Calderon et al v. Total Wealth Management, Inc. et al, No. 3:2015cv01632 - Document 50 (S.D. Cal. 2016)
Court Description: ORDER Granting Motions to Dismiss (Docket Nos. 5 , 26 , 27 ). Plaintiffs may amend on or before April 10, 2016. Signed by Judge Roger T. Benitez on 3/9/2016.(knb)
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Calderon et al v. Total Wealth Management, Inc. et al Doc. 50 1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT 10 SOUTHERN DISTRICT OF CALIFORNIA 11 12 14 ALBERT CALDERON, an individual on behalf of himself and all others similarly situated, et al., Plaintiffs, 15 v. 16 TOTAL WEALTH MANAGEMENT, INC., et al. Defendants. 13 17 Case No.: 15CV1632 BEN (NLS) ORDER GRANTING MOTIONS TO DISMISS [Docket Nos. 5, 26, 27] 18 19 There are three separate motions to dismiss the Second Amended Complaint 20 (“SAC”) before the Court.1 The motions are fully briefed. For the reasons set for below, 21 each motion is GRANTED. However, the Court grants Plaintiffs leave to amend as 22 provided in this Order. 23 24 25 26 27 On October 8, 2015, the Court denied Plaintiffs’ Motion to Remand, but granted Plaintiffs’ request for leave to conduct jurisdictional discovery and file a renewed motion to remand. The Court delayed ruling on the pending motions to dismiss in anticipation of that motion. However, the deadline to file that motion recently passed. 1 1 15CV1632 BEN (NLS) Dockets.Justia.com BACKGROUND2 1 Plaintiffs allege that investors were solicited to invest in Total Wealth Management 2 3 (“TWM”) and its affiliated companies, Altus Capital Opportunity Fund, LLC (“ACOF”) 4 and Altus Capital Portfolio Series (“ACPS”), primarily through a weekly radio program, 5 financial awareness seminars, and community engagement. Investors were allegedly 6 misled into believing their funds were being safely invested based on investment 7 portfolio risk when in fact, investments were being channeled primarily to Private 8 Placement Capital Notes LLC II (“PPCN”), LJL Secured High Yield Income Fund I, 9 LLC (“LJL”), and Aegis Retail Group LLC (“AEGIS”) in exchange for fees paid by the 10 entities, without disclosure to investors. TWM was allegedly under the control or 11 direction of the following defendants by virtue of their ownership or positions as officers: 12 Jacob Cooper, co-founder and majority owner of TWM; Nathan McNamee, TWM’s 13 president and chief compliance officer for relevant periods; David Shoemaker, co- 14 founder and former chief compliance officer. 15 DISCUSSION “[A] complaint must contain sufficient factual matter, accepted as true, to state a 16 17 claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 677-78 18 (2009). “A claim is facially plausible ‘when the plaintiff pleads factual content that 19 allows the court to draw the reasonable inference that the defendant is liable for the 20 misconduct alleged.’” Zixiang Li v. Kerry, 710 F.3d 995, 999 (9th Cir. 2013) (quoting 21 Iqbal, 556 U.S. at 678). When considering a Rule 12(b)(6) motion the court must “accept 22 as true facts alleged and draw inferences from them in the light most favorable to the 23 plaintiff.” Stacy v. Rederite Otto Danielsen, 609 F.3d 1033, 1035 (9th Cir. 2010) (citing 24 Barker v. Riverside Cnty. Office of Educ., 584 F.3d 821, 824 (9th Cir. 2009)). 25 26 27 2 The following overview of the facts are drawn from the allegations of the SAC. The Court is not making findings of fact. The allegations relevant to each motion are detailed in analyzing the individual motions. 2 15CV1632 BEN (NLS) Allegations of fraud must be stated with particularity. Fed. R. Civ. P. 9(b). “In 1 2 order to plead fraud with particularity, the complaint must allege the time, place, and 3 content of the fraudulent representation; conclusory allegations, do not suffice.” Shroyer 4 v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1042 (9th Cir. 2010) (citing Moore 5 v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989)); Kearns v. Ford 6 Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (requiring plaintiffs plead who, what, 7 when, where, and how). “Rule 9(b) does not allow a complaint to merely lump multiple 8 defendants together, but ‘requires plaintiffs to differentiate their allegations when suing 9 more than one defendant . . . and to inform each defendant separately of the allegations 10 surrounding his alleged participation in the fraud.” Swartz v. KPMG LLP, 476 F.3d 759, 11 765 (9th Cir. 2007) (quoting Haskin v. R.J. Reynolds Tobacco Co., 995 F. Supp. 1437, 12 1439 (M.D. Fla. 1998)). “[G]eneral allegations that the ‘defendants’ engaged in 13 fraudulent conduct” with only specific allegations as to some, “patently fail[s] to comply 14 with Rule 9(b).” Id. at 765. 15 The critical deficiency of the SAC as to the moving defendants is the absence of 16 allegations indicating what these defendants did.3 For example, how or when they made 17 any misrepresentation to the Plaintiffs or when they were obligated to disclose something 18 and failed to. There are many conclusory and general allegations, relied on heavily in 19 Plaintiffs’ oppositions, that “defendants” knew about or were involved in a fraudulent 20 scheme, but, when there are more than 30 named defendants it is almost impossible to 21 decipher what Plaintiffs allege the moving defendants, as opposed to TWM and its 22 officers did. Even when a moving defendant is specifically named or listed as part of a 23 group of defendants that allegedly participated in or had knowledge of the fraudulent 24 scheme, itself a legal conclusion, there is little explanation how. 25 26 27 The Court’s analysis of the allegations of the claims and allegations of the SAC are limited to the moving defendants. The Court’s analysis of these Motions does not address and should not be interpreted to apply to any of the other defendants. 3 3 15CV1632 BEN (NLS) 1 2 3 I. Dionne and SoCal Accounting A. Background The SAC alleges that Mark Dionne acted as the financial administrator and 4 accountant for TWM, ACOF, ACPS, and other entities associated with Defendants 5 Cooper, Shoemaker, and McNamee — Financial Council Inc. (Shoemaker); Capita 6 Advisors Inc. (McNamee), and Pinnacle Wealth Group Inc. (Cooper). The SAC alleges 7 that Dionne was an insider, but does not allege he was an officer, director, or shareholder 8 of TWM or any specific facts from which the Court can infer he controlled any of these 9 entities. He allegedly maintained the books, including the general ledger, expenses, 10 financial statements, and statements as to equity. He collected and disbursed funds to 11 Defendants McNamee, Shoemaker, LJL, and AEGIS. The SAC alleges that Dionne must 12 have known certain facts based on his maintenance of the books, i.e. investments were 13 being directed to PPCN, LJL, and AEGIS; that fees were being paid for the investments; 14 and that the investments were riskier than represented. The SAC additionally alleges that 15 he did not disclose this information to investors. 16 Plaintiffs also generally allege that he promoted sales to investors, but the only 17 specific allegations as to how Dionne promoted sales is that he gave “tax advice” on the 18 TWM radio program. However, the SAC does not allege that anything he said was false 19 or misleading or even that he advised listeners to invest with TWM, ACOF, or ACPS. 20 The SAC generally alleges that he referred clients to TWM, ACOF, and ACPS without 21 telling them undisclosed fees were being paid and he was aware of the adverse financial 22 conditions of the LJL, PPCN, and AEGIS entities. There are also general allegations that 23 he assisted in the fraud, but no explanation of how or what he did to assist. 24 25 Dionne and SoCal Accounting, Inc. (collectively “Dionne”) move to dismiss the five claims asserted against them in the SAC: (1) control of party making fraudulent sale 26 27 4 15CV1632 BEN (NLS) 1 of securities in violation of California Corporations Code4 §§ 25501, 25504; (2) 2 materially assisting fraudulent sale of securities in violation of § 25504.1; (3) suppression 3 of material fact in violation of California Civil Code § 1710; (4) aiding and abetting 4 suppression of material fact; (5) aiding and abetting breach of fiduciary duty. 5 B. Analysis 6 1. Control of Party Making Fraudulent Sale of Securities (§§ 25501, 25504) 7 Plaintiffs assert that Dionne is liable for misrepresenting or omitting material facts 8 in connection with the purchase or sale of a security in violation § 25501 as a secondary 9 actor under § 25504. 10 Under . . . section 25504 the following persons are jointly and severally liable for selling unqualified securities, with those who have engaged in the unlawful practice: “Every person who directly or indirectly controls a person liable under Section 25501 or 25503, every partner in a firm so liable, every principal executive officer or director of a corporation so liable, ... unless the other person who is so liable had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which the liability is alleged to exist.” 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Hellum v. Breyer, 194 Cal. App. 4th 1300, 1306 (1st Dist. 2011) (quoting § 25504). Plaintiffs summarily assert in their Opposition that they have “plead facts establishing that Mark Dionne controlled any person primarily liable for securities fraud,” but does not identify who or explain how. (Opp’n at 9.) Plaintiffs argue the Court can draw the inference that Dionne had the power to control the general affairs of the entity that violated the securities law, presumably TWM, and was performing functions similar to TWM’s treasurer, but there is little support for this conclusion in the allegations of the SAC. Plaintiffs generally allege that Dionne and four other defendants associated with TWM, 26 27 4 All further code section references are to the California Corporations Code unless otherwise noted. 5 15CV1632 BEN (NLS) 1 controlled TWM, ACOF, and ACPS through ownership, as officers, board of director members, as principal executive officers or directors, or as persons occupying a similar status or performing similar functions or as an employee of TWM, ACOF, or ACPS because they are employees who materially aided the acts or transactions constituting the violations. 2 3 4 5 6 (SAC ¶ 160.)5 Assuming a violation of § 25501 occurred, the SAC lacks allegations 7 from which the Court can infer that Dionne controlled anyone or any entity. In contrast 8 to the allegations against other Defendants that founded and served as officers of TWM, 9 ACOF, or ACPS, the most the Court can infer from the allegations of the SAC is that 10 Dionne performed accounting work for these entities. This claim is DISMISSED with 11 leave to amend. 12 2. Materially Assisting Fraudulent Sale of Securities (§ 25504.1) Plaintiffs also assert that Dionne is liable under § 25504.1 which “makes a person 13 14 jointly and severally liable for a violation of section 25401 if that person ‘materially 15 assists in the violation of . . . Section 25401 . . . with the intent to deceive or defraud.’” 16 Arei II Cases, 216 Cal. App. 4th 1004, 1014 (1st Dist. 2013). The material assistance 17 must be to “the scheme that constituted a violation of the securities laws” because the 18 underlying violation “is selling or offering to sell a security by means of false and 19 misleading statements.” Id. at 1014. “[A]llegations demonstrating how the defendant 20 assisted in the act of selling or offering to sell securities by means of false and misleading 21 statements” are required. Id. at 1015. The SAC fails to allege how Dionne assisted in 22 selling or offering to sell securities by means of false and misleading statements. Even if 23 the Court assumes that the investments promoted by other defendants qualified as selling 24 25 26 27 5 The Court considers these allegations, although, in asserting Dionne acted similar to a treasurer, Plaintiffs cited ¶¶ 168-171 of the SAC. However, those allegations concern Defendants Lakosil and De Villiers. 6 15CV1632 BEN (NLS) 1 or offering to sell securities by means of false and misleading statements, as noted above, 2 the only specific allegation that he promoted sales, was his appearance on a radio show to 3 provide tax advice. The allegations do not provide any explanation of how providing tax 4 advice constitutes assistance in the ultimate investments. Additionally, just knowing or 5 having “reason to know the facts constituting the violation” is not enough for liability 6 under § 25504.1. Id. at 1015 (contrasting the liability for a broker-dealer under § 25504). 7 It might be that Dionne’s work ultimately was connected to a scheme, but “[a]ssisting in 8 a violation is not the same as assisting someone achieve a violation, which can 9 presumably be accomplished without having any involvement in the violation itself.” Id. 10 11 12 at 1017. This claim is DISMISSED with leave to amend. 3. Suppression of Material Fact (California Civil Code § 1710) California Civil Code § 1710, upon which Plaintiffs’ claim relies, provides for four 13 kinds of deceit, including concealment —“suppression of a fact, by one who is bound to 14 disclose it, or who gives information of other facts which are likely to mislead for want of 15 communication of that fact.” § 1710(3) “The elements of an action for fraud and deceit 16 based on concealment are: (1) the defendant must have concealed or suppressed a 17 material fact, (2) the defendant must have been under a duty to disclose the fact to the 18 plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with 19 the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and 20 would not have acted as he did if he had known of the concealed or suppressed fact, and 21 (5) as a result of the concealment or suppression of the fact, the plaintiff must have 22 sustained damage.” Marketing West, Inc. v. Sanyo Fisher (USA) Corp., 6 Cal. App. 4th 23 603, 612-13 (2d Dist. 1992). 24 Because Plaintiffs allege a course of fraudulent conduct, Plaintiffs must allege the 25 “who, what, when, where, and how of the misconduct charged.” Kearns v. Ford Motor 26 Co., 567 F.3d 1120, 1124-25 (9th Cir. 2009). In Opposition, Plaintiffs allege that Dionne 27 was part of a group that induced people to invest by omitting material facts from TWM 7 15CV1632 BEN (NLS) 1 communications that were directed to Plaintiffs. However, the specific allegations as to 2 Dionne are those discussed above — primarily radio appearances with tax advice and 3 bookkeeping. And the SAC’s general allegation that Dionne, along with eight other 4 defendants “engaged in unlawful conduct in violation of their duties to investors, agreed 5 to join in the unlawful violation of duties owed investors, or aided and abetted those 6 engaged in violations of their duties to investors” is a legal conclusion the Court need not 7 accept as true. See Iqbal, 556 U.S. at 678. There are no particular allegations as to what 8 he misrepresented, how he conveyed any misrepresentation, or when he should have 9 disclosed something. The remainder of the allegations noted in Opposition are attributed 10 to TWM without specifics as to what Dionne did, when he did it, or how he did it. Rule 11 9(b) does not permit “lump[ing] multiple defendants together.” Swartz, 476 F.3d at 765 12 (“[G]eneral allegations that the ‘defendants’ engaged in fraudulent conduct” with only 13 specific allegations as to some, “patently fail[s] to comply with Rule 9(b).”). This claim 14 is DISMISSED with leave to amend. 15 4. Other Claims Dionne moved to dismiss Plaintiffs’ claims for aiding and abetting suppression of 16 17 material fact and aiding and abetting breach of fiduciary duty. Plaintiffs failed to address 18 these claims in Opposition.6 Additionally, the SAC lacks any specific allegations how, 19 when, or who Dionne aided and abetted. Accordingly, these claims are DISMISSED. 20 II. Andesite Defendants 21 A. 22 Defendants Andesite Finance Company, LLC, Secured High Yield Income Fund I, Background 23 LLC, and Andesite Mortgage Pool, LLC (“Andesite entities”), and Susan Lakosil 24 (collectively “Andesite Defendants”) move to dismiss all claims asserted against them in 25 26 27 6 The Court notes that Dionne committed five pages of briefing to these claims. The Court can only conclude that Plaintiffs have conceded these claims are not viable as to Dionne. 8 15CV1632 BEN (NLS) 1 the SAC: (1) fraudulent sale of securities under § 25401; (2) control of party making 2 fraudulent sale of securities under §§ 25501 and 25504; (3) materially assisting 3 fraudulent sale of securities; (4) materially assisting fraudulent sale of securities under § 4 25504.1; (5) suppression of material facts under Civil Code § 1710; (6) aiding and 5 abetting suppression of material fact; and (7) aiding and abetting breach of fiduciary duty. 6 Lakosil allegedly served as an officer of or somehow otherwise oversaw the 7 Andesite entities. The SAC alleges that Plaintiffs’ funds were invested in these funds and 8 the Andesite Defendants paid fees to TWM and others in exchange for the investments 9 that were undisclosed to Plaintiffs.7 There are general allegations that “defendants” were 10 involved in a fraudulent scheme that led investors to believe the investments were safe 11 when they allegedly were not and that “defendants” knew Plaintiffs did not know about 12 the fees. There are some allegations specific to the Andesite Defendants, including that 13 Plaintiffs’ funds were invested with the Andesite Defendants and allegations that 14 representations were made about returns the entities provided. However, there are no 15 allegations as to who made these representations, when they were made, or even that 16 those representations were inaccurate when made. Additionally, there are no allegations 17 that the Andesite Defendants directed the investment of Plaintiffs’ funds. Rather, the 18 SAC alleges TWM and its principals directed Plaintiffs’ investments. 19 Andesite Defendants move to dismiss all claims asserted against them 20 B. 21 Analysis 1. Fraudulent Sale of Securities (§ 25401) 22 Section 25401 prohibits the offer or sale of a security “by means of any written or 23 oral communication that includes an untrue statement of material fact or omits to state a 24 material fact necessary to make the statements made, in light of the circumstances under 25 26 27 7 Andesite Defendants dispute that any fees were paid, but understandably do not argue that as a basis for dismissing the claims given the Court must accept the truth of the factual allegations of the SAC at this stage. 9 15CV1632 BEN (NLS) 1 which the statements were made, not misleading.” As noted above, the SAC fails to 2 identify what, if any, misrepresentation Andesite Defendants conveyed to Plaintiffs 3 concerning investments. Additionally, the SAC does not identify when, where, or how 4 any representation was made. Plaintiffs’ conclusory allegation that “defendants” were 5 aware and failed to disclose fees to Plaintiffs is not sufficient. See Swartz, 476 F.3d at 6 765. This claim is DISMISSED with leave to amend. 7 2. Control of Party Making Fraudulent Sale of Securities (§§ 25501, 25504) 8 Plaintiffs assert that Lakosil controlled the Andesite entities such that she is liable 9 as a control person for their underlying violation. As noted above, the SAC fails to 10 particularly plead a misrepresentation or omission connected with the sale or offer of a 11 security by the Andesite entities. Lakosil cannot be liable as a control person for an 12 underlying violation that is not sufficiently alleged. This claim is DISMISSED with 13 leave to amend. 14 3. Materially Assisting Fraudulent Sale of Securities (§ 25504.1) Plaintiffs’ sixth and ninth causes of action assert that Andesite Defendants, among 15 16 others, are liable under § 25504.1. “[A]llegations demonstrating how the defendant 17 assisted in the act of selling or offering to sell securities by means of false and misleading 18 statements” are required. Arei II Cases, 216 Cal. App. 4th at 1015. Assuming that the 19 investments promoted by other defendants qualified as selling or offering to sell 20 securities by means of false and misleading statements, this claim still fails as to Andesite 21 Defendants because there are no allegations how the Andesite Defendants assisted in that 22 endeavor. There are only general allegations that they were aware of the fraudulent 23 scheme. Additionally, as previously noted, having “reason to know the facts constituting 24 the violation” is not enough for liability under § 25504.1. Id. at 1015. These claims are 25 DISMISSED with leave to amend. 26 /// 27 /// 10 15CV1632 BEN (NLS) 1 4. Suppression of Material Fact (Civil Code § 1710) As explained in more detail above, the SAC must allege a material fact that 2 3 defendants were obligated to disclose was concealed or suppressed with the intent to 4 defraud. Marketing West, Inc., 6 Cal. App. 4th at 612-13. Plaintiffs must also allege that 5 if they had been aware of the concealed fact they would have acted differently and have 6 suffered damage as a result. Id. These allegations must be plead with particularity. 7 Kearns, 567 F.3d at 1124-25. Plaintiffs allege that Lakosil was part of a group that 8 induced people to invest by omitting material facts from TWM communications that were 9 directed to Plaintiffs. However, there are no allegations connecting any of the Andesite 10 Defendants to TWM’s communications to Plaintiffs. It is not clear why the Andesite 11 Defendants should be responsible for TWM and its officer’s alleged misrepresentations 12 to Plaintiffs. This claim is DISMISSED with leave to amend. 13 5. Aiding and Abetting Suppression of Material Fact & Breach of Fiduciary 14 Duty 15 Plaintiffs allege that all defendants aided and abetted all defendants because they 16 knew the investments were not being invested pursuant to an optimization plan. 17 Plaintiffs similarly generally allege that all defendants aided TWM, ACOF, and ACPS in 18 breaching their fiduciary duties to Plaintiffs. However, there are no allegations how the 19 Andesite Defendants knew about the representations about an optimization plan or knew 20 that others had made such a representation. There are also no allegations as to how the 21 Andesite Defendants assisted other defendants in misrepresenting the truth or concealing 22 any information from the Plaintiffs. As to aiding and abetting breach of fiduciary duty, 23 there are no allegations as to how the Andesite Defendants assisted TWM, ACOF, and 24 ACPS in breaching their fiduciary duties to the Plaintiffs. These claims are DISMISSED 25 with leave to amend. 26 /// 27 /// 11 15CV1632 BEN (NLS) 1 III. FTCO 2 As to FTCO, the SAC only alleges that FTCO was the previously unidentified Doe 3 1 and that it is a Kansas corporation. Assuming the doe allegations apply to a now named 4 defendant, those allegations are of little help. There are no specific allegations as to Doe 5 1. The SAC generally alleges that Does 1-10 are accountants and bookkeepers who 6 knowingly aided the violations of law as alleged in the SAC. The SAC more generally 7 alleges that all doe defendants are responsible for the conduct alleged in the SAC. There 8 are no allegations how FTCO is even connected to the Plaintiffs in any way. FTCO 9 provides more explanation of its connection to the case than the SAC, explaining in its 10 Motion that it acted as a custodian of Plaintiffs’ IRA accounts, i.e. held the assets that 11 clients deposited and issued reports to clients on their holdings. The Court will not go through all the elements of the claims8 asserted against 12 13 FTCO because there are no allegations against FTCO other than the legal conclusions 14 noted above. See Papasa v. Allain, 478 U.S. 265, 286 (1986) (“we are not bound to 15 accept as true a legal conclusion couched as a factual allegation”); see also Iqbal, 556 16 U.S. at 678. Nor are the allegations sufficient to meet Rule 8’s pleading requirements. 17 Iqbal, 556 U.S. at 678 (Rule 8’s notice pleading “demands more than an unadorned, the- 18 defendant-unlawfully-harmed-me accusation.”). The SAC does not allege what FTCO 19 did or even what its connection is to the fraud allegedly committed by others. This is 20 apparent from Plaintiffs’ reliance on allegations of conduct by other defendants in its 21 Opposition, without any allegation or explanation as to how FTCO had anything to do 22 with that conduct. And, while FTCO indicates it held Plaintiffs’ funds, this alone, is not 23 actionable. The “mere possibility of misconduct” falls short of the plausibility standard. 24 Id. Additionally, Plaintiffs’ claims against FTCO are subject to Rule 9(b). “In order to 25 26 27 8 The Court assumes Plaintiffs are only asserting the eleventh and twelfth claims against FTCO given those are the only two claims addressed in Plaintiffs’ Opposition. 12 15CV1632 BEN (NLS) 1 plead fraud with particularity, the complaint must allege the time, place, and content of 2 the fraudulent representation; conclusory allegations, [like those asserted here,] do not 3 suffice.” Shroyer, 622 F.3d at 1042 (citing Moore, 885 F.2d at 540). 4 All claims against FTCO are DISMISSED with leave to amend. 5 6 CONCLUSION The Motions to Dismiss are GRANTED. Plaintiffs may amend as noted above on 7 or before April 10, 2016. If Plaintiffs elect not to amend, the case shall proceed on the 8 SAC as to the remaining defendants. 9 IT IS SO ORDERED. 10 Dated: March 9, 2016 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 13 15CV1632 BEN (NLS)
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