SEC Response to Bivens

[Twist Capper]

www.411-room.com/AppealCourt/SECanswerBrief043012.pdf

[Twist Capper]

No. 11-55169
IN THE
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DAVID ANDERSON, et al., )
)
Plaintiffs-Appellants, )
)
v. )
)
CHRISTOPHER COX, et al., )
)
Defendants-Appellees. )
)
DEFENDANTS-APPELLEES’ ANSWERING BRIEF
APPEAL FROM
THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
Case No. SACV 10-00031 JVS (MLGx)
ANDRÉ BIROTTE JR.
United States Attorney
LEON W. WEIDMAN
Assistant United States Attorney
Chief, Civil Division
KEITH M. STAUB [SBN: 137909]
Assistant United States Attorney
Federal Building, Room 7516
300 North Los Angeles Street
Los Angeles, California 90012
Telephone: [phone]
Facsimile: [phone]
Attorneys for Defendants-Appellees
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TABLE OF CONTENTS
I. COUNTER-STATEMENT OF ISSUES ON APPEAL . . . . . . . . . . . . . . . . 1
II. STATEMENT OF JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
III. STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. NATURE OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. COURSE OF PROCEEDINGS BELOW . . . . . . . . . . . . . . . . . . . . . . 3
C. STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
IV. STANDARD OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
V. SUMMARY OF THE ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
VI. ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. THE DISTRICT COURT PROPERLY DISMISSED
APPELLANTS’ FIFTH AMENDMENT CLAIMS FOR
FAILURE TO STATE A CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . . 14
B. OTHER DEFICIENCIES IN THE FAC ALSO
WARRANT DISMISSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1. Appellants’ Bivens Claim Should Be Dismissed Because
They Have Not Alleged that the Commissioners Were
Either Personally Involved in, or Caused Appellants to
Be Subjected to, a Constitutional Deprivation . . . . . . . . . . . . 21
2. Appellants’ Allegations Are Not Sufficiently Plausible
to State a Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3. Appellants Have Failed to Set Forth Facts Sufficient to
Overcome the Commissioners’ Qualified Immunity . . . . . . . 24
i
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4. Appellants Have Abandoned Their Claim for
Declaratory Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
VII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
VIII. STATEMENT OF RELATED CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ii
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TABLE OF AUTHORITIES
FEDERAL CASES
Alston v. Read,
663 F.3d 1094 (9th Cir. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Ashcroft v. Iqbal,
556 U.S. 662 (2009)(quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007)) . . . . . . . . . . . . . . . . . . . . . . 4, 15, 21, 22, 23, 24
Bibeau v. Pacific Northwest Research Foundation,
188 F.3d 1105 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Bivens v. Six Unknown Agents of Fed. Bur. of Narc.,
403 U.S. 388 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4, 21, 22, 26
Board of Regents v. Roth,
408 U.S. 564 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Bowers v. Whitman,
671 F.3d 905 (9th Cir. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Brewster v. Board of Education of the Lynwood Unified School Dist.,
149 F.3d 971 (9th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Broad v. Sealaska Corp.,
85 F.3d 422 (9th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 20
Cato v. United States,
70 F.3d 1103 (9th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Enquist v. Oregon Dep’t of Agric.,
478 F.3d 985 (9th Cir. 2007), aff’d, 553 U.S. 591 (2008) . . . . . . . . 16
Erickson v. United States,
67 F.3d 758 (9th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
iii
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General Dynamics Corp. v. United States,
139 F.3d 1280 (9th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Gerhart v. Lake County, Montana,
637 F.3d 1013 (9th Cir. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16
Green v. United States,
630 F.3d 1245 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Greenwood v. FAA,
28 F.3d 971 (9th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Marquez v. Gutierrez,
322 F.3d 689 (9th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Nurse v. United States,
226 F.3d 996 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Papai v. Harbor Tug and Barge Co.,
67 F.3d 230 n.5 (9th Cir. 1995), rev’d on other grounds,
520 U.S. 548 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Pellegrino v. United States,
73 F.3d 934 (9th cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Peterson v. United States Dep’t of Interior,
899 F.2d 799 (9th Cir.), cert. denied, 498 U.S. 1003 (1990) . . . . . . 16
Saucier v. Katz,
533 U.S. 194 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SEC v. CMKM Diamonds, Inc.,
635 F.Supp.2d 1185 (D. Nev. 2009) . . . . . . . . . . . . . . . . . . . . . . . 7, 23
SEC v. CMKM Diamonds, Inc.,
No. 08-cv-0437, 2001 WL 3047476, at *1 n.2 (D. Nev. 2011) . . . . . 7
iv
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Swanson v. Babbitt,
3 F.3d 1348 (9th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Taylor v. List,
880 F.2d 1040 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
U.S. v. Lewis County,
175 F.3d 671 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Wolfe v. Strankman,
392 F.3d 358 n.2 (9th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FEDERAL ADMINISTRATIVE CASE
In the Matter of CMKM Diamonds, Inc.,
85 SEC Docket 2814, 2005 WL 1652772, at *8 (July 12, 2005) . . . . 6
STATE CASE
SEC v. CMKM Diamonds, Inc.,
No. 08-cv-0437 (D. Nev. June 23, 2009) . . . . . . . . . . . . . . . . . . . . . . 7
FEDERAL STATUTES
28 U.S.C. § 1291
Fed.R.App.P. 4(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fed.R.Civ.P. 12(b)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fed.R.Evid 201(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Fed.R.Evid 201(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
v
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I. COUNTER-STATEMENT OF ISSUES ON APPEAL
1. Whether the district court properly dismissed the First Amended
Complaint (“FAC”) by certain corporate shareholders purporting to state takings
and due process claims under the Fifth Amendment where the FAC did not identify
a Constitutionally-protected property interest in funds the shareholders assert were
being held for their benefit?
2. Whether the Bivens claim should be dismissed where the FAC alleges
generally that SEC Commissioners engaged in actions that deprived Appellants of
funds in which they contend they have an interest (if such funds exist), but do not
present any factual allegations showing that the Commissioners had any personal
involvement in the alleged acts?
3. Whether the FAC should be dismissed because it is based on
conclusory allegations and allegations that are not sufficiently plausible to state a
claim?
4. Whether the SEC Commissioners have qualified immunity for
Appellants’ takings and due process claims under the Fifth Amendment because a
clearly established right is not at issue where the Appellants making the claim have
acknowledged that they do not have any “specific case authority” supporting their
claim that they have a property right in the funds that they claim were taken
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without just compensation and without due process of law?
5. Whether the district court properly dismissed the claim for declaratory
judgment against government officials where Appellants rely on a waiver of
sovereign immunity that applies only to claims for monetary damages?
II. STATEMENT OF JURISDICTION
Appellants invoked the jurisdiction of the district court under 28 U.S.C.
§ 1331. The district court entered an order dismissing Appellants’ FAC, with
prejudice, on December 29, 2010. Appellants filed a timely notice of appeal on
January 27, 2011. Fed.R.App.P. 4(a)(1)(B). This Court has jurisdiction pursuant to
28 U.S.C. § 1291.
III. STATEMENT OF THE CASE
A. NATURE OF THE CASE
Appellants are seven holders of stock in CMKM Diamonds Inc. (“CMKM”).
This action arises out of the sale of stock from CMKM to Appellants, the
corporation’s subsequent resolution to self-liquidate, and the alleged involvement
of the SEC in that process. Appellants contend that during the liquidation of
CMKM’s assets, Commissioners of the Securities and Exchange Commission
(“SEC”) repeatedly delayed distribution of money recovered and held in trust for
Appellants. Appellants’ FAC asserts claims for declaratory judgment and
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deprivation of their Fifth Amendment rights under the Takings Clause and Due
Process Clause, pursuant to Bivens v. Six Unknown Agents of Fed. Bur. of Narc.,
403 U.S. 388, 297 (1971). Appellants claim that the Fifth Amendment protects
their property interest in receiving distribution of assets that were allegedly
collected upon liquidation of CMKM’s assets.
The Commissioners contend that Appellants’ FAC fails to: (1) state a
plausible claim under the Takings and Due Process Clauses; (2) show that the
Commissioners were sufficiently involved in the alleged actions to be subject to a
Bivens action; (3) rebut the Commissioners’ qualified immunity; and (4) state a
claim for declaratory judgment. Therefore, dismissal of the action should be
affirmed.
B. COURSE OF PROCEEDINGS BELOW
In January 2010, Appellants brought this action against nine current and
former Commissioners of the SEC, including both the current chairman, Mary
Schapiro, and her predecessor, Christopher Cox (collectively, the
“Commissioners”).
The original complaint stated two causes of action. First, the complaint
sought a declaration that the Commissioners wrongfully “cause[d] certain acts and
omissions to proceed in such manner” to “prevent the distribution of moneys held
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for the benefit of [Appellants]” and that their actions caused Appellants “to be
deprived of property without just compensation and without due process of law.”
(CR 1.)1 Second, the complaint sought damages “in excess of 3.87 Trillion
Dollars” based on the allegation that the Commissioners violated Appellants’
“Fifth Amendment right to be secure in their property, free from taking without
just compensation and without due process of law.” (CR 1.)
The Commissioners moved to dismiss the original complaint on several
grounds: (1) the declaratory judgment claim was barred by sovereign immunity;
(2) Appellants failed to state a plausible claim; (3) Appellants failed to state a
claim under Bivens v. Six Unknown Agents of Fed. Bur. of Narc., 403 U.S. 388
(1971), because they did not allege the Commissioners were either personally
involved in, or caused Appellants to be subjected to, a Constitutional deprivation;
and (4) Appellants failed to set forth facts sufficient to overcome the
Commissioners’ qualified immunity. (CR 8.)
On August 2, 2010, the district court granted the motion to dismiss, holding
that the “complaint fails to state a plausible claim since it does not assert a viable
property interest under Iqbal standards. . . . Plaintiffs’ vague allegations as to what
1 “CR” refers to the Clerk’s Record and is followed by the document control
number. “ER” refers to the appellants’ Excerpts of Record and is followed by the
applicable page number. “AOB” refers to the appellants’ opening brief followed
by the applicable page number.
4
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exactly their property interest is cannot withstand a motion to dismiss.” (CR 15;
ER 009.) The district court permitted Appellants to file an amended complaint.
Appellants then filed the FAC that added some new allegations but
continued to rely on vague allegations as to the existence of money collected for
the benefit of CMKM shareholders and the Commissioners’ duty to provide for
distribution of that money. (CR 24; ER 32.) The Commissioners moved to
dismiss on the same grounds they had previously raised. (CR 25.)
Oral argument was heard by the district court on December 6, 2010. (CR
30.) On December 29, 2010, the district court issued its order granting the
Commissioners’ motion to dismiss, with prejudice, finding that Appellants had not
identified a Constitutionally-protected property right and that the court lacked
subject matter jurisdiction over the official capacity claims and claim for
declaratory relief. (CR 32; ER 003.) This appeal followed.
C. STATEMENT OF FACTS
The FAC alleges that CMKM was formed in 2002 through a merger of other
companies and, by July 2004, it had amended its Articles of Incorporation to
authorize the issuance of 800,000,000,000 common shares with a par value of
$0.0001. (CR 24; ER 038-39, ¶¶ 25-26.) The FAC alleges that during the summer
or fall of 2004, the SEC allegedly “had an order placed on CMKM preventing any
5
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public disclosure of anticipated mergers or other development information.” (CR
24; ER 039, ¶ 27.) The FAC does not attach any such order, provide a date for the
order, or provide any citation to it.2
In March 2005, the SEC imposed a temporary suspension on trading of
CMKM stock based on concerns over the lack of adequate publicly available
information because CMKM had not filed an annual or quarterly report with the
SEC since November 2002, despite being required to do so. The SEC also brought
an administrative proceeding alleging CMKM had failed to file required reports.
(CR 24; ER 039-40, ¶¶ 28-29.) Despite those actions, trading in CMKM stock
continued. (CR 24; ER 040, ¶ 30.)
In July 2005, an SEC administrative law judge found the facts to be as
alleged by the SEC in the administrative proceeding.3 (CR 24; ER 0041-42, ¶¶ 33-
35.) In October 2005, CMKM allegedly started to wind up its affairs by selling its
2 Moreover, a search of the SEC’s website for “CMKM” leads to no results for
orders entered in 2004 regarding CMKM. See www.sec.gov.
3 That order is available at www.sec.gov/litigation/aljdec/id291bpm.htm. In
the Order, the Administrative Law Judge concludes, “The facts of this case
demonstrate a situation where management deprived shareholders and investors of
material information in official filings, but promoted the company to investors
through informal news releases and public statements that contained false
information.” In the Matter of CMKM Diamonds, Inc., 85 SEC Docket 2814, 2005
WL 1652772, at*8 (July 12, 2005).
6
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assets. Id. On October 28, 2005, the SEC entered an order de-registering CMKM
shares. (CR 24; ER 042, ¶ 35.) At that time, CMKM allegedly had
703,518,875,000 shares of common stock issued and outstanding, and created a
“Task Force” to liquidate CMKM assets. (CR 24; ER 042, ¶ 35.) 4
The FAC alleges that from “June 1, 2004 through October 28, 2005 a total
of 2.25 Trillion ‘phantom’ shares of CMKM Diamonds Inc, was sold into the
4 Although this case was resolved on a motion to dismiss and the decision was
based on the facts in the FAC, this Court may take judicial notice of the fact that
the SEC brought a civil enforcement action, See SEC v. CMKM Diamonds, Inc.,
No. 08-cv-0437 (D. Nev. June 23, 2009), against CMKM and individuals and
entities who worked for or with CMKM, alleging that CMKM officers oversaw a
complex scheme to issue and sell unregistered CMKM stock and to manipulate
CMKM’s stock price and volume through false statements. Fed.R.Evid 201(b) and
(f); Papai v. Harbor Tug and Barge Co., 67 F.3d 203, 207 n.5 (9th Cir. 1995), rev’d
on other grounds, 520 U.S. 548 (1997). In that case, the SEC alleged that “[f]rom
January 2003 through May 2005, eleven individuals and two entities assisted
[CMKM] in fraudulently issuing hundreds of billions of shares of unrestricted
CMKM stock.” SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 1188 (D.
Nev. 2009) (reciting facts alleged by SEC and stipulated to by several defendants).
The SEC further alleged that CMKM “had no legitimate operations. Its only
activities were illegally issuing and falsely promoting its own stock.” Id. These
allegations are inconsistent with Appellants’ claims that CMKM was a company
that had engaged in many business transactions and that had assets to distribute in a
liquidation. In the SEC’s civil enforcement action, judgment has been entered
against all defendants. SEC v. CMKM Diamonds, Inc., No. 08-cv-0437, 2011 WL
3047476, at *1 n.2 (D. Nev. 2011). In addition, while the SEC has obtained
judgments requiring substantial payments of disgorgement and civil penalties
against the defendants in its civil enforcement action, Appellants never mention the
SEC’s action in the FAC, nor suggest that these penalties and payments have been
made.
7

[Twist Capper]

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public market . . . . The sales of the majority of such shares were at all times known
to Defendants Cox, Glassman, Atkins, Campos and Nazareth.” (CR 24; ER 045, ¶
44.) This appears to relate to Appellants’ allegations that the value of CMKM
stock was being driven down by naked short sales. 5 The FAC does not allege why
or how these Commissioners knew about these alleged sales. In particular, the
FAC does not allege that there was any matter before the Commissioners that
required them to consider these alleged sales.
The FAC further alleges that Commissioners Glassman, Atkins, Campos and
the United States Department of Justice (with alleged assistance from the
Department of Homeland Security) operated a “sting operation” and that prior to
June 1, 2004, those Commissioners began using CMKM “for the purpose of
trapping a number of widely disbursed entities and persons who were believed to
be engaged in naked short selling of CMKM Diamonds Inc. stock, and in cellar
boxing the company.” (CR 24; ER 045-46, ¶ 45.) The FAC alleges that the
Commissioners knew that the sting operation would drive CMKM out of business.
5 The FAC does not define or explain naked short selling, and resolution of this
matter does not require definition of that practice. However, some general
information on naked short selling is available at
www.sec.gov/spotlight/keyregshoissues.htm. Generally, “naked short
selling” is the practice of short selling a tradeable asset without first borrowing the
security or ensuring that the security can be borrowed, as is conventionally done in
a short sale.
8
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(CR 24; ER 047, ¶ 46.)
The sting operation allegedly involved several acts such as helping CMKM
hire a former SEC staff person, encouraging CMKM to “‘pump the stock’ by
expanding its promotional activities,” facilitating the sale of CMKM assets to
foreign corporations (and consenting to placement of the proceeds of some sales
“into a frozen trust for disbursal at a later time upon self-liquidation”) , and
facilitating “numerous other acts and deceptions.” (CR 24; ER 046-48, ¶¶ 45, 47.)
In addition, Appellants allege that Commissioners Glassman, Atkins, and Campos,
with assistance from the Department of Justice and the Department of Homeland
Security, facilitated settlement conferences between CMKM and persons who had
engaged in naked short selling. (CR 24; ER 047, ¶ 45(d).) The FAC does not
define the role of the Commissioners in the settlement conferences or state that
they personally participated.
In the purported settlement that followed, the short sellers allegedly
“promised to pay negotiated amounts to a frozen trust for disbursal at a later time”
in return for a promise that the United States government would not prosecute
them. (CR 24; ER 048, ¶ 48.) The FAC does not identify a date in which this
settlement occurred, other than sometime after August 2006, and does not identify
the parties to the agreement. No documentation relating to the settlement is
9
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attached to the FAC.
The FAC does not allege that the SEC was a party to the settlement, received
anything from the settlement, or made any concessions in connection with the
settlement.6 However, the FAC alleges that once the money (presumably the
money in the “frozen trust”) was collected, Commissioners Cox, Glassman, Atkins,
Campos, and Nazareth “assumed disbursement control of the funds, and the right
to determine when the release of the moneys to the shareholders would occur”; “no
CMKM liquidation assets would be distributed without consent of the Defendant
Commissioners.” (CR 24; ER 048-49, ¶ 49.) The FAC does not identify a
document that set up such a trust, does not explain why the Commissioners
allegedly had control over disbursement of the funds, and does not address what, if
any, guidance they received or developed regarding when disbursement would be
appropriate.
Appellants further allege that “other moneys have been collected for the
benefit of the shareholders of CMKM Diamonds, Inc. from the Depository Trust &
Clearing Corporation [“DTCC”], from the United States Government, and from the
sale of additional assets” (apparently assets of CMKM). (CR 24; ER 049, ¶ 50.)
6 The SEC has not brought any claims against naked short sellers in its civil
enforcement action against CMKM or in any other action. See footnotes 2-4,
supra.
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These assets allegedly “have been placed in a trust, or are otherwise now held in
trust, by the Depository Trust & Clearing Corporation . . . and the United States
Treasury, pursuant to a Trust Agreement on behalf of the shareholders.” (CR 24;
ER 049, ¶ 51.) The FAC does not explain why the DTCC and United States
Treasury would have provided funds for the benefit of CMKM shareholders, why
assets from these three different sources were placed together in a trust, or identify
the parties to the alleged trust agreement.
Without specifying what funds it is discussing, the FAC alleges that the
Commissioners “held and hold the sole, final and absolute discretion to determine
when moneys collected pursuant to the scheme set forth above would and could be
released for distribution,” but even though they have “absolute discretion,” they
“must do so pursuant to their mandate under the law to protect the shareholders.”
(CR 24; ER 049-50, ¶ 52.) The FAC also alleges that “the moneys were to have
been released within one year of the time the company was originally de-listed, in
October of 2005.” (CR 24; ER 050, ¶ 53,) and that Appellants’ “[d]emand for
release of said moneys has been repeatedly presented to Defendants, and each of
them, without result.” (CR 24; ER 050, ¶ 54.) However, Appellants do not
provide the dates of any such demands or identify the persons to whom they were
allegedly sent.
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IV. STANDARD OF REVIEW
This Court reviews de novo a dismissal for lack of subject matter
jurisdiction or failure to state a claim on which relief may be granted. See Green v.
United States, 630 F.3d 1245, 1248 (9th Cir. 2011); General Dynamics Corp. v.
United States, 139 F.3d 1280, 1282 (9th Cir. 1998). This Court may affirm on any
ground finding support in the record. U.S. v. Lewis County, 175 F.3d 671, 679 (9th
Cir. 1999).

[Twist Capper]

V. SUMMARY OF THE ARGUMENT
The district court properly dismissed the FAC for failure to state a claim
upon which relief can be granted because Appellants cannot identify a
Constitutionally recognized property interest in the funds they claim are held in
trust. Appellants do not identify any benefit to which they have a “legitimate claim
of entitlement.” Indeed, the FAC itself states that the Commissioners have “the
sole, final and absolute discretion” to determine when to disburse the purported
pool of money collected from naked short sellers and other entities, thus conceding
that Appellants have no more than a “desire” or “unilateral expectation” that they
will receive the funds.
Appellants do not directly own any part of CMKM’s property or assets, but
hold only a proportionate interest in the corporate equity remaining after a
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corporation meets all its other debts and obligations. The profits themselves
belong to the corporation, and do not pass to the shareholders unless and until the
board of directors declares a dividend.
There are several additional deficiencies in the FAC that warrant its
dismissal. First, Appellants have not sufficiently alleged that the Commissioners
personally participated in or directed constitutional violations, or knew of
constitutional violations of subordinates and failed to act to prevent them. The
conclusory nature of the allegations regarding the Commissioners’ involvement
fails to establish that they had any personal involvement.
Second, key allegations in the FAC do not satisfy the pleading requirements
explained by the Supreme Court in Iqbal because the allegations are either
supported only by conclusory statements or are simply not plausible. See Iqbal,
556 U.S. at 679. The FAC’s conclusory allegations that SEC Commissioners were
personally involved in attempting to trap naked short sellers, and that a wide
variety of entities later contributed funds to one or more trusts, seem to have no
basis in fact. Instead, CMKM was a corporation with no legitimate operations,
whose management defrauded its shareholders, resulting in no assets left for
distribution to the shareholders.
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Third, the Commissioners are entitled to qualified immunity because it is not
clearly established that Appellants have a property interest in the funds – if they
exist. Appellants admit that they have “not found specific case authority”
supporting the existence of a property right in any such funds. (AOB at 33.)
Finally, the district court correctly dismissed Appellants’ claim for
declaratory judgment. To the extent this is a claim against the Commissioners
acting in their official capacities, it is barred by sovereign immunity because
Appellants have not identified a relevant waiver of sovereign immunity.
Moreover, the Declaratory Judgment Act does not confer federal subject matter
jurisdiction in the absence of an underlying claim.
VI. ARGUMENT
A. THE DISTRICT COURT PROPERLY DISMISSED
APPELLANTS’ FIFTH AMENDMENT CLAIMS FOR
FAILURE TO STATE A CLAIM.
Appellants assert three Fifth Amendment claims – a takings claim, a
procedural due process claim, and a substantive due process claim. The FAC,
however, fails to provide a basis for any of those claims because it fails to
sufficiently allege a property interest of which Appellants could be deprived
(assuming the claimed funds even exist).
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To survive a motion to dismiss under Federal Rule of Procedure 12(b)(6), “a
complaint must contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 676
(2009)(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This
standard does not require “detailed factual allegations,” but the plaintiff must plead
“factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id. (citing Twombley, 550 U.S. at
555-556). In short, the facts alleged in a complaint must “nudge
claims across the line from conceivable to plausible.” Twombley, 550 U.S. at 570.
A pleading presenting “‘labels and conclusions’ or ‘a formulaic recitation of the
elements of a cause of action will not do.’ Nor does a complaint suffice if it
tenders ‘naked assertions’ devoid of further factual enhancement.’” Iqbal, 556
U.S. at 678 (internal citations omitted).
Appellants do not satisfy this standard. All of the Fifth Amendment claims
that Appellants assert – takings and procedural and substantive due process –
require evidence of deprivation of a property interest.7 See, e.g., Bowers v.
7 Of course, evidence of loss of life or liberty would also suffice for the due
process claims, but claims of that nature are not at issue here. Appellants discuss
only property interests in their brief on appeal. (See, e.g., AOB at 34 [“these
shareholders have suffered a grievous property injury.”])
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Whitman, 671 F.3d 905, 912 (9th Cir. 2012) (first step in determining whether a
taking has occurred is determining “whether the subject matter is ‘property’ within
the meaning of the Fifth Amendment” (citations omitted)); Gerhart v. Lake
County, Montana, 637 F.3d 1013, 1019 (9th Cir. 2011) (to succeed on either a
procedural or substantive due process claim, a plaintiff “must first demonstrate that
he was deprived of a Constitutionally protected property interest”); Brewster v.
Board of Education of the Lynwood Unified School Dist., 149 F.3d 971, 982 (9th
Cir. 1998) (first element of a procedural due process claim is “a deprivation of a
Constitutionally protected liberty or property interest”). Thus, to state a claim,
Appellants must allege facts sufficient to state a plausible claim that they have a
property interest in the purported trust funds described in the FAC.
In defining property interests protected by the Fifth Amendment, the
Supreme Court has stated:
To have a property interest in a benefit, a person clearly must have
more than an abstract need or desire for it. He must have more than a
unilateral expectation of it. He must, instead, have a legitimate claim
of entitlement to it.
Board of Regents v. Roth, 408 U.S. 564, 577 (1972). If a right has not vested, it is
not a cognizable property interest. Peterson v. United States Dep’t of Interior, 899
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F.2d 799, 807 (9th Cir.), cert. denied, 498 U.S. 1003 (1990). In determining
whether a right is vested, one must consider “the certainty of one’s expectation in
the property at issue.” Bowers, 671 F.3d at 913 (quoting Enquist v. Oregon Dep’t
of Agric., 478 F.3d 985, 1002 (9th Cir. 2007), aff’d, 553 U.S. 591 (2008)). Thus,
an individual does not have a Constitutionally protectable property interest in a
particular benefit where a government agency retains discretion to grant or deny
that benefit. See e.g., Id. (under takings clause, “if the property interest is
‘contingent and uncertain’ or the receipt of the interest is ‘speculative’ or
‘discretionary,’ then the government’s modification or removal of the interest will
not constitute a Constitutional taking”); Erickson v. United States, 67 F.3d 758,
862 (9th Cir. 1995) (under due process clause, doctors had no property interest in
continued participation in Medicare or Medicaid); Greenwood v. FAA, 28 F.3d
971, 976 (9th Cir. 1994) (where annual renewal of pilot examiner designation was
left to the discretion of the FAA, plaintiff had no entitlement); Swanson v. Babbitt,
3 F.3d 1348, 1353-54 (9th Cir. 1993) (under takings clause, no vested right to
obtain patent to mining claim upon filing of claim where agency had discretion to
review claim).
Appellants do not identify any benefit to which they have a “legitimate claim
of entitlement.” While they twice argue in their opening brief that they have such a
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claim, in neither instance do they provide legal support for their claim. (See AOB
at 27, 33.)
Appellants appear to argue that they have a cognizable property interest in
the trust funds because: (1) they are beneficiaries of the trusts referred to in the
FAC, (2) these trusts contained the assets of CMKM and, as shareholders in
CMKM, they are entitled to the trust funds because CMKM was liquidated, and/or
(3) the Commissioners drove CMKM out of business by using CMKM to trap
naked short sellers. None of those claims demonstrates a cognizable property
interest in the funds.
Instead, Appellants’ allegations demonstrate that they do not have a vested
interest in any trust funds. Appellants claim that various entities (specifically,
entities that purchased CMKM assets, naked short sellers, the DTCC, and the
United States government) placed funds into one or more trusts and that those
funds were intended to be used for the benefit of CMKM shareholders. (CR 24;
ER 048-49, ¶¶ 47-51.) Appellants, however, do not point to any trust documents
or any other contracts or agreements that would give them a “legitimate claim of
entitlement” to these alleged funds. In fact, the FAC shows that, at most, they had
a “unilateral expectation” of receiving the funds as the FAC states that the
Commissioners have “the sole, final and absolute discretion” to determine when to

[Twist Capper]

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claim, in neither instance do they provide legal support for their claim. (See AOB
at 27, 33.)
Appellants appear to argue that they have a cognizable property interest in
the trust funds because: (1) they are beneficiaries of the trusts referred to in the
FAC, (2) these trusts contained the assets of CMKM and, as shareholders in
CMKM, they are entitled to the trust funds because CMKM was liquidated, and/or
(3) the Commissioners drove CMKM out of business by using CMKM to trap
naked short sellers. None of those claims demonstrates a cognizable property
interest in the funds.
Instead, Appellants’ allegations demonstrate that they do not have a vested
interest in any trust funds. Appellants claim that various entities (specifically,
entities that purchased CMKM assets, naked short sellers, the DTCC, and the
United States government) placed funds into one or more trusts and that those
funds were intended to be used for the benefit of CMKM shareholders. (CR 24;
ER 048-49, ¶¶ 47-51.) Appellants, however, do not point to any trust documents
or any other contracts or agreements that would give them a “legitimate claim of
entitlement” to these alleged funds. In fact, the FAC shows that, at most, they had
a “unilateral expectation” of receiving the funds as the FAC states that the
Commissioners have “the sole, final and absolute discretion” to determine when to
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disburse the purported pool of money collected from naked short sellers and other
entities. (CR 24; ER 049, ¶ 52.) Although Appellants suggest that the
Commissioners’ discretion was limited by their “mandate under the law to protect
the shareholders,” they do not explain how a responsibility to protect public
shareholders generally could create a property interest in trust funds. (Id.)
Similarly, even if, as Appellants allege, there was some expectation that the funds
would be released by October 2005 and the Commissioners had represented that
release of the funds was imminent (CR 24; ER 050, ¶¶ 53-54), Appellants provide
no basis for finding that their expectations could create a property interest in the
funds.
Appellants further suggest that, as CMKM shareholders, they have a pro rata
property interest in the trust funds because CMKM was being liquidated. (CR 24;
ER 044, ¶ 39; AOB at 33.) However, they acknowledge they lack any legal basis
establishing that a shareholder has a Constitutionally-protected right “to receive
proceeds from the winding up of a corporation.” (AOB at 32-33.) Indeed, this
Court has held that shareholders “do not directly own any part of a corporation’s
property or assets,” but hold only a “proportionate interest in the corporate equity
remaining after a corporation meets all its other debts and obligations. The profits
themselves belong to the corporation, and do not pass to the shareholders unless
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and until the board of directors declares a dividend.” Broad v. Sealaska Corp., 85
F.3d 422, 430 (9th Cir. 1996). The FAC fails to allege facts demonstrating that,
even if the trusts represent corporate assets,8 those assets have been distributed to
all corporate debtors, and that the shareholders have a legal right to the remaining
assets. Indeed, Appellants provide no reason for CMKM to liquidate its assets if
those assets far exceed its debts or other obligations. Thus, Appellants’ claim of
entitlement to assets in the trust, based simply on their status as shareholders, does
not sufficiently establish a property interest.
Similarly, any claim that the Commissioners drove CMKM out of business
by using CMKM to trap naked short sellers (CR 24; ER 047, ¶ 46) fails to state a
property interest because, as shareholders, Appellants “do not directly own any
part of a corporation’s property or assets.” Broad, 85 F.3d at 430.
Since Appellants have not identified a property interest protected by the
Fifth Amendment, they have not been deprived of property and cannot state a
takings claim or a substantive or procedural due process claim. Consequently, the
8 The FAC fails to allege that all of the assets in the alleged trust are corporate
assets. Even assuming there is a trust, Appellants do not allege facts that show that
assets from naked short sellers, the DTCC, or the United States government were
corporate assets. In addition, even assets that allegedly originated from sales of
CMKM assets would not be corporate assets if the Commissioners have discretion
to distribute them.
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district court properly dismissed the FAC for failure to state a Fifth Amendment
claim.
B. OTHER DEFICIENCIES IN THE FAC ALSO WARRANT
DISMISSAL.
The FAC may also be dismissed based on Appellants’ failure to state a claim
against the Commissioners, pursuant to Iqbal, and the Commissioners’ qualified
immunity, as further discussed below.
1. Appellants’ Bivens Claim Should Be Dismissed Because
They Have Not Alleged that the Commissioners Were
Either Personally Involved in, or Caused Appellants to Be
Subjected to, a Constitutional Deprivation.
In a Bivens action, the plaintiff must allege facts demonstrating that each
defendant participated in or directed Constitutional violations, or knew of
Constitutional violations of subordinates and failed to act to prevent them. See
Iqbal, 556 U.S. at 676 (“Because vicarious liability is inapplicable to Bivens and §
1983 suits, a plaintiff must plead that each Government-official defendant, through
the official's own individual actions, has violated the Constitution.”); Taylor v. List,
880 F.2d 1040, 1045 (9th Cir.1989) (“A supervisor is only liable for constitutional
violations of his subordinates if the supervisor participated in or directed the
violations, or knew of the violations and failed to act to prevent them.”); Pellegrino
v. United States, 73 F.3d 934, 936 (9th Cir. 1996) (Bivens liability premised on
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proof of direct personal responsibility). In Iqbal, the Supreme Court rejected the
notion that a supervisor’s mere “knowledge and acquiescence in their subordinates
[conduct]” could demonstrate the supervisor’s violation of the Constitution;
“purpose rather than knowledge is required to impose Bivens liability.” Iqbal, 556
U.S. at 677; see also Bibeau v. Pacific Northwest Research Foundation, 188 F.3d
1105, 1114 (9th Cir. 1999) (finding that supervisors who were aware of a project
that allegedly violated prisoners’ rights but were not involved in any of the
experiments were not liable under Bivens).
Appellants’ FAC fails to allege facts demonstrating that the Commissioners
had any personal involvement in the general matters asserted against the SEC.
Excluding conclusory allegations, Appellants fail to state any facts establishing
that these current and former Commissioners said, wrote, directed or instructed any
of the conduct alleged. Instead, the allegations merely attribute all of the SEC’s
alleged conduct to the Commissioners without regard to whether any individual
Commissioner actually engaged in any specific activity or had personal knowledge
of a specific activity. Thus, Appellants have failed to state a Bivens claim against
any of the Commissioners.
///
///
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2. Appellants’ Allegations Are Not Sufficiently Plausible to
State a Claim.
In addition to the fact that Appellants have failed to state a claim upon which
relief can be granted because they have not identified a Constitutionally-protected
property interest, the FAC suffers from numerous additional deficiencies because
the allegations do not satisfy the plausibility requirements outlined in Iqbal. Two
principles guide a court’s analysis of the plausibility of the allegations in a
complaint: (1) legal conclusions or recitals of the elements of a cause of action
supported only by conclusory statements are not entitled to the presumption of
truth; and (2) only a complaint stating a plausible, not merely possible, claim for
relief can survive a motion to dismiss. Iqbal, 556 U.S. at 678-679.
Most of the allegations in the FAC are either conclusory or simply not
plausible. For example, the FAC suggests that the Commissioners engaged in a
“sting operation” involving pumping up the value of CMKM stock to trap persons
engaged in naked short selling, but offer no specific actions by the Commissioners.
In fact, the far more plausible explanation for the rapid increase in CMKM’s stock
is the one detailed in the SEC’s complaint in its litigation involving CMKM:
CMKM was a company with no legitimate operations and CMKM’s management
defrauded shareholders by attempting to make it appear that the company was
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legitimate. See SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185 (D. Nev.
2009).
Similarly, the allegations that various entities placed funds for the benefit of
CMKM shareholders in a trust (or in multiple trusts) are conclusory in that they
fail to state fundamental facts establishing why the trusts were formed, who was
designated to be the beneficiaries of those trusts, and the nature of the
Commissioners’ supposed responsibilities over those trusts. It is simply not
plausible that the SEC, other government agencies, CMKM, naked short sellers,
and others all played a role in negotiating settlement agreements and/or
establishing trust accounts as to which the CMKM shareholders are beneficiaries,
but neither the SEC nor other government agencies have provided any public
information about the trusts. It is far more plausible that because CMKM had no
assets to distribute and could not have entered into any legitimate agreements with
other companies, there are no trusts and no funds to distribute to shareholders.
Because the allegations of the FAC are not plausible, dismissal of the FAC
should be affirmed.
3. Appellants Have Failed to Set Forth Facts Sufficient to
Overcome the Commissioners’ Qualified Immunity.
Government officials are shielded from civil damage liability so long as their
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conduct does not violate clearly established constitutional or statutory rights of
which a reasonable person would have known. See Alston v. Read, 663 F.3d 1094
(9th Cir. 2011). Qualified immunity “is both a defense to liability and a limited
‘entitlement not to stand trial or face the other burdens of litigation.’” Iqbal, 556
U.S. at 672 (internal citation omitted). As such, the Supreme Court has repeatedly
underscored the importance of resolving qualified immunity questions at the
earliest possible stage of litigation so that the costs and expenses of trial are
avoided where the defense is dispositive. Saucier v. Katz, 533 U.S. 194, 200
(2001).
In Saucier, the Court established a two-part inquiry for determining whether
qualified immunity applies: (1) whether taken in the light most favorable to the
plaintiff, the facts alleged show the officer’s conduct violated a constitutional right;
and (2) whether the constitutional right in question was clearly established such
that it would be clear to a reasonable officer that his conduct was unlawful in the
situation confronted. Saucier, 533 U.S. at 201; Marquez v. Gutierrez, 322, F.3d
689, 692 (9th Cir. 2003).
As explained above, Appellants have failed to establish the existence of a
protected property interest in the alleged funds. Absent such an interest, there can
be no Fifth Amendment violation, and the first prong of the Saucier test cannot be
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satisfied.
In addition, Appellants effectively admit that the second prong cannot be
satisfied because they point to no clearly established law showing they have a
constitutional interest in the funds they seek. They admit that they have “not found
specific case authority” supporting the existence of a property right in the funds at
issue, and they do not provide any analysis to support the existence of a right other
than a general sense that there “must be a ‘Constitutionally protected property
right.’”(AOB at 32-33.) Thus, even if they could construct such a claim, the
Commissioners are entitled to qualified immunity.
4. Appellants Have Abandoned Their Claim for Declaratory
Judgment.
The FAC’s first cause of action sought a declaratory judgment that declares
the validity of Appellants’ contentions. (CR 24; ER 054.) Appellants have
abandoned this claim on appeal as they specifically assert that this action was
brought pursuant to Bivens, which provides only for monetary relief. Bivens, 403
U.S. at 397. (AOB at 25.) Appellants concede that they do not rely on the
Administrative Procedure Act, 5 U.S.C. 702, which waives the government’s
sovereign immunity for non-monetary claims. (AOB at 25.)
///

[Twist Capper]

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Nonetheless, the district court properly dismissed Appellants’ claim for
declaratory judgment. To the extent this is a claim against the Commissioners
acting in their official capacities, it is barred by sovereign immunity because there
is no waiver of sovereign immunity. Cato v. United States, 70 F.3d 1103, 1107
(9th Cir. 1995) (stating that a plaintiff suing the United States bears the burden of
showing an unequivocal waiver of sovereign immunity); Nurse v. United States,
226 F.3d 996, 1004 (9th Cir. 2000) (plaintiffs “cannot state a claim against federal
officers in their official capacities unless the United States waives its sovereign
immunity”).
To the extent the declaratory judgment claim is against the Commissioners
in their individual capacities, it must be dismissed because Appellants have named
the wrong defendants. The Commissioners – in their personal capacities – are not
parties from whom a declaratory judgment (or any other equitable relief) can be
obtained because the Commissioners cannot take government action in their
individual capacities. See, e.g., Wolfe v. Strankman, 392 F.3d 358, 360 n.2 (9th
Cir. 2004) (declaratory and injunctive relief only available in official capacity suit;
it is not available in lawsuit against individual government employees in their
personal capacities).
///
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Moreover, the Declaratory Judgment Act does not confer federal subject
matter jurisdiction in the absence of an underlying claim. Thus, the district court
properly dismissed the cause of action for declaratory judgment.
VII. CONCLUSION
For the foregoing reasons, the district court’s order dismissing Appellants’
claims, with prejudice, should be affirmed.
Dated: April 30, 2012 Respectfully submitted,
ANDRÉ BIROTTE JR.
United States Attorney
LEON W. WEIDMAN
Assistant United States Attorney
Chief, Civil Division
/s/ Keith M. Staub
KEITH M. STAUB
Assistant United States Attorney
Attorneys for Defendants-Appellees
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VIII. STATEMENT OF RELATED CASES
The Appellees are unaware of any related actions pending in this Court.
Dated: April 30, 2012 Respectfully submitted,
ANDRÉ BIROTTE JR.
United States Attorney
LEON W. WEIDMAN
Assistant United States Attorney
Chief, Civil Division
/s/ Keith M. Staub
KEITH M. STAUB
Assistant United States Attorney
Attorneys for Defendants-Appellees
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[jsq1]

If and I do mean if AL has the proof then it is time to play his cards. I am trying to stay positive but after reading the reply by the SEC it is becoming harder to remain positive. Let's go AL show them the pocket Aces

[TexasPride]

Man! I bet that took a long time to type... Thanks Twist...