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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Robert Sierp, et al., 

Plaintiffs, 

v. 

DeGreen Partners LP, et al., 

Defendants. 

No. CV-16-00189-PHX-GMS

ORDER 

 Pending before the Court is the Motion to Dismiss and Strike by Defendants 

DeGreen Partners, LP, DeGreen Capital Management, LLC, and Keith DeGreen. (Doc. 

22.) For the following reasons, the Court grants the motion in part and denies it in part. 

BACKGROUND 

Defendant Keith DeGreen (“DeGreen”) is a resident of Ohio and Arizona. (Doc. 1 

at 2.) In 2009, DeGreen formed DeGreen Partners, LP (“DP”), which is a Delaware 

limited partnership with a principal place of business in Arizona. (Id. at 2–3.) DP’s 

general partner was DeGreen Capital Management, LLC (“DCM”). (Id. at 3.) DeGreen 

is the Managing Member of DCM. (Id.) The Limited Partnership Agreement (“LPA”) 

between DP and DCM vested DCM with sole discretion of investing and exercising 

powers on DP’s behalf. (Id.)

 In 2010, Robert Sierp, a resident of Texas, considered using DCM to manage 

some of his investments. (Doc. 1 at 4.) He ultimately decided not to invest in DCM at 

that time, but he did become acquainted with DeGreen. (Id.) DeGreen subsequently 

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sought Sierp’s investments in both DP and DCM through various email correspondence 

as well as a presentation. (Id.) These emails included information about DP’s successes 

and strategies, including statistics such as the company’s alleged “263.04% cumulative 

return in its first twenty-six months of existence.” (Id.) In these emails, DeGreen also 

assured Sierp that he and his wife were the only investors in DP, that they had invested 

one million dollars in the partnership of their personal funds, and that DP followed the 

same investment strategies as DCM. (Id. at 5.) 

 In June 2012, Sierp became a limited partner of DP and invested $1.25 million in 

the company.1

 (Id. at 1, 8.) In November 2012, DCM’s Vice President of Operations 

sent an email on behalf of DeGreen to Mr. Sierp reporting significant losses, but advising 

“I believe our holdings may present strong upside potential.” (Id. at 9.) In August 2013, 

DeGreen informed Sierp and the limited partners that he would be unable to obtain Errors 

and Omissions (“E&O”) insurance because of the losses. (Id. at 10.) Because of this, 

DeGreen sent Sierp several e-mails demanding a waiver releasing DeGreen and DCM of 

liability for certain claims. (Id. 10–11.) Sierp alleges “DeGreen, as an attorney, 

expressly advised Mr. Sierp that signing the waiver does not deprive you of the right to 

make a claim if we, or any of the independent parties involved with DP, engage in fraud 

or other criminal acts that result in losses.” (Id. at 11–12.) Losses continued until DCM 

discontinued DP, and returned $240,412 of Sierp’s principal in February 2014. (Id. at 

12.) 

 On January 26, 2016, Sierp filed a complaint alleging that he invested $1.25 

million and “had DeGreen been honest with [Sierp] about the financial condition and 

performance of DP, [Sierp] would not have made the investment.” (Id. at 8.) 

Specifically, Sierp alleges that DeGreen solicited his investment over the course of two 

years via e-mail, in-person meetings, and presentations. (Id. at 4, 7.) Sierp alleges that 

he was “particularly motivated by three material sales points and representations made by 

 1

 The Court hereby grants Defendants’ Request for Judicial Notice for the 

following documents: (Doc. 22, Ex. 1–6.) 

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DeGreen during those solicitations: (1) that DeGreen would continue to maintain his 

own personal $1 million investment in DP; (2) that DP used the same research and 

protocols of DCM; and (3) DP was a long-term, three to five-year investment.” (Id. at 7.) 

Sierp’s complaint includes eight counts2

: 

1. Count 1 – Securities Fraud – All Defendants 

2. Count 2 – Fraud in the Provision of Investment Advisory Services– 

 DCM and DeGreen 

3. Count 3 – Violation of A.R.S. § 44-1998 – All Defendants 

4. Count 4 – Control Liability – A.R.S. § 44-1999 – DCM and DeGreen 

5. Count 5 – Breach of Fiduciary Duty – All Defendants 

6. Count 6 – Negligence – All Defendants 

7. Count 7 – Negligent Misrepresentation – All Defendants 

8. Count 8 – Common Law Fraud; Fraud by Omission – All Defendants 

DISCUSSION 

I. Legal Standard 

 Generally, to survive dismissal for failure to state a claim pursuant to Federal Rule 

of Civil Procedure 12(b)(6), a complaint must contain more than “labels and conclusions” 

or a “formulaic recitation of the elements of a cause of action”; it must contain factual 

allegations sufficient to “raise a right to relief above the speculative level.” Bell Atl. 

Corp. v. Twombly, 550 U.S. 544, 555 (2007). While “a complaint need not contain 

detailed factual allegations . . . it must plead ‘enough facts to state a claim to relief that is 

plausible on its face.’ ” Clemens v. DaimlerChrysler Corp., 534 F.3d 1017, 1022 (9th 

Cir. 2008) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the 

plaintiff pleads factual content that allows the court to draw the reasonable inference that 

the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 

(2009) (citing Twombly, 550 U.S. at 556). The plausibility standard “asks for more than 

 

2

 Plaintiff withdrew the claims for aiding and abetting in a tort and for conspiracy to commit a tort. (Doc. 1 at 17; Doc. 25 at 17.) 

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a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts 

that are >merely consistent with= a defendant=s liability, it ‘stops short of the line between 

possibility and plausibility of entitlement to relief.’ ” Id. (quoting Twombly, 550 U.S. at 

555) (internal citations omitted). 

 When a plaintiff alleges claims that are rooted in fraud, even those arising under 

state law, he must comply with the heightened pleading standard of Rule 9(b). Cafasso, 

United States ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 

2011); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003) (“[W]hile a 

federal court will examine state law to determine whether the elements of fraud have 

been pled sufficiently to state a cause of action, the Rule 9(b) requirement that the 

circumstances of the fraud must be stated with particularity is a federally imposed rule.”) 

(internal citations omitted). Therefore, state law fraud claims must also comply with the 

pleading standards of Rule 9(b). 

When analyzing a complaint for failure to state a claim under Rule 12(b)(6), “[a]ll 

allegations of material fact are taken as true and construed in the light most favorable to 

the nonmoving party.” Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). However, 

legal conclusions couched as factual allegations are not given a presumption of 

truthfulness, and “conclusory allegations of law and unwarranted inferences are not 

sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 

1998). 

II. Analysis 

 Defendants move to dismiss Sierp’s Complaint on the basis of the sufficiency of 

the allegations as well as numerous affirmative defenses.3

/ / / 

 

3

 The Court has jurisdiction over this case pursuant 28 U.S.C. § 1332, which provides that “[t]he district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of 

interest and costs, and is between . . . citizens of different States.” 28 U.S.C. § 

1332(a)(1). 

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A. The Adequacy of the Pleadings 

Sierp’s allegations may be broken down into two broad categories; those that 

allege fraud, and those that allege negligence.4

 (Doc. 1.) The fraud allegations must 

satisfy Rule 9(b) particularity pleading, whereas the negligence allegations must satisfy 

the plausibility pleading requirement of Rule 8(a). See Fed. R. Civ. P. 8(a), 9(b). 

1. The Fraud Allegations

 Rule 9(b) requires that a party alleging fraud “must state with particularity the 

circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). This requires the 

plaintiff to “set forth what is false or misleading about a statement, and why it is false.” 

Yourish v. Cal. Amplifier, 191 F.3d 983, 993 (9th Cir. 1999) (internal citations omitted). 

“In other words, the plaintiff must set forth an explanation as to why the statement or 

omission complained of was false or misleading.” Id. “This falsity requirement can be 

satisfied by pointing to inconsistent contemporaneous statements or information (such as 

internal reports) which was made by or available to the defendants.” Id. (internal 

citations omitted). 

 Not all statements made by a defendant may constitute grounds for fraud. 

“Outrageous generalized statements, not making specific claims, [which] are so 

exaggerated as to preclude reliance by consumers” are considered puffery, and are not 

actionable. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 

246 (9th Cir. 1990) (internal citations and quotations omitted). However, 

“misdescriptions of specific or absolute characteristics of a product” are actionable. Id. at 

 4

 Where diversity jurisdiction exists, the substantive law of the state in which the 

district court sits, including its choice of law rules, will apply. Because this action was 

brought in this Court based on diversity jurisdiction, Plaintiff’s state law tort claims are 

governed by Arizona law. See, e.g., Guaranty Trust Co. of N.Y. v. York, 326 U.S. 99, 

107–08 (1945). However, the procedural aspects of the claims, including the pleading 

standards, will be governed by the Federal Rules of Civil Procedure. See Vess v. CibaGeigy Corp. USA, 317 F.3d 1097, 1102 (9th Cir. 2003) (“The Federal Rules of Civil 

Procedure apply irrespective of the source of subject matter jurisdiction, and irrespective 

of whether the substantive law at issue is state or federal.”)

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246. Thus, a statement that one type of lamp is “far brighter” than another would be 

considered mere puffery, whereas a more definitive statement, such as that one type of 

lamp has “35,000 candle power and 10-hour life,” would be actionable if it turned out to 

be false. See id. (listing such a situation, outlined in Smith-Victor Corp. v. Sylvania Elec. 

Prods., Inc., 242 F. Supp. 302 (N.D. Ill. 1965), as an example of an actionable statement). 

Courts may resolve whether a statement constitutes mere puffery during a motion to 

dismiss. See Cook, Perkiss & Liehe, Inc., 911 F.2d at 245 (“District courts often resolve 

whether a statement is puffery when considering a motion to dismiss pursuant to Federal 

Rule of Civil Procedure 12(b)(6) and we can think of no sound reason why they should 

not do so.”) (internal citations omitted). 

a. Count 1: Securities Fraud–A.R.S. § 44-1991: All 

Defendants 

In Arizona, it is unlawful for a person to do any of the following in connection 

with a transaction to offer to buy or sell securities, directly or indirectly: (1) “[e]mploy 

any device, scheme or artifice to defraud;” (2) “make any untrue statement of material 

fact, or omit to state any material fact necessary in order to make the statements made, in 

the light of the circumstances under which they were made, not misleading”; or (3) 

“engage in any transaction, practice or course of business which operates or would 

operate as a fraud or deceit.” A.R.S. § 44-1991(A). “The requirement of materiality is 

satisfied by a showing of substantial likelihood that, under all the circumstances, the 

misstated or omitted fact would have assumed actual significance in the deliberations’ of 

a reasonable buyer.” Hirsch v. Arizona Corp. Comm’n, 237 Ariz. 456, 463–64, 352 P.3d 

925, 932–33 (Ct. App. 2015) (internal citations and quotations omitted). 

 Section 44-1991 exposes “any person, including any dealer, salesman or agent, 

who made, participated in or induced the unlawful sale or purchase” to liability. A.R.S. 

§ 44-2003(A). However, “[n]o person shall be deemed to have participated in any sale or 

purchase solely by reason of having acted in the ordinary course of that person’s 

professional capacity in connection with that sale or purchase.” A.R.S.§ 44-2003(A). To 

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impose liability against an individual under § 44-1991, a plaintiff must assert that the 

defendant did more than “merely provide information that contributes to a buyer or 

seller's decision to close the deal.” Standard Chartered PLC v. Price Waterhouse, 190 

Ariz. 6, 22, 945 P.2d 317, 333 (Ct. App. 1996). Rather, the plaintiff must show a more 

direct tie between the fraudulent sale and the defendant, such as an allegation that the 

defendant “actively promoted a fraudulent transaction.” Id. at 21. 

 Sierp’s Complaint sufficiently alleges securities fraud against the Defendants. It 

alleges that DeGreen, in his role as an agent for DP and DCM, recruited Sierp and 

ensured his continued participation in DP through a number of fraudulent mechanisms. 

(Doc. 1 at 17.) Taking Sierp’s allegations as true, in the spring of 2012, DeGreen sent 

emails boosting DP’s impressive annual returns in excess of 40%, while simultaneously 

failing to mention that the company lost 26% of its value as of April 2012. (Doc. 1 at 6, 

13.) DeGreen also claimed that he personally invested $1 million into the company, 

when in he did not. (Doc. 1 at 5, 6, 7, 15.) Throughout the time of Sierp’s limited 

partnership at DP, DeGreen would repeat his personal commitment and financial 

investment to DP to reassure investors during DP’s financial slumps, despite the fact that 

his actual financial commitment was far less than advertised. (Doc. 1 at 9, 11, 14–15.) 

DeGreen also assured Sierp that DP followed the same investment structure as DCM. 

(Doc. 1 at 6.) Specifically, DeGreen told Sierp that “DP invests in long-term options.” 

(Doc. 1 at 6.) However, DeGreen admitted that during the first several months of 2013, 

DP, under his guidance, did not actually comport with this strategy. (Doc. 1 at 9.) 

Contrary to the Defendants’ assertions, these allegations do not equate to the sort of 

vague, generalized assertions that can only be described as mere puffery. Rather, these 

assertions reflect “misdescriptions of specific or absolute characteristics” of DP, and 

therefore also of the securities that DeGreen was attempting to sell. See Cook, Perkiss & 

Liehe, Inc., 911 F.2d at 246 (quoting Stiffel Co. v. Westwood Lighting Grp., 658 F. Supp. 

1103, 1115 (D.N.J. 1987)). 

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 Sierp adequately alleged that these misrepresentations were material. For a fact to 

be considered material, a plaintiff must illustrate that there is a “substantial likelihood 

that, under all the circumstances, the misstated or omitted fact would have assumed 

actual significance in the deliberations’ of a reasonable buyer.” Hirsch, 237 Ariz. at 

463–64 (internal citations and quotations omitted). Sierp states in his Complaint that he 

was “particularly motivated” to invest in DP by the representations that Degreen would 

continue to maintain his one million dollar investment in the company, that DP would 

follow the same strategies as DCM, and that DP was a “long term, three to five-year 

investment.” This is sufficient to allege materiality. Id.

 The Complaint also adequately alleges facts to maintain a cause of action against 

DeGreen under § 44-1991. The Complaint alleges that DeGreen “solicited Plaintiffs’ 

investments in both DP and DCM,” (Doc. 1 at 4), and that he used numerous fraudulent 

inducements, including those listed above, in doing so. (Doc. 1.) Section 44-1991 

imposes liability on any person who “engage[s] in any transaction, practice or course of 

business which operates as a fraud or deceit.” A.R.S. § 44-1991(A)(3). Therefore, 

contrary to the Defendants’ assertion, the Plaintiffs are not attempting to hold DeGreen 

liable “solely by reason of being a member” of DCM; rather, they are alleging that he 

made fraudulent statements to them in connection with the sale of the securities.5

 A.R.S. 

§ 29-651. Sierp alleged sufficient facts that DeGreen did more than “merely provide 

information that contributes to a buyer or seller's decision to close the deal,” and thus he 

may assert a claim against DeGreen personally for violating § 44-1991. Standard 

Chartered PLC, 190 Ariz. at 22. 

 The facts alleged in the Complaint are sufficient to demonstrate “the who, what, 

when, where, and how of the misconduct charged” of the securities fraud claim, as 

required by Rule 9(b). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 

2003). Plaintiffs have sufficiently stated a claim in Count 1 of their complaint. 

 5

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b. Count 2: Fraud in the Provision of Investment 

Advisory Services– A.R.S. § 44-3241: DCM and 

DeGreen. 

 Pursuant to Arizona law, it is unlawful for any individual, “in connection with a 

transaction or transactions within or from this state involving the provision of investment 

advisory services, directly or indirectly” to 1) “employ any device, scheme or artifice to 

defraud, 2) “make any untrue statement of material fact, or fail to state any material fact 

necessary in order to make the statement made, in the light of the circumstances under 

which it was made, not misleading,” 3) “misrepresent any professional qualifications 

with the intent that the client rely on the misrepresentation,” or 4) “engage in any 

transaction, practice or course of business that operates or would operate as a fraud or 

deceit.” A.R.S. § 44-3241. 

 Arizona law broadly defines the term “investment advisor” to include “any person 

who, for compensation, engages in the business of advising others, either directly or 

through publications or writings, as to the value of securities or as to the advisability of 

investing in, purchasing or selling securities.” A.R.S. § 44-3101(5). The statute defines 

“investment advisor representative” to include “any partner, officer or director of an 

investment adviser, any individual who occupies a status or performs functions similar to 

a partner, officer or director of an investment adviser or any other individual who is 

employed by or associated with an investment advisor” that “makes any 

recommendations or otherwise renders advice regarding securities,” “manages accounts 

or portfolios of clients,” or “solicits, offers, or negotiates for the sale or sells investment 

advisory resources.” A.R.S. § 44-3101(6). 

 The Defendants contest that DeGreen is not an “investment advisor” pursuant to 

A.R.S. § 44-3101(5), and therefore he cannot be held primarily liable under A.R.S. § 44-

3241. This is incorrect. A.R.S. § 44-3241 imposes liability on any “person, in 

connection with a transaction or transactions within or from this state involving the 

provision of investment advisory services” that “directly or indirectly” commits the fraud 

outlined above. A.R.S. § 44-324. The factual allegations of the complaint are sufficient 

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to make it plausible that DeGreen is either an “investment advisor,” or an “investment 

advisor representative.” Thus Defendants’ argument provides no basis to dismiss this 

count at this stage. 

The Defendants also allege that the Complaint failed to meet the particularity 

pleading requirement of Rule 9(b). (Doc. 22 at 5.) This assertion fails. Sierp alleges 

sufficient facts to state a claim that DCM and DeGreen violated § 44-3241(A). 

Specifically, Sierp contends that DeGreen violated § 44-3241(A) by: (1) advertising a 

false rate of return and historical performance data; (2) expressing a track record 

involving options and LEAPS without having knowledge or intention of implementing 

such an investment strategy; (3) expressing false intentions to personally invest over a 

period of years in substantial amounts; (4) expressing false intentions to implement 

certain investment strategies throughout the anticipated lifetime of DP investments; and 

(5) expressing false and misleading information concerning the nature, purpose, and 

operation of the waiver. (Doc. 1 at 20–21.) 

 These claims do not amount to mere puffery. DeGreen’s emails on behalf of DCM 

soliciting the Plaintiffs’ investment included specific numbers, not generalized 

assurances. (Doc. 1 at 5.) DeGreen assured Sierp that he invested one million dollars of 

his personal funds in the company, and that he would continue to be personally invested 

in the company. (Doc. 1 at 7.) Furthermore, the Complaint alleges that DeGreen, 

“knowing that Mr. Sierp had been investigating DCM for potential investment 

management,” affirmatively misrepresented the strategies utilized by DP. (Doc. 1 at 5.) 

These allegations form the basis of distinct characteristics of the securities DeGreen was 

seeking to sell, and cannot be said to be “so exaggerated as to preclude reliance by 

consumers.” Cook, Perkiss & Liehe, Inc., 911 F.2d at 246. Therefore, Defendants 

assertions that DeGreen’s statements on behalf of DCM amounted to mere puffery are 

rejected. Plaintiffs have sufficiently stated a claim in Count 2 of the Complaint. 

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c. Count 3: Violation of A.R.S. § 44-1998: All 

Defendants 

 Arizona law permits an individual to recover against “any person who offers or 

sells a security by means of a prospectus or oral communication that includes an untrue 

statement of a material fact or omits to state a material fact necessary in order to make the 

statements . . . not misleading.” A.R.S. § 44-1998. While there is limited guidance on 

what constitutes a “prospectus” for the purposes of A.R.S. § 44-1998, the Supreme Court 

held that “the word ‘prospectus’ is a term of art referring to a document that describes a 

public offering of securities by an issuer or controlling shareholder.” Gustafson v. Alloyd 

Co., Inc., 513 U.S. 561, 584 (1995). Although Arizona courts are not “bound by the 

interpretation placed by the United States Supreme Court on the federal statute, it is 

helpful, for consistency in the application of the law, to be harmonious with the United 

States Supreme Court” when interpreting Arizona statutes that act as counterparts to 

federal law. State v. Gunnison, 127 Ariz. 110, 112, 618 P.2d 604, 606 (1980). 

 Here, Sierp alleged that “[o]n April 30, 2012, DeGreen hosted Mr. Sierp and other 

potential investors for a presentation about DP and provided . . . a power point 

presentation advertising the alleged performance of DP.” (Doc. 1 at 7.) Sierp further 

claims that during this presentation, DeGreen represented that he personally invested $1 

million in DP, and that the investment was long-term: three to five years. (Doc. 1 at 7–

8.) In this context, the power point presentation was acting as “a document that describes 

a public offering of securities by an issuer or controlling shareholder.” Gustafson, 513 

U.S. 561, 584 (1995) (defining the term prospectus under Sections 10 and 12 of the 

Securities Act of 1933). 

 Sierp adequately alleged facts sufficient to show that DeGreen’s oral 

communications and presentation on behalf of DCM and DP contained “untrue 

statement[s] of a material fact or omits to state a material fact necessary in order to make 

the statements . . . not misleading.” A.R.S. § 44-1998. The Complaint alleges that the 

Defendants made untrue statements by (1) advertising a rate of return and other historic 

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performance data for DP that “falsely reflected the most current, available performance 

data,” (2) “expressing a track record involving options and LEAPS without, upon 

information and belief, having the requisite knowledge” to do so, (3) expressing false 

intentions regarding DeGreen’s personal commitment to invest in DP, (4) “expressing 

false intentions regarding the investment strategies to be implemented” by DP, and (5) 

“expressing false and misleading information concerning the purpose for, nature, and 

operation of the waivers demanded by DeGreen.” (Doc. 1 at 21–22.) As addressed in the 

preceding sections, the specific facts alleged in connection to these claims, including but 

not limited to DeGreen’s representations that he invested $1 million dollars in DP and the 

inflated return rates, are not puffery. Plaintiffs have sufficiently stated a claim in Count 3 

of the Complaint. 

d. Count 4: Control Person Liability–Violation of 

A.R.S. § 44-1999: DCM and DeGreen 

 To bring a claim under A.R.S. § 44-1999, also known as control person liability, a 

plaintiff must allege (1) a primary violation of the A.R.S. §§ 44-1991 or 44-1992 and (2) 

that the Defendants had actual power or control over the primary violator. E. Vanguard 

Forex, Ltd. v. Ariz. Corp. Comm’n, 206 Ariz. 399, 410, 79 P.3d 86, 97 (App. 2003) 

(citing A.R.S. § 44-1999(B)). Arizona courts “interpret § 44-1999(B) as imposing 

presumptive control liability on those persons who have the power to directly or 

indirectly control the activities of those persons or entities liable as primary violators of 

§§ 44-1991 and -1992.” E. Vanguard Forex, Ltd., 206 Ariz. at 412 (emphasis in 

original). “Like other portions of the Arizona Securities Act, this section should be 

‘liberally construed to [a]ffect its remedial purpose of protecting the public interest.’” 

Facciola v. Greenberg Traurig, LLP, 781 F. Supp. 2d 913, 923 (D. Ariz. 2011) (quoting

E. Vanguard Forex Ltd., 206 Ariz. at 411). Having already determined that the Plaintiffs 

adequately alleged their fraud claims under A.R.S. §§ 44-1991 pursuant to Rule 9(b), the 

sole question here is whether the Plaintiffs complied with Rule 8(a) to adequately allege 

that DCM and DeGreen may be liable as control persons under the statute. 

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held liable as control persons. The Complaint alleges that DCM acted as “General Partner 

of DeGreen Partners.” (Doc. 1 at 2.) As such, DCM had “sole discretion of making 

investments on behalf of the partnership.” (Doc. 1 at 3.) Furthermore, the Complaint 

alleges that DeGreen was Managing Member of DCM, and in that role he “personally 

controlled and directed operations of DP.” (Doc. 1 at 3.) The Complaint cited to one of 

DP’s internal memorandums, which stated that “Keith DeGreen, the Managing Member, 

or a member of his investment team, will select potential investments in accordance with 

the General Partner’s proprietary investment-selection procedures.” (Doc. 1 at 4.) 

Therefore, Sierp properly alleged that A.R.S. § 44-1999(B) attaches control liability to 

DCM and DeGreen because DCM had the legal power to control DP as its General 

Partner, and DeGreen had the legal power to control DCM, as its Managing Member. 

See E. Vanguard Forex, Ltd., 206 Ariz. at 412 (“[T]o satisfy the first prong of § 44–

1999(B), the evidence need only show that the person targeted as a controlling person 

had the legal power, either individually or as part of a control group, to control the 

activities of the primary violator.”). Plaintiffs have adequately alleged facts sufficient to 

state a claim in Count 4 of their complaint. 

e. Count 7: Negligent Misrepresentation: All 

Defendants 

 Under Arizona tort law, “[a] claim for relief for negligent misrepresentation is one 

governed by the principles of the law of negligence.” Pettay v. Ins. Mktg. Servs., Inc. 

(W.), 156 Ariz. 365, 368, 752 P.2d 18, 21 (Ct. App. 1987). Therefore, “there must be a 

duty owed and a breach of that duty before one may be charged with the negligent 

violation of that duty.” Van Buren v. Pima Cmty. Coll. Dist. Bd., 113 Ariz. 85, 87, 546 

P.2d 821, 823 (1976) (citations and quotations omitted). Arizona courts have outlined the 

elements of the cause of action as: 

(1) the defendant provided false information in a business transaction; (2) 

the defendant intended for the plaintiff to rely on the incorrect information 

or knew that it reasonably would rely; (3) the defendant failed to exercise 

reasonable care in obtaining or communicating the information; (4) the 

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plaintiff justifiably relied on the incorrect information; and (5) resulting 

damage. 

KB Home Tucson, Inc. v. Charter Oak Fire Ins. Co., 236 Ariz. 326, 333 n.7, 340 P.3d 

405, 412 n.7 (Ct. App. 2014). Negligent misrepresentation sounds in fraud, and therefore 

it is subject to the pleading requirements of Rule 9(b). See Lorona v. Ariz. Summit Law 

Sch., LLC, 151 F. Supp. 3d 978, 993 (D. Ariz. 2015); Gould v. M & I Marshall & Isley 

Bank, 860 F. Supp. 2d 985, 988 (D. Ariz. 2012) (applying the Rule 9(b) pleading 

requirements to an Arizona negligent misrepresentation claim). 

 The Complaint adequately pleads the “circumstances” required by Rule 9(b). See 

Vess, 317 F.3d at 1106. The Complaint alleges that the Defendants owed a duty of care 

to the Plaintiffs because they “offered to invest and manage assets of Plaintiffs,” 

“represent[ed] and offer[ed] to Plaintiffs specialized knowledge concerning investment 

strategies,” and “manag[ed] the operations and investments of DP.” (Doc. 1 at 26.) This 

is sufficient to allege that the Defendants owed the Plaintiffs a duty of care. See 

Restatement (Second) of Torts § 552 (explaining that an individual with an economic 

interest in a business transaction has a duty to “use reasonable care or competence” in 

obtaining and communicating information provided for the guidance of another in the 

transaction.) 

 The Complaint goes on to allege that the Defendants breached this duty by (1) 

advertising false rates of return, (2) expressing a track record utilizing “options and 

LEAPS without, upon information and belief, having the requisite knowledge or 

intentions” to do so, (3) DeGreen’s “expressing false intentions” to continue to invest in 

the business personally, (4) falsely claiming that the investment strategies used by DCM 

would be copied by DP, and (5) encouraging the Plaintiffs to sign the waivers under false 

pretenses. (Doc. 1 at 27.) The Complaint alleges specific facts to support these 

allegations, including quotes from numerous emails and statements made by DeGreen. 

(Doc. 1 at 5, 6, 7, 8, 9, 10). For example, the Complaint alleges that DeGreen “tied the 

methodology used by DP to DCM, knowing that Mr. Sierp had been investigating DCM 

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for potential investment management.” (Doc. 1 at 5.) To this end, DeGreen sent Mr. 

Sierp an email on April 13, 2012 asserting that DP “applied the same research techniques 

that DeGreen Capital Management (DCM) uses.” (Doc. 1 at 6.) Therefore, the Plaintiffs 

have adequately alleged a claim in Count 7 of their Complaint. 

f. Count 8: Common Law Fraud: All Defendants

 To assert a claim for common law fraud under Arizona law, a plaintiff must allege 

the following elements: 

(1) a representation, (2) its falsity, (3) its materiality, (4) the speaker’s 

knowledge of its falsity or ignorance of its truth, (5) the speaker’s intent 

that the information should be acted upon by the hearer and in a manner 

reasonably contemplated, (6) the hearer’s ignorance of the information’s 

falsity, (7) the hearer’s reliance on its truth, (8) the hearer’s right to rely 

thereon, and (9) the hearer’s consequent and proximate injury. 

Taeger v. Catholic Family and Cmty. Servs., 196 Ariz. 285, 294, 995 P.2d 721, 730 (Ct. 

App. 1999) (citation omitted). Additionally, “while a federal court will examine state law 

to determine whether the elements of fraud have been pled sufficiently to state a cause of 

action, the Rule 9(b) requirement that the circumstances of the fraud must be stated with 

particularity is a federally imposed rule.” Kearns v. Ford Motor Co., 567 F.3d 1120, 

1125 (9th Cir. 2009). 

 Sierp’s allegations meet each of these elements. As discussed throughout this 

order, Sierp sufficiently alleged that the Defendants intentionally made false and 

misleading statements and omissions regarding existing facts concerning the investment. 

(Doc. 1 at 29.) Specifically, the Complaint alleges that DeGeen misrepresented the actual 

returns of DP in multiple emails to Sierp and other investors. (Doc. 1 at 13.) It also 

alleges that DeGreen assured investors that he invested one million dollars of his personal 

funds in the enterprise, even though he conceded to Sierp that the true number was closer 

to 650,000 dollars. (Doc. 1 at 5, 7.) According to Sierp’s Complaint, he subsequently 

discovered that DeGreen’s actual investment was only 50,000 dollars by September 

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2013, even though he had previously informed Sierp that an individual had to maintain a 

250,000 dollar investment to obtain a share in the net profits of DP. (Doc. 1 at 4, 14–15.) 

 Sierp also made allegations that indicate DeGreen made false statements regarding 

DCM’s present intentions with respect to future DP investment strategies in an attempt to 

convince Sierp to invest with DP. (Doc. 1 at 5, 6.) While “claims for fraud generally 

cannot lie where the allegedly false or misleading representation pertains to future 

prospects or performance . . . forward-looking statements are actionable when the 

Defendants make the statements with actual knowledge that projections, promises, or 

expectations will not be met.” Allstate Life Ins. Co., 756 F. Supp. 2d 1113, 1165 (D. 

Ariz. 2010) (internal citations and quotations omitted). Sierp alleged that DeGreen “tied 

the methodology of DP to DCM, knowing that Mr. Sierp had been investigating DCM for 

potential investment management” and continued to assert that he “avoid[s] short term 

option trading strategies” despite the reality that the firm wholly abandoned DCM’s 

strategies in 2014. (Doc. 1 at 5, 16.) In light of these allegations, Plaintiffs have 

adequately alleged a claim in Count 8 of their Complaint. 

2. The Remaining Tort Claims 

 The remaining tort claims do not sound in fraud, and thus they need only meet the 

pleading requirements of Rule 8(a). The plausibility standard “asks for more than a sheer 

possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 

>merely consistent with= a defendant=s liability, it ‘stops short of the line between 

possibility and plausibility of entitlement to relief.’ ” Ashcroft, 556 U.S. at 678 (quoting 

Twombly, 550 U.S. at 555) (internal citations omitted).

a. Count 5: Breach of Fiduciary Duty: All Defendants 

 Sierp adequately alleged that the Defendants owed a fiduciary duty to the 

Plaintiffs. In Arizona, “A partner stands in a fiduciary relationship to his co-partner.” 

Jerman v. O’Leary, 145 Ariz. 397, 402, 701 P.2d 1205, 1210 (Ct. App. 1985) (citing 

Hurst v. Hurst, 1 Ariz. App. 603, 405 P.2d 913 (1965)). The Complaint alleges that the 

Defendants and Sierp were all partners through their Limited Partnership Agreement. 

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(Doc. 1 at 8.) It also states that at all relevant times Defendants “had complete control 

and sole discretion” over Sierp’s investments, which is a significant entrusting of power 

and sufficient to show a fiduciary relationship in and of itself. (Doc. 1 at 24.) 

 The Complaint’s allegations also sufficiently state that the Defendants breached 

this duty. Specifically, Sierp alleges Defendants breached this duty: (1) by misleading 

Sierp about the financial condition, performance, and investment strategies planned and 

implemented by DP; (2) by misleading Sierp about DeGreen’s personal investment in 

DP; (3) by speculating on options without requisite knowledge; (4) by shifting to high 

risk investment actions; and (5) by failing to disclose conflicts inherent in DeGreen bring 

a DP investor. (Doc. 1 at 24.) Therefore, Defendants’ motion to dismiss this claim based 

on failure to state a claim is denied. 

b. Count 6: Negligence: All Defendants 

 In Arizona, “[t]he elements of actionable negligence are the existence of a duty 

owed by the defendant to the plaintiff, a breach of that duty and an injury proximately 

caused by that breach.” Flowers v. K-Mart Corp., 126 Ariz. 495, 497, 616 P.2d 955, 957 

(Ct. App. 1980) (internal quotes and citation omitted). 

 Here, Sierp alleges that the Defendants owed him a duty of care because they 

undertook “the management and control of Plaintiffs’ investments.” (Doc. 1 at 25.) The 

Complaint alleges that the Defendants breached this duty by (1) by misleading Sierp 

about the financial condition of DP, (2) by misleading Sierp regarding the amount of 

DeGreen’s investments in DP, (3) by speculating on options without the requisite 

knowledge, (4) by procuring a waiver through threats, by shifting to high-risk investment 

strategies, (5) by shifting to “the high risk and speculative actions in 2014 that led to the 

65% loss of capital account value in just a few weeks,” and (6) by not disclosing conflicts 

inherent in DeGreen being a DP investor while making all the investment decisions for 

the limited partners. (Doc. 1 at 25.) The Plaintiffs claim that they have been damaged by 

the Defendants’ breach--specifically that the Plaintiffs lost 81% of their investment 

principle in DP by the time the company finally closed down. (Doc. 1 at 12, 25.) The 

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Plaintiffs allege that had they known the truth, “they would not have invested in DP in 

the first place.” (Doc. 1 at 15.) Moreover, “had Defendants not continued to create and 

maintain false perceptions” regarding DP’s performance, “Plaintiffs would have known 

the truth and divested their investment and avoided losses.” (Id.) These facts are 

sufficient to state a plausible claim against the Defendants under a negligence theory of 

liability. 

3. Affirmative Defenses

 “[T]he assertion of an affirmative defense may be considered properly on a motion 

to dismiss where the ‘allegations in the complaint suffice to establish’ the defense.” 

Sams v. Yahoo! Inc., 713 F.3d 1175, 1179 (9th Cir. 2013) (quoting Jones v. Bock, 549 

U.S. 199, 215 (2007)). However, “[i]f, from the allegations of the complaint as well as 

any judicially noticeable materials, an asserted defense raises disputed issues of fact, 

dismissal under Rule 12(b)(6) is improper.” ASARCO, LLC v. Union Pac. R.R. Co., 765 

F.3d 999, 1004 (9th Cir. 2014). Therefore, “[d]ismissal under Rule 12(b)(6) on the basis 

of an affirmative defense is proper only if the defendant shows some obvious bar to 

securing relief on the face of the complaint.” Id.

a. Liability Disclaimer and Waiver

 Defendants assert that some of the Plaintiffs’ claims are barred by a limitation of 

liability clause within DP’s Limited Partnership Agreement (“LPA”), and that all of the 

Plaintiffs’ claims are barred by the broad “Waiver of Claims” document that the Plaintiffs 

signed in late August 2013. (Doc. 22 at 6, 13.) However, the Plaintiffs present 

challenges to the validity of both of those documents. First, the Plaintiffs argue that the 

Limited Partnership Agreement was procured by fraud, and is therefore void in its 

entirety, including the limitation of liability clause. (Doc. 25 at 15–16.) Second, the 

Plaintiffs argue that the waiver is invalid because it was not supported by consideration 

and was based on misrepresentation, coercion, duress, or all three. (Doc. 25 at 6–7.) 

 These arguments present questions of law and fact that cannot be determined on a 

motion to dismiss. Both the waiver and the limitation of liability clause constitute 

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attempts to bargain away tort liability, and therefore require the consideration of whether 

“the parties did, in fact, bargain for the limitation.” Salt River Project Agric. 

Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 694 P.2d 198 

(1984), abrogated in part by Phelps v. Firebird Raceway, Inc., 210 Ariz. 403, 111 P.3d 

1003 (2005). Furthermore, the Plaintiffs are alleging that the limitation of liability clause 

was obtained by fraud, and is thus unenforceable. These are questions that cannot be 

resolved without factual development, and thus it would be improper to dismiss the 

Complaint at this stage in the proceedings based on the releases. ASARCO, LLC, 765 

F.3d at 1004. 

b. Statute of Limitations and Repose 

 Generally, a court should only grant a motion to dismiss based on the running of 

the statute of limitations “if the assertions of the complaint, read with the required 

liberality, would not permit the plaintiff to prove that the statute was tolled.” Supermail 

Cargo, Inc. v. United States, 68 F.3d 1204, 1206–07 (9th Cir. 1995) (quoting Jablon v. 

Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980)). There are a number of statutes of 

limitations at play in this case. 

 The statute of limitations for Counts 1, 3 and 4 are found in § 44-2004, which 

provides the statute of limitations for all claims brought under Arizona’s securities laws 

unless the individual statute proscribes a different limitation. Sections 44-1991 and 44-

1999 do not proscribe a different limitation, and thus they are each subject to the statute 

of limitations contained in § 44-2004(B). A claim brought under either of these statutes 

must be “brought within two years after discovery of the fraudulent practice on which the 

liability is based, or after the discovery should have been made by the exercise of 

reasonable diligence.” A.R.S. § 44-2004(B). Section 44-1998 is treated slightly 

differently under § 44-2004. A.R.S. § 44-2004(C). A claim brought under § 44-1998 

must be brought within two years after the discovery of the untrue statement or the 

omission,” and “no more than five years after the sale of the security.” Id. Therefore, 

Counts 1, 3 and 4 are subject to a two year statute of limitations, but Count 3 is further 

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limited because it must be brought within five years of the sale of security in question, 

regardless of when the fraudulent practice is discovered. Counts 5, 6 and 7 are subject to 

a two-year statute of limitations. A.R.S. § 12-542. Count 8 must be “commenced and 

prosecuted within three years after the cause of action accrues.” A.R.S. § 12-543. 

 The parties in this case do not agree as to when the statutes of limitations began to 

run in any of these claims, and thus this affirmative defense raises questions of law and 

fact that make its determination improper at this time. Arizona follows the discovery 

rule, which stands for the proposition that “a cause of action does not accrue until the 

plaintiff knows or with reasonable diligence should know the facts underlying the cause.” 

Doe v. Roe, 191 Ariz. 313, 322, 955 P.2d 951, 960 (1998). Furthermore, Arizona law 

tolls statutes of limitation if the defendants engage in “[f]raud practiced to conceal a 

cause of action.” Acton v. Morrison, 62 Ariz. 139, 144, 155 P.2d 782, 784 (1945). Both 

of these tolling measures may be present in this case, and this Court will not dismiss 

Plaintiffs’ claims before they have the opportunity to develop their arguments through 

discovery. Thus, the Defendants’ motion to dismiss based on statutes of limitation is 

denied. 

 Count 2, which alleges a violation of § 44-3241, is “barred unless it is brought 

within three years after the violation or within two years after discovery of the facts 

constituting the violation, whichever occurs first.” A.R.S. § 44-3241(B). This statute is 

part statute of limitations and part statute of repose. The language of the statute indicates 

that it “is intended to establish a limit beyond which no suit may be pursued, and sets a 

period of time within which claims must be brought regardless of when the cause of 

action may accrue.” Albano v. Shea Homes Ltd. P’ship, 227 Ariz. 121, 127, 254 P.3d 

360, 366 (2011) (internal quotations omitted). 

 Statutes of repose are fundamentally different from statutes of limitation, because 

“under statutes of repose, a claim may be barred if it does not accrue within the allowable 

statutory period.” Id. at 127. Common law equitable tolling does not generally apply to 

statutes of repose because it would permit “judge-made doctrine to trump the statutory 

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language reflecting the clear intent of the legislature.” Sullivan v. Pulte Home Corp., 231 

Ariz. 53, 58, 290 P.3d 446, 451 (Ct. App. 2012), vacated in part, 232 Ariz. 344, 306 P.3d 

1 (2013). There is no express language in the statute or any other indication of legislative 

intent to apply tolling principles to § 3241, and thus the Court will not apply equitable 

tolling to claims filed under § 3241. See Moore v. Browning, 203 Ariz. 102, 110, 50 P.3d 

852, 860 (Ct. App. 2002) (declining to apply equitable tolling due to the absence of “any 

[legislative] intent to toll the statute of repose.”). 

 The initial investment in this case occurred on June 1, 2012. Therefore, if Sierp 

desired to bring a cause of action under § 3241 for the initial investment, he needed to do 

so by June 1, 2015. Sierp did not file suit until January 26, 2016. Thus, his claims under 

§ 3241 involving the initial investment are barred. However, the Complaint appears to 

allege other violations of §3241 that occurred in early 2013, including DeGreen’s false 

statements regarding the waiver and his false assurances that he remained an investor in 

DP. These claims were filed within three years of the violation, and at this stage in the 

proceedings it is not clear that they were filed more than two years “after discovery of the 

facts.” A.R.S. § 44-3241(B). Therefore, any claim filed under § 44-3241 that did not 

occur within three years of the time the Complaint was filed (January 26, 2016) is 

dismissed. Any other viable claims asserted under this statute will not be dismissed.. 

A.R.S. § 44-3241(B). 

c. Failure to Plead Loss Causation 

In order to state a claim for relief for Counts 1 (Violation of A.R.S. § 44-1991), 

Count 5 (Breach of Fiduciary Duty), Count 7 (Negligent Misrepresentation), and Count 8 

(Common Law Fraud), Plaintiffs must plead loss causation. Loss causation is nothing 

more than proximate cause—“the allegedly unlawful conduct caused the economic 

harm.” Grand v. Nacchio, 214 Ariz. 9, 19, 147 P.3d 763, 773 (App. 2006) (quoting

AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 209 (2d Cir. 2000)). The pleading 

requirements for loss causation are not stringent standards. See id. at 20 (“[U]nder the 

Restatement, if a plaintiff shows the misrepresentations affected the financial health of an 

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entity and, consequently, the value of the plaintiff’s stock, the plaintiff has made a 

sufficient showing of proximate cause.”). 

 “It is unclear in this Circuit whether Rule 9(b)’s heightened pleading standard or 

whether Rule 8(a)(2)’s short and plain statement applies to allegations of loss causation.” 

WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1053 (9th Cir. 

2011). “However, it is unnecessary to decide that issue, because the [Complaint] offers 

sufficient detail to give defendants ample notice of [the] loss causation theory, and 

[gives] some assurance that the theory has a basis in fact.” Id. Here, along with the 

allegations that Defendants noted, Sierp alleges that Defendants abandoned the LEAPS 

investment strategy and began short-term option trading strategies. (Doc. 1 at 16.) Sierp 

alleges that this shift resulted in “precipitous losses” one month before Defendants 

recommended the end of DP. (Id.) Sierp further alleges that DeGreen conceded that 

losses resulted from this in an e-mail sent to Sierp in May 2013: “Frankly, my focus on 

trying to protect against week-to-week fluctuations has been detrimental to performance, 

and is not consistent with our investment discipline of identifying the strongest 

candidates for growth long–term.” (Doc. 1 at 9.) The Court finds that these allegations 

are sufficient to allege loss causation at this stage in the pleadings, and thus the 

Defendants’ motion is denied. 

4. Attorney’s Fees & Costs under A.R.S. § 44-2001 (A). 

 A.R.S. § 44-2001(A) provides relief for a plaintiff in the form of rescission or in 

damages. Specifically, the statute states that if a defendant sells securities in violation of 

Arizona’s securities laws, the sale is 

voidable at the election of the purchaser, and the purchaser may bring an 

action in a court of competent jurisdiction to recover the consideration paid 

for the securities, with interest, taxable court costs and reasonable attorney 

fees, less the amount of any income received by dividend or otherwise from 

ownership of the securities, on tender of the securities purchased or the 

contract made, or for damages if the purchaser no longer owns the 

securities.

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A.R.S. § 44-2001. Therefore, under the text of the statute, it is unclear whether 

“damages” should be read to include attorney’s fees. “In Arizona, courts generally do not 

construe ‘damages’ to include attorneys’ fees.” City Ctr. Exec. Plaza, LLC v. Jantzen, 

237 Ariz. 37, 41, 344 P.3d 339, 343 (Ct. App. 2015). However, exceptions to this rule do 

exist, including “where attorneys’ fees are a legal consequence of an original wrongful 

act or any of the other situations where attorneys’ fees can be considered damages.” Id.

at 42. 

 Defendants argue that the Court has the ability to strike the request for attorney 

fees under Federal Rule of Civil Procedure 12(f), which provides the Court with the 

ability to “strike from a pleading an insufficient defense or any redundant, immaterial, 

impertinent, or scandalous matter.” Fed. R. Civ. P. 12(f). For the reasons detailed above, 

it is less than clear that the Plaintiffs cannot seek attorney’s fees under § 44-1991, as they 

have alleged that the Defendants acted fraudulently. At any rate, the Ninth Circuit has 

held that “Rule 12(f) does not authorize district courts to strike claims for damages on the 

ground that such claims are precluded as a matter of law.” Whittlestone, Inc. v. HandiCraft Co., 618 F.3d 970, 974–75 (9th Cir. 2010). Thus, even if Defendants are correct in 

their assertion that Plaintiffs’ quest for attorney’s fees under § 44-2001 must ultimately 

fail because it is precluded by law, it would be improper for the Court to strike the 

request. Id. The Defendants’ motion to strike the Plaintiffs’ request for attorney’s fees is 

denied. 

CONCLUSION 

 For the foregoing reasons, the Plaintiffs have adequately stated claims for relief 

that satisfy Rule 12(b)(6). However, §3241(B) bars Sierp from bringing any of his claims 

alleging a violation of §3241(A) that did not occur within three years of filing the 

Complaint or within two years of his discovery. Therefore, Count 2 is dismissed as to the 

violations stemming from the initial investment on June 1, 2012. None of the 

Defendants’ other affirmative defenses demonstrate “some obvious bar to securing relief 

on the face of the complaint,” and thus the motion to dismiss based on the other defenses 

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is denied. ASARCO, LLC., 765 F.3d at 1004. Likewise, the Court finds that pursuant to 

Whittlestone, it would be improper to strike the Plaintiffs’ request for attorney’s fees. 

Whittlestone, Inc., 618 F.3d at 974–75. 

 IT IS THEREFORE ORDERED that the Defendants’ Motion to Dismiss (Doc. 

22) is GRANTED in part and DENIED in part.

 IT IS FURTHER ORDERED that the Defendants’ Motion to Strike (Doc. 22) is 

DENIED. 

 Dated this 6th day of January, 2017. 

Honorable G. Murray Snow

United States District Judge

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