Securities And Exchange Commission v. Sisu Capital, LLC

• Court: District Court, N.D. California
• Decided: June 10, 2024
• Docket: 3:23-cv-03855
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 SECURITIES AND EXCHANGE Case No. 3:23-cv-03855-JSC COMMISSION, 8 Plaintiff, HANSUELI OVERTURF’S MOTION 9 TO DISMISS v. 10 Re: Dkt. Nos. 40, 41 SISU CAPITAL, LLC, et al., 11 Defendants.

12 13 The Securities and Exchange Commission (“SEC”) alleges Hansueli Overturf made 14 unauthorized trades and gave unsuitable investment advice to clients of his son’s investment firm, 15 Sisu Capital, LLC (“Sisu”), even though Mr. Overturf was suspended by the state of California 16 from acting as an investment adviser. (Dkt. No. 1.)1 Now pending before the Court is Mr. 17 Overturf’s motion to dismiss. (Dkt. Nos. 40, 41.)2 Having considered the briefing, the Court 18 concludes oral argument is not required, see N.D. Cal. Civ. L.R. 7-1(b), and DENIES the motion 19 to dismiss. The SEC has adequately pled Mr. Overturf aided and abetted Sisu’s and his son’s 20 violations of sections 206(1) and 206(2) of the Investment Advisers Act of 1940, 15 U.S.C. §§ 21 80b-6(1) & 80b-6(2). The initial case management conference remains on calendar at 9:00 22 a.m. on June 20, 2024 via Zoom video. 23 COMPLAINT ALLEGATIONS 24 Hansueli Overturf’s son, Timothy Overturf, founded Sisu in 2013, when Timothy was 18 25 1 Record citations are to material in the Electronic Case File (“ECF”); pinpoint citations are to the 26 ECF-generated page numbers at the top of the documents. 2 Mr. Overturf filed a motion to dismiss with an attached declaration (Dkt. No. 40), then refiled a 27 seemingly identical motion to dismiss with five newly attached exhibits. (Dkt. No. 41.) The 1 years old. (Dkt. No. 1 ¶¶ 1-2.) At the time Sisu was founded, Hansueli Overturf was suspended 2 by the State of California from acting as an investment adviser. (Id.) “Sisu purported to offer 3 investment advisory and portfolio management services to high net worth clients.” (Id. ¶ 2.) 4 “Hans Overturf turned over many of his personal investment advisory clients to his son’s new 5 company.” (Id.) 6 “Sisu and Timothy Overturf breached their fiduciary duties by engaging in unauthorized 7 and unsuitable trading on behalf of Sisu’s investment advisory clients from December 2017 8 through May 2021, by making investments in Sisu client discretionary accounts contrary to 9 clients’ instructions, and by making unsuitable investments on behalf of Sisu clients.” (Id.¶ 3.) 10 “[F]rom 2017 to 2021, Hans Overturf also made unauthorized trades and recommended unsuitable 11 investments for Sisu’s clients”—including giving advice while he was suspended by the State of 12 California from giving such advice from November 2011 to November 2014 and December 2017 13 to December 2019. (Id. ¶¶ 1, 5.) 14 “Numerous clients retained Sisu under the belief that Hans Overturf was working for Sisu 15 and that he would serve as their investment adviser, including during the period of his suspension 16 from 2017 through 2019.” (Id. ¶ 24.) During his suspension from 2017 to 2019, Hansueli 17 Overturf “provided investment advisory services to Sisu clients, including by communicating 18 investment advice and placing trades in certain Sisu client accounts,” “provided investment advice 19 to Sisu clients during in person meetings and phone calls,” and “exchanged emails and other 20 electronic messages with Sisu clients.” (Id. ¶ 23.) Moreover, while Timothy Overturf knew his 21 father was suspended and prohibited from providing investment advice, Timothy Overturf 22 “allowed Hans Overturf to use Hans Overturf’s limited power of attorney to trade in some Sisu 23 accounts.” (Id. ¶ 25.) Hansueli Overturf “held himself out to Sisu clients as authorized to provide 24 investment advisory services on Sisu’s behalf”—for example, his email signature block stated he 25 was “Head of Business Development, Sisu Holding Company, Inc..” (Id. ¶ 31.) He also “invited 26 Sisu clients to set up an appointment with him by sending an email to a Sisu employee.” (Id.) 27 Neither Hansueli Overturf nor his son informed Sisu clients about the suspensions. (Id. ¶¶ 27-28.) 1 October 2019, and again in March 2021, Timothy Overturf purchased thinly-traded stock of a 2 particular bank (“the Bank”) for five Sisu accounts, but in each instance the transactions were 3 contrary to the clients’ instructions.” (Id. ¶ 34.) “In one instance, Timothy Overturf purchased 4 2,300 additional shares of the Bank’s stock between March 2020 and March 2021 for the account 5 of a Sisu client after that client had specifically and repeatedly instructed Hans Overturf, verbally 6 and in writing, to sell his holdings in the Bank’s stock and that he did not want to invest in the 7 stock of any bank” and “Timothy Overturf was aware of” those instructions. (Id. ¶ 35.) “These 8 trades were made as part of Timothy and Hans Overturfs’ plan, which they did not disclose to the 9 five clients, to collectively amass enough shares among Sisu’s clients and themselves for Timothy 10 Overturf to propose business partnership ideas to the Bank.” (Id. ¶ 37.) 11 Moreover, “[f]rom 2017 to 2021, Hans Overturf also recommended to Sisu clients, and 12 purchased on their behalf, unsuitable, complex financial instruments.” (Id. ¶ 39.) “Specifically, 13 Hans Overturf purchased, or directed Timothy Overturf to purchase, for Sisu clients investments 14 in an inverse short-term volatility futures product (‘the inverse short-term ETP’)” for 16 client 15 accounts. (Id.) “For most of the 16 accounts, the inverse short-term ETP was held for months, 16 and in some cases, for over a year,” (id. ¶ 40), even though “[t]he prospectus for this product 17 warns that it is ‘intended for short-term use; investors should actively manage and monitor their 18 investments, as frequently as daily.’” (Id. ¶ 39.) “The inverse short-term ETP was not a suitable 19 investment for the 16 Sisu client accounts because those clients’ investment objective was to 20 preserve income over a long period of time.” (Id. ¶ 41.) Further, “[o]n at least one occasion in 21 2021, Hans Overturf also increased a client’s holdings in the inverse short-term ETP, despite 22 repeated written and verbal instructions by the client to sell the product.” (Id. ¶ 42.) “Some Sisu 23 clients suffered significant losses” due to these investments. (Id. ¶ 43.) 24 “From 2017 to 2021, Sisu and Timothy Overturf received at least $2 million in payments 25 from clients while acting contrary to their clients’ interests, including during periods of Hans 26 Overturf’s undisclosed suspension and while making unsuitable and unauthorized trades for client 27 accounts.” (Id. ¶ 47.) “Timothy Overturf received approximately $858,000 in owner draws and 1 The SEC alleges Sisu and Timothy Overturf violated Sections 206(1) and 206(2) of the 2 Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-6(1) & 80b-6(2), and 3 Hansueli Overturf aided and abetted their violations. (Id. ¶ 7.) 4 LEGAL STANDARD 5 “Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable 6 legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela 7 Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). The Court “accept[s] factual allegations in 8 the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving 9 party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). 10 When, as here, the complaint alleges fraud, the plaintiff “must state with particularity the 11 circumstances constituting fraud or mistake,” though “[m]alice, intent, knowledge, and other 12 conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). 13 Generally, a district court cannot “consider material outside the pleadings when assessing 14 the sufficiency of a complaint under Rule 12(b)(6);” however, Federal Rule of Evidence 201 15 allows a district court to do so through judicial notice. Khoja v. Orexigen Therapeutics, Inc., 899 16 F.3d 988, 998 (9th Cir. 2018). A court can take judicial notice of facts “not subject to reasonable 17 dispute” because they are “generally known within the court’s territorial jurisdiction” or can be 18 “accurately determined from sources whose accuracy cannot reasonably be questioned.” Fed. R. 19 Evid. 201(b). This includes “undisputed matters of public record, including documents on file in 20 federal and state courts.” Harris v. Cty. of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012). 21 DISCUSSION 22 Sections 206(1) and 206(2) of the Investment Advisers Act provide:

23 It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, directly or 24 indirectly-- (1) to employ any device, scheme, or artifice to defraud any 25 client or prospective client; (2) to engage in any transaction, practice, or course of business 26 which operates as a fraud or deceit upon any client or prospective client[.] 27 1 206(1)” but it “is not required for” violations of § 206(2). Vernazza v. S.E.C., 327 F.3d 851, 860 2 (9th Cir.), amended, 335 F.3d 1096 (9th Cir. 2003); see also Sec. & Exch. Comm’n v. Langemeier, 3 No. 3:22-CV-00269-LRH-CSD, 2024 WL 664452, at *12 (D. Nev. Feb. 16, 2024) (explaining 4 “[t]he same elements are required to prove a Section 206(2) violation” as a Section 206(1) 5 violation ‘except that scienter is not required” for a section 206(2) violation). “[K]nowing or 6 reckless conduct” constitutes scienter for § 206(1). Id. “Proof of simple negligence suffices for a 7 violation of Section 206(2).” Robare Grp., Ltd. v. Sec. & Exch. Comm’n, 922 F.3d 468, 472 (D.C. 8 Cir. 2019). Further, neither provision “require[s] proof of intent to injure and actual injury to the 9 client.” Sec. & Exch. Comm’n v. Cap. Gains Rsch. Bureau, Inc., 375 U.S. 180, 195 (1963). 10 “The Investment Advisers Act of 1940 was ‘directed not only at dishonor, but also at 11 conduct that tempts dishonor.’” Sec. & Exch. Comm’n v. Cap. Gains Rsch. Bureau, Inc., 375 U.S. 12 180, 200 (1963) (quoting United States v. Mississippi Valley Generating Co., 364 U.S. 520, 549 13 (1961)) (cleaned up). Moreover, because investment advisors are fiduciaries for their clients, they 14 have “an affirmative duty of utmost good faith, and full and fair disclosure of all material facts, as 15 well as an affirmative obligation to employ reasonable care to avoid misleading his clients.” Id. at 16 194 (cleaned up). Accordingly, “[f]ailure to disclose material facts” constitutes “fraud or deceit” 17 for purposes of the Investment Act. Id. at 200. “[F]ailure by an investment adviser to disclose 18 potential conflicts of interest to its clients constitutes fraud within the meaning of Sections 206(1) 19 and (2).” Robare Grp., Ltd. v. Sec. & Exch. Comm’n, 922 F.3d 468, 472 (D.C. Cir. 2019); see 20 also Vernazza v. S.E.C., 327 F.3d 851, 859-60 (9th Cir.), amended, 335 F.3d 1096 (9th Cir. 2003) 21 (holding investment advisers “ha[ve] a duty to disclose any potential conflicts of interest 22 accurately and completely,” and “[i]t is indisputable that potential conflicts of interest are 23 ‘material’ facts”). 24 The SEC can bring an enforcement action in U.S. district court against “any person that 25 knowingly or recklessly has aided[ or] abetted . . . a violation of any provision of” the Investment 26 Advisors Act. 15 U.S.C. § 80b-9(f). To establish Hansueli Overturf “aided and abetted” Timothy 27 Overturf’s and Sisu’s “violation of federal securities laws, it must be found that: (1) [Timothy 1 the primary violation and of his [] own role in furthering it; and (3) [Hansueli Overturf] provided 2 substantial assistance in the primary violation.” Ponce v. S.E.C., 345 F.3d 722, 737 (9th Cir. 3 2003) (applying this test to Sections 13(a) and 13(b)(2) of the Exchange Act); see also U.S. S.E.C. 4 v. Fehn, 97 F.3d 1276, 1288 (9th Cir. 1996) (applying the same three factor test to an allegation of 5 aiding and abetting as to Sections 10(b) and 15(d) of the Securities Exchange Act); Sec. & Exch. 6 Comm’n v. Roberts, No. 8:21-CV-01615-DOC-DFM, 2022 WL 2203676, at *5 (C.D. Cal. Jan. 25, 7 2022) (applying same three factor test to allegations of aiding and abetting violations of §§ 206(1) 8 and 206(2) of the Investment Advisers Act); Sec. & Exch. Comm’n v. Sztrom, 538 F. Supp. 3d 9 1050, 1062 (S.D. Cal. 2021) (applying same three factor test to an allegation of aiding and 10 abetting violations of § 204 of the Advisers Act). 11 The SEC has sufficiently pled Hansueli Overturf aided and abetted Timothy Overturf’s and 12 Sisu’s violations of §§ 206(1) and 206(2) of the Investment Advisers Act. The SEC alleges 13 Timothy Overturf and Sisu advised clients about investing in securities and received compensation 14 for that investment, so the SEC has sufficiently pled Sisu and Timothy Overturf were investment 15 advisers. Further, the SEC alleges Sisu and Timothy Overturf violated their fiduciary duties by 16 purchasing the bank securities contrary to clients’ expressed preferences to benefit their own 17 financial interests without disclosing their potential conflict of interest to their clients, and by 18 failing to disclose Hansueli Overturf’s suspension to their clients while allowing Hansueli 19 Overturf to participate in advising clients. Finally, the SEC pleads both that Hansueli Overturf (1) 20 had knowledge of the violation and his own role in furthering it and (2) provided substantial 21 assistance in the primary violation by alleging Hansueli Overturf’s extensive involvement in Sisu 22 and with Sisu clients. 23 Indeed, this case closely resembles Securities and Exchange Commission v. Sztrom, in 24 which the district court held the SEC adequately pled a father aided and abetted in his son’s 25 violations of §§ 206(1) and (2) of the Investment Advisers Act. 538 F. Supp. 3d 1050 (S.D. Cal. 26 2021). In Sztrom, the SEC alleged Michael Sztrom was prohibited from using various brokerage 27 platforms, and therefore could not execute trades for his clients, due to an ongoing Financial 1 role as an investment adviser representative for a company that was a registered investment 2 adviser. Id. The SEC alleged Michael and David “deceived [their] clients in breach of their 3 fiduciary duties by having Michael continue to act as the clients’ investment adviser” despite not 4 despite not being an investment adviser representative associated with the company and “being 5 prohibited from using [] brokerage platform[s].” Id. The court held the “SEC has pled sufficient 6 detailed allegations of the Defendants’ alleged fraudulent scheme to mislead and deceive” their 7 “clients by concealing that Michael was not associated with [the company] or another registered 8 investment adviser,” and that he was “banned using from the [brokerage] platform,” among other 9 things. Id. at 1058. Further, the court concluded such allegations sufficiently pled materiality 10 because it was “plausible that a reasonable investor would have considered it important to know 11 that the individual giving them investment advice and making trades on their behalf was not 12 associated with any registered investment adviser as an [investment adviser representative]” and 13 “was prohibited from accessing the brokerage platform containing their investment portfolio.” Id. 14 at 1061. 15 Similarly, here, drawing all inferences from the alleged facts in the SEC’s favor, Hanseuli 16 Overturf and his son represented to clients that Hansueli Overturf was an investment adviser 17 working for Sisu without disclosing that he had been suspended and could not work as an 18 investment adviser. Such deception is sufficient to plead violations of §§ 206(1) and 206(2) of the 19 Investment Advisers Act. 20 Hansueli Overturf contends the SEC’s complaint must be dismissed under Federal Rules of 21 Civil Procedure 12(b)(6) for three main reasons: (1) the SEC fails to allege Hansueli Overturf was 22 an investment adviser representative or that he acted as one; (2) the SEC’s allegation Hansueli 23 Overturf made unsuitable investment recommendations is “only pointing to a small slice of a 24 diversified portfolio” and therefore any claim he made poor investment decisions is substantively 25 incorrect and (3) the SEC fails to plead the conditions for aiding and abetting. Each argument is 26 unpersuasive. 27 First, while the SEC does not allege Hansueli Overturf received compensation for his 1 adviser to plausibly allege liability under an aiding and abetting theory. In the Investment 2 Advisors Act, an “investment adviser” is defined as

3 any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as 4 to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part 5 of a regular business, issues or promulgates analyses or reports concerning securities. 6 7 15 U.S.C. § 80b-2(a)(11). Hansueli Overturf asserts he is not an investment adviser because his 8 advice was “unpaid” and therefore “does not fall under the definition of Investment Adviser” in 9 the Investment Advisers Act.3 (Dkt. No. 41 at 6.) However, the SEC alleges Hansueli Overturf 10 provided substantial assistance to Sisu and Timothy Overturf—who are alleged to have received 11 payments for investment advice and therefore were investment advisers—and these allegations are 12 sufficient to support an aiding and abetting theory of liability. 13 Second, Hansueli Overturf’s argument that the SEC unfairly focuses on a few investments 14 rather than looking at the investment portfolios as a whole is premature. Hansueli Overturf 15 contends he hedged his riskier bets, so the portfolios, as whole, constituted wise investment 16 decisions even if certain individual investment decisions within those portfolios were risky. 17 However, these allegations dispute the factual accuracy of the complaint and rely on material 18 outside the complaint. At the motion to dismiss stage, with limited exceptions, the Court only 19 considers material attached to the complaint and assumes the truth of all factual allegations in the 20 complaint. So, even if Hansueli Overturf’s contentions turn out to be true, they do not warrant 21 dismissal at this stage. 22 Hansueli Overturf also argues “[i]f the underlying offenses that the plaintiff alleges were 23 3 Hansueli Overturf also submits three exhibits (Dkt. Nos. 41-1, 41-2, 41-3, 41-4, and 41-5), which 24 he asserts demonstrates he offers “unsolicited and unpaid advise” about the stock market and the economy. (Dkt. No. 41 at 6.) The Court does not consider these documents as they are not 25 attached to the complaint are not properly subject to judicial notice. See Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007) (“In ruling on a 12(b)(6) motion, a court may generally consider 26 only allegations contained in the pleadings, exhibits attached to the complaint, and matters properly subject to judicial notice.”). However, the Court notes considering these documents 27 would not change the Court’s analysis nor conclusions, as none of the documents establish 1 grave and a concern to some clients, and clients had been chronically overcharged, why did not a 2 single client file a complaint of any sort, despite the SEC’s extensive interviews and the posing of 3 many leading questions?” (Dkt. No. 41 at 10.) But the complaint does not allege that no client 4 filed a complaint, so to assume that no client did so would be to improperly draw inferences in 5 Hansueli Overturf’s favor. Daniels-Hall v. Nat'l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010) 6 (explaining, at the motion to dismiss stage, courts “accept as true all well-pleaded allegations of 7 material fact, and construe them in the light most favorable to the non-moving party”). Moreover, 8 materiality under securities laws requires “a substantial likelihood that the disclosure of the 9 omitted fact would have been viewed by the reasonable investor as having significantly altered the 10 ‘total mix’ of information made available.” S.E.C. v. Todd, 642 F.3d 1207, 1215 (9th Cir. 2011) 11 (cleaned up)(emphasis added). So, securities laws instruct the Court to look at an objective, 12 reasonable investor rather than the particular clients impacted by Defendants’ activities. See also 13 Sztrom, 538 F. Supp. 3d at 1061 (“[T]he ‘reasonable investor’ test is an objective standard, and 14 thus the reactions of the actual Sztrom clients are not dispositive.”). So, even if Hansueli 15 Overturf’s clients were unperturbed by the conduct demonstrated by the complaint’s allegations, 16 the SEC has sufficiently pled a reasonable investor would have considered Sisu and Timothy 17 Overturf’s misrepresentations to be material. 18 Finally, Hansueli Overturf cites the wrong legal standard for aiding and abetting liability. 19 Hansueli Overturf asserts:

20 [T]he elements necessary to convict under aiding and abetting theory are: 21 1. That the accused had specific intent to facilitate the commission of 22 a crime [in this instance the violation of the Advisers Act] by another;

23 2. That the accused had the requisite intent of the underlying substantive offense 24 3. That the accused assisted or participated in the commission of the 25 underlying substantive offense; and

26 4. That someone committed the underlying offense. 27 (Dkt. No. 41 at 9 (citing U.S. Dep’t of Just., Criminal Resource Manual: 2474. Elements Of 1 2474-elements-aiding-and-abetting).) However, as the Criminal Resource Manual that Hansueli 2 || Overturf cites explains, these are the elements necessary to be “‘convict[ed] as a principal of aiding 3 and abetting the commission of a crime.” Hansueli Overturf is facing civil, rather than criminal, 4 || charges of violating securities laws. In such scenarios, a different standard of aiding and abetting 5 || liability applies, and the SEC was not required to plead Hansueli Overturf had the specific intent 6 || to facilitate the commission of the securities violations. Hansueli Overturf also argues the SEC 7 “fails to provide concrete evidence that Hansueli Overturf knowingly provided substantial 8 || assistance to Timothy Overturf or Sisu Capital” because “[t]here is no clear indication that 9 || Hansueli Overturf had specific intent to facilitate any violations of the Advisors Act.” (Dkt. No. 10 52 at 2.) However, at the motion to dismiss stage, the SEC is not required to provide evidence; 11 instead, the SEC’s factual allegations are assumed to be true. And, as discussed above, to prove 12 || aiding and abetting under the Investment Advisor’s Act, the SEC need not demonstrate Hanseuli 13 Overturf intended to violate the Advisors Act, but rather only that he had knowledge of Sisu and 14 || Timothy Overturf’s violations and provided them substantial assistance in their violations. The 3 15 SEC has sufficiently pled the required elements of the aiding and abetting standard for charges 16 || under the Investment Advisors Act. 3 17 So, the Court holds the SEC adequately pleads Hansueli Overturf aided and abetted Sisu’s 18 and Timothy Overturf’s violations of §§ 206(1) and 206(2) of the Investment Advisers Act, and 19 || therefore DENIES Hansueli Overturf’s motion to dismiss. 20 CONCLUSION 21 For the reasons stated above, the motion to dismiss is DENIED. The initial case 22 || management conference remains on calendar at 9:00 a.m. on June 20, 2024 via Zoom video. 23 Mr. Overturf or his retained counsel, if any, must appear at that time. 24 This Order resolves Dkt. Nos.: 40, 41. 25 IT IS SO ORDERED. 26 Dated: June 10, 2024 lus Sur JACQUELINE SCOTT CORLEY 28 United States District Judge