to the district court regarding application of the Omnicare standard, but Defendants
may not relitigate any of the issues resolved by this memorandum disposition.>.
With this amendment, the petition for panel rehearing filed on February 3,
2023, is DENIED. No further petitions for rehearing will be accepted.
* The Honorable Barbara M. G. Lynn, United States District Judge for the Northern District of Texas, sitting by designation. NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS FEB 22 2023 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT
LUIS PINO, on behalf of himself and all No. 21-55564 others similarly situated, D.C. No. Plaintiff-Appellant, 2:20-cv-08499-JFW-KS
v. AMENDED MEMORANDUM* CARDONE CAPITAL, LLC; GRANT CARDONE; CARDONE EQUITY FUND V, LLC; CARDONE EQUITY FUND VI, LLC,
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
Before: CHRISTEN and BRESS, Circuit Judges, and LYNN,** District Judge.
Plaintiff Luis Pino appeals the district court’s ruling granting the Motion to
Dismiss under Federal Rule of Civil Procedure 12(b)(6), filed by Defendants Grant
* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Barbara M. G. Lynn, United States District Judge for the Northern District of Texas, sitting by designation. Cardone (“Cardone”), Cardone Capital, LLC (“Cardone Capital”), Cardone Equity
Fund V, LLC (“Fund V”), and Cardone Equity Fund VI, LLC (“Fund VI”).
Pino filed suit alleging violations of the Securities Act of 1933, based on
material misstatements or omissions in connection with real estate investment
offerings. Specifically, Pino brought claims under § 12(a)(2) of the Act against all
Defendants, and a claim pursuant to § 15 of the Act against Cardone and Cardone
Capital. In the First Amended Complaint (“FAC”), Pino alleged that when
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, and in the Fund V and VI offering circulars, during the
period between February 5, 2019, and December 24, 2019, and that none of
Defendants’ “test the waters” communications—i.e., statements not contained
within the offering circulars—contained sufficient cautionary language.
Defendants moved to dismiss the FAC for failure to state a claim under Rule
12(b)(6), which the district court granted. Pino appeals. We have jurisdiction
under 28 U.S.C. § 1291.
Pino’s challenge to the district court’s ruling that Cardone and Cardone
Capital are not statutory sellers under the Securities Act is addressed in an opinion
filed concurrently with this memorandum disposition. Because the FAC identifies
actionable alleged misstatements regarding projected internal rates of return and
2 distributions and debt obligations, which are not insulated by the bespeaks caution
doctrine, we reverse the district court’s dismissal of Pino’s claims of violations of
§§ 12(a)(2) and 15 of the Securities Act as to those alleged misstatements. We
remand to the district court to allow Pino to replead consistent with our
memorandum disposition and opinion. We affirm the district court’s dismissal of
Pino’s Securities Act claims on the remainder of the alleged misstatements or
omissions.
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 States, 926 F.3d 1117,
1122 (9th Cir. 2019) (internal quotations omitted).
Discussion
Because the parties are familiar with the facts of the case, we do not recite
them in detail here. Section 12(a)(2) of the Securities Act of 1933 (“Securities
Act”) imposes liability on “any person who . . . offers or sells a security . . . by
means of a prospectus or oral communication, which includes an untrue statement
3 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). To state a claim under Section 12(a)(2),
a plaintiff must allege that (1) the defendant is a statutory seller; (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)).
The parties briefed the case with respect to our decision in In re Apple
Computer Securities Litigation, 886 F.2d 1109, 1113 (9th Cir. 1989), which provides
that a projection or statement of belief may be actionable under the federal securities
laws if (1) the speaker does not actually believe the statement, (2) there is no
reasonable basis for the statement, or (3) the speaker is aware of undisclosed facts
tending seriously to undermine the statement’s accuracy. More recently, in City of
Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology,
Inc., 856 F.3d 605, 616 (9th Cir. 2017), this Court held that claims premised on
statements of opinion must satisfy the pleading standard articulated by the Supreme
Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension
Fund, 575 U.S. 175 (2015). In Omnicare, the Supreme Court made clear that a
statement of opinion cannot constitute an “untrue statement of fact” under the
4 securities laws unless the speaker does not actually believe the statement. 575 U.S.
at 184. The Supreme Court further stated: “an investor cannot state a claim by
alleging only that an opinion was wrong; the complaint must as well call into
question the issuer’s basis for offering the opinion.” Id. at 194. Accordingly, we
held in Dearborn that to plead that a statement of opinion is false by omission, the
plaintiff cannot simply allege there was “no reasonable basis” for the statement, but
instead must allege “‘facts going to the basis for the issuer’s opinion . . . whose
omission makes the opinion statement at issue misleading to a reasonable person
reading the statement fairly and in context.’” 856 F.3d at 616 (quoting Omnicare,
575 U.S. at 194).
The district court erred in holding that the FAC did not state an actionable claim
based on alleged misstatements relating to internal rate of return (“IRR”) 1 and
1 Specifically, the FAC identifies the following actionable alleged misstatements relating to IRR projections: an April 22, 2019, YouTube Video in which Cardone states: “[I]t 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%. . . .” (FAC ¶¶ 1, 56); a May 5, 2019, Instagram post in which Cardone Capital’s account refers to: “15% Targeted IRR,” “monthly distributions,” and “long term appreciation” (id. ¶ 57); a September 4, 2019, Instagram post in which Cardone Capital’s account references “10X Living at Breakfast Point” in “Fund 4 & 5,” and refers to “Target IRR 15%” (id. ¶ 61); and an October 16, 2019, Instagram post in which Cardone Capital’s account refers to 10X Living at Panama Beach City, a property “in both Fund VI and Fund VIII,” and recites a “Targeted Investor IRR” of “17.88%” and a “Targeted Equity Multiple” of “2.5–3X” (id. ¶ 59).
5 distributions, 2 which are not protected by the bespeaks caution doctrine. The FAC
includes allegations that Cardone told investors they would realize a 15% IRR, while
omitting that the SEC had previously requested that Defendants remove from the
proposed Fund V offering circular references to their “strategy to pay a monthly
distribution to investors that will result in a return of approximately 15% annualized
return on investment,” because the Fund had commenced only limited operations,
had not paid any distributions to date, and did not appear to have a basis for such a
projected return. FAC ¶ 55.
The statements recited in the FAC relating to IRR and distributions are
actionable. Pino plausibly alleges that by omitting mention of the SEC’s
communication to Cardone Capital that there was no basis to represent that investors
2 Specifically, the FAC identifies the following actionable alleged misstatements relating to distributions: a February 5, 2019, Instagram 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” (FAC ¶ 67); a September 18, 2019, Instagram post on Cardone Capital’s account which asks, “What does it take to receive $50,000 in yearly dividend income?” and responds “Invest $1,000,000 with Cardone Capital” (id. ¶ 70); a December 24, 2019, Instagram Post that posits, “Unlike Santa, I pay similar distributions every single month” (id. ¶ 76); a January 31 (no year) Instagram post stating, “Last year I sent out $20M in distributions. More importantly investors have their capital sitting next to mine, protected, waiting for appreciation. We [target] to sell properties when I can return to investors at least 2X-3X their investment” (id. ¶ 9); and a September 17, 2019, Instagram video in which Cardone advertised that investing $220,000 would allow investors to earn ‘about $12,000-$15,000 a year’ in distributions” (id. ¶¶ 12–14).
6 would receive monthly distributions resulting in a 15% annualized return on their
investments, the alleged misstatements relating to IRR and distributions were
misleading to a reasonable person reading the statements fairly and in context. See
Omnicare, 575 U.S. at 188–89 (“[I]f the issuer made the statement . . . with
knowledge that the Federal Government was taking the opposite view, the investor
again has cause to complain: He expects not just that the issuer believes the opinion
. . . but that it fairly aligns with the information in the issuer’s possession at the
time.”). Such facts likewise “call into question [Cardone’s] basis for offering” his
projections of a 15% IRR and promises of large monthly distributions or that
investors would double or triple their investments. City of Dearborn Heights, 856
F.3d at 616 (quoting Omnicare, 575 U.S. at 194).
The district court failed to interpret the FAC’s allegations regarding debt
obligations in the light most favorable to Pino, by disregarding defendants’
statements about “who is responsible for the debt? The answer is, Grant!” and
statements that the properties acquired by the Funds were assets, rather than
liabilities. The FAC plausibly alleged that these statements were “untrue statements
of fact,” 15 U.S.C. § 77l(a)(2), because they suggest investors are not responsible
for the “significant monthly debt service payments.” FAC ¶ 82.3
3 Judge Bress does not join this paragraph and would find the debt obligation statements not actionable.
7 In addition, the district court erred in holding that the bespeaks caution
doctrine warranted dismissal of all alleged misstatements. The bespeaks caution
doctrine allows a court to rule, as a matter of law, that a defendant’s “forward-
looking representations contained enough cautionary language or risk disclosure
to protect the defendant against claims of securities fraud.” In re Worlds of Wonder
Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994). A dismissal on the pleadings based
on the bespeaks caution doctrine is justified only by a “stringent” showing that
“‘reasonable minds could not disagree that the challenged statements were not
misleading.’” Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940,
947 (9th Cir. 2005) (quoting In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1409 (9th
Cir. 1996)). Whether a statement in a public document with cautionary language
is misleading may only be determined as a matter of law when reasonable minds
could not disagree that the “mix” of information in the document is not misleading.
Id.
This Court has not directly addressed whether the bespeaks caution doctrine
requires cautionary language to appear in the same communication as the statement
it insulates. However, even if we assume, without deciding, that cautionary language
need not necessarily appear in the same document as the alleged misstatement, the
warnings in the offering circulars do not insulate misstatements made in Instagram
posts and YouTube videos under the bespeaks caution doctrine. “[T]he bespeaks
8 caution doctrine applies only to precise cautionary language which directly
addresses itself to future projections, estimates or forecasts in a prospectus.” Worlds
of Wonder, 35 F.3d at 1414. Here, the offering circulars contain only generalized
cautionary language that is too broad to immunize the otherwise actionable alleged
misstatements about IRR and distributions, rendering the bespeaks caution doctrine
inapplicable. In addition, the offering circulars for Funds V and VI were finalized
and publicly filed in December 2018 and September 2019, respectively, while the
alleged misstatements in the Instagram posts and YouTube video were primarily
made later, from February through December 2019, and thus many of the
misstatements are too attenuated from the release of the offering circulars to be
insulated by the warnings contained therein.
In contrast, the district court did not err in holding that misrepresentations or
omissions made in the Fund V and VI offering circulars themselves are not
actionable. 4 Pino did not sufficiently allege that the descriptions in the offering
4 Specifically, the following alleged omissions and misstatements in the offering circulars are not actionable: (1) that the offering circulars represented the Funds’ strategy was to acquire multi-family apartment communities at “below-market prices,” when in fact Cardone and Cardone Capital purchased the “Delray” property at a high price to maximize their fee (FAC ¶¶ 86–87); (2) that the offering circulars represented that necessary financing would be secured before properties were obtained, when in fact Cardone purchased the properties from third parties before selling them to the Funds without informing investors (FAC ¶¶ 88–93); and (3) the Funds did not disclose that Cardone charged investors interest on money loaned to the Fund to acquire properties (FAC ¶¶ 96–100).
9 circulars of Defendants’ strategy to purchase properties below market value was
misleading. Instead, Pino only alleges that the Funds overpaid in the purchase of a
single property, the Delray property, which does not bear on Defendants’ intended
strategy to purchase property at below-market prices.
In addition, any alleged omission regarding Cardone receiving an acquisition
fee from sale of the Delray property in the Fund V offering is not actionable. The
Fund V offering circular expressly disclosed the potential for conflicts of interest
and related-party transactions between the Fund, Cardone Capital, and its affiliates,
and that Defendants had sole discretion to decide what properties to purchase, so the
allegation that Defendants engaged in undisclosed self-dealing is not actionable. For
the same reason, the district court correctly dismissed Pino’s claims that the Funds
did not disclose that Cardone Capital was extending commercially unnecessary,
interest-bearing loans to the Funds; the offering circulars warn that Cardone and
Cardone Capital may obtain lines of credit and long-term financing that may be
secured by Fund assets, and have broad authority to incur debt and high debt levels.
For the foregoing reasons, we reverse the district court’s dismissal of Pino’s
§§ 12(a)(2) and 15 claims as to Defendants’ alleged statements regarding a 15% IRR
and distributions, as well as the Funds’ debt obligations. Because Pino did not plead
these claims under the standard in Omnicare, the district court shall grant Pino leave
to amend the FAC to replead these claims consistent with this memorandum
10 disposition and opinion. We affirm the district court on Pino’s Securities Act claims
on the remainder of the alleged misstatements. On remand, Defendants may raise
arguments to the district court regarding application of the Omnicare standard, but
Defendants may not relitigate any of the issues resolved by this memorandum
disposition.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.5
5 The parties shall bear their own costs on appeal.