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UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

ERWIN GRAMPP, derivatively on behalf of JBI, INC., Plaintiff, Civil Action No.: 1:12-cv-10495-MLW vs. JOHN BORDYNUIK, DR. JACOB SMITH, RONALD C. BALDWIN, JR., AMY BRADSHAW, JOHN M. WESSON, ROBIN BAGAI, GREGORY GOLDBERG, and THEODORE J. HENRY, Defendants, and JBI, INC. Nominal Defendant.

THE INDIVIDUAL DEFENDANTS MEMORANDUM IN SUPPORT OF THEIR MOTION TO DISMISS THE COMPLAINT

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TABLE OF CONTENTS Page

INTRODUCTION ...........................................................................................................................1 BACKGROUND .............................................................................................................................3 A. B. The Parties ...............................................................................................................3 Facts and Allegations...............................................................................................4

ARGUMENT...................................................................................................................................6 I. THE COURT LACKS PERSONAL JURISDICTION OVER THE INDIVIDUAL DEFENDANTS OTHER THAN DEFENDANT BORDYNUIK......................................................................................................................6 A. B. C. Plaintiff Will Be Unable to Prove Affirmative Jurisdictional Facts Beyond The Complaint. ...........................................................................................7 Plaintiff Cannot Prove General Or Specific Jurisdiction.........................................7 The Fact That JBI Formerly Had Its Principal Place of Business In Massachusetts Is An Insufficient Basis For Specific Jurisdiction Over The Individual Defendants..............................................................................8

II.

PLAINTIFF HAS NOT ADEQUATELY ALLEGED THAT DEMAND ON JBIS BOARD WAS FUTILE PURSUANT TO RULE 23.1. ...................................10 A. B. Demand Futility Is Assessed Based on Composition of Board on the Date the Complaint Was Filed. ........................................................................13 The Particularized Facts Alleged in the Complaint Fail to Raise a Reasonable Doubt that a Majority of the JBI Board For Demand Purposes Was Disinterested...................................................................................13 1. 2. Plaintiffs Allegations Regarding The Companys Public Statements and Filings Do Not Establish Demand Futility. ......................15 That Mr. Wesson Served On JBIs Audit Committee Is Not Sufficient To Excuse Demand. ..................................................................18

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C.

The Particularized Facts Alleged In The Complaint Fail To Raise A Reasonable Doubt That A Majority Of The JBI Board For Demand Purposes Was Independent......................................................................19

III.

PLAINTIFF HAS NOT ADEQUATELY ALLEGED BREACHES OF FIDUCIARY DUTY UNDER RULE 12(B)(6) AND RULE 9(B) STANDARDS....................................................................................................................20 A. B. C. The Court Should Consider Only Factual Allegations, Not Threadbare Conclusory Allegations. .....................................................................21 Plaintiff Failed to Allege Cognizable Damage To JBI. .........................................21 Plaintiff Failed To Plead Intentional Misconduct, Fraud, Or A Knowing Violation Of The Law With Requisite Particularity. .............................23

IV.

IN THE ALTERNATIVE, THE COURT SHOULD STAY THIS ACTION BECAUSE THERE IS A SIMILAR CLASS ACTION SECURITIES CASE PENDING IN NEVADA. ...............................................................28

CONCLUSION..............................................................................................................................30

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TABLE OF AUTHORITIES

Page(s) FEDERAL CASES Adelson v. Hananel, 652 F.3d 75 (1st Cir. 2011).........................................................................................................8 Advanced Ink Sys. Corp. v. Ink Half Price, Inc., 2007 U.S. Dist. LEXIS 24009 (D.P.R. Mar. 30, 2007) ..............................................................7 Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613 (1st Cir. 1988) ................................................................................................9, 10 American Freedom Train Found. v. Spurney, 747 F.2d 1069 (1st Cir. 1984) ....................................................................................................9 Ashcroft v. Iqbal, 556 U.S. 662 (2009).................................................................................................................21 Austin v. Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36 (1st Cir. 1993) ................................................................................................26 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).................................................................................................................21 Breault v. Folino, 2002 U.S. Dist. LEXIS 25587 (C.D. Cal. Mar. 15, 2002) .......................................................29 Brown v. Moll, 2010 U.S. Dist. LEXIS 73875 (N.D. Cal. July 21, 2010)........................................................27 Carp v. XL Ins., 754 F. Supp. 2d 230 (D. Mass. 2010) ............................................................................7, 10, 21 Caviness v. Evans, 229 F.R.D. 354 (D. Mass. 2005) ...................................................................................... passim Chlebda v. H. E. Fortna & Bro., Inc., 609 F.2d 1022 (1st Cir. 1979) ....................................................................................................7 Chorney v. White, 1986 U.S. Dist. LEXIS 25559 (D. Mass. May 13, 1986) ........................................................10 Cucci v. Edwards, 2007 U.S. Dist. LEXIS 86832 (C.D. Cal. Oct. 31, 2007)........................................................29

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Delaware & Hudson Co. v. Albany & S.R. Co., 213 U.S. 435 (1909).................................................................................................................11 Destination Mktg., Inc. v. Kessler Fin. Servs., L.P., 2001 U.S. Dist. LEXIS 25841 (D. Mass. Nov. 2, 2001)..........................................................25 Dollens v. Zionts, 2002 U.S. Dist. LEXIS 13511 (N.D. Ill. July 22, 2002)..........................................................22 Ehlert v. Singer, 245 F.3d 1313 (11th Cir. 2001) ................................................................................................13 Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902 (1st Cir. 1980) ......................................................................................................9 Fosbre v. Matthews, No. 3:09 CV-04676, 2010 WL 2696615 (D. Nev. July 2, 2010) ...........................15, 18, 20, 23 Gerber v. Bowditch, 2006 U.S. Dist. LEXIS 27552 (D. Mass. May 8, 2006) ..........................................................24 Gonzalez Turul v. Rogatol Distribs., Inc., 951 F.2d 1 (1st Cir. 1991) ..................................................................................................10, 11 Goodyear Dunlop Tires Operations v. Brown, 131 S. Ct. 2846 (U.S. 2011).......................................................................................................8 Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ....................................................................................................24 Grossman v. Johnson, 674 F.2d 115 (1st Cir. 1982).....................................................................................................13 Hayduk v. Lanna, 775 F.2d 441 (1st Cir. 1985) ....................................................................................................28 Heit v. Baird, 567 F.2d 1157 (1st Cir. 1977)...................................................................................................11 In re Cray Inc. Derivative Litig., 431 F. Supp. 2d 1114 (W.D. Wash. 2006) ................................................................................22 In re First Bancorp Derivative Litig., 465 F. Supp. 2d 112 (D.PR) .....................................................................................................27 In re Isolagen Inc. Sec. & Derivative Litig., 2007 U.S. Dist. LEXIS 26905 (E.D. Pa. Apr. 10, 2007)..........................................................22

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In re Kauffman Mut. Fund Actions, 479 F.2d 257 (1st Cir. 1973) ....................................................................................................11 In re Ormat Techs., Inc. Derivative Litig., 2011 U.S. Dist. LEXIS 96891 (D. Nev. Aug. 29, 2011) ..........................................................29 In re Sagent Tech. Inc., Derivative Litig., 278 F. Supp. 2d 1079 (N.D. Cal. 2003) ...................................................................................20 In re Sonus Networks, Inc., 499 F.3d 47 (1st Cir. 2007) ..........................................................................................12, 14, 20 In re Stratus Computer, 1991 U.S. Dist. LEXIS 21587 (D. Mass. Dec. 10, 1991) ........................................................24 In re United Telecomms., Sec. Litig., 1993 U.S. Dist. LEXIS 4749 (D. Kan. Mar. 4, 1993)..............................................................22 Israni v. Bittman, 2012 WL 1074266 (9th Cir. Apr. 2, 2012) ....................................................................... passim Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325 (D. Ariz. 2007) ................................................................................19, 20 Klein v. Freedom Strategic Partners, LLC, 595 F. Supp. 2d 1152 (D. Nev. 2009).......................................................................................21 Ladia Sys., L.L.C. v. Argonaut Ins. Group, 2001 U.S. Dist. LEXIS 19093 (D. Mass. Nov. 20, 2001)........................................................10 Lockebridge, LLC v. RGMS Media, Inc., 2012 U.S. Dist. LEXIS 86504 (D. Mass. June 22, 2012) ......................................................7, 8 Mangual v. General Battery Corp., 710 F.2d 15 (1st Cir. 1983) ........................................................................................................7 Mass. Sch. of Law v. ABA, 142 F.3d 26 (1st Cir. 1998) ....................................................................................................7, 8 N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8 (1st Cir. 2009) ........................................................................................................27 Pancoe v. JBI, Inc., No. 3:11-CV-00545 (D. Nev.)..................................................................................................28 Prudential Ins. Co. v. Turner & Newall Plc., 1988 U.S. Dist. LEXIS 15960 (D. Mass. Dec. 12, 1988) ........................................................25

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Rapaport v. Soffer, 2012 U.S. Dist. LEXIS 90324 (D. Nev. June 29, 2012) ..........................................................23 Sachs v. Sprague, 401 F. Supp. 2d 159 (D. Mass. 2005) ......................................................................................24 SEC v. Tambone, 597 F.3d 436 (1st Cir. 2010) ....................................................................................................26 Shaffer v. Heitner, 433 U.S. 186 (U.S. 1977).....................................................................................................9, 10 Stanley Works v. Globemaster, Inc., 400 F. Supp. 1325 (D. Mass. 1975) .........................................................................................10 Stiegele ex rel Viisage Tech., Inc. v. Bailey, 2007 WL 4197496 (D. Mass. 2007).......................................................................11, 13, 18, 19 Strickland v. Hongjun, 2011 U.S. Dist. LEXIS 73944 (S.D.N.Y. July 8, 2011) ...........................................................23 STATE CASES Aronson v. Lewis, 473 A.2d 805 (Del. 1984) ..................................................................................................12, 19 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) ................................................................................................13, 20 Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ............................................................................................11, 12, 14 Brudno v. Wise, 2003 Del. Ch. LEXIS 35 (Del. Ch. Apr. 1, 2003)....................................................................29 Dunphy v. Travelers Newspaper Assn, 16 N.E. 426 (Mass. 1888) ........................................................................................................11 Grimes v. Donald, 673 A.2d 1207 (Del. 1996) ......................................................................................................14 Grobow v. Perot, 539 A.2d 180 (Del. 1988) ..................................................................................................14, 20 Guttman v. Jen-Hsun Huang, 823 A.2d 492 (Del. Ch. 2003)..................................................................................................27 Harrison v. NetCentric Corp., 744 N.E.2d 622 (Mass. 2001) ..................................................................................................12 -vi-

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Johnston v. Box, 903 N.E.2d 1115 (Mass. 2009) ................................................................................................12 Kahn v. Dodds, 252 P.3d 681 (Nev. 2011).............................................................................................23, 26, 27 Kannavos v. Annino, 247 N.E.2d 708 (Mass. 1969) ..................................................................................................26 Rales v. Blasband, 634 A.2d 927 (Del. 1993) ............................................................................................12, 13, 20 Roy v. Roy, 715 N.E.2d 70 (Mass. App. Ct. 1999)........................................................................................8 Seminaris v. Landa, 662 A.2d 1350 (Del. Ch. 1995)..........................................................................................13, 14 Shoen v. SAC Holding Corp., 137 P.3d 1171 (Nev. 2006)............................................................................................... passim Wood v. Baum, 953 A.2d 136 (Del. 2008) ......................................................................................15, 16, 17, 27 STATE STATUTES Nev. Rev. Stat. 78.120(1) ............................................................................................................11 Nev. Rev. Stat. 78.138(7) .................................................................................................... passim

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INTRODUCTION Pursuant to Federal Rules of Civil Procedure 12(b)(2), 12(b)(6), and 23.1, Defendants John Bordynuik, Dr. Jacob Smith, Ronald C. Baldwin, Jr., Amy Bradshaw, John M. Wesson, Robin Bagai, Gregory Goldberg, and Theodore J. Henry (collectively, the Individual Defendants) respectfully move the Court to dismiss the Complaint. The Complaint should be dismissed as to all the Individual Defendants other than Mr. Bordynuik because the Court lacks personal jurisdiction over these defendants. None of their conduct at issue is alleged to have occurred in Massachusetts. And no factsalleged in the Complaint or otherwisesupport the proposition that they ever had any substantial contacts with Massachusetts. Indeed, the only alleged fact suggesting they ever had any connection with Massachusetts is that they are current or former directors or officers of JBI, Inc. (JBI or the Company), which formerly had its principal office in Massachusetts. But such a tenuous connection to Massachusetts is woefully insufficient for this Courts assertion of personal jurisdiction under long-standing First Circuit authority. Second, the Complaint should be dismissed because Plaintiff has failed to satisfy the basic pleading standards for bringing this derivative action purportedly on behalf of the Company. Because Plaintiff did not make a demand on the three-member JBI board of directors (the JBI Board) serving at the time the Complaint was filed, Plaintiff must allege with particularity the reasons why such demand should be excused as futile. See Fed. R. Civ. P. 23.1. Here, even accepting all of Plaintiffs allegations as true, they at most support an inference that a majority of the three-member JBI Board serving at the time the Complaint was filed had approved one of the SEC filings containing the erroneous media credits valuation at issue. But such allegations are insufficient to meet the applicable demand futility standard. Under the

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applicable law of Nevada (JBIs state of incorporation), Plaintiff must make particularized allegations demonstrating that a majority of the JBI Board faces a substantial likelihood of liability for engaging in intentional misconduct, fraud, or a knowing violation of the law in connection with the underlying conduct. The Complaint contains no allegations that would meet that stringent standard. Third, the Complaint should be dismissed because Plaintiff has also failed to satisfy basic pleading standards in asserting the underlying claim for breach of fiduciary duty. Most clearly, the Complaint fails to allege cognizable damages, a necessary element of the claim. Plaintiff asserts that JBI has sustained substantial damages by having been sued by the Securities and Exchange Commission (SEC) in a case that the SEC has brought against JBI and Defendants Bordynuik and Baldwin. But that case, which is still in its infancy, has not resulted in any finding of liability, let alone judgment against the Company. Thus, any assertion that JBI has been damaged is entirely speculative. Courts have repeatedly dismissed as premature derivative complaints that allege as damages the mere fact that a second lawsuit is pending against the company pursuant to which the company may ultimately be held liable. Likewise, the Complaint fails to plead a claim for breach of fiduciary duty because none of its particularized allegations give rise to an inference that the Individual Defendants were engaged in intentional misconduct, fraud, or a knowing violation of the law. For example, one of the Individual Defendants, Theodore Henry, was a JBI director for only a six week period during which none of the filings at issue were made. Another Individual Defendant, Dr. Bagai, became a director after the allegedly inaccurate year-end financial statements were filed, and only a few weeks before they were corrected. Indeed, Plaintiff pleads no facts of which the Individual Defendants were supposedly aware that would lead a reasonable person to conclude that they

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knew the statements at issue were false at the time made, much less that they were engaged in intentional misconduct, fraud, or a knowing violation of the law. In short, the Complaint should be dismissed for each of these independent reasons, as set forth in greater detail below. BACKGROUND A. The Parties

Plaintiff Erwin Grampp claims to be a shareholder of JBI. He does not allege how many shares he holds. ( 11.)1 Nominal defendant JBI is a Nevada corporation with principal offices located in Ontario, Canada. JBIs principal business is converting waste plastic into fuel. ( 12.) Defendants Bordynuik, Wesson and Bagai were each directors of Company at the time the Complaint was filed (i.e., March 16, 2012). ( 13, 17 & 18.) They were the Companys only directors as of that time. Mr. Bordynuik had been a director since April 24, 2009, and was also the Companys founder, CEO and President. ( 13.)2 Mr. Wesson has only been a director since February 12, 2010 and holds no other positions with the Company. ( 17.) Likewise, Dr. Bagai was only appointed director on April 30, 2010 and has held no other positions with the Company. ( 18.)3 The Complaints allegations regarding the dates of Dr. Smiths affiliation with the Company are clearly erroneous. The Complaint contends that Dr. Smith became a JBI Board member on February 11, 2009. (See 14.) But the Companys public filings with the SEC
1 2

All references to are to the numbered paragraphs of the Complaint.

Mr. Bordynuik has since resigned all of these positions and is now Chief of Technology, a non-officer position. Dr. Bagai has since resigned as director.

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demonstrate that Dr. Smith was appointed Chief Operating Officer on January 11, 2010, and that he became a member of the Board on February 12, 2010. (See JBI Form 8-K, Jan. 11, 2010 (Exhibit A); JBI Form 8-K, Feb. 12, 2010 (Exhibit B).) Further, although the Complaint suggests that Dr. Smith remained a director at the time the Complaint was filed (see 14), the Companys public filings with the SEC demonstrate that allegation to be incorrect, as well. Specifically, he resigned both positions on March 12, 2012, i.e., before the Complaint was filed. (See JBI Form 8-K, March 12, 2012 (Exhibit C).) The Complaint names four additional defendants who were not affiliated with JBI at the time of its filing: Ronald Baldwin, Jr. was the Companys Chief Financial Officer from January 1, 2010 to April 6, 2011. ( 15.) Amy Bradshaw was a JBI director for less than four months from February 12, 2010 to June 1, 2010, when she resigned to become its Vice President of Marketing and Communications, a position she held until December 16, 2010. ( 16.) Theodore Henry was a JBI director for only six weeks, from February 12, 2010 to March 24, 2010. ( 21.) Gregory Goldberg was a JBI director for only four and one-half months, from March 24, 2010 to August 12, 2010. ( 20.) B. Facts and Allegations

In summary, the Complaint alleges as follows: On August 24, 2009, the Company, then doing business under the name 310 Holdings, Inc. (310 Holdings), purchased 100% of the outstanding shares of Javaco, Inc. (Javaco), which was itself a wholly owned subsidiary of an unrelated company named Domark International, Inc. (Domark). ( 38.) As part of the transaction, but pursuant to a separate agreement, Domark assigned to 310 Holdings certain media credits (the Media Credits) that allowed their holder to purchase $9,997,134 worth of prepaid advertising and marketing promotions. Id. 310 Holdings paid for those credits by issuing one million shares of common stock then valued at one million dollars. Id. 310 -4-

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Holdings acquisition of Javaco and the amount it paid for the Media Credits was disclosed in a Form 8-K that 310 Holdings filed on August 28, 2009. (See JBI Form 8-K, Aug. 24, 2009 (Exhibit D).) In JBIs third-quarter 2009 Form 10-Q filed on November 16, 2009, and in its fiscal year 2009 Form 10-K filed on March 31, 2010, JBI reported the value of the Media Credits at their face value, i.e., $9,997,134. ( 41-42.) That valuation was based on the price Domark paid for the Media Credits when it had purchased them from Media4Equity LLC on August 13, 2008. ( 44.) On May 21, 2010, JBI filed a Form 8-K stating that its financial statements included in its third quarter and full year 2009 10-Q and 10-K filings should no longer be relied upon due, in part, to the valuation of the Media Credits. ( 70.) The 8-K also disclosed that JBI had dismissed its independent audit firm Gately and Associates, and had retained a new independent registered public accounting firm, Withum Smith & Brown, PC, to review its previous financial statements. (JBI Form 8-K, May 14, 2010 (Exhibit E).) On July 9, 2010 and November 17, 2010, JBI issued two restatements, which had the effect of writing down the value of the Media Credits to zero. ( 70.) On January 4, 2012, the SEC filed a civil lawsuit against the Company, Mr. Bordynuik and Mr. Baldwin in the District of Massachusetts, alleging various securities fraud claims in connection with the Companys erroneous booking of media credits (1:12-cv-10012-MLW (D. Mass.)) (the SEC Action). On March 16, 2012, Plaintiff brought this action. The gravamen of Plaintiffs Complaint is that the Individual Defendants allegedly breached their fiduciary duties in connection with the Companys erroneous booking of the Media Credits, i.e., the subject of the SEC Action. In

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addition, the Complaint suggests that Mr. Bordynuik made a variety of misstatements about the Companys commercial fuel processing operations, which statements are not the subject of the SEC Action. ( 71-80.) ARGUMENT I. THE COURT LACKS PERSONAL JURISDICTION OVER THE INDIVIDUAL DEFENDANTS OTHER THAN DEFENDANT BORDYNUIK. The Court lacks personal jurisdiction over all of the Individual Defendants other than Mr. Bordynuik. The Complaint does not allege a single fact (as opposed to mere conclusory allegations, see 9-10) that would provide a valid basis for the Courts assertion of personal jurisdiction over any of the Individual Defendants.4 Indeed, the Complaint affirmatively alleges that none of the Individual Defendants are citizens of Massachusetts. ( 13-21.) The only relevant fact alleged in support of personal jurisdiction is that the Individual Defendants are current or former directors or officers of the Company which, according to the Complaint, had its principal place of business . . . in Cambridge[,] Massachusetts up through July 2010. ( 9.) But JBIs former place of business in this state is an insufficient basis for establishing personal jurisdiction, as discussed in detail below. Further, declarations signed by these defendants establish that there are no other bases for personal jurisdiction. See Declarations of Ronald Baldwin, Jr., Theodore Henry, Gregory Goldberg, Dr. Robin Bagai, Dr. Jacob Smith, John Wesson and Amy Bradshaw (attached as Exhibits F through L). Therefore, the Complaint should be dismissed on this basis as to all Individual Defendants other than Mr. Bordynuik.

While the Complaint does not sufficiently allege personal jurisdiction with respect to any of the Individual Defendants, Mr. Bordynuik does not contest personal jurisdiction.

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A.

Plaintiff Will Be Unable to Prove Affirmative Jurisdictional Facts Beyond The Complaint.

Plaintiff bears the burden of proving that personal jurisdiction exists over the moving Defendants. See Mass. Sch. of Law v. ABA, 142 F.3d 26, 34 (1st Cir. 1998). And it is wellestablished that in responding to this motion to dismiss, plaintiff must go beyond the pleadings and make affirmative proof. Chlebda v. H. E. Fortna & Bro., Inc., 609 F.2d 1022, 1024 (1st Cir. 1979). That is because the unsupported allegations of the complaint are insufficient to establish jurisdiction. Advanced Ink Sys. Corp. v. Ink Half Price, Inc., 2007 U.S. Dist. LEXIS 24009, at *6 (D.P.R. Mar. 30, 2007). While there are several permissible approaches to assessing whether a plaintiff has satisfied its burden of proof, the most common is the prima facie evidentiary standard. Under that standard, a court considers whether the plaintiff has proffered evidence that, if credited, is enough to support findings of all facts essential to personal jurisdiction. Carp v. XL Ins., 754 F. Supp. 2d 230, 232-233 (D. Mass. 2010) (quotations omitted). As an evidentiary matter, the Court accepts properly supported proffers of evidence by the plaintiff as true and considers facts put forward by the defendant to the extent that they are uncontradicted by the plaintiff. Id. (quotations omitted). B. Plaintiff Cannot Prove General Or Specific Jurisdiction.

Because this is a diversity case, the Courts personal jurisdiction over nonresident defendants is governed by Massachusetts long-arm statute. See Mangual v. General Battery Corp., 710 F.2d 15, 18 (1st Cir. 1983); Lockebridge, LLC v. RGMS Media, Inc., 2012 U.S. Dist. LEXIS 86504, 12-14 (D. Mass. June 22, 2012). Personal jurisdiction must be either general or specific. Massachusetts Sch. of Law, 142 F.3d at 34. The Complaint alleges no facts that could conceivably establish general jurisdiction over the Individual Defendants. That would require -7-

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proof that they engaged in continuous and systematic activity, unrelated to the alleged wrongdoing alleged in the Complaint, in Massachusetts. Id. For individuals, as opposed to companies, the paradigm forum for the exercise of general jurisdiction is the individuals domicile. Goodyear Dunlop Tires Operations v. Brown, 131 S. Ct. 2846, 2853 (U.S. 2011). None of the Individuals Defendants are domiciled or reside in Massachusetts, as their Declarations establish. (See Exhibits F-L.) And there is no other basis for general jurisdiction. See Roy v. Roy, 715 N.E.2d 70, 72 (Mass. App. Ct. 1999) (being an officer and director of a Massachusetts corporation does not constitute sufficiently substantial contacts of a continuous and systematic nature so as to justify general jurisdiction). C. The Fact That JBI Formerly Had Its Principal Place of Business In Massachusetts Is An Insufficient Basis For Specific Jurisdiction Over The Individual Defendants.

Nor does this Court have specific jurisdiction over the Individual Defendants. Because courts have construed the Massachusetts long-arm statute as being coextensive with the limits permitted by the Constitution, district courts may turn directly to the constitutional test for determining specific jurisdiction. Lockebridge, LLC, 2012 U.S. Dist. LEXIS 86504, at *13 (quoting Adelson v. Hananel, 652 F.3d 75, 80 (1st Cir. 2011)). The first step in the First Circuits tripartite analysis to determine whether specific jurisdiction is appropriate is a determination of whether the claims arise out of or are related to the defendants in-state activities. Lockebridge, LLC, 2012 U.S. Dist. LEXIS 86504, at *14. The relatedness inquiry focuses on whether the claim underlying the litigation . . . directly arise[s] out of, or relate[s] to, the defendants forum-state activities. Id. (quotations omitted). Plaintiff cannot satisfy the relatedness test. Other than in the most conclusory manner (see 10), Plaintiff does not allege that any Individual Defendant undertook any conduct at issue in Massachusetts. The only jurisdictional -8-

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facts alleged are that the Individual Defendants are directors or officers of a company that had its principal office in Massachusetts when the financial statements at issue were published. ( 9; see also 13-21 (alleging the director and officer positions of the Individual Defendants). These facts are insufficient as a matter of law, because jurisdiction over the individual officers of a corporation may not be based merely on jurisdiction over the corporation. Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902, 906 (1st Cir. 1980) (affirming dismissal for lack of personal jurisdiction in Puerto Rico over directors and officers of Puerto Rican company); see also Shaffer v. Heitner, 433 U.S. 186, 213-214 (1977) (Delaware lacked personal jurisdiction over directors of Delaware corporation where plaintiff did not identify any act related to his derivative suit as having taken place in Delaware). Instead, what is required is some showing of direct personal involvement by the corporate officer in some decision or action which is causally related to plaintiff's injury and that occurred in Massachusetts. Escude Cruz, 619 F.2d at 907. In other words, Jurisdiction over the individual officers or directors of a corporation cannot be imputed from jurisdiction over the corporation. . . . There must be independent, personal involvement in the tortious acts occurring in the forum state. Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613, 617 (1st Cir. 1988) (affirming dismissal for lack of personal jurisdiction where Plaintiffs affidavits were completely devoid of any proof, or even allegations, that the individual [officer] defendants sanctioned, formulated, directed, [or] actively participated in the conduct at issue that occurred in the forum state); see also American Freedom Train Found. v. Spurney, 747 F.2d 1069, 1074 (1st Cir. 1984) (affirming dismissal for lack of personal jurisdiction because defendants mere acceptance of positions as officers and directors of a Massachusetts corporation . . . falls far

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short of that necessary to give rise to plaintiff's cause of action, and thus could not establish specific jurisdiction).5 Here, Plaintiff failed to allegeand will not be able to provethat the Individual Defendants took any action in Massachusetts related to the conduct at issue. The Court therefore lacks personal jurisdiction over Defendants Smith, Baldwin, Bradshaw, Wesson, Bagai, Goldberg, and Henry, and should dismiss the Complaint as to them. See, e.g., Shaffer v. Heitner, 433 U.S. 186 (1977).6 II. PLAINTIFF HAS NOT ADEQUATELY ALLEGED THAT DEMAND ON JBIS BOARD WAS FUTILE PURSUANT TO RULE 23.1. Plaintiff admits he did not make demand on the JBI Board (see 85) but then fails adequately to state with particularity that such demand was futile, as he must. Fed. R. Civ. P. 23.1; Gonzalez Turul v. Rogatol Distribs., Inc., 951 F.2d 1, 2 (1st Cir. 1991). The First Circuit vigorously enforces demand requirements, and will dismiss derivative actions when plaintiffs do not comply. Gonzalez Turul, 951 F.2d at 2. A shareholder may not plead in general terms, hoping that, by discovery or otherwise, he can later establish that demand would have been
Carp v. XL Ins., 754 F. Supp. 2d 230, 232 (D. Mass. 2010) (dismissing claims against CEO because [e]ven if the Court has jurisdiction over XL Insurance, however, jurisdiction over the individual officers of a corporation may not be based merely on jurisdiction over the corporation) (citation omitted); Chorney v. White, 1986 U.S. Dist. LEXIS 25559, at *9 (D. Mass. May 13, 1986) (dismissing claims against officer and director because In order for a court in Massachusetts to exercise jurisdiction over Patton, there must be an independent basis for it. Merely being the officer or director of a corporation that acts in Massachusetts or associated with an individual who acts in Massachusetts is insufficient); Stanley Works v. Globemaster, Inc., 400 F. Supp. 1325, 1336-1337 (D. Mass. 1975) (dismissing claims against corporate officers because defendants positions as officers in a company with a substantial Massachusetts office and related trips to Massachusetts once a year were insufficient). See also Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613, 617 (1st Cir. P.R. 1988) (affirming dismissal where there was no proof that officers had independent, personal involvement in the tortious acts that occurred in the forum state); Ladia Sys., L.L.C. v. Argonaut Ins. Group, 2001 U.S. Dist. LEXIS 19093, at *18-19 (D. Mass. Nov. 20, 2001) (dismissing complaint where it did not allege that the causes of action alleged against corporate agent defendant arose out of [his] contacts with Massachusetts, and observing that [o]rdinarily, an agent of a corporation would not be subject to jurisdiction on the basis of the corporations contacts with the forum).
6 5

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futile. Id. at 3. Mere conclusory assertions or generalized allegations of control, acquiescence, [or] wrongful participation are insufficient to satisfy this heightened pleading standard. Stiegele ex rel Viisage Tech., Inc. v. Bailey, 2007 WL 4197496, at * 5 (D. Mass. 2007); accord Shoen v. SAC Holding Corp., 137 P.3d 1171, 1180 (Nev. 2006); Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000). Rule 23.1 places an initial burden on the plaintiff to demonstrate why the directors are incapable of doing their duty, or as the [Supreme] Court has put it, to show that antagonism between the directory and the corporate interest . . . be unmistakable. In re Kauffman Mut. Fund Actions, 479 F.2d 257, 263 (1st Cir. 1973) (quoting Delaware & Hudson Co. v. Albany & S.R. Co., 213 U.S. 435, 447 (1909)). Failure to meet the pleading standard imposed by Rule 23.1 requires dismissal of the action even if the plaintiff has an otherwise meritorious claim. Id. This stringent pleading standard furthers the longstanding principle that the board of directors is vested with the authority to manage the corporations affairs. Heit v. Baird, 567 F.2d 1157, 1162 n.6 (1st Cir. 1977); see also Nev. Rev. Stat. 78.120(1) (providing that board of directors has full control over the affairs of the corporation). Included within the boards authority is the decision of whether to take legal action on the corporations behalf. Shoen, 137 P.3d at 1179. As our courts have long recognized, It would be contrary to the fundamental principles of corporate organization to hold that a single shareholder can at any time launch the corporation into litigation to obtain from another what he deems to be due to it, or to prevent methods of management which he thinks unwise. Dunphy v. Travelers Newspaper Assn, 16 N.E. 426, 431 (Mass. 1888). The demand requirement thus protects corporate assets by discouraging unnecessary, unfounded, or improper shareholder actions. Shoen, 137 P.3d at 1179. It exists at the threshold, first to insure that a stockholder exhausts his intercorporate

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remedies, and then to provide a safeguard against strike suits. Aronson v. Lewis, 473 A.2d 805, 811-812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The law of Nevada, JBIs state of incorporation, governs both the determination of whether the particularized facts alleged in the Complaint establish that demand was futile, as well as the substantive law applied to the claims. See, e.g., In re Sonus Networks, Inc., 499 F.3d 47, 66 (1st Cir. 2007) (applying Delaware law as to demand futility because it was the state of incorporation); Johnston v. Box, 903 N.E.2d 1115, 1123 (Mass. 2009) (same); Harrison v. NetCentric Corp., 744 N.E.2d 622, 629 (Mass. 2001) ( the law of the State of incorporation governs claims concerning the internal affairs of a corporation, including the treatment of alleged breaches of fiduciary duty). The Supreme Court of Nevada has adopted Delawares Aronson test, as modified by Rales, for assessing demand futility. Shoen, 137 P.3d at 1184; see Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993); Aronson, 473 A.2d at 814. Under this standard, the plaintiff is required to plead particularized facts demonstrating: (1) in those cases in which the directors approved the challenged transactions, a reasonable doubt that the directors were disinterested or that the business judgment rule otherwise protects the challenged decisions; or (2) in those cases in which the challenged transactions did not involve board action or the board of directors has changed since the transactions, a reasonable doubt that the board can impartially consider a demand. Shoen, 137 P.3d at 1184. Demand is excused only if a majority of the directors had a disqualifying interest in the [demand] matter or were otherwise unable to act independently at the time the complaint was filed. Id. at 1183 (internal quotation marks and citation omitted, emphasis added).

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A.

Demand Futility Is Assessed Based on Composition of Board on the Date the Complaint Was Filed.

Courts assess demand futility as of the date the derivative action is filed. Grossman v. Johnson, 674 F.2d 115, 123 (1st Cir. 1982); see also Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del. 2004). At the time Plaintiff filed his complaint, JBIs board of directors consisted of Defendants Bordynuik, Wesson and Bagai. Plaintiff must therefore establish demand futility with respect to two out of three of those JBI Board members (the JBI Board For Demand Purposes).7 B. The Particularized Facts Alleged in the Complaint Fail to Raise a Reasonable Doubt that a Majority of the JBI Board For Demand Purposes Was Disinterested.

To raise a reasonable doubt that the board was disinterested, a shareholder must allege that a majority of the board members would be materially affected, either to [their] benefit or detriment, by a decision of the board, in a manner not shared by the corporation and the stockholders. Shoen, 137 P.3d 1171, 1183 (quoting Seminaris v. Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995)). A director may be shown to be interested if he has a personal financial interest in the subject matter of the litigation that is not shared by the corporation or its shareholders. Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993). However, an officer or directors receipt of compensation or stock awards does not constitute a disabling interest unless there are

As noted above, Plaintiffs allegation that Defendant Smith was also a director on the JBI Board For Demand Purposes is in obvious error, since Dr. Smith resigned four days before filing of the Complaint, on March 12, 2012. (See JBI Form 8-K, March 12, 2012, Exhibit C.) The Court may take judicial notice of the filing announcing Dr. Smiths resignation because it is a public document filed with the SEC, which can be accessed through its EDGAR database accessible at www.sec.gov/edgar/searchedgar/companysearch.htmlwww.sec.gov. See Caviness v. Evans, 229 F.R.D. 354, 359 (D. Mass. 2005) (This court may consider public filings with the SEC when deciding a motion to dismiss.); see also Ehlert v. Singer, 245 F.3d 1313, 1317 n.4 (11th Cir. 2001) (taking judicial notice of prospectus filed with SEC); Stiegele ex rel Viisage Tech., Inc., 2007 WL 4197496, at *12 n.3 (D. Mass. 2007).

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particularized facts alleged that show the compensation was unusual or uncustomary. Israni v. Bittman, 2012 WL 1074266, at *2 (9th Cir. Apr. 2, 2012) (applying Nevada law); Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). No such facts are alleged in this case.8 The mere threat of personal liability for having approved the alleged wrongdoing, or for otherwise having been named in the suit, is likewise insufficient to show that the director is interested in the subject matter of the litigation. Shoen, 137 P.3d at 1183 (Allegations of mere threats of liability through approval of the wrongdoing or other participation . . . do not show sufficient interestedness to excuse the demand requirement.); In re Sonus Networks, Inc., 499 F.3d 47, 67 (1st Cir. 2007) (holding that naming of director as defendant is insufficient in and of itself). Indeed, courts have recognized the circularity of such allegations and the ease with which demand could be avoided if a plaintiff could disqualify a director simply by naming him a defendant or attacking a transaction in which he participated. E.g., Grimes v. Donald, 673 A.2d 1207, 1216 n.8 (Del. 1996). Demand futility based on a directors potential liability can be shown only in those rare case[s] . . . where defendants actions were so egregious that a substantial likelihood of director liability exists. Shoen, 137 P.3d at 1184 (quoting Seminaris, 662 A.2d at 1354). In considering whether the Individual Defendants are disinterested, the Court should also take into account the fact that, under Nevada law, the personal liability of corporate directors and officers is statutorily limited to breaches of fiduciary duty that involve intentional misconduct,
Plaintiffs vague and conclusory allegation that the Individual Defendants have received substantial compensation in this District by doing business here (10), and its more particularized allegations of employment-related compensation received by Defendants Bordynuik and Smith (85(a)) are insufficient. Indeed, there is no suggestion that such compensation was in any way unusual or not customary of all directors.
8

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fraud or a knowing violation of law. Nev. Rev. Stat. 78.138(7).9 In light of Nevadas statutory exculpation provision, to demonstrate demand futility through a showing of a substantial likelihood of director liability, [the plaintiff] must plead particularized facts showing that the acts or omissions of the defendant directors involved intentional misconduct, fraud or a knowing violation of the law. Fosbre v. Matthews, No. 3:09 CV-04676, 2010 WL 2696615, at *6 (D. Nev. July 2, 2010); see also Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (plaintiff must plead non-exculpated claim based on particularized facts). Plaintiff has not met that strict standard here. 1. Plaintiffs Allegations Regarding The Companys Public Statements and Filings Do Not Establish Demand Futility.

The Complaints allegations are insufficient to raise a substantial likelihood that JBIs directors face liability based upon the Companys valuation of Media Credits and other public statements. Plaintiff alleges that JBIs third-quarter Form 10-Q, which was filed on November 16, 2009, improperly valued the Companys Media Credits. ( 38, 42.) Significantly, however, two of the three members of the JBI Board For Demand Purposes (Mr. Wesson and Dr. Bagai) had no alleged affiliation with the Company at the time the 10-Q was filed (see 17, 18) and thus face no personal liability for this filing. Plaintiff further alleges that the Media Credits were improperly valued in JBIs 2009 Form 10-K, filed on March 31, 2010. However, as of that time, Defendant Wesson had been a
9

While a corporation may affirmatively opt out of this statutory limitation of liability by including a more expansive liability provision in its articles of incorporation, id., JBI has not done so, and Plaintiff does not allege otherwise. (See Articles of Incorporation of 310 Holdings, Inc. (JBIs former name), 6 (JBI officers or directors shall not be personally liable to the corporation or its stockholders other than for, in relevant part, acts or omissions which involve intentional misconduct, fraud or a knowing violation of the law) (Exhibit M).)

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director for only six weeks, and Defendant Bagai had not yet been appointed as a director as of this time. Indeed, just a few weeks after Dr. Bagai joined the Board on April 30, 2010, JBI took corrective action by announcing that its previously filed financial statements could not be relied upon due to questions concerning the valuation of the Media Credits. ( 70.) Thus, there is virtually no likelihood (much less a substantial one) that these Individual Defendantswho comprise a majority of the JBI Board For Demand Purposeswill face liability for the alleged wrongful conduct. See, e.g., Caviness v. Evans, 229 F.R.D. 354, 360 (D. Mass. 2005) ([F]ailing to detect improperly audited financials for just one year is insufficient to show that [the directors] face a substantial likelihood of liability). Plaintiff also asserts a variety of additional disjointed allegations suggesting that the Companys press releases and public filings somehow misrepresented its planned commercial production of fuel. (See 71-79.) Significantly, however, there are no allegations that Mr. Wesson or Dr. Bagai knew these statements to be false or misleading, and therefore Plaintiff has failed to show they face potential personal liability for any of these alleged misstatements. More broadly, Plaintiff has not alleged any facts that raise a substantial likelihood that a majority of the JBI Board for Demand Purposes engaged in intentional misconduct, fraud, or a knowing violation of the law as the Nevada statute requires. The Complaint is devoid of any specific allegations that a majority of the JBI Board for Demand Purposes knew that the public statements and filings were inaccurate when issued, and no reasonable inference of that boards knowledge may be drawn from the particularized facts alleged. See Wood, 953 A.2d at 141 (Where, as here, directors are exculpated from liability except for claims based on fraudulent, illegal or bad faith conduct, a plaintiff must also plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had actual or constructive knowledge that

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their conduct was legally improper.). The Complaint does not contain any particularized allegations of what Mr. Wesson and Dr. Bagai knew about either the Media Credits or their accounting treatment, or how they came to possess such knowledge. The same is true with respect to the Complaints conclusory assertion that the board issued false and misleading proxy statements that failed to disclose that the JBI Board had not implemented internal controls for JBIs compliance with GAAP. (See 85(d).) Conclusory allegations like Plaintiffs are routinely rejected. In Wood v. Baum, for example, the plaintiff alleged that the directors breached their fiduciary duties by improperly valuing certain assets in violation of GAAP and SEC standards, and issued false financial statements regarding the value and performance of those assets.10 953 A.2d at 139. The Supreme Court of Delaware held that these and other allegations were insufficient to raise a substantial likelihood of liability for breach of fiduciary duty claims based on fraudulent, illegal, or bad faith conduct, and affirmed dismissal of the complaint. Id. at 141, 144 Similarly, in Caviness v. Evans, the plaintiff alleged that the directors misrepresented the corporations financial results and failed to correct the misstatements.11 229 F.R.D. at 356. The plaintiff claimed that the directors issued numerous positive statements and filed financial reports with the SEC that showed increasing financial performance over a period of five years. Id. The company subsequently determined that it had improperly accounted for the revenue recognition of numerous software license transactions during that same period and had to restate its financials. Id. at 357. The plaintiff further alleged that the directors concealed the improper
10

The Wood v. Baum court applied Delaware law. 953 A.2d at 141. Similar to Nevadas statutory scheme, however, the companys operating agreement limited the directors liability to fraudulent, illegal, or bad faith conduct. Id.

Like Wood, the court in Caviness applied Delaware law. However, as in the present case, the corporate charter insulated the directors from ordinary breaches of the duty of care. 229 F.R.D. at 359 & n.45.

11

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revenue treatment to artificially inflate the price of the Companys shares and that they failed to disclose that the Company lacked adequate internal controls. Id. The Court concluded that these allegations were insufficient because the complaint lacked particularized facts showing that the directors knew of the accounting improprieties. Id. at 359, 361-362. The allegations in the instant case stand on equally dubious footing. There are no allegations, for example, as to the specific information that Mr. Wesson and Dr. Bagai (or even Dr. Smith) had about the alleged inaccuracies that would have informed them that the Companys financial statements were incorrect. Alleging simply that each of the Individual Defendants had access to material non-public information ( 30) or that Defendants Bordynuik, Smith, and Wesson knew and/or should have known that the financials were false ( 67) is insufficient to satisfy the stringent pleading standard imposed by Rule 23.1. See, e.g., Israni, 2012 WL 1074266, at *2 (applying Nevada law and holding that demand was not excused because the complaint failed to plead facts regarding what information the [directors] saw and failed to act on); Fosbre, 2010 WL 2696615, at *6 (same). 2. That Mr. Wesson Served On JBIs Audit Committee Is Not Sufficient To Excuse Demand.

Plaintiffs allegation that demand on Mr. Wesson is excused based on his audit committee membership is without merit. It is well-established that a directors membership on a corporations audit committee, standing alone, is insufficient to establish that the director is interested or subject to a substantial likelihood of liability based on alleged accounting deficiencies. See, e.g., Israni, 2012 WL 1074266, at *2 (applying Nevada law); Fosbre, 2010 WL 2696615, at *6; Stiegele ex rel Viisage Tech., Inc., 2007 WL 4197496, at *10; Caviness, 229 F.R.D. 354, 359; Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325, 1334-1335 (D. Ariz. 2007). [I]t has been repeatedly and rightly held that generalized allegations reflecting -18-

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poor supervision over financial statements by members of the Audit Committee and other directors [do] not excuse pre-suit demand. Stiegele ex rel Visage Tech. Inc., 2007 WL 4197496, at *10 (quoting Caviness, 229 F.R.D. at 359-360 n.46). As noted above, the Complaint does not contain any particularized allegations showing the information Mr. Wesson had as a member of the audit committee and upon which he failed to act. Mr. Wessons mere membership on the audit committee does not raise a substantial likelihood of liability based on intentional misconduct, fraud, or a knowing violation of the law. C. The Particularized Facts Alleged In The Complaint Fail To Raise A Reasonable Doubt That A Majority Of The JBI Board For Demand Purposes Was Independent.

In the context of demand futility, [i]ndependence means that a directors decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences. Aronson, 473 A.2d at 816. To raise a reasonable doubt as to independence, a plaintiff must allege particularized facts that show that the majority is beholden to directors who would be liable or for other reasons is unable to consider a demand on its merits. Shoen, 137 P.3d at 1183. [I]t is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. Aronson, 473 A.2d at 816. Plaintiff does not seriously contest the independence of a majority of the JBI Board for Demand Purposes. The only facts alleged regarding Mr. Wesson and Dr. Bagai are that they made remarks commending the company and its CEO. (See 85(c) & 85(e).) There is no basis in the case law for concluding that a directors enthusiasm over the companys potential or favorable opinion of its CEO render the director incapable of considering a demand on its

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merits,12 particularly in the absence of any alleged familial or social ties that would cast doubt on Mr. Wesson and Dr. Bagais independence from Bordynuik. The relationship with an interested director must be of a bias-producing nature for demand to be excused. Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004). Mere allegations that [the directors] move in the same business and social circles, or a characterization that they are close friends, is not enough to negate independence for demand excusal purposes. In re Sonus Networks, Inc., 499 F.3d 47, 68 (1st Cir. 2007) (quoting Beam, 845 A.2d at 1051-1052). In other words, the relationship must be of such nature that the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director. Beam, 845 A.2d at 1052. Plaintiffs allegations fall far short of demonstrating such relationship. III. PLAINTIFF HAS NOT ADEQUATELY ALLEGED BREACHES OF FIDUCIARY DUTY UNDER RULE 12(B)(6) AND RULE 9(B) STANDARDS. Plaintiffs breach of fiduciary duty claim should be dismissed pursuant to Rule 12(b)(6) for two additional reasons. First, Plaintiff failed to plead the necessary element of damages. He alleges only that JBI has been injured by the SEC lawsuit (the SEC Action) that has been filed against JBI, Mr. Bordynuik, and Mr. Baldwin. ( 90.) It is well-established that other pending cases relating to the same alleged conduct do not suffice to plead damages. Second, Plaintiff failed to plead with particularity that the Individual Defendants engaged in intentional
Plaintiff also alleges that Bordynuik and Smith are long time executive officers and directors of JBI, whose primary livelihoods are bound up in the Company. ( 85(a).) But these allegations are also insufficient to excuse demand based on their independence. A directors employment by the corporation and receipt of remuneration is insufficient to create a reasonable doubt as to the directors independence. See, e.g., Israni v. Bittman, 2012 WL 1074266, at *2 (holding that demand was not excused based on corporations employment of directors); Fosbre v. Matthews, 2010 WL 2696615, at *5 ([A]llegations that directors are paid for their services as directors . . . without more, do not establish a disabling interest or lack of independence on the part of the director. [internal quotation marks and citation omitted]); Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325, 1338 (D. Ariz. 2007); In re Sagent Tech. Inc., Derivative Litig., 278 F. Supp. 2d 1079, 1089 (N.D. Cal. 2003) (applying Rales); Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988).
12

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misconduct, fraud, or a knowing violation of the law, as is required by Nevadas director exculpation statute and Rule 9(b). See Nev. Rev. Stat. 78.138(7). A. The Court Should Consider Only Factual Allegations, Not Threadbare Conclusory Allegations.

As an initial matter, the Court should only consider the Complaints well-pleaded factual allegations in assessing this motion. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, (2007) (holding that a complaint must contain sufficient factual allegations to state a claim to relief that is plausible on its face). The Court should disregard the numerous conclusory allegations, legal conclusions and formulaic recitations of elements of a cause of action asserted throughout the Complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Threadbare recitals of the legal elements, supported by mere conclusory statements, do not suffice to state a cause of action. Accordingly, a complaint does not state a claim for relief where the well-pled facts fail to warrant an inference of any more than the mere possibility of misconduct. Carp, 754 F. Supp. 2d at 233 (citing Iqbal, 556 U.S. 662). B. Plaintiff Failed to Allege Cognizable Damage To JBI.

To state a claim for breach of fiduciary duty under Nevada law, Plaintiff was required to allege the element of damages. See Klein v. Freedom Strategic Partners, LLC, 595 F. Supp. 2d 1152, 1162 (D. Nev. 2009) (In Nevada, a claim for breach of fiduciary duty has three elements: (1) existence of a fiduciary duty; (2) breach of the duty; and (3) the breach proximately caused the damages). But Plaintiff has alleged no facts concerning damages other than that [a]s a direct and proximate result of the Individual Defendants failure to perform their fiduciary obligations, JBI has sustained significant damages, including, but not limited to, being sued by the SEC. ( 90.)

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This allegation is insufficient as a matter of law. The SEC Action is still pending; no findings of liability have been made. Thus, there is no basis to conclude that the Company will be found liable or sustain any losses as a result of the SEC Action. Courts routinely dismiss derivative claims for breach of fiduciary duty in precisely these circumstances, i.e., where the only injury alleged is that additional lawsuits are pending against the company addressing the same alleged director misconduct as the derivative suit, and that the company will be required to spend money to defend against those actions and may ultimately be found liable. As one such court stated: Derivative shareholder suits are consistently foreclosed when they merely allege damages based on the potential costs of investigating, defending, or satisfying a judgment or settlement for what might be unlawful conduct. . . . Moreover, Courts routinely dismiss claims as premature if the alleged injury is contingent upon the outcome of a separate, pending lawsuit. In re Isolagen Inc. Sec. & Derivative Litig., 2007 U.S. Dist. LEXIS 26905, at *6-7 (E.D. Pa. Apr. 10, 2007) (dismissing derivative complaint as premature because allegations that company was damaged by pending securities fraud class action and related internal investigation were insufficient) (citations and quotations omitted); see also In re Cray Inc. Derivative Litig., 431 F. Supp. 2d 1114, 1133-1134 (W.D. Wash. 2006) (dismissing derivative claim for breach of fiduciary duty because [t]he Court concludes that Plaintiffs damage allegations based on potential costs of the class action suits are insufficient to state a claim for relief).13

Dollens v. Zionts, 2002 U.S. Dist. LEXIS 13511, 27-28 (N.D. Ill. July 22, 2002) (granting motion to dismiss for failure to plead a legally cognizable theory of damages because plaintiffs cannot bring a derivative action to recover expenses from a pending securities action involving [the corporate defendant] until the case has proceeded to final judgment or settlement. . . . Thus, this claim for damages is premature and must be dismissed); In re United Telecomms., Sec. Litig., 1993 U.S. Dist. LEXIS 4749 at *10 (D. Kan. Mar. 4, 1993) (dismissing derivative suit as premature where damages depended on pending securities class action suit, and observing that Courts routinely dismiss claims as premature if the alleged injury is contingent upon the outcome of a separate, pending lawsuit).

13

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Because Plaintiff has not alleged any injury to JBI apart from defending against the pending SEC Action, the Complaint should be dismissed for failure to allege damages. C. Plaintiff Failed To Plead Intentional Misconduct, Fraud, Or A Knowing Violation Of The Law With Requisite Particularity.

Nevada law is unique in the extraordinarily high statutory standard it imposes on shareholders suing directors and officers for breach of fiduciary duty. As explained supra at 14, Section 78.138(7) provides that a director or officer of a Nevada corporation is not individually liable to the corporation or its stockholders . . . for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that he breached his or her fiduciary duties and that the breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Nev. Rev. Stat. 78.138(7) (Emphasis added.) As Nevada courts have recognized, Nevada law statutorily exculpates directors and officers from personal liability for breach of fiduciary duty unless the act or failure to act constituting the breach involved intentional misconduct, fraud or a knowing violation of the law. Fosbre, 2010 WL 2696615 at *6; see also Kahn v. Dodds, 252 P.3d 681, 700-701 (Nev. 2011) (to hold a director or officer . . . individually liable, the shareholder must prove that the director's breach of his or her fiduciary duty of loyalty involved intentional misconduct, fraud or a knowing violation of law.); Strickland v. Hongjun, 2011 U.S. Dist. LEXIS 73944, at *7-8 (S.D.N.Y. July 8, 2011) (same, applying Nevada law). Significantly, Nevadas statutory exculpation for all but intentional misconduct or fraud applies at the pleading stage. Fosbre, 2010 WL 2696615, at *6 n.6. It also triggers the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) as to the requisite allegations of intentional misconduct, fraud, or knowing violation of law. See Rapaport v. Soffer, 2012 U.S. Dist. LEXIS 90324, at *14 (D. Nev. June 29, 2012) (because Section -23-

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78.138(7) requires intentional misconduct, fraud, or a knowing violation of the law, it triggers application of Fed. R. Civ. P. 9(b)). That is because Rule 9(b) requires that in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. It is also the law of this Circuit that breach of fiduciary duty claims based on allegations of fraud trigger application of Rule 9(b). See, e.g., Gerber v. Bowditch, 2006 U.S. Dist. LEXIS 27552, at *41-44 (D. Mass. May 8, 2006) (applying Rule 9(b) to breach of fiduciary duty claim sounding in fraud); Sachs v. Sprague, 401 F. Supp. 2d 159, 170 (D. Mass. 2005) (Plaintiffs claims alleging intentional breaches of fiduciary duties are subject to the heightened pleading requirements of Rule 9(b)); In re Stratus Computer, 1991 U.S. Dist. LEXIS 21587, at 20-21 (D. Mass. Dec. 10, 1991) (applying Rule 9(b) to derivative suit alleging breach of fiduciary duty claims that sounded in fraud). Nor does the Court even need to assess whether the allegations here sound in fraud. Because any claim for breach of fiduciary duty against a director of a Nevada corporation must allege fraud or intentional misconduct pursuant to statute, Rule 9(b) is triggered as a matter of law. The First Circuit has been especially rigorous in enforcing the particularize pleading requirements of Rule 9(b). Greebel v. FTP Software, Inc., 194 F.3d 185, 193-94 (1st Cir. 1999). To satisfy Rule 9(b), Plaintiff was required to allege particularized facts showing that directors or officers engaged in intentional misconduct, fraud or a knowing violation of the law. Israni, 2012 WL 1074266, at *2 (emphasis added). Plaintiff failed to meet these stringent pleading standards as to most if not all of the Individual Defendants. Plaintiff does not allege any misconduct at all by Defendants Henry and Bagai, much less misconduct that would satisfy Nev. Rev. Stat. 78.138(7). The claims against these individuals are frivolous. Mr. Henry was a JBI board member for six weeks, from

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February 12, 2010 to March 24, 2010. ( 21.) Plaintiff does not allege that Mr. Henry had any role at all in valuing the Media Credits or preparing the financial statements at issue. In fact, no financial statements were filed with the SEC in the six weeks Mr. Henry was a director. Nor does Plaintiff allege with particularity any other false statements Mr. Henry made, or any other basis for a claim of breach of fiduciary duty against Mr. Henry. Indeed, the only conceivable allegations of misconduct by Mr. Henry are those that are made by group pleading against all Individual Defendants, such as that Each of the Individual Defendants had actual knowledge of JBIs improper accounting of the Media Credits . . . . ( 89.) But Rule 9(b) makes group pleading insufficient as a matter of law. See, e.g., Destination Mktg., Inc. v. Kessler Fin. Servs., L.P., 2001 U.S. Dist. LEXIS 25841, at *22-23 (D. Mass. Nov. 2, 2001) (where multiple defendants are involved, each persons role in the alleged fraud must be particularized in order to satisfy Rule 9(b)) (quotation omitted); Prudential Ins. Co. v. Turner & Newall Plc., 1988 U.S. Dist. LEXIS 15960, at *36-37 (D. Mass. Dec. 12, 1988) (same). Plaintiffs allegations against Dr. Bagai are equally frivolous. Dr. Bagai did not become a JBI director until April 30, 2010, which was after the financial statements at issue were already filed with the SEC. ( 18.) No financial statements were filed between April 30, 2010, and May 21, 2010, when JBI first announced that it would be restating certain 2009 financial statements. The only allegation with respect to Dr. Bagai is that he allegedly issued false and misleading proxy statements to JBI shareholders in 2010 and 2011, which were false because they failed to disclose that the JBI Board had not implemented internal controls for JBIs

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compliance with GAAP.14 ( 85(d).) But even accepting this cursory, unparticularized allegation as true, there are no allegations that Dr. Bagai signed any proxy statement with the requisite intent, i.e., that his conduct involved intentional misconduct, fraud or a knowing violation of law. Nev. Rev. Stat. 78.138(7); see also In re AMERCO Derivative Litig., 252 P.3d 681, 701 (Nev. 2011) (allegations that certain directors knowingly signed misleading and incomplete public filings were insufficient to satisfy Rule 9(b) and Nev. Rev. 78.138(7)).15 Plaintiff also failed to allege that Defendants Smith, Bradshaw, Wesson, and Goldberg engaged in the requisite intentional misconduct, fraud or a knowing violation of law. The only conduct they are alleged to have engaged in is signing a 2009 Form 10-K that contained a valuation of Media Credits that was later restated. ( 14, 67.) Based on nothing more than the restatement itself and the fact that Defendants Bradshaw, Wesson, and Goldberg were on the Audit Committee at the time ( 43), Plaintiff claims that Defendants Smith, Bradshaw, Wesson, and Goldberg knew and/or should have known that the financials and presentation materials for JBI that listed the Media Credits at a value of $9.997 million were false statements. ( 67 (emphasis added).) An allegation that these defendants should have known of a false statement does not comply with Nev. Rev. Stat. 78.138(7), which requires actual knowledge, fraud, or intentional

Dr. Bagai could not have issued false and misleading proxy statements in 2010 because he was not appointed to the JBI Board until after the 2010 proxy had been issued and the 2010 shareholder meeting had been held. (See 18, 85(e).) Furthermore, to the extent Plaintiff suggests that corporations are under an ongoing obligation to disclose all material facts, this misstates the law. The Massachusetts Supreme Judicial Court has long adhered to the rule of nonliability for bare nondisclosure," Kannavos v. Annino, 247 N.E.2d 708, 711 (Mass. 1969), and in the securities fraud context, the duty to disclose material facts arises only when there is some basis outside the securities laws, such as state law, for finding a fiduciary or other confidential relationship, which are not alleged in the Complaint. See SEC v. Tambone, 597 F.3d 436, 448 (1st Cir. 2010); see also Austin v. Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36, 39 (1st Cir. 1993).
15

14

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misconduct. Israni, WL 1074266, at *2-3 (affirming dismissal of derivative suit under Nevada law because the complaint does not contain particularized facts showing that the committee members engaged in intentional misconduct, fraud or a knowing violation of the law, as required under Nevada law); In re AMERCO Derivative Litig., 252 P.3d at 701.16 With respect to Mr. Baldwin, the Complaint alleges that he knew the Media Credits were incorrectly valued, but does so in the most conclusory manner. Plaintiff alleges that Baldwin knew the valuation was false and inaccurate when [he] certified the . . . 10-K, and [he] did so with the intent to mislead and deceive JBI investors as to the true net worth of the Company. ( 43; see also 65 (Mr. Baldwin was fully aware that they were improperly valued).) But the Complaint fails to allege any facts from which a reasonable person would conclude that Mr. Baldwin had such knowledge, as the First Circuit requires. See, e.g., N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8, 13 (1st Cir. 2009) (precedent in this circuit . . . . is clear: The courts have uniformly held inadequate a complaints general averment
Even when judged under state law that is less stringent than Nevada, such bare-bones allegations are insufficient. See, e.g., In re First Bancorp Derivative Litig., 465 F. Supp. 2d 112, 120-121 (D.PR) (dismissing derivative claim where Plaintiffs failed to allege any particularized facts that would have put the directors on clear notice of the accounting problems that led to restatements, and holding that allegations that the individual defendants knew or should have known of the accounting irregularities because of their positions lacks the particularity required); Caviness, 229 F.R.D. at 359 (directors on audit committee did not face substantial likelihood of liability where there were no particularized allegations regarding the knowledge of any member of the Audit Committee" concerning the transactions that were accounted for improperly and thereafter the subject of restatements); Brown v. Moll, 2010 U.S. Dist. LEXIS 73875, at *19 (N.D. Cal. July 21, 2010) (dismissing derivative claims where there were no allegations in this case demonstrating that the improper revenue recognition at issue was so egregious or its existence so clear on its face that audit committee approval of financial statements and audit controls would suffice to show bad faith on the part of the audit committee members); Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) (holding that The Boards execution of MME's financial reports, without more, is insufficient to create an inference that the directors had actual or constructive notice of any illegality, and that membership on audit committee also did not provide basis to infer knowledge of accounting errors); Guttman v. Jen-Hsun Huang, 823 A.2d 492, 498 (Del. Ch. 2003) (dismissing derivative claims against directors based on restatement where the complaint was entirely devoid of particularized allegations of fact demonstrating that the outside directors had actual or constructive notice of the accounting improprieties, and as to the management director, lacked particularized allegations regarding his involvement in the process of preparing the company's financial statements).
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of the defendants knowledge of material falsity, unless the complaint also sets forth specific facts that make it reasonable to believe that defendant knew that a statement was materially false or misleading). Mr. Baldwin was not employed by JBI when the Media Credits were purchased from Domark, nor when the first allegedly erroneous financial statement was issued in November 2009. ( 42.) Nor is Mr. Baldwin alleged to have discussed the matter with JBIs then-auditor, Gately & Associates, LLC. ( 58-62, 64.) Finally, Mr. Baldwin is alleged to have made willful misrepresentations about the value of the Media Credits at JBIs annual General Meeting held on April 24, 2010. ( 68.) But the Complaint fails to allege either the contents of the statement, or the facts from which one could reasonably infer that Mr. Baldwin knew the statements were false. See, e.g., Hayduk v. Lanna, 775 F.2d 441, 444 (1st Cir. 1985) (Rule 9(b) requires plaintiffs to allege the time, place and content of an alleged false representation) (emphasis added). These allegations therefore fail to state a claim against Mr. Baldwin under Rule 9(b). The claims against Mr. Baldwin should be dismissed. IV. IN THE ALTERNATIVE, THE COURT SHOULD STAY THIS ACTION BECAUSE THERE IS A SIMILAR CLASS ACTION SECURITIES CASE PENDING IN NEVADA. The Court should dismiss this case for all the reasons stated above. However, if the Court declines to dismiss any part of the case against any of the Individual Defendants, that part should be stayed because there is a class action pending in the District of Nevada, which is based largely on the same factual allegations concerning the Media Credits. Before Plaintiff Grampp filed this suit, shareholders of JBI sued JBI, Mr. Bordynuik, and Mr. Baldwin on August 28, 2011, alleging violations of Section 10(b) of the Exchange Act. See Pancoe v. JBI, Inc., No. 3:11-CV-00545 (D. Nev.). The Pancoe plaintiffs have recently amended their complaint. (See Exhibit N.) The amended complaint makes clear that those plaintiffs claims are based on -28-

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the same conduct at issue in this derivative suit, i.e., the valuation of the Media Credits and resulting restatement, and the SECs investigation and prosecution of the same. Id. Numerous courts have stayed derivative cases in these circumstances in recognition of the fact that permitting a derivative case to proceed simultaneously with a securities class action based on the same allegations may harm the company, which is ostensibly the entity that the derivative claim aims to benefit. See, e.g., In re Ormat Techs., Inc. Derivative Litig., 2011 U.S. Dist. LEXIS 96891, at *10-15 (D. Nev. Aug. 29, 2011) (staying federal derivative case for this reason); Cucci v. Edwards, 2007 U.S. Dist. LEXIS 86832, at *2 (C.D. Cal. Oct. 31, 2007) (staying federal derivative case); Breault v. Folino, 2002 U.S. Dist. LEXIS 25587 (C.D. Cal. Mar. 15, 2002) (same); Brudno v. Wise, 2003 Del. Ch. LEXIS 35, at *12-13 (Del. Ch. Apr. 1, 2003) (same). That is because in the securities case, the company will necessarily rely for its defense on the testimony of the named directors and officers, whose credibility the derivative plaintiffs will be seeking to undermine. That would be the result here. In the securities case, JBI will be relying upon the testimony of Mr. Bordynuik and Mr. Baldwinwho are named as Defendants in both actionswhile Plaintiff here would be attempting to prove they breached fiduciary duties to the company based on the same conduct. In addition, a stay is also appropriate because, as discussed above, the damages sought in this case are dependent on other litigation, making the case premature until the SEC action and class action have concluded. See Brudno, 2003 Del. Ch. LEXIS 35, at *12-13 (granting stay in part because alleged damages in derivative case turned on outcome of pending regulatory investigation and securities class action lawsuit).

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CONCLUSION For the forgoing reasons, the Complaint should be dismissed as to the Individual Defendants, with prejudice, or in the alternative, stayed pending resolution of the SEC and class actions.

Dated: July 27, 2012 Respectfully submitted, /s/John G. Wheatley John G. Wheatley, BBO #670989 MELICK PORTER & SHEA LLP 28 State Street Boston, MA 02109 617 523-6200 (tel) 617 523-8130 (fax) jwheatley@melicklaw.com

Michael R. MacPhail Leif T. Simonson Matthew B. Kilby FAEGRE BAKER DANIELS LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-3901 (612) 766-7000 (612) 766-1600 fax Michael.MacPhail@faegrebd.com Leif.Simonson@faegrebd.com Matthew.Kilby@faegrebd.com Counsel for John Bordynuik, Dr. Jacob Smith, Ronald C. Baldwin, Jr., Amy Bradshaw, John M. Wesson, Dr. Robin Bagai, Gregory Goldberg, and Theodore J. Henry

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CERTIFICATE OF SERVICE I hereby certify that this document filed through the ECF system will be sent electronically to the registered participants as identified on the Notice of Electronic Filing and paper copies will be sent via U.S. first class mail to those indicated as non-registered participants on July 27, 2012. /s/ John G. Wheatley

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