Dos Bowies LP v. Ackerman

Background

Thirty-eight plaintiffs sued defendants connected to Q3 Holdings, LLC and Q3 I, LP, investment entities that solicited money for cryptocurrency trading. The complaint alleged securities fraud, fraudulent inducement, breach of fiduciary duty, civil conspiracy to commit fraud, negligence, conversion, and unjust enrichment.

The complaint alleged that the defendants marketed the investments using false statements about the entities’ profitability, trading algorithm, assets under management, investment practices, and control over the trading account. It also alleged that defendants collected approximately $3.9 million from the plaintiffs and approximately $33 million from more than 150 investors, did not invest most of the money as promised, transferred investor funds to personal accounts, and paid earlier investors with later investors’ contributions.

Defendants James A. Seijas and Dr. Quan Tran moved to dismiss the corrected complaint under Federal Rules of Civil Procedure 12(b)(6), 8(a), and 9(b). A Rule 12(b)(6) motion tests whether a complaint states a legally sufficient claim. Rule 9(b) requires fraud to be pleaded with particularity, and the Private Securities Litigation Reform Act requires securities-fraud plaintiffs to plead facts supporting a strong inference that the defendant acted with the required fraudulent state of mind, known as scienter.

Securities-fraud claims

The complaint asserted federal securities-fraud claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5 against Tran and Seijas. The defendants argued that the complaint did not adequately allege reliance, identify each defendant’s fraudulent statements with sufficient detail, or plead scienter.

The court rejected the reliance argument. The complaint specifically alleged that plaintiffs relied on Tran’s and Seijas’s misrepresentations when deciding to invest. The court also found that Seijas’s late-2019 statements could potentially have been relied on by plaintiffs who continued investing at that time, and that the complaint expressly alleged reliance on Tran’s social-media statements.

The court nevertheless found deficiencies in the fraud allegations. The complaint often attributed statements to “Defendants” collectively, without identifying each defendant’s role. Those collective allegations did not satisfy Rule 9(b)’s particularity requirement because they did not tell each defendant the nature of his alleged participation.

As to Tran, the complaint identified specific statements he allegedly posted on Facebook, including false brokerage statements, account balances, returns, and claims about the use and control of investor funds. The court held that these allegations identified the statements, speaker, timing, and alleged falsity, but did not plead facts creating a strong inference that Tran acted knowingly, intentionally, or recklessly. The complaint’s only supporting fact was Tran’s statement that Ackerman could not transfer funds alone even though Ackerman had the only login credentials. The court found no other facts showing Tran’s motive, knowledge, or reckless conduct.

As to Seijas, the complaint described several alleged misstatements, including statements about investors’ share of profits, the performance of the trading algorithm and Q3 Companies, Seijas’s role in trading, and Ackerman’s control over investor funds. The court again found that the complaint did not plead sufficient facts supporting a strong inference of scienter. The only fact supporting such an inference concerned Seijas’s statements about Ackerman’s control of the trading account; the complaint otherwise lacked particularized facts about Seijas’s state of mind regarding the alleged performance-related misstatements.

State-law claims and amendment

The plaintiffs relied on federal-question jurisdiction for the securities claims and supplemental jurisdiction for the state-law claims. Because the court dismissed the federal claims, it declined to exercise supplemental jurisdiction over the remaining claims for fraudulent inducement, breach of fiduciary duty, civil conspiracy to commit fraud, negligence, conversion, and unjust enrichment. The court noted that the case was still in its early stages and that fact discovery had not begun.

The court dismissed the complaint but allowed the plaintiffs to seek leave to replead within 21 days of the opinion. Any request had to be a letter motion of no more than three pages explaining how a proposed First Amended Complaint would cure the particularity or scienter deficiencies, accompanied by a marked draft. Defendants would have seven days to respond to any such request.

Disposition

Judge Lorna G. Schofield granted defendants’ motion to dismiss. The court directed the Clerk of Court to close the motion at Docket No. 38.