THOMAS B. RUSSELL, Senior Judge.
This matter comes before the Court on a motion to dismiss by Defendants Charles A. Jones, CA Jones Management Group, LLC, Global Book Resellers, LLC, and Technology Associates, Inc. (Docket No. 21). The Plaintiff Responded (Docket No. 23). The Defendants replied (Docket No. 25). The Plaintiff filed a surreply (Docket No. 36). Fully briefed, the matter is now ripe for adjudication. For the following reasons, the Defendants' motion is DENIED.
Plaintiff David Griffin ("Griffin") brings suit against Defendants Charles Jones ("Jones"), CA Jones Management Group, LLC, Global Book Resellers, LLC, and Technology Associations, Inc. (collectively ("Defendants"). Griffin asserts six separate causes of action against the Defendants. Among Griffin's allegations is that the Defendants violated § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 of the act's implementing regulations, 17 C.F.R. § 240.10b-5, by making fraudulent statements of material fact or omitting to state material facts in connection with the purchase of securities in a number of companies jointly owned by Griffin and Jones.
As required when deciding a motion to dismiss, the Court presumes that the allegations in the first amended complaint are true. Total Benefits Planning Agency v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008). Taking them as true, the relevant facts are as follows.
This action arises from a soured business relationship between David Griffin and Charles Jones. Four interrelated businesses are at the center of this dispute. In 1993, Jones founded Integrated Computer Solutions, Inc. ("ICS") and installed himself as an officer of the company. Some years later, in March 2008, Jones also formed Blackrock Investments, LLC ("BRI), of which he was the controlling member. In May 2008, BRI formed a subsidiary, SE Book Company, LLC ("SEB") for the purpose of acquiring a textbook company in Murray, Kentucky. Initially, SEB was wholly owned and managed by its sole member, BRI. In July 2008, SEB's operating agreement was amended, and ICS was added as an eight percent member of SEB. In March 2009, College Book Rental Company, LLC ("CBR") was formed. ICS also owns an eight percent interest in CBR, with the remaining interest held by BRI. Further details of CBR's formation are discussed below.
An entity separate from ICS, BRI, SEB, and CBR also figures prominently into the present dispute. In June 2008, Jones formed CA Jones Management Group, LLC ("CJM"). As detailed herein, management responsibilities for ICS, BRI, SEB, and CBR were eventually delegated to CJM, but CJM never had an ownership stake in any of those companies. CJM was paid management fees from the companies for its services, which were allegedly paid to Jones and his wife as owners of CJM.
Griffin became involved in ICS, BRI, and SEB in 2008. Toward the beginning of that year, Jones approached Griffin about investing in ICS. As a result of the solicitation, Griffin bought fifty percent of the outstanding shares of the company for $2 million. Later, in April 2008, Griffin also bought fifty percent of BRI in exchange for $100, 000. As alleged, "Griffin made his investments in BRI and ICS based on the expectation that [Jones's] undivided loyalty was devoted to BRI and ICS, and not to other competing companies." (Am. Compl., DN 18, ¶ 19.)
On February 11, 2009, Jones and Griffin began discussing the formation of CBR for the purpose of renting textbooks to college students. During these discussions, Jones provided Griffin with forecasts of sales, profits, inventory, and expenses for CBR's first six years of operation. These forecasts allegedly predicted CBR making profits of $940, 000, $2.8 million, and $3.7 million during its first three years of operation, respectively. ( Id. ¶ 22.) Although the forecasts contained projected expenses, Griffin alleges that Jones "omitted any specific allocation for fees to be paid by CBR to CJM" for the purposes of managing the company. ( Id. ) CJM allegedly paid CJM management fees of approximately $2.3 million in 2010 and $5.7 million in 2011. ( Id. )
In addition to CBR, Griffin alleges that BRI, SEB, and ICS paid CJM significant management fees. For example, BRI, SEB, and ICS paid CJM management fees totaling $24, 000, $2.7 million, and $600, 000, respectively, in 2008 alone. ( Id. ¶ 30.) Accordingly, Griffin alleges that Jones "deliberately channeled millions of dollars from [ICS, BRI, SEB, and CBR] to CJM, " and ultimately into his own pockets as CJM's managing member. ( Id. ¶ 31.) Overall, Griffin alleges that Jones's ultimate goal was to convince Griffin to invest in ICS, BRI, SEB, and CBR; Jones would then siphon off those investments for his own benefit through payment of management fees to CJM.
Griffin alleges that payment of the exorbitant fees to CJM would not have been possible absent his continued investments in the companies. For example, beginning in early 2009, Jones allegedly told Griffin that "SEB and CBR were unable to pay operating expenses and did not have the funds necessary to purchase inventory." ( Id. ¶ 35.) To remedy these shortfalls, Jones "asked Griffin for additional investment." ( Id. ) In response, "Griffin made additional investments in SEB and CBR in the form of over 100 wire transfers of funds to SEB's and CBR's accounts between April 2009 and June 2012." ( Id. ) Griffin claims to have made these transfers in reliance "on misrepresentations by [Jones] and CJM about the current financial health and inventory value of SEB and CBR." ( Id. ) For example, Jones allegedly represented to Griffin that SEB would have net income of $2.1 million during the twelve-month period between March 2009 and February 2010. ( Id. ¶ 32.) Again, however, that projection allegedly excluded any management fees to be paid to CJM during the same period. ( Id. )
While Griffin was making wire transfers to SEB and CBR between April 2009 and June 2012, he alleges that Jones was increasing the management fees charged by CJM. For example, Griffin claims that SEB paid CJM $2.4 million and $4.3 million in management fees in 2009 and 2010, respectively, and that these fees far exceeded SEB's net earnings during those years. ( Id. ¶¶ 39-40.) Similarly, CJM was allegedly paid $2.3 million in management fees by CBR in 2010, while the company had a net loss of approximately $1.8 million. ( Id. ¶ 41.)
In December 2010, Jones asked Griffin to contribute an additional $10 million to SEB and CBR. ( Id. at 42.) Griffin expressed concern about the economic viability of the companies in light of his already large investments. Prior to this request, a consulting firm, Commonwealth Economics, had been hired to make recommendations for improving the companies' profitability. In response to Griffin's concerns about additional investments, "Commonwealth Economics again provided recommendations to [Jones] and CJM about ways to increase the profits of [ICS, BRI, SEB, and CBR] with the goal of repaying all amounts owed to Griffin by 2012." ( Id. ) Jones allegedly represented to Griffin that he would implement the recommendations "in order to repay Griffin all amounts he had invested in [ICS, BRI, SEB, and CBR] by 2012." ( Id. ¶ 43.) In reliance on that promise, "Griffin invested another $9, 353, 000 in CBR and SEB during the first six months of 2011." ( Id. ) Again, Griffin alleges that Jones did nothing to implement the recommendations and instead paid $5.7 million from CBR to CJM during the first six months of 2011 as management fees. ( Id. ¶ 45.) During this period, CBR apparently operated at a net loss of $3.6 million. ( Id. )
Based on the foregoing, Griffin alleges that his contributions and wire transfers to ICS, BRI, SEB, and CBR were transactions in "securities" as that term is used and defined in the Securities Exchange Act of 1934. ( Id. ¶ 90.) He additionally claims that he made his "investments" in reliance on material misrepresentations and omissions by Jones and CJM. ( Id. ) Finally, he asserts that the Defendants intended to defraud Griffin or were at least reckless in their representations to him regarding the companies' financial health and projections for future profit. ( Id. ) As a result, Griffin alleges that the Defendants' transactions in securities were fraudulent in violation of Section 10(b) of the Securities Exchange act and Rule 10b-5 of its implementing regulations. He moves the Court to exercise its supplemental jurisdiction pursuant to 28 U.S.C. § 1367 to consider his state law claims of breach of fiduciary duties, fraud, misappropriation, and unjust enrichment. ( Id. at 23-27). He urges the Court to find that the funds in question are held on his account in a constructive trust. ( Id. at 27.)
The Defendants move to dismiss the securities fraud claim as a matter of law and ask the Court to decline to exercise supplemental jurisdiction over the state law claims.
The Federal Rules of Civil Procedure require that pleadings, including complaints, contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). A complaint may be attacked for failure "to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, the Court will presume that all the factual allegations in the complaint are true and will draw all reasonable inferences in favor of the non-moving party. Total Benefits Planning Agency v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008) (citing Great Lakes Steel v. Deggendorf, 716 F.2d 1101, 1105 (6th Cir. 1983)). "The court need not, however, accept unwarranted factual inferences." Id. (citing Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987)). Additionally, "[w]hen a court is presented with a Rule 12(b)(6) motion, it may consider the Complaint and any exhibits attached thereto... and exhibits attached to the defendant's motion to dismiss so long as they are referred to in the Complaint and are central to the claims contained therein." Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008) (citing Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th Cir. 2001)).
Even though a "complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 US. 544, 555 (2007) (citations omitted). Instead, the plaintiff's [f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id. (citations omitted). A complaint should contain enough facts "to state a claim to relief that is plausible on its face." Id. at 570. A claim becomes plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556). If, from the well-pleaded facts, the court cannot "infer more than the mere possibility of misconduct, the complaint has alleged - but has not show[n]- that the pleader is entitled to relief." Id. at 1950 (citing Fed.R.Civ.P. 8(a)(2). "Only a complaint that states a plausible claim for relief survives a motion to dismiss." Id.
In addition to the foregoing, the pleading standard is higher for claims involving allegation of fraud, like the securities fraud claims at issue in this case. When alleging fraud, a plaintiff "must state with particularity the circumstances constituting fraud." Fed. R. 9(b). "A plaintiff's complaint must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Louisiana Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 662 F.3d 471, 478 (6th Cir. 2010) (quoting Frank v. Dana Corp., 547 F.3d 564, 569 (6th Cir. 2008)).
On top of the pleading requirements of Rules 8(a)(2), 9(b), and 12(b)(6), the Private Securities Litigation Reform Act of 1995 ("PSLRA") "imposes additional and more [e]xacting pleading requirements' for pleading scienter in a securities fraud case." Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007)). Under the PSLRA's heightened pleading requirements, a plaintiff alleging that the defendant made a false or misleading statement must:
(1) specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed [and]
(2) state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
15 U.S.C. § 78u-4(b)(1), (2). The PSLRA "requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention to deceive, manipulate, or defraud." Tellabs, 551 U.S. at 313, 127 S.Ct. 2499 (quotation and citation omitted).
I. Griffin's initial investment and subsequent contributions are properly construed as "securities" within the meaning of the ...