Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01632/USCOURTS-casd-3_15-cv-01632-3/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1441fr Removal- Fraud

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8 UNITED STATES DISTRICT COURT

9 SOUTHERN DISTRICT OF CALIFORNIA

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11 ALBERT CALDERON, an individual on

behalf ofhimself and all others similarly

situated, et al.,

Case No.: 3:15-cv-1632-BEN-NLS

12 ORDER GRANTING MOTIONS TO

13 DISMISS Plaintiffs,

14

v. [Docket Nos. 63,65]

15 TOTAL WEALTH MANAGEMENT,

16 INC. et. al,

17 Defendants.

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There are two separate motions to dismiss Plaintiffs’ Third Amended Complaint

(“TAC”) before the Court. (Docket Nos. 63, 65.) The motions are fully briefed. The

Court finds the motions suitable for determination on the papers without oral argument,

pursuant to Civil Local Rule 7.1 .d. 1. For the reasons set forth below, each motion is

GRANTED with prejudice.

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BACKGROUND1

Plaintiffs allege that investors were solicited to invest in Total Wealth Management

(“TWM”) and its affiliated companies, Altus Capital Opportunity Fund, LLC (“ACOF”)

and Altus Capital Portfolio Series (“ACPS”), primarily through a weekly radio program,

financial awareness seminars, and community engagement. Investors were allegedly

misled into believing their funds were being safely invested based on investment

portfolio risk when in fact, investments were being channeled primarily to Private

Placement Capital Notes LLC II (“PPCN”), LJL Secured High Yield Income Fund I,

LLC (“LJL”), and Aegis Retail Group LLC (“AEGIS”) in exchange for fees paid by the

entities, without disclosure to investors. TWM was allegedly under the control or

direction ofthe following defendants by virtue oftheir ownership or positions as officers:

Jacob Cooper (“Cooper”), co-founder and majority owner ofTWM; Nathan McNamee

(“McNamee”), TWM’s president and chief compliance officer for relevant periods; and

David Shoemaker (“Shoemaker”), co-founder and former chief compliance officer.

PROCEDURAL HISTORY

Plaintiffs filed their initial Complaint in the Superior Court ofCalifornia, County

of San Diego, Central Division, Case Number 37-2014-00015682-CU-SL-CTL. On July

22,2015, former Defendant First Trust Company ofOnaga, renamed Mainstar Trust

(“Mainstar”), removed the action to the United States District Court for the Southern

District ofCalifornia based on jurisdiction under the Class Action Fairness Act

(“CAFA”). (Docket No. 1.) On October 15, 2015, the Court denied Plaintiffs’ motion to

remand the case back to state court due to a lack of evidence establishing the applicability

of either the “local controversy” or “home-state controversy” exceptions to CAFA

jurisdiction. (Docket No. 42.)

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The following overview ofthe facts are drawn from the allegations ofthe TAC. The

Court is not making findings offact. The allegations relevant to each motion are detailed

in analyzing the individual motions.

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On March 9, 2016, the Court granted three separate motions to dismiss Plaintiffs’

Second Amended Complaint. (Docket No. 50.) On March 16,2016, Receiver Kristen A.

Janulewicz (“Receiver”) filed a Notice ofPending Receivership regarding her

appointment as a permanent Receiver for Total Wealth Management Inc., and its

subsidiaries and affiliates, in Securities andExchange Commission v. Total Wealth

Management, Case No. 15-CV-226-BAS (DHB) (the “Receivership Case”). (Docket No.

51.) Receiver’s Notice included a copy ofDistrict Judge Cynthia Bashant’s preliminary

injunction, issued on February 12, 2015, which provides that:

[Ejxcept by leave ofthis Court, during the pendency ofthis

receivership, all clients, investors, trust beneficiaries, note

holders, creditors, claimants, lessors and all other persons or

entities seeking reliefof any kind, in law or in equity, from

Defendant Total Wealth Management, Inc., or its subsidiaries

or affiliates ... are hereby restrained and enjoined from,

directly or indirectly, with respect to these persons and entities .

.. commencing, prosecuting, continuing or enforcing any suit

or proceeding (other than the present action by the SEC or any

other action by the government) against any ofthem

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16 {Id., Ex. B.)

Plaintiffs filed their TAC on April 18, 2016. (Docket No. 54.) On May 2, 2016,

Mainstar filed a motion to dismiss the TAC. (Docket No. 60.) On May 5, 2016,

Defendants Andesite Finance Company, LLC, Secured High Yield Income Fund I, LLC,

and Andesite Mortgage Pool, LLC and Susan Lakosil (collectively, “Andesite

Defendants”) filed a motion to dismiss the TAC. (Docket No. 63.) On May 19, 2016,

Defendants Mark Dionne and SoCal Accounting, Inc. (collectively, “Dionne”) filed a

motion to dismiss the TAC. (Docket No. 65.)

On November 29, 2016, the Court granted Mainstar’s Motion to Dismiss. (Docket

No. 75.) On December 2,2016, the Court issued an order requesting supplemental

briefing on: (1) whether the dismissal ofMainstar divested the Court ofsubject matter

jurisdiction over Plaintiffs’ claims, and (2) the effect, if any, ofJudge Bashant’s

receivership order on Plaintiffs TAC. (Docket No. 76.) Plaintiffs and Dionne filed

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supplemental briefs. (Docket Nos. 77, 80.) Andesite Defendants filed a joinder to

Dionne’s brief. (Docket No. 79.) Receiver did not file a supplemental brief.

DISCUSSION

I. The Court’s Request for Supplemental Briefing

A) Subject Matter Jurisdiction

If “at any time” the Court lacks subject matterjurisdiction, “the case shall be

remanded.” 28 U.S.C. § 1447(c). As mentioned above, this case was removed by

Mainstar based on jurisdiction under CAFA. (Docket No. 1.) “CAFA gives federal

courtsjurisdiction over certain class actions, defined in § 1332(d)(1), ifthe class has

more than 100 members, the parties are minimally diverse, and the amount in controversy

exceeds $ 5 million.” Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct.

547, 552 (2014) (citing 28 U.S.C. § 1332(d)(2), (5)(B) and StandardFire Ins. Co. v.

Knowles, 133 S. Ct. 1345, 1348 (2013)).

None ofthe parties argue that any ofthese requirements are not met, or that

Mainstar’s dismissal divested the Court ofits subject matterjurisdiction. Instead,

Plaintiffs re-assert their contention that the “local controversy” exception to CAFA

jurisdiction applies and requires remand. (Docket No. 80.) All responding Defendants

oppose remand. (Docket Nos. 77, 79.)

When the requirements ofthe local controversy exception are met, a district court

is required to remand the class action back to the originating state court. Serrano v. 180

Connect, Inc., 478 F.3d 1018,1022-1023 (9th Cir. 2007). The local controversy

exception requires that more than two-thirds ofthe proposed class are citizens ofthe state

in which the action was originally filed. §§ 1332(d)(4)(A)(i)(I). In addition, “there must

ordinarily be at least some facts in evidence from which the district court may make

findings regarding class members’ citizenship for purposes ofCAFA’s local controversy

exception.” Mondragon v. Capital One Auto Finance, 736 F.3d 880, 884 (9th Cir. 2013).

“A district court makes factual findings regarding jurisdiction under a preponderance of

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the evidence standard.” Id. (citing Valdez v. All State Ins. Co., 372 F.3d 1115, 1117 (9th

Cir. 2004)).

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Plaintiffs’ prior motion for remand was denied for a complete lack of evidence as

to the citizenship ofthe class. (Docket No. 42 at 4-5.) As “the party seeking remand,”

Plaintiffs “bear[] the burden to prove an exception to CAFA’sjurisdiction.” Serrano,

supra, 478 F.3d at 1022 (discussing local controversy exception, § 1332(d)(4)(A); see

also Benko v. Quality Loan Serv. Corp., 789 F.3d 1111, 1116 (9th Cir. 2015) (“plaintiff

bears burden ofshowing that this provision, known as the ‘local controversy exception,’

applies to the facts of a given case.”). Plaintiffs were granted leave to conduct

jurisdictional discovery and file a renewed motion for remand by January 6, 2016.

(Docket No. 42 at 7.) The deadline to file a renewed motion for remand elapsed without

the filing of a renewed motion for remand, and Plaintiffs admit in their supplemental

briefing that “jurisdictional discovery was not taken.” (Docket No. 80 at 2.)

As alleged in the TAC, the proposed class is “TWM’s investment advisory clients

whose funds were placed in or passed through TWM, ACOF or the series ofunregistered

fund offunds referred to as the ‘Altus Portfolio Series’ who suffered damages.” (TAC f

149.) To establish the requisite citizenship ofthe class, Plaintiffs rely on the SEC Initial

Decision and factual findings in the SEC case against TWM et al., and copies of emails

from Mainstar’s counsel. (Docket No. 80 at 3, Exs. 3,5.) Plaintiffs cite to the SEC

findings that “Cooper and Shoemaker identified potential investors by hosting workshops

and dinner seminars in ... San Diego, California” and that Cooper “obtained clients form

hosting a radio show in San Diego” as evidence that TWM “marketed only to investors in

San Diego.” (Docket 80 at 3, Ex. 3 at 3.) Plaintiffs also represent that a number of

emails from Mainstar’s counsel “demonstrate that the majority ofinvestors were from

California.” (Docket No. 80 at 3.) Finally, Plaintiffs reiterate that all named plaintiffs

are alleged to be “residents of San Diego County.” (Id.)

“[Jjjurisdictional findings offact should be based on more than guesswork.”

Mondragon, 736 F.3d at 884. Plaintiffs have not cured their failure to provide any

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evidence as to the citizenship ofthe proposed class. The evidence submitted suggests at

most that some ofthe potential class members were contacted in California or are “from”

California, but does not identify the citizenship of any ofthe class members. Mainstar’s

Notice ofRemoval provides evidence that Defendants had between 400 and 800 clients

when they were engaging in this scheme. (Docket No. 1.) Although the TAC alleges the

27 named plaintiffs are “residents ofthe State ofCalifornia, County of San Diego,” it is

silent as to each oftheir citizenships. While the Court may make reasonable inferences

from facts in evidence when evaluating the applicability ofthe local controversy

exception, concluding that more than two-thirds of a class ofhundreds are California

citizens based on allegations that: (1) plaintiffs were contacted by some ofthe defendants

in California, (2) plaintiffs are “from” California, and (3) the 27 named plaintiffs are

residents ofthe State ofCalifornia, is not a reasonable inference. Therefore, the Court

finds Plaintiffs have failed to meet their burden to demonstrate that the local controversy

exception applies and DENIES their request for remand.

B) Judge Bashant’s Receivership Order

All ofthe responding parties agree that the moving Defendants are not subject to

the receivership order and are not subject to Judge Bashant’s preliminary injunction.

(Docket Nos. 77 at 5-6, 79 at 2, 80 at 4.) Receiver did not file a supplemental brief.

Additionally, the Declaration that Receiver filed with her Notice ofPending Receivership

omits any identification ofDionne or Andesite Defendants as affiliates ofTotal Wealth

Management. (Docket No 51-2, Exhibit 1.) The Court concludes that the prosecution of

this action as to Dionne and the Andesite Defendants does not violate the injunction

issued by the Honorable Cynthia Bashant in Case No. 15-cv-226-BAS (DHB).

II. The Motions to Dismiss

“[A] complaint must contain sufficient factual matter, accepted as true, to state a

claim to reliefthat is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 677-78

(2009). “A claim is facially plausible ‘when the plaintiffpleads factual content that

allows the court to draw the reasonable inference that the defendant is liable for the

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misconduct alleged.”’ ZixiangLi v. Kerry, 710 F.3d 995, 999 (9th Cir. 2013) (quoting

Iqbal, 556 U.S. at 678).

When considering a Rule 12(b)(6) motion the court must “accept as true facts

alleged and draw inferences from them in the light most favorable to the plaintiff.” Stacy

v. Rederite Otto Danielsen, 609 F.3d 1033,1035 (9th Cir. 2010) (citing Barker v.

Riverside Cnty. Office ofEduc., 584 F.3d 821, 824 (9th Cir. 2009)). On the other hand,

bare, conclusory allegations, including legal allegations couched as factual, are not

entitled to be assumed to be true. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555

(2007). “[T]he tenet that a court must accept as true all ofthe allegations contained in a

complaint is inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678. “While legal

conclusions can provide the framework of a complaint, they must be supported by factual

allegations.” Id. at 664.

Allegations offraud must be stated with particularity. Fed. R. Civ. P. 9(b). “In

order to plead fraud with particularity, the complaint must allege the time, place, and

content ofthe fraudulent representation; conclusory allegations, do not suffice.” Shroyer

v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1042 (9th Cir. 2010) (citing Moore

v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989)); Kearns v. Ford

Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (requiring plaintiffs plead who, what,

when, where, and how). “Rule 9(b) does not allow a complaint to merely lump multiple

defendants together, but ‘requires plaintiffs to differentiate their allegations when suing

more than one defendant. .. and to inform each defendant separately ofthe allegations

surrounding his alleged participation in the fraud.” Swartz v. KPMG LLP, 476 F.3d 759,

765 (9th Cir. 2007) (quotingHaskin v. R.J. Reynolds Tobacco Co., 995 F. Supp. 1437,

1439 (M.D. Fla. 1998)). “[G]eneral allegations that the ‘defendants’ engaged in

fraudulent conduct” with only specific allegations as to some, “patently fail[s] to comply

with Rule 9(b).” Id. at 765.

As pointed out by Dionne, Plaintiffs failed to provide a copy ofthe TAC that

shows “through redlining, underlining, strikeouts, or other similarly effective typographic

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methods” how the TAC differs from the Second Amended Complaint (“SAC”) as

required by CivLR 15.1(c). Although the Court has discretion to dismiss the TAC on this

basis, in the interests ofjudicial economy, the Court has reviewed Plaintiffs’ TAC2 and

makes its findings after careful consideration ofthe parties’ briefings.

The Court finds the TAC fails to remedy the deficiencies the Court identified in the

SAC as to the moving defendants.3 Plaintiffs’ TAC provides more legal conclusions and

general allegations that the moving “defendants” knew about or were involved in a

fraudulent scheme involving more than 30 named defendants, but did not plead specific

factual allegations as to what Plaintiffs allege the moving defendants actually did to

engage in the alleged wrongful conduct.

1) Mark Dionne and SoCal Accounting

A. Background4

The TAC alleges that “Cooper hired Dionne in and around May 2009 to work as

the accountant and financial administrator” for TWM. (TAC 1179.) Mr. Dionne is also

alleged to have acted as the financial administrator and accountant for, ACOF, ACPS,

and other entities associated with Defendants Cooper, Shoemaker, and McNamee —

Financial Council Inc. (Shoemaker), Capita Advisors Inc. (McNamee), and Pinnacle

Wealth Group Inc. (Cooper).

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22 2 The Court notes that paragraphs 1-153 and 154-209 ofthe TAC are substantively

identical, ifnot verbatim copies, ofparagraphs 1-153 and 261-316, respectively, in

Plaintiffs’ SAC. Plaintiffs’ amendments to the SAC are purportedly contained in

paragraphs 154-260. (TAC 1154.)

3 The Court’s analysis ofthe allegations ofthe claims and allegations ofthe TAC are

limited to the moving defendants. The Court’s analysis ofthese Motions does not

address and should not be interpreted to apply to any ofthe other defendants.

4 Due to the substantial similarity ofthe facts alleged in the SAC and the TAC, the Court

repeats some ofthe summary offacts set forth in its March 9, 2016 Order granting

dismissal ofPlaintiffs’ SAC. (Docket No. 50.)

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Once again, Plaintiffs allege Mr. Dionne was an insider, but do not allege he was

an officer, director, or shareholder ofTWM or any specific facts from which the Court

can infer he controlled any ofthese entities. Instead, the TAC alleges Cooper “explained

[to Mr. Dionne] that TWM would be inducing investors to transfer their funds to TWM’s

control and how the scheme, described above, worked.” (TAC f 180.) Mr. Dionne

allegedly had “control over TWM’s financial books and records” and “managed the

financial records for the spoke entities that too [sic] investor money and used it to pay for

the unlawful revenue sharing, bogus fees and receive the kickbacks.” (TAC || 180, 181.)

Further, Mr. Dionne is generally alleged to be the “common thread ofthe fraudulent

scheme.” (Id. at 187.) None ofthese facts leads to a reasonably inference that Mr.

Dionne exerted control over TWM or its affiliated entities.

The TAC alleges Mr. Dionne must have known certain facts based on his

maintenance ofthe books (i.e. investments were being directed to PPCN, LJL, and

AEGIS; that fees were being paid for the investments; and that the investments were

riskier than represented), but did not disclose this information to investors.

Plaintiffs also generally allege that Mr. Dionne promoted sales to investors, but the

only specific allegations as to how Dionne promoted sales is that he gave “tax advice” on

the TWM radio program. (Id. at ^ 67.) However, the TAC does not allege that anything

he specifically said was false or misleading. The TAC contains general allegations that

he assisted in the fraud, but no explanation of how or what he did to actually assist.

The TAC further generally alleges Mr. Dionne “was integrally involved in the

representations to investors, including Plaintiffs,” but the only specific example is an

excerpt of an alleged email from McNamee stating:

Mark,

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25 The Disclaimer on page 1 says Altus Capital Opportunity Fund.

26 Can you change the Disclaimer on page 1 to say the following?

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{Id. at Tf 192.) Plaintiffs allege “a similar request to perform disclaimers was sent by

McNamee” to Mr. Dionne relating to AMGPS, but do not allege any specifics as to what

he actually represented to Plaintiffs that was misleading.

Additionally, the TAC generally alleges that Mr. Dionne referred clients to TWM,

ACOF, and ACPS without telling them undisclosed fees were being paid and he was

aware ofthe adverse financial conditions ofthe LJL, PPCN, and AEGIS entities. To

PlaintiffClugston, Mr. Dionne allegedly “promoted investing TWM [sic]” and

“recommending he take out a $400,000 loan on his house and invest it with TWM.” {Id.

at 1203.) To PlaintiffMcKinney, Mr. Dionne allegedly “promoted TWM” and advised

her to “switch all of [her] retirement investment money over to [TWM/Cooper].” {Id. at

1205.) To Plaintiffs Cartier and Green, Mr. Dionne allegedly “gave specific advice”

about their IRA investments, which were invested with TWM. {Id. at ^[ 207.) However,

Plaintiffs do not allege what Dionne stated to promote TWM or advise use ofTWM that

was misleading.

Lastly, Plaintiffs generally allege Mr. Dionne assisted in the selling or offering of

securities “by being part ofthe ‘Asset Optimization’ team described by TWM as

including professionals such as tax advisers” and assisting “TWM and its principals

achieve a violation ... ofsecurities laws.” (TAC 1214.) Once again, Plaintiffs fail to

allege what Mr. Dionne did to assist in the sales or achieve the violations.

Mr. Dionne and SoCal Accounting move to dismiss the five claims asserted against

them in the TAC: (1) control ofparty making fraudulent sale ofsecurities in violation of

California Corporations Code5 §§ 25501,25504; (2) materially assisting fraudulent sale

ofsecurities in violation of § 25504.1; (3) suppression ofmaterial fact in violation of

California Civil Code § 1710; (4) aiding and abetting suppression ofmaterial fact; (5)

aiding and abetting breach offiduciary duty.

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27 5 All further code section references are to the California Corporations Code unless

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1 Analysis

1. Control ofParty Making Fraudulent Sale of Securities 25501.

25504)

In the TAC’s Second Claim for Relief, Plaintiffs assert that Mr. Dionne is liable

for misrepresenting or omitting material facts in connection with the purchase or sale of a

security in violation § 25501 as a secondary actor under § 25504.

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 ofthe facts by

reason ofwhich the liability is alleged to exist.”

B.

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14 Helium, v. Breyer, 194 Cal. App. 4th 1300, 1306 (IstDist. 2011) (quoting § 25504).

Plaintiffs’ TAC repeats the general allegation that Mr. Dionne and four other defendants

associated with TWM,

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17 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 ofTWM,

ACOF, or ACPS because they are employees who materially

aided the acts or transactions constituting the violations.

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(TAC 1267.) Plaintiffs conclude that they “cured [the] perceived deficiencies” in the

SAC by including new allegations regarding Mr. Dionne’s activity in (1) controlling and

maintaining TWM’s and its affiliated entities’ financial records, and (2) “working with

Cooper, McNamee and Fowler to make representations to investors and do internal

transfers and payments between the accounts.” (Docket No. 69 at 15-17.) Plaintiffs

argue that “[f]rom these allegations showing Dionne managed the bank and fund

accounts and books of original entry, the Court can infer Dionne acted as TWM’s

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treasurer and that Dionne was a person who controlled these persons and their entities.”

(Id. at 17.)

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Once again, assuming a violation of § 25501 occurred, there is simply a lack of

evidence alleged from which the Court can infer Dionne’s control over any person or any

entity. The new allegations, at most, further support an inference that Mr. Dionne

performed accounting work for the entities identified in the TAC. Therefore, this claim is

DISMISSED.

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2. Materially Assisting Fraudulent Sale of Securities f§ 25504.1)

In the TAC’s Seventh Claim for Relief, Plaintiffs assert that Dionne is liable under

§ 25504.1, which “makes a person jointly and severally liable for a violation ofsection

25401 ifthat person ‘materially assists in the violation of... Section 25401 ... with the

intent to deceive or defraud.’” AreiII Cases, 216 Cal. App. 4th 1004,1014 (1st Dist.

2013). The material assistance must be to “the scheme that constituted a violation ofthe

securities laws” because the underlying violation “is selling or offering to sell a security

by means offalse and misleading statements.” Id. at 1014. “[AJllegations demonstrating

how the defendant assisted in the act ofselling or offering to sell securities by means of

false and misleading statements’’ are required. Id. at 1015 (emphasis added).

In their Opposition, Plaintiffs argue they have sufficiently pled a violation of

section 25401 by pointing to the portions ofthe TAC where it alleges:

Dionne performed the function oftreasurer, controlling TWM

bank accounts, check writing, internal transfers between funds,

financial statement and general ledger preparation, and reports

as requested or needed in the scope ofthe TWM scheme. (TAC

212[.]) Dionne assisted in selling or offering securities by

being part ofthe “Asset Optimization” team described by TWM

as including professionals such as advisers. He assisted TWM

and its principals achieve a violation (notjust assist the

violation) ofsecurities laws ... (TAC Tf 213[.])

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Plaintiffs summarily conclude that, on these facts, “Dionne’s representations to

plaintiffinvestors fail to state facts needed to make those stated not misleading.” (Id. at

19.) However, Plaintiffs’ TAC fails to set forth specific allegations as to how Dionne

assisted in selling or offering to sell securities by means offalse and misleading

statements.6 AreiII Cases, 216 Cal. App. 4th at 1015. The only specific allegations in

the TAC that Dionne promoted sales are his appearance on a radio show to provide tax

advice, and his “promoting” ofTWM to his tax clients. However, the allegations do not

provide any explanation ofhow providing tax advice constitutes assistance in the ultimate

investments. Additionally, although the TAC alleges Mr. Dionne specifically promoted

TWM to Plaintiffs Clugston, McKinney, Cartier, and Green, the allegations are deficient

because they fail to specifically allege what Mr. Dionne said to “promote” or “advise”

that was misleading. Alleging a person promotes or advises use of an investment

company does not, in it ofitself, constitute fraud under the heightened pleading standards

ofFed. R. Civ. P. 9(b). Plaintiffs must at least specify statements they claim were

misleading. Fed. R. Civ. P. 9(b).

Lastly, the Court reiterates thatjust knowing or having “reason to know the facts

constituting the violation” is not enough for liability under § 25504.1. AreiII Cases, 216

Cal. App. 4th at 1015 (contrasting the liability for a broker-dealer under § 25504). It

might be that Dionne’s work ultimately was connected to a scheme, but “[assisting in a

violation is not the same as assisting someone achieve a violation, which can presumably

be accomplished without having any involvement in the violation itself.” Id. at 1017.

This claim is DISMISSED.

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6 This is particularly true when reviewing the portions ofthe TAC where Plaintiffs’

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223-229.)

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3. Suppression ofMaterial Fact (California Civil Code $ 1710)

In the TAC’s Eleventh Claim for Relief, Plaintiffs allege Dionne violated

California Civil Code section 1710. Section 1710 defines the elements of actionable

deceit and provides for four kinds of deceit, including concealment- “suppression of a

fact, by one who is bound to disclose it, or who gives information of other facts which are

likely to mislead for want of communication ofthat fact.” § 1710(3) “The elements of

an action for fraud and deceit based on concealment are: (1) the defendant must have

concealed or suppressed a material fact, (2) the defendant must have been under a duty to

disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or

suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiffmust have been

unaware ofthe fact and would not have acted as he did ifhe had known ofthe concealed

or suppressed fact, and (5) as a result ofthe concealment or suppression ofthe fact, the

plaintiffmust have sustained damage.” Marketing West, Inc. v. Sanyo Fisher (USA)

Corp., 6 Cal. App. 4th 603, 612-13 (2d Dist. 1992).

Plaintiffs allege Dionne engaged in a course offraudulent conduct and therefore

must allege the “who, what, when, where, and how ofthe misconduct charged.” Kearns

v. Ford Motor Co., 567 F.3d 1120, 1124-25 (9th Cir. 2009). In Opposition, Plaintiffs

generally assert:

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The TAC describes Dionne’s role on TWM’s radio program,

making representations as their tax arm. Dionne made

misrepresentations by failing to disclose what was needed to

make that stated not misleading, namely the unlawful revenue

sharing, kickbacks, payments made from investor funds to

TWM principals and affiliates with no supporting

documentation for services performed for those payments.

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(Docket No. 69 at 20.) However, the TAC does not contain any particular allegations as

to what Dionne misrepresented, how he conveyed any misrepresentation, or when he

should have disclosed something. Similarly, Plaintiffs’ Opposition contends Dionne had

a “legal duty” to disclose “the material facts about the fund and kickbacks” to Plaintiffs

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1 because “when a party choses [sic] to speak, the speaker has duty to not only tell the

truth, but also not to suppress or conceal [material] facts.” (Id.) Yet Plaintiffs do not

specify what it is that Dionne said that gave rise to a duty to disclose the alleged

“material facts about the fund and kickbacks.” (Id.) Simply put, the TAC lacks any

specific allegations of actionable statements attributable to Dionne, for which he then

suppressed material facts.

Moreover, Plaintiffs failed to address Dionne’s argument that the TAC fails to

sufficiently plead the requisite elements ofintent and reliance. The Court concludes

Plaintiffs concede the TAC lacks specific allegations that Dionne acted with the intent to

defraud Plaintiffs as well as allegations that Plaintiffs relied on the allegedly omitted

information. Marketing West, 6 Cal. App. 4th at 612-13 (2d Dist. 1992). Therefore, this

claim is DISMISSED.

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13 4. Aiding and Abetting Claims

Dionne moved to dismiss Plaintiffs’ claims for aiding and abetting suppression of

material fact and aiding and abetting breach offiduciary duty. Plaintiffs failed to address

these claims in Opposition.7 Moreover, the TAC does not include any specific

allegations as to how, when, or who Dionne aided and abetted. Accordingly, these claims

are DISMISSED.

2) Andesite Defendants

A. Background

The TAC alleges TWM and LJL “have had a close relationship from their

inceptions” and conducted business out ofthe same office suite. (TAC 219.) Ms.

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7 The Court notes that Dionne devoted over five pages ofbriefing to these claims. The

Court can only conclude that Plaintiffs have, once again, conceded these claims are not

viable as to Dionne, or acknowledge they should have sought leave to amend their

complaint to re-allege these claims. See Fed. R. Civ. P. 15; CivLR 15.1; Docket No. 50

at 8.

See Footnote 4, above.

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1 Lakosil allegedly served as an officer of or somehow otherwise oversaw the Andesite

entities. Beginning in 2008, TWM and Andesite Defendants allegedly entered into a

revenue sharing agreement, whereby Plaintiffs’ funds were invested in these funds and

Andesite Defendants paid fees to TWM and others in exchange for the investments that

were undisclosed to Plaintiffs.

The TAC repeats the same general allegations in the SAC that “defendants” were

involved in a fraudulent scheme that led investors to believe the investments were safe

when they allegedly were not and that “defendants” knew Plaintiffs did not know about

the fees. The TAC also repeats the allegations specific to the Andesite Defendants,

including that TWM invested Plaintiffs’ funds with Andesite entities and allegations that

representations were made about returns the Andesite entities provided.

The new allegations in the TAC assert that LJL’s website stated that its “seamless

operations and lending philosophy mirror traditional mortgage banking platforms,” and

that “ifthe ‘real estate market totally tanks’ due to a ‘catastrophic drop’ -investments

with LJL would ‘remain relatively unscathed.’” (TAC 223-224) (emphasis omitted.)

Plaintiffs further allege that Andesite Defendants made a false statement in their Form

ADV - Uniform Application for Investor Adviser Registration, dated August 12, 2010,

when they stated “they ‘may’ pay introductory fees’” because they failed to disclose the

revenue sharing agreement with TWM. {Id. at 228.) Additionally, Plaintiffs’ allege

Andesite Defendants “assisted with TWM Defendants’ fraudulent scheme by, among

other things, preparing a series of brochures and other documents.” {Id. at 229.)

However, Plaintiffs’ TAC lacks factual allegations that Plaintiffs relied on

Andesite Defendants’ statements, or that the statements were made with the intent to

defraud Plaintiffs. Moreover, as in the SAC, there are no allegations that the Andesite

Defendants directed the investment ofPlaintiffs’ funds. Instead, the TAC alleges TWM

and its principals directed Plaintiffs’ investments.

The Andesite Defendants move to dismiss all claims asserted against them in the

TAC: (1) fraudulent sale ofsecurities under § 25401; (2) control ofparty making

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fraudulent sale ofsecurities under §§ 25501 and 25504; (3) materially assisting

fraudulent sale ofsecurities; (4) materially assisting fraudulent sale ofsecurities under §

25504.1; (5) suppression ofmaterial facts under Civil Code § 1710; (6) aiding and

abetting suppression ofmaterial fact; and (7) aiding and abetting breach offiduciary duty.

Analysis

1. Fraudulent Sale of Securities (§ 25401)

In the TAC’s First Claim for Relief, Plaintiffs allege Andesite Defendants violated

Section 25401, which prohibits the offer or sale of a security “by means of any written or

oral communication that includes an untrue statement ofmaterial fact or omits to state a

material fact necessary to make the statements made, in light ofthe circumstances under

which the statements were made, not misleading.”

Plaintiffs argue that the TAC at paragraphs 223, 225, 226-229, 234- 238 and 240

alleges “a series offalse statements that the LJL/Andesite Defendants made directly to

Plaintiffs -in order to promote and advance the fraudulent scheme.” (Docket No. 68 at

7.) After reviewing the cited paragraphs, the Court finds only the following paragraphs

allege specific statements attributable to Andesite Defendants:

- TAC 1223: “LJL falsely told the public on their website (as of2008) that, “our

seamless operations and lending philosophy mirror traditional mortgage

banking platforms.”

- TAC 1225: Andesite Defendants “falsely told investors in marketing materials

that it could earn ‘FIVE TIMES the return of a traditional CD without five

times the risk’ because their ‘secured fund’ is akin to ‘a long term CD’ which

could be used to ‘wait out the uncertainty in the market.’”

- TAC 228: Andesite Defendants “made false statements in their Form ADV -

Uniform Application for Investor Adviser Registration, dated August 12, 2010

- by failing to disclose the revenue sharing agreement with TWM and instead

stating that they ‘may pay introductory fees.’”

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(TAC Tflf 223, 225,228) (emphasis omitted.) The Court does not agree that these

statements demonstrate a claim under Section 25401. First, each ofthese statements

describes qualities ofthe Andesite entities, not TWM. Yet nowhere in the TAC do

Plaintiffs allege they were fraudulently induced into investing their money with the

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Andesite entities, or that any Plaintiffs invested money with Andesite Defendants. In fact,

the TAC solely alleges Andesite Defendants assisted in inducing Plaintiffs to invest their

money with TWMand its entities. (See TAC fflf 36-205,229.) Second, other than general

allegations that “Plaintiffs relied on the information they received from the defendants,”

the TAC does not allege Plaintiffs relied on the above-referenced statements in

connection with an offer or sale of a security.

In addition, the TAC states that Andesite Defendants “reviewed and approved”

TWM’s marketing materials and brochures that “TWM shared with investors” (id. at |

222), “prepared] a series ofbrochures and other documents in order to induce Plaintiffs

and others to invest with TWM” (id. at ^ 229), and “reviewed the fraudulent marketing

materials together [with TWM] and exchanged input with respect to their content.” (Id.

at 1230.) However, these conclusory assumptions appear to stem from Plaintiffs’ factual

allegation that Andesite Defendants and TWM “conducted business out ofthe same exact

office suite.” (Id. at 1219.) Plaintiffs do not offer any factual allegations to support

these conclusory assumptions, which is not sufficient. See Swartz, supra, 476 F.3d at

765. Therefore, this claim is DISMISSED.

2. Control ofParty Making Fraudulent Sale of Securities (§§ 25501.

25504)

The TAC’s Fourth Claim for Relief alleges Ms. Lakosil controlled the Andesite

entities such that she is liable as a control person for their underlying violation. As noted

above, the TAC fails to particularly plead a misrepresentation or omission connected with

the sale or offer of a security by the Andesite entities. Ms. Lakosil cannot be liable as a

control person for an underlying violation that is not sufficiently alleged. This claim is

DISMISSED.

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The TAC’s Sixth and Ninth Claims for Relief assert that Andesite Defendants are

liable under § 25504.1. As stated above, “allegations demonstrating how the defendant

assisted in the act ofselling or offering to sell securities by means offalse and misleading

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statements” are required. AreiII Cases, 216 Cal. App. 4th at 1015. Assuming that the

investments promoted by other defendants qualified as selling or offering to sell

securities by means offalse and misleading statements, this claim still fails as to Andesite

Defendants because there are no specific factual allegations how the Andesite Defendants

assisted in that endeavor. There are only general allegations that they were aware ofthe

fraudulent scheme, or conclusory assumptions that they participated in the review of

TWM’s marketing materials and brochures because they shared office space.

Additionally, as previously noted, having “reason to know the facts constituting the

violation” is not enough for liability under § 25504.1. Id. at 1015. These claims are

DISMISSED.

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The TAC’s Eleventh Claim for ReliefAlleges Andesite Defendants failed to

disclose a material fact. As explained in more detail above, the TAC must allege a

material fact that defendants were obligated to disclose was concealed or suppressed with

the intent to defraud. Marketing West, Inc., supra, 6 Cal. App. 4th at 612-13. Plaintiffs

must also allege that ifthey had been aware ofthe concealed fact they would have acted

differently and they must allege that they have suffered damage as a result ofthe

concealed fact. Id. These allegations must be plead with particularity. Kearns, supra,

567 F.3d at 1124-25. Plaintiffs allege that Ms. Lakosil was part of a group that induced

people to invest by omitting material facts from TWM communications that were

directed to Plaintiffs. However, as set forth above, the TAC only contains conclusory

assumptions that Andesite Defendants’ were involved in the content of TWM’s

communications to Plaintiffs. Plaintiffs have not articulated the material facts which the

Andesite Defendants were obligated to disclose or the Andesite Defendants’ intent. This

claim is DISMISSED.

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1 5. Aiding and Abetting Suppression ofMaterial Fact & Breach of

Fiduciary Duty

Plaintiffs Twelfth and Fourteenth Claims for Relief allege that Andesite

Defendants aided and abetted all defendants because they knew the investments were not

being invested pursuant to an optimization plan. Plaintiffs similarly generally allege that

Andesite Defendants aided TWM, ACOF, and ACPS in breaching their fiduciary duties

to Plaintiffs.

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assisted other defendants in misrepresenting the truth or concealing any information from

the Plaintiffs. As to aiding and abetting breach offiduciary duty, there are no allegations

as to how Andesite Defendants assisted TWM, ACOF, and ACPS in breaching their

fiduciary duties to the Plaintiffs. These claims are DISMISSED.

Whether to Grant Leave to Amend

After a responsive pleading is served, a “court should freely give leave [to amend]

when justice so requires.” Fed. R. Civ. P. 15(a)(2). The policy for granting leave should

“be applied with extreme liberality.” Owens v. Kaiser Found. Health Plan, Inc., 244

F.3d 708, 712 (9th Cir. 2001) (citations omitted). In determining whether to grant leave,

a court considers “the presence of any offour factors: bad faith, undue delay, prejudice to

the opposing party, and/or futility.” Id. In the absence ofthese factors, leave should be

freely given. Hall v. City ofLos Angeles, 697 F.3d 1059, 1072-73 (9th Cir. 2012)

(reversing district court’s denial ofleave for failure to meet and confer).

The Court finds Plaintiffs have not shown good cause to grant leave to file a fourth

amended complaint. In their Opposition, Plaintiffs requested leave to amend stating only

that: “‘there is a reasonable possibility that the defect can be cured by amendment’”

(Docket No. 68 (quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318)), and uifremanded,

they could add facts developed in their analysis and investigation to cure insufficiencies,

if any are found to exist, and to add specificity if any found lacking.” (Docket Nos. 68 at

14; 69 at 21) (emphasis added.)

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First, as stated above, Plaintiffs did not renew their motion for remand or conduct

any jurisdictional discovery that would support a renewed motion for remand. Based on

the supplemental briefing provided by the parties, remand is not appropriate at this time.

Second, Plaintiffs filed their initial complaint on May 16, 2014. (Docket No. 14-1 at 4.)

Since then, Plaintiffs have amended their complaint three times. Plaintiffs’ TAC failed to

address the deficiencies identified by this Court in its March 9, 2016, Order granting

Defendants’ motions to dismiss the SAC. (Docket No. 50.) Third, Plaintiffs did not

identify any new facts that could cure the deficiencies, already identified by this Court, in

a fourth amended complaint. As a result, Plaintiffs have not shown “a reasonable

possibility” that the defects could be cured by an amendment. Blank, 39 Cal.3d at 318.

Fourth, Defendants would be prejudiced ifPlaintiffs were allowed to file a fourth

amended complaint- having prevailed twice on their motions to dismiss and without

Plaintiffs demonstrating the existence ofnew facts to justify amendment oftheir claims.

Therefore, Plaintiffs’ request for leave to amend as to the claims against the

moving Defendants is DENIED.

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16 CONCLUSION

For the reasons set forth above, the Court GRANTS Dionne’s and the Andesite

Defendants’ Motions to Dismiss. The claims against the Andesite Defendants, Dionne

and SoCal Accounting are DISMISSED with prejudice. Plaintiffs’ request to amend

their Complaint as to these Defendants is DENIED.

IT IS SO ORDERED.

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DATED: JanuaryV/^2017 23

HON. 'ROGJERTT. BENI

United States District Judge 24

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