sac hard rock
TRANSCRIPT
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Michael J. Aguirre, Esq., SBN 060402Christopher S. Morris, Esq., SBN 163188Maria C. Severson, Esq., SBN 173967AGUIRRE, MORRIS & SEVERSON LLP444 West C Street, Suite 210San Diego, CA 92101Telephone: (619) 876-5364Facsimile: (619) 876-5368
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
TAMER SALAMEH, an individual; REALESTATE 4 HOSPITALITY, LLC, aCalifornia limited liability company;ALEKSEY KATS; DIANA KATS;MITCHELL J. PEREIRA; GARY A.TORRETTA; ROBERT ALVARENGA;ALEXIS COSIO; CESAR MOTA; DENISB. ROTHE JR; CHARLENE SCHRUFER;DAVID R. BUSHY; DALE CURTIS;ZONDRA SCHM IDT; DOLORES
GREEN; CHRISTY JESKE; TAZIAREYNA; MARY L. WEE SONG; KERRYL. STEIGERWALT; BETHSTEIGERWALT; STUART M. WOLMAN;JEFFREY E. LUBIN AND BARBARA L.LUBIN, INDIVIDUALLY AND AS CO-TRUSTEES OF THE LUBIN FAMILYTRUST DATED MARCH 26, 2002;MIKAEL HAVLUCIYAN ANDTHERESE HAVLUCIYANINDIVIDUALLY AND AS CO-TRUSTEES OF THE HAVLUCIYANFAMILY TRUST; SADOUX KIM; VITOMICALE, PHILLIP GUTIRREZ, DANONSLINKARD, JOEY CLEMENT, ANDREWPAUL, STEVEN PAUL, MATTHEWHOERR, SYLVIA HOERR, KEVINHENRY, KIM HENRY, THOMASBEHRLE, BARABARA BEHRLE, JOSEGALLANOSA, VIRGINIA GALLANOSA,
Case No. 09-cv-02739-DMS-CAB
CLASS ACTION SECOND AMENDEDCOMPLAINT FOR VIOLATIONS OFFEDERAL AND STATE SECURITIES LAWS
1. 12(a)(2) Securities Act of 1933(Misrepresentation and Omission)
2. 10(b)(5) Securities Act of 1934(Misrepresentation and Omission)
3. Corp Code 25110, 25503, 25504.1(Failure to Qualify)
4. Corp Code 25401, 25501, 25504.1(Misrepresentations and Omissions)
5. Corp Code 25501.5 (Rescission AgainstUnlicensed Broker-Dealer)
6. Corp Code 25504 (Control PersonLiability)
7. Fraud-Misrepresentation8. Fraud-Concealment
JURY TRIAL DEMANDED
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
individually and on behalf of a Class of allothers similarly situated ,
Plaintiffs,
v.TARSADIA HOTEL, a CaliforniaCorporation; GASLAMP HOLDINGS LLC,a California Limited Liability Company;TUSHAR PATEL, an individual; B.U.PATEL, an individual; GREGORYCASSERLY, an individual; 5th ROCKLLC, a Delaware limited liability company;MPK ONE, LLC, a California limitedliability company; PLAYGROUNDDESTINATION PROPERTIES, acorporation; EAST WEST BANK, a
California corporation; BANK OFAMERICA, a Delaware Corporation; JPMORGAN CHASE; PROFESSIONALMORTGAGE PARTNERS, INC.; XBRFINANCIAL SERVICES, LLC, a Californialimited liability company; ERSKINECORP., a California Corporation;INDEPENDENT BANK CORPORATION,a Michigan corporation; WINTRUSTFINANCIAL CORPORATION, an Illinoiscorporation; and DOES 1 to 100, inclusive,
Defendants.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
TABLE OF CONTENTS
NATURE OF ACTION .................................................................................................................. 1
THE PARTIES ................................................................................................................................ 2
CLASS ALLEGATIONS ............................................................................................................. 10
JURISDICTION AND VENUE ................................................................................................... 11
HARD ROCK HOTEL SAN DIEGO COMMON ENTERPRISE .............................................. 11
EXPECTATION OF PROFIT AS THE PRODUCT OFEFFORTS OTHER THAN HRHSD INVESTORS ...................................................................... 14
MISREPRESENTATIONS OF MATERIAL FACTSAND OMISSIONS OF MATERIAL FACTS .............................................................................. 21
SALE OF HRHSD INVESTMENT CONTRACTS ..................................................................... 24
KEY PLAYERS ............................................................................................................................ 26
DISCOVERY OF PLAINTIFFS CLAIMS ................................................................................. 28
ATTEMPTED WAIVER OF SECURITIES LAW VOID ........................................................... 28
EAST WEST BANK .................................................................................................................... 29
JP MORGAN CHASE .................................................................................................................. 34
PROFESSIONAL MORTGAGE PARTNERS, INC. .................................................................. 36
INDEPENDENT BANK ............................................................................................................... 38
BANK OF AMERICA .................................................................................................................. 38
REGISTRATION WOULD HAVE DISCLOSED FLAWSIN THE INVESTMENT ............................................................................................................... 43
OFFERING WAS NOT FAIR, JUST AND EQUITABLE .......................................................... 43
CONTROL PERSON AND JOINT AND SEVERAL LIABILITY ............................................ 44
UNLICENSED BROKER DEALER LIABILITY ....................................................................... 44
FIRST CLAIM FOR RELIEF ....................................................................................................... 4612(a)(2) Securities Act of 1933Misrepresentation and Omission
SECOND CLAIM FOR RELIEF ................................................................................................. 4610(b)(5) Securities Exchange Act of 1934Misrepresentation and Omission
/ / /
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
THIRD CLAIM FOR RELIEF ................................................................................................... 47Corp Code 25110, 25503, 25504.1Failure to Qualify, Material Assistance
FOURTH CLAIM FOR RELIEF ............................................................................................... 47Corp Code 25401, 25501, 25504.1Misrepresentations and Omissions, Material Assistance
FIFTH CLAIM FOR RELIEF .................................................................................................... 48Corp Code 25501.5Rescission Against Unlicensed Broker-Dealer againstPlayground Destination Properties only
SIXTH CLAIM FOR RELIEF .................................................................................................... 48Corp Code 25504Control Person Liability against Patel and Casserly Defendants
SEVENTH CLAIM FOR RELIEF ............................................................................................. 48Fraud Misrepresentation
EIGHTH CLAIM FOR RELIEF ................................................................................................. 49Fraud-Concealment
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
NATURE OF ACTION
1. This action arises from defendants knowing and intentional violation ofregistration, qualification, and broker licensing requirements of the federal and California State
securities laws.
2. Public investors in the Hard Rock Hotel San Diego (HRHSD) are losing tens ofmillions of dollars from their failed HRHSD investment properties. The HRHSD promoters sold
investment contracts (HRHSD Investment Contracts) to investors without registering the
investment agreements with the US Securities & Exchange Commission (SEC) or qualifying
them with the California Department of Corporations (DOC), in violation of federal and state
investor protection laws.
3. The HRHSD promoters and issuers did not want the HRHSD Investment Contractto be reviewed by federal and state investment regulators. The promoters knew the SEC
Corporate Finance Division would review, from the point of view of investors, the investment
features of the HRHSD Investment Contracts to determine if the investor agreements contained
material misrepresentations or omitted facts needed to make those stated not misleading. The
HRHSD also believed the DOC would not issue a permit for the HRHSD if the DOC determined
the HRHSD Investment Contracts were not fair, just and equitable. In order to avoid this scrutiny
of the HRHSD Investment Contracts, HRHSD promoters elected to disregard their legal duties to
submit the HRHSD Investment Contracts to the federal and state investment regulators.
4. The HRHSD promoters shifted the risk of their HRHSD investment through theHRHSD Investment Contracts to investors. HRHSD promoters sold individual studio and suite
investment properties to investors but under the terms of the HRHSD Investment Contract the
promoters retained control of the HRHSD studio and suite keys. Under the terms of the HRHSD
Investment Contract investors were only permitted to stay in their HRHSD studio and suites a
maximum of 28 days of the year.
5. Whether investors made money on their HRHSD investment under the terms ofthe HRHSD Investment Contract was substantially dependent on the managerial efforts of the
HRHSD promoters.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
6. As a direct and proximate result of defendants violation of investor protectionlaws, plaintiffs have suffered tens of millions of dollars in damages. The HRHSD is paying
plaintiffs only a fraction of what plaintiffs would need to break even on their HRHSD Investment
Contracts. For those who financed their investment in HRHSD with bank loans, the HRHSD
revenues are materially and substantially less than the loan debt service.
7. HRHSD promoters prepared documents and provided them to potential purchasersto give the false impression that HRHSD investors had a choice about whether to use the HRHSD
promoters to manage rentals of investors HRHSD investment properties, when in fact the
promoters structured the HRHSD so that investors were required to rely on the HRHSD
promoters to manage the rental of the HRHSD investment properties.
8. The HRHSD promoters used classic bait-and-switch techniques to sell investorsHRHSD Investment Contracts. Promoters told investors they would be treated like rock stars --
the HRHSD Investment Contracts would give investors a proverbial back stage pass to the
investment opportunity that was HRHSD.
9. In fact the HRHSD Investment Contract was an artifice of deception devised to beused by HRHSD promoters to shift substantial risks of the HRHSD to dazzled investors.
10. This operative complaint has been filed to force the HRHSD promoters to honortheir legal duties and make whole the investors who were tricked into buying HRHSD Investment
Contracts.
THE PARTIES
PLAINTIFFS
11. Plaintiffs individually and on behalf of a Class of all other similarly situatedpersons described below (collectively, "Plaintiffs"), file this Class Action Second Amended
Complaint.
12. Plaintiff Tamer Salameh is a resident of the Southern District of California.Plaintiff is an investor who purchased ten (10) HRHSD Investment Contracts underwritten by
defendant East West Bank.
13. Plaintiff Real Estate 4 Hospitality, LLC is a California limited liability company
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
whose principal place of business is in the Southern District of California. Plaintiff Real Estate 4
Hospitality, LLC , was an investor who purchased HRHSD Investment Contracts underwritten by
defendant East West Bank.
14. Plaintiffs Jeffrey E. Lubin and Barbara L. Lubin individually and as co-trustees ofthe Lubin Family Trust dated March 26, 2002 ("Lubin") are residents of or organized under laws
of the State of California and reside within the Southern District of California. Lubin purchased
an HRHSD Investment Contract underwritten by Water Stone Bank.
15. Plaintiffs Aleksey Kats and Diana Kats are residents of the State of Californiaresiding within the Southern District of California. Aleksey Kats and Diana Kats purchased an
HRHSD Investment Contract underwritten by defendant East West bank. After this legal action
was filed, defendant East West Bank notified plaintiffs it has sold the plaintiffs note to XBR
Financial Services; LLC, a California limited liability company.
16. Mitchell J. Pereira is a resident of the State of California residing within theSouthern District of California. Mr. Pereira purchased an HRHSD Investment Contract
underwritten by Professional Mortgage Partners, Inc. (Professional Mortgage Partners).
17. Gary A. Toretta is a resident of the State of California residing within the SouthernDistrict of California. Mr. Toretta purchased an HRHSD Investment Contract underwritten by
Professional Mortgage Partners.
18. Stuart M. Wolman is a resident of the State of California residing within theSouthern District of California. Mr. Wolman purchased an HRHSD Investment Contract
underwritten Professional Mortgage Partners.
19. Robert Alvarenga is a resident of the State of California residing within theSouthern District of California. Mr. Alvarenga purchased an HRHSD Investment Contract that
was underwritten by defendant Bank of America.
20. Alexis Cosio is a resident of the State of California residing within the SouthernDistrict of California. Ms. Cosio purchased an HRHSD Investment Contract that was
underwritten by Professional Mortgage Partners, later sold to JP Morgan Chase.
21. Cesar Mota is a resident of the State of California residing within the Southern
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
District of California. Mr. Mota purchased an HRHSD Investment Contract underwritten by
Professional Mortgage Partners, later sold to JP Morgan Chase.
22. Denis B. Rothe Jr., is a resident of the State of Florida. Mr. Rothe purchased anHRHSD Investment Contract underwritten by Professional Mortgage Partners, then immediately
sold to JP Morgan Chase.
23. Charlene Schrufer is a resident of the State of Florida. Ms. Schrufer purchased anHRHSD Investment Contract underwritten by Professional Mortgage Partners, then immediately
sold to JP Morgan Chase.
24. Mikael and Therese Havluciyan individually and as trustees of the HavluciyanTrust are residents of the State of California residing within the Southern District of California.
Mr. Havluciyan and Ms. Havluciyan individually and as trustees of the Havluciyan family trust
purchased an HRHSD Investment Contract underwritten by Bank of America.
25. David J. Bushey is a resident of the State of California residing within theSouthern District of California. Mr. Bushy purchased an HRHSD Investment Contract
underwritten by East West Bank.
26. Dale Curtis is a resident of the State of California residing within the SouthernDistrict of California. Mr. Curtis purchased an HRHSD Investment Contract underwritten by East
West Bank.
27. Dale Curtis and David J. Bushey together purchased an
28. Kerry Steigerwalt is a resident of the State of California residing within theSouthern District of California. Mr. Steigerwalt purchased an HRHSD Investment Contract with
East West Bank.
HRHSD Investment
Contract underwritten by Professional Mortgage Partners.
29. Beth Steigerwalt is a resident of the State of California residing within theSouthern District of California. Ms. Steigerwalt purchased an HRHSD Investment Contract with
East West Bank.
30. Dolores Green is a resident of the State of California residing within the SouthernDistrict of California. Ms. Green purchased an HRHSD Investment Contract underwritten by
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Bank of America.
31. Zondra Schmidt is a resident of the State of California residing within the SouthernDistrict of California. Ms. Schmidt purchased an HRHSD Investment Contract underwritten by
Bank of America.
32. Christy Jeske is a resident of the State of California residing within the SouthernDistrict of California. Ms. Jeske purchased an HRHSD Investment Contract underwritten by
Professional Mortgage Partners.
33. Mary L. Wee Song is a resident of Arizona. She purchased three (3) HRHSDInvestment Contracts underwritten by East West Bank.
34. Tazia Reyna is a resident of the State of California and resides in Orange County.Ms. Reyna purchased an HRHSD Investment Contract underwritten by JP Morgan Chase.
35. Sadoux Kim is a resident of the State of California. Mr. Kim purchased anHRHSD Investment Contract underwritten by Professional Mortgage Partners.
36. Vito Micale is a resident of the State of California. Mr. Micale purchased anHRHSD Investment Contract underwritten by East West Bank.
37. Phillip Gutirrez is a resident of the State of California. Mr. Gutirrez purchased anHRHSD Investment Contract underwritten by East West Bank.
38. Danon Slinkard is a resident of the State of California. Mr. Slinkard purchased anHRHSD Investment Contract underwritten by East West Bank.
39. Joey Clement is a resident of the State of California. Mr. Clement purchased anHRHSD Investment Contract underwritten by East West Bank.
40. Andrew M. Paul is a resident of the State of California. Mr. Paul purchased anHRHSD Investment Contract underwritten by East West Bank.
41. Steven D. Paul is a resident of the State of California. Mr. Paul purchased anHRHSD Investment Contract underwritten by East West Bank.
42. Matthew Hoerr is a resident of the State of California. Mr. Hoerr purchased anHRHSD Investment Contract underwritten by Independent Bank.
43. Sylvia Hoerr is a resident of the State of California. Ms. Hoerr purchased an
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
HRHSD Investment Contract underwritten by Independent Bank.
44. Kevin Henry is a resident of the State of California. Mr. Henry purchased anHRHSD Investment Contract underwritten by Independent Bank.
45. Kim Henry is a resident of the State of California. Ms. Henry purchased anHRHSD Investment Contract underwritten by Independent Bank.
46. Thomas Behrle is a resident of the State of California. Mr. Behrle purchased anHRHSD Investment Contract underwritten by Independent Bank.
47. Barbara Behrle is a resident of the State of California. Ms. Behrle purchased anHRHSD Investment Contract underwritten by Independent Bank.
48. Jose Gallanosa is a resident of the State of California. Mr. Gallanosa purchased anHRHSD Investment Contract underwritten by Bank of America.
49. Virginia Gallanosa is a resident of the State of California. Ms. Gallanosapurchased an HRHSD Investment Contract underwritten by Bank of America.
50. Each of the Plaintiffs, including those listed by name in the caption and above,(collectively, Plaintiffs) acquired or purchased a Hard Rock Hotel San Diego Investment
Contract, as described more fully herein.
DEFENDANTS
51. The promoters who engaged in the unlawful activities alleged are defendantsTarsadia Hotels, a California Corporation (Tarsadia); Tushar Patel, Chairman of Tarsadia; B.U.
Patel, founder and Vice Chairman of Tarsadia; Greg Casserly, agent and President of Tarsadia; 5th
Rock LLC, a Delaware limited liability company and seller of the HRHSD studios and suites, and
also the HRHSD operator; MPK ONE, LLC, a California limited liability company doing
business in the Southern District of California and the manager of 5th Rock LLC; Gaslamp
Holdings LLC, a California limited liability company; Playground Destination Properties, a
corporation, sales broker for the HRHSD Investment Contracts; East West Bank, a California
corporation; JP Morgan Chase; Bank of America; Erskine Corporation, a California corporation
that provided mortgage/financing services and arranged financing with defendant Professional
Mortgage Partners, Inc.; and other banking company defendants that assisted, participated in, and
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
funded the investment contracts in whole or part (collectively, the "Defendants").
52. Those defendants not previously named are substituted in as formerly named"Doe" defendants.
53. Defendant 5th Rock LLC is a Delaware limited liability company doing businessin the Southern District of California. Defendant 5th Rock LLC was the developer and one of the
sellers of the HRHSD Investment Contracts.
54. Defendant Gaslamp Holdings LLC (Doe Defendant 1) is a California limitedliability company doing business in the Southern District of California. Gaslamp Holdings LLC is
the owner of the ground upon which HRHSD is built. Gaslamp Holdings LLC entered into a
ground lease with 5th
Rock LLC.
55. Defendants MPK ONE, LLC, is a California limited liability company doingbusiness in the Southern District of California. MPK ONE LLC is the controlling entity that
manages 5th Rock LLC. MPK ONE LLC executed the sales documents by which the investment
contracts and properties -- studio and suites -- were sold to investors.
56. Defendant Tarsadia Hotels (Tarsadia) is a California Corporation doing business inthe Southern District of California. Tarsadia is HRHSD's operator.
57. Defendant Tushar Patel is the Chairman of defendant Tarsadia. In the SouthernDistrict of California, he engaged in material and substantial wrongdoing underlying and forming
the basis of the claims alleged in this operative complaint.
58. B.U. Patel is the Vice Chairman and founder of defendant Tarsadia. In theSouthern District of California, defendant B.U. Patel engaged in material and substantial
wrongdoing underlying and forming the basis of the claims alleged in this operative complaint.
59. Defendant Gregory Casserly was at all relevant times the President of defendantTarsadia. He joined defendant Tarsadia in 1998. In the Southern District of California, defendant
Casserly engaged in material and substantial wrongdoing underlying and forming the basis of the
claims alleged in this operative complaint.
60. Defendant Playground Destination Properties, Inc. (Playground) is a Washingtoncorporation doing business in the Southern District of California. At all relevant times,
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Playground materially and substantially assisted in the unlawful sale of unregistered and
unqualified HRHSD investment contracts.
61. Defendant East West Bank, a California Corporation, materially assisted in theunlawful sale of approximately $42,726,435 of unqualified and unregistered HRHSD Investment
Contracts.
62. XBR Financial Services (Doe Defendant 2) is a California limited liabilitycompany. After this legal action was filed, defendant East West Bank notified several plaintiffs
that it has sold the plaintiffs note to XBR Financial Services, LLC.
63. Defendant JPMorgan Chase & Co. (JPMorgan Chase, Doe Defendant 3), afinancial holding company incorporated under Delaware law in 1968. Defendant JP Morgan
Chase is added to the operative complaint as Doe Defendant 3. Defendant JP Morgan Chase
materially assisted in the unlawful sale of approximately $7,349,895 of unqualified and
unregistered HRHSD Investment contracts.
64. Defendant Professional Mortgage Partners, Inc. [PMP] (Doe Defendant 4) is aChicago-based mortgage banking firm. Defendant Professional Mortgage Partners materially
assisted in the unlawful sale of approximately $38,536,730 of unqualified and unregistered
HRHSD.
65. Defendant Wintrust Financial Corporation is an Illinois corporation who purchasedthe assets and became responsible for the liabilities of Professional Mortgage Partners. Wintrust
had knowledge of PMP in connection with the impaired loans made to finance the HRHSD
Investment Contracts. Wintrust continued the business of PMP after its acquisition of PMP. They
are named as a defendant herein based on successor liability.
66. Defendant Bank of America is a Delaware corporation, a bank holding companyand a financial holding company under the Gramm-Leach-Bliley Act. Bank of America's
principal executive offices are located in the Bank of America Corporate Center, Charlotte, North
Carolina. Bank of America is added to the operative complaint in place of Doe Defendant 5.
Defendant Bank of America (Doe Defendant 5) materially assisted in the unlawful sale of
approximately $14,450,870 of the unregistered and unqualified HRHSD Investment Contracts.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
67. Defendant Erskine Corp. (Doe Defendant 6) operates under the name the ErskineGroup is a division of Cal Con Mutual Mortgage Corporation; both companies have their
principal places of business in San Diego County. The Erskine Group is added to the operative
complaint as Doe Defendant 6. Defendant Erskine Group materially assisted in the unlawful sale
of the unregistered and unqualified BRHSD Investment Contracts as a co-underwriter of HRHSD
Investment Contracts.
68. Defendant Erskine Corporation is a California corporation run by two brothers,Joshua Erskine and Shane Erskine. Erskine Corp. provided mortgage and financing services
steering most if not all Investment Contract financing to defendant Professional Mortgage
Corporation. Together with Professional Mortgage Partners, and as its agent, materially assisted
in the unlawful sale of unqualified and unregistered HRHSD Investment Contracts.
69. Defendant Independent Bank (Doe Defendant 7) is a bank headquartered in Ionia,Michigan. Independent Bank is chartered by the State of Michigan. Independent Bank provides
a full range of financial services, including commercial banking, mortgage lending, investments
and title services. Independent Bank does business in California and purchased approximately
100 HRHSD Investment Contract loans from PMP.
70. Defendants offered and sold, or materially assisted the offer and sale ofapproximately $195,757, 613 of HRHSD Investment Contracts. Fifth Rock appears to have
purchased about $22,940,514 of HRHSD Investment Contracts.
71. Table 1 illustrates the amounts underwritten by defendants East West Bank, JPMorgan Chase, Professional Management Partners, Bank of America and Independent Bank:
Table 1Bank
Amount of HRHSD InvestmentContracts Underwritten
East West Bank $42,726,435
JP Morgan Chase $7,349,895
Professional MortgagePartners/Independent Bank $38,536,730
Bank of America $14,450,870
Total $103,063,930
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
72. The true names and capacities of those defendants sued herein as DOES 9 through50, inclusive, whether individual, corporate, associate or otherwise, are unknown to plaintiffs,
who sue those defendants by such fictitious names. When the DOE parties' true names and
capacities and their actual involvement in the matters alleged herein are ascertained, plaintiffs
will amend this complaint to accurately reflect the same.
73. Plaintiffs are informed and believe, and thereon allege, that each of the fictitiouslynamed defendants designated hereunder as a DOE defendant is responsible in some manner for
the occurrences alleged herein, and that plaintiffs' damages as herein alleged were proximately
caused or contributed to by their conduct.
74. Plaintiffs are informed and believe and thereon allege. that at all relevant timesherein, each of the defendants was the agent, employee, partner, joint venture, alter ego, and/or
co-conspirator of one or more of the remaining defendants and in doing the acts alleged herein,
was acting within the purpose, course and scope of such agency, employment joint venture or
conspiracy, and with the consent, permission or ratification of one or more remaining defendants.
CLASS ALLEGATIONS
75. Plaintiffs bring this action pursuant to Fed. R. Civ. P. 23(a), (b)(1), and (b)(3) onbehalf of all persons (the "Investors") who were sold and who purchased HRHSD Investment
Contracts (referred to as HRHSD Investment Contracts or HRHSD Securities).
76. Plaintiffs sue as representative parties on behalf of all members of the class ofpurchasers of HRHSD Investment Securities. The class is so numerous that joinder of all of the
several hundred purchasers of the HRHSD Investment Securities would be impracticable. There
are fundamental questions of law and fact common to the class including whether the elements of
the federal and state investor protection law claims can be satisfied.
77. The claims of the representative parties are typical of the claims of the class. Therepresentative parties and counsel will fairly and adequately protect the interests of the class. The
common questions of law and fact common to the class members predominate over any questions
affecting only individual members, and a class action is superior to other available methods for
fairly and efficiently adjudicating the controversy.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
78. The contracts identified in this operative complaint that collectively form theHRDSD Investment Contracts are contracts of adhesion. To the extent those contracts purport to
restrain a partys ability to proceed in this action, those provisions are unconscionable and
unenforceable.
JURISDICTION AND VENUE
79. The claims herein arise under Section 12(a)(2) of the Securities Act, 15 U.S.C. 77l (a)(2), and Section 15 of the Securities Act, 15 U.S.C. 77o. This Court has subject matter
and supplemental jurisdiction of this action pursuant to Section 22 of the Securities Act, 15
U.S.C. 77v, and 28 U.S.C. 1331 and 1337, 1367(a).
80. Venue is proper in this District pursuant to Section 22 of the Securities Act and 28U.S.C. 1391(b). The violations of law alleged herein occurred in substantial part in this District,
within which the sale of the Hard Rock Investment Securities to Class members occurred, and
within which the investment properties are located.
81. In connection with the acts and practices alleged herein, Defendants used the U.S.Mail and facilities of interstate commerce.
HARD ROCK HOTEL SAN DIEGO COMMMON ENTERPRISE
82. Plaintiffs invested money, in a common enterprise (HRHSD Common Enterprise),with an expectation that profits would be produced by the managers of HRHSD for plaintiffs.
The nature of the HRHSD Common Enterprise, and the basis of plaintiffs expectation that profits
would be produced by the operators of HRHSD, were detailed in the documents that framed the
legal relationships amongst and between the parties.
83. The HRHSD Common Enterprise in which plaintiffs were invested was describedin a California Department of Real Estate Final Subdivision Public Report (DRE Report) for the
HRHSD project (also known as 5th & K Parcel 2 Condominiums and 5th
& K Parcel 3
Condominiums) prepared by defendant 5th
Rock LLC. The DRE Report was provided to
plaintiffs and informed plaintiffs that they were joining in a common interest development.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
84. The DRE report described the integrated and common nature of the HRHSDCommon Enterprise. The HRHSD Common Enterprise, according to the DRE Report, required
plaintiffs to pay for the operation and maintenance of the common facilities associated with
plaintiffs HRHSD units through two owner associations. The DRE Report represented that the
HRHSD included 420 room units divided into one parcel of 257 rooms and another parcel of 163
room units.
85. The DRE Report informed plaintiffs that each of their hotel units has an undividedinterest in the common area located within the parcel in which the room unit is situated. The
DRE Report informed plaintiffs their units and associations were part of a master planned
development commonly known and advertised as the The Hard Rock Hotel & Condominiums
(the Project).
86. The DRE Report further represented that the HRHSD Common Enterpriseincluded within the Master Planned Development a parcel of 17 commercial condominiums. The
commercial condominiums included retail shops, restaurants, bars, and the majority of a hotel, but
not the hotel rooms. Plaintiffs were told in the DRE Report their owners associations were
members of the HRHSD master association (5th & K Master Association).
87. The DRE Report further described the HRHSD Common Enterprise explainingthat the HRHSD project would be operated by, and subject to, the jurisdiction of the Master
Association. The Master Association, according to what plaintiffs were told by the DRE Report,
was to manage and maintain the common area of the HRHSD project, including all common
areas.
88. As part of the HRHSD Common Enterprise plaintiffs were required to pay theirshare of the (1) Master Assessments, (2) Special Master Assessments, (3) Sub-Association
Assessments, (4) Enforcement Assessments, and (5) Unit Expenses under Section 5.1 of the terms
of the Declaration of Covenants, Conditions, Easements, and Restrictions for 5th
& K Master
Association.
89. The HRHSD Common Enterprise was further defined by restrictions imposed onthe HRHSD project by the City of San Diego as a condition for approving the HRHSD project.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Those restrictions required plaintiffs units to be managed as part of the hotel and restricted
plaintiffs occupancy to 28 days per calendar year. Gaslamp Holdings LLC as the owner of the
land below the HRHSD was required by the City of San Diego to file with the San Diego County
Recorder a declaration of restrictions1
as follows:
The approximately 420 hotel condominium units (Units) may be soldindividually only as non-residential condominium units. Owner occupancy in theUnits 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.
90. The HRHSD Common Enterprise came into existence as a result of the promotersdecisions to convert what had begun as a hotel project. On 24 July 2004 the San Diego Centre
City Development Corporation granted 5th
Rock LLC (as the developer) Special Permit No. 2004-
13 to permit the development of a 12-story hotel with 338 hotel rooms and 23,000 square feet of
retail/commercial and parking uses on a 52,500 square foot site. While the project was under
construction in 2005 Gaslamp Holdings LLC was granted Map Waiver No. 245739 allowing
Gaslamp Holdings LLC to create 420 commercial hotel commercial hotel condominium units and
17 commercial condominium units in the building then under construction. The waiver was
granted on the grounds that:
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 projectis strictly commercial, staff has determined the proposed waiver conforms to theapplicable requirements of the States Subdivision map Act Section 66428.Therefore, a Tentative Map may be waived for this project with Certificates ofCompliance required as a condition of the Map Waiver.
91. The HRHSD Common Enterprise in which plaintiffs invested was framed by aseries of agreements and documents by which plaintiffs were bound included the following:
Document TitlePurchase Contract and Escrow InstructionsUnit Maintenance AgreementTarsadia Hotels Hard Rock Rental Management AgreementDeclaration of Restrictions (CC&Rs)Association Articles of Incorporation and By LawsDeed Restrictions
1 On 30 January 2006 Gaslamp Holdings, LLC, filed a Declaration of Restrictions reciting these restrictions with the
San Diego County Recorders Office as Document No. 2006-0067051.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
City of San Diego RestrictionsDRE Report
EXPECTATION OF PROFIT AS THE PRODUCT OF
EFFORTS OTHER THAN HRHSD INVESTORS
92.
The economic reality of the HRHSD project led plaintiffs to expect a profit fromthe efforts of the management of HRHSD rather than from plaintiffs own efforts. Plaintiffs
access to their units was limited. Plaintiffs were not allowed to possess a key to their units under
the Unit Management Agreement. Plaintiffs were not permitted to stay in their units for longer
than 28 days a year. The units had to be operated as commercial units as part of the HRHSD by
the hotel managers. The marketing of the units was controlled by management. The costs of
operations were determined by management, which named a majority to all boards controlling the
three associations. The rental income was collected by management. Management determined
and controlled the HRHSD internal control system. Management hired all employees.
Management controlled the HRHSD design and construction. Management engaged in extensive
preconstruction promotional activity and post construction management.
93. Plaintiffs received less than 38% of the rental income from their units.Management charged an operators fee of 50% of net rental revenues derived from plaintiffs
hotel units. From plaintiffs 50% a 10% market fee was deducted by management. Plaintiffs paid
an additional 3% of rental revenue generated from group booked nights. Plaintiffs pay their
association dues and unit costs for repairs and bedding. Plaintiffs were forced to join the
Tarsadia rental program and Tarsadia was plaintiffs exclusive rental agent and plaintiffs were not
able to rent their studios or suites on their own. Plaintiffs were not allowed to collect money for
the use of their studios or suites for the 28 days of allowed residence. Plaintiffs were provided
with the following revenue projections:
/ / /
/ / /
/ / /
/ / /
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Percent TransientRevenue
Group Revenue
Gross Rental Revenue $100.00 $100.00Less: Marketing Fee 10% ($10.00)
Less: Group Sales Fee 3% ($0.00) ($3.00)
Net Room Revenue $90.00 $87.00Less Operators Fee 50% $45.00 $43.50
Owners Revenue 50% $45.00 $43.50Less: Reserve 5% ($2.25) ($2.18)
94. The HRHSD Common Enterprise was organized so that the investors andpromoters shared in the costs and profits from ownership as illustrated in the following Table:
Item
244 Studio Rooms paid by plaintiffs (room owners and hotel
owners shared income, except for those owned by hotel
owners; hotel owners receive an operators fee of 50% of Net
Room Rental Revenue)
159 Suites paid by plaintiffs (room owners and hotel owners
shared income, except for those owned by hotel owners)
17 Rock Star Suites paid by plaintiffs (room owners and hotel
owner shared income, except for those owned by hotelowners)
40,000 Meeting Space (hotel owner receives income)
Nobu Restaurant (hotel owners receives income
Maryjanes Coffee Shop (hotel owners receives income)
Pinkberry (hotel owners receives income)
Rock Spa (hotel owner receives income)
Rock Shop (hotel owners receives income
Bars (hotel owners receive income)
Parking (hotel owners receive income)
Room Service (hotel owners receive income)
Mini Bars in hotel rooms (hotel owners receive income)
Marketing Fee room owners pay 10% of their Net Room
Revenue
Group Sales Fee room owners pay 3% of their Group income
Reserve Fee of room owner pays 5% of Net Room Revenue
Construction Cost Paid by Hotel Owner
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Association Maintenance Fees paid by room owner
Repair and Replacement Costs paid by room owners
Guests who fail to pay, room owners incur loss
Costs of Common Areas (hotel room owners and hotel
owners share the costs of the common area, hotel owner
imposes association owner fees through the home ownersassociation which hotel owners control because they appoint a
majority of each board)
95. Plaintiffs were induced to believe they were investing in a common enterprise inwhich their profits would come from the efforts of others by written representations contained in
the Tarsadia Hotels Inc., (Tarsadia) Hard Rock Hotel San Diego Rental Management Agreement
(HRHSD Common Enterprise Rental Agreement) which provided and acknowledged that
Tarsadia Hotel was the manager of the HRHSD, and that HRHSD was operated as part of the
HRHSD and Condominium project located at 207 5th
Avenue, in San Diego, California.
96. The HRHSD Common Enterprise Rental Agreement led plaintiffs to believe theywere investing in a common enterprise in which profits would come from the efforts of others
because it provided that Tarsadia was the operator of the HRHSD and was also the operator of the
rental management and reservation program for HRHSD. In the HRHSD Common Enterprise
Rental Agreement plaintiffs appointed Tarsadia to be their exclusive rental management agent.
Plaintiffs were led to believe that rental income from their hotel units would come from the
efforts of Tarsadia as the HRHSD operator and as the operator of the reservation and rental
program.
97. Plaintiffs looked to Tarsadia, and its affiliated companies and persons, to produceplaintiffs return on investment. Tarsadia and its affiliated companies decided on HRHSDs
location, its operation as a Hard Rock Hotel, the number of rooms, the organization of its
associations, its marketing structure, its management, employees, unit prices, and design and
architecture. Plaintiffs looked to Tarsadia and its affiliated persons and entities to market their
rental units, to set the rental price, to decide when to grant complimentary use of plaintiffs
rooms, to select the dcor, the bedding, the color schemes, the entertainment, the restaurants, the
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
shops, and the other elements that make for a successful hotel.
98. The defendants written assertion that the rental program was voluntary was notcorrect, based upon the way in which defendants structured HRHSD. Section 10.2.3 Rooms
Units of the Declaration of Covenants, Conditions, Easements, and Restrictions for 5th
& K
Master Association provided that plaintiffs could only rent their unit under a program operated by
the Hotel Owner (5th Rock LLC or Gaslamp Holdings LLC) or any third party approved by the
Hotel Owner. The plaintiff unit owner is required to provide written notice to the Master
Association of the owners intention to permit occupancy of the owners unit room. Section 4.1
of the Unit Maintenance and Operation Agreement provided that the unit owner was required to
pay the Hotel owner a service fee at initial rates of $90 per day for a studio, $125 per day for a
one-bed-room suite, and $150 per day for a Rock Star Suite. The service fee automatically
increased every year by an amount equal to the percentage increase in the Consumer Price Index,
San Diego Average, All Urban Consumers, All Items (1982-1984=100) as published by the U.S.
Department of Labor, over the Consumer Price Index amount on the first day of the prior period
but in no event shall the percentage increase be less than 4% per annum. The imposition of
service charges by defendants, together with the other provisions in the applicable governing
agreements, rendered the option of owners renting out their own units financially infeasible.
99. The opportunity to invest in the HRHSD Common Enterprise in which plaintiffsexpected profit was to come from the efforts of others was made to plaintiffs by way of a public
offering. The opportunity to invest was advertized on television, in magazines and other
publications in California and in other states. The public offerings of HRHSD units involved
operation cost pool arrangements as described above. The costs of operating the common areas
were combined and the individual owners were charged a ratable share of the costs without regard
to whether plaintiffs units were actually rented. The offer of the unit together with the offer of an
opportunity to participate in such a cost sharing pool involved the offer of investment contracts
which should have been, but were not, registered with the Securities & Exchange Commission
(SEC) or qualified by the California Department of Corporations.
/ / /
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
100. Although there was some boilerplate disclaimers that plaintiffs were not investingin HRHSD, those disclaimers were not contained in the other documents. Such disclaimers are
contradicted by the economic reality of the investment terms. Plaintiffs, under the restrictions
imposed by the City of San Diego, could not reside in their units and had to operate them as
commercial units under hotel management as part of the hotel. The HRHSD Common Enterprise
Rental Agreement frequently asked questions distributed to plaintiffs made it clear plaintiffs were
looking to Tarsadia and their affiliated persons and entitles To maximize revenue by renting the
participating suites for the most number of nights at the highest possible rate. Tarsadia and its
affiliated persons, entities and agents represented that Weve got the team. Weve got the ideas.
Weve got the experience. Now we want you. And Again, please know that the sooner we
receive your signed RMA, the sooner well be able to get your suite into the rental rotation.
101. Through writings, Tarsadia and its affiliated entities and persons used to describethe Rental Agreement, Tarsadia represented it was voluntary in fact as a practical matter it was
mandatory. Plaintiffs could not, as a practical matter, rent out their own unit because under the
restrictions imposed by the City of San Diego and agreed to by Tarsadia and its affiliated entities,
the units had to be operated as part of the management of the hotel.
102. The rental management agreement was for three years. The primary objective, asrepresented by Tarsadia to plaintiffs, was revenue maximization. Tarsadia agreed to provide a
monthly statement in the form decided on by Tarsadia and its affiliated entities and persons.
Tarsadia falsely promised plaintiffs that it was Tarsadias goal to have each suite occupied the
most number of nights each year at the highest possible rate. Tarsadia imposed a term in the
rental agreement that allowed Tarsadia to comp plaintiffs units in order to adequately promote
the Hotel demand. Tarsadia was allowed to comp Plaintiffs units 5 days per year.
103. Tarsadia represented to plaintiffs that reservations would be allocated by Tarsadiathrough its Our Property Management System known as OPERA. Plaintiffs were told in the
Frequently Asked Questions [FAQ] hand out for the rental agreement that Opera would distribute
reservations within each suite category (e.g. studios, one bedroom suites, rock star suites) on a
rotational basis, taking into consideration owner use, complimentary occupancy, maintenance
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
down-time, other variables.
104. HRHSD units were offered with a contract or agreement that placed restrictions onthe use of the units. These restrictions required the use of Tarsadia as plaintiffs exclusive rental
agent and placed a 28-day per year limit on the period of time plaintiffs could occupy their units.
These restrictions required that the units had to be operated as commercial units and as part of the
hotel by hotel management. Plaintiffs were not even issued keys to their units and the units did
not have kitchens. These restrictions show the economic reality of the transaction in which
plaintiffs intended to invest in a business enterprise, the return from which was to be substantially
dependent on the success of the managerial efforts of other persons.
105. Defendants own actions support plaintiffs claims that they invested in a commonenterprise with the expectation that a return on their investments would come from the efforts of
the defendants. Defendants were well aware of the fact that plaintiffs had invested in a risky
investment based on defendants own experience with the HRHSD Project.
106. Defendants had organized the HRHSD project as a hotel with 288 rooms, asdescribed in the 24 June 2004 San Diego Centre City Development Corporation News Digest:
Regular Meeting of the Centre City DevelopmentCorporation Board of Directors
June 23, 2004
The following summaries Wednesdays meeting:
1. HARD ROCK HOTEL design review approved by Board (Gaslamp Quarter)The Board granted design review approval of developer 5
thRock, LLCs Hard
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 Sixthavenues 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 ofretail/restaurant space and parking for up to 280 cars. The project will incorporatea restored historic William Sterling Hebbard 1896 Otay Railroad Depot Buildingat 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 andDirectors Vilaplana and McNeely)
107. The promoter defendants knew that HRHSD had started as a 388 room hotelproject because they were involved in the work needed to permit the project and to secure
financing. Defendant East West Bank was aware the HRHSD project started as a hotel because
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
East West Bank provided the original financing. On 17 August 2005 a Leasehold Construction
Deed of Trust was recorded in favor of East West Bank by 5th
Rock, LLC for the sum of $88
million. The deed of trust secured an $88 million construction loan East West Bank made to 5th
Rock to construct the hotel.
108. On 12 September 2005 the Orange County Business Journal reported, based on itsinterview with B.U. Patel, that Tarsadia was developing a hotel with condominiums:
In downtowns Gaslamp Quarter, Tarsadia is building a Hard Rock hotel. The$125 million project calls for an eight-story hotel, condominiums and shops. Itsset to open next winter.
109. On 14 December 2005 San Diego City Development Project Manager Peter Lynchrecommended to a San Diego Development Services Hearing Officer that the City approve Map
Waiver No. 245739 and allow 5th Rock LLC to convert the HRHSD project from a hotel with 388
rooms to a commercial non-residential condominium project. The project manager wrote:
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 projectis strictly commercial, staff has determined the proposed waiver conforms to theapplicable requirements of the States Subdivision Map Act Section 66428.Therefore, a Tentative Map may be waived for this project with Certificates ofCompliance required as a condition of the Map Waiver.
110. The Hearing Officers Resolution granting the map waiver provided in pertinentpart that:
5. Prior to the recordation of the Certificates of Compliance, subdivider shallrecord a deed restriction as follows: The approximately 420 hotel condominiumunits (Units) may be sold individually only as non-residential condominiumunits. Owner occupancy in the Units shall be limited to a maximum of 28 days percalendar year, and at all times the Units shall be managed as part of the Hotel.
111. On 30 January 2006 Gaslamp Holdings LLC, the owner of the land on which theHRHSD was under construction, filed a declaration of restrictions for the HRHSD project in
connection with the restriction that the approximately 420 hotel condominium units (Units)
may be sold individually only as non-residential condominium units. Owner occupancy in the
Units was to be limited to a maximum of 28 days per calendar year, and at all times the Units
were to be managed as part of the Hotel.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
112. Another document that showed plaintiffs expectation of profit from the HRHSDCommon Enterprise was based substantially on the efforts of others was the HRHSD Operation
Agreement. Under the HRHSD Operation Agreement, defendant 5th
Rock LLC had the
responsibility and authority to:
accept reservations, enforce check-in and check-out procedures, performhousekeeping services;
issue room keys (including to plaintiffs and investors); collect service and other charges; collect and remit transient occupancy taxes; provide such personnel as are necessary to accomplish the defined services. purchase and replace linens, towels, blankets and the like within the Studio and
suites (costs to be paid by plaintiffs); connect plaintiffs unit telephones to the Hard Rock Hotel switchboard; arrange for basic cable or satellite television service to the Hotel Unit; operate the mini-bars and otherwise sell alcoholic beverages and foot in the studio
and suites.
MISREPRESENTATIONS OF MATERIAL FACTSAND OMISSIONS OF MATERIAL FACTS
113. In a series of writings issued to plaintiffs by defendants in connection with theoffer made to plaintiffs to invest in the HRHSD Common Enterprise HRHSD, Tarsadia and its
affiliated persons and entities made the following misrepresentations and omitted to state facts
needed to make those stated not misleading:
Hard Rock Guide RepresentationEnclosed youll find the Hard Rock Guideand within its pages all the details of SanDiegos first and most rockin brandedcondo-hotel. Everythings here, from thefloor plates to the plans to the preferredlendersWe will help you through this process andour goal is equally simple To ensureyou consider every opportunity thatllexceed your expectations and desires. Sojust have fun with this. Circle anythingthat catches your eye.Were here to make this a fantasticexperience. Call us anytime. Rock on,[7 signatures]The Hard Rock Condo-Hotel Sales Team(This was a false statement on severallevels. The Hard Rock Guide did notcontain all the details. It omitted thefact that defendants had changed thebusiness model of HRHSD in July 2005
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
after defendants determined that the risksof developing the hotel were too great andcould be shifted to investors. All thedetails that should have been provided toinvestors were not provided includingdetails required under the applicable SECand California Department ofCorporations laws and regulations such as(1) business strategy; (2) recentdevelopments; (3) use of proceeds: (4)risk factors; (5)certified financialstatement; (6)liquidity and capitalresources; (7)qualitative and quantitativedisclosures about market risk; (8)detailedstatement of the business; (9)marketanalysis; (10)suitability standards; and(11) conflicts of interests; .
Hard Rock Guide San Diegos First Branded Condo-HotelCalifornias Hottest Performing Hotel
Market(This was misleading because defendantshad determined that the hotel market wasnot sufficiently strong to support theHRHSD as a hotel and defendants haddecided to transform their hotel projectinto a condominium/hotel project.
Q. Whats been your greatest success to date? A. Breaking five world records in a rowfor franchise development (over 400 deals each year) and building the worlds largesthotel company when I was with Cendant.Q. Tell us about your greatest real estate project? A. Building high-end all-inclusiveresorts in the Pacific Rim, Bali, Phuket, Guam, and Saipan; and creating once in alifetime experience for our guests.
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, NewYork and Miami.Q. You could have chosen to work with just about any hotel brand on this project. WhyHard Rock?A. There are a ton of reasons but the key is the authentic hard Rock experience. Fewhotels 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 luxuryservice 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-class, yet unpredictable. Its what going to separate us from everything else in SouthernCalifornia.Q. Whats the one greatest differentiator of this project?
A. A project like this is one in a million. All the stars are aligned: great location, greatbrand, 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.Thats it-short and sweet. Theres nothing more important in real estate than the locationand this one, no doubt, is the most coveted in San Diego. (This statement wasmisleading 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 planto shift the investment risks to plaintiffs while Tarsadia still retained a substantial part ofthe income and financial benefit of the project)
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Q. Normally in the world of condo-hotels, youd sell first, then build. But youre alreadybuilding and have about $40m in the ground. Whats the story there?A. Weve 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 andthe right team with the right ideas, theres nothing holding you back. (This statementwas false and it was known to be false when it was made. Tarsadia and its affiliatedpersons 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 projectdid 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 riskto plaintiffs.).
Q. Youve talked about San Diego as being one of the hottest spots for a condo-hotelWhy do you feel this way?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-Diamondluxury level-and thats exactly what were delivering. Then theres the idea of a loyalbase of Owners that become the hotels greatest fans and connectors. That priceless forus 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 outbecause 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 toplaintiffs as a device to shift the investment risks to plaintiffs away from Cass and hisfellow defendants.)
114. Defendants legal duty was to register and qualify the HRHSD InvestmentContracts -- a process that would have caused defendants to disclose the material information
required by those investor protection agencies, explaining how defendants organized the HRHSD
investment to achieve its investment objectives.
115. Instead, the promoters distracted investors with claims that HRHSD was a hot newscene and a place to be seen. HRHSD promoters successfully marketed the sizzle of the HRHSD
investment opportunity without going through the legally required process of registration and
qualification.
116. The key misrepresentation and omission revolved around the defendants rentalmanagement agreement and program. Defendants falsely represented that defendant Tarsadias
rental program was not mandatory and not a condition of ownership. However, as a matter of
economic and practical reality, the Tarsadia rental program was mandatory and a condition of
ownership. It was not feasible, as plaintiffs were to later discover, for investors to operate their
own rental management system separate from the HRHSD given the control 5th Rock LLC
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
exercised over investors studios and suites under the terms of the Operations Agreement.
Defendant Tarsadia, an affiliate of 5th
Rock LLC and under the common control of the Patel
defendants and defendant Casserly, was the manager of the HRHSD and investors exclusive
rental agent.
117. Defendants represented that investors were not required to participate in Tarsadiasrental management program and that the decision was entirely up to investors. This representation
was false and untrue in that plaintiffs were required to participate in Tarsadias rental
management program and the decision was not entirely up to investors. Under the terms of the
operations agreement, 5th Rock LLC, under the common control of Tarsadia, Patel defendants and
Casserly, retained control of investors studios and suites as alleged in this operative complaint
such that separate rental management by investors was not feasible. Defendants made these
misrepresentations in Tarsadias Optional Rental Management Program FAQ.
118. Defendants omitted to disclose that the reason they misrepresented the rentalmanagement agreement as notmandatory is that they were attempting to conceal the fact that the
HRHSD Investment Contract transaction was an unregistered, public offering of a security.
Defendants prepared and approved the Tarsadias Optional Rental Management Program FAQ
with the intent of creating a false written record that the rental management was not a condition of
ownership to make it less likely that the investment would be recognized for what it was -- the
public offering of a security. Defendants aided and materially assisted each other in the
misrepresentations so as to close the deals with the plaintiff investors.
119. Plaintiffs had no control over the rental management of their studios and suites andwere prohibited under the mandatory Operations Agreement from having control over their
studios and suites. This lack of control prevented and continues to prevent Plaintiffs from ever
being able to separately manage the rental of their studios and suites.
SALE OF HRHSD INVESTMENT CONTRACTS
120. The sale and purchase of the HRHSD investment contracts were not final until theclose of escrow. Section 4.2 of the Purchase Contract and Escrow Instructions allowed buyer to
make material changes in the transaction up to the time of Escrow:
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
TERMINATION OF CONTRACT AND ESCROW.
Subject to the provisions ofSection 9 hereof, if this Contract is terminated in accordance with this Contract,(i)Escrow shall be automatically cancelled and the parties shall executecancellation instructions requested by Escrow Holder, (ii) within five (5) days aftersuch termination, Buyer shall deliver to Seller all documents delivered by Seller toBuyer hereunder, (iii) Buyer shall have no further right or interest in the Units, and(iv) Buyers indemnities of Seller in this Contract shall survive the termination. Inaddition to any other rights provided under this Contract, the following terminationright exist:
(i) BUYERSS CANCELLATION RIGHT.
121. The Hard Rock Guide informed investors that the transaction was not final whenplaintiffs made their deposits:
If through no fault of Buyer, Escrowis not closed by the Outside Date or within one (1) year after the Sellers receipt ofthe Certificate of Occupancy for the Units which is the subject of this Contract,Buyer may terminate this Contract, cancel Escrow and, within fifteen (15) calendardays after Escrow Holder receives written notice of such termination andcancellation, receive a refund of the Escrow Deposit. Before the Close ofEscrow, Seller May in its sole discretion, make material changes in theProject and/or management documents for the Associations, changes in the
overall development of the Project or change in the manner of content of anyoffering of units in the Sub-Association or any phase of development thereof;
The prices, plans, amenities, availability and improvements shown are subject tochange without notice. Illustrations are artists depictions only and may differfrom completed improvements, and scenes may include locations or activities noton the property. Improvements, facilities and programs are in formative stages,and there is no guarantee that they will be completed or developed.
122.
Section 4.2 of the Purchase Contract also contained a waiver of plaintiffs rights
under the federal and state securities laws which is a void and unenforceable term as alleged
below:
provided that
123. The provision limiting the penalty for providing material false statements abovequoted are void under Section 14 (15 U.S.C. 77n) of the Securities Act of 1933 which provides:
"Contrary stipulations void. Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of this title or of the rules and
, Seller shall advise Buyer if Seller becomes aware that any ofSellers representation and warranties in this Contract has become materiallyinaccurate. In such case, Seller shall provide Buyer with written notice of suchmaterial change or material inaccuracy, and Buyers sole remedy at that time shallbe to terminate this Contract, request the cancellation of Escrow and receive arefund of the Escrow Deposit. Buyers failure to deliver written notice oftermination to Seller within five (5) days after receipt of Sellers material change
notice constitutes a waiver of Buyers right to terminate this Contract and cancelEscrow in response to such change/inaccurancy.
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
regulations of the Commission shall be void." 15 U.S.C. 77n.
124. The provision limiting the penalty for providing material false statements abovequoted is void under Corporations Code 25701 which provides: Any condition, stipulation or
provision purporting to bind any person acquiring any security to waive compliance with any
provision of this law or any rule or order hereunder is void.
KEY PLAYERS
125. The Key Players in carrying out the fraud consist of confidential source No. 1 whoacted as a HRHSD unit appraiser and who did not use the income method under instructions from
the bank defendant for whom he was retained to provide appraisals.
126. The main players through whom Tarsadia engaged in the alleged unlawful conductinclude but are not limited to Greg Casserly the Tarsadia principle manager. Mr. Casserly was an
architect of the plan to shift HRHSD from a hotel to a non-commercial condominium investment
program and to move investment risk of the HRHSD project from the promoters to plaintiffs. Mr
Casserly was one of the authors of the Hard Rock Guide, Frequently Asked Questions and the
other documents cited in the operative complaint that were used to mislead and defraud plaintiffs.
127. Other Tarsadia players who helped to develop the strategy behind the fraudulentscheme to which plaintiffs were subjected included Trevor Horwell, Vice President of Tarsadia.
Mr. Horwell participated in the development of the strategy to shift the investment risk from the
HRHSD promoters to plaintiffs. Mr. Horwell also participated in communications with investors
representing the terms of the investment opportunity without disclosing the risks identified in this
operative complaint. Another key Tarsadia player was Robert Todak, Tarsadia General Manager,
who also participated in drafting communications to investors that were misleading and failed to
inform investors of the risks of the investment identified in this operative complaint.
128. Another key Tarsadia player was Lori Prock. Ms. Prock provided comparables inconnection with plaintiffs participation in the HRHSD Rental Management Agreement under
which Tarsadia managed the HRHSD hotel rooms. One such projection she provided to plaintiffs
was dated 3 May 2006:
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Hotel Standard
Room Rate
Room Size Sq
Ft
Suite Rate Suite Size Sq
Ft
W Hotel$329 250 $650 500
Hotel Solamar$319 336 $500 480
Omni Hotel $329 360 $500 520
Hilton Gaslamp$359 330 Sold Out 500
Marriott Marina$349 355 Sold Out 534
MarriottGaslamp $315 392 Sold Out 448
129. John Resnick, a Tarsadia agent, was instrumental in making misrepresentations toinvestors regarding the rental agreement being voluntary when it was as a practical matter
mandatory. Mr. Resnick also reviewed the rental agreement frequently asked questions document
that was communicated to investors and contained the misrepresentations identified in the
operative complaint. Brent McLean, another VP at Tarsadia, was also instrumental in preparing
and approving the frequently asked questions documents provided to plaintiffs containing the
misrepresentations identified herein.
130.
Playground related defendants were led by BJ Turner, and Jason DolkerPlaygrounds Director of Sales. Playground defendants Turner and Dolker and their fellow
Playground brokers participated directly in the sale of HRHSD Investment Contracts. They
negotiated the contracts, provided the terms, helped to prepare the paper work, coordinated with
the bank sales representatives, provided comparables sales and rent information, and issued a
constant stream of upbeat emails touting the attributes of the HRHSD investment contracts.
131. These Playground representatives knew the HRHSD project had been shifted froma hotel project to a commercial non-residential condominium and that plaintiffs were not
receiving the information they needed about the projected performance underlying the HRHSD
Investment Contracts. These agents of Playground knew the HRHSD Investment Contracts were
required to be registered with the SEC and qualified by the Department of Corporations from
their training as real estate brokers and agents. These Playground agents knew they were required
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
to be registered as broker dealers before they could lawfully sell the HRHSD Investment
Contracts. These Playground agents were highly compensated and were motivated by the lure of
financial gain to violate their legal duties.
DISCOVERY OF PLAINTIFFS CLAIMS
132. Plaintiffs are bringing this action within: one (1) year after discovery of the untruestatements or the omissions of material facts alleged herein; within one (1) year after discovery of
the untrue statements and omissions should have been made by the exercise of reasonable
diligence; and within three (3) years of the sale of the HRHSD Investment Contracts. Plaintiffs
did not discover the facts on which this action is based until after consulting with counsel, which
was less than a year before the filing of this operative complaint.
133. Plaintiffs were subjected to a barrage of false and misleading statements by theTarsadia and Playground Defendants designed to keep plaintiffs from discovering facts
supporting the need to bring these claims. One device was to slowly reduce plaintiffs hotel room
revenue while gradually increasing costs.
ATTEMPTED WAIVER OF SECURITIES LAW VOID
134. The HRHSD Purchase Contract and Escrow Instructions contain provisionssuggesting that plaintiffs were not investing HRHSD and waiving their rights under the federal
securities laws. Those provisions are unenforceable under both the federal and state securities
laws.
135. Section 14 (15 U.S.C. 77n) of the Securities Act of 1933 which provides:"Contrary stipulations void. Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of this title or of the rules and
regulations of the Commission shall be void." 15 U.S.C. 77n.
136. Corporations Code 25701 provides: Any condition, stipulation or provisionpurporting to bind any person acquiring any security to waive compliance with any provision of
this law or any rule or order hereunder is void.
137. Section 29(a) of the Securities Exchange Act of 1934 provides: "Waiverprovisions. Any condition, stipulation, or provision binding any person to waive compliance with
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
any provision of this title or of any rule or regulation thereunder, or of any rule of a self-
regulatory organization, shall be void." 15 U.S.C. 78cc(a).
138. Defendants B.U. Patel and Tushar Patel were the ultimate decision makers incarrying out the fraud. They were the ultimate owners of Defendants 5
thRock LLC, Gaslamp
Holding LLC, MPK One LLC, and Tarsadia. Defendant Gregory Casserly was in control of
Tarsadia and participated in the fraud by making the misrepresentations and omissions attributed
in this operative complaint. Casserly held the top management position in Defendant Tarsadia.
Playground acted as the broker-dealer for the sale of HRHSD Investment Contracts.
EAST WEST BANK
139. East West Bank is the wholly owned subsidiary of East West Bancorp Inc., a bankholding company incorporated in Delaware on August 26, 1998. East West Bank's principal
office is located at 135 N. Los Robles Avenue, 7th Floor, Pasadena, California 91101, and the
telephone number is (626) 768-6000.
140. East West Bank offers a broad spectrum of personal and commercial bankingservices to small and medium-sized businesses, business executives, professionals, and other
individuals. East West Bank's principal officers include Dominic Ng. Mr. Ng serves as the
Chairman, the President and the Chief Executive Officer of East West Bank. Douglas P. Krause is
an Executive Vice President, the Chief Risk Officer, a General Counsel and a Corporate Secretary
of East West Bank. William J. Lewis is an Executive Vice President and the Chief Credit Officer.
Mr. Lewis joined the Bank in 2002. Julia Gouw is President and Chief Operating Officer of East
West Bank. Thomas J. Tolda was the Chief Financial Officer and Executive Vice President of
East West Bank. Irene H. Oh is the current Executive Vice President and Chief Financial Officer
of East West Bank.
141. The East West Bank Commercial Lending segment is comprised of commercialreal estate which principally generates commercial loans and deposits through the lending offices
located in East West Bank's northern and southern California production offices. The Commercial
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CLASS ACTION SECOND AMENDED COMPLAINT CASE NO. 09-CV-02739-DMS-CAB
Lending segment generated 50% of the total revenue of East West Bank, Inc.
142. The East West loan and sales team were identified as preferred HRHSD lenders bythe Playground sales team. East West bank loan and sales team members spoke with investors
and helped seal the deal by proclaiming the financial viability of the HRHSD Investment
contracts. East West Bank understood from its underwriting and due diligence review that the
HRHSD units were commercial non-residential units and not second homes. East West Bank
knew from the underwriting and due diligence it did in providing a construction loan to HRHSD
in and before August 2005 that HRHSD was transformed from a 388 hotel project to a 420
commercial non-residential room project because the HRHSD promoters had determined that the
project was too risky to continue as a hotel project.
143. East West Bank knew there was a substantial risk its construction loan to HRHSDwould be impaired if the project continued as a hotel project. East West bank knew that getting
HRHSD investors to sign the East West Bank loan documents was a necessary part of the sales of
the HRHSD Investment Contract. East West Bank knew the transaction had been structured so
that investors had to get their loan commitment from East West Bank before the completion of
the HRHSD construction was completed. In this regard defendant Cass told investors as follows:
Q. Normally in the world of condo-hotels, youd sell first, then build. But yourealready building and have about $40m in the ground. Whats the story there?
A. Weve been work