backOn August 15, 2023, Northern District of California Judge Araceli Martinez-Olguin dismissed a lawsuit asserting that Spiegel Accountancy Corp., a California-based accounting firm, violated Section 10(b) of the Securities Act of 1934 and Rule 10b-5, Section 12(a)(2) and Section 15 of the Securities Act of 1933, and California Corporations Code, and committed negligent misrepresentation and accounting malpractice in connection with its involvement with an alleged Ponzi scheme perpetrated by Zachary Horwitz, through his company 1inMM Capital, LLC. Plaintiffs purchased promissory notes that were to be used to purchase rights to movies that would then be licensed to HBO or Netflix. Plaintiffs claimed that the funds from these promissory notes were not used to purchase movie rights but rather were paid out to the Defendants. Plaintiffs specifically claimed that Spiegel Accountancy Corp., and its principles, perpetuated false information about the financial position of 1inMM Capital, LLC, and acted as placement agents via promissory notes, which induced Plaintiffs’ investments in the Profit Sharing Agreements.
Judge Martinez-Olguin dismissed, with leave to replead, the securities fraud claim finding that Plaintiffs failed to plead with sufficient particularity details surrounding the alleged misrepresentations such as who made the representation ad timing of the alleged misrepresentation and noted that some allegations post-dated Plaintiffs’ investments.
In connection with the Section 12(a)(2) claim, Defendants argued that Plaintiffs’ cause of action fails in that Section 12(a)(2) only applies to public offerings and this was a private offering. Plaintiffs responded asserting that these were public offerings and claimed that Defendants had conceded on all other elements. While claiming this concession by Defendants, Plaintiffs told the court they would seek leave to file a sur-reply if Defendants raised any new arguments in their reply. Defendants replied rejecting any concession and argued that Plaintiffs failed to allege all of the required elements. Plaintiffs subsequently failed to seek leave to file a sur-reply, as they had conveyed to the court that they would. The court then dismissed the Section 12(a)(2) claim finding that “Plaintiffs’ inaction” was “consent to grant the motion to dismiss this cause of action.” Following the dismissal of the Section 12 claim, the Section 15 claim necessarily failed.
The court also dismissed the Section 29 claim, which asserts that the Profit Sharing Agreement was void for impermissibly waived compliance with antifraud and civil liability provisions of the Securities Exchange Acts of 1933 and 1934. The court, citing to Facebook, Inc. v. Pacific Northwest Software, Inc., 640 F.3d 1034, 1039 (9th Cir. 2011), found that the agreement could not be voided when the “deficiencies in the operative complaint” left a “big ‘if’” as to whether there were potential securities violations. The court noted that it could not sustain such a claim “where allegations of a necessary predicate claim are inadequate.”
Lastly, the court declined to exercise supplemental jurisdiction over the state law claims (including accounting malpractice) since the court dismissed all of the federal claims.
The case is Ellusionist Cash Balance Plan and Trust, et al. v. Spiegel Accountancy Corp. et al., Case No. 23-cv-00287-AMO (N.D. Cal.). Plaintiffs are represented by Loftus & Eisenberg, Ltd. Defendants are represented by Baldwin Mader Law Group.
A copy of the order can be found here.