Brinker v. Axos Bank

[7] 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA [10] 11 JENNIFER BREAR BRINKER, Case No. 22-cv-386-MMA-DDL 12 Plaintiff, ORDER GRANTING IN PART AND 13 v. DENYING IN PART DEFENDANTS’ MOTION TO DISMISS 14 AXOS BANK, et al., 15 Defendants. [Doc. No. 45] [18] 19 Plaintiff Jennifer Brear Brinker (“Plaintiff”) has filed a Third Amended Complaint 20 against Defendants Axos Bank and John Tolla (collectively, “Defendants”). See Doc. 21 No. 44 (“Third Amended Complaint” or “TAC”). Defendants now move to dismiss 22 Plaintiff’s first cause of action, retaliation in violation of the Sarbanes Oxley Act 23 (“SOX”), 18 U.S.C. § 1514A. See Doc. No. 45. Plaintiff filed an opposition to 24 Defendants’ motion,1 to which Defendants replied. See Doc. Nos. 46, 47. The Court [26] 27 1 Plaintiff is once again reminded that “the Civil Local Rules require that briefs, including footnotes, be ‘no smaller than 14-point standard font (e.g. Times New Roman).’” Doc. No. 43 at 1 fn.1 (quoting [28] 1 found the matter suitable for determination on the papers and without oral argument 2 pursuant to Federal Rule of Civil Procedure 78(b) and Civil Local Rule 7.1.d.1. See Doc. 3 No. 48. For following reasons, the Court GRANTS IN PART and DENIES IN PART 4 Defendant’s motion to dismiss. 5 I. BACKGROUND 6 As this case is before the Court on Plaintiff’s fifth attempt to plead her claims, see 7 Doc. Nos. 1 (Complaint), 4 (Amended Complaint), 19 (Second Amended Complaint, 8 stricken from the docket for noncompliance with Fed. R. Civ. P. 15), 31 (Second 9 Amended Complaint), 44 (Third Amended Complaint), and third motion to dismiss, see 10 Doc. Nos. 13, 36, 45, the Court incorporates its prior Dismissal Orders, see Doc. Nos. 30, 11 43, by reference here. The Court does not recount the factual background, but rather 12 provides an overview on the procedural history of this case and the Court’s prior rulings. 13 Plaintiff initiated this action on March 21, 2022. See Doc. No. 1 (“Compl.”). 14 Plaintiff initially named Axos Bank, Axos Financial, Inc., John Tolla, Eshel Bar-Adon, 15 and Tom Constantine as defendants, and pleaded claims for (1) SOX retaliation; and 16 (2) whistleblower retaliation in violation of California Labor Code § 1102.5. Id. After 17 more than three months had elapsed with no activity, including proof of service, the 18 Court ordered Plaintiff to show cause why the case should not be dismissed for failure to 19 serve pursuant to Federal Rule of Civil Procedure2 4(m) and Civil Local Rule 4.1(b). See 20 Doc. No. 3. Plaintiff never responded to the Court’s OSC. Instead, Plaintiff filed an 21 Amended Complaint. See Doc. No. 4. By way of her First Amended Complaint, 22 Plaintiff asserted eight causes of action—in addition to the two previously pleaded 23 claims, she added the following: (3) violation of California’s Equal Pay Act, Cal. Labor 24 Code § 1197.5 (“EPA”); (4) gender discrimination in violation of the Fair Employment 25 and Housing Act, Cal. Gov. Code § 12940 et seq. (“FEHA”); (5) failure to prevent [28] 1 discrimination and harassment in violation of FEHA; (6) retaliation in violation of 2 FEHA; (7) wrongful termination in violation of public policy; and (8) unlawful business 3 practices, Cal. Bus. & Prof. Code § 17200 et seq. (“UCL”). The defendants thereafter 4 moved to dismiss the First Amended Complaint and moved to strike a paragraph 5 contained therein. Doc. Nos. 13, 14. 6 A few days before Plaintiff’s opposition was due, Plaintiff filed a second amended 7 complaint. Doc. No. 19. The Court rejected the filing and struck the document from the 8 record as the Court had not provided leave to amend, and there was no indication the 9 defendants consented to the amendment. Doc. No. 20 (citing Fed. R. Civ. P. 15(a)(2)). 10 Plaintiff then filed an opposition to the defendants’ motion to dismiss. Doc. No. 23. In 11 her opposition, Plaintiff represented in a footnote that the defendants had consented to the 12 initial amendment—i.e., filing the First Amended Complaint—and therefore that she was 13 permitted to file a second amended complaint pursuant to Federal Rule of Civil 14 Procedure 12(a)(1)(B). As a result, the Court directed the defendants to file a statement 15 of position, see Doc. No. 27, which only seemed to complicate the issue rather than 16 provide any clarity, see Doc. Nos. 28, 29. 17 Ultimately, the Court granted the defendants’ motion to dismiss in its entirety and 18 denied the motion to strike as moot. Doc. No. 30. In particular, the Court found that 19 Plaintiff: (1) failed to plead any authority enumerated in SOX § 1514, nonetheless that 20 she reasonably believed in a violation of the authority, and that Plaintiff did not allege 21 Bar-Adon’s and Constantine’s involvement in the alleged adverse employment decision; 22 (3) failed to plead any comparator in support of her EPA claim; (4–6) failed to plead 23 timely exhaustion of her FEHA claims; and (8) failed to adequately support her UCL 24 claim under any of the three prongs. Id. The Court also dismissed Axos Financial for 25 failure to plead any facts supporting this defendant’s involvement, or sufficient 26 information to justify an alter ego theory of liability. Id. 27 On January 17, 2023, Plaintiff filed her Second Amended Complaint, naming only 28 Axos Bank, Axos Financial, and John Tolla as defendants. Doc. No. 31. Because 1 Plaintiff neglected to include a redlined version of her amended as required by the Civil 2 Local Rules, the Court issued a Discrepancy Order directing her to do so. Doc. No. 32. 3 Plaintiff subsequently cured this noncompliance by filing a redlined version of her 4 Second Amended Complaint. Doc. No. 35. 5 The defendants moved to dismiss, see Doc. No. 36, which the Court granted in part 6 and denied in part, see Doc. No. 43. Namely, the Court again dismissed Axos Financial 7 and Plaintiff’s FEHA claims. The Court found that Plaintiff’s EPA claim survived 8 dismissal, and as a result, her UCL claim survived as well. The Court also addressed 9 Plaintiff’s SOX retaliation claim at length, as will be discussed further below. At bottom, 10 only to the extent Plaintiff premised her claim upon a reasonable belief she reported 11 securities fraud did her SOX claim survive dismissal. 12 On August 2, 2023, Plaintiff filed the Third Amended Complaint. See TAC. 13 Plaintiff names only Axos Bank and John Tolla as Defendants, and she brings five claims 14 against them: (1) SOX retaliation; (2) whistleblower retaliation, Cal. Labor Code 15 § 1102.5; (3) violation of the EPA; (4) wrongful termination in violation of public policy; 16 and (5) violation of the UCL. Defendants now move to dismiss Plaintiff’s SOX 17 retaliation claim to the extent it is based upon a violation of the rules and statutes the 18 Court previously found were not adequately or properly pleaded. 19 II. LEGAL STANDARD 20 A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro 21 v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A pleading must contain “a short and plain 22 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 23 8(a)(2). However, plaintiffs must also plead “enough facts to state a claim to relief that is 24 plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also 25 Fed. R. Civ. P. 12(b)(6). The plausibility standard demands more than a “formulaic 26 recitation of the elements of a cause of action,” or “‘naked assertions’ devoid of ‘further 27 factual enhancement.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, [28] 550 U.S. at 555, 557 ). Instead, the complaint “must contain sufficient allegations of 1 underlying facts to give fair notice and to enable the opposing party to defend itself 2 effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). 3 In reviewing a motion to dismiss under Rule 12(b)(6), courts must assume the truth 4 of all factual allegations and must construe them in the light most favorable to the 5 nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336 , 337–38 (9th Cir. 1996) 6 (citing Nat’l Wildlife Fed’n v. Espy, 45 F.3d 1337 , 1340 (9th Cir. 1995)). The court need 7 not take legal conclusions as true merely because they are cast in the form of factual 8 allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987) (quoting W. Min. 9 Council v. Watt, 643 F.2d 618 , 624 (9th Cir. 1981)). Similarly, “conclusory allegations 10 of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” 11 Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). In determining the propriety of a 12 Rule 12(b)(6) dismissal, courts generally may not look beyond the complaint for 13 additional facts. See United States v. Ritchie, 342 F.3d 903 , 907–08 (9th Cir. 2003). 14 Where dismissal is appropriate, a court should grant leave to amend unless the 15 plaintiff could not possibly cure the defects in the pleading. Knappenberger v. City of 16 Phoenix, 566 F.3d 936, 942 (9th Cir. 2009) (quoting Lopez v. Smith, 203 F.3d 1122 , 1127 17 (9th Cir. 2000)). 18 III. REQUEST FOR JUDICIAL NOTICE 19 Plaintiff has filed a request for judicial notice in support of her opposition to 20 Defendant’s motion. See Doc. No. 46-1. Plaintiff asks the Court to take judicial notice 21 of seven exhibits: (A) her October 4, 2022 “Right to Sue” letter from the California 22 Department of Fair Employment and Housing; (B) the “Commission Guidance Regarding 23 Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) 24 or 15(d) of the Securities Exchange Act of 1934,” available on the Securities and 25 Exchange Commission’s (“SEC”) website; (C) the “Internal Routine and Controls 26 Section 4.2” from the RMS Manual of Examination Policies, available on the Federal 27 Deposit Insurance Corporation’s website; (D) AXOS Financial, Inc.’s 2021 Form 10-K, 28 available on the SEC’s website; (E) Public Company Accounting Oversight Board 1 (“PCAOB”) Release No. 2007- 005A, dated June 12, 2007, available on the PCAOB’s 2 website; (F) the SEC’s adoption of the PCAOB’s standard set forth in Release No. 20073 005A; and (G) the PCAOB Staff Audit Practice Alert, dated October 24, 2013. 4 Defendant has not responded to Plaintiff’s request. 5 While, generally, the scope of review on a motion to dismiss for failure to state a 6 claim is limited to the contents of the complaint, see Warren v. Fox Family Worldwide, 7 Inc., 328 F.3d 1136 , 1141 n.5 (9th Cir. 2003), a court may consider certain materials, 8 including matters of judicial notice, without converting the motion to dismiss into a 9 motion for summary judgment, see United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 10 2003). For example, “a court may take judicial notice of matters of public record,” Khoja 11 v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999 (9th Cir. 2018) (quoting Lee v. City of 12 Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001), overruled on other grounds by Galbraith 13 v. County of Santa Clara, 307 F.3d 1119 , 1125–26 (9th Cir. 2002)), and of “documents 14 whose contents are alleged in a complaint and whose authenticity no party questions, but 15 which are not physically attached to the pleading,” Branch v. Tunnell, 14 F.3d 449 , 454 16 (9th Cir. 1994), overruled on other grounds by Galbraith, 307 F.3d at 1125–26; see also 17 Fed. R. Evid. 201. A judicially noticed fact must be one not subject to reasonable dispute 18 in that it is either: (1) generally known within the territorial jurisdiction of the trial court; 19 or (2) capable of accurate and ready determination by resort to sources whose accuracy 20 cannot reasonably be questioned. See Fed. R. Evid. 201(b); see also Khoja, 899 F.3d at 21 999 (quoting Fed. R. Evid. 201(b)) 22 The Court previously granted Plaintiff’s request for judicial notice as to Exhibits 23 A–D, see Doc. No. 43 at 6, and for those same reasons, GRANTS her request here. As 24 to Exhibits E, F, and G, the Court finds that they are publicly available documents that 25 are neither subject to reasonable dispute nor can be reasonably questioned. See U.S. ex 26 rel. Modglin v. DJO Glob. Inc., 48 F. Supp. 3d 1362, 1381 (C.D. Cal. 2014) (collecting 27 cases in which courts have taken judicial notice of the websites of government agencies). 28 Accordingly, the Court GRANTS Plaintiff’s request as to Exhibits E, F, and G as well. 1 IV. DISCUSSION 2 The Court reiterates that to state a prima facie claim under 18 U.S.C. § 1514A, 3 Plaintiff must plead that: (1) she engaged in a protected activity; (2) Defendants knew or 4 suspected, actually or constructively, that she engaged in the protected activity; (3) she 5 suffered an adverse employment action; and (4) the circumstances were sufficient to raise 6 the inference that the protected activity was a contributing factor in the adverse action. 7 Van Asdale v. Int’l Game Tech., 577 F.3d 989, 996 (9th Cir. 2009). As to the protected 8 activity element, the anti-retaliation statute protects an employee who “provide[s] 9 information . . . regarding any conduct which the employee reasonably believes 10 constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], 11 or 1348 [securities or commodities fraud], any rule or regulation of the Securities and 12 Exchange Commission, or any provision of Federal law relating to fraud against 13 shareholders . . . .” 18 U.S.C. § 1514A(a)(1). The second to last segment, “any rule or 14 regulation of the [SEC],” refers to “administrative rules or regulations,” not statutes. See 15 Wadler v. Bio-Rad Labs., Inc., 916 F.3d 1176 , 1186–87 (9th Cir. 2019). 16 Defendants move to dismiss Plaintiff’s SOX retaliation claim, only challenging the 17 sufficiency of Plaintiff’s pleading of the second element, and only to the extent her claim 18 is premised upon a violation of 17 C.F.R § 240.13a-15, 17 C.F.R § 240.13a-14, and 15 19 U.S.C. § 78m(b)(2)(B). 20 A. 17 C.F.R. §§ 240.13a-15(a) and 240.13a-14 21 Plaintiff identifies 17 C.F.R. §§ 240 .13a-15(a) and 240.13a-14 and she pleads that 22 she reasonably believed the conduct she complained of violated these regulations. See, 23 e.g, TAC ¶¶ 34, 42, 47, 54, 69. First, Rule 13a-15(a) provides, in full: [24] 25 Every issuer that has a class of securities registered pursuant to section 12 of the Act (15 U.S.C. 781), other than an Asset-Backed Issuer (as defined in [26] § 229.1101 of this chapter), a small business investment company registered 27 on Form N-5 (§§ 239.24 and 274.5 of this chapter), or a unit investment trust as defined in section 4(2) of the Investment Company Act of 1940 (15 U.S.C. [28] 1 80a-4(2)), must maintain disclosure controls and procedures (as defined in paragraph (e) of this section) and, if the issuer either had been required to file [2] an annual report pursuant to section 13(a) or 15(d) of the Act (15 U.S.C. 3 78m(a) or 78o(d)) for the prior fiscal year or had filed an annual report with the Commission for the prior fiscal year, internal control over financial [4] reporting (as defined in paragraph (f) of this section). [6] 17 C.F.R. § 240 .13a-15(a). “Internal control over financial reporting” is defined as: [7] 8 a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar [9] functions, and effected by the issuer’s board of directors, management and 10 other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external [11] purposes in accordance with generally accepted accounting principles and 12 includes those policies and procedures that: [13] (1) Pertain to the maintenance of records that in reasonable detail 14 accurately and fairly reflect the transactions and dispositions of the assets of the issuer; [15] 16 (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance [17] with generally accepted accounting principles, and that receipts and 18 expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and [19] 20 (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s [21] assets that could have a material effect on the financial statements. [23] 17 C.F.R. § 240 .13a-15(f). 24 Rule 13a-14 in turn “requires that for every report filed under Section 13(a) of the 25 Exchange Act, including Form 10-Q and 10-K financial reports, each principal executive 26 and principal financial officer of the issuer must sign a certification as to the accuracy of 27 the financial statements within the report.” United States SEC v. Jensen, 835 F.3d 1100 , 28 1112 (9th Cir. 2016) (citing 17 C.F.R. § 240 .13a-14). The rule “includes an implicit 1 truthfulness requirement,” and therefore a certifying principal can be held liable for 2 violating this rule where he or she certifies the filing includes “no material misstatements 3 or omissions but does not have a sufficient basis to believe that the certification is 4 accurate.” Id. 5 Having reviewed Plaintiff’s Third Amended Complaint, as well as the arguments 6 for and against dismissal on this basis, the Court concludes that Plaintiff has plausibly 7 pleaded a SOX retaliation claim based upon her belief that she was reporting a violation 8 of these SEC rules sufficient to survive dismissal. Plaintiff pleads a host of issues she 9 identified during her Portfolio reviews: underwriting failures and concerns with 10 underwriting standards, failure to monitor loan covenants, AML and KYC concerns and 11 deficiencies, failure to implement contingency plans, failure to analyze the Portfolios, 12 accounting problems with respect to operating lease schedules, improper risk ratings, and 13 lack of skilled credit analysts. See TAC ¶¶ 21–26, 36–37, 40, 49, 51, 53. With respect to 14 all of these issues, she contends that the Bank was left at risk of holding risky loans, with 15 inaccurate reserves for loan losses, over-exposed to risky borrowers, and unable to 16 accurately state the value of its assets. See, e.g., id. ¶¶ 27, 43, 70 . Plaintiff also alleges 17 that the excessive role of management in editing her reports, and failure to address the 18 issue and concerns she raised, created a risk that the Bank’s financial statements would 19 not reflect her independent analysis but the self-interested conclusions of management. 20 See id. ¶¶ 29, 55 . These allegations are sufficiently plausible, at this stage, to state a SOX 21 retaliation claim premised upon a reasonable belief that Plaintiff complained of 22 Defendants’ failure to maintain adequate internal controls and inaccurate certification of 23 those controls in its financial reports. Accordingly, the Court DENIES Defendant’s 24 motion on this basis. 25 B. 15 U.S.C. § 78m(b)(2)(B) 26 Turning to 15 U.S.C. § 78m(b)(2)(B)(ii), this section of the Foreign Corrupt 27 Practices Act, 15 U.S.C. § 78dd-1 et seq., requires securities issuers to “devise and 28 maintain a system of internal accounting controls sufficient to provide reasonable 1 assurances” that four enumerated controls are in place. 15 U.S.C. § 78m(b)(2)(B). The 2 || Court reiterates that the Ninth Circuit case of Wadler, is instructive on this issue. 916 3 || F.3d at 1182, 1187; see also Baker v. Smith & Wesson, Inc., 40 F.4th 43, 48 (1st Cir. 4 || 2022) (finding on summary judgment that the FCPA is not an SEC rule or regulation and 5 || noting that the plaintiff “concedes that Section 78m(b)(2), (5) is not . . . a provision of 6 || Federal law relating to fraud against shareholder”) (internal quotation marks and citations 7 ||omitted). The Ninth Circuit has made it clear that “rule or regulation” does not mean 8 statute, and “law” does not mean rule or regulation. See Wadler, 916 F.3d at 1186 . 9 || Therefore, for an unlisted statute to be covered by § 1514A, it must relate to shareholder 10 fraud. As the Court previously explained, § 78m is facially neither an enumerated 11 statute, an SEC rule or regulation, nor a law relating to shareholder fraud. Plaintiff does 12 || not address this argument in opposition and therefore seemingly concedes this point. 13 || Accordingly, the Court GRANTS Defendant’s motion on this basis and DISMISSES 14 || Plaintiff's SOX retaliation claim to the extent it is based upon her reporting of an alleged 15 || violation of § 78m(b)(2)(B). 16 V. CONCLUSION 17 Based upon the foregoing, the Court GRANTS IN PART and DENIES IN PART 18 || Defendant’s motion to dismiss. In particular, the Court DISMISSES Plaintiff's SOX 19 || retaliation claim to the extent it is premised upon 15 U.S.C. § 78m without leave to 20 |}amend. The Court DIRECTS Defendant to file an answer to the Third Amended 21 Complaint within twenty-one (21) days of the date of this Order. 22 IT IS SO ORDERED. 23 || Dated: October 31, 2023 24 BMaihek. M =| linklr 25 HON. MICHAEL M. ANELLO %6 United States District Judge