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

Background

The case arose from a Ponzi scheme operated through 1inMM Capital, LLC, by Zachary Horwitz. The complaint alleged that Horwitz raised more than $690 million by issuing promissory notes and representing that the money would be used to acquire and license movie rights to companies including HBO and Netflix. The complaint further alleged that Horwitz had no actual relationship with those companies, did not acquire the promised rights, and used fabricated agreements and emails.

The plaintiffs alleged that Spiegel Accountancy Corporation, Jeffrey Spiegel, Ryan Spiegel, and SAC Advisory Group, LLC helped bring investments into the scheme. The defendants’ efforts allegedly led to $75,132,950 in investments, while the plaintiffs collectively invested more than $17 million. The investments were structured as profit-sharing agreements under which SAC provided funds to 1inMM in exchange for an interest in money supposedly received from relicensing movie distribution rights.

Claims and procedural posture

The second amended complaint asserted claims for:

- violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5; - violation of Section 12(a)(2) of the Securities Act of 1933; - control-person liability under Section 15 of the Securities Act of 1933; - declaratory relief under Section 29 of the Securities Exchange Act of 1934; - violation of California Corporations Code section 25401; - negligent misrepresentation; - accounting malpractice; and - unjust enrichment.

The defendants moved to dismiss all claims under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally sufficient claim. The court had previously dismissed two earlier versions of the complaint with permission to amend. The court also granted the defendants’ request for judicial notice of identified court records because they were public records whose accuracy could not reasonably be questioned.

Federal securities claims

For the Section 10(b) and Rule 10b-5 claim, the court applied heightened pleading requirements for fraud claims and the Private Securities Litigation Reform Act. The court held that the plaintiffs failed to sufficiently allege an actionable misstatement or omission.

The court agreed that the plaintiffs’ allegations did not adequately establish materiality. It also noted that the plaintiffs did not meaningfully respond to the defendants’ argument that several statements concerned projects in which the plaintiffs did not invest, while other statements were made after the investments. The court stated that this lack of a connection between the alleged statements and the purchase or sale of a security was an independently sufficient reason for dismissal.

The court separately found that the allegations concerning due diligence were insufficient. The complaint alleged that the defendants performed some due diligence, including engaging an attorney to draft documents and review contracts and ordering a background check. The plaintiffs therefore had not alleged facts showing that the defendants performed no due diligence or that the statements were false when made. The court also rejected omission theories based on the alleged failure to conduct due diligence because the complaint itself alleged that some due diligence occurred. The allegations concerning the profit-sharing agreements likewise did not show that the defendants knew the statements were false when made.

For the Section 12(a)(2) claim, the court concluded that the allegations did not show a public offering involving a qualifying prospectus. The profit-sharing agreements described the plaintiffs as accredited investors, the investments ranged from hundreds of thousands of dollars to multiple millions of dollars, and all but one plaintiff had a prior relationship with SAC. The court held that these allegations supported treating the offering as limited rather than public and granted the motion to dismiss this claim.

The Section 15 claim was derivative of the Section 12 claim. Because the plaintiffs had not adequately pleaded an underlying Section 12 violation, the court held that the Section 15 claim also failed. The court likewise granted dismissal of the Section 29 claim because that claim depended on an underlying securities-law violation, which the plaintiffs had not adequately alleged.

Leave to amend and state-law claims

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

The court declined to exercise supplemental jurisdiction, meaning its authority to hear related state-law claims, over the claims under California Corporations Code section 25401, negligent misrepresentation, accounting malpractice, and unjust enrichment. The court did not decide those state-law claims on their merits.

Disposition

The court granted the defendants’ motion to dismiss the federal claims without leave to amend. It declined to exercise supplemental jurisdiction over the state-law claims, directed the Clerk to enter judgment consistent with the order, and closed the case.