IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 18-40499

DOCTOR DAVID MASEL; DINESH CHANDIRAMANI; NEURON SHIELD, 

L.L.C.; NEURON SHIELD PARTNERS I, L.P.; NEURON SHIELD 2, L.L.C.; 

NEURON SHIELD PARTNERS 2, L.P.; NEURON SHIELD 3, L.L.C.; 

NEURON SHIELD PARTNERS 3, L.P.; NEURON SHIELD 4, L.L.C.; 

NEURON SHIELD PARTNERS 4, L.P.; NEURON SHIELD 7, L.L.C.; 

NEURON SHIELD MONITORING ASSOCIATES, P.L.L.C.; NEURON 

INTEGRITY TEXAS, P.L.L.C.; NEURON INTEGRITY 1, P.L.L.C.; NEURON 

INTEGRITY PARTNERS, L.L.C.; NEURON SHIELD MONITORING 

ASSOCIATES, P.C.; NEURON SHIELD 9, L.L.C., 

 Plaintiffs - Appellants

v.

ADRIANA VILLARREAL; ANTHONY CASAREZ; MEDICAL PRACTICE 

SOLUTIONS, L.L.C.; IOS MANAGEMENT SERVICES, L.L.C.; CGR 

INVESTMENTS, L.L.C., 

 Defendants - Appellees

Appeal from the United States District Court 

for the Eastern District of Texas

Before KING, SMITH, and WILLETT, Circuit Judges.

KING, Circuit Judge:

Adriana Villarreal and Anthony Casarez approached Dr. David Masel 

with a proposal: if you will set up businesses that provide intraoperative

neuromonitoring procedures, we will manage them, and through our signature

United States Court of Appeals

Fifth Circuit

FILED

May 15, 2019

Lyle W. Cayce

Clerk

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2

billing practices, we can make you a substantial profit. It did not work out that 

way; on the $190 million worth of services the entities allegedly provided, 

Villarreal and Casarez collected less than $11 million. Masel and his business 

partner sued, alleging Villarreal and Casarez induced them to join the 

enterprise with material misrepresentations and omissions in violation of the 

Securities Exchange Act of 1934. The district court granted defendants’ motion 

to dismiss, and plaintiffs appealed. For the reasons set forth below, we 

REVERSE and REMAND IN PART and AFFIRM IN PART.

I.

We recount the allegations as they are pleaded in the complaint, taking 

them as true, as we are required to do at the motion-to-dismiss stage. AriasBenn v. State Farm Fire & Cas. Ins. Co., 495 F.3d 228, 230 (5th Cir. 2007).

Intraoperative monitoring (“IOM”) is a method of monitoring a patient’s 

nervous system during surgery. The administration of IOM has a so-called

technical component and a professional component. The technical component 

is usually performed by a certified neurophysiological intraoperative 

monitoring professional (“CNIM”), who operates the IOM machinery. The 

professional component is performed by a licensed physician, who evaluates

the IOM readings produced by the CNIM. 

Plaintiff David Masel is a neurosurgeon with more than 30 years of 

experience in the field. Defendant Adriana Villarreal is the owner of Medical 

Practice Solutions, L.L.C. (“MPS”), a medical services billing company 

specializing in billing for IOM services. Masel and Villarreal met through 

defendant Anthony Casarez, a CNIM Masel had worked with.

In the spring of 2014, during a chance encounter at a hospital, Casarez 

informed Masel that the IOM business was very profitable and proposed a 

meeting between Masel, Casarez, and Villarreal to discuss investment 

opportunities within the industry. Shortly thereafter, Masel, Casarez, and 

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Villarreal met at a bakery in Plano, Texas. There, Villarreal told Masel that 

MPS had superior billing practices and was capable of generating the highest 

payouts for IOM procedures. Villarreal explained that her ability to pinpoint 

how much a given claim will pay within a margin of error of about 10 to 20 

percent gave MPS an advantage in the industry. She said she could achieve 

this feat using a special algorithm—or “secret sauce,” in her words—that she

had developed while working for two large insurance companies. Villarreal told 

Masel that her “secret sauce” enabled her to collect $50,000 or more for each 

out-of-network claim for IOM services. She also represented that the 

reimbursement cycle for such claims was around six months. According to the 

complaint “Ca[s]are[z] agreed with and confirmed the veracity of these 

statements for Dr. Masel, adopting them as his own representations.” In a later 

email, Masel emailed Villarreal to ask what percentage of accounts receivable 

MPS could be expected to recover. Villarreal replied, “I always say 50% but a 

lot of times its [sic] more.” 

Sometime after the Plano meeting, Masel took this proposal to plaintiff 

Dinesh Chandiramani, his business partner. Motivated by Villarreal’s 

representations at the Plano meeting, the two agreed to Villarreal’s proposal.

At this point in the narrative, the experienced reader of securities-law 

cases might expect the plaintiffs to allege that Masel and Chandiramani 

turned over large sums of cash to Villarreal and Casarez, who then squandered 

it all. If only it were that simple. Though the complaint is somewhat vague as 

to precisely how the transaction got off the ground, this much is clear: instead 

of just giving Villarreal and Casarez a check, Masel and Chandiramani (in 

reliance on Villarreal’s pitch) established and invested in a large collection of 

business entities, each founded for the purpose of providing IOM services. 

Masel and Chandiramani then hired Villarreal’s companies to operate these 

entities in exchange for a financial interest in the entities.

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The first of these entities was Neuron Shield, LLC, organized and 

headquartered in Texas. Neuron Shield, LLC contracted with defendant CGR 

Investments, LLC (“CGR”), a Texas company solely owned by Villarreal, to 

grant CGR a 35% non-voting net-profits interest in the company in exchange 

for CGR’s agreement to provide management services for the company.1

According to the complaint, the profits-interest agreement “acknowledged the 

applicability of the Securities Act of 1933.” Though this is not reflected in any 

formal agreement contained in the record, the complaint alleges that CGR’s 

responsibilities included management of all day-to-day operations of Neuron 

Shield, LLC, including marketing the business, retaining and paying 

employees, booking and scheduling IOM services, locating new sources of 

business, and collecting and billing for Neuron Shield’s services. Neuron 

Shield, LLC also contracted with MPS to provide billing services.2

Plaintiffs then formed Neuron Shield Partners I, LP; Neuron Shield 

Partners 2, LP; Neuron Shield Partners 3, LP; and Neuron Shield Partners 4, 

LP. Each of these LPs designated one of the Neuron Shield LLCs3 as the 

general partner. Limited partners were divided into two classes: Class A and 

Class B. In each agreement, CGR was a Class B limited partner. The 

agreements limit Class A partners to physicians and Class B partners to nonphysicians. They provide that Class A partners shall have no more than 40% 

 

1 The only document in the record related to Neuron Shield, LLC, is the first page of 

the profits-interest agreement discussed above. Neither the complaint nor any exhibit in the 

record further elaborates on the structure of Neuron Shield, LLC, or the parties’ formal 

powers within that company.

2 The complaint alleges that both CGR and MPS managed billing for IOM services. 

The complaint is not clear as to how labor was divided between the two companies with 

respect to billing.

3 Each numbered Neuron Shield Partners, LP lists the corresponding numbered 

Neuron Shield, LLC as the general partner. So, for example, Neuron Shield Partners 2, LP, 

lists Neuron Shield 2, LLC, as the general partner. For ease of reading, we refer to Neuron 

Shield, LLC as the general partner for each agreement.

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aggregate ownership in the partnership, but the provision explaining how a 

party’s percentage interest in the partnership is determined is not in the 

record. However, the complaint alleges that plaintiffs sold CGR a 35% interest 

in each of the plaintiff entities “other than Neuron Shield[,] LLC.”4 Each 

agreement prohibited the general partner (Neuron Shield, LLC) from making 

certain enumerated major decisions (such as receiving a capital contribution 

or dissolving the partnership) without obtaining approval of each partner with 

an interest equal to or greater than 20% of the partnership, which would 

include CGR as a 35% interest-holder. According to the complaint, the Limited

Partnership agreements each also “acknowledged the applicability of the 

Securities Act of 1933.” CGR’s interests in Neuron Shield Partners I, 2, and 4 

were later transferred to defendant IOS Management Services, LLC (“IOS”), 

of which Villarreal is a principal member. Plaintiffs also allege that they 

agreed to pay an 8% fee to MPS on all collections, regardless of whether they

made a profit, although it is unclear what agreement this arrangement was 

based on or whether this arrangement applied to each entity concerned in this 

case.

Plaintiffs also formed several other entities. Neither the complaint nor 

the exhibits provide any clarification as to how these entities were structured 

or what formal powers the parties had in them. These other entities were: 

Neuron Shield 2, LLC; Neuron Shield 3, LLC; Neuron Shield 4, LLC; Neuron 

Shield 7, LLC; Neuron Shield 9, LLC; Neuron Shield Monitoring Associates,

PLLC; Neuron Integrity Texas, PLLC; Neuron Integrity 1, PLLC; Neuron 

 

4 It is uncertain how plaintiffs reconcile this statement with the Neuron Shield, LLC 

profits-interest agreement discussed above. We understand plaintiffs to allege that CGR 

received a 35% voting interest in each of the non-LLC entities. 

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Integrity Partners, LLC; and Neuron Shield Monitoring Associates, PC. Each 

entity is a plaintiff in this action.5

The complaint also contains scant information regarding the scope and 

degree of plaintiffs’ involvement in the Neuron Shield Enterprise. As discussed 

above, CGR, and in certain cases IOS, handled the day-to-day operations of the 

entities. It is clear that Masel was not entirely removed from the Neuron Shield 

Enterprise’s operations, however. The complaint alleges that Masel’s

“established relationships with neurosurgeons and referral sources in the 

neurosurgical industry were critical to Neuron Shield’s growth” and that these 

relationships “gave him an edge over other providers when competing to offer 

IOM services to these doctors.” Masel’s participation “paid off. In two and [a]

half years since it was established, Neuron Shield provided over $190 Million 

in IOM services.” 

The Neuron Shield Enterprise’s revenues ultimately fell far short of 

what Villarreal had promised. Of the $190 million the Neuron Shield 

Enterprise billed for IOM services, MPS collected just $11 million. MPS was 

unable to collect anything on half of the claims it submitted, and it collected 

less than one percent of the value on three-quarters. Based on this outcome, 

plaintiffs allege that no “secret sauce” algorithm existed. The reimbursement 

cycle also lasted significantly longer than Villarreal had represented. Instead 

of a six-month cycle, the complaint alleges that Villarreal later stated, “in 

sworn courtroom testimony” given during a parallel proceeding, that the cycle 

takes “anywhere from 12 to 18 months.” It also turned out, unbeknown to 

plaintiffs, that defendants had many other clients who provided IOM services.

 

5 For ease of reading, we refer to the entire arrangement between the parties to this 

case as the “Neuron Shield Enterprise.” We refer to each of the entity plaintiffs (e.g., Neuron 

Shield, LLC, Neuron Integrity Texas, PLLC, and Neuron Shield, PC) as the “Neuron Shield 

entities.”

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In a “recent court hearing,” Villarreal testified that MPS provided billing 

services to “109 or 110” IOM providers. This is contrary to what Villarreal had 

told Masel previously: when asked if she had any other clients, Villarreal told 

Masel that she worked with only one other “small” IOM provider. 

According to the complaint, defendants actively stole business from 

Neuron Shield entities for the benefit of their other clients. As an example, 

plaintiffs cite to an instance where a physician had been in discussions with 

Neuron Shield to use its IOM services but did not ultimately sign on. Sometime 

thereafter, the physician contacted Masel to ask him why, following a 

procedure performed by a CNIM wearing a Neuron Shield uniform, the bill for 

the procedure was sent to “an unknown and undisclosed entity.” When Masel 

confronted Casarez about this development, Casarez admitted to Masel that 

he had redirected the physician from Neuron Shield to a competing business. 

When plaintiffs thereafter raised their concerns regarding defendants’ 

conflicts of interest to Villarreal, she refused to proceed with any collections for 

the Neuron Shield entities “unless Neuron Shield signed over a vested interest 

in the uncollected accounts receivable to MPS and agreed to a one-sided 

confidentiality agreement.” When plaintiffs refused, defendants terminated 

their contracts with all Neuron Shield entities. 

Plaintiffs sued defendants in federal district court. They sought relief 

under the Securities Exchange Act of 1934, the Texas Securities Act, Texas 

common law, the Racketeer Influenced and Corrupt Organizations Act 

(“RICO”), and the Texas Theft Liability Act. With respect to their securitiesfraud claims, plaintiffs cited several misrepresentations and omissions. The 

precise statements alleged are set forth in the discussion below. Broadly 

speaking, plaintiffs alleged that defendants (1) misrepresented that a “secret 

sauce” algorithm existed, when in fact it did not; (2) misrepresented how much 

MPS was capable of collecting with this supposed algorithm and how soon 

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collections could be expected; and (3) made material omissions by failing to 

disclose their intention to set up competing businesses. 

The district court dismissed each of these claims for failure to state a 

claim under Federal Rule of Civil Procedure 12(b)(6). With respect to plaintiffs’ 

securities-fraud claims, the court found that plaintiffs failed to plead several 

of the alleged misrepresentations or omissions with sufficient particularity, 

that other statements were inactionable as either puffery or future predictions, 

and in all other cases plaintiffs had failed to adequately plead that defendants 

acted with scienter in making the alleged misrepresentations or omissions. The 

court proceeded directly to the merits of plaintiffs’ claims and did not consider 

the threshold question (raised by the defendants) whether plaintiffs had 

adequately pleaded the existence of a security. The district court also dismissed 

plaintiffs’ RICO claims on the merits and declined to exercise supplemental 

jurisdiction over the state-law claims. Plaintiffs appeal, arguing the district 

court erred in dismissing their securities-fraud claims.6

II.

A.

We review a district court’s grant of a motion to dismiss de novo, applying 

the same standard applied by the district court. Boyd v. Driver, 579 F.3d 513, 

515 (5th Cir. 2009). To survive a motion to dismiss, “a complaint must contain 

sufficient factual matter, accepted as true, to ‘state a claim to relief that is 

plausible on its face.’” Waller v. Hanlon, No. 18-10561, 2019 WL 1783558, at 

*4 (5th Cir. Apr. 24, 2019) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). 

In conducting this analysis, we accept as true any well-pleaded factual 

allegations, but we do not accept as true legal conclusions or “‘naked 

 

6 Plaintiffs do not press their remaining claims on appeal and we therefore do not 

consider them. 

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assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal, 556 U.S. at 678 

(alteration in original) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 

(2007)).

B.

Before proceeding to the merits of plaintiffs’ securities-fraud claims, we 

must first address the threshold question—not considered by the district 

court—whether plaintiffs have successfully pleaded the existence of a security. 

Plaintiffs seek relief under § 10(b) of the Securities Exchange Act of 1934 (the 

“1934 Act”). 15 U.S.C. § 78j(b). To successfully state a private cause of action 

under § 10(b), a plaintiff must plead “(1) a material misrepresentation or 

omission by the defendant; (2) scienter; (3) a connection between the 

misrepresentation or omission and the purchase or sale of a security; (4) 

reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss 

causation.” Affco Invs. 2001, L.L.C. v. Proskauer Rose, L.L.P., 625 F.3d 185, 

192 (5th Cir. 2010) (quoting Stoneridge Inv. Partners, LLC v. Sci.–Atlanta, Inc., 

552 U.S. 148, 157 (2008)). The third factor in this test—a connection between 

the misrepresentation or omission and the purchase or sale of a security—

requires the existence of a security. The 1934 Act defines “security” broadly to 

include, among other things, an “investment contract.” 15 U.S.C. § 78c(a)(10).

The Supreme Court has in turn interpreted “investment contract” to mean “a 

contract, transaction or scheme whereby a person invests his money in a 

common enterprise and is led to expect profits solely from the efforts of the

promoter or a third party.” SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 

(1946).7 We have gleaned from this statement a three-factor test, requiring 

plaintiffs to show “(1) an investment of money; (2) in a common enterprise; and 

 

7 Although Howey interpreted the Securities Act of 1933, we have extended its 

reasoning to cases such as this that concern the definition of “security” under the 1934 Act. 

See Affco, 625 F.3d at 190.

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(3) on an expectation of profits to be derived solely from the efforts of 

individuals other than the investor.” Williamson v. Tucker, 645 F.2d 404, 417 

(5th Cir. May 1981). In conducting this analysis, “form should be disregarded 

for substance and the emphasis should be on economic reality.” United Hous.

Found., Inc. v. Forman, 421 U.S. 837, 848 (1975) (quoting Tcherepnin v. 

Knight, 389 U.S. 332, 336 (1967)). Accordingly, the label given by parties to a 

certain transaction will not be determinative of whether the parties have 

engaged in the purchase or sale of a security. See Williamson, 645 F.2d at 423 

(“A scheme which sells investments to inexperienced and unknowledgeable 

members of the general public cannot escape the reach of the securities laws 

merely by labelling itself a general partnership or joint venture.”). 

The only Howey factor disputed in this case is the third one: whether 

investors have been “led to expect profits solely from the efforts of the promoter 

or a third party.” Howey, 328 U.S. at 299. In applying this third factor, we have 

not understood the Supreme Court to use the word “solely” in its literal sense. 

Williamson, 645 F.2d at 418. Instead, the question is “whether the efforts made 

by those other than the investor are the undeniably significant ones, those 

essential managerial efforts which affect the failure or success of the 

enterprise.” Affco, 625 F.3d at 190 (quoting SEC v. Koscot Interplanetary, Inc., 

497 F.2d 473, 483 (5th Cir. 1974)). 

Interests in a general partnership typically do not meet Howey’s third 

prong. Youmans v. Simon, 791 F.2d 341, 346 (5th Cir. 1986). The interest of a 

limited partner, by contrast, “is analogous to that of a stockholder in a 

corporation,” and thus limited partnership interests typically are securities 

under Howey’s third prong. Id. Nonetheless, even a limited partnership

interest may not be a security when limited partners are given such 

managerial control that it can no longer be said that the limited partners are 

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dependent on the entrepreneurial skills of the promoter or a third party. See 

Frazier v. Manson, 651 F.2d 1078, 1080 (5th Cir. Unit A July 1981).

The unusual facts of this case make this analysis particularly vexing.

Typically, Williamson cases (and securities-fraud cases generally) involve the 

investment of money by a plaintiff either directly with the defendant or in an 

entity controlled by the defendant. Here, by contrast, plaintiffs’ investment 

went into entities they themselves set up. Although defendants exercised dayto-day managerial control of each of those entities, it was plaintiffs who held 

controlling interests. Plaintiffs also marketed the entities to potential 

customers using Masel’s professional connections. Nonetheless, it is 

undeniable that the inducement for setting up these entities was the profit that 

might be generated through the collection of payments—profits only made 

possible by Villarreal’s promised “secret sauce.”

Further complicating matters is the fact that plaintiffs do not make clear 

precisely what it was in this case that they bought or sold that amounted to a 

security—i.e., which agreement in this case constituted an investment 

contract. By our lights, plaintiffs attempt to argue that defendants’ interests 

in the Neuron Shield entities were securities and that the agreement conveying 

those interests to defendants was a sale of securities (in relation to which 

defendants made fraudulent representations). In this scenario, somewhat 

idiosyncratically, plaintiffs are the promoters, and defendants are the 

investors.

We note also that the structure of our analysis may appear highly

counterintuitive at first blush; because plaintiffs were the promoters of the 

Neuron Shield entities, the question is whether defendants exercised sufficient 

managerial control such that the third Howey factor was satisfied. Thus, 

plaintiffs’ case depends on their demonstrating that defendants were passive 

investors. This is unlike the typical case, wherein defendants claim plaintiffs

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exercised such control that their interests were not securities. Unusual as this 

mode of analysis may be, nothing about it runs contrary to federal securities 

law. The 1934 Act prohibits fraud “in connection with the purchase or sale” of 

a security. 15 U.S.C. § 78j(b). Accordingly, so long as the fraud alleged is 

connected with the purchase or sale of a security, it is within the bounds of the 

1934 Act, and a 10(b) suit may proceed, regardless of which side of the caption

an investor or promoter falls on in a given case. See Chadbourne & Parke LLP 

v. Troice, 571 U.S. 377, 387 (2014) (“A fraudulent misrepresentation or 

omission is not made ‘in connection with’ such a ‘purchase or sale of a covered 

security’ unless it is material to a decision by one or more individuals (other 

than the fraudster) to buy or to sell a ‘covered security.’”).

In all, plaintiffs allege that they set up 15 entities, including LLCs, LPs, 

PLLCs, and a PC. Defendants only argue on appeal that plaintiffs have failed 

to allege that the limited partnership interests were securities; they do not 

discuss the LLCs, PLLCs, or the PC. As discussed, the complaint and record 

tell us little about any of these entities: neither explains what each entity did, 

why each additional entity was set up, or what powers the parties had within 

them. Nonetheless, we will evaluate the limited partnerships based on the 

documents provided and the facts alleged.

Each of the Neuron Shield LPs is structured in roughly the same 

manner. Neuron Shield, LLC served as the general partner, and CGR and 

others served as the limited partners. Limited partners were divided into Class 

A and B partners, with CGR listed as a Class B partner in each agreement.

The agreements, together with the complaint, tell us that (1) Class A partners 

could not possess more than 40% of aggregate ownership of the partnership;

(2) Neuron Shield, LLC could not make major decisions without the approval 

of each partner holding an interest of 20% or greater in the partnership; and 

(3) CGR held a 35% interest in each partnership. 

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Defendants argue that they had too much control of the LPs for their 

interests in them to be securities. For support, defendants cite the district court 

opinion in Frazier v. Manson, 484 F. Supp. 449 (N.D. Tex. 1980), aff’d, 651 F.2d 

1078, as well as this court’s brief affirming opinion in that case. Defendants 

cite Frazier for the proposition that where a party maintains managerial rights

in an investment, the investment is not a security, even where that investment 

takes the form of a limited partnership. Thus, defendants argue, their 

extensive participation in the day-to-day work of the LPs negates the 

possibility that a security existed in this case.

This misunderstands Frazier’s characterization of “managerial rights.” 

In Frazier, the plaintiff’s involvement was not merely that of a limited partner 

in the relevant enterprise. See 484 F. Supp. at 450-51. Manson-Frazier 

Companies was the general partner in the underlying limited partnerships. 

Manson-Frazier Companies, in turn, was a general partnership in which the 

plaintiff served as a general partner. Id. In granting defendants’ motion for 

summary judgment on the grounds that plaintiff had failed to prove the 

existence of a security, the district court found it could not “segregate Frazier’s 

limited partnership interests from his status as a partner in [Manson-Frazier 

Companies].” Id. at 452. It was this status that gave him the “managerial 

rights” to “participate actively in the daily business operations of both 

[Manson-Frazier Companies] and the limited partnerships,” id., and it was on 

this basis that we affirmed. Frazier, 651 F.2d at 1080 (“The District Court 

properly concluded that Frazier’s managerial rights negated the possibility 

that his limited partnership interests were securities. An investor does not 

always need the extensive protection of the federal securities laws when he or 

she has partial control of an enterprise.” (citation omitted)).

Here, by contrast, defendants have not entered into a general 

partnership agreement with plaintiffs. Instead, CGR’s (or IOS’s) involvement 

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in the relevant entities is solely as a limited partner. At this stage, not enough 

is known about defendants’ formal powers under the limited partnership 

agreements to say whether their powers were akin to those of a general 

partner. True, defendants did in fact take on significant day-to-day 

responsibilities within these LPs, but defendants took this control pursuant to 

what was essentially a service agreement subservient to the plaintiffs’ formal 

powers under the limited-partnership agreements. As a factual matter, no

agreement is provided or alleged that grants them any ultimate power to 

control those entities. As a legal matter, defendants cite to no case where the 

conduct of investors, without any formal power to engage in that conduct, has 

sufficed to overcome the presumption that limited partnerships are securities. 

More by way of formal powers is needed to do so. Cf. Steinhardt Grp. Inc. v. 

Citicorp, 126 F.3d 144, 153-54 (3d Cir. 1997) (finding limited partnership

interest was not a security where limited partner retained powers “far afield 

of the typical limited partnership agreement,” including power to remove 

general partner without notice, propose and approve new business plan, and 

veto the general partner’s business plan). Here, the record only establishes 

that defendants had the power to block certain enumerated business decisions, 

including receiving capital contributions, admitting a new partner, and 

dissolving the partnership. We will not expand the law to say that such veto

powers, standing alone, suffice to negate the existence of an investment 

contract when it comes to limited partnership interests.

We therefore conclude that the limited partnership interests in this case 

were securities. Defendants do not argue on appeal that the interests in the 

other Neuron Shield entities were not securities, and we therefore will not 

analyze those entities under Howey. Moreover, nothing in the record

undermines the conclusion that the entities discussed were securities for the 

same reasons stated above. There is no pleading, for example, suggesting that 

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defendants had legal powers under any of the LLC entities that either matched 

or went beyond their powers under the LPs. We acknowledge the possibility 

that, during the course of discovery, new facts may emerge that cast doubt on 

this conclusion. We are limited at this stage, however, to the complaint and 

documents attached as exhibits. On the basis of those sources alone, we cannot 

say plaintiffs have failed to plead the existence of a security.

C.

i.

Having determined that plaintiffs have adequately pleaded the existence 

of a security, we proceed to the merits of plaintiffs’ securities-fraud claims. As 

discussed, the Securities Exchange Act of 1934 makes it unlawful “[t]o use or 

employ, in connection with the purchase or sale of any security . . . any 

manipulative or deceptive device or contrivance in contravention of such rules 

and regulations as the [SEC] may prescribe as necessary or appropriate in the 

public interest or for the protection of investors.” 15 U.S.C. § 78j(b). The SEC 

has interpreted this provision to prohibit the making of “any untrue statement 

of a material fact or [omission of] a material fact necessary in order to make 

the statements made, in the light of the circumstances under which they were 

made, not misleading” in connection with the sale of a security. 17 C.F.R. § 

240.10b-5(b). Courts have read the above statute and regulation to imply the 

existence of a private cause of action, requiring proof of six elements: “(1) [a]

misstatement or omission (2) of material fact (3) in connection with the 

purchase or sale of a security, which was made (4) with scienter, and upon 

which (5) plaintiff justifiably relied, (6) proximately causing injury to the 

plaintiff.” Rosenzweig v. Azurix Corp., 332 F.3d 854, 865 (5th Cir. 2003). 

The Private Securities Litigation Reform Act (“PSLRA”) requires 

plaintiffs in 10b-5 actions to satisfy a pleading requirement higher than the 

ordinary Rule 12(b)(6) standard. For the first element of the cause of action—

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a misstatement or omission—plaintiffs must “specify each statement alleged 

to have been misleading, the reason or reasons why the statement is 

misleading, and, if an allegation regarding the statement or omission is made 

on information and belief, the complaint shall state with particularity all facts 

on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). This pleading standard 

requires plaintiffs to set forth the who (the speaker), the what (the statements 

alleged to have been misleading, as well as their content), the when (when the 

statement was made), the where (where the statement was made), and the why 

(what the defendant obtained by making the statement, and why it was 

misleading). See Rosenzweig, 332 F.3d at 866. Failure to plead any of these 

facts with particularity warrants dismissal of the case. See id. On the fourth 

element—that the statements or omissions were made with scienter—plaintiff 

must plead “with particularity facts giving rise to a strong inference that the 

defendant acted with” scienter. § 78u-4(b)(2)(A). In 10b-5 actions, “scienter”

ranges from intentional deception to severe recklessness, the latter being 

defined as “an extreme departure from the standards of ordinary care, 

[presenting] a danger of misleading buyers or sellers which is either known to 

the defendant or is so obvious that the defendant must have been aware of it.”

Rosenzweig, 332 F.3d at 866 (quoting Nathenson v. Zonagen Inc., 267 F.3d 400, 

408 (5th Cir. 2001)). 

Plaintiffs alleged both misrepresentations and omissions as part of their 

case under 10b-5. The misrepresentations are as follows: 

(1) Villarreal’s representation to Masel that MPS was “superior at 

billing IOM procedures and could generate the highest payouts.” 

(“Statement 1”).

(2) Villarreal’s representation that she developed a “secret sauce” 

while working at other insurance companies that allowed her to 

“pinpoint how much any given claim will pay within a 10 to 20 

percent margin of error.” (“Statement 2”).

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(3) Villarreal’s representation that she could generate “$50,000 or 

more for each out-of-network IOM claim,” and that she “could 

generate $20,000 in additional revenue for the technical

component of monitoring, and that she typically got much more, 

up to $50,000 for the professional component.” (“Statement 3”).

(4) Villarreal’s representation that “the reimbursement cycle for 

out-of-network claims is around six months.” (“Statement 4”).

(5) When Masel inquired about the percentage of accounts 

receivable that MPS could be expected to recover on a given claim, 

Villarreal responded “I always say 50% but a lot of times its more.”

(“Statement 5”).

(6) Villarreal’s repeating of Statement 4 at a later date. 

(“Statement 6”).

(7) Villarreal’s statement that MPS’s “average out of network 

claim will reimburse around 50-75k.” (“Statement 7”).

Plaintiffs also allege the following omissions:

(1) Defendants’ failure to disclose their investments in other IOM 

providers. (“Omission 1”).

(2) Defendants’ failure to disclose their intent to set up other IOM 

businesses to compete with Neuron Shield. (“Omission 2”).

(3) Defendants’ failure to disclose that plaintiffs would not receive 

compensation for most IOM cases. (“Omission 3”).

Plaintiffs allege that Casarez adopted as his own Statements 1–4 above and is 

therefore liable for them as well. They also allege that MPS, CGR, and IOS are 

liable for each of these misrepresentations because Villarreal and Casarez 

made them while acting as their agents. For the reasons set forth below, we 

conclude that Statements 1, 6, and 7, as well as all three omissions, were 

properly dismissed. But we conclude that plaintiffs adequately stated a 10b-5 

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claim with regard to Villarreal and the defendant entities for Statements 2–5. 

However, we also conclude that plaintiffs’ case against Casarez fails with 

regard to these statements.

ii.

We address first the statements and omissions properly dismissed by the 

district court, each in turn. The district court dismissed Statement 1—that 

MPS had superior billing procedures and was capable of generating the highest 

payouts—because it found the statement to be inactionable puffery. See Emps.’

Ret. Sys. v. Whole Foods Mkt., Inc., 905 F.3d 892, 901 (5th Cir. 2018) (“[A] 

company’s ‘generalized, positive statements’ are immaterial because they do 

not alter a reasonable investor’s assessment of the company’s prospects.”) We 

express no opinion as to whether such a statement constitutes puffery because 

we believe there is a sounder basis for affirmance. Whether or not reasonable 

investors would rely on such statements, there is no allegation in plaintiffs’ 

complaint that the statements were false when made, i.e., that MPS’s billing 

procedures were not in fact superior and that they were not capable of 

generating the “highest payouts.” This factual scenario is akin to one addressed 

by this court in Whole Foods. In that case, plaintiffs alleged that Whole Foods 

had made an actionable misrepresentation when it stated that its prices were 

“competitive.” Id. at 901. While acknowledging that the complaint may have 

established that Whole Foods’ prices were not “as competitive as advertised,” 

we concluded that “it need not follow that they were not competitive.” Id. 

Similarly here, although the payouts generated by MPS fell short of what 

Villarreal represented, this does not mean that these payouts were not “the 

highest” or that the billing procedures were not “superior.” Thus, the district 

court properly dismissed Statement 1 as inactionable because of plaintiffs’ 

failure to allege with particularity that such statements were false when made.

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Statements 6 and 7 also fail under the heightened pleading standard 

imposed by the PSLRA. As the district court recognized, the complaint “fail[ed] 

to specify the place Villarreal allegedly made such statements.” Plaintiffs 

maintain on appeal that these statements were “obvious[ly]” made in 

correspondence because of their inclusion of misspelled words, quotation 

marks, and brackets. First, we express doubt as to whether the existence of 

typos, quotation marks, and brackets in a court filing indicates that the filing 

is quoting from correspondence. Second, and more to the point, we are aware 

of no case supporting the claim that the PSLRA’s heightened standard can be 

satisfied where the context in which a statement is made has been implied by 

spelling and punctuation. The statute requires such matters to be set forth 

“with particularity,” and we insist on nothing less.

In the alternative, plaintiffs request that this court reverse the judgment 

of the district court with instructions to grant them leave to amend so that they 

can specify that Statements 6 and 7 were made in written correspondence. 

Generally, leave to amend should be “freely give[n] . . . when justice so 

requires.” Fed. R. Civ. P. 15(a)(2). But for leave to be given, it must be 

requested. Here, plaintiffs failed to request leave to amend at any point 

following the filing of their first amended complaint. Our rule that arguments 

not raised below are waived on appeal applies with equal force to requests for 

leave to amend. See Cent. Sw. Tex. Dev., L.L.C. v. JPMorgan Chase Bank, Nat’l 

Ass’n, 780 F.3d 296, 300 (5th Cir. 2015) (treating as waived argument not 

raised before the district court); Ransom v. Nat’l City Mortg. Co., 595 F. App’x 

304, 306 (5th Cir. 2014) (unpublished) (finding plaintiffs could not seek leave 

to amend on appeal when they had failed to do so in the district court). And a

party’s obligation to seek leave to amend from the district court first is not 

discharged, as plaintiffs seem to imply, when the party requests “any 

alternative relief.” A holding to the contrary would render our waiver rules 

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meaningless. See F.D.I.C. v. Mijalis, 15 F.3d 1314, 1327 (5th Cir. 1994) (“[I]f a 

litigant desires to preserve an argument for appeal, the litigant must press and 

not merely intimate the argument during the proceedings before the district 

court. If an argument is not raised to such a degree that the district court has 

an opportunity to rule on it, we will not address it on appeal.”).

Turning to the omissions, we conclude that none states a claim under 

10b-5 and the PSLRA. Omissions 2 and 3 (failure to disclose an intent to set 

up competing businesses and that plaintiffs would not receive compensation 

on most claims) fail under the PSLRA’s particularity requirement. To plead an 

omission with sufficient particularity, plaintiff must specifically plead when a 

given disclosure should have been made. Carroll v. Fort James Corp., 470 F.3d 

1171, 1174 (5th Cir. 2006). Here, plaintiffs contend on appeal that defendants 

should have made these disclosures at the initial meeting between Masel and 

defendants. However, plaintiffs do not point us to anywhere in the complaint 

where this is alleged, and we are unable to discern therein any specific 

allegations to this effect. Accordingly, plaintiffs failed to plead with sufficient 

particularity the existence of a fraudulent omission on the part of defendants

for Omissions 2 and 3.

As for Omission 1—defendants’ failure to disclose conflicts of interest—

we will assume, as the district court did, that defendants should have disclosed 

their alleged conflict of interest when Masel asked Villarreal if she had any 

other clients. Even granting plaintiffs that fact, the complaint does not 

plausibly allege that this conflict existed when the disclosure should have been 

made. The only support plaintiffs offer for their claim that defendants operated 

under a conflict of interest is Villarreal’s testimony in a recent proceeding that 

she had over 100 IOM clients. Nowhere in the complaint is it alleged that 

Villarreal had over 100 clients at the time Masel inquired about her other 

business. Thus, plaintiffs’ fraudulent omission claims were properly dismissed.

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iii.

Statements 2 through 5, however, were adequately pleaded and should 

not have been dismissed. Broadly characterized, each representation relates to 

MPS’s capabilities to pinpoint how much it will collect on a given claim and 

how long MPS would take to collect. Statements 2 and 4 were Villarreal’s

representations that she had developed a “secret sauce” to pinpoint how much 

a given statement would pay within a 10–20% margin of error and that the 

reimbursement cycle for out-of-network claims was six months, respectively. 

The district court dismissed both because the complaint lacked “any 

allegations demonstrating that such statements were false when they were 

made.” We disagree.

Beginning with Statement 2, plaintiffs alleged that no “secret sauce” 

existed at the time of Villarreal’s alleged representations. They supported this 

claim by pointing to the fact that MPS was ultimately unable to collect on the 

overwhelming majority of claims it billed. Defendants contend that plaintiffs 

are attempting to prove fraud by hindsight by pointing to later events in order 

to shed light on the truth or falsehood of earlier statements. However, evidence 

of later events can provide useful circumstantial evidence that a given 

representation was false when made. See Lormand v. US Unwired, Inc., 565 

F.3d 228, 254 (5th Cir. 2009) (concluding scienter was adequately alleged, even 

when allegation was partially based on later admissions by defendants, 

because the admissions “directly and cogently tend to prove their state-ofmind at the time of their misleading statements and omissions, i.e., they are 

evidence that the defendants actually knew earlier that the course of action 

would turn out badly”). Moreover, as the foregoing parenthetical indicates, 

fraud-by-hindsight issues arise in the context of the scienter factor, not the 

misrepresentation factor. Id. (“This is not the classic fraud by hindsight case 

where a plaintiff alleges that the fact that something turned out badly must 

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mean defendant knew earlier that it would turn out badly.”) (quoting Miss. 

Pub. Emps.’ Ret. Sys. v. Bos. Sci. Corp., 523 F.3d 75, 91 (1st Cir. 2008)

(emphasis added)).

Where, as here, the representation in question concerned an asset or 

skill possessed by the defendant (here, an algorithm), the defendant’s failure 

to perform as promised casts doubt on whether he possessed that skill in the 

first place. Plaintiffs draw a helpful analogy: suppose a pianist represents that 

he is well-trained and commits to perform Gershwin’s Rhapsody in Blue at a 

concert some time in the future. If he later arrives unable to play even

Chopsticks, it becomes highly unlikely that he was a talented piano player to 

begin with. Here, Villarreal claimed to possess an algorithm that enabled her 

to pinpoint the payout for a given procedure within a 10–20% margin of error.

The complaint alleges that MPS collected nothing on more than half of all 

claims and less than 1% on 75% of all claims. Taking these allegations as true,

they allow for the plausible inference that either (1) Villarreal had no 

algorithm and therefore misrepresented her capabilities when she pitched her 

investment to Masel, or (2) Villarreal had an algorithm and some intervening 

event prevented her algorithm from functioning as described. Since no 

intervening event is alleged, the former scenario is the more plausible of the 

two. Plaintiffs have therefore adequately pleaded a misrepresentation with 

respect to Statement 2. 

The same reasoning applies to Statement 4. Villarreal’s assertion that 

claims would be reimbursed within six months was directly contradicted by 

her later sworn testimony in another proceeding that reimbursement took 12 

to 18 months. There is no allegation that some intervening event made the 

reimbursement cycle substantially longer. Perhaps discovery may help explain

this alleged inconsistency, but we may not probe such depths at this early 

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stage. Accordingly, plaintiffs adequately alleged a misrepresentation for 

Statements 2 and 4.

We turn next to Statements 3 and 5. These both concern the profits MPS 

could generate. The district court dismissed both of these, finding they 

constituted nonactionable future predictions. The district court is correct that

“projections of future performance not worded as guarantees are generally not 

actionable under the federal securities laws.” Shushany v. Allwaste, Inc., 992 

F.2d 517, 524 (5th Cir. 1993) (quoting Krim v. BancTexas Grp., Inc., 929 F.2d 

1435, 1446 (5th Cir. 1993)).8 However, we do not read Statements 3 and 5 as 

projections of future performance. Rather, they relate to the present 

capabilities of the MPS algorithm. To understand this contrast, consider an 

alternative scenario in which Villarreal stated that plaintiffs could expect 

profits of $50,000, without referencing the algorithm. In that case, the 

statement would be predictive in nature. Here, by contrast, Villarreal is alleged 

to have stated that “she had the ability to generate $50,000,” and that she

typically collects 50% or more of accounts receivable. The latter statement

concerns how the algorithm had previously performed. The former statement 

concerns how the algorithm could perform at the time the statement was made.

Because, as discussed, the failure of Villarreal to come close to generating the 

profits represented casts doubt on the veracity of her statements as to the 

algorithm’s existence, it is plausible her statements as to how well the 

supposed algorithm could perform are false as well. Accordingly, we find that 

Statements 3 and 5 also satisfied the first element of a 10b-5 claim.

The district court concluded in the alternative that, even if Statements 

2 through 5 were misrepresentations, plaintiffs had not adequately pleaded

 

8 We do not understand defendants to seek the safe-harbor provision of the PSLRA for 

forward-looking statements in making this argument. See 15 U.S.C. § 78u-5. 

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that defendants possessed the required scienter in making them. As discussed, 

the PSLRA requires plaintiffs to allege with particularity facts giving rise to a 

“strong inference” of scienter. 15 U.S.C. § 78u-4(b)(2)(A). In this context, 

scienter means, at a minimum, severe recklessness. See Lormand, 565 F.3d at

251. The PSLRA’s requirement of a “strong inference” does not require an 

“irrefutable” inference “or even the most plausible of competing inferences.” Id.

(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)). 

Rather, the inference of scienter must be “cogent and at least as compelling as 

any opposing inference of nonfraudulent intent.” Id. at 252 (quoting Tellabs, 

551 U.S. at 314). This inference may be made using not only direct evidence 

but circumstantial evidence as well. Id. at 251.

In their complaint, plaintiffs alleged that defendants knew such 

representations were false because they were based on metrics and 

information in their control. The district court deemed these allegations to be 

conclusory and determined that they did not give rise to a strong inference of 

scienter. For support, the district court cited Indiana Electrical Workers’ 

Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527 (5th Cir. 2008). 

There, we stated that “‘general allegations and conclusory statements, such as 

stating [defendants] knew . . . adverse material’ do not contribute to a strong 

inference of scienter.” Id. at 538-39 (alteration and omission in original) 

(quoting Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 289-90 (5th 

Cir. 2006)). Shaw is distinguishable. In the quoted portion of Shaw, this court 

confronted the question whether the CEO and CFO of a corporation were

aware at the time they made certain representations about the corporation’s 

financial performance that the corporation’s accounting software “was not 

functional.” Id. at 538. Plaintiffs supported their scienter claim with 

allegations that a letter was sent to certain senior officials in the corporation 

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detailing the problems with the software, but no specific allegations suggesting 

the CEO and CFO were themselves made aware of such issues. Id. at 538-39. 

Here, by contrast, plaintiffs allege that Villarreal knew her algorithm 

could not generate the expected returns because her representations on this 

subject were based on metrics and information within her own control. That 

Villarreal would possess such information is plausible: returning to the pianist 

analogy discussed above, if it is plausible that a self-purported pianist 

misrepresented his ability to play piano, it is similarly likely that he knew he 

lacked such capability. This does not amount, as defendants contend, to an 

allegation that defendants “must have known” that their statements were 

false, or an allegation of scienter based solely on defendant’s position. Rather, 

plaintiffs’ scienter allegations proceed from the premise, plausible on its face, 

that because Villarreal had developed this algorithm and used it previously, 

she knew how and whether it would work. Since plaintiffs have plausibly 

alleged that this algorithm did not exist, they have similarly alleged that 

Villarreal was aware of this fact. Indeed, the competing inference—that 

Villarreal mistakenly, but honestly, believed she had developed and 

successfully employed an algorithm to precisely predict how much an IOM 

claim would pay out—seems unlikely. The same goes for Villarreal’s 

representation that the reimbursement cycle took about six months: this too 

was purportedly based on information gleaned from her work billing for 

medical procedures. Defendants do not contest whether Villarreal’s 

misrepresentations are attributable to MPS, CGR, and IOS, and we therefore 

do not consider the issue. Based on the foregoing, we conclude that plaintiffs 

have successfully pleaded a case for securities fraud against Villarreal, MPS, 

CGR, and IOS with respect to Statements 2 through 5.

The reasoning above does not extend to Casarez, however. Although the 

complaint alleges that Villarreal had developed the secret-sauce algorithm and 

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previously used it, nothing in the complaint suggests that Casarez understood 

the algorithm, how it worked, or whether it existed. Nor is there any allegation 

that Casarez was aware that the billing cycle would take longer than six 

months. Although the representations Casarez adopted turned out to be false, 

nothing in the complaint suggests that he had any basis to know that they were 

false. At most, the face of the complaint establishes that Casarez was negligent 

in agreeing with Villarreal’s statements about her algorithm and billing cycle. 

Accordingly, the district court correctly dismissed the claims against Casarez.

III.

Because we conclude that the district court erred in dismissing plaintiffs’ 

securities-fraud claims for Statements 2 through 5 in their suit against 

Villarreal, MPS, CGR, and IOS, we REVERSE and REMAND IN PART with 

regard to the court’s dismissal of those claims. Because the district court did 

not err in dismissing plaintiffs’ claims stemming from the remaining alleged 

misrepresentations and omissions as to each defendant, as well as each claim 

against Casarez, we AFFIRM IN PART with regard to the court’s dismissal of 

those claims. Each party shall bear is own costs. 

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