AGUIRRE, MORRIS & SEVERSON LLP - Stanford...
Transcript of AGUIRRE, MORRIS & SEVERSON LLP - Stanford...
Case 3:09-cv-02739-DMS -CAB Document 86 Filed 09/10/10 Page 1 of 55
1 Michael J. Aguirre, Esq., SBN 060402Christopher S. Morris, Esq., SBN 163188
2 Maria C. Severson, Esq., SBN 173967AGUIRRE, MORRIS & SEVERSON LLP
3 444 West C Street, Suite 210San Diego, CA 92101
4 Telephone: (619) 876-5364Facsimile: (619) 876-5368
5Attorneys for Plaintiffs
6
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8 UNITED STATES DISTRICT COURT
9 SOUTHERN DISTRICT OF CALIFORNIA
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11 TAMER SALAMEH, an individual; REAL Case No. 09-cv-02739-DMS-CABESTATE 4 HOSPITALITY, LLC, a
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CLASS ACTION SECOND AMENDEDCalifornia limited liability company;COMPLAINT FOR VIOLATIONS OF13 ALEKSEY KATS; DIANA KATS; FEDERAL AND STATE SECURITIES LAWS
MITCHELL J. PEREIRA; GARY A.14 TORRETTA; ROBERT ALVARENGA; 1. §12(a)(2) Securities Act of 1933
ALEXIS COSIO; CESAR MOTA; DENIS (Misrepresentation and Omission)15 B. ROTHE JR; CHARLENE SCHRUFER; 2. §10(b)(5) Securities Act of 1934
DAVID R. BUSHY; DALE CURTIS; (Misrepresentation and Omission)16 ZONDRA SCHM IDT; DOLORES 3. Corp Code §§25110, 25503, 25504.1
(Failure to Qualify)17 GREEN; CHRISTY JESKE; TAZIA 4. Corp Code §§25401, 25501, 25504.1
REYNA; MARY L. WEE SONG; KERRY (Misrepresentations and Omissions)18 L. STEIGERWALT; BETH 5. Corp Code §25501.5 (Rescission Against
STEIGERWALT; STUART M. WOLMAN; Unlicensed Broker-Dealer)19 JEFFREY E. LUBIN AND BARBARA L. 6. Corp Code § 25504 (Control Person
20LUBIN, INDIVIDUALLY AND AS CO- Liability)
TRUSTEES OF THE LUBIN FAMILY 7. Fraud-Misrepresentation8. Fraud-Concealment
21 TRUST DATED MARCH 26, 2002;MIKAEL HAVLUCIYAN AND
22 THERESE HAVLUCIYAN JURY TRIAL DEMANDEDINDIVIDUALLY AND AS CO-
23 TRUSTEES OF THE HAVLUCIYANFAMILY TRUST; SADOUX KIM; VITO24MICALE, PHILLIP GUTIRREZ, DANON
25 SLINKARD, JOEY CLEMENT, ANDREWPAUL, STEVEN PAUL, MATTHEW
26 HOERR, SYLVIA HOERR, KEVINHENRY, KIM HENRY, THOMAS
27 BEHRLE, BARABARA BEHRLE, JOSE
28 GALLANOSA, VIRGINIA GALLANOSA,
CLASS ACTION SECOND AMENDED COMPLAINT CASE NO 09-CV-02739-DMS-CAB
Case 3:09-cv-02739-DMS -CAB Document 86 Filed 09/10/10 Page 2 of 55
1 individually and on behalf of a Class of all
2others similarly situated,
Plaintiffs,3
4 v.
5 TARSADIA HOTEL, a CaliforniaCorporation; GASLAMP HOLDINGS LLC,
6 a California Limited Liability Company;TUSHAR PATEL, an individual; B.U.
7 PATEL, an individual; GREGORYCASSERLY, an individual; 5th ROCK
8 LLC, a Delaware limited liability company;MPK ONE, LLC, a California limited
9 liability company; PLAYGROUNDDESTINATION PROPERTIES, a
10 corporation; EAST WEST BANK, aCalifornia corporation; BANK OF
11 AMERICA, a Delaware Corporation; JPMORGAN CHASE; PROFESSIONAL
12 MORTGAGE PARTNERS, INC.; XBRFINANCIAL SERVICES, LLC, a California
13 limited liability company; ERSKINECORP., a California Corporation;
14 INDEPENDENT BANK CORPORATION,a Michigan corporation; WINTRUST
15 FINANCIAL CORPORATION, an Illinois
16corporation; and DOES 1 to 100, inclusive,
Defendants.17
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1 TABLE OF CONTENTS
2 NATURE OF ACTION 1
3 THE PARTIES 2
4 CLASS ALLEGATIONS 10
5 JURISDICTION AND VENUE 11
6 HARD ROCK HOTEL SAN DIEGO COMMON ENTERPRISE 11
7 EXPECTATION OF PROFIT AS THE PRODUCT OFEFFORTS OTHER THAN HRHSD INVESTORS 14
8MISREPRESENTATIONS OF MATERIAL FACTS
9 AND OMISSIONS OF MATERIAL FACTS 21
10 SALE OF HRHSD INVESTMENT CONTRACTS 24
11 KEY PLAYERS 26
12 DISCOVERY OF PLAINTIFFS' CLAIMS 28
13 ATTEMPTED WAIVER OF SECURITIES LAW VOID 28
14 EAST WEST BANK 29
15 JP MORGAN CHASE 34
16 PROFESSIONAL MORTGAGE PARTNERS, INC. 36
17 INDEPENDENT BANK 38
18 BANK OF AMERICA 38
19 REGISTRATION WOULD HAVE DISCLOSED FLAWSIN THE INVESTMENT 43
20OFFERING WAS NOT FAIR, JUST AND EQUITABLE 43
21CONTROL PERSON AND JOINT AND SEVERAL LIABILITY 44
22UNLICENSED BROKER DEALER LIABILITY 44
23FIRST CLAIM FOR RELIEF 46
24 §12(a)(2) Securities Act of 1933Misrepresentation and Omission
25SECOND CLAIM FOR RELIEF 46
26 §10(b)(5) Securities Exchange Act of 1934Misrepresentation and Omission
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28 / / /
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1 THIRD CLAIM FOR RELIEF 47Corp Code §§25110, 25503, 25504.1
2 Failure to Qualify, Material Assistance
3 FOURTH CLAIM FOR RELIEF 47Corp Code §§ 25401, 25501, 25504.1
4 Misrepresentations and Omissions, Material Assistance
5 FIFTH CLAIM FOR RELIEF 48Corp Code §25501.5
6 Rescission Against Unlicensed Broker-Dealer againstPlayground Destination Properties only
7SDCTH CLAIM FOR RELIEF 48
8 Corp Code § 25504Control Person Liability against Patel and Casserly Defendants
9SEVENTH CLAIM FOR RELIEF 48
10 Fraud Misrepresentation
11 EIGHTH CLAIM FOR RELIEF 49Fraud-Concealment
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1 NATURE OF ACTION
2 1. This action arises from defendants' knowing and intentional violation of
3 registration, qualification, and broker licensing requirements of the federal and California State
4 securities laws.
5 2. Public investors in the Hard Rock Hotel San Diego (HRHSD) are losing tens of
6 millions of dollars from their failed HRHSD investment properties. The HRHSD promoters sold
7 investment contracts (HRHSD Investment Contracts) to investors without registering the
8 investment agreements with the US Securities & Exchange Commission (SEC) or qualifying
9 them with the California Department of Corporations (DOC), in violation of federal and state
10 investor protection laws.
11 3. The HRHSD promoters and issuers did not want the HRHSD Investment Contract
12 to be reviewed by federal and state investment regulators. The promoters knew the SEC
13 Corporate Finance Division would review, from the point of view of investors, the investment
14 features of the HRHSD Investment Contracts to determine if the investor agreements contained
15 material misrepresentations or omitted facts needed to make those stated not misleading. The
16 HRHSD also believed the DOC would not issue a permit for the HRHSD if the DOC determined
17 the HRHSD Investment Contracts were not fair, just and equitable. In order to avoid this scrutiny
18 of the HRHSD Investment Contracts, HRHSD promoters elected to disregard their legal duties to
19 submit the HRHSD Investment Contracts to the federal and state investment regulators.
20 4. The HRHSD promoters shifted the risk of their HRHSD investment through the
21 HRHSD Investment Contracts to investors. HRHSD promoters sold individual studio and suite
22 investment properties to investors but under the terms of the HRHSD Investment Contract the
23 promoters retained control of the HRHSD studio and suite keys. Under the terms of the HRHSD
24 Investment Contract investors were only permitted to stay in their HRHSD studio and suites a
25 maximum of 28 days of the year.
26 5. Whether investors made money on their HRHSD investment under the terms of
27 the HRHSD Investment Contract was substantially dependent on the managerial efforts of the
28 HRHSD promoters.
1
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1 6. As a direct and proximate result of defendants' violation of investor protection
2 laws, plaintiffs have suffered tens of millions of dollars in damages. The HRHSD is paying
3 plaintiffs only a fraction of what plaintiffs would need to break even on their HRHSD Investment
4 Contracts. For those who financed their investment in HRHSD with bank loans, the HRHSD
5 revenues are materially and substantially less than the loan debt service.
6 7. HRHSD promoters prepared documents and provided them to potential purchasers
7 to give the false impression that HRHSD investors had a choice about whether to use the HRHSD
8 promoters to manage rentals of investors' HRHSD investment properties, when in fact the
9 promoters structured the HRHSD so that investors were required to rely on the HRHSD
10 promoters to manage the rental of the HRHSD investment properties.
11 8. The HRHSD promoters used classic bait-and-switch techniques to sell investors
12 HRHSD Investment Contracts. Promoters told investors they would be treated like "rock stars" --
13 the HRHSD Investment Contracts would give investors a proverbial back stage pass to the
14 investment opportunity that was HRHSD.
15 9. In fact the HRHSD Investment Contract was an artifice of deception devised to be
16 used by HRHSD promoters to shift substantial risks of the HRHSD to dazzled investors.
17 10. This operative complaint has been filed to force the HRHSD promoters to honor
18 their legal duties and make whole the investors who were tricked into buying HRHSD Investment
19 Contracts.
20 THE PARTIES
21 PLAINTIFFS
22 11. Plaintiffs individually and on behalf of a Class of all other similarly situated
23 persons described below (collectively, "Plaintiffs"), file this Class Action Second Amended
24 Complaint.
25 12. Plaintiff Tamer Salameh is a resident of the Southern District of California.
26 Plaintiff is an investor who purchased ten (10) HRHSD Investment Contracts underwritten by
27 defendant East West Bank.
28 13. Plaintiff Real Estate 4 Hospitality, LLC is a California limited liability company
2
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1 whose principal place of business is in the Southern District of California. Plaintiff Real Estate 4
2 Hospitality, LLC , was an investor who purchased HRHSD Investment Contracts underwritten by
3 defendant East West Bank.
4 14. Plaintiffs Jeffrey E. Lubin and Barbara L. Lubin individually and as co-trustees of
5 the Lubin Family Trust dated March 26, 2002 ("Lubin") are residents of or organized under laws
6 of the State of California and reside within the Southern District of California. Lubin purchased
7 an HRHSD Investment Contract underwritten by Water Stone Bank.
8 15. Plaintiffs Aleksey Kats and Diana Kats are residents of the State of California
9 residing within the Southern District of California. Aleksey Kats and Diana Kats purchased an
10 HRHSD Investment Contract underwritten by defendant East West bank. After this legal action
11 was filed, defendant East West Bank notified plaintiffs it has sold the plaintiffs note to XBR
12 Financial Services; LLC, a California limited liability company.
13 16. Mitchell J. Pereira is a resident of the State of California residing within the
14 Southern District of California. Mr. Pereira purchased an HRHSD Investment Contract
15 underwritten by Professional Mortgage Partners, Inc. (Professional Mortgage Partners).
16 17. Gary A. Toretta is a resident of the State of California residing within the Southern
17 District of California. Mr. Toretta purchased an HRHSD Investment Contract underwritten by
18 Professional Mortgage Partners.
19 18. Stuart M. Wolman is a resident of the State of California residing within the
20 Southern District of California. Mr. Wolman purchased an HRHSD Investment Contract
21 underwritten Professional Mortgage Partners.
22 19. Robert Alvarenga is a resident of the State of California residing within the
23 Southern District of California. Mr. Alvarenga purchased an HRHSD Investment Contract that
24 was underwritten by defendant Bank of America.
25 20. Alexis Cosio is a resident of the State of California residing within the Southern
26 District of California. Ms. Cosio purchased an HRHSD Investment Contract that was
27 underwritten by Professional Mortgage Partners, later sold to JP Morgan Chase.
28 21. Cesar Mota is a resident of the State of California residing within the Southern
3
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1 District of California. Mr. Mota purchased an HRHSD Investment Contract underwritten by
2 Professional Mortgage Partners, later sold to JP Morgan Chase.
3 22. Denis B. Rothe Jr., is a resident of the State of Florida. Mr. Rothe purchased an
4 HRHSD Investment Contract underwritten by Professional Mortgage Partners, then immediately
5 sold to JP Morgan Chase.
6 23. Charlene Schrufer is a resident of the State of Florida. Ms. Schrufer purchased an
7 HRHSD Investment Contract underwritten by Professional Mortgage Partners, then immediately
8 sold to JP Morgan Chase.
9 24. Mikael and Therese Havluciyan individually and as trustees of the Havluciyan
10 Trust are residents of the State of California residing within the Southern District of California.
11 Mr. Havluciyan and Ms. Havluciyan individually and as trustees of the Havluciyan family trust
12 purchased an HRHSD Investment Contract underwritten by Bank of America.
13 25. David J. Bushey is a resident of the State of California residing within the
14 Southern District of California. Mr. Bushy purchased an HRHSD Investment Contract
15 underwritten by East West Bank.
16 26. Dale Curtis is a resident of the State of California residing within the Southern
17 District of California. Mr. Curtis purchased an HRHSD Investment Contract underwritten by East
18 West Bank.
19 27. Dale Curtis and David J. Bushey together purchased an HRHSD Investment
20 Contract underwritten by Professional Mortgage Partners.
21 28. Kerry Steigerwalt is a resident of the State of California residing within the
22 Southern District of California. Mr. Steigerwalt purchased an HRHSD Investment Contract with
23 East West Bank.
24 29. Beth Steigerwalt is a resident of the State of California residing within the
25 Southern District of California. Ms. Steigerwalt purchased an HRHSD Investment Contract with
26 East West Bank.
27 30. Dolores Green is a resident of the State of California residing within the Southern
28 District of California. Ms. Green purchased an HRHSD Investment Contract underwritten by
4
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1 Bank of America.
2 31. Zondra Schmidt is a resident of the State of California residing within the Southern
3 District of California. Ms. Schmidt purchased an HRHSD Investment Contract underwritten by
4 Bank of America.
5 32. Christy Jeske is a resident of the State of California residing within the Southern
6 District of California. Ms. Jeske purchased an HRHSD Investment Contract underwritten by
7 Professional Mortgage Partners.
8 33. Mary L. Wee Song is a resident of Arizona. She purchased three (3) HRHSD
9 Investment Contracts underwritten by East West Bank.
10 34. Tazia Reyna is a resident of the State of California and resides in Orange County.
11 Ms. Reyna purchased an HRHSD Investment Contract underwritten by JP Morgan Chase.
12 35. Sadoux Kim is a resident of the State of California. Mr. Kim purchased an
13 HRHSD Investment Contract underwritten by Professional Mortgage Partners.
14 36. Vito Micale is a resident of the State of California. Mr. Micale purchased an
15 HRHSD Investment Contract underwritten by East West Bank.
16 37. Phillip Gutirrez is a resident of the State of California. Mr. Gutirrez purchased an
17 HRHSD Investment Contract underwritten by East West Bank.
18 38. Danon Slinkard is a resident of the State of California. Mr. Slinkard purchased an
19 HRHSD Investment Contract underwritten by East West Bank.
20 39. Joey Clement is a resident of the State of California. Mr. Clement purchased an
21 HRHSD Investment Contract underwritten by East West Bank.
22 40. Andrew M. Paul is a resident of the State of California. Mr. Paul purchased an
23 HRHSD Investment Contract underwritten by East West Bank.
24 41. Steven D. Paul is a resident of the State of California. Mr. Paul purchased an
25 HRHSD Investment Contract underwritten by East West Bank.
26 42. Matthew Hoerr is a resident of the State of California. Mr. Hoerr purchased an
27 HRHSD Investment Contract underwritten by Independent Bank.
28 43. Sylvia Hoerr is a resident of the State of California. Ms. Hoerr purchased an
5
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1 HRHSD Investment Contract underwritten by Independent Bank.
2 44. Kevin Henry is a resident of the State of California. Mr. Henry purchased an
3 HRHSD Investment Contract underwritten by Independent Bank.
4 45. Kim Henry is a resident of the State of California. Ms. Henry purchased an
5 HRHSD Investment Contract underwritten by Independent Bank.
6 46. Thomas Behrle is a resident of the State of California. Mr. Belu-le purchased an
7 HRHSD Investment Contract underwritten by Independent Bank.
8 47. Barbara Belu-le is a resident of the State of California. Ms. Belu-le purchased an
9 HRHSD Investment Contract underwritten by Independent Bank.
10 48. Jose Gallanosa is a resident of the State of California. Mr. Gallanosa purchased an
11 HRHSD Investment Contract underwritten by Bank of America.
12 49. Virginia Gallanosa is a resident of the State of California. Ms. Gallanosa
13 purchased an HRHSD Investment Contract underwritten by Bank of America.
14 50. Each of the Plaintiffs, including those listed by name in the caption and above,
15 (collectively, Plaintiffs) acquired or purchased a Hard Rock Hotel San Diego Investment
16 Contract, as described more fully herein.
17 DEFENDANTS
18 51. The promoters who engaged in the unlawful activities alleged are defendants
19 Tarsadia Hotels, a California Corporation (Tarsadia); Tushar Patel, Chairman of Tarsadia; B.U.
20 Patel, founder and Vice Chairman of Tarsadia; Greg Casserly, agent and President of Tarsadia; 5th
21 Rock LLC, a Delaware limited liability company and seller of the HRHSD studios and suites, and
22 also the HRHSD operator; MPK ONE, LLC, a California limited liability company doing
23 business in the Southern District of California and the manager of 5 th Rock LLC; Gaslamp
24 Holdings LLC, a California limited liability company; Playground Destination Properties, a
25 corporation, sales broker for the HRHSD Investment Contracts; East West Bank, a California
26 corporation; JP Morgan Chase; Bank of America; Erskine Corporation, a California corporation
27 that provided mortgage/financing services and arranged financing with defendant Professional
28 Mortgage Partners, Inc.; and other banking company defendants that assisted, participated in, and
6
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1 funded the investment contracts in whole or part (collectively, the "Defendants").
2 52. Those defendants not previously named are substituted in as formerly named
3 "Doe" defendants.
4 53. Defendant 5th Rock LLC is a Delaware limited liability company doing business
5 in the Southern District of California. Defendant 5th Rock LLC was the developer and one of the
6 sellers of the HRHSD Investment Contracts.
7 54. Defendant Gaslamp Holdings LLC (Doe Defendant 1) is a California limited
8 liability company doing business in the Southern District of California. Gaslamp Holdings LLC is
9 the owner of the ground upon which HRHSD is built. Gaslamp Holdings LLC entered into a
10 ground lease with 5 th Rock LLC.
11 55. Defendants MPK ONE, LLC, is a California limited liability company doing
12 business in the Southern District of California. MPK ONE LLC is the controlling entity that
13 manages 5th Rock LLC. MPK ONE LLC executed the sales documents by which the investment
14 contracts and properties -- studio and suites -- were sold to investors.
15 56. Defendant Tarsadia Hotels (Tarsadia) is a California Corporation doing business in
16 the Southern District of California. Tarsadia is HRHSD's operator.
17 57. Defendant Tushar Patel is the Chairman of defendant Tarsadia. In the Southern
18 District of California, he engaged in material and substantial wrongdoing underlying and forming
19 the basis of the claims alleged in this operative complaint.
20 58. B.U. Patel is the Vice Chairman and founder of defendant Tarsadia. In the
21 Southern District of California, defendant B.U. Patel engaged in material and substantial
22 wrongdoing underlying and forming the basis of the claims alleged in this operative complaint.
23 59. Defendant Gregory Casserly was at all relevant times the President of defendant
24 Tarsadia. He joined defendant Tarsadia in 1998. In the Southern District of California, defendant
25 Casserly engaged in material and substantial wrongdoing underlying and forming the basis of the
26 claims alleged in this operative complaint.
27 60. Defendant Playground Destination Properties, Inc. (Playground) is a Washington
28 corporation doing business in the Southern District of California. At all relevant times,
7
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1 Playground materially and substantially assisted in the unlawful sale of unregistered and
2 unqualified HRHSD investment contracts.
3 61. Defendant East West Bank, a California Corporation, materially assisted in the
4 unlawful sale of approximately $42,726,435 of unqualified and unregistered HRHSD Investment
5 Contracts.
6 62. XBR Financial Services (Doe Defendant 2) is a California limited liability
7 company. After this legal action was filed, defendant East West Bank notified several plaintiffs
8 that it has sold the plaintiffs note to XBR Financial Services, LLC.
9 63. Defendant JPMorgan Chase & Co. (JPMorgan Chase, Doe Defendant 3), a
10 financial holding company incorporated under Delaware law in 1968. Defendant JP Morgan
11 Chase is added to the operative complaint as Doe Defendant 3. Defendant JP Morgan Chase
12 materially assisted in the unlawful sale of approximately $7,349,895 of unqualified and
13 unregistered HRHSD Investment contracts.
14 64. Defendant Professional Mortgage Partners, Inc. [PMP] (Doe Defendant 4) is a
15 Chicago-based mortgage banking firm. Defendant Professional Mortgage Partners materially
16 assisted in the unlawful sale of approximately $38,536,730 of unqualified and unregistered
17 HRHSD.
18 65. Defendant Wintrust Financial Corporation is an Illinois corporation who purchased
19 the assets and became responsible for the liabilities of Professional Mortgage Partners. Wintrust
20 had knowledge of PMP in connection with the impaired loans made to finance the HRHSD
21 Investment Contracts. Wintrust continued the business of PMP after its acquisition of PMP. They
22 are named as a defendant herein based on successor liability.
23 66. Defendant Bank of America is a Delaware corporation, a bank holding company
24 and a financial holding company under the Gramm-Leach-Bliley Act. Bank of America's
25 principal executive offices are located in the Bank of America Corporate Center, Charlotte, North
26 Carolina. Bank of America is added to the operative complaint in place of Doe Defendant 5.
27 Defendant Bank of America (Doe Defendant 5) materially assisted in the unlawful sale of
28 approximately $14,450,870 of the unregistered and unqualified HRHSD Investment Contracts.
8
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1 67. Defendant Erskine Corp. (Doe Defendant 6) operates under the name the Erskine
2 Group is a division of Cal Con Mutual Mortgage Corporation; both companies have their
3 principal places of business in San Diego County. The Erskine Group is added to the operative
4 complaint as Doe Defendant 6. Defendant Erskine Group materially assisted in the unlawful sale
5 of the unregistered and unqualified BRHSD Investment Contracts as a co-underwriter of HRHSD
6 Investment Contracts.
7 68. Defendant Erskine Corporation is a California corporation run by two brothers,
8 Joshua Erskine and Shane Erskine. Erskine Corp. provided mortgage and financing services
9 steering most if not all Investment Contract financing to defendant Professional Mortgage
10 Corporation. Together with Professional Mortgage Partners, and as its agent, materially assisted
11 in the unlawful sale of unqualified and unregistered HRHSD Investment Contracts.
12 69. Defendant Independent Bank (Doe Defendant 7) is a bank headquartered in Ionia,
13 Michigan. Independent Bank is chartered by the State of Michigan. Independent Bank provides
14 a full range of financial services, including commercial banking, mortgage lending, investments
15 and title services. Independent Bank does business in California and purchased approximately
16 100 HRHSD Investment Contract loans from PMP.
17 70. Defendants offered and sold, or materially assisted the offer and sale of
18 approximately $195,757, 613 of HRHSD Investment Contracts. Fifth Rock appears to have
19 purchased about $22,940,514 of HRHSD Investment Contracts.
20 71. Table 1 illustrates the amounts underwritten by defendants East West Bank, JP
21 Morgan Chase, Professional Management Partners, Bank of America and Independent Bank:
22Table 1 Amount of IIRHST) Investment
23 Bank Contracts Underwritten
24 East West Bank $42,726,435
25 JP Morgan Chase $7,349,895
Professional Mortgage
26 Partners/Independent Bank $38,536,730
$14,450,870
27 Bank of America
28 Total $103,063,930
9
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1 72. The true names and capacities of those defendants sued herein as DOES 9 through
2 50, inclusive, whether individual, corporate, associate or otherwise, are unknown to plaintiffs,
3 who sue those defendants by such fictitious names. When the DOE parties' true names and
4 capacities and their actual involvement in the matters alleged herein are ascertained, plaintiffs
5 will amend this complaint to accurately reflect the same.
6 73. Plaintiffs are informed and believe, and thereon allege, that each of the fictitiously
7 named defendants designated hereunder as a DOE defendant is responsible in some manner for
8 the occurrences alleged herein, and that plaintiffs' damages as herein alleged were proximately
9 caused or contributed to by their conduct.
10 74. Plaintiffs are informed and believe and thereon allege. that at all relevant times
11 herein, each of the defendants was the agent, employee, partner, joint venture, alter ego, and/or
12 co-conspirator of one or more of the remaining defendants and in doing the acts alleged herein,
13 was acting within the purpose, course and scope of such agency, employment joint venture or
14 conspiracy, and with the consent, permission or ratification of one or more remaining defendants.
15 CLASS ALLEGATIONS
16 75. Plaintiffs bring this action pursuant to Fed. R. Civ. P. 23(a), (b)(1), and (b)(3) on
17 behalf of all persons (the "Investors") who were sold and who purchased HRHSD Investment
18 Contracts (referred to as "HRHSD Investment Contracts" or "HRHSD Securities").
19 76. Plaintiffs sue as representative parties on behalf of all members of the class of
20 purchasers of HRHSD Investment Securities. The class is so numerous that joinder of all of the
21 several hundred purchasers of the HRHSD Investment Securities would be impracticable. There
22 are fundamental questions of law and fact common to the class including whether the elements of
23 the federal and state investor protection law claims can be satisfied.
24 77. The claims of the representative parties are typical of the claims of the class. The
25 representative parties and counsel will fairly and adequately protect the interests of the class. The
26 common questions of law and fact common to the class members predominate over any questions
27 affecting only individual members, and a class action is superior to other available methods for
28 fairly and efficiently adjudicating the controversy.
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1 78. The contracts identified in this operative complaint that collectively form the
2 HRDSD Investment Contracts are contracts of adhesion. To the extent those contracts purport to
3 restrain a party's ability to proceed in this action, those provisions are unconscionable and
4 unenforceable.
5 JURISDICTION AND VENUE
6 79. The claims herein arise under Section 12(a)(2) of the Securities Act, 15 U.S.C. §
7 771 (a)(2), and Section 15 of the Securities Act, 15 U.S.C. § 770. This Court has subject matter
8 and supplemental jurisdiction of this action pursuant to Section 22 of the Securities Act, 15
9 U.S.C. § 77v, and 28 U.S.C. §§ 1331 and 1337, 1367(a).
10 80. Venue is proper in this District pursuant to Section 22 of the Securities Act and 28
11 U.S.C. § 1391(b). The violations of law alleged herein occurred in substantial part in this District,
12 within which the sale of the Hard Rock Investment Securities to Class members occurred, and
13 within which the investment properties are located.
14 81. In connection with the acts and practices alleged herein, Defendants used the U.S.
15 Mail and facilities of interstate commerce.
16 /Th,RockA„,,,z)rei
17SAN DIEGO
18 HARD ROCK HOTEL SAN DIEGO COMMMON ENTERPRISE
19 82. Plaintiffs invested money, in a common enterprise (HRHSD Common Enterprise),
20 with an expectation that profits would be produced by the managers of HRHSD for plaintiffs.
21 The nature of the HRHSD Common Enterprise, and the basis of plaintiffs' expectation that profits
22 would be produced by the operators of HRHSD, were detailed in the documents that framed the
23 legal relationships amongst and between the parties.
24 83. The HRHSD Common Enterprise in which plaintiffs were invested was described
25 in a California Department of Real Estate Final Subdivision Public Report (DRE Report) for the
26 HRHSD project (also known as 5th & K Parcel 2 Condominiums and 5 th & K Parcel 3
27 Condominiums) prepared by defendant 5 th Rock LLC. The DRE Report was provided to
28 plaintiffs and informed plaintiffs that they were joining in a "common interest development."
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1 84. The DRE report described the integrated and common nature of the HRHSD
2 Common Enterprise. The HRHSD Common Enterprise, according to the DRE Report, required
3 plaintiffs to pay for the operation and maintenance of the common facilities associated with
4 plaintiffs HRHSD units through two owner associations. The DRE Report represented that the
5 HRHSD included 420 room units divided into one parcel of 257 rooms and another parcel of 163
6 room units.
7 85. The DRE Report informed plaintiffs that each of their hotel units has an undivided
8 interest in the "common area" located within the parcel in which the room unit is situated. The
9 DRE Report informed plaintiffs their units and associations were part of a master planned
10 development commonly known and advertised as the "The Hard Rock Hotel & Condominiums"
11 (the "Project").
12 86. The DRE Report further represented that the HRHSD Common Enterprise
13 included within the Master Planned Development a parcel of 17 commercial condominiums. The
14 commercial condominiums included retail shops, restaurants, bars, and the majority of a hotel, but
15 not the hotel rooms. Plaintiffs were told in the DRE Report their owners associations were
16 members of the HRHSD master association (5 th & K Master Association).
17 87. The DRE Report further described the HRHSD Common Enterprise explaining
18 that the HRHSD project would be operated by, and subject to, the jurisdiction of the Master
19 Association. The Master Association, according to what plaintiffs were told by the DRE Report,
20 was to manage and maintain the common area of the HRHSD project, including all common
21 areas.
22 88. As part of the HRHSD Common Enterprise plaintiffs were required to pay their
23 share of the (1) Master Assessments, (2) Special Master Assessments, (3) Sub-Association
24 Assessments, (4) Enforcement Assessments, and (5) Unit Expenses under Section 5.1 of the terms
25 of the Declaration of Covenants, Conditions, Easements, and Restrictions for 5 th & K Master
26 Association.
27 89. The HRHSD Common Enterprise was further defined by restrictions imposed on
28 the HRHSD project by the City of San Diego as a condition for approving the HRHSD project.
12
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1 Those restrictions required plaintiffs' units to be managed as part of the hotel and restricted
2 plaintiffs occupancy to 28 days per calendar year. Gaslamp Holdings LLC as the owner of the
3 land below the HRHSD was required by the City of San Diego to file with the San Diego County
4 Recorder a declaration of restrictions as follows:
5 The approximately 420 hotel condominium units ("Units") may be soldindividually only as non-residential condominium units. Owner occupancy in the
6 Units shall be limited to a maximum of 28 days per calendar year, and at all timesthe Units shall be managed as part of the Hotel.
7
8 90. The HRHSD Common Enterprise came into existence as a result of the promoters'
9 decisions to convert what had begun as a hotel project. On 24 July 2004 the San Diego Centre
10 City Development Corporation granted 5 th Rock LLC (as the developer) Special Permit No. 2004-
11 13 to permit the development of a 12-story hotel with 338 hotel rooms and 23,000 square feet of
12 retail/commercial and parking uses on a 52,500 square foot site. While the project was under
13 construction in 2005 Gaslamp Holdings LLC was granted Map Waiver No. 245739 allowing
14 Gaslamp Holdings LLC to create 420 commercial hotel commercial hotel condominium units and
15 17 commercial condominium units in the building then under construction. The waiver was
16 granted on the grounds that:
17 As this project is merely a conversion of commercial units to condominiums andno new development is proposed as a result of this action, and because the project
18 is strictly commercial, staff has determined the proposed waiver conforms to theapplicable requirements of the State's Subdivision map Act Section 66428.
19 Therefore, a Tentative Map may be waived for this project with Certificates of
20Compliance required as a condition of the Map Waiver.
21 91. The HRHSD Common Enterprise in which plaintiffs invested was framed by a
22 series of agreements and documents by which plaintiffs were bound included the following:
23 Document nue
Purchase Contract and Escrow Instructions
24 Unit Maintenance AgreementTarsadia Hotels Hard Rock Rental Management Agreement
25 Declaration of Restrictions (CC&R's)
26 Association Articles of Incorporation and By LawsDeed Restrictions
27 1 On 30 January 2006 Gaslamp Holdings, LLC, filed a Declaration of Restrictions reciting these restrictions with the
28 San Diego County Recorder's Office as Document No 2006-0067051
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1 City of San Diego RestrictionsDRE Report
2EXPECTATION OF PROFIT AS THE PRODUCT OF
3 EFFORTS OTHER THAN HRHSD INVESTORS
4 92. The economic reality of the HRHSD project led plaintiffs to expect a profit from
5 the efforts of the management of HRHSD rather than from plaintiffs' own efforts. Plaintiffs'
6 access to their units was limited. Plaintiffs were not allowed to possess a key to their units under
7 the Unit Management Agreement. Plaintiffs were not permitted to stay in their units for longer
8 than 28 days a year. The units had to be operated as commercial units as part of the HRHSD by
9 the hotel managers. The marketing of the units was controlled by management. The costs of
10 operations were determined by management, which named a majority to all boards controlling the
11 three associations. The rental income was collected by management. Management determined
12 and controlled the HRHSD internal control system. Management hired all employees.
13 Management controlled the HRHSD design and construction. Management engaged in extensive
14 preconstruction promotional activity and post construction management.
15 93. Plaintiffs received less than 38% of the rental income from their units.
16 Management charged an operator's fee of 50% of net rental revenues derived from plaintiffs'
17 hotel units. From plaintiffs 50% a 10% market fee was deducted by management. Plaintiffs paid
18 an additional 3% of rental revenue generated from group booked nights. Plaintiffs pay their
19 association dues and unit costs for repairs and bedding. Plaintiffs were forced to join the
20 Tarsadia rental program and Tarsadia was plaintiffs' exclusive rental agent and plaintiffs were not
21 able to rent their studios or suites on their own. Plaintiffs were not allowed to collect money for
22 the use of their studios or suites for the 28 days of allowed residence. Plaintiffs were provided
23 with the following revenue projections:
24
25 /
26
27
28
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1
2 Percent Transient Group RevenueRevenue
3 Gross Rental Revenue $100.00 $100.00Less: Marketing Fee 10% ($10.00)
4 Less: Group Sales Fee 3% ($0.00) ($3.00)
5 Net Room Revenue $90.00 $87.00
6 Less Operator's Fee 50% $45.00 $43.50
7 Owners Revenue 50% $45.00 $43.50Less: Reserve 5% ($2.25) ($2.18)
8
9 94. The HRHSD Common Enterprise was organized so that the investors and
10 promoters shared in the costs and profits from ownership as illustrated in the following Table:
11Item
12 244 Studio Rooms paid by plaintiffs (room owners and hotel
13 owners shared income, except for those owned by hotelowners; hotel owners receive an operators fee of 50% of Net
14 Room Rental Revenue)
15 159 Suites paid by plaintiffs (room owners and hotel ownersshared income, except for those owned by hotel owners)
16 17 Rock Star Suites paid by plaintiffs (room owners and hotel
17 owner shared income, except for those owned by hotelowners)
18 40,000 Meeting Space (hotel owner receives income)
19 Nobu Restaurant (hotel owners receives incomeMaryjane's Coffee Shop (hotel owners receives income)
20 Pinkberry (hotel owners receives income)
21 Rock Spa (hotel owner receives income)Rock Shop (hotel owners receives income
22 Bars (hotel owners receive income)
23 Parking (hotel owners receive income)
24Room Service (hotel owners receive income)Mini Bars in hotel rooms (hotel owners receive income)
25 Marketing Fee room owners pay 10% of their Net Room
26RevenueGroup Sales Fee room owners pay 3% of their Group income
27 Reserve Fee of room owner pays 5% of Net Room Revenue
28Construction Cost Paid by Hotel Owner
15
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1 Association Maintenance Fees paid by room owner
2 Repair and Replacement Costs paid by room ownersGuests who fail to pay, room owners incur loss
3 Costs of Common Areas (hotel room owners and hotel
4 owners share the costs of the common area, hotel ownerimposes association owner fees tlu-ough the home owners
5 association which hotel owners control because they appoint a
6 majority of each board)
7 95. Plaintiffs were induced to believe they were investing in a common enterprise in
8 which their profits would come from the efforts of others by written representations contained in
9 the Tarsadia Hotels Inc., (Tarsadia) Hard Rock Hotel San Diego Rental Management Agreement
10 (HRHSD Common Enterprise Rental Agreement) which provided and acknowledged that
11 Tarsadia Hotel was the manager of the HRHSD, and that HRHSD was operated as part of the
12 HRHSD and Condominium project located at 207 5 th Avenue, in San Diego, California.
13 96. The HRHSD Common Enterprise Rental Agreement led plaintiffs to believe they
14 were investing in a common enterprise in which profits would come from the efforts of others
15 because it provided that Tarsadia was the operator of the HRHSD and was also the operator of the
16 rental management and reservation program for HRHSD. In the HRHSD Common Enterprise
17 Rental Agreement plaintiffs appointed Tarsadia to be their exclusive rental management agent.
18 Plaintiffs were led to believe that rental income from their hotel units would come from the
19 efforts of Tarsadia as the HRHSD operator and as the operator of the reservation and rental
20 program.
21 97. Plaintiffs looked to Tarsadia, and its affiliated companies and persons, to produce
22 plaintiffs' return on investment. Tarsadia and its affiliated companies decided on HRHSD's
23 location, its operation as a Hard Rock Hotel, the number of rooms, the organization of its
24 associations, its marketing structure, its management, employees, unit prices, and design and
25 architecture. Plaintiffs looked to Tarsadia and its affiliated persons and entities to market their
26 rental units, to set the rental price, to decide when to grant complimentary use of plaintiffs'
27 rooms, to select the décor, the bedding, the color schemes, the entertainment, the restaurants, the
28
16
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1 shops, and the other elements that make for a successful hotel.
2 98. The defendants' written assertion that the rental program was voluntary was not
3 correct, based upon the way in which defendants structured HRHSD. Section 10.2.3 Rooms
4 Units of the Declaration of Covenants, Conditions, Easements, and Restrictions for 5 th & K
5 Master Association provided that plaintiffs could only rent their unit under a program operated by
6 the Hotel Owner (5 th Rock LLC or Gaslamp Holdings LLC) or "any third party approved by the
7 Hotel Owner." The plaintiff unit owner is required to provide written notice to the Master
8 Association of the owner's intention to permit occupancy of the owner's unit room. Section 4.1
9 of the Unit Maintenance and Operation Agreement provided that the unit owner was required to
10 pay the Hotel owner a service fee at initial rates of $90 per day for a studio, $125 per day for a
11 one-bed-room suite, and $150 per day for a Rock Star Suite. The service fee automatically
12 increased every year by an amount equal to the percentage increase in the Consumer Price Index,
13 San Diego Average, All Urban Consumers, All Items (1982-1984=100) as published by the U.S.
14 Department of Labor, over the Consumer Price Index amount on the first day of the prior period
15 but in no event shall the percentage increase be less than 4% per annum. The imposition of
16 service charges by defendants, together with the other provisions in the applicable governing
17 agreements, rendered the option of owners renting out their own units financially infeasible.
18 99. The opportunity to invest in the HRHSD Common Enterprise in which plaintiffs
19 expected profit was to come from the efforts of others was made to plaintiffs by way of a public
20 offering. The opportunity to invest was advertized on television, in magazines and other
21 publications in California and in other states. The public offerings of HRHSD units involved
22 operation cost pool arrangements as described above. The costs of operating the common areas
23 were combined and the individual owners were charged a ratable share of the costs without regard
24 to whether plaintiffs units were actually rented. The offer of the unit together with the offer of an
25 opportunity to participate in such a cost sharing pool involved the offer of investment contracts
26 which should have been, but were not, registered with the Securities & Exchange Commission
27 (SEC) or qualified by the California Department of Corporations.
28 / / /
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1 100. Although there was some boilerplate disclaimers that plaintiffs were not investing
2 in HRHSD, those disclaimers were not contained in the other documents. Such disclaimers are
3 contradicted by the economic reality of the investment terms. Plaintiffs, under the restrictions
4 imposed by the City of San Diego, could not reside in their units and had to operate them as
5 commercial units under hotel management as part of the hotel. The HRHSD Common Enterprise
6 Rental Agreement frequently asked questions distributed to plaintiffs made it clear plaintiffs were
7 looking to Tarsadia and their affiliated persons and entitles "To maximize revenue by renting the
8 participating suites for the most number of nights at the highest possible rate." Tarsadia and its
9 affiliated persons, entities and agents represented that "We've got the team. We've got the ideas.
10 We've got the experience. Now we want you." And "Again, please know that the sooner we
11 receive your signed RMA, the sooner we'll be able to get your suite into the rental rotation."
12 101. Through writings, Tarsadia and its affiliated entities and persons used to describe
13 the Rental Agreement, Tarsadia represented it was voluntary in fact as a practical matter it was
14 mandatory. Plaintiffs could not, as a practical matter, rent out their own unit because under the
15 restrictions imposed by the City of San Diego and agreed to by Tarsadia and its affiliated entities,
16 the units had to be operated as part of the management of the hotel.
17 102. The rental management agreement was for three years. The primary objective, as
18 represented by Tarsadia to plaintiffs, was "revenue maximization." Tarsadia agreed to provide a
19 monthly statement in the form decided on by Tarsadia and its affiliated entities and persons.
20 Tarsadia falsely promised plaintiffs that it was Tarsadia's goal to have each suite occupied the
21 most number of nights each year at the highest possible rate. Tarsadia imposed a term in the
22 rental agreement that allowed Tarsadia to "comp" plaintiffs units in order to "adequately promote
23 the Hotel demand." Tarsadia was allowed to comp Plaintiffs' units 5 days per year.
24 103. Tarsadia represented to plaintiffs that reservations would be allocated by Tarsadia
25 through its "Our Property Management System" known as "OPERA." Plaintiffs were told in the
26 Frequently Asked Questions [FAQ] hand out for the rental agreement that Opera would distribute
27 reservations within each suite category (e.g. studios, one bedroom suites, rock star suites) on a
28 rotational basis, taking into consideration owner use, complimentary occupancy, maintenance
18
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1 down-time, other variables.
2 104. HRHSD units were offered with a contract or agreement that placed restrictions on
3 the use of the units. These restrictions required the use of Tarsadia as plaintiffs' exclusive rental
4 agent and placed a 28-day per year limit on the period of time plaintiffs could occupy their units.
5 These restrictions required that the units had to be operated as commercial units and as part of the
6 hotel by hotel management. Plaintiffs were not even issued keys to their units and the units did
7 not have kitchens. These restrictions show the economic reality of the transaction in which
8 plaintiffs intended to invest in a business enterprise, the return from which was to be substantially
9 dependent on the success of the managerial efforts of other persons.
10 105. Defendants' own actions support plaintiffs' claims that they invested in a common
11 enterprise with the expectation that a return on their investments would come from the efforts of
12 the defendants. Defendants were well aware of the fact that plaintiffs had invested in a risky
13 investment based on defendants' own experience with the HRHSD Project.
14 106. Defendants had organized the HRHSD project as a hotel with 288 rooms, as
15 described in the 24 June 2004 San Diego Centre City Development Corporation News Digest:
16 Regular Meeting of the Centre City DevelopmentCorporation Board of Directors
17 June 23, 2004
18 The following summaries Wednesday's meeting:
19 1. HARD ROCK HOTEL design review approved by Boatird (Gaslamp Quarter)The Board granted design review approval of developer 5 Rock, LLC's Hard
20 Rock Hotel project and recommended a height exception of 125 feet. Located atthe southern end of the Gaslamp Quarter on the block bounded by Fifth and Sixth
21 avenues and K and L streets (adjacent to the Old Spaghetti Factory restaurant) thetwo towers, 11, and 12 story (124ft), 388 room hotel includes 23,000sf of
22 retail/restaurant space and parking for up to 280 cars. The project will incorporatea restored historic William Sterling Hebbard 1896 Otay Railroad Depot Building
23 at Sixth and L as lobby bar. In addition, the project will feature an artist-designedwater sculpture at the L Street entrance. (Vote 4-0, Vice Chair Johnson and
24 Directors Vilaplana and McNeely)
25107. The promoter defendants knew that HRHSD had started as a 388 room hotel
26project because they were involved in the work needed to permit the project and to secure
27financing. Defendant East West Bank was aware the HRHSD project started as a hotel because
28
19
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1 East West Bank provided the original financing. On 17 August 2005 a Leasehold Construction
2 Deed of Trust was recorded in favor of East West Bank by 5th Rock, LLC for the sum of $88
3 million. The deed of trust secured an $88 million construction loan East West Bank made to 5th
4 Rock to construct the hotel.
5 108. On 12 September 2005 the Orange County Business Journal reported, based on its
6 interview with B.U. Patel, that Tarsadia was developing a hotel with condominiums:
7 In downtown's Gaslamp Quarter, Tarsadia is building a Hard Rock hotel. The$125 million project calls for an eight-story hotel, condominiums and shops. It's
8 set to open next winter.
9 109. On 14 December 2005 San Diego City Development Project Manager Peter Lynch
10 recommended to a San Diego Development Services Hearing Officer that the City approve Map
11 Waiver No. 245739 and allow 5 th Rock LLC to convert the HRHSD project from a hotel with 388
12 rooms to a commercial non-residential condominium project. The project manager wrote:
13 As this project is merely a conversion of commercial units to condominiums andno new development is proposed as a result of this action, and because the project
14 is strictly commercial, staff has determined the proposed waiver conforms to theapplicable requirements of the State's Subdivision Map Act Section 66428.
15 Therefore, a Tentative Map may be waived for this project with Certificates of
16Compliance required as a condition of the Map Waiver.
17 110. The Hearing Officer's Resolution granting the map waiver provided in pertinent
18 part that:
19 5. Prior to the recordation of the Certificates of Compliance, subdivider shallrecord a deed restriction as follows: The approximately 420 hotel condominium
20 units ("Units") may be sold individually only as non-residential condominiumunits. Owner occupancy in the Units shall be limited to a maximum of 28 days per
21 calendar year, and at all times the Units shall be managed as part of the Hotel.
22111. On 30 January 2006 Gaslamp Holdings LLC, the owner of the land on which the
23HRHSD was under construction, filed a declaration of restrictions for the HRHSD project in
24connection with the restriction that the approximately 420 hotel condominium units ("Units")
25may be sold individually only as non-residential condominium units. Owner occupancy in the
26Units was to be limited to a maximum of 28 days per calendar year, and at all times the Units
27were to be managed as part of the Hotel.
28
20
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1 112. Another document that showed plaintiffs' expectation of profit from the HRHSD
2 Common Enterprise was based substantially on the efforts of others was the HRHSD Operation
3 Agreement. Under the HRHSD Operation Agreement, defendant 5 th Rock LLC had the
4 responsibility and authority to:
5 • accept reservations, enforce check-in and check-out procedures, performhousekeeping services;
6 • issue room keys (including to plaintiffs and investors);• collect service and other charges;
7 • collect and remit transient occupancy taxes;• provide such personnel as are necessary to accomplish the defined services.
8 • purchase and replace linens, towels, blankets and the like within the Studio andsuites (costs to be paid by plaintiffs);
9 • connect plaintiffs' unit telephones to the Hard Rock Hotel switchboard;• arrange for basic cable or satellite television service to the Hotel Unit;
10 • operate the mini-bars and otherwise sell alcoholic beverages and foot in the studioand suites.
11MISREPRESENTATIONS OF MATERIAL FACTS
12 AND OMISSIONS OF MATERIAL FACTS
13 113. In a series of writings issued to plaintiffs by defendants in connection with the
14 offer made to plaintiffs to invest in the HRHSD Common Enterprise HRHSD, Tarsadia and its
15 affiliated persons and entities made the following misrepresentations and omitted to state facts
16 needed to make those stated not misleading:
17 Hard Rock Guide RepresentationEnclosed you'll find the Hard Rock Guide
18 and within its pages all the details of SanDiego's first and most rockin' branded
19 condo-hotel. Everything's here, from thefloor plates to the plans to the preferred
20 lendersWe will help you through this process and
21 our goal is equally simple... To ensureyou consider every opportunity that'll
22 exceed your expectations and desires. Sojust have fun with this. Circle anything
23 that catches your eye.We're here to make this a fantastic
24 experience. Call us anytime. Rock on,[7 signatures]
25 The Hard Rock Condo-Hotel Sales Team(This was a false statement on several
26 levels. The Hard Rock Guide did notcontain "all the details." It omitted the
27 fact that defendants had changed thebusiness model of HRHSD in July 2005
28
21
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1 after defendants determined that the risksof developing the hotel were too great and
2 could be shifted to investors. All thedetails that should have been provided to
3 investors were not provided includingdetails required under the applicable SEC
4 and California Department ofCorporations laws and regulations such as
5 (1) business strategy; (2) recentdevelopments; (3) use of proceeds: (4)
6 risk factors; (5)certified financialstatement; (6)liquidity and capital
7 resources; (7)qualitative and quantitativedisclosures about market risk; (8)detailed
8 statement of the business; (9)marketanalysis; (10)suitability standards; and
9 (11) conflicts of interests; .Hard Rock Guide San Diego's First Branded Condo-Hotel
10 California's Hottest Performing HotelMarket
11 (This was misleading because defendantshad determined that the hotel market was
12 not sufficiently strong to support theHRHSD as a hotel and defendants had
13 decided to transform their hotel projectinto a condominium/hotel project.
14 Q. What's been your greatest success to date ? A Breaking five world records in a rowfor franchise development (over 400 deals each year) and building the world's largest
15 hotel company when I was with Cendant.Q. Tell us about your greatest real estate project? A. Building high-end all-inclusive
16 resorts in the Pacific Rim, Bali, Phuket, Guam, and Saipan; and creating once in alifetime experience for our guests.
17 Q. Where do you see San Diego in 10 years?A. As a world-class 24-hour city keeping the same company as San Francisco, New
18 York and Miami.Q. You could have chosen to work with just about any hotel brand on this project. Why
19 Hard Rock?A. There are a ton of reasons but the key is the authentic hard Rock experience. Few
20 hotels in the world deliver truly authentic experiences or even spend any time thinkingabout it. Hard Rock focuses on it 24 hours a day and understands that delivering luxury
21 service is one thing, but making it so kick-ass that it becomes an experience issomething else. The best way to say it is every experience at hard Rock Hotels is world-
22 class, yet unpredictable. It's what going to separate us from everything else in SouthernCalifornia.
23 Q. What's the one greatest differentiator of this project?A. A project like this is one in a million. All the stars are aligned: great location, great
24 brand, great dining and entertainment, great design and great partners. It has the hottestlocation in all of San Diego and this is one of the most desirable markets in the world.
25 That's it-short and sweet. There's nothing more important in real estate than the locationand this one, no doubt, is the most coveted in San Diego. (This statement was
26 misleading because Tarsadia had determined that the HRHSD project did not pencil outas a hotel and the investment opportunity being presented to plaintiffs was part of a plan
27 to shift the investment risks to plaintiffs while Tarsadia still retained a substantial part of
28the income and financial benefit of the project)
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1 Q. Normally in the world of condo-hotels, you'd sell first, then build. But you're alreadybuilding and have about $40m in the ground. What's the story there?
2 A. We've been working on this project for three years and at the end of the day wehave a fantastic project that works all day long. When you get a site like this one and
3 the right team with the right ideas, there's nothing holding you back. (This statementwas false and it was known to be false when it was made. Tarsadia and its affiliated
4 persons and entities had worked on the project for three years but they had determinedthat the project did not "work all day long." In fact, they had determined that the project
5 did not pencil out and had shifted from a hotel project to a commercial condominiumproject after construction began in December 2005 in order to shift the investment risk
6 to plaintiffs.).
7 Q. You've talked about San Diego as being one of the hottest spots for a condo-hotelWhy do you feel this way?
8 A. With the millions of people visiting San Diego every year, this is the perfect spot fora condo-hotel. They work really well at the upper end of the market-at the 4-Diamond
9 luxury level-and that's exactly what we're delivering. Then there's the idea of a loyalbase of Owners that become the hotel's greatest fans and connectors. That priceless for
10 us as the operator for the Owners. (This statement was false because it was misleading.Mr. Cass and the other defendants had determined that the HRHSD would not pencil out
11 because of the income would be insufficient to produce a positive return on the fundsinvested. Cass and his fellow defendants had decided to use the sale of units to
12 plaintiffs as a device to shift the investment risks to plaintiffs away from Cass and hisfellow defendants.)
13
14 114. Defendants' legal duty was to register and qualify the HRHSD Investment
15 Contracts -- a process that would have caused defendants to disclose the material information
16 required by those investor protection agencies, explaining how defendants organized the HRHSD
17 investment to achieve its investment objectives.
18 115. Instead, the promoters distracted investors with claims that HRHSD was a hot new
19 scene and a place to be seen. HRHSD promoters successfully marketed the sizzle of the HRHSD
20 investment opportunity without going through the legally required process of registration and
21 qualification.
22 116. The key misrepresentation and omission revolved around the defendants' rental
23 management agreement and prop-am. Defendants falsely represented that defendant Tarsadia's
24 rental prop-am was not mandatory and not a condition of ownership. However, as a matter of
25 economic and practical reality, the Tarsadia rental program was mandatory and a condition of
26 ownership. It was not feasible, as plaintiffs were to later discover, for investors to operate their
27 own rental management system separate from the HRHSD given the control 5 th Rock LLC
28
23
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1 exercised over investors' studios and suites under the terms of the Operations Agreement.
2 Defendant Tarsadia, an affiliate of 5 th Rock LLC and under the common control of the Patel
3 defendants and defendant Casserly, was the manager of the HRHSD and investors' exclusive
4 rental agent.
5 117. Defendants represented that investors were not required to participate in Tarsadia's
6 rental management program and that the decision was entirely up to investors. This representation
7 was false and untrue in that plaintiffs were required to participate in Tarsadia's rental
8 management program and the decision was not entirely up to investors. Under the terms of the
9 operations agreement, 5 th Rock LLC, under the common control of Tarsadia, Patel defendants and
10 Casserly, retained control of investors' studios and suites as alleged in this operative complaint
11 such that separate rental management by investors was not feasible. Defendants made these
12 misrepresentations in Tarsadia's Optional Rental Management Program FAQ.
13 118. Defendants omitted to disclose that the reason they misrepresented the rental
14 management agreement as not mandatory is that they were attempting to conceal the fact that the
15 HRHSD Investment Contract transaction was an unregistered, public offering of a security.
16 Defendants prepared and approved the Tarsadia's Optional Rental Management Program FAQ
17 with the intent of creating a false written record that the rental management was not a condition of
18 ownership to make it less likely that the investment would be recognized for what it was -- the
19 public offering of a security. Defendants aided and materially assisted each other in the
20 misrepresentations so as to close the deals with the plaintiff investors.
21 119. Plaintiffs had no control over the rental management of their studios and suites and
22 were prohibited under the mandatory Operations Agreement from having control over their
23 studios and suites. This lack of control prevented and continues to prevent Plaintiffs from ever
24 being able to separately manage the rental of their studios and suites.
25 SALE OF HRHSD INVESTMENT CONTRACTS
26 120. The sale and purchase of the HRHSD investment contracts were not final until the
27 close of escrow. Section 4.2 of the Purchase Contract and Escrow Instructions allowed buyer to
28 make material changes in the transaction up to the time of Escrow:
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1TERMINATION OF CONTRACT AND ESCROW. Subject to the provisions of
2 Section 9 hereof, if this Contract is terminated in accordance with this Contract,(i)Escrow shall be automatically cancelled and the parties shall execute
3 cancellation instructions requested by Escrow Holder, (ii) within five (5) days aftersuch termination, Buyer shall deliver to Seller all documents delivered by Seller to
4 Buyer hereunder, (iii) Buyer shall have no further right or interest in the Units, and(iv) Buyer's indemnities of Seller in this Contract shall survive the termination. In
5 addition to any other rights provided under this Contract, the following terminationright exist:
6(i) BUYERS'S CANCELLATION RIGHT. If through no fault of Buyer, Escrow
7 is not closed by the Outside Date or within one (1) year after the Seller's receipt ofthe Certificate of Occupancy for the Units which is the subject of this Contract,
8 Buyer may terminate this Contract, cancel Escrow and, within fifteen (15) calendardays after Escrow Holder receives written notice of such termination and
9 cancellation, receive a refund of the Escrow Deposit. Before the Close ofEscrow, Seller May in its sole discretion, make material changes in the
10 Project and/or management documents for the Associations, changes in theoverall development of the Project or change in the manner of content of any
11 offering of units in the Sub-Association or any phase of development thereof;
12 121. The Hard Rock Guide informed investors that the transaction was not final when
13 plaintiffs made their deposits:
14 The prices, plans, amenities, availability and improvements shown are subject tochange without notice. Illustrations are artists' depictions only and may differ
15 from completed improvements, and scenes may include locations or activities noton the property Improvements, facilities and programs are in formative stages,
16 and there is no guarantee that they will be completed or developed.
17 122. Section 4.2 of the Purchase Contract also contained a waiver of plaintiffs' rights
18 under the federal and state securities laws which is a void and unenforceable term as alleged
19 below:
20 provided that, Seller shall advise Buyer if Seller becomes aware that any ofSeller's representation and warranties in this Contract has become materially
21 inaccurate. In such case, Seller shall provide Buyer with written notice of suchmaterial change or material inaccuracy, and Buyer's sole remedy at that time shall
22 be to terminate this Contract, request the cancellation of Escrow and receive arefund of the Escrow Deposit. Buyer's failure to deliver written notice of
23 termination to Seller within five (5) days after receipt of Seller's material changenotice constitutes a waiver of Buyer's right to terminate this Contract and cancel
24 Escrow in response to such change/inaccurancy.
25 123. The provision limiting the penalty for providing material false statements above
26 quoted are void under Section 14(15 U.S.C. § 77n) of the Securities Act of 1933 which provides:
27 "Contrary stipulations void. Any condition, stipulation, or provision binding any person
28 acquiring any security to waive compliance with any provision of this title or of the rules and
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1 regulations of the Commission shall be void." 15 U.S.C. § 77n.
2 124. The provision limiting the penalty for providing material false statements above
3 quoted is void under Corporations Code § 25701 which provides: "Any condition, stipulation or
4 provision purporting to bind any person acquiring any security to waive compliance with any
5 provision of this law or any rule or order hereunder is void."
6 KEY PLAYERS
7 125. The Key Players in carrying out the fraud consist of confidential source No. 1 who
8 acted as a HRHSD unit appraiser and who did not use the income method under instructions from
9 the bank defendant for whom he was retained to provide appraisals.
10 126. The main players tlu-ough whom Tarsadia engaged in the alleged unlawful conduct
11 include but are not limited to Greg Casserly the Tarsadia principle manager. Mr. Casserly was an
12 architect of the plan to shift HRHSD from a hotel to a non-commercial condominium investment
13 program and to move investment risk of the HRHSD project from the promoters to plaintiffs. Mr.
14 Casserly was one of the authors of the Hard Rock Guide, Frequently Asked Questions and the
15 other documents cited in the operative complaint that were used to mislead and defraud plaintiffs.
16 127. Other Tarsadia players who helped to develop the strategy behind the fraudulent
17 scheme to which plaintiffs were subjected included Trevor Horwell, Vice President of Tarsadia.
18 Mr. Horwell participated in the development of the strategy to shift the investment risk from the
19 HRHSD promoters to plaintiffs. Mr. Horwell also participated in communications with investors
20 representing the terms of the investment opportunity without disclosing the risks identified in this
21 operative complaint. Another key Tarsadia player was Robert Todak, Tarsadia General Manager,
22 who also participated in drafting communications to investors that were misleading and failed to
23 inform investors of the risks of the investment identified in this operative complaint.
24 128. Another key Tarsadia player was Lori Prock. Ms. Prock provided comparables in
25 connection with plaintiffs' participation in the HRHSD Rental Management Agreement under
26 which Tarsadia managed the HRHSD hotel rooms. One such projection she provided to plaintiffs
27 was dated 3 May 2006:
28
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1 Hotel Standard Room Size S Suite Rate Suite Size Sq qRoom Rate Ft Ft
2 W Hotel$329 250 $650 500
3 Hotel Solamar$319 336 $500 480
4Omni Hotel
$329 360 $500 520 5
Hilton Gaslamp$359 330 Sold Out 500
6Marriott Marina
7 $349 355 Sold Out 534
Marriott
8 Gaslamp $315 392 Sold Out 448
9
10 129. John Resnick, a Tarsadia agent, was instrumental in making misrepresentations to
11 investors regarding the rental agreement being voluntary when it was as a practical matter
12 mandatory. Mr. Resnick also reviewed the rental agreement frequently asked questions document
13 that was communicated to investors and contained the misrepresentations identified in the
14 operative complaint. Brent McLean, another VP at Tarsadia, was also instrumental in preparing
15 and approving the frequently asked questions documents provided to plaintiffs containing the
16 misrepresentations identified herein.
17 130. Playground related defendants were led by BJ Turner, and Jason Dolker
18 Playground's Director of Sales. Playground defendants Turner and Dolker and their fellow
19 Playground brokers participated directly in the sale of HRHSD Investment Contracts. They
20 negotiated the contracts, provided the terms, helped to prepare the paper work, coordinated with
21 the bank sales representatives, provided comparables sales and rent information, and issued a
22 constant stream of upbeat emails touting the attributes of the HRHSD investment contracts.
23 131. These Playground representatives knew the HRHSD project had been shifted from
24 a hotel project to a commercial non-residential condominium and that plaintiffs were not
25 receiving the information they needed about the projected performance underlying the HRHSD
26 Investment Contracts. These agents of Playground knew the HRHSD Investment Contracts were
27 required to be registered with the SEC and qualified by the Department of Corporations from
28 their training as real estate brokers and agents. These Playground agents knew they were required
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1 to be registered as broker dealers before they could lawfully sell the HRHSD Investment
2 Contracts. These Playground agents were highly compensated and were motivated by the lure of
3 financial gain to violate their legal duties.
4 DISCOVERY OF PLAINTIFFS' CLAIMS
5 132. Plaintiffs are bringing this action within: one (1) year after discovery of the untrue
6 statements or the omissions of material facts alleged herein; within one (1) year after discovery of
7 the untrue statements and omissions should have been made by the exercise of reasonable
8 diligence; and within three (3) years of the sale of the HRHSD Investment Contracts. Plaintiffs
9 did not discover the facts on which this action is based until after consulting with counsel, which
10 was less than a year before the filing of this operative complaint.
11 133. Plaintiffs were subjected to a barrage of false and misleading statements by the
12 Tarsadia and Playground Defendants designed to keep plaintiffs from discovering facts
13 supporting the need to bring these claims. One device was to slowly reduce plaintiffs' hotel room
14 revenue while gradually increasing costs.
15 ATTEMPTED WAIVER OF SECURITIES LAW VOID
16 134. The HRHSD Purchase Contract and Escrow Instructions contain provisions
17 suggesting that plaintiffs were not investing HRHSD and waiving their rights under the federal
18 securities laws. Those provisions are unenforceable under both the federal and state securities
19 laws.
20 135. Section 14(15 U.S.C. § 77n) of the Securities Act of 1933 which provides:
21 "Contrary stipulations void. Any condition, stipulation, or provision binding any person
22 acquiring any security to waive compliance with any provision of this title or of the rules and
23 regulations of the Commission shall be void." 15 U.S.C. § 77n.
24 136. Corporations Code § 25701 provides: "Any condition, stipulation or provision
25 purporting to bind any person acquiring any security to waive compliance with any provision of
26 this law or any rule or order hereunder is void."
27 137. Section 29(a) of the Securities Exchange Act of 1934 provides: "Waiver
28 provisions. Any condition, stipulation, or provision binding any person to waive compliance with
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1 any provision of this title or of any rule or regulation thereunder, or of any rule of a self-
2 regulatory organization, shall be void." 15 U.S.C. § 78cc(a).
3 138. Defendants B.U. Patel and Tushar Patel were the ultimate decision makers in
4 carrying out the fraud. They were the ultimate owners of Defendants 5 th Rock LLC, Gaslamp
5 Holding LLC, MPK One LLC, and Tarsadia. Defendant Gregory Casserly was in control of
6 Tarsadia and participated in the fraud by making the misrepresentations and omissions attributed
7 in this operative complaint. Casserly held the top management position in Defendant Tarsadia.
8 Playground acted as the broker-dealer for the sale of HRHSD Investment Contracts.
9
10 EAST WEST BANK
11 EAs-rWEST BANK
12 139. East West Bank is the wholly owned subsidiary of East West Bancorp Inc., a bank
13 holding company incorporated in Delaware on August 26, 1998. East West Bank's principal
14 office is located at 135 N. Los Robles Avenue, 7th Floor, Pasadena, California 91101, and the
15 telephone number is (626) 768-6000.
16 140. East West Bank offers a broad spectrum of personal and commercial banking
17 services to small and medium-sized businesses, business executives, professionals, and other
18 individuals. East West Bank's principal officers include Dominic Ng. Mr. Ng serves as the
19 Chairman, the President and the Chief Executive Officer of East West Bank. Douglas P. Krause is
20 an Executive Vice President, the Chief Risk Officer, a General Counsel and a Corporate Secretary
21 of East West Bank. William J. Lewis is an Executive Vice President and the Chief Credit Officer.
22 Mr. Lewis joined the Bank in 2002. Julia Gouw is President and Chief Operating Officer of East
23 West Bank. Thomas J. Tolda was the Chief Financial Officer and Executive Vice President of
24 East West Bank. Irene H. Oh is the current Executive Vice President and Chief Financial Officer
25 of East West Bank.
26 141. The East West Bank Commercial Lending segment is comprised of commercial
27 real estate which principally generates commercial loans and deposits through the lending offices
28 located in East West Bank's northern and southern California production offices. The Commercial
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1 Lending segment generated 50% of the total revenue of East West Bank, Inc.
2 142. The East West loan and sales team were identified as preferred HRHSD lenders by
3 the Playground sales team. East West bank loan and sales team members spoke with investors
4 and helped seal the deal by proclaiming the financial viability of the HRHSD Investment
5 contracts. East West Bank understood from its underwriting and due diligence review that the
6 HRHSD units were commercial non-residential units and not second homes. East West Bank
7 knew from the underwriting and due diligence it did in providing a construction loan to HRHSD
8 in and before August 2005 that HRHSD was transformed from a 388 hotel project to a 420
9 commercial non-residential room project because the HRHSD promoters had determined that the
10 project was too risky to continue as a hotel project.
11 143. East West Bank knew there was a substantial risk its construction loan to HRHSD
12 would be impaired if the project continued as a hotel project. East West bank knew that getting
13 HRHSD investors to sign the East West Bank loan documents was a necessary part of the sales of
14 the HRHSD Investment Contract. East West Bank knew the transaction had been structured so
15 that investors had to get their loan commitment from East West Bank before the completion of
16 the HRHSD construction was completed. In this regard defendant Cass told investors as follows:
17 Q. Normally in the world of condo-hotels, you'd sell first, then build. But you're
18already building and have about $40m in the ground. What's the story there?
A. We've been working on this project for three years and at the end of the day we
19 have a fantastic project that works all day long. When you get a site like this one
20and the right team with the right ideas, there's nothing holding you back.
21 144. Further the Hard Rock Guide provided that financing was required before the
22 HRHSD contracts could be entered:
23 FINANCINGWhether you plan to purchase your Hard Rock Hotel San Diego suite either
24 through financing or with cash, prior to going to contract you'll need to verify yourfinancial qualification in writing in the form of a letter from your chosen financial
25 institution. Your financial institution will need to provide, on official letterhead,either:
26COMFORT LETTER
27 (for financed purchases) showing your loan pre-qualification in the full amount ofthe desired purchased.
28
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1 145. The East West bank officers, agents and employees who participated in the lending
2 to consummate the transaction vouched for the HRHSD project and assisted in the completion of
3 the required financing documents as part of the completion of the sales of HRHSD Investment
4 Contracts. East West bank knew it would be receiving from plaintiffs the funds from the sales of
5 the HRHSD Investment Contracts to pay off the loans East West Bank had advanced to the
6 HRHSD promoters to construct the HRHSD project.
7 146. Defendant East West Bank agents, officers and employees learned that HRHSD
8 was proposed to be a 388 room hotel in two towers with 23,000 square feet of retail and
9 restaurant space and parking for 280 cars because East West Bank provided the original
10 construction financing.
11 147. East West Bank advanced an $88 million construction loan and $30 million in
12 letters of credit to HRHSD for a total of approximately $111 million. East West Bank materially
13 assisted the unlawful sale of unqualified and unregistered securities by acting as an underwriter
14 for over $42,726,435 of HRHSD Investment Contracts.
15 148. In so acting, East West Bank materially assisted in the unlawful sale of the
16 HRHSD Investment Contracts with the intent of generating proceeds from these sales of HRHSD
17 Investment Contracts in an amount sufficient to pay the $111 million East West Bank had
18 advanced for the construction and development of the HRHSD. East West Bank materially
19 assisted the sale of the HRHSD Investment Contracts by acting as an underwriter and providing
20 financing.
21 149. East West Bank was the beneficiary of a deed of trust dated 12 August 2005 and
22 executed by defendant 5 th Rock LLC securing the $88 million HRHSD construction promissory
23 note from 5th Rock LLC in favor of East West bank. East West Bank memorialized 5th Rock
24 LLC's payment of the $88 million HRHSD construction promissory note by way of a full
25 reconveyance dated 15 February 2008 (DOC # 2008-0086687) filed with the San Diego
26 Recorders Office on 20 February 2008. East West Bank was the beneficiary of a deed of trust
27 dated 30 October 2008 made by 5 th Rock LLC securing the $33 million East West Bank letters of
28 credit. East West Bank memorialized 5 th Rock LLC's payment of the $30 million by way of a full
31
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1 reconveyance dated 4 June 2008 (Doc # 2008-03090833 from East West Bank to 5 th Rock LLC).
2 150. In so acting, defendant East West Bank materially assisted in the sale of the
3 unqualified HRHSD Investment Contracts that were sold in violation of Cal. Corp. Code Sections
4 25110 and 25401, which were supported by material misrepresentations of fact and concealment
5 of facts in violation of Cal. Corp. Code § 25501. The East West Bank defendants knew, or were
6 reckless in not knowing, that their co-defendants were misrepresenting that the HRHSD rental
7 program was not mandatory.
8 151. Defendants East West Bank knew or was reckless in not knowing that the reason
9 their co-defendants were misrepresenting that the rental program was voluntary was to conceal
10 the fact that defendants were making a public offering of the HRHSD Investment Securities. East
11 West Bank undertook this risk for the financial motive of getting a repayment on their
12 construction and other loans to the HRHSD promoters. East West Bank was concerned that these
13 loans would become impaired loans.
14 152. East West Bank engaged in a pattern of using reckless underwriting and legal
15 compliance in issuing the loans to plaintiffs. On 11 February 2010 the Congressional Oversight
16 Panel issued a report finding that certain banks and thrifts had "problematic exposure" to
17 commercial real estate and related loans. A related public report reviewed the largest U.S.
18 publicly traded banks with high concentrations in commercial real estate, or CRE loans. The
19 report found that three of the second group of five banks that meet the Congressional Oversight
20 Panel's criteria for "CRE-concentrated" (commercial real estate) show significant weakness. In
21 the report defendant East West Bank was found to have a large ratio of net charge-offs (actual
22 loan losses) to average loans, with a high 5.16% for 2009. East West bank received a U.S.
23 Treasury bailout of $306.5 million.
24 153. Another public report issued 1 September 2010 found that defendant East West
25 Bank was likely to join the 109 banks that have failed in 2010. East West Bank stock was found
26 to be in an "intermediate-term downtrend and falling." It is currently testing an important
27 resistance zone between $14.10 and $15.00. The report found that in March 2009 shares of
28 EWBC hit a low of $3.22. The report found that East West Bank stock was currently clinging to
32
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1 historical support dating back to 2009. The report found that the East West Bank holding
2 company also had an uncertain fundamental outlook. With increasing expenses, the company
3 issued cautious guidance for the upcoming third quarter. For the full 2010 year, analysts projected
4 revenue would stay essentially flat, increasing only +0.8% to $887.1 million compared to $879.9
5 million in 2009. The report found that East West Bank revenue was expected to drop -9.2% to
6 $805.5 million by 2011. For 2010, analysts projected that the bank would earn $0.77 a share,
7 which means that East West Bank stock was selling for almost 20 times earnings at current prices.
8 The report found that East West Bank stock appeared "overvalued on several other metrics." The
9 company had a projected five-year PEG ratio of 2.3. (A PEG of 1.0 or less shows attractive
10 valuation )
11 154. East West Bank attempted to cover up the unlawful and fraudulent loans it made in
12 connection with the HRHSD Investment Contract by using "straw persons" to contact HRHSD
13 Investment purchasers who were in default on their East West Bank loans made to pay for the
14 HRHSD Investment Contracts. On more than one occasion East West Bank arranged for a quiet
15 transfer of ownership back to East West Bank-controlled entities. East West Bank so acted to
16 avoid having to report the loans as "charge offs."
17 155. Even though East West Bank was well aware that the "units" were commercial
18 properties, and had been certified as such to the City of San Diego, it papered its HRHSD loan
19 files with "second home appraisals" rather than appraisals based on projected rental income from
20 their use as hotel rooms. This was an additional part of the fraud because proper income based
21 appraisals based on the information known to East West Bank would have shown that the
22 projected income did not support the loans. East West Bank concealed these material facts from
23 plaintiffs. Had plaintiffs known that the appraisals should have been based on projected
24 occupancy rates and room rates, with deductions for costs based upon the less than 38% share of
25 revenue less owner association fees set by the HRHSD promoters the appraisals would not have
26 supported the sales price charged plaintiffs. East West Bank so acted in order to defraud
27 plaintiffs into obligating themselves on East West Bank loans so East West Bank could transfer to
28 plaintiffs the risk the project would not perform at the level required to make it a financial
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1 success. This practice had the concomitant effect of extinguishing the risk associated with the
2 initial HRHSD construction loan issued by East West Bank.
3 156. It was a further part of the fraud to avoid registration and qualification because
4 East West Bank knew that the HRHSD Investment Contracts cold not satisfy the disclosure and
5 qualification requirements of federal and California securities laws.
6 157. East West Bank further engaged in the fraud by transferring HRHSD Investment
7 Contract loans to third parties. East West Bank engaged in a pattern of conduct designed to shift
8 the risk loss on their bad loans by selling them into the secondary market.
9 158. A February 2010 public report noted that defendant East West Bank was
10 marketing $244.5 million of commercial mortgages, most of them backed by condominium
11 properties in California. The public report noted that many of the loans in the current offering
12 were distressed. In addition to the California collateral, a few loans were backed by office
13 buildings and land in New York, Arizona and suburban Seattle. About one-third of the portfolio
14 had already matured. The other loans had maturity dates extending as far out as 2018.
15 159. XBR was fully informed of the fact that plaintiffs had good defenses to the
16 enforcement of the agreements supporting the HRHSD loans made by East West Bank to finance
17 the HRHSD Investment Contracts. XBR agreed to act as a straw person buyer in order to give the
18 false impression XBR was a good faith holder in due course of the promissory note plaintiffs
19 were signed with East West Bank in connection with the HRHSD Investment contracts.
20
21
22iptsitertianC"
23
24
25
26 JP MORGAN CHASE
27 160. Defendant JP Morgan Chase (Doe Defendant 3) is a National Association with
28 U.S. branches in 17 states. At the time of the offering of the HRHSD Investment Contracts JP
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1 Morgan Chase was the 9 th highest ranked national underwriter of subprime loans. JP Morgan had
2 a business practice of using reckless underwriting standards. Internal controls related to subprime
3 commercial loans at JP Morgan Chase had broken down at the time of the HRHSD lending by
4 defendant JP Morgan Chase. JP Morgan Chase used loans like those made to finance HRHSD
5 Investment Contract in securitizations which were sold fraudulently on the secondary markets.
6 161. Defendant JP Morgan Chase (Doe Defendant 3) knew that the HRHSD hotel units
7 were commercial, non-residential units that could not be used as second homes. Defendant JP
8 Morgan Chase knew they were investment properties. JP Morgan Chase knew that it was
9 required to evaluate the HRHSD Investment Contract loans based on the anticipated rental
10 revenue received by plaintiffs. Defendant JP Morgan Chase, through its underwriting procedures,
11 learned that the less than 38% of hotel room revenue, less the owner association costs, would not
12 support the loan amounts of the HRHSD Investment Contract loans defendant JP Morgan was
13 making to plaintiffs. JP Morgan knew that without the loans made by JP Morgan Chase plaintiffs
14 would not be able to complete their purchases of HRHSD Contracts. JP Morgan Chase as a
15 preferred lender worked with the HRHSD sales staff to complete the sales of the HRHSD
16 Investment Contracts to plaintiffs. JP Morgan Chase agents vouched for the investment while not
17 disclosing to plaintiffs that the appraisals used to support the purchase money financing did not
18 include an analysis of value based on hotel revenue plaintiffs could reasonably expect. JP
19 Morgan Chase knew a revenue based appraisal was required because of the commercial, non-
20 residential, status of the HRHSD rooms plaintiffs were investing in with their JP Morgan Chase
21 loan money.
22 162. JP Morgan Chase, through their agents, officers and employees, knew that the
23 HRHSD Investment Contracts were not registered with the SEC or qualified by the California
24 Department of Corporations. Defendant JP Morgan Chase knew that federal and state securities
25 laws required registration and qualification because the HRHSD Investment Contracts constituted
26 a public offering of securities. JP Morgan Chase knew that a review by the SEC or California
27 Department of Corporations would result in disclosing the fact that inappropriate appraisals were
28 being used to support the sale of the HRHSD Investment Contracts. JP Morgan knew that income
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1 based appraisals would not support the prices at which the HRHSD units were being sold.
2 163. JP Morgan knew that the financing had to be provided before the sales contract for
3 the HRHSD Investment Contracts could be consummated and that such financing was a necessary
4 condition of the sale. JP Morgan agents worked as part of the sales team completing necessary
5 forms and documents in order to consummate the fraudulent transactions.
6 164. Upon these premises, JP Morgan materially assisted in the unlawful sale of
7 unqualified and unregistered HRHSD Investment Contracts by acting as an underwriter for the
8 sale of approximately $7,349,895 HRHSD Investment contracts with full knowledge that the
9 HRHSD Investment Contracts were not registered or qualified, as required by law. Further,
10 Defendant JP Morgan Chase (Doe Defendant 3) knew, or should have known, that sales were
11 made to plaintiffs based upon material misrepresentations that the HRHSD Investment Contracts
12 were not required to be registered or qualified by the SEC and the California Department of
13 Corporations.
14
15Professional MORTGAGE
16 Paltners, Inc.17
18 PROFESSIONAL MORTGAGE PARTNERS, INC.
19 165. Defendant Professional Mortgage Partners (PMP) (Doe Defendant 4) was founded
20 in 1999 by President Barton Pitts and six other investors. PMP built its business into a well
21 known mortgage banking operation with 180 employees comprised of ten retail mortgage offices
22 with nearly $1.6 billion in annual mortgage originations in 2008. Underwriting standards for
23 loans like those made to plaintiffs in connection with the HRHSD Investment Contract purchases
24 deteriorated and eventually led to PMP's financial collapse. After PMP packaged the HRHSD
25 loans it sold the majority of them off to Defendant Independent Bank.
26 166. PMP worked tlu-ough Defendant Erskine Corp. (Doe Defendant 6) which acted as
27 PMP's agent for consummating the HRHSD loans issued by PMP. The Erskine Corp. personnel
28 involved in the loans knew that the HRHSD hotel units were commercial and non-residential and
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1 could not be sold as second homes but were in fact investment properties. Defendant Erskine
2 Corp. agents knew that the appraisals supporting the loans were not based on the less than 38% of
3 hotel room revenue plaintiffs were to receive, less owner association costs, set by HRHSD
4 promoters. Defendant Erskine Corp. knew that the sales prices at which the HRHSD Investment
5 Contracts were being sold to plaintiffs exceeded what rental income based appraisals would
6 support. Defendant Erskine Corp. knew that the HRHSD Investment Contracts were required to
7 be registered with the SEC and qualified by the California Department of Corporations.
8 Defendant Erskine Corp. possessed the knowledge based on their experience and training in the
9 mortgage banking and real estate brokerage business. They obtained this training and knowledge
10 from their preparation for the licensing exams they were required to successfully complete.
11 167. Agents of Erskine Corp., on behalf of PMP, knew that plaintiffs were not informed
12 of the fact that the wrong appraisals were being used and that had proper appraisals been used,
13 appraisals based on hotel revenues, they would not support the price at which the HRHSD units
14 were being sold to plaintiffs as part of the HRHSD Investment Contracts. Agents of Erskine
15 Corp. acted knowingly and intentionally. Their actions were within the course and scope of their
16 agency with PMP. It was a business practice of PMP to engage in violations of underwriting
17 standards in connection with the origination of mortgage loans and PMP's issuance of the
18 unlawful loans in connection with HRHSD Investment Contracts was a continuation of those
19 unlawful practices.
20 168. Upon these premises, defendant Professional Mortgage Partners (Doe Defendant
21 4) materially assisted in the unlawful sale of the unqualified and unregistered HRHSD Investment
22 Contracts by underwriting approximately $38,536,730 of unqualified and unregistered HRHSD
23 Investment Contracts with knowledge that the HRHSD Investment Contracts were not registered
24 or qualified, as required by law. Further, Defendant Professional Management Partners (Doe
25 Defendant 4) knew or should have known that sales were made to plaintiffs based upon material
26 misrepresentations that the HRHSD Investment Contracts were not required to be registered or
27 qualified by the SEC and the California Department of Corporations.
28 169. Defendant Erskine Corp., by and through its agents, materially assisted in the
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1 unlawful sale of unqualified and unregistered HRHSD Investment Contracts by acting as the
2 agent for Professional Mortgage Partners by coordinating the financing of the investment.
3 170. On 23 December 2008 Wintrust Financial Corporation ("Wintrust") announced it
4 had acquired certain assets and the assumption of certain liabilities of the mortgage banking
5 business of Professional Mortgage Partners ("PMP"). PMP is no longer in business.
6 171. After originating the loans, PMP transferred and assigned HRHSD mortgages to
7 Independent Bank.
8
9 ent BankStar,
10
11
12 INDEPENDENT BANK
13 172. Independent Bank Corporation is the holding company for Independent Bank (Doe
14 Defendant 7) and was founded in 1973 and commenced the operations in the following year.
15 Independent Bank was incorporated as a state chartered, federally registered bank holding
16 company in 1992.
17 173. With full knowledge of the underlying fraud and violations of securities laws,
18 Defendant Independent Bank acquired HRHSD mortgages from Defendant Professional
19 Mortgage Partners. Agents, officers, and employees of Independent Bank, as part of its
20 underwriting done in connection with its purchase of the HRHSD Investment Contracts, learned
21 that the loans were made without the support of hotel revenue based appraisals. Independent
22 Bank agents, officers, and employees learned that the HRHSD Investment Contracts had not been
23 registered with the SEC or qualified by the California Department of Corporations.
24 174. Agents, officers and employees of Independent Bank knew that hotel income
25 based appraisals would not support the prices at which the HRHSD loans were made. Agents,
26 officers, and employees of Independent Bank knew that plaintiffs had sound legal basis for
27 terminating the HRHSD Investment Contracts and related loans made by PMP tlu-ough Erskine
28 Corp. at the time Independent Bank made the decision to purchase the loans supporting the
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ase 3:09-cv-02739-DMS -CAB Document 86 Filed 09/10/10 Page 43 of 55
1 HRHSD Investment Contracts financed by PMP.
2 175. HRHSD transactions were part of a pattern of unsound and unsafe banking
3 practices Independent Bank engaged in in connection with its commercial financing business
4 activities.
5 176. Independent Bank engaged in a pattern of underwriting abuses that resulted in a
6 federal government bailout. In 2008 the federal government, through the U.S. Treasury
7 Department, infused $72 million of capital into Independent Bank.
8 177. The bailout did not work. In 9 July 2010 Independent Bank Corporation's stock
9 fell 22.5% and in 20 August 2010 Independent Bank Corporation announced it had taken steps to
10 initiate a one-for-ten reverse stock split of the Company's common stock, effective 31 August
11 2010. As a result of the reverse stock split, every ten shares of the Company's common stock
12 issued and outstanding immediately prior to the effective date was combined into one share of
13 common stock.
14 BankoM ". 15
16
17
18 BANK OF AMERICA
19 178. Defendant Bank of America (Doe Defendant 5) was a HRHSD project preferred
20 lender. Agents, officers, and employees of Bank of America were assigned to work as part of the
21 HRHSD sales team. Bank of America agents, officers, and employees knew from their
22 underwriting of the HRHSD transaction that HRHSD hotel rooms were commercial and non-
23 residential units that had to be managed as part of the HRHSD hotel. The Bank of America
24 agents, officers, and employees knew that the appraisals used to support the purchase price of the
25 HRHSD Investment Contracts were not based on the less than 38%, less the amount HRHSD
26 promoters determined plaintiffs had to pay in owner association fees, of hotel room revenue
27 plaintiffs were to receive.
28 179. Bank of America officers, agents, and employees knew that the financing it was
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1 providing was required to be in place before plaintiffs HRHSD Investment Contracts could be
2 consummated. Bank of America officers, agents, and employees, as part of the HRHSD sales
3 team, vouched for the HRHSD investment with plaintiffs and helped plaintiffs complete the
4 papers needed to consummate the purchase of the HRHSD Investment Contract. These Bank of
5 America officers, agents, and employees participated directly in consummating the sale while not
6 disclosing to plaintiffs that a hotel revenue based appraisal was not being used as required by the
7 commercial and investment nature of the transaction.
8 180. Bank of America officers, agents, and employees knew that the HRHSD
9 Investment contracts were required to be registered with the SEC and qualified by the California
10 Department of Corporations because plaintiffs were purchasing an investment because they knew
11 that the hotel units could not be used as second homes and plaintiffs return on investment would
12 be determined by the managerial efforts of HRHSD promoters. Bank of America officers, agents,
13 and employees knew that if the HRHSD Investment Contracts were provided to the SEC and
14 Department of Corporations the fact that the appraisals supporting the price at which the HRHSD
15 Investment Contracts were being sold to plaintiffs would be disallowed. They knew that once
16 there was full disclosure a qualification permit would not be issued.
17 181. A key player at Bank of America who participated in the sale of the HRHSD
18 Investment Contracts to plaintiffs was Bank of America Senior Vice President for Mortgage Sales
19 Brianne Pham-Lukas. Ms. Lukas participated in the sale of the HRHSD Investment Contracts to
20 plaintiffs. She encouraged plaintiffs to buy the HRHSD Investment Contracts. She worked in
21 tandem and part of the Playground and Tarsadia HRHSD sales force. She prepared the paper
22 work needed to complete the sale and purchase of the HRHSD Investment Contracts. She knew
23 the HRHSD project had been shifted by Tarsadia from a hotel project to a commercial non-
24 residential condominium project. Ms Pham-Lukas knew from her training and her interaction
25 with the Playground and Tarsadia sales staff that Playground was selling the HRHSD Investment
26 Contracts without a sales license and that the HRHSD Investment Contracts were required to be
27 but were not registered with the SEC and qualified by the Department of Corporations.
28 182. Ms. Pham-Lukas knew the commercial non-residential nature of the HRHSD
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1 Investment Contracts required a income based appraisal but no such appraisal was provided
2 because it would show that the less than 38% rental revenue income plaintiffs were to receive
3 from the HRHSD hotel units would not support the sales price.
4 183. Another person who participated in the fraudulent transaction on behalf of Bank of
5 America was a Bank of America appraiser who papered the HRHSD file with an appraisal that
6 contained knowingly false information to the effect that the hotel units would be rented tlu-ough
7 the owners association and omitted the fact that plaintiffs had to rely upon Tarsadia to rent the
8 units for which Tarsaida would extract in operation fees, marketing fees owner association fees
9 and other withholdings in excess of $62% of the hotel room revenue.
10 184. By the time Bank of America became a preferred HRHSD lender, its underwriting
11 practices in connection with the its subprime and collateralized debt obligation business had
12 broken down.
13 185. Defendant Bank of America (Doe Defendant 5) materially assisted in the unlawful
14 sale of unqualified and unregistered HRHSD Investment Contracts by underwriting
15 approximately $14,450,870 of unqualified and unregistered HRHSD Investment Contracts with
16 full knowledge that the HRHSD Investment Contracts were not registered or qualified, as
17 required by law. Further, defendant Bank of America (Doe defendant 5) knew, or should have
18 known, that sales were made to plaintiffs based upon material misrepresentations that the
19 HRHSD Investment Contracts were not required to be registered or qualified by the SEC and the
20 California Department of Corporations.
21 186. Defendants East West Bank, JP Morgan Chase (Doe Defendant 3), Professional
22 Mortgage Partners (Doe defendant 4), Bank of American (Doe Defendant 5), Independent Bank
23 (Doe Defendant 7) and the remaining Doe Defendants materially assisted in the sale of the
24 unqualified and unregistered HRHSD Investment Contracts that were sold in violation of Cal.
25 Corp. Code §Section 25110 and 25401, and § 12(1) of the 1933 Securities Act.
26 187. Defendants East West Bank, JP Morgan Chase (Doe Defendant 3), Professional
27 Mortgage Partners (Doe Defendant 4), Bank of American (Doe Defendant 5), Independent Bank
28 (Doe Defendant 7) and the remaining Doe Defendants knew, or were reckless in not knowing that
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ase 3:09-cv-02739-DMS -CAB Document 86 Filed 09110/10 Page 46 of 55
1 their co-defendants were misrepresenting that the HRHSD rental program was not mandatory in
2 order to give the false impression to plaintiffs that the HRHSD Investment Contracts did not have
3 to be registered with the SEC or qualified by the California Department of Corporations.
4 188. Defendants East West Bank, JP Morgan Chase (Doe Defendant 3), Professional
5 Mortgage Partners (Doe Defendant 4), Bank of American (Doe Defendant 5), Independent Bank
6 (Doe Defendant 7) and the remaining Doe Defendants knew, or were reckless in not knowing,
7 that the reason their co-defendants were misrepresenting that the rental program was voluntary
8 was to conceal the fact that defendants were making an unlawful public offering of the HRHSD
9 Investment Securities in violation of the California and federal securities laws.
10 189. Defendants East West Bank, JP Morgan Chase (Doe Defendant 3), Professional
11 Mortgage Partners (Doe Defendant 4), Bank of American (Doe Defendant 5), Independent Bank
12 (Doe Defendant 7) and the remaining Doe Defendants provided substantial assistance in the
13 unlawful sale of the unqualified HRHSD Investment Contracts in violation of Cal. Corp. Code
14 Sections 25110 and 25401 by acting as underwriters of the HRHSD Investment Contract offering
15 by providing the essential financing needed to consummate the sales of HRHSD Investment
16 Contracts.
17 190. Defendants East West Bank, JP Morgan Chase (Doe Defendant 3), Professional
18 Mortgage Partners (Doe Defendant 4), and Bank of American (Doe Defendant 5), Independent
19 Bank (Doe Defendant 7) and the remaining Doe Defendants knew, or with reasonable diligence
20 should have known, that the rental program was mandatory, and that the reason their co-
21 defendants were misrepresenting the rental program was voluntary was to conceal the fact that
22 defendants were making a public offering of HRHSD Investment Securities.
23 191. Each of the defendants knew, or should have known, that plaintiffs who purchased
24 HRHSD Investment Contracts via bank financing, provided by the bank underwriter defendants,
25 would have no financing available to refinance their loans; loans that were short term interest
26 only for short durations. This information was material information to plaintiffs who bought
27 HRHSD Investment Contracts through financing provided by the bank defendants.
28 / / /
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ase 3:09-cv-02739-DMS -CAB Document 86 Filed 09110/10 Page 47 of 55
1 REGISTRATION WOULD HAVE DISCLOSED FLAWS IN THE INVESTMENT
2 192. Had defendants complied with their legal duties, they would have filed a
3 registration statement with the SEC describing in detail the Hard Rock Investment Contract. The
4 Hard Rock Hotel Registration Statements would have had two principal parts: Part I would have
5 been the prospectus, the legal offering or "selling" document. In the prospectus defendants would
6 have been required, as the issuers of the HRHSD Investment Contracts, to describe the important
7 facts about the defendants' business operations, financial condition, and management.
8 193. Defendants would have been required to provide the HRHSD Prospectus to those
9 to whom the opportunity to buy a HRHSD was presented.
10 194. The SEC Division of Corporation Finance would have reviewed the HRHSD
11 registration statement information to make sure investors were provided with material
12 information in order to make an informed investment decision as to whether to buy the HRHSD
13 Investment Security.
14 195. SEC staff would have examined the HRHSD registration statements for
15 compliance with disclosure requirements. Those parts of the filing that appeared incomplete or
16 inaccurate would have been identified in a letter to defendants from SEC staff Defendants would
17 have been required to file a correcting or clarifying amendment to the Hard Rock Registration
18 Statement.
19 196. During this process, defendants would have been required to disclose the essential
20 financial information and mode of operations.
21 197. Defendants failed to comply with their legal duty to register the Hard Rock
22 Investment Contracts with the SEC in violation of §12(a)(1) of the Securities Act. Defendants
23 also misrepresented to plaintiffs that defendants were not required to register the offering with
24 SEC, when in fact they were required to register, in violation of § 12(a)(2) of the Securities Act.
25 OFFERING WAS NOT FAIR, JUST AND EQUITABLE
26 198. The HRHSD Investment Contract was a security and an issuer transaction that was
27 not qualified under the California Corporations Code (Cal. Corp. Code).
28 199. Defendants were required under Cal. Corp. Code § 25110 to qualify the HRHSD
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ase 3:09-cv-02739-DMS -CAB Document 86 Filed 09110/10 Page 48 of 55
1 Investment Contracts in California before offering and selling it to California investors including
2 plaintiffs.
3 200. Plaintiffs purchased HRHSD Investment Contracts that were required to be, but
4 were not, qualified under the California investor protection law. Plaintiffs sue to recover the
5 consideration they paid for the HRHSD Investment Contracts with interest thereon at the legal
6 rate, less the amount of any income received therefrom.
7 201. Plaintiffs hereby tender their HRHSD Investment Contracts, including the studios
8 and suites, plaintiffs purchased.
9 202. In violation of Cal. Corp. Code § 25401 defendants sold to plaintiffs HRHSD
10 Investment Contracts by means of written or oral communication which included an untrue
11 statement of a material fact or omitted to state a material fact necessary in order to make the
12 statements made, in the light of the circumstances under which they were made, not misleading.
13 203. Defendants violated Cal. Corp. Code § 25401 because they sold to plaintiffs
14 HRHSD Investment Contracts by means of untruthful information and thus are liable to plaintiffs
15 who purchased the HRHSD Investment Contracts from defendants. Plaintiffs sue in this action for
16 rescission and/or for damages.
17 CONTROL PERSON AND JOINT AND SEVERAL LIABILITY
18 204. The Patel defendants and defendant Greg Casserly, directly or indirectly, control
19 Tarsadia, a corporation liable to plaintiffs under Cal. Corp. Code §§ 25501 or 25503. The Patel
20 defendants and defendant Casserly are principal executive officers and/or directors of the
21 Tarsadia corporation, which is so liable.
22 205. Defendant Playground Destination Properties, agent of defendants Tarsadia and 5th
23 Rock LLC, materially aided in the act or transaction constituting the violations and is also liable,
24 jointly and severally, with and to the same extent as the remaining defendants.
25 UNLICENSED BROKER DEALER LIABILITY
26 206. Plaintiffs purchased HRHSD Investment Contracts from Defendant Playground
27 Destination Properties. Defendant Playground Destination Properties was required to be
28 registered as a broker-dealer and, at the time of the sale, had not applied for and secured from the
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1 commissioner a required broker-dealer certificate.
2 207. Plaintiffs bring this action for rescission of the sale of the HRHSD Investment
3 Contracts to recover the consideration plaintiffs paid for the HRHSD Investment Contracts plus
4 interest at the legal rate, less the amount of any income received on the HRHSD Investment
5 Contract pursuant to Corp Code § 25501.5.
6 208. Plaintiffs allege the following violations of law by the defendants:
7 No, CLAIM FOR RELIEFFirst §12(a)(2) Securities Act of 1933 Misrepresentation and Omission
8 of Material FactSecond §10(b)(5) Securities Exchange Act of 1934 Misrepresentation and
9 OmissionThird Corp Code §§25110, 25503, 25504.1 Failure to Qualify, Material
10 AssistanceFourth Corp Code §§ 25401, 25501, 25504.1
11 Misrepresentations and Omissions, Material Assistance
12 Fifth Corp Code §25501.5Rescission Against Unlicensed Broker-Dealer against
13Playground Destination Properties only
Sixth Corp Code § 25504
14 Control Person Liability against Patel and Casserly DefendantsSeventh Fraud Misrepresentation
15 Eighth Fraud Concealment
16
17 FIRST CLAIM FOR RELIEF
18 §12(a)(2) Securities Act of 1933
19 Misrepresentation and Omission of Material Fact
20 209. Plaintiffs incorporate each and every allegation alleged in the preceding
21 paragraphs as though fully set forth herein.
22 210. Defendants are persons who offered and sold HRHSD Investment Contracts by the
23 use of means or instruments of transportation or communication in interstate commerce or of the
24 mails, by means of a prospectus or oral communication, which includes an untrue statement of a
25 material fact or omits to state a material fact necessary in order to make the statements, in the
26 light of the circumstances under which they were made, not misleading.
27 211. Defendants East West Bank, XBR Financial Services (Doe Defendant 2), JP
28 Morgan Chase (Doe Defendant 3), Professional Mortgage Partners (Doe Defendant 4), and Bank
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1 of American (Doe Defendant 5), Erskine Corp. (Doe Defendant 6), Independent Bank (Doe
2 Defendant 7) and the remaining Doe defendants participated in the sale of the unregistered
3 HRHSD Investment securities by acting as underwriters of the HRHSD Investment Contract, by
4 providing the essential financing needed to consummate the sales of HRHSD Investment
5 Contracts, and by materially participating in the sale itself.
6 212. Upon these premises, defendants are liable to plaintiffs for the consideration
7 plaintiffs paid for such HRHSD Investment Contracts with interest thereon, less the amount of
8 any income received thereon, upon the tender of such security, or for damages if appropriate.
9 SECOND CLAIM FOR RELIEF
10 §10(b)(5) Securities Exchange Act of 1934
11 Misrepresentation and Omission
12 213. Plaintiffs incorporate each and every allegation alleged in the preceding
13 paragraphs as though fully set forth herein.
14 214. Defendants each violated Section 10(b) of the Exchange Act [15 U.S.0 § 78j(b)]
15 and Rule 10b-5 [17 C.F.R. § 240.10b-5].
16 215. As set forth above, defendants in connection with the purchase and sale of the
17 HRHSD investment contracts by the use of means or instrumentalities of interstate commerce or
18 of the mails, directly or indirectly (a) employed devices, schemes or artifices to defraud; (b) made
19 untrue statements of material facts or omissions of material facts necessary in order to make the
20 statements made, in the light of the circumstances under which they were made, not misleading;
21 or (c) engaged in transactions, practices or courses of business which operated or would operate
22 as a fraud or deceit upon plaintiffs.
23 216. Defendants knowingly or recklessly misrepresented the material facts alleged and
24 omitted. Plaintiffs relied on the misrepresentations and omissions and those misrepresentations
25 and omissions were the proximate and actual cause of plaintiffs' damages according to proof at
26 trial.
27 / / /
28 / / /
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1 THIRD CLAIM FOR RELIEF
2 Corp Code §25110, 25503, 25504.1
3 Failure to Qualify, Material Assistance
4 217. Plaintiffs incorporate each and every allegation alleged in the preceding
5 paragraphs as though fully set forth herein.
6 218. The Defendants are persons who violated § 25110, or who materially assisted the
7 violation of § 25110, and are therefore liable to plaintiffs who are persons who acquired from
8 defendants the HRHSD Investment Contract securities in violation of § 25110.
9 219. Defendants East West Bank, XBR Financial Services (Doe Defendant 2), JP
10 Morgan Chase (Doe Defendant 3), Professional Mortgage Partners (Doe Defendant 4), and Bank
11 of American (Doe Defendant 5), Erskine Corp. (Doe Defendant 6), Independent Bank (Doe
12 Defendant 7) and the remaining Doe defendants materially assisted the violation § Section 25110
13 by acting as underwriters of the HRHSD Investment Contract by providing the essential financing
14 needed to consummate the sales of HRHSD Investment Contracts.
15 220. Upon these premises, defendants are liable to plaintiffs for the consideration
16 plaintiffs paid for such HRHSD Investment Contracts with interest thereon, less the amount of
17 any income received thereon, upon the tender of such security, or for damages if appropriate.
18 FOURTH CLAIM FOR RELIEF
19 Corp Code §§ 25401, 25501, 25504.1
20 Misrepresentations and Omissions, Material Assistance
21 221. Plaintiffs incorporate each and every allegation alleged in the preceding
22 paragraphs as though fully set forth herein.
23 222. Defendants are persons who violated Cal. Corp. Code §§ 25401, 25501, 25504.1
24 because they offered for sale and sold in the State of California the HRHSD Investment Contracts
25 by means of written or oral communications which included an untrue statement of a material fact
26 or omitted to state a material fact necessary in order to make the statements made, in the light of
27 the circumstances under which they were made, not misleading or materially assisted in such
28 violation.
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1 223. Plaintiffs are persons who purchased the HRHSD Investment Contracts from
2 defendants. Upon these premises plaintiffs sue for rescission or for damages.
3 FIFTH CLAIM FOR RELIEF
4 Corp Code §25501.5
5 Rescission Against Unlicensed Broker-Dealer against
6 Playground Destination Properties only
7 224. Plaintiffs incorporate each and every allegation alleged in the preceding
8 paragraphs as though fully set forth herein.
9 225. Defendants are persons who violated Corp Code §25501.5 because as an
10 unlicensed broker-dealer, they offered for sale and sold in the State of California the HRHSD
11 Investment Contracts that were securities.
12 226. Plaintiffs are persons who purchased the HRHSD Investment Contracts from
13 defendants. Upon these premises plaintiffs sue for rescission and/or for damages according to
14 proof at trial.
15 SIXTH CLAIM FOR RELIEF
16 Corp Code § 25504
17 Control Person Liability against Patel and Casserly Defendants
18 227. Plaintiffs incorporate each and every allegation alleged in the preceding
19 paragraphs as though fully set forth herein.
20 228. Defendants Patel and Casserly, directly and indirectly, controlled persons liable
21 under §§ 25501 and 25503 as set forth in this operative complaint and are liable jointly and
22 severally with and to the same extent as such persons under their control.
23 SEVENTH CLAIM FOR RELIEF
24 Fraud Misrepresentation
25 229. Plaintiffs incorporate each and every allegation alleged in the preceding
26 paragraphs as though fully set forth herein.
27 230. The representations made by defendants were in fact false as alleged above. When
28 the defendant made these representations they knew them to be false and made these
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1 representations with the intention to deceive and defraud plaintiffs and to induce plaintiffs to act
2 in reliance on these representations by purchasing a HRHSD Investment Contract and to not bring
3 claims against the defendants to recover plaintiffs' damages.
4 231. When defendants made these representations, they knew them to be false and
5 made these representations with the intention to deceive and defraud plaintiffs and the class to act
6 in reliance on these representations in purchasing a HRHSD Investment Contract and to not bring
7 claims against the defendants to recover plaintiffs' damages.
8 232. Plaintiffs, at the time these representations were made by defendants and at the
9 time the plaintiffs took the actions herein alleged, were ignorant of the falsity of defendants'
10 representations and believed them to be true. In reliance on these representations, plaintiffs were
11 induced to and did purchase and hold HRHSD Investment Contracts and did not bring a legal
12 action to set aside their purchase of the HRHSD Investment Contracts. Had plaintiffs known the
13 actual facts, they would not have taken such action. Plaintiffs' reliance on the defendants'
14 representations was justified because defendants appeared to be speaking the truth based upon
15 defendants' track record in the hotel industry and the involvement of the Hard Rock Hotel brand.
16 233. As a proximate result of the fraudulent conduct of the defendants as herein alleged,
17 plaintiffs were damaged in an amount according to proof at trial. The aforementioned conduct of
18 the defendants was an intentional misrepresentation, deceit, or concealment of a material fact
19 known to the defendants with the intention on the part of the defendants of thereby depriving
20 plaintiffs of property or legal rights or otherwise causing injury, and was despicable conduct that
21 subjected plaintiffs to a cruel and unjust hardship in conscious disregard of plaintiffs' rights, so as
22 to justify an award of exemplary and punitive damages.
23 EIGHTH CLAIM FOR RELIEF
24 Fraud-Conceahnent
25 234. Plaintiffs incorporate each and every allegation alleged in the preceding
26 paragraphs as though fully set forth herein.
27 235. The representations made by defendants were in fact false as alleged above
28 because defendants failed to state facts needed to make those made not misleading. When
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1 defendants made these representations they knew them to be false and made these representations
2 with the intention to deceive and defraud plaintiffs and to induce plaintiffs to act in reliance on
3 these representations by purchasing a HRHSD Investment Contract and to not bring claims
4 against defendants to recover plaintiffs' damages.
5 236. When defendants concealed facts needed to make those made not misleading they
6 knew them to be false and omitted the correct facts with the intention to deceive and defraud
7 plaintiffs and the class to act in reliance on these omissions in purchasing a HRHSD Investment
8 Contract and to not bring claims against defendants to recover plaintiffs' damages.
9 237. Plaintiffs, at the time these omissions by defendants and at the time plaintiffs took
10 the actions herein alleged, were ignorant of the falsity of the defendants' representations and
11 believed them to be true. In reliance on these omissions, plaintiffs were induced to and did
12 purchase and hold HRHSD Investment Contracts and did not bring a legal action to set aside their
13 purchase of the HRHSD Investment Contracts. Had plaintiffs known the actual facts, they would
14 not have taken such action. Plaintiffs' reliance on the defendants' omissions was justified
15 because defendants appeared to be speaking the truth based upon defendants' track record in the
16 hotel industry and the involvement of the Hard Rock Hotel brand.
17 238. As a proximate result of the fraudulent conduct of defendants as herein alleged,
18 plaintiffs were damaged in an amount according to proof at trial. The aforementioned conduct of
19 defendants was an intentional misrepresentation, deceit, or concealment of a material fact known
20 to the defendants with the intention on the part of the defendants of thereby depriving plaintiffs of
21 property or legal rights or otherwise causing injury, and was despicable conduct that subjected
22 plaintiffs to a cruel and unjust hardship in conscious disregard of the plaintiffs' rights, so as to
23 justify an award of exemplary and punitive damages.
24 UPON THE FIRST, SECOND, FIFTH, SIXTH,
25 SEVENTH, AND EIGHTH CLAIMS FOR RELIEF
26 1. Damages in an amount according to proof at trial
27 2. Alternatively, an order of recession together with the return by defendants of all
28 consideration paid by plaintiffs less any appropriate income offset.
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1 3. For reasonable attorneys fees, costs and expenses; and
2 4. All other relief deemed appropriate by the Court;
3 UPON THE THIRD AND FOURTH CAUSES OF ACTION
4 5. Damages in an amount according to proof at trial
5 6. Alternatively, an order of recession together with the return by defendants of all
6 consideration paid by plaintiffs less any appropriate income offset.
7 7. Punitive damages according to proof at trial.
8 8. For reasonable attorneys fees, costs and expenses; and
9 9. All other relief deemed appropriate by the Court.
10 Respectfully submitted,
11 AGUIRRE, MORRIS & SEVERSON LLP
12
13 Dated: September 10, 2010 /s/ Marla C. Severson Maria C. Severson, Esq.
14 Attorneys for Plaintiffs
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