Ellusionist Cash Balance Plan and Trust v. Spiegel Accountancy Corp.

• Court: District Court, N.D. California
• Decided: August 15, 2023
• Docket: 3:23-cv-00287
• Status: Unknown

Opinion

1 2 3 4 5 UNITED STATES DISTRICT COURT 6 NORTHERN DISTRICT OF CALIFORNIA 7 8 ELLUSIONIST CASH BALANCE PLAN Case No. 23-cv-00287-AMO AND TRUST, et al., 9 Plaintiffs, ORDER GRANTING MOTION TO 10 DISMISS FIRST AMENDED v. COMPLAINT WITH LEAVE TO 11 AMEND SPIEGEL ACCOUNTANCY CORP., et al., 12 Re: Dkt. No. 36 Defendants.

14 15 Defendants Spiegel Accountancy Corporation, Jeffrey Spiegel, Ryan Spiegel and SAC 16 Advisory Group, LLC move to dismiss the first amended complaint filed by Plaintiffs Ellusionist 17 Cash Balance Plan and Trust, Uyen Huhyn, Southwest Investments Funds, LLC, AVR Group, 18 LLC, Trident Asset Management, Inc., and Phoenix Affordable Housing Authority, LLC. 19 Pursuant to Civil Local Rule 7-1(b), the Court deems the matter suitable for disposition without 20 oral argument and VACATES the hearing currently set for August 17, 2023. Having carefully 21 considered the parties’ papers, the relevant legal authority, and good cause appearing, the Court 22 GRANTS the motion WITH LEAVE TO AMEND for the reasons set forth below. 23 I. BACKGROUND 24 A. Factual Background1 25 Zachary Horwitz is an actor based in Los Angeles. ECF 32 ¶ 19. He raised more than 26

27 1 The factual background is based on the allegations in Plaintiffs’ first amended complaint, which 1 $690 million as part of a Ponzi scheme operated through his company, 1inMM Capital, LLC. Id. 2 1inMM issued promissory notes with maturities ranging from three to twenty-four months, with 3 the majority of the notes coming due in six or twelve months. Id. ¶ 21. The “relativity short 4 maturities” supposedly aligned with “the standard payment timeline” for Netflix and HBO. 5 Id. ¶ 34. Each note provided for a specific amount to be paid at maturity, equating to a profit 6 between 35 to 45 percent over the life of the note. Id. ¶ 21. 7 The funds generated from the promissory notes were to be used “to purchase the rights to a 8 specific movie, to license those rights to either HBO or Netflix, and to use the profits to repay the 9 note[s].” Id. ¶ 31. Horwitz claimed 1inMM would generate revenue by:

10 (i) receiving a percentage of the gross receipts that HBO generated from exploiting film rights; (ii) retaining a portion of the profit 11 margin from Netflix-specific transactions; (iii) following the repayment of notes used to finance the acquisition of content rights 12 and the expiration of initial 3-year sublicensing period with platforms such as HBO and Netflix, 1inMM would retain rights to 13 the same content for an additional period of years, thereby enabling 1inMM to continue licensing the content to other parties for 14 1inMM’s sole financial benefit. 15 Id. ¶ 32. Horwitz actually had no relationship with HBO or Netflix, did not sign distribution 16 agreements with either company, and did not acquire the promised movie rights using the money 17 raised by the sale of promissory notes. Id. ¶¶ 24, 35. He used “fabricated agreements and fake 18 emails with third-party companies with whom Horwitz had no actual business relationship.” 19 Id. ¶ 19. 20 Plaintiffs attribute Horwitz’s success to Defendant “SAC and other aggregators acting as 21 placement agents via promissory notes which were issued to the aggregators.” Id. ¶ 25. He 22 “raised money with five principal aggregators who acted as placement agents or underwriters 23 selling securities for investment in 1inMM most of whom raised funds from friends, family, and 24 other downstream investors[.]” Id. ¶ 43. Defendants’ efforts led to “$75,132,950 in 25 investment[s,]” with Plaintiffs’ collective investments totaling more than $17,000,000. Id. ¶¶ 1, 26 46. The investments “were structured as ‘Profit Sharing Agreements’ whereby SAC provided 27 1inMM with the funds necessary to pay the purported Acquisition Fee (the ‘SAC Advance’) in 1 Distribution Rights to a third-party media company.” Id. ¶ 50. “SAC did not invest money via the 2 Profit Sharing Agreements but earned a significant profit on each investment that paid before the 3 Ponzi Scheme collapsed.” Id. ¶ 53. 4 Plaintiffs Southwest Investment Funds, AVR Group, Trident Asset Management, and 5 Phoenix Affordable Housing Authority first invested in SAC on or about June 2019. Id. ¶¶ 124- 6 127. Plaintiffs UYEN and Ellusionist first invested in SAC on or about September 2019. 7 Id. ¶¶ 121, 122. All Plaintiffs entered into their final investment agreement on or about January 8 2020. Id. ¶¶ 121-127. Horwitz and 1inMM stopped making payments to investors in late 2019. 9 Id. ¶¶ 38, 74. 10 B. Procedural Background 11 Plaintiffs commenced this action on January 19, 2023, asserting claims for (1) accounting 12 malpractice, (2) violation of Section 12(a)(2) of the Securities Act of 1933, (3) violation of 13 Section 15 of the Securities Act of 1933, (4) declaratory judgment under Section 29(b) for 14 Violation of Section 15(a) and 17 C.F.R. § 239.500, (5) violation of California Corporations Code 15 § 25501.5, (6) violation of California Corporations Code § 25401, (7) violation of California 16 Corporations Code § 25403, (8) violation of California’s Unfair Competition Law, Cal. Bus. & 17 Prof. Code § 17200, and (9) negligent misrepresentation. ECF 1. Defendants moved to dismiss 18 the original complaint on February 17, 2023. ECF 11, 21. After full briefing and a hearing on the 19 motion, the Court granted Plaintiffs leave to file an amended complaint.2 ECF 26. 20 Plaintiffs filed their first amended complaint on April 26, 2023, asserting claims for 21 (1) violation of Section 10(b) of the Securities Act of 1934 and Rule 10b-5, (2) violation of 22 Section 12(a)(2) of the Securities Act of 1933, (3) violation of Section 15 of the Securities Act of 23 1933, (4) declaratory judgment under Section 29(b) of the Securities Act of 1934, (5) violation of 24 California Corporations Code § 25401, (6) violation of California Corporations Code § 25403, 25 (7) negligent misrepresentation, and (8) accounting malpractice. ECF 32. 26 // 27 1 II. LEGAL STANDARDS 2 A. Request for Judicial Notice 3 A district court may take judicial notice of facts not subject to reasonable dispute that are 4 “capable of accurate and ready determination by resort to sources whose accuracy cannot 5 reasonably be questioned.” United States v. Bernal-Obeso, 989 F.2d 331, 333 (9th Cir. 1993) 6 (citing Fed. R. Evid. 201(b)(2)). This includes matters of public record. See United States v. 7 Wilson, 631 F.2d 118, 119 (9th Cir. 1980). 8 B. Motion to Dismiss 9 Federal Rule of Civil Procedure 8 requires a complaint to include “a short and plain 10 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A 11 complaint that fails to meet this standard may be dismissed pursuant to Fed. R. Civ. P. 12(b)(6). 12 To overcome a Rule 12(b)(6) motion to dismiss, the factual allegations in the plaintiff’s 13 complaint “‘must . . . suggest that the claim has at least a plausible chance of success.’” Levitt v. 14 Yelp! Inc., 765 F.3d 1123, 1135 (9th Cir. 2014) (quoting In re Century Aluminum Co. Sec. Litig., 15 729 F.3d 1104, 1107 (9th Cir. 2013) (alterations in original)). In ruling on the motion, courts 16 “accept factual allegations in the complaint as true and construe the pleadings in the light most 17 favorable to the nonmoving party.” Manzarek, 519 F.3d at 1031 (citation omitted). 18 “[A]llegations in a complaint . . . may not simply recite the elements of a cause of action 19 [and] must contain sufficient allegations of underlying facts to give fair notice and to enable the 20 opposing party to defend itself effectively.” Levitt, 765 F.3d at 1135 (quoting Starr v. Baca, 652 21 F.3d 1202, 1216 (9th Cir. 2011)). The court may dismiss a claim “where there is either a lack of a 22 cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal claim.” 23 Hinds Invs., L.P. v. Angioli, 654 F.3d 846, 850 (9th Cir. 2011) (citing Johnson v. Riverside 24 Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008)). “[T]he non-conclusory factual content 25 and reasonable inferences from that content must be plausibly suggestive of a claim entitling the 26 plaintiff to relief.” Moss v. U.S. Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (internal 27 quotations and citation omitted). 1 circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). A plaintiff must set forth “‘the 2 who, what, when, where, and how’ of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 3 317 F.3d 1097, 1107 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 4 1997)). 5 When deciding whether to grant a motion to dismiss, the court generally “may not consider 6 any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 7 1542, 1555 n.19 (9th Cir. 1990). However, the court may consider material submitted as part of 8 the complaint or relied upon in the complaint and may also consider material subject to judicial 9 notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). 10 III. DISCUSSION 11 A. Request for Judicial Notice 12 Defendants ask the Court to take judicial notice of the following documents (1) the SEC’s 13 complaint against Horwitz and 1inMM, (2) the United States’ criminal complaint against Horwitz, 14 (3) the sentencing order issued in Horwitz’s federal criminal case, and (4) the transcript of the 15 hearing on the last motion to dismiss. ECF 36-1; ECF 44 at 6, n.1. Because these are court 16 records whose accuracy cannot reasonable be questioned, see Fed. R. Evid. 201(b), the Court 17 grants the request for judicial notice.3 See Bridges v. Geringer, No. 5:13-CV-01290-EJD, 2015 18 WL 2438227, at *1 n.2 (N.D. Cal. May 21, 2015) (taking judicial notice of indictment and plea 19 agreement in related federal criminal proceedings).4 20 B. Motion to Dismiss 21 Applying the heightened pleading standard that governs here, the Court evaluates whether 22 Plaintiffs have alleged sufficient facts in support of each federal claim. 23 // 24

25 3 As to Exhibits 1-3, the Court deems Plaintiffs to have joined in the request because they cite 26 those materials in their opposition brief. See ECF 41 at 7.

27 4 The Court has not, however, considered the factual assertions made in paragraphs 2 and 3 of the 1. Violation of Section 10(b) of the Securities Act of 1934 1 In order to state a claim under Section 10(b) and Rule 10b-5, “‘a plaintiff must prove (1) a 2 material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between 3 the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the 4 misrepresentation or omission; (5) economic loss; and (6) loss causation.’” In re Quality Sys., Inc. 5 Sec. Litig., 865 F.3d 1130, 1140 (9th Cir. 2017) (quoting Halliburton Co. v. Erica P. John Fund, 6 Inc., 573 U.S. 258, 267 (2013)). Allegations of such a violation “must meet both the heightened 7 pleading requirements for fraud claims under Fed. R. Civ. P. 9(b), which require[] that the 8 complaint ‘state with particularity the circumstances constituting fraud[.]’” Id. (quoting Tellabs, 9 Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007)). They must also meet the 10 “exacting pleading requirements . . . of the Private Securities Litigation Reform Act (‘PSLRA’), 11 which require that the complaint ‘state with particularity facts giving rise to a strong inference that 12 the defendant acted with the required state of mind.’” Id. (quoting 15 U.S.C. § 78u-4(b)(2)(A)). 13 Defendants argue that Plaintiffs’ first cause of action should be dismissed for failing the 14 heightened specificity standard set by the PSLRA and Rule 9(b). ECF 36 at 22-26. They contend 15 that Plaintiffs have resorted to improper group pleading and have not identified the material 16 statements alleged to be misleading, the reason why each such statement was misleading, when 17 each such statement was made, who made it, and to whom. Id. at 24, 25. Where Plaintiffs have 18 provided some detail, Defendants argue that the allegations fail for a different reason, i.e., the 19 alleged misrepresentations were either not made in connection with the purchase or sale of a 20 security5 or they sound in negligence. Id. at 25. Defendants also argue that Plaintiffs have failed 21 to sufficiently allege loss causation. Id. at 26. 22 Plaintiffs argue that they’ve alleged sufficient facts to meet the heightened pleading 23 standard. ECF 41 at 9-17. Plaintiffs explain that “[t]he premise of the [Section 10(b)] claim is 24

25 5 Nowhere in their papers do Plaintiffs address Defendant’s argument that allegations of a 26 connection with the purchase or sale of a security are lacking. See generally ECF 41. That failure alone serves as an independently sufficient basis to grant the motion to dismiss as to Plaintiffs’ 27 claims for violations of federal securities laws. See Ardente, Inc. v. Shanley, No. C 07-4479 MHP, 1 that Defendants affirmatively created the impression that Horwitz’s scheme was real, money was 2 moving to and from HBO and Netflix, and Defendants had investigated this fully and even were 3 co-signors on the accounts to guarantee the money was moving as promised.” ECF 41 at 9 (citing 4 ECF 32 ¶ 64). They claim “[t]he reality is that the whole thing was imaginary[,] and Defendants 5 did nothing to confirm Horwitz’s story.” Id. (citing ECF 32 ¶ 65). 6 The misrepresentations alleged in Paragraph 64 of the operative complaint are as follows:

7 64. The Spiegels made the following representations to Plaintiffs: 8 a. Jeff, Ryan, and SAC communicated by phone to Plaintiffs at the time of their investment commitment that they did their own 9 due diligence on Horwitz’s representations; b. Jeff, Ryan, and SAC communicated by phone to Plaintiffs 10 at the time of their investment commitment that they engaged professionals to do due diligence on Horwitz’s representations; 11 c. Jeff, Ryan, and SAC told investors at conferences and symposiums and Plaintiffs by phone and email that 1inMM had a 12 letter of intent to sell each movie with a distributor before the movie rights were purchased; 13 d. Jeff, Ryan, and SAC told Plaintiffs via email at the time of the investment and in the Profit Sharing Agreements that 1inMM 14 was receiving its funds from HBO and had active contracts with HBO; 15 e. Jeff, Ryan, and SAC told Plaintiffs via email at the time of the investment and in the Profit Sharing Agreements that 1inMM 16 was in the business of acquiring and licensing film distribution rights; 17 f. Jeff, Ryan, and SAC told Plaintiffs via email prior to their investment that Craig Cole (“Cole”) was the co-founder and part 18 owner of 1inMM; . . . 19 i. Jeff, Ryan, and SAC told investors at conferences and symposiums and Plaintiffs by phone and email that they were co- 20 signors on Horwitz’s bank account and signed off on each payment to foreign sales agents that 1inMM bought the movie rights from[.] 21 22 ECF 32 ¶ 64.a-64.f, 64.i. Paragraph 65 states “All of the aforementioned representations in 23 paragraph 64 will hereinafter be referred to as the ‘Representations.’” Id. ¶ 65. 24 The Court agrees with Defendants that these allegations are too general. They do not 25 specify which Defendant made a given alleged misrepresentation or to which Plaintiff. They do 26 not specify whether Plaintiffs were present at some of the events where some of these alleged 27 misrepresentations were made. Most of the allegations also do not specify when a given alleged 1 to an identified individual, they appear to post-date Plaintiffs’ final investments in the Ponzi 2 scheme. See id. ¶¶ 64.j-64.o. 3 Plaintiffs argue that any purported “group” pleading ignores the reality of how the scheme 4 was perpetrated, i.e., “representations were made by both father and son . . . father, son, and the 5 business they own all communicating the same offering.” ECF 41 at 15. This argument merely 6 underscores the difficulty Plaintiffs may face in preparing a future compliant pleading rather than 7 demonstrating one is presently before the Court. To the extent Plaintiffs suggest that by operation 8 of California law “what SAC says, Jeff and Ryan say, and Jeff and Ryan are liable for SAC’s 9 statements,” see ECF 41 at 15-16, the Court declines to rule that invoking state substantive law in 10 this Court excuses non-compliance with federal pleading standards. See Vess, 317 F.3d at 1103 11 (“It is established law, in this circuit and elsewhere, that Rule 9(b)’s particularity requirement 12 applies to state-law causes of action.”). 13 Without the foundational “who, what, where, when, and how,” the Court cannot proceed to 14 address the element of falsity that Plaintiffs argue is met here. See Crago v. Charles Schwab & 15 Co., No. 16-CV-03938-RS, 2017 WL 2540577, at *5 (N.D. Cal. June 12, 2017) (“Plaintiffs fail to 16 indicate when the [alleged misrepresentations] were made; whether during or after the class 17 period. Accordingly, it is not possible to evaluate them for falsity.”) (citing Cooper, 137 F.3d at 18 627). Nor can the Court proceed to meaningfully analyze claims of scienter, see id. (“fail[ure] to 19 plead the falsity of [defendant’s] alleged misrepresentations with requisite particularity . . . 20 precludes a determination that plaintiffs have adequately plead scienter”), or loss causation, see id. 21 at *7 (“it is premature to accept as adequately pleaded plaintiffs’ theory of loss causation” where 22 the assumptions underlying that theory “maps onto an element of a 10b-5 claim that plaintiffs have 23 not yet adequately pleaded”). 24 In sum, because Plaintiffs have failed to specifically plead the details surrounding the 25 material statements alleged to be misleading, the Court cannot assess the rest of the Plaintiffs’ 26 allegations, and this claim must be dismissed. 27 // 2. Violation of Section 12(a)(2) of the Securities Act of 1933 1 “[T]o prevail under Section 12(a)(2), a plaintiff must demonstrate (1) an offer or sale of a 2 security, (2) by the use of a means or instrumentality of interstate commerce, (3) by means of a 3 prospectus or oral communication, (4) that includes an untrue statement of material fact or omits 4 to state a material fact that is necessary to make the statements not misleading.” Miller v. Thane 5 Int’l, Inc., 519 F.3d 879, 885 (9th Cir. 2008). Section 12(a)(2) does not prohibit all species of 6 securities fraud; instead, it prohibits fraud in or relating to a prospectus. See id. (quoting 15 U.S.C. 7 § 77l(a)(2)). For the purposes of Section 12(a), a “prospectus” is “a document that describes a 8 public offering of securities by an issuer or controlling shareholder.” Gustafson v. Alloyd Co., 9 Inc., 513 U.S. 561, 584 (1995). 10 In their opening brief, Defendants argue that Plaintiffs’ second cause of action fails 11 because Section 12(a)(2) does not apply to private placements. ECF 36 at 19-20. On this issue, 12 Defendants cite to specific allegations Plaintiffs’ original complaint, including: 13

14 27. The unregistered securities at issue in this case are not “covered securities” within the meaning of National Securities 15 Market Improvement Act of 1996 (NMSIA), 15 U.S.C. § 77r(b), and accordingly this action is not subject to the procedural requirements 16 of the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u–4(a). The securities were not issued by a nationally registered 17 investment company nor was it designated for trading in a national securities exchange. 18 81. Placement agents such as SAC who sell private placements to retail customers for a commission such as SAC are 19 required to register with the Financial Industry Regulatory Authority (“FINRA”). While SAC was not actually a professional 20 broker/dealer, it pretended to be and just as it assumed the profits of a broker/dealer, it assumed the duties. 21 84. A placement agent, or at least a party acting in that role such as SAC, is required to perform reasonable due diligence on 22 a private placement prior to offering it for sale to its customers pursuant to FINRA Rule 2111.05(a), FINRA Regulatory Notice 10- 23 22, NASD Notice to Members 03-71, and NASD Notice to Members 05-26, 17 C.F.R. § 240.15l-1(b)(1). 24 ECF 36 at 20 (citing ECF 1 ¶ 27); ECF 44 at 15 (citing ECF 1 ¶¶ 27, 81, 84).6 They also cite to 25 26 6 Defendants argue that “Plaintiffs cannot now change course and alter a fundamental allegation, 27 just to get past a Motion to Dismiss.” See ECF 44 at 8 (citing Airs Aromatics, LLC v. Victoria’s 1 specific allegations in Plaintiffs’ first amended complaint, “Neither Plaintiffs nor SAC had access 2 to the type of information normally provided in prospectus of a SEC registration statement such as 3 Form S-1,” noting that “there is no disclosure requirement in a private placement limited to 4 Accredited Investors, and particularly . . . where five of the six Accredited Investors are 5 institutional investors.” ECF 36 at 20 (citing ECF 32 ¶ 150); ECF 44 at 15 (citing ECF 32 ¶ 150). 6 Plaintiffs focus their counter-argument on whether the 1inMM investment offering was 7 public, not private, citing to the following facts:

8 (1) Defendants solicited $75,132,950 in investment via sales of three 9 forms of investment in the 1inMM Offering of which $29,733,025 remains owed to investors (FAC ¶ 46); 10 (2) Over 100 individuals from all walks of life and experience invested in Defendants’ various offerings of investment in 1inMM 11 thanks to Defendants’ aggressive public sales efforts. (FAC ¶ 63); (3) Defendants employed a video presentation to sell investment in 12 the 1inMM Offering (FAC ¶ 66, https://grabify.link/RCI5S5); (4) Defendants engaged at least one salesman with experience 13 selling insurance and unregistered investments and paid him a finder’s fee of 5% of the amount invested in consideration of each 14 investor he successfully solicited on Defendants’ behalf. (FAC ¶55); (5) Defendants had no prior relationship with the investors solicited 15 by salesmen including recent immigrants and elderly individuals. (FAC ¶ 56); Ryan and Jeff presented to large groups of potential 16 investors at a conference in Oregon. (FAC ¶ 57); On or about April 5, 2017, Ryan presented the investment opportunity to individuals at 17 the Mile Marker Club Symposium in Oregon. (FAC ¶ 57); Defendants had no prior relationship with the investors solicited at 18 conferences. (FAC ¶ 58). 19 ECF 41 at 17-18. Plaintiffs, however, do not address the remaining elements of their cause of 20 action under Section 12(a)(2), claiming that “the only point of contention now is whether the 21 investment is public or private.” Id. at 17. While Defendants focus their opening brief on whether 22 the offering was public or private, see ECF 36 at 19-20, Plaintiffs’ reading is too narrow. On 23 reply, Defendants clarify: “Plaintiffs’ statement that the Defendants concede that the elements 24 25 hearing on Defendants’ prior motion to dismiss is not properly before the Court at this time. It will, however, factor into the analysis of whether leave to amend will be appropriate on 26 subsequent attempts. See Airs Aromatics, 744 F.3d at 600 (“Given leave to amend, Airs Aromatics could not advance an alternative set of allegations about activities by Airs International 27 during the period in dispute that would constitute continuous usage. Consequently, leave to 1 have been adequately plead . . . is flat wrong. To the contrary, Plaintiffs fail to allege all of the 2 required elements for the [Section] 12(a)(2) claim.” ECF 44 at 15. A footnote at the end of 3 Plaintiffs’ opposition brief states “This Response only addresses the arguments in Defendants’ 4 Motion. If any new arguments are made in Defendants’ Reply, Plaintiff will seek leave to file a 5 sur-reply.” ECF 41 at 28 n.2. Plaintiffs have sought no such leave, even though Defendants’ 6 reply brief clearly puts Plaintiffs on notice of their misreading of the opening brief. The Court 7 treats Plaintiffs’ inaction as consent to grant the motion to dismiss this cause of action. See 8 Ardente, Inc., 2010 WL 546485, at *6. 9 3. Violation of Section 15 of the Securities Act of 1933 10 “Section 15(a) provides liability for persons who control any person or entity liable under 11 other sections of the 1933 Act, including Section 12.” Fabian v. LeMahieu, No. 19-CV-00054- 12 YGR, 2019 WL 4918431, at *7 (N.D. Cal. Oct. 4, 2019) (citing 15 U.S.C. § 77o(a)). 13 Defendants argue that Plaintiffs’ Section 15 claim is derivative of the Section 12 claim and 14 must be dismissed because the underlying claim is not viable. ECF 36 at 20. Though Plaintiffs 15 dispute that the claim is subject to dismissal, Plaintiffs appear to agree that the claims rise and fall 16 together. ECF at 41 at 20 (“[T]he Motion to Dismiss should be denied as to the 12(a) claim and 17 the related control person claim.”). 18 As discussed above, the Court grants the motion to dismiss as to the Section 12 claim, and 19 so dismissal is appropriate as to the Section 15 claim. See In re Rigel Pharms., Inc. Sec. Litig. v. 20 Deleage, 697 F.3d 869, 886 (9th Cir. 2012) (Section 15 “require[s an] underlying primary 21 violation of the securities laws. . . . Because Plaintiff here has failed to adequately plead a 22 violation of the federal securities laws, it follows that Plaintiff also has failed to adequately plead 23 violation[] of . . . section 15.”); see also Fabian, 2019 WL 4918431, at *7 (“as [the] parties 24 conceded during the September 24 hearing, plaintiff’s Section 15 claim rises and falls with his 25 Section 12 claim.”)). 26 4. Declaratory Judgment under Section 29 27 Section 29(a) of the Securities Exchange Act of 1934 provides that “[a]ny condition, 1 chapter or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, 2 shall be void.” 15 U.S.C. § 78cc(a). Section 29(b) renders voidable “‘[e]very contract made in 3 violation of any provision of [the securities laws] or of any rule or regulation thereunder, and 4 every contract . . . the performance of which involves [such a] violation.’” Facebook Inc. v. Pac. 5 Nw. Software, Inc., 640 F.3d 1034, 1039 (9th Cir. 2011) (quoting 15 U.S.C. § 78cc(b); Mills v. 6 Elec. Auto-Lite Co., 396 U.S. 375, 387-88 (1970) (modifications in original)). 7 In the operative complaint, Plaintiffs allege that “[t]he Profit Sharing Agreement 8 impermissibly seeks to waive compliance with the antifraud and civil liability provisions of the 9 Securities Exchange Acts of 1933 and 1934.” ECF 32 at 30. They point to two specific 10 provisions:

11 “Investor irrevocably waives any and all claims against SAC in the event Investor receives less than the Preferred Return or realizes a 12 complete loss of the Investment Amount in connection with the payment of the Investment Amount hereunder[.]” 13 “He or she acknowledges that in connection with paying the 14 Investment Amount no oral or written representations have been made by SAC, its manager or any officer, employee, agent other 15 than representations made in this Agreement[.]” 16 Id. 17 Defendants argue that these provisions are insufficient to render the Profit Sharing 18 Agreement voidable under Section 29. ECF 36 at 21-22; ECF 44 at 17-18. Citing Berckeley 19 Investment Group, Ltd. v. Colkitt, 455 F.3d 195, 206 (3d Cir. 2009), but failing to address Ninth 20 Circuit authority cited by Plaintiffs, Defendants assert that Section 29(b) permits rescission “only 21 where the agreement cannot be performed without violating the securities laws.” ECF 36 at 21; 22 ECF 44 at 17-18. 23 In Facebook, Inc. v. Pacific Northwest Software, Inc., the Ninth Circuit upheld the district 24 court’s enforcement of a settlement agreement between Facebook, Cameron and Tyler 25 Winklevoss, and Divya Narendra (collectively, “the Winklevosses”). 640 F.3d at 1042. The 26 Winklevosses argued that Facebook misled them during settlement negotiations by representing 27 that the company’s shares were worth about four times more than they actually were. Id. at 1038. 1 agreed to the settlement agreement. Id. They alleged Facebook’s representation about the share 2 price constituted a violation of Rule 10b-5, which entitled them to rescission under Section 29(b). 3 Id. Though it declined to disturb the district court’s order enforcing the settlement agreement for 4 reasons not relevant here, the Ninth Circuit stated: “If Facebook violated Rule 10b-5, the 5 Winklevosses would be entitled to rescission of the Settlement Agreement.” Id. at 1039 (citing 6 Mills, 396 U.S. at 387-88; Royal Air Props., Inc. v. Smith, 312 F.2d 210, 213 (9th Cir. 1962)). 7 That observation is instructive here. If Defendants here violated a provision of the 8 securities laws, Plaintiffs would be entitled to relief under Section 29(b). But given the 9 deficiencies in the operative complaint, that is a big “if.” The Court cannot sustain a Section 29(b) 10 claim where allegations of a necessary predicate claim are inadequate. Compare In re Wells 11 Fargo & Co. S’holder Derivative Litig., 282 F. Supp. 3d 1074, 1106 (N.D. Cal. 2017) (Section 12 29(b) claim survived dismissal where plaintiffs alleged actionable claims). For these reasons, the 13 Court must dismiss this claim. 14 C. State Law Claims 15 In addition to the federal claims discussed above, Plaintiffs also assert state law claims for 16 (5) violation of California Corporations Code § 25401, (6) violation of California Corporations 17 Code § 25403, (7) negligent misrepresentation, and (8) accounting malpractice. ECF 32. Because 18 the Court has dismissed all federal claims asserted in the operative complaint, the Court declines 19 to exercise supplemental jurisdiction over Plaintiffs’ state law claims. Accordingly, those claims 20 will also stand dismissed. See Bridges, 2015 WL 2438227, at *7 (citing 28 U.S.C. 21 § 1367(c)(3); Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 n.7 (1988); Acri v. Varian 22 Assocs., Inc., 114 F.3d 999, 1000 (9th Cir.1997) (en banc)). 23 // 24 // 25 // 26 // 27 // IV. CONCLUSION For the reasons set forth above, the Court GRANTS the motion to dismiss. Because leave 2 to amend should be liberally granted, Plaintiffs may file an amended complaint within 21 days of 3 this order. 4 5 IT IS SO ORDERED. 6 Dated: August 15, 2023 7 Qaacel MES 9 ARACELI MARTINEZ-OLGUIN 10 United States District Judge 11 12

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