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

Background

Zachary Horwitz operated 1inMM Capital, LLC, which allegedly raised more than $690 million through a Ponzi scheme. The scheme involved promissory notes and investment agreements tied to purported purchases and licensing of movie rights for HBO and Netflix. According to the first amended complaint, Horwitz had no relationship with HBO or Netflix, did not sign distribution agreements with them, and did not acquire the promised movie rights with the money raised.

The plaintiffs alleged that Spiegel Accountancy Corporation, Jeffrey Spiegel, Ryan Spiegel, and SAC Advisory Group, LLC helped promote the investments. The plaintiffs named in the first amended complaint were Ellusionist Cash Balance Plan and Trust, Uyen Huhyn, Southwest Investments Funds, LLC, AVR Group, LLC, Trident Asset Management, Inc., and Phoenix Affordable Housing Authority, LLC. Their collective investments allegedly exceeded $17 million.

The first amended complaint asserted eight causes of action: claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; Sections 12(a)(2) and 15 of the Securities Act of 1933; a declaratory-judgment claim under Section 29(b) of the Securities Exchange Act; claims under California Corporations Code sections 25401 and 25403; negligent misrepresentation; and accounting malpractice.

Motion to Dismiss

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legally recognized claim. The court also applied Federal Rule of Civil Procedure 9(b), which requires fraud allegations to identify the basic details of the alleged misconduct, including who, what, when, where, and how. Securities-fraud claims also had to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act.

For the Section 10(b) and Rule 10b-5 claim, the defendants argued that the plaintiffs used improper group pleading and failed to identify the specific misleading statements, the speaker, the recipient, the timing, why the statements were misleading, and how the statements caused the plaintiffs’ losses. The plaintiffs relied on allegations that the defendants represented that they had investigated Horwitz’s claims, that 1inMM had movie-distribution arrangements, that it received money from HBO, and that the defendants were co-signers on Horwitz’s bank account.

The court found these allegations too general. They did not specify which defendant made each statement or to which plaintiff, and many did not identify when the statements were made. Because the complaint lacked these foundational details, the court could not meaningfully evaluate falsity, the defendants’ required state of mind, or loss causation. The court therefore dismissed the Section 10(b) and Rule 10b-5 claim.

The court also dismissed the Section 12(a)(2) claim. The defendants argued that Section 12(a)(2) did not apply to private placements and also argued that the plaintiffs had not adequately alleged all required elements. The plaintiffs focused on whether the offering was public or private and did not address the other elements identified by the defendants. The court treated that failure as consent to dismissal.

The Section 15 claim was dismissed because it depended on an adequately pleaded underlying securities-law violation, and the court had dismissed the Section 12 claim. The Section 29(b) claim was also dismissed because it depended on an adequately pleaded underlying securities-law violation.

State-Law Claims and Disposition

The court declined to exercise supplemental jurisdiction, meaning authority to hear related state-law claims, over the California Corporations Code, negligent-misrepresentation, and accounting-malpractice claims after dismissing all federal claims. Those state-law claims therefore also stood dismissed.

Judge Araceli Martinez-Olguin granted the motion to dismiss the first amended complaint and granted leave to amend. The plaintiffs could file another amended complaint within 21 days of the order. The opinion does not state that the dismissal was with or without prejudice.