Source: http://mi.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20180405_0001179.EMI.htm/qx
Timestamp: 2019-04-24 04:44:52+00:00

Document:
FindACase | Byrd v. Visalus, Inc.
VISALUS, INC., et al., Defendants.
In this putative class action, Plaintiffs claim that the Defendants defrauded them into purchasing equity in Defendant ViSalus, Inc. Defendants ViSalus, Nick Sarnicola, Ashley Sarnicola, Blake Mallen, Ryan Blair, Todd Goergen, Gary Reynolds, and Michael Craig (collectively, the “ViSalus Defendants”) have now moved to dismiss Plaintiffs' First Amended Complaint. (See ECF #39.) For the reasons that follow, the motion is GRANTED IN PART and DENIED IN PART.
ViSalus operates using a multi-level marketing (“MLM”) business model. Under this model, “participants pay money to the program promoter in return for which the participants obtain the right to: (1) recruit additional participants …; (2) sell goods or services; and (3) receive payment or other compensation … based upon the sales of those [individuals that the participant recruits].” F.T.C. v. Five Star Auto Club, Inc., 2000 WL 1609798, at *1 (S.D.N.Y. June 12, 2000). In other words, a company using the MLM model “markets its products not through direct sale to customers, but rather, through sales to individual distributors … who then sell to the general public” and recruit others to do the same. Virgin Enterprises Ltd. v. American Longevity, 2001 WL 34142402, at *1 (S.D.N.Y. Mar. 1, 2001); Altaria Corp. v. Woodbolt Distribution, LLC, 2014 WL 3121899, at *4 (W.D. Tex. July 7, 2014) (describing how companies using the MLM model “use promoters to sell directly to customers and also to enroll other promoters”).
. He, Blair, and Mallen had spent $105 million to “buy back” ViSalus from its previous owner.
The ViSalus Defendants also recruited individuals to help market the Plan to potential investors and current ViSalus distributors. One of these individuals was Defendant Vincent Owens, the pastor of the Household of Faith Empowerment Temple in Aurora, Colorado. (See Id. at ¶38, Pg. ID 384.) He “promoted [the Plan] to dozens or hundreds of people, ” including the Plaintiffs. (Id.) Among other things, Owens and/or his associate Deb Johnson told the Plaintiffs that ViSalus was a successful, “expanding, ” company with “2.2 billion dollar[s]  to date in sales, ” that six-percent “of [ViSalus] would be available” in “equity” to promoters who participated in the Plan, and that participants in the Plan would receive “years” of “dividends, ” including “a large payout on April 17, 2017.” (Id. at ¶¶ 165, 169, 183, 259, Pg. ID 483-85, 492, 522.) At the urging of Owens and/or Johnson, each of the Plaintiffs became ViSalus distributors and invested tens of thousands of dollars in order to qualify for equity through participation in the Plan. (See Id. at ¶¶ 147-262, Pg. ID 477-523.) Plaintiffs believed that by participating in the Plan, they would become shareholders in ViSalus and start receiving dividend payments. (See id.) Plaintiffs now say that they did not receive either the promised equity or any dividends.
. Statutory and common law conversion against Defendants ViSalus, Nick Sarnicola, Blair, and Mallen.
In the Motion, Defendants seek relief pursuant to Federal Rule of Civil Procedure 12(b)(6). Rule 12(b)(6) provides for dismissal of a complaint when a plaintiff fails to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). “To survive a motion to dismiss” under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678, (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). A claim is facially plausible when a plaintiff pleads factual content that permits a court to reasonably infer that the defendant is liable for the alleged misconduct. See Id. (citing Twombly, 550 U.S. at 556). When assessing the sufficiency of a plaintiff's claim, a district court must accept all of a complaint's factual allegations as true. See Ziegler v. IBP Hog Mkt., Inc., 249 F.3d 509, 512 (6th Cir. 2001). “Mere conclusions, ” however, “are not entitled to the assumption of truth. While legal conclusions can provide the complaint's framework, they must be supported by factual allegations.” Iqbal, 556 U.S. at 664. A plaintiff must therefore provide “more than labels and conclusions, ” or “a formulaic recitation of the elements of a cause of action” to survive a motion to dismiss. Twombly, 550 U.S. at 556. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id.
In addition, where, as here, Plaintiffs allege fraud under Section 10(b) of the Exchange Act, they must “state with particularity the circumstances constituting fraud or mistake” under Rule 9b of the Federal Rules of Civil Procedure. Fed.R.Civ.P. 9(b). Under this rule, Plaintiffs “must (1) specify the statements that [they] contend were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. At a minimum, Plaintiffs must allege the time, place and contents of the misrepresentations upon which they relied.” Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir. 2008) (internal punctuation and citations omitted). Finally, Plaintiffs must also satisfy the pleading requirements of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 (the “PSLRA”) with respect to their fraud claims under Section 10(b). See Id. Among other things, the PSLRA requires Plaintiffs to “specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading. 15 U.S.C. § 78u-4(b)(1).
In Count I of the First Amended Complaint, Plaintiffs bring multiple securities fraud claims under Section 10(b) and Rules 10b-5(a), (b), and (c) of the Exchange Act. (See First. Am. Compl. at ¶¶ 270-277, ECF #30 at Pg. ID 530-566.) The ViSalus Defendants argue that the Court should dismiss all of these claims because (1) the units in the Plan offered to Plaintiffs were not “securities, ” (2) even if the units were “securities, ” the alleged misrepresentations or omissions were not made in connection with the “purchase” or “sale” of the units, (3) Plaintiffs have not sufficiently pleaded that they relied on any misstatements or omissions, and (4) Plaintiffs have not sufficiently pleaded a scheme to defraud under Rules 10b-5(a) and (c). (See Mot. to Dismiss, ECF #39 at Pg. ID 657-74.) The Court concludes that Plaintiffs have sufficiently pleaded that units in the Plan are securities and that the alleged misstatements or omissions were made in connection with the purchase of a security. But it agrees with the ViSalus Defendants that Plaintiffs' Rule 10b-5(b) claim fails because Plaintiffs have not sufficiently alleged that they relied on a particular misrepresentation made by any of these Defendants. The Court also agrees with the ViSalus Defendants that Plaintiffs' Rule 10b-5(a) and (c) claims fail because Plaintiffs have not sufficiently alleged a scheme to defraud separate and apart from the ViSalus Defendants' alleged misrepresentations. The Court will therefore dismiss Plaintiffs' Section 10b and Rule 10b-5 claims and grant Plaintiffs leave to amend these claims in a Second Amended Complaint.
The ViSalus Defendants first assert that the Court should dismiss all of Plaintiffs' securities-fraud claims because (1) those claims “require that the plaintiff [has] purchased a security[, ]” (2) the “security” that Plaintiffs have identified here are units in the Plan,  and (3) units in the Plan are not securities. (Mot. to Dismiss, ECF #39 at Pg. ID 657-63.) The Court disagrees.
At the hearing on Defendants' motion to dismiss, counsel for the ViSalus Defendants acknowledged that it would be proper for the Court to determine whether units in the Plan are securities by applying the framework described in United States Securities and Exchange Commission v. Zada, 787 F.3d 375, 380 (6th Cir. 2015). Under Zada, a court first determines whether the “instrument” at issue is expressly identified as a security in 15 U.S.C. § 77b(a)(1). Id. If the instrument does appear in that list, then it is “presumptively [a] securit[y].” Id. A defendant may “rebut [this] presumption” by showing that “the [instrument] bears a family resemblance to a list of instruments that are not securities.” Id. (internal quotation marks omitted). “Whether the [instrument] bears a resemblance to one of those instruments depends on four factors: first, the motivation prompting the transaction; second, the plan of distribution; third, the reasonable expectations of the investing public; and fourth whether a risk-reducing factor (for example, another regulatory scheme) makes application of the Securities Acts unnecessary.” Id.
The Court first concludes that units in the Plan are presumptively securities under Zada. One of the “instruments” listed in 15 U.S.C. § 77b(a)(1) is “stock, ” and Plaintiffs plausibly allege that units in the Plan are stock. Indeed, as quoted extensively above, the ViSalus Defendants repeatedly referred to the instrument that Plaintiffs could acquire as “equity” and referred to the holders of that equity as “shareholders, ” words and phrases commonly-associated with stock.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 § 78
 § 78
 v. 
 § 77
 § 77