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Baytree Capital Associates, LLC v. Quan

April 18, 2008

BAYTREE CAPITAL ASSOCIATES, LLC, DERIVATIVELY ON BEHALF OF, BROADCASTER, INC., PLAINTIFFS,
v.
NOLAN QUAN, MARTIN R. WADE III, BLAIR MILLS, RICHARD BERMAN, ANDREW GARRONI, JASON BRAZELL, ROBERT GOULD, SANGER ROBINSON, ALCHEMY COMMUNICATIONS, INC., FROSTHAM MARKETING, INC., PACIFICON INTERNATIONAL, INC., LONGVIEW MEDIA, INC., ACCESS MEDIA NETWORKS, INC., ALCHEMY F/X, INC., INNOVATIVE NETWORKS, INC., BINARY SOURCE, INC., BROADCASTER, LLC, TRANSGLOBAL MEDIA, LLC, SOFTWARE PEOPLE, LLC, AND ACCESS MEDIA TECHNOLOGIES, LLC, DEFENDANTS,
v.
BROADCASTER, INC., NOMINAL DEFENDANT.
PAUL GOODMAN, INDIVIDUALLY AND IN HIS CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS AS A DIRECTOR OF BROADCASTER INC., PURSUANT TO BCL 720, 08 PLAINTIFFS,
v.
BROADCASTER, INC., MARTINE WADE, NOLAN QUAN AND BLAIR MILLS, DEFENDANTS.



The opinion of the court was delivered by: Louis L. Stanton, U.S.D.J.

Opinion and Order

Defendants move pursuant to 28 U.S.C. § 1404(a) to transfer the above actions to the District Court for the Central District of California.

BACKGROUND

On February 15, 2008, Baytree Capital Associates ("Baytree") filed a shareholder derivative action in this Court against Broadcaster, Inc. ("Broadcaster") and many of its current and former directors and officers, seeking injunctive relief and damages for securities fraud, breach of fiduciary duties, corporate waste, unjust enrichment, conversion of corporate assets, and violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq..

On March 4, 2008, Paul Goodman commenced an action pursuant to New York's Business Corporation Law ("BCL") § 720 in the Supreme Court of the State of New York, stemming from similar allegations of breaches of fiduciary duties by Broadcaster's officers and directors, corporate waste, improper related-company transactions, and the improper issuance of "earn out shares." The case was removed to this Court on March 11, 2008, there being diversity jurisdiction.

Both complaints allege that defendants engaged in undisclosed related party transactions in which they drained millions of dollars of Broadcaster assets for their personal benefits.

Broadcaster was created on June 2, 2006 when International Microcomputer Software, Inc. acquired AccessMedia, a company owned and/or controlled by defendant Nolan Quan. IMSI then changed its name to Broadcaster, Inc.. The merger occurred in California.

In August 2006, the Federal Trade Commission ("FTC") filed a complaint in the United States District Court for the Central District of California against defendants AccessMedia Networks Inc., Alchemy Communications Inc., Pacificon International, Inc., Frostham Marketing Inc., Longview Media Inc., Innovative Networks Inc., Binary Source Inc., and Andrew Garroni, alleging that they used an unfair and deceptive computer scheme to coerce payments from consumers. The FTC proceeding was conducted in California and resulted in a settlement. Defendant Jason Brazell, who executed the FTC settlement agreement on Frostham's behalf, is a citizen of California. Defendant Garroni, who executed the settlement agreement on behalf of defendants Longview and Pacificon, is a citizen of California. Defendants Pacificon, Binary, and Longview are California corporations with their principal places of business in California. Defendant Frostham is a Florida corporation with its principal place of business in California. Defendant AccessMedia is a Delaware corporation with its principal place of business in California. Defendant Alchemy is incorporated in California and has its principal place of business there.

The complaints in the present actions allege that following the FTC settlement, defendants Martin Wade (New Jersey resident), Blair Mills (California resident), and Richard Berman (Connecticut resident), who were directors of Broadcaster, began a fraudulent scheme, with defendant Quan (Broadcaster's Chief Operating Officer, a California resident), to loot the assets of Broadcaster through payments to other defendant companies for fictitious internet advertising campaigns. They allege that Broadcaster paid Frostham and Longview millions of dollars for advertising and traffic generation, for which Frostham and Longview did not provide any services. According to the complaints, defendants did not disclose that Frostham and Longview were controlled by Quan, Garroni, and Brazell, who personally profited from the transactions.

The complaints allege that Alchemy (a California corporation with its principal place of business in California) utilized software to cause computers to involuntarily visit the broadcaster.com site, registering a "hit" or "unique visitor" on the website server which gave the false impression that a consumer had visited the site.

Those involuntary visits allowed defendants to hide payments supposedly made for traffic generation that never occurred.

The scheme benefited Quan because on January 4, 2007, Broadcaster altered Quan's compensation package, equating each unique visitor with one dollar of earnings, so that when the company reached certain unique visitor levels, Quan was issued millions of additional shares of stock. Plaintiffs allege that those shares were illegitimately earned.

On March 26, 2008, this Court entered a Temporary Restraining Order in the Goodman case, restraining defendants' attempted removal of Mr. Goodman from Broadcaster's Board of Directors.

This Court entered a Temporary Restraining Order in the Baytree case on March 28, 2008, restraining Broadcaster "from spending, transferring, selling, encumbering, pledging, or conveying in any manner the funds, assets, and/or treasury stock of Broadcaster, Inc. except in the ordinary course of Broadcaster's business, and that all such ordinary course payments in excess of $1000 shall be reviewed by outside counsel to Broadcaster."

Thereafter, defendants brought these motions to transfer both actions to the Central District of California.

DISCUSSION

Section 1404(a) of title 28 of the United States Code provides that, "For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." The actions could have been brought in the Central District of California because venue would be proper and defendants would be subject to process there.

In determining whether the Goodman and Baytree cases should be transferred to the Central District of California, ...


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