Court Opinion

ID: 9363093
Source: CourtListenerOpinion
Date Created: 2023-01-13 18:57:05.15834+00
Date Added: 2024-06-11T17:15:28.693199
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

LUIS PINO, on behalf of himself and     No. 21-55564
all others similarly situated,
                                          D.C. No.
          Plaintiff-Appellant,         2:20-cv-08499-
                                          JFW-KS
 v.

CARDONE CAPITAL, LLC;                     OPINION
GRANT CARDONE; CARDONE
EQUITY FUND V, LLC; CARDONE
EQUITY FUND VI, LLC,

          Defendants-Appellees.

       Appeal from the United States District Court
          for the Central District of California
        John F. Walter, District Judge, Presiding

         Argued and Submitted March 17, 2022
              San Francisco, California

                Filed December 21, 2022
2                 PINO V. CARDONE CAPITAL, LLC

     Before: Morgan Christen and Daniel A. Bress, Circuit
       Judges, and Barbara M. G. Lynn, * District Judge.

                     Opinion by Judge Lynn

                          SUMMARY **

                     Securities Act of 1933

    The panel affirmed in part and reversed in part the
district court’s dismissal pursuant to Federal Rule of Civil
Procedure 12(b)(6) of Luis Pino’s suit against Grant
Cardone, Cardone Capital, LLC, Cordone Equity Fund V,
LLC, and Cardone Equity Fund VI, LLC, alleging violations
of the Securities Act of 1933 based on material
misstatements or omissions in certain real estate investment
offering materials.
    Pino brought claims under § 12(a)(2) of the Securities
Act against all Defendants, and a claim pursuant to § 15 of
the Securities Act against Cardone and Cardone Capital. At
issue was whether Cardone and Cardone Capital count as
persons who “offer[] or sell[]” securities under § 12(a) based
on their social media communications to prospective
investors. The district court concluded that Cardone and
Cardone Capital did not qualify as statutory sellers.

*
  The Honorable Barbara M. G. Lynn, United States District Judge for
the Northern District of Texas, sitting by designation.

**
  This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                PINO V. CARDONE CAPITAL, LLC              3

    The panel concluded that § 12 contains no requirement
that a solicitation be directed or targeted to a particular
plaintiff, and accordingly, held that a person can solicit a
purchase, within the meaning of the Securities Act, by
promoting the sale of a security in mass
communication. Because the First Amended Complaint
sufficiently alleges that Cardone and Cardone Capital were
engaged in solicitation of investments in Funds V and VI,
the district court erred in dismissing Pino’s claim against
Cardone and Cardone Capital under § 12(a)(2), and also
erred in dismissing his § 15 claim for lack of a primary
violation of the Securities Act.
    In a separate memorandum disposition, the panel
concluded that some of the Defendants’ challenged
statements are actionable under the Securities Act.

                       COUNSEL

Raj Mathur (argued), Susman Godfrey LLP, New York,
New York; Marc M. Seltzer, Steven G. Sklaver, and Krysta
K. Pachman, Susman Godfrey LLP, Los Angeles,
California; for Plaintiff-Appellant.

Anne M. Voigts (argued), King & Spalding LLP, Palo Alto,
California; David P. Mattern, King & Spalding LLP,
Washington, D.C.; Joseph N. Akrotirianakis, King &
Spalding LLP, Los Angeles, California; Lisa R. Bugni, King
& Spalding LLP, San Francisco, California; for Defendants-
Appellees.
4               PINO V. CARDONE CAPITAL, LLC

                        OPINION

LYNN, District Judge:

    Plaintiff Luis Pino filed suit against Defendants Grant
Cardone, Cardone Capital, LLC, Cardone Equity Fund V,
LLC, and Cardone Equity Fund VI, LLC, alleging
violations of the Securities Act of 1933 (“Securities Act”)
based on material misstatements or omissions in certain
real estate investment offering materials. Specifically,
Pino brought claims under § 12(a)(2) of the Securities Act
against all Defendants, and a claim pursuant to § 15 of the
Securities Act against Cardone and Cardone Capital, LLC.
The district court dismissed all claims under Federal Rule
of Civil Procedure 12(b)(6).
    Pino appeals, arguing that the district court erred in
holding that Cardone and Cardone Capital, LLC are not
“sellers” under § 12(a)(2). In this opinion, we hold that
Pino plausibly stated a claim that Cardone and Cardone
Capital, LLC qualify as statutory sellers under the
Securities Act. In a separate memorandum disposition
filed concurrently with this opinion, we conclude that
some of the Defendants’ challenged statements are
actionable under the Act. We therefore affirm in part and
reverse in part the district court’s dismissal of Pino’s
claims.
                        Background
   Cardone founded Cardone Capital, LLC (“Cardone
Capital”) in 2017, and is its CEO and sole Manager.
Cardone Capital is a real estate property management
company that invests in property by pooling money from
many other investors. ER 6–7. Cardone Capital manages
                PINO V. CARDONE CAPITAL, LLC                   5

Cardone Equity Fund V, LLC (“Fund V”) and Cardone
Equity Fund VI, LLC (“Fund VI”), which invest in real
estate assets throughout the United States. Funds V and
VI (the “Funds”) are categorized as emerging growth
companies under the 2015 U.S. JOBS Act, a law that
reduces reporting and accounting requirements for
emerging companies, and that enables the sale of securities
using crowdfunding techniques. See Jumpstart Our
Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306
(Apr. 5, 2012). Investments in Funds V and VI were
subject to Regulation A, which exempts offerings from
registration with the Securities and Exchange Commission
(“SEC”), but are subject to certain requirements, including
submission to the SEC of an “offering statement”
disclosing information about the proposed offering on
Form 1-A, which is subject to qualification by the SEC
before the offering can proceed. 17 C.F.R. §§ 230.252,
230.255. Regulation A provides that the SEC “does not
pass upon the merits of or give its approval to any
securities offered or the terms of the offering, nor does it
pass upon the accuracy or completeness of any offering
circular or other solicitation materials.” Id. § 230.253.
    Fund V began receiving subscriptions on December
12, 2018, and raised $50,000,000 as of September 20,
2019. The First Amended Complaint alleges that when
Fund V closed, Cardone posted on the Cardone Capital
Instagram account that Fund V is “the first Regulation A
of its kind to raise $50 Million in crowdfunding using
social media,” and that “[b]y accessing social media, I am
offering investment opportunities to the everyday investor,
like you!” Appellant’s Excerpts of the Record (“ER”) ER-
56 (“FAC”) ¶ 38; see also id. ¶ 40 (“This is the largest Reg
A+ crowdfunding ever done for real estate investments of
6                PINO V. CARDONE CAPITAL, LLC

this quality using social media. . . . By using no
middleman & going directly to the public using social
media we reduce our cost. This ensures more of your
money goes directly into the assets, resulting in lower
promotional cost. More importantly, investors gain access
to real estate that has never been available before.”). Fund
VI began receiving subscriptions on October 16, 2019, and
raised $50,000,000 as of June 25, 2020.
    Plaintiff Luis Pino alleges he invested a total of $10,000
in Funds V and VI. Pino further alleges that he invested in
Fund V two days after attending a marketing presentation
hosted by Cardone in Anaheim, California, titled the
“Breakthrough Wealth Summit.” Id. ¶¶ 34–36.
    In 2020, Pino filed this putative class action, asserting
claims under § 12(a)(2) of the Securities Act against all
Defendants, and a claim pursuant to § 15 of the Securities
Act against Cardone and Cardone Capital. In the FAC,
Pino alleges that in soliciting investments in Funds V and
VI, Defendants made untrue statements of material fact or
concealed or failed to disclose material facts in Instagram
posts and a YouTube video posted between February 5,
2019, and December 24, 2019.
      For example, the FAC describes an April 22, 2019,
YouTube video in which Cardone states, “it doesn’t matter
whether [the investor] [is] accredited [or] non-accredited
. . . you’re gonna walk away with a 15% annualized return.
If I’m in that deal for 10 years, you’re gonna earn 150%.
You can tell the SEC that’s what I said it would be. They
call me Uncle G and some people call me Nostradamus,
because I’m predicting the future, dude; this is what’s
gonna happen.” Id. ¶¶ 1, 56. The FAC also quotes several
Instagram posts, made on both Cardone’s personal account
                 PINO V. CARDONE CAPITAL, LLC                  7

and the Cardone Capital account, regarding certain
internal rates of return (“IRR”), monthly distributions, and
long-term appreciation. For example, the FAC describes
a February 5, 2019, post in which Cardone asks potential
investors on his personal Instagram account, “Want to
double your money[?]” and states that an investor could
receive $480,000 in cash flow after investing $1,000,000,
achieve “north of 15% returns after fees,” and obtain a
“118% return amounting to 19.6% per year.” Id. ¶ 67.
    Pino alleges that these statements were materially
misleading.     Further, he alleges that none of the
communications contained cautionary language either
indicating that the promises were speculative, or
identifying the risk associated with investing in Funds V
and V, but instead contained only a generic legend
required under SEC Rule 255. E.g., id. ¶ 62.
    Defendants moved to dismiss the FAC for failure to state
a claim under Rule 12(b)(6). The district court granted the
motion, concluding in part that Cardone and Cardone Capital
did not qualify as statutory sellers, warranting dismissal of
the § 12(a)(2) and § 15 claims against them. Pino appeals.
We have jurisdiction under 28 U.S.C. § 1291.
                    Standard of Review
    We review de novo a district court’s dismissal on the
pleadings. Moore v. Trader Joe’s Co., 4 F.4th 874, 880 (9th
Cir. 2021). Dismissal under Rule 12(b)(6) is warranted
when the complaint fails to state sufficient facts to establish
a plausible claim to relief. Id. When reviewing a dismissal
pursuant to Rule 12(b)(6), the Court accepts “as true all facts
alleged in the complaint” and construes them “in the light
most favorable to plaintiff.” DaVinci Aircraft, Inc. v. United
8                 PINO V. CARDONE CAPITAL, LLC

States, 926 F.3d 1117, 1122 (9th Cir. 2019) (internal
quotations omitted). However, “[t]hreadbare recitals of the
elements of a cause of action” do not suffice to state a claim.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
                           Discussion
    Section 12(a)(2) of the Securities Act of 1933 imposes
liability on “any person who . . . offers or sells a security . . .
by means of a prospectus or oral communication, which
includes an untrue statement of a material fact or omits to
state a material fact . . . to the person purchasing such
security from him.” 15 U.S.C. § 77l(a)(2). The only issue
we decide here is whether Cardone and Cardone Capital
count as persons who “offer[] or sell[]” securities under
§ 12(a) based on their social media communications to
prospective investors.
    The term “offer to sell” or “offer” means a “solicitation
of an offer to buy . . . for value.” Id. § 77b(b)(3). To state a
claim under § 12(a)(2), a plaintiff must allege that: (1) the
defendant qualifies as a statutory seller or offeror; (2) the
sale was effected “by means of a prospectus or oral
communication”; and (3) the communication contains an
“‘untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements . . .
not misleading.’” In re Daou Sys., Inc., 411 F.3d 1006,
1028–29 (9th Cir. 2005) (quoting 15 U.S.C. § 77l(a)(2)).
Section 15 of the Act imposes secondary liability on anyone
who “controls” an entity that violates § 12. 15 U.S.C.
§ 77o(a). To state a claim under § 15, a plaintiff must show
that: (1) there is a primary violation of the Securities Act;
and (2) the defendant directly or indirectly controlled the
person or entity liable for the primary violation. See SEC v.
Todd, 642 F.3d 1207, 1223 (9th Cir. 2011).
                 PINO V. CARDONE CAPITAL, LLC                 9

    The district court held that neither Cardone nor Cardone
Capital qualified as a statutory seller under § 12(a)(2).
Specifically, the district court noted that the alleged
solicitation consisted solely of statements made on social
media highlighting the benefits of investing in the Funds.
ER-24. Because neither Cardone nor Cardone Capital
directly and actively solicited Pino’s investment, and Pino
did not allege that he relied on any such solicitation when
investing, the district court held neither could be held liable
as a “seller” under § 12(a)(2). The district court further held
that, in the absence of a primary § 12 violation of the
Securities Act, Pino’s control claims against Cardone and
Cardone Capital under § 15 must be dismissed. On appeal,
Pino contends this was error, mandating reversal.
    In Pinter v. Dahl, 486 U.S. 622, 643, 647–48 (1988), the
Supreme Court held that a person may be liable as a “seller”
under the predecessor version of § 12(a) if the person either:
(1) passes title to the securities to the plaintiff; or
(2) “engages in solicitation,” i.e., “solicits the purchase [of
the securities], motivated at least in part by a desire to serve
his own financial interests or those of the securities owner.”
The FAC does not allege that Cardone or Cardone Capital
passed title to the securities in question, and accordingly,
neither qualify as a “seller” under the first prong of Pinter.
   As to the second prong, there is no question that Cardone
and Cardone Capital had financial interests tied to the Funds.
Cardone Capital received 35% of the Funds’ profits, ER 143,
141, 260, 268, and Cardone personally controlled Cardone
Capital. ER 148, 265. The question, then, is whether
Cardone and Cardone Capital “engaged in solicitation.”
   Neither the Supreme Court nor this Court has opined on
whether solicitation must be direct or targeted towards a
10              PINO V. CARDONE CAPITAL, LLC

particular purchaser to fall within § 12. Accordingly, we
must decide whether the Securities Act requires that a seller
must specifically target an individual purchaser’s
investment, or whether Defendants’ indirect, mass
communications to potential investors through social media
posts and online videos counts as “engaging in solicitation”
under Pinter, such that Cardone and Cardone Capital qualify
as statutory sellers.
    The Eleventh Circuit recently held that videos posted
publicly on YouTube and similar websites can constitute
solicitation under § 12, even if the offering’s promoters did
not directly target the particular purchasers. Wildes v.
BitConnect Int’l PLC, 25 F.4th 1341 (11th Cir. 2022).
Specifically, in Wildes, the Eleventh Circuit considered
“whether a person can solicit a purchase, within the meaning
of the Securities Act, by promoting a security in a mass
communication.” Id. at 1345. The Eleventh Circuit
concluded that, to qualify as solicitation under § 12, a person
must “urge or persuade” another to buy a particular security,
but those efforts at persuasion need not be personal or
individualized. Id. at 1346 (quoting Ryder Int’l Corp. v.
First Am. Nat’l Bank, 943 F.3d. 1521, 1531, 1534 (11th Cir.
1991)). In reaching its holding, the Eleventh Circuit
observed that the Securities Act does not distinguish
between individually targeted sales efforts and broadly
disseminated pitches, and noted that in early cases applying
the Securities Act of 1933, “people understood solicitation
to include communications made through diffuse, publicly
available means—at the time, newspaper and radio
advertisements.” Id. at 1346.
    The Eleventh Circuit correctly recognized that nothing
in § 12 expressly requires that solicitation must be direct or
personal to a particular purchaser to trigger liability under
                 PINO V. CARDONE CAPITAL, LLC                 11

the statute. See id. at 1345–46. Put differently, nothing in
the Act indicates that mass communications, directed to
multiple potential purchasers at once, fall outside the Act’s
protections.
    On the contrary, the Act contains broad language
authorizing the purchaser of a security to bring suit against
“[a]ny person . . . who offers or sells a security . . . by means
of a prospectus or oral communication” that misleads or
omits material facts. 15 U.S.C. § 77l(a)(2) (emphasis
added). The statute defines “offer to sell,” “offer for sale,”
and “offer” as including “every attempt or offer to dispose
of, or solicitation of an offer to buy, a security or interest in
a security, for value.” Id. § 77b(a)(3) (emphasis added).
“Prospectus” means “any prospectus, notice, circular,
advertisement, letter, or communication, written or by radio
or television, which offers any security for sale or confirms
the sale of any security.” Id. § 77b(a)(10) (emphasis added).
Although the Securities Act of 1933 predates the Internet,
the inclusion of radio and television communications
indicates Congress contemplated that broadly disseminated,
mass communications with potentially large audiences
would fall within the Act’s scope. See Wildes, 25 F.4th at
1346.
    Nor has the Supreme Court imposed a requirement that
solicitation under § 12 requires that a seller “actively and
directly” solicit a plaintiff’s investment, as Defendants
contend. In Pinter, the leading case on the meaning of a
“statutory seller” under § 12, the Supreme Court recognized
that imposing liability beyond those who merely pass title to
securities, i.e., to brokers and others who solicit offers to
purchase securities, “furthers the purposes of the Securities
Act—to promote full and fair disclosure of information to
the public in the sales of securities.” 486 U.S. at 646. In that
12               PINO V. CARDONE CAPITAL, LLC

vein, the Court held in Pinter that the Act’s “seller”
requirement extends liability “to the person who
successfully solicits the purchase, motivated at least in part
by a desire to serve his own financial interests or those of the
securities owner.” Id. at 647; see In re Daou, 411 F.3d at
1029 (“[A] plaintiff must allege that the defendants did more
than simply urge another to purchase a security; rather, the
plaintiff must show that the defendants solicited purchase of
the securities for their own financial gain . . . .”).
    Creating liability for those who solicit a sale for financial
gain, as opposed to limiting it to those who simply pass title,
is consistent with the Securities Act’s remedial goal of
protecting purchasers from the harm caused by promoters’
material misstatements and omissions, in part due to the
promoter’s superior access to information concerning the
securities and their valuation. As the Court explained in
Pinter:
        In order to effectuate Congress’ intent that
        § 12(1) civil liability be in terrorem, the risk
        of its invocation should be felt by solicitors
        of purchases. The solicitation of a buyer is
        perhaps the most critical stage of the selling
        transaction. It is the first stage of a traditional
        securities sale to involve the buyer, and it is
        directed at producing the sale. In addition,
        brokers and other solicitors are well
        positioned to control the flow of information
        to a potential purchaser, and, in fact, such
        persons are the participants in the selling
        transaction who most often disseminate
        material information to investors. Thus,
        solicitation is the stage at which an investor
        is most likely to be injured, that is, by being
                 PINO V. CARDONE CAPITAL, LLC                13

       persuaded to purchase securities without full
       and fair information. Given Congress’
       overriding goal of preventing this injury, we
       may infer that Congress intended solicitation
       to fall under the mantle of § 12(1).

486 U.S. at 646–47 (citations omitted).
    Beyond the requirement that a seller must have his own,
independent financial interest in the sale, Pinter contains no
indication that Congress was concerned with regulating only
a certain type of solicitations, let alone specifically targeted
“active and direct solicitations,” as urged by Defendants.
Defendants contend that a plaintiff must allege a relationship
“not unlike contractual privity” between purchaser and
seller, which cannot be created by a broadly distributed
communication. For support, Defendants argue that the
language of § 12 cabins a “seller” to a person who makes an
“offer” to the person “purchasing such security from him,”
pointing to a statement in Pinter that “the language of
§ 12(1) contemplates a buyer-seller relationship not unlike
traditional contractual privity.” 486 U.S. at 641–42.
    We disagree. the “contractual privity” language in
Pinter comes from the Court’s recognition that, in
considering who may be regarded as a statutory seller, “the
language of § 12(1) contemplates a buyer-seller
relationship.” Id. at 642. However, as discussed above, the
Supreme Court interpreted the meaning of “seller” under
§ 12 to include more than mere owners to encompass those
who engage in solicitation. But Pinter did not answer what
types of communications qualify as solicitation. See Wildes,
25 F.4th at 1346 (explaining that Pinter “says nothing about
what solicitation entails” and “instead focuses on the result
and intent necessary for section 12 liability: the solicitation
14               PINO V. CARDONE CAPITAL, LLC

must succeed, and it must be motivated by a desire to serve
the solicitor’s or the security owner’s financial interests”).
    In fact, if anything, the advertisements at issue in this
case—Instagram posts and YouTube videos—are the types
of potentially injurious solicitations that are intended to
command attention and persuade potential purchasers to
invest in the Funds during the “most critical” first stage of a
selling transaction, when the buyer becomes involved. See
Pinter, 486 U.S. at 646–47. Pino fairly alleges that the
nature of social media presents dangers that investors will be
persuaded to purchase securities without full and fair
information.
    In this case, Defendants allegedly relied significantly on
social media to source investors for the Funds at issue here.
Cardone posted on social media that Fund V was funded
through “crowdfunding using social media,” and touted the
use of social media as an intentional strategy to reduce
promotional costs. FAC ¶¶ 38, 40. Accordingly, through
their social media engagement, Cardone and Cardone
Capital were significant participants in the selling
transaction because they disseminated material information
to would-be investors. To conclude that their social media
communications fall outside the Act’s protections would be
at odds with Congress’s remedial goals. As observed by the
Eleventh Circuit in Wildes, under Defendants’ interpretation
of the Act, a seller liable “for recommending a security in a
personal letter could not be held accountable for making the
exact same pitch in an internet video.” 25 F.4th at 1346.
    For the foregoing reasons, we conclude that § 12
contains no requirement that a solicitation be directed or
targeted to a particular plaintiff, and accordingly, join the
Eleventh Circuit in holding that a person can solicit a
                      PINO V. CARDONE CAPITAL, LLC         15

purchase, within the meaning of the Securities Act, by
promoting the sale of a security in a mass communication.
Here, the FAC sufficiently alleges that Cardone and Cardone
Capital were engaged in solicitation of investments in Funds
V and VI. The FAC contends that Cardone and Cardone
Capital engaged in extensive solicitation efforts, including
through the “Breakthrough Wealth Summit,” a conference
hosted by Cardone, and Defendants’ extensive social media
posts. Moreover, the FAC alleges that both Cardone and
Cardone Capital had a financial interest in the sale of the
securities; the Fund V and VI offering statements describe
compensation tethered to contributed capital and
distributions received by the Funds’ manager, Cardone
Capital, which is controlled by Cardone. FAC ¶ 84. To state
a claim under § 12(a)(2), Pino need not have alleged that he
specifically relied on any of the alleged misstatements
identified in the FAC. See Smolen v. Deloitte, Haskins &
Sells, 921 F.2d 959, 965 (9th Cir. 1990) (“[R]eliance is not
an element of a section 12(2) claim.”). Accordingly, Pino
plausibly alleged that Cardone and Cardone Capital were
both statutory sellers under § 12(a)(2). Because the district
court erred in dismissing Pino’s claim against Cardone and
Cardone Capital under § 12(a)(2), it also erred in dismissing
Pino’s § 15 claim for lack of a predicate primary violation of
the Securities Act.
   For the foregoing reasons and those set forth in our
accompanying memorandum disposition, the district court’s
dismissal of Pino’s claims under § 12(a)(2) and § 15 is
       AFFIRMED IN PART, REVERSED IN PART. 1

1
    The parties shall bear their own costs on appeal.