing demand futility.Shoen v. SAC Holding Corp., 137 P.3d 1171, 1184 (Nev. 2006). That is because the two states rules areconsistent with respect to pleading demand futility. Compare Del. Chancery R. 23.1 (The complaintshall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff
desires from the directors . . . and the reasons for the plaintiffs failure to obtain the action or for notmaking the effort.) with Nev. R. Civ. P. 23.1 (The complaint shall . . . allege with particularity theefforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and thereasons for the plaintiffs failure to obtain the action or for not making the effort.). As explained herein,however, the two states statutes are materially different with respect to the standard for director liabilityfor breach of fiduciary duty.
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limits liability to breaches of fiduciary duty that involve intentional misconduct, fraud or a
knowing violation of law. Nev. Rev. Stat. 78.138(7); see also Shoen v. SAC Holding Corp.,
137 P.3d 1171, 1184 (Nev. 2006) (directors and officers may only be found personally liable for
breaching their fiduciary duty of loyalty if that breach involves intentional misconduct, fraud, or
a knowing violation of the law) (emphasis added). Accordingly, Delawares so-called
Caremark standard for evaluating potential liability of directors under Del. Code Ann. tit. 8,
102(b)(7), i.e., whether there was a sustained or systemic failure of the board to exercise
oversight, is wholly inapplicable to the conduct of the Individual Defendants. Indeed, Plaintiff
has not cited to a single Nevada case that has applied the Caremark standard or otherwise
adopted Delaware law governing director oversight liability.2 Therefore, even if Plaintiff had
adequately pleaded facts satisfying the Delaware standard, dismissal of his Complaint would be
required because he does not allege that they acted knowingly or intentionally.
Moreover, even under the less rigorous standard advocated (wrongly) by Plaintiff,
Plaintiff has nevertheless failed to pleadparticularized facts demonstrating that a majority of the
board faces a substantial likelihood of liability under a failure of oversight theory. As previously
noted by the Individual Defendants, Messrs. Wesson and Bagai constitute a majority of the JBI
board for demand purposes. Plaintiff has failed to state with particularity that demand on the
board would have been futile, as required by Rule 23.1. Plaintiff essentially concedes that his
allegations against director Bagai are insufficient, as his Opposition brief makes no argument
2 As the Supreme Court of Delaware has observed, the Delaware statute distinguishes betweenintentional misconduct and a knowing violation of law (both examples of subjective bad faith) on theone hand, and acts . . . not in good faith, on the other. In re Walt Disney Co., 906 A.2d 27, 67 (Del.2006). In consequence, the court held that the statutory denial of exculpation for acts . . . not in goodfaith encompasses an intermediate category of misconduct that lies between gross negligence andintentional misconduct. Id. The Nevada statute, in contrast, does not extend liability to any intermediatecategory of misconduct that does not rise to the level of intentional misconduct or knowing violation ofthe law.
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that demand on Bagai would have been futile. Plaintiffs failure to respond to the Individual
Defendants arguments concerning Dr. Bagai (Individual Defendants Mem., 24-26) waives
Plaintiffs claim against him. See In re Compact Disc Minimum Advertised Price Antitrust
Litig., 456 F. Supp. 2d 131, 152-153 (D. Me. 2006) (A partys failure to oppose specific
arguments in a motion to dismiss results in waiver of those issues.) (citing Collins v. Marina-
Martinez, 894 F.2d 474, 481 n.9 (1st Cir. 1990) (It is settled beyond peradventure that issues
mentioned in a perfunctory manner, unaccompanied by some effort at developed argumentation
are deemed waived.)).
Although Plaintiff argues that director John Wesson faces a substantial likelihood of
liability (based on his purported failure to take action with regard to the Media Credits
valuation), Plaintiffs allegations are woefully inadequate to show a sustained or systemic failure
of oversight, much less knowing or intentional misconduct, as required under Nevada law.
While Plaintiff argues in his opposition that Wesson failed to take any action whatsoever to
correct the false and inaccurate valuation of the Media Credits (Plaintiffs Opp., 14), his
argument is directly contradicted by his own allegations. As alleged in the Complaint, three
months after Mr. Wesson was appointed to the board of directors, and less than two months after
the Form 10-K at issue was filed, JBI filed a Form 8-K notifying shareholders that its previously
issued financial statements could no longer be relied upon. (Compl. 17, 41, 70.) Within the
next six months, the company restated its financial statements, thereby writing down the value of
the Media Credits to zero. (Compl. 70.) These allegations do not demonstrate Mr. Wessons
sustained or systemic failure to monitor the companys operations, particularly with respect to
any alleged overvaluation of the Media Credits, and they certainly do not establish that he
engaged in intentional misconduct, fraud or knowing violation of law. Rather, they establish that
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JBI, through its board, took appropriate remedial action after learning that the credits were
overstated.
Furthermore, even if the more lenient liability standard were applied, Plaintiff has not
alleged any particularized red flags that might suffice to support liability under Delaware law.
See Guttman v. Huang, 823 A.2d 492, 507 n.36 (Del. Ch. 2003) (to excuse demand in a director
oversight case, plaintiff must plead particularized facts that support an inference that the
director[] did possess knowledge of facts suggesting potential accounting improprieties . . . and
took no action to respond to them) (internal quotation marks and citation omitted). The
Complaint fails to identify any information that would reasonably have alerted Mr. Wesson to
problems with JBIs accounting or internal controls, much less the Media Credits themselves.
In a transparent attempt to circumvent the deficiencies in his faulty Complaint, Plaintiff
suggests that Wesson was aware of problems based on alleged events that transpired before he
was even appointed to the board. First, Plaintiff claims he has alleged that Wesson participated
in a concerted effort to ensure the Media Credits valuation was audit proof. (Plaintiffs
Opp., 13.) In support, Plaintiff cites Paragraph 56 of the Complaint. That paragraph, however,
makes no mention of Mr. Wesson, but instead relates to an alleged conversation between
Bordynuik and an unnamed business consultant that took place prior to the Form 10-Q filing
on November 16, 2009 (i.e.,priorto Wesson joining the JBI board). (See Compl. 56, 57.)
Second, Plaintiff asserts that Wesson knew that the Company had no professional
accounting firm to assist with its financial reporting and instead was relying on consultants to
ensure compliance with GAAP. (Plaintiffs Opp., 14.) This allegation erroneously presupposes
that it is negligent not to hire a professional accounting firm to help a companys internal
financial reporting. More importantly, Paragraph 50 of the Complaint, cited by Plaintiff in
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support of this assertion, not only does not even refer to Mr. Wesson, it describes events that
occurred prior to October 5, 1999, when the company was still called 310 Holdings, well
before February 12, 2010, when Wesson joined the JBI board.3 (See Compl. 17, 41 and 50;
seealsoExhibit A, depicting when each Individual Defendant was an officer or director in
relation to the publication of the financial statements at issue, the corrective disclosure, and the
filing of the Complaint.)
Third, Plaintiffs Opposition claims that Wesson also knew that the so called auditor
was a sham auditor, whose reputation and problems with the Public Company Accounting
Oversight Board (PCAOB) were known as far back as 2006. (Plaintiffs Opp., 14.) In
support, Plaintiff cites to Paragraphs 58 and 59 of the Complaint, which likewise make no
mention of Mr. Wesson or how he was supposedly aware of the alleged eventual problems
involving the auditor, the timing of which is not specified, 4 and do not identify any specific
events that occurred after Wesson became a director. Further, the Public Company Accounting
Oversight Board inspection report described in Paragraph 59 suggests that any auditor criticisms
contained therein were immaterial and inconclusive, stating that any references to violations or
potential violations of law, rules, or professional standards . . . are not a result of an adversarial
adjudicative process and do not constitute conclusive findings of fact or of violations for
purposes of imposing legal liability.5
3 See Complaint 41 (alleging that 310 Holdings changed its name to JBI on that date).
4 The Complaint alleges that the audit firm was barred by the PCAOB, but does not state when thisoccurred, leaving open the possibility that decisions regarding the Media Credits valuation preceded thisevent.
5 See http://pcaobus.org/Inspections/Reports/Documents/2006_Gately.pdf. In deciding a motion underRule 12(b)(6), the Court may consider documents appended to the complaint or documents incorporatedby reference therein. Trans-Spec Truck Serv., Inc. v. Caterpillar Inc., 524 F.3d 315, 321 (1st Cir. 2008);see also Schnall v. Marine Midland Bank, 225 F.3d 263, 266 (2d Cir. 2000); Breliant v. Preferred Equities
(footnote continued)
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Fourth, Plaintiff asserts that Mr. Wesson should have known that the valuation of the
Media Credits was being manipulated to the Companys advantage in violation of GAAP
because the Board was informed of the concerns raised by the Companys consultants as early as
November 2009. (Plaintiffs Opp., 14.) Notably, this allegation is deficient under Nevada law
because it does not suggest that Mr. Wesson actually knew of these concerns. Indeed, in support
of his assertion Plaintiff cites to Paragraphs 53, 54, 56 and 57 of the Complaint, which allege that
an unidentified consultant expressed concerns to Bordynuik about the valuation of the Media
Credits in the fall of 2009, prior to Mr. Wessons appointment to the board. 6 Among other
things, the Complaint does not allege how Mr. Wesson would have known the substance of
discussions with Bordynuik that took place before Mr. Wesson became a director. Finally,
Plaintiff asserts that Mr. Wesson should have known about the personal issues of JBIs
auditor (Plaintiffs Opp., 14), but cites only to paragraphs in the Complaint alleging that
Bordynuik, not Mr. Wesson, knew about the auditors drinking problems and related
_________________________________(footnote continued from previous page)
Corp., 858 P.2d 1258, 1261 (Nev. 1993). When a plaintiff chooses not to attach to the complaint orincorporate by reference a document upon which it relies and which is integral to the complaint, the courtmay nevertheless take that document into consideration in deciding the defendants motion to dismiss,without converting the motion into one for summary judgment. Clorox Co. Puerto Rico v. Proctor &Gamble Commercial Co., 228 F.3d 24, 32 (1st Cir. 2000) (in deciding a motion to dismiss, the court mayproperly consider the relevant entirety of a document integral to or explicitly relied upon in the complaint,even though not attached to the complaint, without converting the motion into one for summaryjudgment) (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.1996)); Cortec Indus., Inc.v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991). Were the rule otherwise, a plaintiff could
maintain a claim . . . by excising an isolated statement from a document and importing it into thecomplaint. Clorox Co. Puerto Rico, 228 F.3d at 32 (quoting Shaw, 82 F.3d at 1220).
6 See Complaint 53 (alleging that a consultant advised Bordynuik prior to September 30, 2009 aboutconcerns relating to the Media Credits), 54 (alleging that the consultant advised Bordynuik about asuspect relationship relating to the Media Credits by mid-September 2009), 56 (describingBordynuiks response to these expressed concerns), and 57 (describing Bordynuiks actions in valuing theMedia Credits in JBIs third-quarter 2009 Form 10-Q filed on November 16, 2009).
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incarceration during an unspecified time that apparently preceded Mr. Wessons appointment to
the board.7
Instead, Plaintiff simply makes the cursory allegation that Mr. Wesson knew and/or
should have known that the financials and presentation materials for JBI that listed the Media
Credits at a value of $9.997 million were false statements not reflecting their actual value and
inconsistent with GAAP and standard independent auditing standards. (Compl. 67.)
Conclusory allegations that a director knew and/or should have known of an accounting
problem are insufficient to support a breach of duty claim even under the more lenient Delaware
standard for director liability. See, e.g., In re Sonus Networks, Inc., 499 F.3d 47, 54, 71 (1st Cir.
2007) (allegations that directors participated in wrongdoing because they knew of the accounting
problems held insufficient to plead demand futility under Delaware law); Stiegele v. Bailey,
2007 WL 4197496, at *10 (D. Mass. Aug. 23, 2007) (rejecting allegation that each defendant
knew the adverse non-public information which made the representations made by [the
company] false and misleading); Guttman, 823 A.2d at 496-498 (allegation that defendants
were in a position to know of . . . improper accounting practices did not constitute
particularized allegation of fact demonstrating knowledge of accounting improprieties); Rattner
v. Bidzos, 2003 WL 22284323, at *10 n.53 (Del. Ch. Oct. 7, 2003) (rejecting conclusory
allegations regarding directors knowledge and how they acquired such knowledge).
In the absence of any particularized red flags, the Court should reject Plaintiffs
suggestion that Mr. Wesson was obliged to investigate the companys accounting treatment of
the Media Credits during the mere six weeks he was a director before the company filed its Form
7 See Complaint 60 (alleging that Bordynuik was aware of auditors drinking problem), 61 (allegingthat Bordynuik was aware of auditors related incarceration); and 62 (alleging that Bordynuik and JBInonetheless allowed the auditor to audit JBIs Form 10-K).
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10-K. In the words of the Supreme Court of Delaware, absent cause for suspicion there is no
duty upon the directors to install and operate a corporate system of espionage to ferret out
wrongdoing which they have no reason to suspect exists. Stone v. Ritter, 911 A.2d 362, 368
(Del. 2006) (quoting Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963)); see
also In re Goldman Sachs Group, Inc., 2011 WL 4826104, at *13 (Del. Ch. Oct. 12, 2011)
(Conscious disregard involves an intentional dereliction of duty which is more culpable
than simple inattention or failure to be informed of all facts material to the decision.). Rather,
Mr. Wesson was entitled to rely on the companys financial statements, particularly given that
the valuation of the Media Credits in its Form 10-K was a continuation of the valuation set forth
in its Form 10-Q filed before his affiliation with JBI. (Compl. 42.) See Nev. Rev. Stat.
78.138(2) (providing that directors are entitled to rely on the companys books, financial
statements, etc., unless the director has knowledge that would make reliance unwarranted).
II. PLAINTIFF HAS NOT ALLEGED COGNIZABLE DAMAGES.
Plaintiff concedes that the only damages he claims JBI has incurred are the costs and
expenses associated with the SEC suit and prior [related] investigation. (Plaintiffs Opp., 19) It
is undisputed that the SEC suit has not concluded; indeed, it has barely even begun, since a Rule
26(f) conference has not been held, and discovery therefore has not commenced. (See Docket
Nos. 12 and 13, indicating that no substantive pleadings have been filed in the case subsequent to
the Defendants answers). As the Individual Defendants demonstrated in their opening brief,
allegations concerning other pending lawsuits are insufficient to plead damages as a matter of
well-established law. (Individual Defendants Mem., 21-23.) Courts dismiss derivative claims
for breach of fiduciary duty where the only injury alleged is that additional lawsuits are pending
against the company concerning the same alleged misconduct as in the derivative suit, and that
the company is spending money to defend against those actions. (Id.)
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Plaintiff attempts to distinguish the overwhelming case law directly on point by arguing
in a footnote that here, there are very real costs, fees and expenses associated with both the
completed [SEC] investigation and the current pending SEC suit that JBI has already suffered.
(Plaintiffs Opp., 19 n.14.) But that is not a distinguishing factor. As an initial matter, this
allegation does not even appear in the Complaint, and therefore amounts to mere speculation.
(See Compl. 90.) For the purposes of deciding whether a plaintiffs factual allegations are
sufficient in the context of a motion to dismiss under Rule 12(b)(6), the court may not look
beyond the complaint to facts alleged solely in a plaintiffs moving papers. Klein v. MHM
Corr. Servs., 2010 U.S. Dist. LEXIS 83818, at *4-5 (D. Mass. Aug. 16, 2010) (Wolf, J.).
Moreover, the courts in the cases cited by the Individual Defendants specifically rejected
Plaintiffs new theory that he may recover as damages in a derivative action the expenses that
JBI has incurred in defending against other pending lawsuits. In In re Cray Inc. Derivative
Litig., 431 F. Supp. 2d 1114 (W.D. Wash. 2006), for example, plaintiff similarly argued that his
breach of fiduciary duty claim was based on allegations that Cray sustained damages in the
form of . . . costs incurred to carry out internal investigations of, and defend against, potential
legal liability from the pending class action lawsuit. Id. at 1133. The court held that such
damages allegations were insufficient to state a claim for relief. Id. at 1133-1134. Likewise,
the In re Isolagen Inc. Sec. & Derivative Litig., 2007 U.S. Dist. LEXIS 26905 (E.D. Pa. Apr. 10,
2007) court rejected a plaintiffs identical argument that [t]he Defendants misconduct has
caused the Company to incur the costs of internal investigations, including accounting fees and
legal fees, and the costs and legal fees for defending the related securities class action lawsuits,
because such costs cannot be recovered prior to a finding of liability in the separate litigation.
Id. at *7-8; see also Dollens v. Zionts, 2002 U.S. Dist. LEXIS 13511, at *27-28 (N.D. Ill. July
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22, 2002) ([P]laintiffs cannot bring a derivative action to recover expenses from a pending
securities action involving Westell until the case has proceeded to final judgment or settlement.)
(emphasis added). Therefore, the Complaint should be dismissed for failure to allege cognizable
damages, in addition to the other grounds cited in the Individual Defendants memorandum.
III. PLAINTIFF HAS NOT PLED INTENTIONAL MISCONDUCT, FRAUD, OR A
KNOWING VIOLATION OF THE LAW BY DEFENDANTS HENRY, BAGAI,
SMITH, BRADSHAW, WESSON, OR GOLDBERG.
A. Rule 9(b) Applies To The Complaint.Plaintiff agrees that in order to state a claim for breach of fiduciary duty he was required
by Nevada statute to plead facts against each Individual Defendant indicating that he or she
engaged in intentional misconduct, fraud, or a knowing violation of the law. (Plaintiffs Opp., 16
(citing Nev. Rev. Stat. 78.138(7)).) For the reasons discussed in the Individual Defendants
opening brief, Plaintiff failed to do. (Individual Defendants Mem. 23-28.) Plaintiffs argument
that in the circumstances of this case he may simply plead in a vague and conclusory fashion that
the defendants engaged in a knowing violation of the law without satisfying the heightened
pleading standards of Rule 9(b)or even the Rule 8 pleading requirements clarified by the
Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)is incorrect. (Plaintiffs Opp.,
16 & n.11.)
Although Plaintiff argues that he has merely pleaded a breach of duty claim to which
Rule 9(b) does not apply (Plaintiffs Opp., 16-17 and n.11), the Nevada Supreme Court has held
that allegations that defendants knowingly signed misleading and incomplete public filings,
which are the essential allegations here, do trigger application of the rule. Kahn v. Dodds, 252
P.3d 681, 701 (Nev. 2011). Likewise, the First Circuit has held that statutes that require a
knowing violation of law trigger Rule 9(b) particularity requirements. See United States ex
rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 226-228 (1st Cir. 2004) (holding that
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False Claims Act claims must satisfy Rule 9(b) because they require a knowing submission of
a false claim). Therefore, the rule applies even if, as Plaintiff asserts, his Complaint merely
implicates knowing or intentional, but not fraudulent, conduct. (Plaintiffs Opp., 17-18).
In addition, apart from Nev. Rev. Stat. 78.138(7), which requires breach of duty claims
against directors to be knowing or intentional, the Complaint sounds in fraud, thereby requiring
satisfaction of Rule 9(b). Plaintiff alleges, for example, that Mr. Bordynuik and Mr. Baldwin
knew the valuation was false and inaccurate when they certified the 10-Q and 10-K, and they
did so with the intent to mislead and deceive JBI investors as to the true net worth of the
Company. (Compl. 43 (emphasis added); see also id. at 45 (JBI deliberately misled
investors and the public by using the purported face value of the Media Credits, rather than their
actual cost.) (emphasis added).) Similarly, Plaintiff alleges that Defendants Bordynuik,
Bradshaw, Wesson, Henry, and Goldberg refused to write off the value of the Media Credits as
of September 30, 2009 because they knew that without inflating JBIs assets they would be
unable to attract the level of investment they desired for the company to purportedly expand its
operations and increase the share price of JBI. (Id. at 48.) Such allegations clearly implicate
fraud. Breach of fiduciary duty claims sounding in fraud must satisfy the particularity standards
of Rule 9(b). See Individual Defendants Mem., 24 (citing, inter alia, Gerber v. Bowditch, 2006
U.S. Dist. LEXIS 27552, at *41-44 (D. Mass. May 8, 2006)). Plaintiff was therefore required to
plead his breach of fiduciary duty claim with particularity in compliance with Rule 9(b), but
failed to do so.
B. Plaintiff Waives His Claims Against Defendants Henry and Dr. Bagai.Plaintiff does not even attempt to defend his patently insufficient allegations against Mr.
Henry and Dr. Bagai. (See Plaintiffs Opp., 17 & n.17 (defending allegations against only
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Baldwin, Smith, Bradshaw, Goldberg, Bordynuik, and Wesson); Individual Defendants Mem.,
24-25.) That is because Mr. Henry was a JBI board member for only six weeks, from
February 12, 2010 to March 24, 2010 (Compl. 21), during which time no financial statements
were filed with the SEC. (Ex. A.) Dr. Bagai did not become a JBI director until April 30, 2010,
which was after the financial statements at issue were already so filed. (Compl. 18; Ex. A.) As
noted above (pages 2-3, supra), by failing to respond to the Individual Defendants arguments
and failing to point to any facts indicating that Dr. Bagai or Mr. Henry breached their fiduciary
duties with respect to any public statement made while they were JBI directors, at a minimum
the claims against them should be dismissed, even if the court concludes that Plaintiffs faulty
allegations are sufficient as to certain other Individual Defendants.
C. Plaintiff Fails To Allege Intentional Misconduct, Fraud, or a KnowingViolation of the Law By Defendants Smith, Bradshaw, Baldwin or Goldberg.
The claims against Messrs. Smith, Baldwin and Goldberg and Ms. Bradshaw should also
be dismissed because Plaintiff misrepresents in his Opposition brief his actual allegations
concerning these defendants. Plaintiff claims that Paragraph 41 of his Complaint alleges that
these defendants knowingly participated in the dissemination of materially false misleading
statements. (Plaintiffs Opp., 18.) But that is not what the Complaint alleges; rather, it alleges
only that those defendants signed or certified the companys December 31, 2009 Form 10-K.
(Compl. 41.) There are no facts pled in the Complaint that would suggest that these Individual
Defendants had actual knowledge that the Form 10-K contained false statements; indeed, the
majority of these defendants were either directors for a brief period (Bradshaw and Goldberg) or
operational officers (Smith) who would not be reasonably expected to know or understand
accounting issues, and the fourth defendant (Baldwin) was a brand-new chief financial officer
when the form, which merely continued the existing accounting treatment for the Media Credits,
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was filed. Similarly, Plaintiff claims in his Opposition brief that the Complaint sets forth
particular allegations as to the . . . widespread cover-up and conspiracy that all the Individual
Defendants engaged in to further Bordynuiks aspirations for Plastic2Oil. (Plaintiffs Opp., 18.)
But none of the cited paragraphs allege anything of the sort, much less allege any facts
supporting an inference of such a purported conspiracy.
Finally, Plaintiff falls back on his conclusory allegations that these individuals failed to
monitor and oversee the Companys financial and accounting controls. (Plaintiffs Opp., 18.)
But as set forth above, supra at pages 1-2, Nevada law does not recognize such conduct as an
actionable breach of fiduciary duty. It is quite clear that only actual knowledge, or intentional
misconductstates a claim for breach of fiduciary duty under Nevada law. Nev. Rev. Stat.
78.138(7). Moreover, even under less stringent Delaware law, Plaintiff has not pled any specific
facts or red flags necessary to support a Caremark claim against them.
IV. PLAINTIFF HAS NOT MADE A PRIMA FACIE SHOWING OF PERSONALJURISDICTION OVER THE INDIVIDUAL DEFENDANTS OTHER THAN
DEFENDANT BORDYNUIK.
All Individual Defendants other than Mr. Bordynuik submitted Declarations with the
Individual Defendants opening brief establishing that this Court lacks personal jurisdiction over
them. (See Individual Defendants Mem., Exs. F-L.) Plaintiff has not presented any contrary
evidence.8 Instead, Plaintiff suggests that the submission of declarations in support of a Rule
8 After the Individual Defendants filed their opening brief, Plaintiff informally requested jurisdictional
discovery. The Individual Defendants stated that such discovery was not appropriate because Plaintiffhas not identified facts that would establish a colorable claim of personal jurisdiction. See U.S. v. SwissAmerican Bank, Ltd., 274 F.3d 610, 625-26 (1st Cir. 2001). Rather than separately brief a motion forjurisdictional discovery, the parties filed a Joint Motion to Postpone Consideration of Fed. R. Civ. P.12(b)(2) Motion To Dismiss Pending Resolution of Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 23.1Grounds for Dismissal. (See Dkt. No. 25.) That motion remains pending. However, in his Oppositionbrief, Plaintiff nevertheless presented argument and made unsubstantiated factual claims in purportedsupport of personal jurisdiction. While continuing to believe that several non-jurisdictional grounds for
(footnote continued)
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12(b)(2) motion to dismiss is somehow improper and inadmissible (Plaintiffs Opp., 20 n.15);
argues that his vague and conclusory allegations in the Complaint must be accepted as true to
establish personal jurisdiction (id. at 20); and even invents out of whole cloth supposed contacts
with Massachusetts that are not just unsubstantiated, but are directly contrary to the evidence
before the Court (id. at 20-26). Plaintiff misstates the law, and has failed to carry his burden to
make a prima facie showing of personal jurisdiction.
Plaintiff wrongly claims that in evaluating whether he has carried his burden of proving
personal jurisdiction, the Court, must accept the uncontroverted allegations in the plaintiffs
complaint as true. (Plaintiffs Opp., 20 (citing Elecs. For Imaging, Inc. v. Coyle, 340 F.3d
1344, 1349 (Fed. Cir. 2003)).) To the contrary, in the First Circuit, the plaintiff must go beyond
the pleadings and make affirmative proof. . . . It has long been the rule of this circuit . . . that
plaintiffs may not rely on unsupported allegations in their pleadings to make a prima facie
showing of personal jurisdiction. Boit v. Gar-Tec Products, Inc., 967 F.2d 671, 675 (1st Cir.
1992) (quotation omitted). Because evidence is considered in determining whether a plaintiff
has made a prima facie showing, the Court may properly consider declarations in deciding a Rule
12(b)(2) motion to dismiss for lack of personal jurisdiction. See e.g., Sawtelle v. Farrell, 70 F.3d
1381, 1385 (1st Cir. 1995) (holding that in considering whether plaintiff has made a prima facie
showing of personal jurisdiction, the court draws the facts from the pleadings and the parties
supplementary filings, including affidavits); Ticketmaster-New York v. Alioto, 26 F.3d 201,
203 (1st Cir. 1994) (Inasmuch as the district court dismissed this suit for failure of the plaintiff
_________________________________(footnote continued from previous page)
dismissing the Complaint exist, the moving Individual Defendants respond to those arguments in thisSection.
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to make a prima facie jurisdictional showing . . . we draw the facts from the pleadings and the
parties supplementary filings, including affidavits.).
The Individual Defendants demonstrated in their opening brief that the Complaints
allegations regarding personal jurisdiction are woefully deficient. Those allegations are based
solely on the fact that the Individual Defendants are directors or officers of a company that had
its principal office in Massachusetts when the financial statements at issue were published.
(Compl. 9, 13-21). Such allegations are insufficient as a matter of law. (See Individual
Defendants Mem., 9-10, citing, inter alia, Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902,
906 (1st Cir. 1980); Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613, 617 (1st Cir. 1988);
and American Freedom Train Found. v. Spurney, 747 F.2d 1069, 1074 (1st Cir. 1984).)
Plaintiff does not contest this authority. Instead, he simply invents contacts with
Massachusetts that are unsupported by any evidence and cannot be plausibly inferred from his
faulty Complaint. For example, Plaintiff states in his Opposition brief that [a]s directors, the
Individual Defendants, were responsible for attending board meetings in Massachusetts.
(Plaintiffs Opp., 23.) That is not true. The Individual Defendants did not attend board meetings
in Massachusetts; in fact, each has averred that during the time I was a JBI director, I did not
perform any of my duties in Massachusetts, and never traveled to the companys Massachusetts
office. (See Individual Defendants Mem., Exs. F-L, 3.) Plaintiff cites no evidenceor even
Complaint allegationsfor his inconsistent factual statement. But statements made in an
opposition brief do not constitute evidence that can support a prima facie showing of personal
jurisdiction. As the First Circuit stated in this precise context:
In order to defeat a motion to dismiss for want of in personam jurisdiction, a plaintiffmust do more than simply surmise the existence of a favorable factual scenario; he mustverify the facts alleged through materials of evidentiary quality. . . . Thus, allegations in
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a lawyers brief or legal memorandum are insufficient, even under the relatively
relaxed prima facie standard, to establish jurisdictional facts.
Barrett v. Lombardi, 239 F.3d 23, 27 (1st Cir. 2001) (emphasis added); see also Goldberg v.
Reeves, 2010 U.S. Dist. LEXIS 86955, at *2 (D. Mass. Aug. 24, 2010) (refusing to consider for
jurisdictional purposes assertions made in an opposition brief because they were wholly
unsupported by any evidence, affidavit or otherwise).
Plaintiffs assertion that the Individual Defendants communications directed at
Massachusetts are systematic and continuous is another invention of Plaintiff, again
unsupported by any evidence. (Plaintiffs Opp., 23-24.) The Declarations executed by these
defendants state the opposite. Most Individual Defendants had no communications at all with
the Massachusetts office. (See Individual Defendants Mem., Exs. F, H, I, J, L, 3.) The
communications with that office by Mr. Smith and Mr. Baldwin were completely unrelated to the
subject matter of the Complaint. Mr. Smith had possible occasional calls with a single
employee relating to computer problems in the Philadelphia Pak-It, LLC office. (Id. at Ex. K,
3.) And Mr. Baldwin had infrequent telephone calls with . . . a programmer who worked in [the
Massachusetts] office, relating to software issues at JBI subsidiary Pak-It, LLC. (Id. at Ex. G,
3.) Plaintiff makes no attempt to show how these unrelated communications regarding
technology issues could conceivably establish personal jurisdiction over Messrs. Smith and
Baldwin. See, e.g., LaVallee v. Parrot-Ice Drink Prods. of Am., Inc., 193 F. Supp. 2d 296, 303
(D. Mass. 2002) (holding that to satisfy the relatedness requirement as it concerns
communications with persons in the forum state, plaintiff must also demonstrate that these
communications caused the plaintiffs injury, constituting in-forum acts sufficient to establish
specific personal jurisdiction in Massachusetts).
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Plaintiff next baldly states that the SEC filings that certain of the Individual Defendants
signed or certified emanated from the Company, i.e., from Massachusetts. (Plaintiffs Opp.,
25.) Plaintiff even states that the 2009 Form 10-K originated in the District of Massachusetts.
(Id.) There is no evidence that this is true. Plaintiff offers no evidence that any work or review
performed by any Individual Defendant on any financial statement was performed in
Massachusetts. Indeed, to the contrary, the Individual Defendants at issue each submitted a
Declaration verifying that their work was not performed in Massachusetts. (Individual
Defendants Mem., Exs. F-L, 3.) Nor does the authority Plaintiff cites support the novel theory
that all financial statements of a company are deemed by operation of law to issue from the state
containing its principal office, regardless of where the work was actually performed. 9
Finally, Plaintiff invents the fact that the Individual Defendants have been paid by JBI, a
Massachusetts based company. (Plaintiffs Opp., 26.) Once again, Plaintiff cites no evidence
other than the unsupported, conclusory allegation in his Complaint. That is not sufficient. See
Boit, 967 F.2d at 674-75. The Declarations submitted by the Individual Defendants establish
that they were not paid by JBI or any Massachusetts company. (Individual Defendants Mem.,
Exs. F-L.) Therefore, the Complaint should be dismissed as to all Individual Defendants other
than Mr. Bordynuik for failure to prove personal jurisdiction for the reasons discussed in the
Individual Defendants opening brief.
9 Johnson v. Witkowski, 30 Mass. App. Ct. 697 (Mass. App. Ct. 1991) concerned the operation of a trustthat was formed in Massachusetts and was funded by the estate of a Massachusetts resident; thedefendant signed the trust in Massachusetts and has continued to manage and administer the trust whilemaintaining numerous contacts with the plaintiff in Massachusetts. Id. at 714. The other cases cited byPlaintiff, In re DaimlerChrysler AG Sec. Litig., 197 F. Supp. 2d 86, 95-96 (D. Del. 2002), and Itoba Ltd.v. LEP Group PLC, 930 F. Supp. 36, 40-41 (D. Conn. 1996), both concerned the exercise of personaljurisdiction over a foreign defendant, and are therefore inapposite.
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V. IN THE ALTERNATIVE, THE COURT SHOULD STAY THIS ACTION
BECAUSE THERE IS A SIMILAR CLASS ACTION SECURITIES CASE
PENDING IN NEVADA.
Plaintiff does not deny that his Complaint substantially overlaps with the conduct at issue
in the pending Nevada class action against JBI and certain officers and directors. (Compare
Compl. with Individual Defendants Mem., Exhibit N.) Nor does Plaintiff deny that in that case,
JBI will be relying upon the testimony of Messrs. Bordynuik and Baldwin, who are named as
individual defendants therein, while Plaintiff here would be attempting to prove they breached
fiduciary duties to the company based on the same conduct. Because permitting this derivative
case to proceed simultaneously with the securities class action based on the same allegations
could harm the companyostensibly the entity that the derivative claim aims to benefitthis
case should be stayed if it is not dismissed. See, e.g., In re Ormat Techs., Inc. Derivative Litig.,
2011 U.S. Dist. LEXIS 96891, at *10-15 (D. Nev. Aug. 29, 2011) (staying federal derivative
case for this reason); Brudno v. Wise, 2003 Del. Ch. LEXIS 35, at *12-13 (Del. Ch. Apr. 1,
2003) (same).
CONCLUSION
For the forgoing reasons and those stated in the Individual Defendants opening brief, the
Complaint should be dismissed as to the Individual Defendants, with prejudice, or in the
alternative, stayed pending resolution of the SEC and class actions.
Dated: November 7, 2012
Respectfully submitted,
/s/John G. WheatleyJohn G. Wheatley, BBO #670989MELICK & PORTER LLP28 State StreetBoston, MA 02109617 523-6200 (tel)
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617 523-8130 (fax)[email protected]
Michael R. MacPhail
Leif T. SimonsonMatthew B. KilbyFAEGRE BAKER DANIELS LLP
1700 Lincoln Street Suite 3200Wells Fargo CenterDenver, CO 80202303-607-3692
and2200 Wells Fargo Center
90 South Seventh StreetMinneapolis, MN 55402-3901(612) 766-7000(612) 766-1600 [email protected]
Counsel for John Bordynuik, Dr. Jacob Smith, Ronald C. Baldwin,
Jr., Amy Bradshaw, John M. Wesson, Dr. Robin Bagai, Gregory
Goldberg, and Theodore J. Henry
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CERTIFICATE OF SERVICE
I hereby certify that this document filed through the ECF system will be sent
electronically to the registered participants as identified on the Notice of Electronic Filing and
paper copies will be sent via U.S. first class mail to those indicated as non-registered participants
on November 7, 2012.
/s/John G. Wheatley
Case 1:12-cv-10495-MLW Document 29-1 Filed 11/07/12 Page 21 of 21