united states district court central district of … · ii. the sec has pled fraud with sufficient...

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Leslie J. Hughes, Colo. Bar No. 15043 [email protected] Securities and Exchange Commission 1801 California Street, Suite 1500 Denver, Colorado 80202 Telephone: (303) 844-1000 Fax: (303) 844-1068 Local Counsel: Molly M. White, Cal. Bar No. 171448 [email protected] Securities and Exchange Commission 5670 Wilshire Boulevard, 11th Floor Los Angeles, California 90036 Telephone: (323) 965-3998 Fax: (323) 965-3908 Attorneys for Plaintiff United States Securities and Exchange Commission

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION Securities and Exchange ) Commission, ) Case No. 2:12-cv-5662 PA (CWx) ) Plaintiff ) PLAINTIFF’S OPPOSTION TO ) EADE’S MOTION TO DISMISS v. )

) Date: October 1, 2012 Gold Standard Mining Corp., et al. ) Time: 1:30 p.m.

) Courtroom: 15 Defendants. ) Judge: Hon. Percy Anderson

)

Case 2:12-cv-05662-PA-CW Document 24 Filed 09/10/12 of 33 Page ID #:482

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TABLE OF CONTENTS

I. Eade’s Motion to Dismiss Should Be Denied ....................................... 1 A. Eade Failed to Confer with Counsel Before Filing

His Motion as Required by LR 7-3 ................................................. 1

B. Standards for Consideration of a Motion to Dismiss ..................... 2 C. Judicial Notice of SEC Reports ...................................................... 3

II. The SEC Has Pled Fraud With Sufficient Particularity ........................ 4

A. The SEC has adequately pled that Eade aided and

abetted Gold Standard’s fraud violations ......................................... 4 1. Gold Standard committed a primary violation ........................... 5 2. Eade provided substantial assistance .......................................... 8 3. Eade had knowledge of Gold Standard’s violations ................... 8

B. Eade Omitted and Misrepresented Material Facts ........................... 8 1. Eade’s failure to disclose the lack of Russian

governmental approval was material ........................................ 10

2. Eade’s failure to disclose the oral agreement on profits was material ................................................................... 13

C. The SEC has adequately pled that Eade acted with

Scienter ........................................................................................... 16

D. Janus Capital does not apply to the aiding and abetting allegations against Eade ................................................... 20

E. The SEC has adequately pled that Eade Aided and Abetted Gold Standard’s Reporting Violations ...................... 21

F. The SEC States a Claim for Injunctive Relief ............................... 23

III. Conclusion ........................................................................................... 25


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TABLE OF AUTHORITIES

FEDERAL CASES AES Corp. v. Dow Chemical Co., 325 F.3d 174 (3d Cir.), cert. denied, 540 U.S. 1068, 124 S. Ct. 805, 157 L. Ed. 2d 732 (2003) ............................ 14 Abrams v. Baker Hughes, Inc., 292 F.3d 424 (5th Cir. 2002) ........................... 19, 20 Ackerman v. N.W. Mutual Live Insurance Co., 172 F.3d 467 (7th Cir. 1999) ........ 16 Arnold v. National Aniline & Chemical Co., 20 F.2d 364 (2d Cir. 1927) .............. 15 Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) ........... 2 Basic, Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988) ...... 8 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) ................................................................................ 2 Binder v. Gillespie, 184 F.3d 1059 (9th Cir. 1999) ................................................. 14 In re Ceredian Corp. Sec. Litigation, 542 F.3d 240 (8th Cir. 2008) ....................... 17 In re Dauo Systems, Inc. Sec. Litigation, 411 F.3d 1006 (9th Cir. 2005) ......... 19, 20 Decker v. GlenFed, Inc. (In re GlenFed Inc. Sec. Lit.), 42 F.3d 1541 (9th Cir. 1994) ........................................................................................... 2, 16 Del Webb Communities, Inc. v. Partrington, 652 F.3d 1145 (9th Cir. 2011) ... 24, 25 Desaigourdar v. Meyercord, 223 F.3d 1020 (9th Cir. 2005) .................................. 16 Edwards v. Marin Park, Inc., 356 F.3d 1058 (9th Cir. 2004) ................................. 16 Everest Sec., Inc. v. SEC, 116 F.3d 1235 (8th Cir. 1997) ......................................... 9 Fecht v. Price Co., 70 F. 3d 1078, 1080-81 (9th Cir. 1995) ..................................... 8 Finance Acquisition Partners v. Blackwell, 440 F.3d 278 (5th Cir. 2006) ............. 17


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Gilligan v. Jamco Development Corp., 108 F.3d 246 (9th Cir. 1997) ...................... 2 Jackvonry v. RIHT Finance Corp., 873 F.2d 411 (1st Cir. 1989) ........................... 13 Janas v. McCracken (in re Silicon Graphics SEC. Litigation), 183 F.3d 970 (9th Cir. 1999) ......................................................................... 17 Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 180 L. Ed. 2d 166 (2011) ........................................................................ 20, 21 Lopes v. Vieria, 2011 U.S. Dist. LEXIS 52860 (E.D. Calif. May 17, 2011) .......... 15 Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90 (10th Cir.), cert. denied, 404 U.S. 1004 (1971) ...................................................................................... 9 Moore v. Kayport Package Express, Inc., 885 F.2d 531 (9th Cir. 1989) ................ 16 Morgongo Band of Mission Indians V. Rose, 893 F.2d 1074 (9th Cir. 1990) .......... 3 One-O-One Enterprises, Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988) ....... 13, 15 Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003) ....................................................... 5, 22 Rissman v. Rissman, 213 F.3d 381 (7th Cir.) ........................................ 11, 13, 14, 15 SEC v. Beisinger Industrial Corp., 552 F.2d 15 (1st Cir. 1977) ............................. 22 SEC v. Berry, 580 F. Supp. 2d 911 (N.D. Cal. 2008) ................................................ 2 SEC v. Daifotis, 2012 U.S. Dist. LEXIS 81306 2011 WL 3295139 (N.D. Cal. June 12, 2012) .............................................................................. 21 SEC v. Fehn, 97 F.3d 1276 (9th Cir. 1996) ............................................................... 8 SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011) ............................................................ 24 SEC v. Goble, 682 F.3d 934 (11th Cir. 2012) ......................................................... 24

SEC v. ICN Pharmaceuticals, Inc., 84 F. Supp. 2d 1097 (C.D. Cal. 2000) .................................................................................. 3, 16, 20


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SEC v. Kalvex, Inc., 425 F. Supp. 310 (S.D.N.Y. 1975) ......................................... 22 SEC v. Kelly, 765 F. Supp. 2d 301 (S.D. N.Y. 2011) ........................................ 20, 21 SEC v. Koracorp Industrial, Inc., 575 F.2d 692 (9th Cir. 1978) ............................ 23 SEC v. Levin, 232 F.R.D. 619 (C.D. Cal. 2005) ........................................................ 2 SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972) .......................... 24 SEC v. McNulty, 137 F.3d 732 (2d Cir.), cert. denied sub. nom., Shanklin v. SEC, 525 U.S. 931 (1988) .......................................................... 22 SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) ............................................ 10, 23, 24 SEC v. Phan, 500 F.3d 895 (9th Cir. 2007) ............................................................... 5 SEC v. Rana Research, Inc., 8 F.3d 1358 (9th Cir. 1996)........................... 11, 13, 14 SEC v. Richie, 2006 U.S. Dist. LEXIS 45853 (C.D. Cal. May 9, 2006) .......... 24, 25 SEC v. Sells, 2012 U.S. Dist. LEXIS 112450 (N. D. Cal. Aug. 10, 2012) ......... 3, 21 SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011) ........................................................... 17 SEC v. Yuen, 221 F.R.D. 631 (C.D. Cal. 2004) ........................................... 2, 5, 7, 22 In re Software Toolworks Inc. Securities Litigation, 50 F.3d 615 (9th Cir.1994) ...................................................................................... 8, 19, 20 South Ferry LP v. Killinger, 542 F.3d 776 (9th Cir. 2008) ..................................... 17 Tellabs, Inc. v. Makor Inssues & Rights, Ltd., 551 U.S. 308, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007) .............................................................................. 17 United States v. Reyes, 577 F.3d 1069 (9th Cir. 2009) ....................................... 9, 10 W.R. Grace & Co. v. W. U.S. Industrial, Inc., 608 F.2d 1214 (9th Cir. 1979) ......... 7


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Walling v. Beverly Enterprises, 476 F.2d 393, 397 (9th Cir. 1973) ........................ 20 Whelan v. Abell, 48 F.3d 1247 (D.C. Cir. 1995) ..................................................... 15 Wool v. Tandem Computers Inc., 818 F.2d 1433 (9th Cir. 1987) ............................. 2 Zucco Partners LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009).................. 17


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FEDERAL STATUTES 15 U.S.C. § 78cc (a)................................................................................................. 14 15 U.S.C. § 78j(b) .................................................................................................. 1, 4 15 U.S.C. § 78m(a) ........................................................................................ 1, 21, 22 15 U.S.C. § 78t(e) .................................................................................................... 21 15 U.S.C. § 78u-4(b)(2) ....................................................................................... 3, 16 15 U.S.C. § 78u(d)(1) .............................................................................................. 23 17 C.F.R. § 202.5(c) (2008) ....................................................................................... 2 17 C.F.R. § 210.4-01(a)(1) (2008) .................................................................... 17, 22 17 C.F.R. § 240.10b-5 (1959) ................................................ 1, 4, 5, 8, 13, 14, 20, 21 17 C.F.R. § 240.12b-20 (1965) ...................................................................... 1, 21, 22 17 C.F.R. § 240.13a-1 (1997) .................................................................................. 22 17 C.F.R. § 240.13a-11 (2006) ...................................................................... 1, 21, 22 17 C.F.R. § 240.13a-13 (2008) ...................................................................... 1, 21, 22 Fed. R. Civ. P. 8(a)(2) ..................................................................................... 1, 2, 23 Fed. R. Civ. P. 9(b) .................................................................. 1, 2, 16, 17, 19, 20, 23 Fed. R. Civ. P. 12(b)(6) ............................................................................. 1, 4, 20, 23 Fed. R. Civ. P. 15(a) .................................................................................................. 3 Fed. R. Civ. P. 65(d) ................................................................................................ 24


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I. Eade’s Motion to Dismiss Should Be Denied. Plaintiff Securities and Exchange Commission (SEC) opposes defendant

Kenneth G. Eade’s (Eade) motion to dismiss its two claims against him. [ECF # 11] The SEC alleges that Eade aided and abetted Gold Standard Mining Corporation’s (Gold Standard) violations of (1) the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5, [15 U.S.C. § 78j(b) and17 C.F.R. §§ 240.10b-5 (1959)]; and (2) the periodic reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 [15 U.S.C. § 78m(a), and17 C.F.R. §§ 240.12b-20 (1965), 240.13a-11 (2006) and 240.13a-13 (2008)] by preparing seven reports that contained misrepresentations and omissions of material fact, necessary to make statements made not misleading, which Gold Standard filed with the SEC between May 2009 and February 2011. The SEC has pled the “who, what, where, when and how” of Eade’s fraudulent misrepresentations and omissions with sufficient facts to meet the particularity requirements of Fed. R. Civ. P. 9(b), and to state claims for relief under Fed. R. Civ. P. 8(a)(2) and 12(b)(6). For the reasons discussed below, Eade’s motion to dismiss should be denied.

A. Eade Failed to Confer with Counsel Before Filing His Motion as Required by LR 7-3.

Eade’s motion should be denied because he did not confer with SEC’s counsel at least five days prior to filing his motion as required by the Court’s Standing Order [ECF # 2] and L.R. 7-3. Plaintiff served the Court’s Standing Order on Eade on July 3, 2012. [ECF #7] In his tardy declaration [ECF #18], Eade contends that his meeting with the staff of the SEC on March 13, 2012, nearly three months before the complaint was filed, complies with the Court’s Standing Order and L.R. 7-3. To the contrary, the March meeting was part of the SEC’s “Wells submission process,” which allows a person under investigation to present his position to the Commission prior to authorization of an enforcement


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proceeding. 17 C.F.R. § 202.5(c) (2008). Once the complaint was filed, Eade did not confer with SEC’s counsel to resolve the issues that he now raises in his motion to dismiss as required by L.R. 7-3. Declaration of Leslie J. Hughes at ¶ 3-6 (Hughes Decl.). Accordingly, Eade’s motion to dismiss should be denied because he failed to comply with the Court’s Standing Order and L.R. 7-3.

B. Standards for Consideration of a Motion to Dismiss. A motion to dismiss for failure to state a claim is disfavored and rarely

granted. Gilligan v. Jamco Dev. Corp., 108 F. 3d 246, 248-49 (9th Cir. 1997). In considering a motion to dismiss, the court must accept the factual allegations of the complaint as true and draw all reasonable inferences in favor of the plaintiff. SEC v. Levin, 232 F. R. D. 619, 622 (C.D. Cal. 2005). Fed. R. Civ. P. 8(a) (2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief,” in order to “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). To survive a motion to dismiss, a complaint must plead enough facts to allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009).

When the complaint contains allegations of fraud, the pleader must also “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b); Decker v. GlenFed, Inc. (In re GlenFed Inc. Sec. Litig.), 42 F.3d 1541, 1547 (9th Cir. 1994) (en banc). A pleading is sufficient if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer. Wool v. Tandem Computers Inc., 818 F.2d 1433, 1439 (9th Cir. 1987); SEC v. Yuen, 221 F.R.D. 631, 634 (C.D. Cal. 2004). For claims grounded in fraud, the SEC must allege the "who, what, where, when, and how" of the fraudulent conduct. SEC v. Berry, 580 F. Supp. 2d 911, 920 (N.D. Cal. 2008). The SEC may allege scienter or knowledge generally. Fed. R. Civ. P. 9(b); SEC v. Levin, 232 F. R. D. at 623. It is


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well settled that the heightened scienter pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b)(2), to which Eade points, do not apply to enforcement actions brought by the SEC, such as this one. SEC v. ICN Pharms., Inc., 84 F. Supp. 2d 1097, 1099 (C.D. Cal. 2000).

Eade also requests that the action be dismissed without granting the SEC leave to amend. Motion at 25. But leave to amend “shall be freely given when justice so requires,” Fed. R. Civ. P. 15(a), and this policy is to be applied with “extreme liberality.” Morgongo Band of Mission Indians V. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990). If the court grants Eade’s motion to dismiss, the SEC requests leave to amend its complaint under Fed. R. Civ. P. 15(a). SEC v. Sells, 2012 U.S. Dist. LEXIS 112450 *15 (N. D. Cal. Aug. 10, 2012).

C. Judicial Notice of SEC Reports. Eade has filed a separate motion requesting the Court take judicial notice of

14 exhibits. As discussed in its response to that motion, the SEC has no objection to Eade’s Exhibits 1, 2, 3, 5, 9, 11, and 12 which are reports discussed in the Complaint. The SEC objects to the Court’s consideration of Exhibits 4, 7, 8, 10, and 13, because they are not discussed in the Complaint. The SEC also objects to Exhibit 6 (missing pages 14-18), and Exhibit 14, which are duplicative of Exhibits 12 and 1 respectively.

The SEC requests that the Court take judicial notice of Exhibit 15, the May 8, 2009 Form 8-K filed with the Exchange Agreement to acquire Ross Zoloto, Complaint ¶ 23; Exhibit 16, the May 15, 2009 Form 8-K, Complaint ¶ 29; and Exhibit 17, the June 30, 2009 Form 10-Q, Complaint ¶ 35, which are true and correct copies of public reports filed with the SEC by Gold Standard under its former name Fluid Solutions Inc., and which are discussed in the Complaint. The SEC also requests that the Court take judicial notice of Exhibit 18, Russian Federal Law No. 129-FZ of August 8, 2001 (as amended July 2, 2005) “On State


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Registration of Legal Entities” and Exhibit 19, Russian Federal Law No. 58-FZ of April 29, 2008 “Concerning the Procedure for Foreign Investment in Business Companies Which Are of Strategic Importance for National Defense and State Security”, which contain the English translations of Russian statutes requiring registration, which are discussed in the Complaint ¶ 1, 31, 36, 44, 47, 52, 61, 69, 76. The SEC also requests that Court take judicial notice of Exhibit 20, a true and correct copy of the Form 10 registration statement filed with the SEC by Independent Film Development Corp. on February 20, 2008. Copies of these exhibits are attached to Hughes Decl. II. The SEC Has Pled Fraud With Sufficient Particularity.

A. The SEC has adequately pled that Eade aided and abetted Gold Standard’s fraud violations.

Eade contends that the SEC failed to state a claim under Fed. R. Civ. P. 12(b)(6) that he aided and abetted Gold Standard’s violations of the anti-fraud provisions of the federal securities laws. Motion at 12. The SEC alleged in its First Claim that Eade aided and abetted Gold Standard’s violations of Section 10(b) of the Exchange Act and Rule 10b-5,15 U.S.C. § 78j(b) and17 C.F. R. § 240.10b-5.1 Section 10(b) of the Exchange Act makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). Under this sub-section, the SEC promulgated Rule 10b-5, which makes it unlawful, among other things, “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 17 C.F.R. §240.10b-5(b).

1 See allegations in Complaint at ¶ 1-116 [ECF # 1].


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To state a claim that Eade aided and abetted the violations, the SEC must allege (1) that Gold Standard committed a primary violation; (2) Eade had knowledge of the primary violation and of his own role in furthering it; and (3) Eade provided substantial assistance in the primary violation. Ponce v. SEC, 345 F.3d 722, 737 (9th Cir. 2003).

1. Gold Standard committed a primary violation. To establish Gold Standard’s primary violation of Section 10(b) of the

Exchange Act and Rule 10b-5, the SEC alleged that Gold Standard filed seven current or quarterly reports with the SEC that contained (1) misrepresentations or omissions of material fact, (2) in connection with the purchase or sale of a security, (3) scienter, and (4) interstate commerce. SEC v. Phan, 500 F.3d 895, 907-8 (9th Cir. 2007). Scienter is defined as a "mental state embracing intent to deceive, manipulate, or defraud." SEC v. Yuen, 2006 U.S. Dist. LEXIS 33938 *106 (C.D. Ca. Mar. 16, 2006) (citation omitted). Scienter may be established by a showing of reckless conduct and proof of this element can be inferred from circumstantial evidence. Id. In the seven reports, Gold Standard omitted material facts, necessary to make statements made not misleading,2 that (1) the announced acquisition of the Russian gold mining operations of Ross Zoloto Ltd. had not been completed because the change in ownership had not been registered with and approved by

2 The seven false and misleading reports that Gold Standard filed with the SEC related to the claims that Eade aided and abetted the violations include four current reports on Forms 8-K filed May 15, 2009, October 5, 2010, January 27, 2011 and February 9, 2011; and three quarterly reports on Forms 10-Q filed on August 17, 2009, November 17, 2009, and November 22, 2010. Complaint at ¶ 29, 35, 51, 60, 68, 75, & 78. In the Complaint at p. 8, the heading C.1. contains a typographical error stating “Defendants Filed a False Form 8-K on May 8, 2009” when it should read “May 15, 2009.” However, the allegations following this heading correctly refer to the May 15, 2009 Form 8-K, contrary to Eade’s assertion in his Motion at p. 19.


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Russian governmental authorities, 3 and (2) the company had a verbal agreement that contradicted the terms of the written agreement to acquire Ross Zoloto, which allowed Ross Zoloto’s owner, Araik Khachatrian, to keep the profits from the existing alluvial mining operations, and so new investors would receive profits only after investing $40 million to $100 million to develop hard rock mining.4 Gold Standard also misrepresented in three of the reports that the company’s financial statements were prepared in conformance with generally accepted accounting principles (GAAP), when in fact they were not. 5 In those three reports, Gold Standard improperly valued the Russian mining operations at three different values: originally at over $1.3 billion, then at the reduced amount of over $394 million, and later at a further reduced amount of $13.7 million, none of which comply with GAAP, as it represented. Gold Standard also represented in the February 9, 2011 Form 8-K that it held 56,500 ounces of gold in inventory at the end of 2010 worth over $75,000,000, but omitted material facts that the company had no reasonable basis for its statement because it had no inventory as of September 30, 2010 at the end of its mining season, and had no internal controls to determine whether the amount of inventory reported was accurate.6

3 Gold Standard failed to disclose 1) that the acquisition of Ross Zoloto was not complete because it had not been registered and approved by Russian governmental authorities, and 2) the profit agreement with the owner of Ross Zoloto in each of the seven reports. Complaint at ¶ 21, 31, 32, 36, 44, 52, 61, 69, 76, 80. 4 See allegations listed in footnote 3. 5 Gold Standard’s and Eade’s misstatements that the financial statements prepared in conformance with GAAP occur in the May 15, 2009 Form 8-K, Exhibit 16 at 39; the June 30, 2009 Form 10-Q, Exhibit 17 at 49; and the September 30, 2009 Form 10-Q, Exhibit 11 at 3. See Complaint at ¶ 29-30, 33-35, 37, 46-49, 51-52, 54-58. 6 The misrepresentation about gold inventory occurs in the February 9, 2011 Form 8-K. See Complaint at ¶ 79-81.


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Gold Standard’s omissions and misrepresentations were “in connection with” securities transactions because the seven reports were filed with the SEC and available to public investors, and Gold Standard’s securities were publicly traded. See list of reports in footnote 2 supra; SEC v. Yuen, 2006 U.S. Dist. LEXIS 33938 *113-14, (C.D. Cal. Mar. 16, 2006) (periodic reports meet the “in connection with” element) (citations omitted). Eade agreed to secure financing from public investors for Ross Zoloto’s Russian mining operations by creating a company with securities that were publicly traded; arranged for a brokerage firm to make quotes for the purchase or sale of the securities of Gold Standard; introduced the company to investment banking firms; prepared a private placement memorandum; and later sold 24,750,000 shares in 2010. Complaint at ¶ 11, 13, 18-28. Gold Standard used the means of interstate commerce to file its periodic and current reports with the SEC, and issue shares to Khachatrian who lived in Russia. Complaint at ¶ 3, 9, 19, 25, 114.

The SEC alleged that Gold Standard acted with scienter by alleging that its officers and agents, Zachos and Eade, knew that the transfer of ownership of Ross Zoloto had not been registered with Russian governmental authorities, that there was a verbal agreement for Khachatrian to keep the profits from the alluvial mining operations, and that the financial statements, which valued the company’s mining assets initially at over $1.3 billion, were not prepared in conformance with GAAP. Complaint at ¶ 1, 3, 4, 9, 21, 31-34, 39, 44-49, 53-59, 76-77, 79-81, 114. Knowledge of a corporate officer or agent acting within the scope of his authority is attributable to the corporation. W.R. Grace & Co. v. W. U.S. Indus., Inc., 608 F. 2d 1214, 1218-19 (9th Cir. 1979). Zachos, who signed the seven reports as Gold Standard’s CEO, relied on Eade, who was corporate counsel, to conduct the negotiations, to hire the accountants, and to prepare the reports. Complaint at ¶ 3, 22, 59.


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2. Eade provided substantial assistance. The SEC alleged that Eade provided substantial assistance to Gold

Standard’s violations by preparing each of the seven reports that Zachos signed and Gold Standard filed with the SEC. 7 The term “substantial assistance” includes an attorney’s participation in the drafting or editing of information in draft quarterly reports. SEC v. Fehn, 97 F.3d 1276, 1293 (9th Cir. 1996). Substantial or intricate involvement in preparing a false statement that is later made by another supports a claim for securities fraud. E.g., In re Software Toolworks Inc. Securities Litig., 50 F.3d 615, 628-29 & n.3 (9th Cir.1994).

3. Eade had knowledge of Gold Standard’s violations. The SEC alleged that Eade negotiated the acquisition of Ross Zoloto, knew

of the profit arrangement with Khachatrian, and that the exchange agreement was not registered with Russian governmental authorities. Complaint at ¶ 21, 22, 31, 32, 33. He also knew from his preparation of the financial statements and discussions with the auditor and accountant that the financial statements were not prepared in conformance with GAAP. Id. at ¶ 33, 34, 37-49, 52, 54-58. Together the allegations of the Complaint state a claim that Eade aided and abetted Gold Standard’s violations of Section 10(b) of the Exchange Act and Rule 10b-5(b).

B. Eade Omitted and Misrepresented Material Facts. Eade contends that the Complaint fails to allege misrepresentations or

omissions of material fact, citing Basic, Inc. v. Levinson, 485 U.S. 224, 238, 108 S. Ct. 978, 99 L. Ed. 2d. 194 (1988). Motion at p. 14. The determination of whether an omission is material requires a delicate assessment of the inferences a reasonable shareholder would draw from a given set of facts; an issue ordinarily left to the trier of fact. Fecht v. Price Co., 70 F. 3d 1078, 1080-81 (9th Cir. 1995). The standard of materiality is an objective one. Basic, 485 U.S. at 238; United

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States v. Reyes, 577 F.3d 1069, 1076 (9th Cir. 2009). Eade contends that “a reasonable investor would not consider it important in making an investment decision”, id., that the company’s acquisition of over $1.3 billion in Russian mining operations had not been registered and approved by Russian governmental authorities; that the company had an undisclosed verbal agreement to allow Khachatrian to keep the profits from the company’s alluvial mining operations with investors only sharing in the profits after an addition $40 million to $100 million was invested to develop hard rock mining claims; that the company’s financial statements which initially reported assets of over $1.3 billion were not prepared in conformance with GAAP and were later reduced to $13.7 million; or that the company was misrepresenting it held in inventory gold worth over $75 million. Each of these omissions and misrepresentations are material facts.

At the time of the purported acquisition, Gold Standard with reported assets of only $3 switched from its plan to bottle and sell natural mineral water to conducting gold mining in Russia with reported assets of over $1.3 billion. Complaint at ¶ 17, 21, 30. Certainly the increase from $3 to over $1.3 billion was a material fact to any reasonable investor. Id. at ¶ 30. "[C]onsidering the size of [the issuer] and its level of operations in international mineral exploration and development, the known size and quality of the ore body was material information; that is, the trading judgment of reasonable investors would not have been left untouched upon receipt of such information." See Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90, 97 (10th Cir.), cert. denied, 404 U.S. 1004 (1971).

Along that same line, whether Gold Standard had an enforceable acquisition agreement registered and approved by Russian governmental authorities is a material fact to any reasonable investor, since failing to comply with the laws of the country where the mining operations are located may void the acquisition. Investors would also consider it important that the company did not own the properties and assets it claimed to own. See Everest Sec., Inc. v. SEC, 116 F.3d


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1235, 1239 (8th Cir. 1997). In addition, Gold Standard reported revenue and profits from the existing alluvial mining operations, but its verbal agreement to pay those profits to the former owner of Ross Zoloto is an important fact in making an investment decision. See SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (information concerning a company’s financial condition, solvency and profitability are generally considered material). Gold Standard also misrepresented that it held 56,500 ounces of gold in inventory at the end of 2010 worth over $75,000,000 is material. “[I]nformation regarding a company’s financial condition is material to investment.” United States v. Reyes, 577 F.3d 1069, 1076 (9th Cir. 2009).

1. Eade’s failure to disclose the lack of Russian governmental approval was material.

Eade contends that the Form 8-K filed on May 8, 2009, disclosed that the acquisition was not complete by stating “the registrant is issuing 20 million shares”, so no material omission exists. Motion at 14; Exhibit 15 at p. 6. But in the same report, the company represented that it had already issued over 20 million shares on May 6, 2009 in exchange for Ross Zoloto. See Exhibit 15 at p. 16, Certain Relationships and Related Transactions; and Exchange Agreement at p. 4 Section 2.2(a), and p. 14, Schedule of stock issuances. Eade’s argument misses the point: the material fact that he omitted was that Gold Standard’s acquisition of mining operations was subject to registration and approval by Russian governmental authorities, an event not within the control of the company, and a delay or denial would make the acquisition void.

Eade also contends that warranties that he drafted in the Exchange Agreement demonstrate that the company is in “compliance with all foreign, federal, state and local laws and regulations of any Governmental Authority”, and so no material fact was omitted. Motion at 15-16; Exhibit 15, Exchange Agreement at p. 10 & 11. However, these warranties provide no shield against


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securities fraud, because such representations between the parties to the contract address the issue of reliance, which the SEC is not required to allege or prove reliance. SEC v. Rana Research, Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1996). These boiler plate provisions cannot annul a legal obligation to register the acquisition with Russian governmental authorities. See discussion below of Rissman case in Section B.2.

Eade also contends that Russian law does not require the acquisition of Ross Zoloto to be registered and approved, but Russian Federal Law No. 129-FZ of August 8, 2001 (as amended July 2, 2005) “On State Registration of Legal Entities” requires a legal entity to register at its formation, and when it is reorganized. Hughes Decl. at ¶ 10; Article 12 and 14, Exhibit 18 at p. 87-88. During reorganization, a legal entity must file an application with the registration body that contains proof of its notification to creditors. Id. Ross Zoloto reorganized from a limited liability company to a wholly owned subsidiary of a publicly owned U.S. corporation, but no registration application had been completed and approved. Complaint ¶ 19, 20, 21, 23, 31, 32, 36, 44, 46, 47, 52-53, 61, 69, 76. Gold Standard’s consolidated financial statements in the May 15, 2009 Form 8-K disclose that Ross Zoloto had loans payable of $171,394,437 at the time of the acquisition. Exhibit 16 at p. 36. Under Article 14, if proof of the notice to creditors is absent from the application then the registration body shall refuse to affect the registration of the legal entity. Exhibit 18 at p. 87, see introductory note to Article 14. In the Exchange Agreement prepared by Eade, GSMC and Ross Zoloto represented that they would deliver a “Certified copy of the Charter of GSMC, as amended to date, certified by the government of Russia at or about the Closing Date.” Exhibit 15 at p. 23, Article III Section 2.2 (b) (ii); Complaint ¶ 23. But Gold Standard never obtained the amended charter certified by the Russian government, Complaint ¶ 32, 36, 44, 46, 47, 52-53, 61, 69, 76; and disclosed on January 25, 2011 that “the exchange transaction is [still] pending review and


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approval by the Russian regulatory authorities.” See amended Form 10-K for December 31, 2009, Exhibit 5 at p. 4. These allegations demonstrate that Eade did not disclose that Ross Zoloto had not registered and obtained approval of its sale to Gold Standard as required by Russian law.

In addition, Russian Federal Law No. 58-FZ of April 29, 2008 “Concerning the Procedure for Foreign Investment in Business Companies Which Are of Strategic Importance for National Defense and State Security” prohibits the transfer of the right to use a subsurface site to a legal entity with participation of a group of foreign investors who have the right to control more than 10% of the total number of voting shares. Exhibit 19 at p. 11-12 108-109, amendment to Article 17; Hughes Decl. at ¶ 11. The SEC alleged that Eade owned 24,750,000 shares of Gold Standard, Complaint ¶ 26, which was approximately 17% of the 142,699,522 outstanding shares as of June 30, 2009. Exhibit 17 at p. 1 47. Gold Standard reported that Eade was the beneficial owner of half of 49,170,000 shares owned by his wife, Agata Gotovo, who owned 34.4% of the company. Exhibit 2, at p. 10/34. Eade’s ownership of more than 10% of Gold Standard triggers this statute. Eade contends that this law does not apply because Ross Zoloto possessed less than 50 tons of gold classified as “A reserves” under the Russian Reserve Reporting System. Motion at 18-19. But his contention is not supported by the statutory language of Article 2.1, which identifies subsurface mineral deposits of strategic importance to include 1) deposits containing any platinum group metals; and 2) gold reserves of 50 tons or more. Exhibit 19 at p. 98-99. In its May 15, 2009 Form 8-K, Gold Standard reported proven reserves of 25 tons and probable reserves of 120 tons of gold and platinum in the Zeisky District, and additional proven reserves of 25 tons and probable reserves of 125 tons of gold at the Elnichnoie Mineral Deposit. See Exhibit 15 at p. 8-9. Gold Standard also reported in a later amendment to the Form 8-K that the company’s total gold reserves were


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estimated at 6,24 billion ounces.8 Exhibit 2, at p. 2/34. These gold and platinum reserves come within the definition of subsurface mineral deposits of strategic importance, which subject Gold Standard to the provisions in Russian law which prohibited the transfer of ownership of Ross Zoloto to foreign investors. Eade omitted this material fact.

2. Eade’s failure to disclose the oral agreement on profits was material. Eade failed to disclose in the seven reports that a verbal agreement allowed

Khachatrian to retain the profits from the alluvial mining operations, and that Gold Standard’s shareholders would only participate in profits after investing $40 million to $100 million to develop hard rock mining operations. Complaint at ¶ 1, 21, 31, 32, 36, 44, 52, 61, 69, 76, 80. Eade contends that a securities fraud claim under Rule 10b-5 cannot lie for an oral statement that contradicts a written anti-reliance clause, citing Rissman v. Rissman, 213 F.3d 381, 384 (7th Cir.) and two cases cited in that decision.9 Motion at p. 16. Rissman and the two other cases are inapposite. Private suits for securities fraud must allege and prove, among other

8 To understand the quantity of gold reserves that Gold Standard reported, compare the online encyclopedia report at en.wikipedia.org/wiki/gold_reserve that “as of June 2009, the International Monetary Fund held 3,217 tonnes (103.4 million troy ounces) of gold” to Gold Standard’s reported amount of 6,24 billion ounces, which substantially exceeds the 50 tons that Russian Law No. 58 defines a subsurface mineral deposit that is strategically important. 9 Eade cites Jackvonry v. RIHT Fin. Corp., 873 F.2d 411, 416-17 (1st Cir. 1989) ("Insofar as [the plaintiff] argues that pre-Agreement statements . . . were materially misleading, his claim fails because in light of the later Agreement… he could not reasonably have relied upon them."); and One-O-One Enters., Inc. v. Caruso, 848 F.2d 1283, 1286 (D.C. Cir. 1988) ("plaintiffs’ allegations must indicate that their reliance on the fraudulent representations were reasonable.") Both cases hinge upon the reliance element of private securities fraud actions, which is not applicable to SEC enforcement actions. See Rana Research, Inc., 8 F.3d at 1363-64.


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things that private investors reasonably relied on the false statements or omissions of material fact. See e.g. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999) (identifying justifiable reliance as one element of private claim for securities fraud). The Rissman decision turned on the fact that no reasonable trier of fact could be persuaded that the plaintiff, having sought broad assurances from his brother against future resale of the family business and having been refused, relied on his brother’s prior oral statements that contradicted their written contract. Id. at 383. However, reliance is not an element required to be alleged or proven in an SEC action to enforce the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5. SEC v. Rana Research, Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1996) (discussing elements the SEC must prove to establish a violation of Rule 10b-5). So the holdings in Rissman and the other cases do not apply in an SEC enforcement action.

Eade also argues that the integration clause he placed in Gold Standard’s acquisition agreement prevents the SEC and Court from considering his misrepresentations or omissions of material fact made outside of the four corners of the contract. Motion at 16. But Eade ignores Section 29(a) of the Exchange Act that provides “Any condition, stipulation, or provision binding another person to waive compliance with any provision of this title or of any rule or regulation thereunder . . . shall be void.” 15 U.S.C. § 78cc (a). See e.g. AES Corp. v. Dow Chem. Co., 325 F.3d 174, 179 (3d Cir.), cert. denied, 540 U.S. 1068, 124 S. Ct. 805, 157 L. Ed. 2d 732 (2003), holding “Section 29(a) of the Exchange Act . . . forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5”. Id. at 180. "[I]f a deliberate fraud may be shielded by a clause in a contract that the writing contains every representation made by way of inducement, or that utterances shown to be untrue were not an inducement to the agreement, sellers of bogus securities may defraud the public with impunity, through the simple expedient of placing such a clause in the prospectus which they put out, or


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in the contracts which their dupes are asked to sign." Arnold v. Nat'l Aniline & Chemical Co., 20 F.2d 364, 369 (2d Cir. 1927).

When fraud or illegality is alleged, the parole evidence rule does not apply, and any evidence which varies or contradicts the terms of an integrated contract is admissible. Lopes v. Vieria, 2011 U.S. Dist. LEXIS 52860 *55-56 (E.D. Calif. May 17, 2011) (distinguishing the holding in Rissman and One-O-One). In Whelan v. Abell, 48 F.3d 1247, 1258 (D.C. Cir. 1995), the court explicitly recognized that the conclusion in One-O-One "was plainly not intended to say that an integration clause bars fraud-in-the-inducement claims generally or confines them to claims of fraud in execution. . . . Such a reading would leave swindlers free to extinguish their victims' remedies simply by sticking in a bit of boilerplate." Id. It would defeat the federal securities laws, if Eade could escape liability for his deliberate misrepresentations and omissions by inserting boilerplate disclaimers into the contract.

Eade argues that the existence of an oral agreement is not plausible because such an agreement is in direct conflict with the integrated acquisition agreement. Motion at 16. This disputed issue of fact cannot be resolved through a motion to dismiss where the allegations of the complaint are to be taken as true. Moreover, Eade’s position is contradicted by the company’s payments of $15,269,000 in retained earnings to Khachatrian which is disclosed in June 30, 2009 Form 10-Q. See Note 10, Exhibit 17 at p. 66. During Eade’s preparation of this Form 10-Q, the hired accountant raised several issues with Eade including that the company had paid most of its retained earnings to Khachatrian. Complaint ¶ 44. Similarly, in the amended Form 8-K filed on October 5, 2010, they disclosed that as of December 31, 2009, the member [Khachatrian] had withdrawals and dividends of $17,855,000 during 2009, or over $2.6 million after the contract was completed. See Consolidated Statements of Cash Flows entry titled “Member withdrawals and dividends” in Exhibit 12 at p. 17/32, showing payments to Khachatrian. In its


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December 31, 2009 Form 10-K, Gold Standard reported only the financial activity of the parent company and not Ross Zoloto’s Russian mining activities, and disclosed “Our board of directors has not declared a dividend on our common stock during the last two fiscal years or the subsequent interim period and we do not anticipate the payments of dividends in the near future as we intend to reinvest our profits to grow our business.” Exhibit 5, “Dividends” at p. 24/43. The payment of over $17.8 million to Khachatrian during 2009, when no dividends were paid to shareholders, supports the SEC’s allegation that there was an undisclosed verbal agreement under which Khachatrian withdrew the profits from the alluvial operations.

C. The SEC has adequately pled that Eade acted with scienter. Eade contends that the SEC has not adequately pled scienter related to his

misrepresentations that the financial statements of Gold Standard were prepared in conformance with GAAP. Motion at 19. Fed. R. Civ. P. 9(b) provides that “knowledge, and other conditions of a person’s mind may be alleged generally.” The heightened scienter pleading requirement cited by Eade that “in any private action . . . a complaint shall . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” is contained in the PSLRA, 15 U.S.C. § 78u-4(b)(2) (emphasis added), which does not apply to enforcement actions brought by the SEC. SEC v. ICN Pharms., Inc., 84 F. Supp. 2d at 1099. Furthermore, the cases that Eade cites on the pleading standard for scienter are inapposite because they also involve private actions under the PSLRA, which is not applicable to SEC enforcement actions. 10

10 Each of these cases cited by Eade involves private litigation and applies a scienter pleading standard under the PSLRA that does not apply to SEC enforcement actions: Desaigourdar v. Meyercord, 223 F. 3d 1020, 1022-23 (9th Cir. 2005); Edwards v. Marin Park, Inc., 356 F. 3d 1058, 1066 (9th Cir. 2004); Ackerman v. N.W. Mut. Live Ins. Co., 172 F. 3d 467, 469 (7th Cir. 1999); In re GlenFed, Inc. Sec. Lit., 42 F. 3d 1541 (9th Cir. 1994); Moore v. Kayport Package


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The SEC alleges that Eade aided and abetted misrepresentations in three reports that Gold Standard’s financial statements were prepared in conformance with GAAP: the May 15, 2009 Form 8-K, the June 30, 2009 Form 10-Q, and the September 30, 2009 Form 10-Q. 11 Eade knew that Gold Standard was required to prepare its financial statements in conformance with GAAP. Complaint at ¶ 34. Moreover, Rule 4.01(a)(1) of Regulation S-X requires that financial statements filed with SEC reports contain sufficient information as is necessary not to be misleading and states that a financial statement that is not prepared in conformance with GAAP is presumptively misleading or inaccurate. 17 C.F.R. § 210.4-01(a)(1) (2008).

In preparing the May 15, 2009 Form 8-K, Eade knew that the company had not hired an accountant to convert Ross Zoloto’s financial statements from Russian Accounting Principles to GAAP, and the value assigned to the mining assets of over $1.3 billion was based on historical information without conducting an

Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989); South Ferry LP v. Killinger, 542 F.3d 776, 782 (9th Cir. 2008); Fin. Acquisition Partners v. Blackwell, 440 F.3d 278, 287 (5th Cir. 2006); In re Ceredian Corp. Sec. Litig., 542 F.3d 240, 249 (8th Cir. 2008); Tellabs, Inc. v. Makor Inssues & Rights, Ltd., 551 U.S. 308, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007); Zucco Partners LLC v. Digimarc Corp., 552 F. 3d 981 (9th Cir. 2009); Janas v. McCracken (in re Silicon Graphics SEC. Litig.), 183 F. 3d 970, 974 (9th Cir. 1999). See Motion at 9-10, 20-21. Eade also cites SEC v. Todd, 642 F.3d 1207, 1215 (9th Cir. 2011), an SEC enforcement action, for the definition of reckless conduct. This decision upon appeal after a jury trial does not address the pleading requirements of scienter under Fed. R. Civ. P. 9(b). 11 The May 15, 2009 Form 8-K states “The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States of America applicable to exploration stage enterprises.” Exhibit 16 at p. 39. Both the Forms 10-Q state “The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. . . .” Exhibit 17 at p. 49; Exhibit 11 at p. 3.


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impairment analysis to determine whether the carrying value exceeded the fair value. Complaint ¶ 29, 30, 33, 34. 12 In the Form 8-K, Eade listed several new accounting rules that the company had adopted including the accounting treatment for Business Combinations. Exhibit 16 at p. 42-43. In preparing the June 30, 2009 Form 10-Q, Eade knew that the value of Gold Standard’s Property, Plant and Equipment was reduced from the $1.3 billion that he had disclosed in the May 15, 2009 Form 8-K to $391,460,000, Complaint ¶ 29-30, 37, see also Exhibit 17 at p. 51 (Property, plant and equipment), which new amount was not presented in conformance with GAAP because he did not disclose the basis for the material change in the amount. He also knew from his discussions with the auditor and outside accountant that the assets were still overvalued, but he made changes to the financial statements without the oversight of the company’s CFO. Complaint ¶ 30, 34, 35, 37, 39, 43-49. 13 In preparing the September 30, 2009 Form 10-Q, Eade knew the value of the Property, Plant and Equipment was further reduced from $391,893,000 to $13,700,000 misrepresented as an adjustment to accumulated depreciation, depletion and amortization, when in fact it was based on a flawed appraisal. Complaint ¶ 51, 52, 54-58. This disclosure did not conform to GAAP, because the adjustment to DDA was improper. Id. at ¶ 56, 57. Eade knew that the value of the assets was reduced based on the appraisal rather than accumulated depreciation. Id. at ¶ 58. These allegations aver that Eade knew that these financial statements were not prepared in conformance with GAAP, which meets

12 Eade contends that the allegations in paragraphs 33, 34, and 37-49, and 54 through 58 allege negligence and do not support an allegation of scienter. Motion at p. 21-23. But these paragraphs allege Eade knew that the financial statements were not prepared in conformance with GAAP, not that he was negligent. 13 Eade disputes the allegation in paragraph 46 that he finalized the financial statements without the oversight of the chief financial officer (CFO), Motion at p. 22, but in considering a motion to dismiss, the court must take the allegations of the complaint as true.


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the requirements of Fed. R. Civ. P. 9(b). 14 Eade attempts to cast responsibility for the false financial statements upon

the auditor asserting that defendant Gruber “engaged in review of the financial statements contained in the report” citing Complaint at ¶ 38-45. But these allegations do not state that Gruber conducted a review of the June 30, 2009 financial statements of Gold Standard. Rather, the SEC avers that during May and June 2009, Gruber & Co. began the audit of the financial statements for Ross Zoloto. Id. at ¶ 38. This audit work was in preparation for Gruber & Co.’s audit report filed with the Super Form 8-K on October 5, 2010. Id. at ¶ 85; Exhibit 12 at p. 13. The financial statements attached to the June 30, 2009 Form 10-Q, state they are “unaudited” and no audit report is included. See unaudited notation at top of each page, Exhibit 17 at p. 51-55.

Eade contends that the SEC has not adequately alleged his knowledge of accounting principles and only alleged negligence rather than scienter. Motion at 21, 23. To the contrary, the Complaint alleges that Eade knew that the value assigned to the assets in the May 15, 2009 Form 8-K, the June 30, 2009 Form 10-Q and the September 30, 2009 10-Q did not conform to GAAP. Eade argues the SEC is overreaching without also alleging that he had accounting expertise. Motion at p. 19. But Fed. R. Civ. P. 9(b) does not require that the SEC allege how Eade came to have his accounting knowledge.

Eade asserts that his GAAP violations are not sufficient to impose liability for violations of the securities laws, citing Abrams v. Baker Hughes, Inc., 292 F.3d 424, 433 (5th Cir. 2002); In re Software Toolworks Sec. Litig., 50 F.3d 615, 627 (9th Cir. 1994); and In Re Dauo Systems, Inc. Sec. Litig.411 F.3d 1006, 1016 (9th Cir. 2005). Motion at 24-25. These cases are distinguishable because each

14 Eade also complains about the allegations in paragraphs 62 through 81,but these relate to the SEC’s claim against Gold Standard and Zachos, rather than Eade.


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involved private securities litigation subject to the pleading requirements of the PSLRA, which do not apply to the SEC. In Abrams, the court reviewed de novo a motion to dismiss under Fed. R. Civ. P. 12(b)(6) and stated ‘the mere publication of inaccurate accounting figures or failure to follow GAAP, without more, does not establish scienter. The party must know that it is publishing materially false information . . . .” Id. at 432. The court found that complaint did not allege particularized facts to establish scienter which would show “actual knowledge or intentional or deliberate behavior” and suggested that the accounting problems could have arisen “from negligence, oversight or simple mismanagement, none of which rise to the standard necessary to support a securities fraud action.” Id. These particularized scienter pleading standards of the PSLRA discussed in Abrams, Software Toolworks, and Dauo do not apply to SEC enforcement actions. SEC v. ICN Pharms., Inc., 84 F. Supp. 2d 1097, 1099 (C.D. Cal. 2000). Whether scienter exists is an issue for determination by the trier of fact and not one for resolution on a motion to dismiss. Walling v. Beverly Enterprises, 476 F.2d 393, 397 (9th Cir. 1973). The SEC’s complaint adequately alleges that Eade had actual knowledge that the financial statements did not conform to GAAP and that he was publishing materially false information about the value of Gold Standard’s assets. These allegations are sufficient under Fed. R. Civ. P. 9(b).

D. Janus Capital does not apply to the aiding and abetting allegations against Eade.

Eade argues that the SEC’s First Claim should be dismissed because he was not the maker of the false statements in Gold Standard’s reports. But the cases that he cites involve motions to dismiss claims for primary liability under Section 10(b) of the Exchange Act and Rule 10b-5, rather than for secondary liability for aiding and abetting a public company’s false and misleading statements. See Motion at 24 citing Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 180 L. Ed. 2d 166 (2011); SEC v. Kelly, 765 F. Supp. 2d 301 (S.D. N.Y. 2011);


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and SEC v. Daifotis, 2012 U.S. Dist. LEXIS 81306 2011 WL 3295139 (N.D. Cal. June 12, 2012). The SEC seeks to impose secondary liability upon Eade by alleging he aided and abetted Gold Standard’s misrepresentations and omissions. The SEC does not need to allege or prove Eade is a maker of the statements only that he provided knowing substantial assistance. The Court recognized in Janus Capital that the SEC may bring aiding and abetting claims under 15 U.S.C. § 78t(e) for violations of Rule 10b-5 “against entities that contribute substantial assistance to the making of a statement but do not actually make it.” 131 S. Ct. at 2303; see also SEC v. Sells, 2012 U.S. Dist. LEXIS 112450 *25 (N. D. Cal. Aug. 10, 2012). Similarly, the decisions in Kelly and Daifotis are directed to primary liability rather than secondary liability for aiding and abetting a violation of Rule 10b-5. Eade may be liable for aiding and abetting violations even if he is not the “maker” of the statement, if the SEC proves a primary violation by Gold Standard. See Janus, 131 S. Ct. at 2302 (explaining “[s]uch suits – against entities that contribute ‘substantial assistance’ to the making of a statement but do not actually make it – may be brought by the SEC . . . but not by private parties.”). Eade’s motion to dismiss the First Claim for relief should be denied.

E. The SEC has adequately pled that Eade Aided and Abetted Gold Standard’s Reporting Violations.

In the Second Claim, the SEC alleges that Eade aided and abetted Gold Standard’s violations of quarterly and current reporting requirements of Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-20, 15 U.S.C. § 78m(a), and17 C.F. R. §§ 240.12b-20, 240.13a-11 and 240.13a-13. 15 Gold Standard, as an issuer of securities registered under Section 12 of the Exchange Act, Complaint at ¶ 17, is required to file accurate annual reports on Form 10-K, quarterly reports on Forms 10-Q, and current reports on Form 8-K. 15 U.S.C. §

15 See Complaint at ¶ 1-112, and 118-121.


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78m(a); 17 C.F. R. §§ 240.13a-1 (1967), 240.13a-13, 240.13a-11; see also Ponce, 345 F.3d at 734-6. In addition, Rule 12b-20 requires the reports to contain any “further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made not misleading.” 17 C.F.R. § 240.12b-20. An issuer violates the reporting provisions if it files a report that contains material false or misleading information. Yuen, 2006 U.S. Dist. LEXIS 33938 *116. In addition, Rule 4.01(a)(1) of Regulation S-X, which provides the form and content of financial statements filed with SEC reports, requires that financial statements contain sufficient information as is necessary not to be misleading and states that a financial statement that is not prepared in conformance with GAAP is presumptively misleading or inaccurate. 17 C.F.R. § 210.4-01(a)(1).

These reporting requirements are intended to insure that investors receive true and correct periodic reports about the operation and financial condition of the company. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975). Congress fashioned the reporting requirements to protect investors from negligent, careless, and deliberate misrepresentations in the sale of securities. SEC v. Beisinger Indus. Corp., 552 F.2d 15, 18 (1st Cir. 1977). Scienter is not an element of a civil violation of Section 13(a). SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir.), cert. denied sub. nom., Shanklin v. SEC, 525 U.S. 931 (1988); Ponce v. SEC, 345 F.3d 722, 737 n. 10 (9th Cir. 2003); Yuen, 2006 U.S. Dist. LEXIS 33938 *115.

This claim is based on the essentially same allegations as the First Claim. Eade provided substantial assistance by preparing the seven false and misleading quarterly and current reports,16 which he knew that Gold Standard would file with the SEC. Kalvex, 425 F. Supp. at 316. He knew that the reports contained false and misleading statements because he negotiated the acquisition of Ross Zoloto,

16 See footnotes 2, 3, 5 supra.


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knew of the profit arrangement with Khachatrian, and that the exchange agreement was not registered with Russian governmental authorities. Complaint at ¶ 21, 22, 31, 32, 33. He also knew from his preparation of the financial statements and discussions with the auditor and outside accountant that the financial statements were not prepared in conformance with GAAP. Id. at ¶ 33, 34, 37-49, 52, 54-58. The SEC has adequately pled its claim for aiding and abetting violations of the reporting provisions under the requirements of Fed. R. Civ. P. 8(a)(2), 9(b) and 12(b)(6). Eade’s motion to dismiss the Second Claim for relief should be denied.

F. The SEC States a Claim for Injunctive Relief. Eade contends that the SEC’s request for entry of injunctive relief should be

dismissed because “the claim is not plausible,” since he has resigned as general counsel and is not in a position to engage in further violations. Motion at 11. An injunction is the primary statutory remedy that Congress provided for violations of the federal securities laws. 15 U.S.C. § 78u(d)(1) authorizes a court to grant the SEC’s request for an injunction upon a proper showing of (1) a past violation and (2) a reasonable likelihood that the defendant will violate the securities laws in the future. SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). Injunctive relief is used to deter future violations of securities laws, not to punish past violations. SEC v. Koracorp Indus., Inc., 575 F.2d 692, 697 (9th Cir. 1978).

The SEC alleges that Eade aided and abetted Gold Standard’s violations by preparing seven false and misleading reports filed with the SEC. Eade, an attorney who practices corporate and securities law, makes public and private offering of securities, and prepares SEC filings, prepared seven false and misleading reports that Gold Standard filed with the SEC between May 2009 and February 2011.17 He omitted material facts in those reports that the exchange agreement, under which Gold Standard purportedly acquired the mining assets of Ross Zoloto, had

17 Complaint ¶ 3, 13; see footnotes 2 supra.


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not been registered and approved by Russian governmental authorities; and that a verbal agreement allowed Khachatrian, the former owner of Ross Zoloto, to retain the profits from the alluvial mining operations. Eade also misrepresented that the financial statements representing Gold Standard owned over $1.3 billion in mining assets were prepared in conformance with GAAP, when they were not, resulting in a material overstatement of the company’s assets. These allegations are sufficient to establish Eade knowingly aided and abetted Gold Standard’s past violations.

The complaint also alleges that for almost two years Eade intentionally aided and abetted Gold Standard’s violations in seven reports. "[F]raudulent past conduct gives rise to an inference of a reasonable expectation of continued violations," SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1100 (2d Cir. 1972); Murphy, 626 F. 2d at 655. Taking all the allegations of the Complaint as true, Eade’s violations occurred over nearly two years, the violations occurred with scienter, and Eade is a securities attorney that files periodic reports with the SEC. See description of Eade in Independent Films Development Corp.’s Form 10, Exhibit 20 at 137. Eade’s vocation as a securities attorney provides him ample opportunity to commit further violations of Sections 10(b) and 13(a) of the Exchange Act. Using the Murphy factors, these alleged facts, if proven, entitle the SEC to injunctive relief. Id.; SEC v. Richie, 2006 U.S. Dist. LEXIS 45853 * 24-28 (C.D. Cal. May 9, 2006). The Complaint sufficiently pleads a reasonable likelihood of future violations that overcomes a motion to dismiss. SEC v. Gabelli, 653 F.3d 49, 61 (2d Cir. 2011).

Eade also argues that the claim for an injunction should be dismissed because the SEC seeks an “obey the law” injunction which is impermissible under Fed. R. Civ. P. 65(d), citing SEC v. Goble, 682 F.3d 934, 948-52 (11th Cir. 2012). But Goble does not address a motion to dismiss injunctive relief; rather the Eleventh Circuit determined the language of the injunction entered after trial did not comply with Fed. R. Civ. P. 65(d). Contrary to Eade’s assertion, the Ninth Circuit has not adopted the holding in Goble in Del Webb Communities, Inc. v.


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Partrington, 652 F.3d 1145, 1150 (9th Cir. 2011). In Del Webb, the court held that the injunction prohibiting a contractor from soliciting inspection reports by means of illegal, unlicensed and false practices was too vague to be enforceable. But the analysis of the injunctive language in Del Webb occurred after trial. It is premature for the court to dismiss the SEC’s request for injunctive relief at the motion to dismiss stage where the SEC has not yet submitted proposed language for an injunction. SEC v. Richie, 2006 U.S. Dist. LEXIS 45853 *29. Eade will have the opportunity to address the language of a proposed injunctive order after the merits of the case are resolved. III. Conclusion

The SEC has pled with sufficient particularity its claims that Eade aided and abetted Gold Standard’s anti-fraud and reporting violations by omitting or misrepresenting material facts in seven reports filed with the SEC. The SEC has pled allegations to support its request for the statutory remedy of entry on an injunction against further violations. The SEC respectfully requests that the Court deny Eade’s motion to dismiss. If the Court should find the complaint fails to state a claim, then the SEC requests leave to file an amended complaint.18 Dated: September 10, 2012 Respectfully submitted,

/s/ Molly M. White Molly M. White, Esq. Attorney for Plaintiff Securities and Exchange Commission

18 Eade seeks dismissal of the SEC’s “first amended complaint,” Motion at p. 8, 25, but the SEC filed only the initial complaint. [ECF # 1].


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CERTIFICATE OF SERVICE

I certify that on September 10, 2012, I caused true and correct copies of the foregoing to be mailed: Irving M. Einhorn, Esq. 1710 10th Street Manhattan Beach, CA 90266 Attorney for Panteleimon Zachos and Gold Standard Mining Corporation Kenneth D. Eade, Esq. 6699 Wilshire Blvd. Suite 507 Los Angeles, California 90048 Appearing Pros se Edward Randall Gruber, CPA

Lake Saint Louis, MO 63367 Appearing Pro se Gruber & Co. LLC 1025 Marions Cove Drive Lake Saint Louis, MO 63367 Appearing Pro se

/s/ Leslie J. Hughes


united states district court central district of … · ii. the sec has pled fraud with sufficient...

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