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Securities and Exchange Commission v. Edwin Yoshihiro Funinaga and Mri International, Inc.

United States District Court, D. Nevada

October 3, 2014



JAMES C. MAHAN, District Judge.

Presently before the court is a motion to dismiss filed by defendants MRI International, Inc. ("MRI") and Edwin Fujinaga ("Fujinaga") (collectively "defendants"), and relief defendants CSA Service Center, LLC ("CSA") and the Factoring Company ("FC"), pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. #134). Plaintiff Securities and Exchange Commission (hereinafter "plaintiff") filed a response, (doc. #138), and defendants filed a reply, (doc. #147). Plaintiff also filed a notice of supplemental authority. (Doc. #149).

Also before the court are two motions to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) filed by relief defendants June Fujinaga and the Yunju Trust. (Docs. #140, 141). Plaintiff filed a response to the motions, (doc. #144), and the relief defendants filed a reply, (doc. #150).

Also before the court is defendants' motion for partial summary judgment. (Doc. #122). Plaintiff filed a response, (doc. #137), and defendants filed a reply, (doc. #146).

Also before the court is plaintiff's motion for summary judgment. (Doc. #113). Defendants filed a response, (doc. #136), to which plaintiff filed a reply, (doc. #139).

I. Background

On September 11, 2013, the Securities and Exchange Commission ("SEC") filed a civil enforcement complaint against defendants. (Doc. #3). On September 12, 2013, the court entered an order that Fujinaga and MRI show cause as to why a preliminary injunction should not issue. (Doc. #11). On October 7, 2013, the parties stipulated to the entry of a preliminary injunction. (Doc. #20).

On December 11, 2013, defendants Fujinaga, MRI, and CSA filed an answer to plaintiff's complaint. (Doc. #27). The parties completed discovery by July 8, 2014. (Doc. # 138). On July 16, 2014, plaintiff filed a motion for summary judgment. (Doc. #113). On July 24, 2014, after having been granted leave by the court, plaintiff filed an amended complaint. (Doc. #118).

Plaintiff alleges that Fujinaga, through his company, MRI, perpetrated an elaborate Ponzi scheme robbing investors of their life savings. Plaintiff alleges that defendants told investors that MRI was using their investments to buy medical accounts receivable ("MARS") from medical providers at a discount to recover their full value from insurance companies.

Plaintiff claims that in reality, defendants were using the investments to pay back earlier investors. In an April 2013 statement to the Japanese Financial Services Agency, Fujinaga admitted that "from 3, 4, 5 years ago, we started to appropriate investments from our investors to pay the principal and interest of other investors." (Doc. #113). Plaintiff also asserts that Fujinaga used investors' money for his own personal expenses, including to buy property and luxury cars. By May 2013, investors' funds had been depleted entirely.

Plaintiff alleges that from 1998 to 2013, defendants operated from Las Vegas, Nevada with a sales office in Tokyo, Japan. According to plaintiff, investors wired money or sent checks to defendants' Wells Fargo bank accounts in Las Vegas.

The relief defendants purportedly received and used investors' funds, also to buy and hold real property. June Fujinaga is defendant Edwin Fujinaga's wife. She allegedly used investor funds to purchase condominium units in the MGM Grand residential tower, later transferring ownership of these units to relief defendant "the Yunju Trust." (Doc. #118).

Relief defendant CSA is purportedly an alter-ego of Fujinaga. (Doc. #113). FC is also wholly owned by Fujinaga. MRI allegedly paid FC millions of dollars of "marketing fees." (Doc. #113).

According to plaintiff, defendants solicited Japanese investors to purchase Class A and Select A securities. (Doc. #113). Plaintiff contends that defendants' offering book advertised these investments with statements such as the following:

"[I]nvesting with MRI provides superb profitability and, above all, unwavering stability."
"Funds are used for purchasing medical account [sic] receivable only."
"[Y]our precious investments are protected in the event of unforeseen circumstances."
"The role of state governments... [p]rovides guarantees through deposit system [sic]."
"Investors' money is... kept... in special lock box accounts managed by an escrow agent... protected by state laws so that they cannot be touched by anyone else, even if the bank goes bankrupt."

Defendants also allegedly delivered a Japanese disclosure document to defendants stating that "[t]he funds from investors will be deposited in an account in trust under prudent fund management by an escrow agent." (Doc. #113). Finally, defendants supposedly represented in their investor magazine that "[i]n 2009, MRI purchased MARS of approximately 1.3 billion dollars in total, " when MRI really purchased only $16.1 million in value. (Doc. #113).

The president and owner of defendants' purported escrow service, Sterling Escrow, declared that he transferred money at Fujinaga's discretion, and did not provide escrow services to defendants. (Doc. #113). Fujinaga later blamed his failure to pay interest to investors on a "financial audit that is taking place in Sterling Escrow." (Doc. #113).

Fujinaga has invoked his Fifth Amendment privilege in response to questions about his representations to investors, MRI's safekeeping of investor funds, the money MRI owed to investors, CSA's receipt of money from MRI, Fujinaga's ownership of FC, and FC's performance of marketing services for MRI, among other topics. (Doc. #113).

Based on the foregoing facts, plaintiff requests an injunction and civil monetary penalties against Fujinaga and MRI, disgorgement of misappropriated funds from all defendants and relief defendants, and other appropriate equitable relief. (Doc. #118).

Defendants filed the instant motions to dismiss and motion for summary judgment in response to the parties' discovery and plaintiff's amended complaint. Plaintiff filed a motion for summary judgment on liability.

II. Legal Standard

A. 12(b)(1) lack of subject matter jurisdiction

A court may dismiss a plaintiff's complaint for lack of subject-matter jurisdiction. Fed.R.Civ.P. 12(b)(1). Federal Rule of Civil Procedure 12(b)(1) permits a party to assert this defense by motion. Id. When presented as a factual challenge, a rule 12(b)(1) motion can be supported by affidavits or other evidence outside of the pleadings. United States v. LSL Biotechs., 379 F.3d 672, 700 n.14 (9th Cir. 2004) (citing St. Clair v. City of Chicago, 880 F.2d 199, 201 (9th Cir. 1989)).

"A plaintiff suing in federal court must show in his pleading, affirmatively and distinctly, the existence of whatever is essential to federal jurisdiction, and, if he does not do so, the court, on having the defect called to its attention or on discovering the same, must dismiss the case." Tosco Corp. v. Communities for a Better Env't, 236 F.3d 495, 499 (9th Cir. 2001).

B. 12(b)(6) failure to state a claim

A court may dismiss a plaintiff's complaint for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). A properly pled complaint must provide "[a] short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). While Rule 8 does not require detailed factual allegations, it demands "more than labels and conclusions" or a "formulaic recitation of the elements of a cause of action." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted).

"Factual allegations must be enough to rise above the speculative level." Twombly, 550 U.S. at 555. Thus, to survive a motion to dismiss, a complaint must contain sufficient factual matter to "state a claim to relief that is ...

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