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

Background

The plaintiffs—Ellusionist Cash Balance Plan and Trust, Uyen “Cindy” Huhyn, Southwest Investments Funds, LLC, AVR Group, LLC, Trident Asset Management, Inc., and Phoenix Affordable Housing Authority, LLC—sued Spiegel Accountancy Corp., Jeffrey Spiegel, Ryan Spiegel, and SAC Advisory Group, LLC. They alleged that Zachary Horwitz operated a Ponzi scheme through 1inMM Capital, LLC, by selling investments tied to purported movie-distribution rights. The complaint alleged that the defendants’ efforts resulted in approximately $75 million in investments and that the plaintiffs collectively invested more than $17 million.

The second amended complaint asserted federal claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, Sections 12(a)(2) and 15 of the Securities Act of 1933, and Section 29 of the Securities Exchange Act. It also asserted claims under California Corporations Code § 25401, negligent misrepresentation, accounting malpractice, and unjust enrichment.

Motion to Dismiss

The defendants moved to dismiss all claims under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally viable claim. For the Section 10(b) and Rule 10b-5 claim, the court held that the plaintiffs had not adequately pleaded an actionable misstatement or omission. In particular, the plaintiffs did not sufficiently show that the alleged statements were material, connected to the purchase or sale of the securities at issue, false when made, or based on an actionable omission. The court also found that the plaintiffs had not adequately alleged that the defendants knew the statements were false when they made them.

The court granted dismissal of the Section 12(a)(2) claim because the allegations described a limited offering to accredited investors with substantial investments and preexisting relationships with SAC, rather than a public offering involving a qualifying prospectus. The Section 15 claim failed because it depended on an underlying Section 12 violation, which the plaintiffs had not adequately pleaded. The Section 29 claim also failed because it depended on an underlying securities-law violation that had not been adequately alleged.

The court granted the defendants’ request for judicial notice of specified court records, including records from the criminal case involving Horwitz and related litigation materials. The court did not reach the defendants’ remaining arguments concerning the Section 10(b) claim after finding that the alleged misstatements and omissions were insufficiently pleaded.

Leave to Amend and State Claims

The court denied further leave to amend because the plaintiffs had already filed three versions of the complaint and had failed in each version to plead a viable federal claim. It therefore found that further amendment would be futile.

Because the federal claims were dismissed, the court declined to exercise supplemental jurisdiction—the court’s authority to hear related state-law claims—over the California Corporations Code, negligent-misrepresentation, accounting-malpractice, and unjust-enrichment claims. The court granted the motion to dismiss as to the federal claims without leave to amend, directed entry of judgment consistent with the order, and directed the clerk to close the file.