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Re: MOTION TO DISMISS GRANTED
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1 Plaintiffs are David Anderson, Nelson L. Reynolds, Sheila Morris, Patrick Cluney,
Robert Hollenegg, Allan Treffry, and Reece Hamilton.
2 See, e.g., Broad v. Sealaska Corp., 85 F.3d 422, 430 (9th Cir. 1996) (Takings Clause);
Brewster v. Bd. of Educ. of the Lynwood Unified Sch. Dist., 149 F.3d 971, 982 (9th Cir.1998)
(Due Process Clause).
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David Anderson, et al. v. Christopher Cox, et al.,
SAVC 10-31 JVS (MLGx)
Tentative Order Granting Motion to Dismiss
The present action arises out of the sale of stock from CMKM Diamonds,
Inc. (“CMKM”), to plaintiffs,1 the corporation’s subsequent implementation of its
resolution to self-liquidate, and the involvement of the Securities and Exchange
Commission (“SEC”) in that process. Plaintiffs have brought an action against a
number of former and present SEC Chairpersons and Commissioners, asserting
claims for declaratory judgment and deprivation of their Fifth Amendment Rights
under the Takings Clause and the Due Process Clause.
Presently before the Court is the Motion to Dismiss the Revised First
Amended Complaint (“FAC”) of defendants Christopher Cox, Mary L. Shapiro,
Cynthia A. Glassman, Paul S. Atkins, Roel C. Campos, Annette L. Nazareth, Troy
A. Paredes, Luis A. Aguilar, Elisse B. Walter, and Kathleen L. Casey (collectively,
“Defendants”).
The Court previously, on August 2, 2010, dismissed plaintiffs’ Complaint
because plaintiffs failed to identify a viable property interest. The holding of a
property interest is a necessary predicate to both a Takings Clause claim and a
procedural due process claim.2 Moreover, as to the Takings Clause claim, the
Court noted that mere ownership of shares of stock could not establish the property
interest because the Takings Clause does not protect shareholders from a
government caused reduction of corporate equity. See Aug. 2, 2010, Order
(Docket No. 15) at 5 (citing Broad v. Sealaska Corp., 85 F.3d 422, 430 (9th Cir.
1996) (noting that, in addition to the lack of case law authority suggesting the
Takings Clause applies to cases not involving rights in real property, shareholders
have no proprietary interest in corporate assets or profits in the absence of a
declared dividend)).
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The Court dismissed the Complaint with leave to amend. Plaintiffs filed the
FAC, adding certain factual allegations. Relevant to the present discussion, and
presented along with relevant factual allegations from the original Complaint, they
may be summarized as follows.
I. Factual Allegations
The day before CMKM resolved to self-liquidate, the co-chair of the Board
of Directors (Robert A. Maheu) resigned, and the other co-chair “agreed to remain
as the sole officer and Director . . . until the affairs of CMKM were would up to
ensure all shares and other assets . . . were properly distributed to its stockholders .
. . .” FAC ¶¶ 34-35. CMKM thereafter traded certain assets for 50 million shares
in a corporation called Entourage. FAC ¶ 34. On the day CMKM resolved to selfliquidate,
October 21, 2005, a Task Force was appointed, “to conduct and orderly
and verifiable pro rata liquidating distribution” of CMKM’s assets. FAC ¶ 35. A
website was set up to help identify bona fide shareholders of CMKM. FAC ¶ 36.
On January 19, 2006, the Task Force issued a press release regarding the reduction
in total shares of Entourage from 50 million to 45 million, with proceeds to be
distributed to CMKM shareholders. FAC ¶ 38. Based on these facts, “[t]he
CMKM shareholders . . . believed a pro-rata share of the assets that the company
possessed would be duly distributed.” FAC ¶ 39. According to plaintiffs, “[s]ince
Entourage had considerable assets and no substantial liabilities, the shareholders
then held a vested pro-rata property right interest protected under the
Constitution.” FAC ¶ 39.
At points of time not entirely clear, defendants began to use CMKM as a
“sting operation” to identify illegal trading activity. See FAC ¶¶ 46-48. Beginning
some time before the resolution to self-liquidate and continuing thereafter, Maheu
negotiated settlements between those caught in the SEC’s sting operation and the
SEC. FAC ¶ 48. These actions tended to injure the interests of the shareholders
and delayed any distribution of assets to shareholders. FAC ¶ 46, 49.
Plaintiffs allege that all the moneys were intended to be distributed within a
year of October, 2005, but that, five years later, no funds have been released.
FAC ¶ 53.
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II. Legal Standards for Dismissal
A. Rule 12(b)(1)
Dismissal under Rule 12(b)(1) is proper when the plaintiff fails to properly
plead subject matter jurisdiction in the complaint. Fed. R. Civ. P. 12(b)(1). The
plaintiff always bears the burden of establishing subject matter jurisdiction.
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). For a
facial attack on subject-matter jurisdiction, the Court accepts all allegations in the
complaint as true. Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139
(9th Cir. 2003). However, for a factual attack, the Court “need not presume the
truthfulness of the plaintiff’s allegations.” White v. Lee, 227 F.3d 1214, 1242 (9th
Cir. 2000). The Court may dismiss on jurisdictional grounds if the material
allegations in the complaint are “controverted by undisputed facts in the record.”
Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987).
B. Rule 12(b)(6)
Under Rule 12(b)(6), a defendant may move to dismiss for failure to state a
claim upon which relief can be granted. A plaintiff must state “enough facts to
state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007). A claim has “facial plausibility” if the plaintiff pleads facts
that “allow[] the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Ashcroft v. Iqbal, --- U.S. ----, 129 S. Ct. 1937, 1949
(May 18, 2009).
In resolving a 12(b)(6) motion under Twombly, the Court must follow a
two-pronged approach. First, the Court must accept all well-pleaded factual
allegations as true, but “[t]hread-bare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.” Id. Nor must the Court
“accept as true a legal conclusion couched as a factual allegation.” Id. at 1949-50
(quoting Twombly, 550 U.S. at 555). Second, assuming the veracity of wellpleaded
factual allegations, the Court must “determine whether they plausibly give
rise to an entitlement to relief.” Id. at 1950. This determination is context-specific,
requiring the Court to draw on its experience and common sense, but there is no
plausibility “where the well-pleaded facts do not permit the court to infer more
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than the mere possibility of misconduct.” Id.
III. Official Capacity Claims
Sovereign immunity bars claims against the United States and its officers
when sued in their official capacity. Hodge v. Dalton, 107 F.3d 705, 707 (9th Cir.
1997) (“The doctrine of sovereign immunity applies to federal agencies and to
federal employees acting within their official capacities.”). Where there is no
waiver of sovereign immunity, the Court lacks subject-matter jurisdiction to hear
claims against the United States or its officers. Id. (“The terms of the United
States' consent to be sued in any court define that court's jurisdiction to entertain
the suit.”).
The Federal Tort Claims Act (“FTCA”) provides a limited waiver of that
immunity; however, the FTCA does not include a waiver of sovereign immunity
for constitutional tort claims. Pesnell v. Arsenault, 543 F.3d 1038, 1041 (9th Cir.
2008).
Thus, to the extent plaintiff’s claims against the defendants are asserted
against them in their official capacity, no court has jurisdiction, and those claims
are therefore dismissed with prejudice.
IV. Individual Capacity Claims
As to the individual capacity claims, plaintiffs have failed to correct the
pleading deficiency the Court found fatal to their claims when considering the
Motion to Dismiss the original Complaint: Plaintiffs fail to set forth factual
allegations supporting their claim to a property interest.
Nevertheless, even if the Court were to hold that plaintiffs have sufficiently
pleaded a property interest, the claims asserted still fail.
The takings claim fails because, as noted by the Court in its previous Order,
the Ninth Circuit has held that a takings claim is not cognizable under the present
facts. See Broad, 85 F.3d at 430. In Broad, the court considered the takings claim
of a number of shareholders who challenged the creation of a trust that favored one
group of shareholders (those who had attained the age of 65) over another. Id. at
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425-26. In rejecting the takings claim, the court noted that “almost universally”
takings claims involve rights to real property, and plaintiffs cited no cases
suggesting that the Takings Clause applied to their personal property. Id. at 430.
The court went on to note that, by definition, shareholders do not “directly own
any part of a corporation’s property or assets,” and that shareholders merely held a
“proportionate interest in the corporate equity remaining after a corporation meets
all its other debts and obligations.” Id. On those facts, which are indistinguishable
from those presented here, the court concluded: “Thus, the plaintiff shareholders
have no proprietary interest that could have been ‘taken.’” Id. For this reason,
plaintiffs may not assert their takings claim.
Plaintiff’s procedural due process claim also fails. A procedural due process
claim has two elements: deprivation of a constitutionally protected liberty or
property interest and denial of adequate procedural protection. Brewster v. Bd. of
Educ. of the Lynwood Unified Sch. Dist., 149 F.3d 971, 982 (9th Cir.1998).
Property interests are not constitutionally created; rather, protected property rights
are “created and their dimensions are defined by existing rules or understandings
that stem from an independent source such as state law.” Bd. of Regents of State
Coll. v. Roth, 408 U.S. 564, 577 (1972).
Even assuming that plaintiffs have identified a property right in the abstract,
plaintiffs have not cited authority suggesting that such a right is constitutionally
protectable. In its research, the Court has not found authority suggesting that the
right of a shareholder to receive proceeds from the winding up of a corporation is a
constitutionally protected property right entitling the shareholder to a due process
hearing. Plaintiffs have no more than a “unilateral expectation”; to proceed here
they must have a “legitimate claim of entitlement,” id. at 577, and they do not.
In the absence of an underlying claim, the declaratory relief claim must be
dismissed. Nationwide Mut. Ins. Co. v. Liberatore, 408 F.3d 1158, 1161 (9th Cir.
2005) (noting that the Declaratory Judgment Act does not confer federal
subject-matter jurisdiction).
3 In view of the disposition of the Takings Clause and the Due Process
Clause claims, the Court need no consider the argument that each defendant’s
conduct has not been sufficiently detailed, and that they are entitled to qualified
immunity. Motion at 11-14.
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V. Conclusion
Defendants Motion to Dismiss is granted. Plaintiffs’ claims are dismissed
with prejudice.3
IT IS SO ORDERED.




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