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Sierp v. Degreen Partners LP

United States District Court, D. Arizona

January 6, 2017

Robert Sierp, et al., Plaintiffs,
DeGreen Partners LP, et al., Defendants.


          Honorable G. Murray Snow United States District Judge.

         Pending before the Court is the Motion to Dismiss and Strike by Defendants DeGreen Partners, LP, DeGreen Capital Management, LLC, and Keith DeGreen. (Doc. 22.) For the following reasons, the Court grants the motion in part and denies it in part.


         Defendant Keith DeGreen (“DeGreen”) is a resident of Ohio and Arizona. (Doc. 1 at 2.) In 2009, DeGreen formed DeGreen Partners, LP (“DP”), which is a Delaware limited partnership with a principal place of business in Arizona. (Id. at 2-3.) DP's general partner was DeGreen Capital Management, LLC (“DCM”). (Id. at 3.) DeGreen is the Managing Member of DCM. (Id.) The Limited Partnership Agreement (“LPA”) between DP and DCM vested DCM with sole discretion of investing and exercising powers on DP's behalf. (Id.)

         In 2010, Robert Sierp, a resident of Texas, considered using DCM to manage some of his investments. (Doc. 1 at 4.) He ultimately decided not to invest in DCM at that time, but he did become acquainted with DeGreen. (Id.) DeGreen subsequently sought Sierp's investments in both DP and DCM through various email correspondence as well as a presentation. (Id.) These emails included information about DP's successes and strategies, including statistics such as the company's alleged “263.04% cumulative return in its first twenty-six months of existence.” (Id.) In these emails, DeGreen also assured Sierp that he and his wife were the only investors in DP, that they had invested one million dollars in the partnership of their personal funds, and that DP followed the same investment strategies as DCM. (Id. at 5.)

         In June 2012, Sierp became a limited partner of DP and invested $1.25 million in the company.[1] (Id. at 1, 8.) In November 2012, DCM's Vice President of Operations sent an email on behalf of DeGreen to Mr. Sierp reporting significant losses, but advising “I believe our holdings may present strong upside potential.” (Id. at 9.) In August 2013, DeGreen informed Sierp and the limited partners that he would be unable to obtain Errors and Omissions (“E&O”) insurance because of the losses. (Id. at 10.) Because of this, DeGreen sent Sierp several e-mails demanding a waiver releasing DeGreen and DCM of liability for certain claims. (Id. 10-11.) Sierp alleges “DeGreen, as an attorney, expressly advised Mr. Sierp that signing the waiver does not deprive you of the right to make a claim if we, or any of the independent parties involved with DP, engage in fraud or other criminal acts that result in losses.” (Id. at 11-12.) Losses continued until DCM discontinued DP, and returned $240, 412 of Sierp's principal in February 2014. (Id. at 12.)

         On January 26, 2016, Sierp filed a complaint alleging that he invested $1.25 million and “had DeGreen been honest with [Sierp] about the financial condition and performance of DP, [Sierp] would not have made the investment.” (Id. at 8.) Specifically, Sierp alleges that DeGreen solicited his investment over the course of two years via e-mail, in-person meetings, and presentations. (Id. at 4, 7.) Sierp alleges that he was “particularly motivated by three material sales points and representations made by DeGreen during those solicitations: (1) that DeGreen would continue to maintain his own personal $1 million investment in DP; (2) that DP used the same research and protocols of DCM; and (3) DP was a long-term, three to five-year investment.” (Id. at 7.) Sierp's complaint includes eight counts[2]:

1. Count 1 - Securities Fraud - All Defendants
2. Count 2 - Fraud in the Provision of Investment Advisory Services- DCM and DeGreen
3. Count 3 - Violation of A.R.S. § 44-1998 - All Defendants
4. Count 4 - Control Liability - A.R.S. § 44-1999 - DCM and DeGreen
5. Count 5 - Breach of Fiduciary Duty - All Defendants
6. Count 6 - Negligence - All Defendants
7. Count 7 - Negligent Misrepresentation - All Defendants 8. Count 8 - Common Law Fraud; Fraud by Omission - All Defendants


         I. Legal Standard

         Generally, to survive dismissal for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint must contain more than “labels and conclusions” or a “formulaic recitation of the elements of a cause of action”; it must contain factual allegations sufficient to “raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). While “a complaint need not contain detailed factual allegations . . . it must plead ‘enough facts to state a claim to relief that is plausible on its face.' ” Clemens v. DaimlerChrysler Corp., 534 F.3d 1017, 1022 (9th Cir. 2008) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). The plausibility standard “asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are >merely consistent with= a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.' ” Id. (quoting Twombly, 550 U.S. at 555) (internal citations omitted).

         When a plaintiff alleges claims that are rooted in fraud, even those arising under state law, he must comply with the heightened pleading standard of Rule 9(b). Cafasso, United States ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 2011); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003) (“[W]hile a federal court will examine state law to determine whether the elements of fraud have been pled sufficiently to state a cause of action, the Rule 9(b) requirement that the circumstances of the fraud must be stated with particularity is a federally imposed rule.”) (internal citations omitted). Therefore, state law fraud claims must also comply with the pleading standards of Rule 9(b).

         When analyzing a complaint for failure to state a claim under Rule 12(b)(6), “[a]ll allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.” Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). However, legal conclusions couched as factual allegations are not given a presumption of truthfulness, and “conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).

         II. Analysis

         Defendants move to dismiss Sierp's Complaint on the basis of the sufficiency of the allegations as well as numerous affirmative defenses.[3]

         A. The Adequacy of the Pleadings

         Sierp's allegations may be broken down into two broad categories; those that allege fraud, and those that allege negligence.[4] (Doc. 1.) The fraud allegations must satisfy Rule 9(b) particularity pleading, whereas the negligence allegations must satisfy the plausibility pleading requirement of Rule 8(a). See Fed. R. Civ. P. 8(a), 9(b).

         1. The Fraud Allegations

         Rule 9(b) requires that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). This requires the plaintiff to “set forth what is false or misleading about a statement, and why it is false.” Yourish v. Cal. Amplifier, 191 F.3d 983, 993 (9th Cir. 1999) (internal citations omitted). “In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading.” Id. “This falsity requirement can be satisfied by pointing to inconsistent contemporaneous statements or information (such as internal reports) which was made by or available to the defendants.” Id. (internal citations omitted).

         Not all statements made by a defendant may constitute grounds for fraud. “Outrageous generalized statements, not making specific claims, [which] are so exaggerated as to preclude reliance by consumers” are considered puffery, and are not actionable. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246 (9th Cir. 1990) (internal citations and quotations omitted). However, “misdescriptions of specific or absolute characteristics of a product” are actionable. Id. at 246. Thus, a statement that one type of lamp is “far brighter” than another would be considered mere puffery, whereas a more definitive statement, such as that one type of lamp has “35, 000 candle power and 10-hour life, ” would be actionable if it turned out to be false. See Id. (listing such a situation, outlined in Smith-Victor Corp. v. Sylvania Elec. Prods., Inc., 242 F.Supp. 302 (N.D. Ill. 1965), as an example of an actionable statement). Courts may resolve whether a statement constitutes mere puffery during a motion to dismiss. See Cook, Perkiss & Liehe, Inc., 911 F.2d at 245 (“District courts often resolve whether a statement is puffery when considering a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) and we can think of no sound reason why they should not do so.”) (internal citations omitted).

         a. Count 1: Securities Fraud-A.R.S. § 44-1991: All Defendants

         In Arizona, it is unlawful for a person to do any of the following in connection with a transaction to offer to buy or sell securities, directly or indirectly: (1) “[e]mploy any device, scheme or artifice to defraud;” (2) “make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading”; or (3) “engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit.” A.R.S. § 44-1991(A). “The requirement of materiality is satisfied by a showing of substantial likelihood that, under all the circumstances, the misstated or omitted fact would have assumed actual ...

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