Plaintiff Michael Kronk brings this putative class action...

Case 8:10-cv-00242-CJC-MLG Document 120 Filed 06/07/11 of 22 Page ID#:3169

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8 UNITED STATES DISTRICT COURT

9 CENTRAL DISTRICT OF CALIFORNIA

10 SOUTHERN DIVISION

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)12 MICHAEL KRONK, ) Case No.: SACV 10-00242-CJC(MLGx)

)

13 Plaintiff, ))

14 vs. ))

15 ) ORDER GRANTING INLANDWIN GROUP, LLC et al., ) SUBSTANTIAL PART DEFENDANTS’

16 MOTIONS TO DISMISSDefendants. )

17 ))

18 ))

19 ))

20 )

21

22 INTRODUCTION

23

24 Plaintiff Michael Kronk brings this putative class action on behalf of himself and

25 other investors who purchased limited liability company units (“units”) in Landwin

26 Management, LLC (“Landwin”) for $50,000 each between February 1, 2005 and August

27 15, 2005. (Second Am. Compl. ¶ 176.) Mr. Kronk asserts fifteen causes of action for

28 securities fraud, false advertising, unfair business practices, common-law fraud, breach of

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1 fiduciary duty, negligence, and interference with prospective economic advantage against

2 Defendants Landwin Group, LLC, SmithDennison Capital, LLC (“SDC”), Sylvia, Inc.

3 (“Sylvia”), the managers of Landwin, Sean Dennison and Martin Landis, the respective

4 principals of SDC and Sylvia, as well as individual Jack Andrews and his company Jack

5 R. Andrews and Associates, LLC, Tom Casault and his company Muir, LLC (“Muir”),

6 Chris Parnass and his company CPP Properties, LLC (“CCP”), and Marshall Reddick and

7 his company Marshall Reddick Commercial Real Estate Networks, Inc., who were

8 officers of or advisors to Landwin. (Id. ¶¶ 6–16.) By order dated January 28, 2011, this

9 Court granted motions to dismiss filed by each of the Defendants with leave to amend.

10 (Ct. Order, Jan. 28, 2011, Dkt. No. 88.) Mr. Kronk filed his Second Amended Complaint

11 on February 16, 2011. Defendants Sylvia and Martin Landis now move to dismiss the

12 claims that Mr. Kronk alleges against them in the Second Amended Complaint pursuant

13 to Federal Rule of Civil Procedure 12(b)(6). Defendants Landwin Group, LLC, SDC,

14 Sean Dennison, Muir, Tom Casault, CCP and Chris Parnass joined in the motion to

15 dismiss filed by their co-defendants. Defendant Marshall Reddick filed a separate motion

16 to dismiss the claims against him pursuant to Rule 12(b)(6) and joined in the motions

17 filed by his co-defendants. Because Mr. Kronk has had three opportunities to attempt to

18 state a viable claim against any of the Defendants and he has still failed to cure many of

19 the major deficiencies that this Court previously identified, Defendants’ motions to

20 dismiss are GRANTED IN SUBSTANTIAL PART.

21

22 BACKGROUND

23

24 Mr. Kronk alleges that Landwin was organized under Delaware law to “acquire,

25 hold, manage” the real estate asset management business of Sylvia, Inc. and other pools

26 of real estate assets. (Second Am. Compl. ¶ 21.) SDC and Sylvia are the managers or

27 directors of Landwin. (Id. ¶¶ 8–10.) Mr. Landis has an ownership interest in and is the

28 president of Sylvia. (Id. ¶ 11.) Mr. Dennison is the president of SDC. (Id. ¶ 10.) Mr.

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1 Andrews, Mr. Casault and Mr. Reddick were “officers” of Landwin and Mr. Parnass was

2 an advisor to Landwin. (Id. ¶¶ 12–15, 27.)

3

4 Mr. Kronk and 210 other investors invested in Landwin by purchasing between

5 one and seven units at $50,000 each through a private offering extended to accredited

6 investors in a real estate network established by Marshall Reddick between February 1,

7 2005 and August 15, 2005. (Id. ¶¶ 28, 31.) Mr. Kronk alleges that he received an email

8 from Mr. Reddick on February 14, 2005 telling about an opportunity to invest in Landwin

9 and promising cash distributions and a high rate of return on his investment. ( Id. ¶ 29).

10 Mr. Kronk alleges that on March 2, 2005, he attended a power point presentation by Mr.

1 1 Dennison about the Landwin investment at a seminar hosted by Mr. Reddick, at which

12 Mr. Landis, Mr. Andrews, Mr. Casault, and Mr. Parnass were also present. (Id. ¶¶ 56–

13 61; id. Ex. 6.) Mr. Kronk alleges that he relied on the presentation and representations

14 made at the seminar that he attended in deciding to invest in Landwin. (See id. ¶ 67.) 1

15 Mr. Kronk purchased one unit of Landwin on March 6, 2004. (Id. ¶ 63.) The private

16 offering generated $13.8 million in investments. (Id. ¶ 31.)

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18 Mr. Kronk alleges that Defendants violated federal securities regulations because

19 they purported to offer for sale unregistered securities through a private offering, but they

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21 1 In his Second Amended Complaint, Mr. Kronk alleges for the first time that he did not receive a copyof the confidential Private Placement Memorandum (“PPM”) describing the details of the Landwin

22 investment prior to his purchase and that he relied solely on representations in the power point

23 presentation in making his investment decision. ( See Second Am. Comp. ¶¶61–63, 68.) However, inhis First Amended Complaint, Mr. Kronk alleged that “the standardized presentations and prospectuses”

24 included materially false and misleading representations, (First Am. Compl. ¶ 117), that “Defendantsshould have known that the Private Placement Memorandum (PPM) was materially false and

25 misleading,” ( id. ¶ 135), that “[t]he PPM was an essential link in the accomplishment of ...Defendants’

26 unlawful defrauding scheme,” ( id. ¶136) and that “[t]he Class members were damaged as a result of thematerial misrepresentations and omissions in the PPM,” ( id. ¶ 137). The power point presentation that

27 Mr. Kronk attaches to his Second Amended Complaint states that investors must receive and read thePPM, (see Second Am. Compl. Ex. 6 at 14), and Mr. Kronk admits that he signed a Subscription

28 Agreement representing that he received and read the PPM, (Second Am. Compl. ¶ 64; id. Ex. 7). Mr.Kronk cannot credibly allege that he did not receive the PPM.

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1 did not satisfy the regulatory requirements for the private offering “safe harbors.” ( Id.

2 ¶¶ 32–44.) Specifically, Mr. Kronk alleges that Defendants did not obtain an

3 independent audit of the purchase price of $5.8 million for Sylvia’s assets. ( Id. ¶¶ 52–53,

4 55, 84–88). Mr. Kronk also alleges Martin Landis, Sean Dennison, Marshall Reddick,

5 Jack Andrews and Tom Casault acted as broker-dealers of unregistered securities without

6 registering with the SEC or with the State of California. (Id. ¶¶ 69–72, 78.) Mr. Kronk

7 also alleges that Defendants violated numerous provisions of the California Corporations

8 Code because they failed to register the investment offer with the State of California

9 Department of Corporations until October 20, 2005, after the offer had closed. ( Id. ¶¶

10 45–51.) Mr. Kronk alleges that Mr. Landis and Mr. Dennison purposefully avoided

11 registering the investment offer with the in order to escape the greater scrutiny applied by

12 the California State Department of Corporations. (Id. ¶ 49.)

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14 Mr. Kronk also alleges that Mr. Dennison made material misrepresentations and

15 omissions in the power point presentation regarding the Landwin investment. ( Id. ¶¶ 57–

16 60.) Specifically, Mr. Kronk alleges that the power point presentation falsely promised

17 that investors would receive monthly cash distributions, a high return on their investment,

18 and that no investor had ever lost money with Landwin or its managers. (Id. ¶¶ 29, 59;

19 id. Ex. 6.) Mr. Kronk also alleges that the power point presentation did not disclose that

20 Landwin would pay $5.8 million for the purchase of Sylvia’s asset management business,

21 that Mr. Landis and Mr. Dennison would be paid salaries of more than $250,000, or that

22 Marshall Reddick, Tom Casault and Jack Andrews were to receive $690,000 in finders’

23 fees. (Id. ¶ 60.) The power point presentation also did not explain that Landwin’s

24 success depended on an exclusive agreement with Mr. Reddick to refer his real estate

25 clients to Landwin. (Id.) Mr. Kronk also alleges that Defendants made a material

26 “omission” by failing to provide the PPM before Mr. Kronk purchased his unit of

27 Landwin. (Id. ¶¶ 66–68.) Based on these alleged misrepresentations and omissions, Mr.

28 Kronk also alleges that Landwin Group, LLC, Mr. Dennison, SDC, Mr. Landis, and

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1 Sylvia, Inc. fraudulently or negligently misrepresented the value of the investment in

2 Landwin and the return on the investment that Mr. Kronk and the other class members

3 could expect. (Id. ¶¶ 409–412.) Mr. Kronk alleges that Mr. Reddick negligently referred

4 him and the other class members to the Landwin investment. (Id. ¶¶ 401–03.)

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6 Mr. Kronk also alleges that the Landwin managers and top officers engaged in a

7 scheme to deplete the assets of Landwin by paying themselves high fees and salaries even

8 though Landwin was not making money. ( Id. ¶¶ 89–93.) Mr. Kronk alleges that

9 Defendants did not use investors’ money to purchase real estate assets as promised, but

10 instead squandered it on other expenses, ( id. ¶ 104–05), and used it to set up their own

1 1 business ventures for their own benefit and at the expense of Landwin, ( id. ¶¶ 111–29).

12 In addition, Mr. Reddick breached his agreement to exclusively refer prospective real

13 estate investors to Landwin, which caused Landwin to lose significant income. ( Id. ¶¶

14 137–40.) Mr. Kronk alleges that despite the ongoing loss in value, Landwin managers

15 and officers continued to represent that business was going well and investors could

16 expect a high rate of return. (Id. ¶¶ 105–06, 323, 385–90.) For example, Mr. Kronk

17 alleges that on July 28, 2006, the Landwin managers sent out an email stating that they

18 had closed a multi-million dollar investment that ultimately proved to be risky and

19 unprofitable, without disclosing the risks involved in the investment. (Id. ¶¶ 94–95, 110).

20 On February 4, 2008, Mr. Kronk alleges that Tom Casault sent out an email re-stating his

21 excitement about Landwin’s ability to generate “exceptional returns” on investment. ( Id.

22 ¶ 324.) Mr. Kronk alleges that he never received any return on his investment. ( Id.

23 ¶ 406.) By May 2009, the Landwin managers notified Mr. Kronk and other investors that

24 their initial $50,000 investments were now worth only a few hundred dollars. (Id. ¶ 333.)

25 In November 2009, Mr. Kronk alleges Landwin was bought out by Sylvia and SDC but

26 investors never received any monetary compensation for the sale. ( Id. ¶ 334.)

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1 Based on these events, Mr. Kronk filed the instant action on March 1, 2010. By

2 order dated August 10, 2010, this Court granted Defendants’ motion to strike the

3 Complaint with leave to amend because Mr. Kronk had failed to satisfy certain notice and

4 certification requirements imposed by the Private Securities Litigation Reform Act

5 (“PSLRA”). Mr. Kronk subsequently complied with those requirements and filed his

6 First Amended Complaint on August 27, 2010. By order dated January 28, 2011, this

7 Court granted Defendants’ motions to dismiss the First Amended Complaint. Mr. Kronk

8 filed his Second Amended Complaint on February 16, 2011. Defendants now move to

9 dismiss the claims raised against each of them in the Second Amended Complaint.

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11 LEGAL STANDARD

12

13 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal

14 sufficiency of the claims asserted in the complaint. The issue on a motion to dismiss for

15 failure to state a claim is not whether the claimant will ultimately prevail, but whether the

16 claimant is entitled to offer evidence to support the claims asserted. Gilligan v. Jamco

17 Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997). When evaluating a Rule 12(b)(6) motion,

18 the district court must accept all material allegations in the complaint as true and construe

19 them in the light most favorable to the non-moving party. Moyo v. Gomez, 32 F.3d 1382,

20 1384 (9th Cir. 1994). Rule 12(b)(6) is read in conjunction with Rule 8(a), which requires

21 only a short and plain statement of the claim showing that the pleader is entitled to relief.

22 Fed. R. Civ. P. 8(a)(2). Dismissal of a complaint for failure to state a claim is not proper

23 where a plaintiff has alleged “enough facts to state a claim to relief that is plausible on its

24 face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Although the district court

25 should grant the plaintiff leave to amend if the complaint can possibly be cured by

26 additional factual allegations, Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995), the

27 district court need not grant leave to amend if amendment of the complaint would be

28 futile. See Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1051–52 (9th Cir. 2008) (finding

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1 that amendment would be futile where plaintiff was granted leave to amend once and the

2 amended complaint contained the same defects as the prior complaint).

3

4 ANALYSIS

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6 I. Violation of Section 10(b)(5) of the Securities and Exchange Act of 1934

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8 In order to state a claim for securities fraud in violation of Section 1 0(b) of the

9 Securities Exchange Act of 1934, 15 U.S.C. § 78j (b), and Rule 10b-5, 17 C.F.R. § 240,

10 Mr. Kronk must plead (1) a material misrepresentation or omission of fact in connection

1 1 with his purchase of membership interests in Landwin, (2) scienter, (3) reliance on the

12 misrepresentation or omission, (4) economic loss and (5) loss causation. Stoneridge Inv.

13 Partners v. Scientific -Atlanta, 552 U.S. 148, 157 (2008). The Private Securities

14 Litigation Reform Act (“PSLRA”) imposes heightened pleading standards in securities

15 fraud actions with respect to the elements of material misrepresentations and scienter that

16 are similar to the particularity requirement under Federal Rule of Civil Procedure 9(b).

17 The plaintiff must “specify each statement alleged to have been misleading” and “the

18 reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1). Cf. Alan

19 Neuman Prods., Inc. v. Albright, 862 F.2d 1388,1392 (9th Cir. 1988) (quoting Schreiber

20 Distrib. Co. v. Serv- Well Furniture Co., 806 F.2d 1393 (9th Cir. 1986)). Where, as here,

21 there are multiple defendants, the PLSRA requires that the misrepresentations or

22 omissions be set forth with particularity as to each defendant. See In re Impac Mortg.

23 Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083, 1093 (C.D. Cal. 2008) (quoting

24 Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 364–64 (5th Cir.

25 2004)). The plaintiff must allege that a specific defendant “made” the statement or

26 “substantially participate [ed] ” or had “intricate involvement” in the preparation of the

27 statements in order to find that defendant is liable as a primary violator under Section

28 10(b). Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000). The

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1 plaintiff must also “state with particularity facts giving rise to a strong inference that the

2 defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2); Tellabs, Inc.

3 v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007). Mr. Kronk has failed to

4 adequately plead any misrepresentations or omissions by any of the Defendants or that

5 Defendants acted with the requisite scienter in order to satisfy these standards.

6

7 As a preliminary matter, Mr. Kronk purports to assert a Section 10(b) claim against

8 each of the Defendants, including Landwin itself as a nominal defendant, but he has still

9 not alleged which Defendant is responsible for each of the alleged misrepresentations or

10 omissions. (See Ct. Order, Jan. 28, 2011, Dkt. No. 88; see also Second Am. Compl.

11 ¶¶ 59, 60, 66.) Mr. Kronk has identified an email that he received from Mr. Reddick on

12 February 14, 2005, (Second Am. Compl. ¶ 29), and a power point presentation that was

13 primarily presented by Mr. Dennison at a seminar attended by Mr. Landis, Mr. Dennison,

14 Mr. Andrews, Mr. Casault, Mr. Reddick, and Mr. Parnass, ( id. ¶¶ 57–58). Apart from

15 that, Mr. Kronk has not alleged any facts to show that any specific defendant “made” any

16 statement or “substantially participate[d]” or had “intricate involvement” in the power

17 point presentation as required to state a claim for a Section 10(b) violation against any of

18 the other Defendants. See Howard, 228 F.3d at 1061 n.5.

19

20 Mr. Kronk cannot state a claim against any of the Defendants under Section 10(b)

21 because Mr. Kronk has not adequately alleged an actionable false or misleading

22 misrepresentation or omission by any of the Defendants in either the power point

23 presentation or the PPM, or that his reliance on any of the information in the power point

24 presentation, instead of the PPM, was reasonable. Mr. Kronk alleges, for the first time in

25 his Second Amended Complaint, that Defendants made a “material omission” by failing

26 to provide him with a copy of the PPM prior his purchase of a unit in Landwin, and that

27 had he received the PPM, he would have been dissuaded from making the purchase.

28 (Second Am. Compl. ¶¶ 66, 68.) However, in light of Mr. Kronk’s prior allegations in

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1 his First Amended Complaint, (First Am. Compl. ¶¶ 117, 135–37), as well as other

2 allegations in the Second Amended Complaint admitting that he previously represented

3 that he had received and read the PPM, (Second Am. Compl. ¶ 64; id. Ex. 7), Mr. Kronk

4 cannot now allege that neither he nor any of the other class members received the PPM or

5 that it was reasonable for him to rely on statements in the power point presentation

6 without considering the PPM.

7

8 Mr. Kronk alleges that promises in the power point presentation that clients would

9 receive monthly cash flow distributions, that investors would receive a high return on

10 their investment, and that no investor had ever lost money with Landwin, were false

1 1 because he ultimately did not in fact receive cash distributions and he did lose money in

12 his Landwin investment. (Id. ¶ 59.)2 However, Mr. Kronk has not alleged any facts to

13 show that statements regarding Landwin’s history of providing a high return on

14 investment were false or misleading at the time that they were made. Moreover, the PPM

15 expressly states that Landwin is a high-risk investment because it did not have a prior

16 performance record. (Defs.’ Req. Judicial Notice Ex. B at 44.) The PPM also clearly

17 identifies statements regarding cash flow distributions to investors or the anticipated

18 return on investments as forward-looking, describes the assumptions upon which the

19 various projections were based, and discusses the risks of limited cash flow and a

20 business model that depends on attracting additional capital contributions in the future.

21 (See, e.g., Defs.’ Req. Judicial Notice Ex. B at 39, 41–45.) Such forward-looking

22 statements are not actionable misrepresentations unless Mr. Kronk alleges that at the time

23 that Defendants made those statements, they did not actually believe them, there was no

24 reasonable basis for their belief, or that Defendants were “aware of undisclosed facts

25 tending to seriously undermine the statement’s accuracy.” Kaplan v. Rose, 49 F.3d 1363,

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27 2 Mr. Kronk has not specifically alleged a Section 10(b) claim based on Mr. Reddick’s February 14,2005 email. (See Second Am. Compl. ¶¶ 217–29.) However, the representations in the email are

28 substantially identical to those identified in the power point presentation, ( id. ¶ 192), so Mr. Kronk hassimilarly failed to allege any actionable misrepresentation or omission in the email.

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1 1375 (9th Cir. 1994); see also In re Cutera Sec. Litig., 610 F.3d 1103, 1111–12 (9th Cir.

2 2010) (rejecting investors’ conclusory allegations that statements were not accompanied

3 by meaningful cautionary language and that defendants knew that the statements were

4 false when made and finding that defendants had satisfied the safe harbor under the

5 PSLRA for forward-looking statements). Mr. Kronk has still not alleged any such facts.

6 His single conclusory assertion that “Defendants ... had actual knowledge that the

7 forward-looking statement was materially false or misleading,” (Second Am. Compl.

8 ¶ 59), is not sufficient to meet this standard. See In re Cutera Sec. Litig., 610 F.3d at

9 1112.

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1 1 Mr. Kronk also alleges that the power point presentation did not disclose that Mr.

12 Landis and Mr. Dennison would receive a high salary, or that Mr. Reddick, Mr. Casault,

13 and Mr. Andrews would receive finders’ fees, or that the success of Landwin depended

14 on Mr. Reddick’s ability to raise $80 million. (Id. ¶ 60.) However, that information is

15 thoroughly described in the PPM. (See Def.’s Req. Judicial Notice Ex. B at 35–38, 41–

16 45, 54.) Because the power point presentation instructed investors to read the PPM,

17 (Second Am. Compl. Ex. 6 at 14), and Mr. Kronk represented that he had read the PPM

18 prior to purchasing his unit of Landwin and that “he will rely solely upon the PPM and

19 incorporated documents previously made available,” (Second Am. Compl. Ex. 7), Mr.

20 Kronk cannot allege that he reasonably relied on the incomplete information in the power

21 point presentation instead of the PPM. See Paracor Fin., Inc. v. General Elec. Capital

22 Corp., 96 F.3d 1151, 1159–60 (9th Cir. 1996) (finding that investors’ recital in purchase

23 agreement that they did not rely on representations from any other persons meant that

24 investors could not show that their reliance on other statements by defendant was

25 justifiable).

26

27 Finally Mr. Kronk appears to base his Section 10(b) claim on his allegations that

28 Defendants did not satisfy the requirements for the safe harbor provided in Regulation D

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1 Rule 506 for the private offering exemption of Section 4(2) of the Securities Act of 1933,

2 17 C.F.R. § 230.506, (Second Am. Compl. ¶¶ 191–216), that Defendants’ payment of

3 finders’ fees violated the broker-dealer requirements under federal law, ( id. ¶¶ 230–39),

4 and that that Defendants failed to timely register their offer to sell securities as required

5 by federal or California law, (id. ¶¶ 41–53, 201–04, 206). Although Mr. Kronk alleges

6 that Defendants did not tell him that they were selling unregistered securities, and that he

7 would not have invested in Landwin had he known, ( id. ¶¶ 202, 210–11), Mr. Kronk has

8 not alleged any statements in the power point presentation or the PPM that were rendered

9 false or misleading by Defendants’ alleged failure to comply with federal and state

10 securities regulations. In fact, the PPM expressly states in numerous places that the

1 1 Landwin units are not registered, (Defs.’ Req. Judicial Notice Ex. B at 30, 31, 48), and

12 Mr. Kronk acknowledged that the units were not registered when he signed the

13 Subscription Agreement, (Second Am. Compl. Ex. 7). Mr. Kronk’s allegations regarding

14 Defendants’ alleged non-compliance do not establish any of the other elements of a

15 Section 10(b) claim. Absent adequately alleging that Defendants’ alleged non-

16 compliance with the federal and state registration requirements rendered a specific

17 statement false or misleading, the Court is not aware of any legal authority that allows

18 Mr. Kronk to state a claim under Section 10(b) of the Securities Exchange Act of 1934

19 that is solely premised on violations of the Securities Act of 1933.

20

21 Mr. Kronk has also failed to allege any facts to show that Defendants acted with

22 scienter when they allegedly failed to provide the PPM or made any of the statements in

23 the power point presentation. As the Court warned in its previous order, Mr. Kronk must

24 allege facts such that “a reasonable person would deem the inference of scienter cogent

25 and at least as compelling as any opposing inference one could draw from the facts

26 alleged.” Tellabs, Inc., 551 U.S. at 324. Mr. Kronk alleges, on information and belief,

27 that Mr. Landis and Mr. Dennison “deliberately and purposefully withheld the PPM from

28 Plaintiff and the other class members because it contained information that was contrary

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1 to what was presented in the seminars and emails.” (Id. ¶ 66.) Mr. Kronk has not alleged

2 any facts to show that Mr. Landis or Mr. Dennison acted deliberately to withhold or

3 conceal the PPM. In fact, other circumstances such as that the power point presentation

4 itself expressly instructed investors to read the PPM, (Second Am. Compl. Ex. 6 at 14),

5 and Mr. Kronk and the other investors were required to sign an agreement representing

6 that they had received and read the PPM, ( id. Ex. 7), strongly support the opposite

7 inference, that Defendants did not intend to conceal the information in the PPM. Mr.

8 Kronk has also not alleged any facts to show that Defendants knew that statements in the

9 power point presentation wee false or misleading or that the projections were overly

10 optimistic. (See Second Am. Compl. ¶¶ 59, 134.) Instead, Mr. Kronk simply recites the

11 statutory standard provided in the PSLRA for liability for forward-looking statements,

12 (id. ¶ 59), and makes conclusory assertions that Defendants “had actual knowledge” or

13 “knew or should have known” that the projections were unreasonable, (id. ¶¶ 59, 134).

14

15 In sum, Mr. Kronk has failed to allege sufficient facts to show any actionable

16 misrepresentation or omission in the power point presentation or the PPM or that

17 Defendants acted with scienter. Because Mr. Kronk has had three opportunities to

18 attempt to state a viable securities fraud claim, and he has still failed to do so, the Court

19 concludes that allowing Mr. Kronk leave to amend his complaint again would be futile.

20 Mr. Kronk’s Section 10(b) claim is DISMISSED WITH PREJUDICE.

21

22 II. Violation of Section 20(a) of the Securities and Exchange Act of 1934

23

24 Mr. Kronk has also failed to state a claim for control person liability pursuant to

25 Section 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78t(a), against Mr.

26 Dennison, Mr. Landis, Mr. Casault, Mr. Andrews, or Mr. Reddick. In order to establish

27 control person liability, Mr. Kronk must allege (1) a primary violation of Section 10(b)

28 by Landwin, and (2) the exercise of actual power or control by one of the Defendants

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1 over Landwin. 15 U.S.C. § 78t(a); In re Oracle Corp. Sec. Litig., 627 F.3d 376, 394 (9th

2 Cir. 2010); Heliotrope General, Inc. v. Ford Motor Co., 189 F.3d 971, 978 (9th Cir.

3 1999). Because Mr. Kronk has failed to adequately allege a violation of Section 10(b),

4 Mr. Kronk cannot state a claim under Section 20(a) against any of the individual

5 Defendants. See In re Oracle Corp., 627 F.3d at 394. Mr. Kronk’s Section 20(a) claim is

6 DISMISSED WITH PREJUDICE.

7

8 III. Violations of California Corporations Code Sections 25501 and 25501.5

9

10 Mr. Kronk has also failed to state a claim against any of the Defendants for

11 violations of California Corporations Code Section 25501. Section 25501 prohibits any

12 person “to offer or sell a security” by means of a written or oral communication “which

13 includes an untrue statement of a material fact or omits to state a material fact necessary

14 in order to make the statements made ... not misleading.” Cal. Corp. Code §§ 25401,

15 25501. A person’s liability for any violation of Section 25501 is strictly limited “to the

16 person who purchases a security from him,” requiring direct privity between a plaintiff

17 purchaser and the alleged violator. Apollo Capital Fund, LLC, v. Roth Capital Partners,

18 LLC, 158 Cal. App. 4th 226, 252–53 (2007) (finding that only corporation from whom

19 investors bought securities, not placement agent, could be held liable under Section

20 25401). Mr. Kronk purchased his unit from Landwin, (see Second Am. Compl. Ex.7),

21 and thus cannot assert a claim against any of the individual Defendants under Section

22 25501. In any event, as discussed with respect to Mr. Kronk’s Section 10(b) claim, Mr.

23 Kronk has failed to identify any false or misleading statement in the power point

24 presentation or the PPM, or any omission that renders any statement made in those

25 documents misleading, in violation of Section 25501. Mr. Kronk appears to rely

26 specifically on his allegations that Defendants failed to disclose that they had not

27 registered their offer as required by California or federal law to support his Section 25501

28 claim, (Second Am. Compl. ¶¶ 273–80), but he has not alleged that that omission

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1 rendered any statement in the power point presentation or the PPM false or misleading,

2 especially in light of his representation in the Subscription Agreement acknowledging

3 that the investment would not be registered, (Second Am. Compl. Ex. 7). Mr. Kronk’s

4 Section 25501 claim is also DISMISSED WITH PREJUDICE.

5

6 However, Mr. Kronk has adequately alleged that he purchased his unit of Landwin

7 from an unlicensed “broker-dealer” in violation of California Corporations Code Section

8 25501.5. Mr. Kronk alleges that Mr. Landis and Mr. Dennison, as promoters for

9 Landwin, and Mr. Reddick, Mr. Casault, and Mr. Andrews, who received finders’ fees in

10 exchange for referring investors to Landwin, were broker-dealers under California law,

11 (Second Am. Compl. ¶¶ 69–72, 272). See Cal. Corp. Code § 25004(a) (“‘Broker-dealer’”

12 means any person engaged in the business of effecting transactions in securities in this

13 state for the account of others or for his own account.”). But see id. § 25004(a)(1)–(7)

14 (listing exclusions from definition of broker dealer, including any issuer or any person

15 who buys and sells securities not as part of a regular business). Mr. Kronk also alleges

16 that Mr. Reddick, Mr. Casault, and Mr. Andrews, were not registered as broker-dealers as

17 required by federal and state law, and that Mr. Landis and Mr. Dennison “acted as

18 unregistered broker-dealers.” (See Second Am. Compl. ¶¶ 69–72, 76, 272.) Defendants’

19 motions to dismiss are DENIED with respect to this claim.

20

21 IV. Violations of California Corporations Code Section 25504

22

23 Mr. Kronk has failed to state a claim for control person liability against any of the

24 individual Defendants under California law. See Cal. Corp. Code § 25504. Section

25 25504 provides for joint and several liability for every person who directly or indirectly

26 controls a person liable under Section 25501 or 25503, including every partner in a firm,

27 principal or executive officer or director of a corporation, or every employee who

28 materially aids in a transaction that is a violation of 25501 or 25503. Cal. Corp. Code

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1 § 25504. Even assuming that each of the individual Defendants are control persons

2 within the broad definition of Section 25504, Mr. Kronk cannot state a claim because he

3 has not adequately alleged that Landwin or any other Defendant violated Section 25501.

4 Mr. Kronk has also not alleged that any Defendant violated Section 25503. Mr. Kronk’s

5 Section 25504 claim is DISMISSED WITH PREJUDICE.

6

7 V. Intentional or Negligent Misrepresentation

8

9 Mr. Kronk also asserts claims for common-law intentional misrepresentation and

10 negligent misrepresentation against the Landwin Group, LLC, Mr. Dennison, SDC, Mr.

1 1 Landis and Sylvia. (See Second Am. Compl. ¶¶ 404–10.) In order to state a claim for

12 intentional misrepresentation, Mr. Kronk must allege that these Defendants made false

13 representations of a material fact with knowledge that they were false, that the

14 Defendants intended to induce reliance on that representation, that Mr. Kronk relied on

15 the misrepresentation, and resulting damage. Lazar v. Superior Court, 12 Cal. 4th 631,

16 638 (1996). The elements for a claim for negligent misrepresentation are similar to the

17 elements for intentional misrepresentation except that Mr. Kronk need not allege actual

18 knowledge of falsity or intent to defraud. Bily v. Arthur Young & Co., 3 Cal. 4th 370,

19 407–08 (1992). Mr. Kronk need only allege that the Defendants made a representation of

20 a material fact without a reasonable basis for that representation. Id. Claims for fraud,

21 including intentional misrepresentation and negligent misrepresentation, must be pleaded

22 with particularity under Rule 9(b). Neilson v. Union Bank of Cal., N.A., 290 F. Supp. 2d

23 1101, 1141 (C.D. Cal. 2003); North Am. Catholic Ed. Programming Found., Inc. v.

24 Cardinale, 567 F.3d 8, 15 (1st Cir. 2000).

25

26 Mr. Kronk has not specifically identified misrepresentations by each of the

27 Defendants to support his claims, but instead simply incorporates by reference all of his

28 prior allegations. (See Second Am. Compl. ¶¶ 404, 410.) Mr. Kronk also alleges that

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1 Defendants’ statements that Landwin Group, LLC has a history of a high rate of return on

2 investment and that it has never lost money for its investors are false. ( Id. ¶ 406.)

3 However, as discussed above with respect to Mr. Kronk’s claim for securities fraud, Mr.

4 Kronk has failed to allege a single actionable misrepresentation in the power point

5 presentation or the PPM or that his reliance on any of the alleged misrepresentations was

6 reasonable. (See Second Am. Compl. ¶ 59.) The PPM clearly identified statements about

7 the monthly cash flow distributions to investors and the anticipated return on investment

8 as forward-looking statements or projections. (Defs.’ Req. Judicial Notice Ex. B. at 39–

9 40.) The PPM also disclosed the risks of investing in Landwin, including that Landwin

10 would have little cash or a negative cash flow at the beginning, especially after paying the

11 Defendants’ salaries, that this particular Landwin partnership had no record of prior

12 performance, and that the success of the business model depended on Landwin’s ability

13 to attract new capital from additional investors. (Id. at 41–45.) The power point

14 presentation expressly instructed investors to read the PPM, (Second Am. Compl. Ex. 6 at

15 14), and Mr. Kronk signed a Subscription Agreement in which he represented that he had

16 received and read the PPM and that that “he will rely solely upon the PPM and

17 incorporated documents previously made available,” (Second Am. Compl. Ex. 7). Mr.

18 Kronk cannot allege that he reasonably relied on statements made in the power point

19 presentation instead of the PPM. Mr. Kronk’s claims for intentional misrepresentation

20 and negligent misrepresentation are DISMISSED WITH PREJUDICE.

21

22 VI. Deceit/Fraudulent Concealment

23

24 Mr. Kronk has also failed to allege sufficient facts to state a claim for deceit or

25 fraudulent concealment against Landwin Group, LLC, Mr. Dennison, SDC, Mr. Landis

26 or Sylvia. In order to state a claim, Mr. Kronk must allege that Defendants concealed a

27 material fact, that Defendants had a duty to disclose the fact to Mr. Kronk, that

28 Defendants intentionally concealed the fact with the intent to defraud Mr. Kronk, that Mr.

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1 Kronk would not have acted as he did had he been aware of that fact, and that Mr. Kronk

2 suffered damages as a result. Levine v. Blue Shield of California, 189 Cal. App. 4th

3 1117, 1126–27 (2010). Mr. Kronk appears to base his claim for fraudulent concealment

4 on his allegations that Defendants fraudulently concealed that they were using Landwin

5 funds to support other ventures for their own benefit. (See Second Am. Compl. ¶¶ 412,

6 416.) Mr. Kronk alleges that he would not have invested in Landwin had he known that

7 Defendants would use funds for their own ventures. (Id. ¶¶ 419–20.) However, Mr.

8 Kronk has not identified any statements or material facts that Defendants concealed at the

9 time that he invested in Landwin in 2005. In fact, Mr. Kronk alleges that Defendants

10 fraudulently concealed that they set up their own business ventures in 2007 and 2008,

1 1 more than two years after Mr. Kronk and the other class members had invested in

12 Landwin. (See Second Am. Compl. ¶ 176.) Mr. Kronk has not alleged that he took any

13 actions or failed to take any actions in 2007 or 2008 because of Defendants’ alleged

14 deceit. Mr. Kronk cannot allege that Defendants intended to induce him to invest in

15 Landwin in 2005 by concealing conduct that occurred two years later. Mr. Kronk’s claim

16 for fraudulent concealment is DISMISSED WITH PREJUDICE.

17

18 VII. Violations of California Unfair Competition Law (“UCL”) and False

19 Advertising Law (“FAL”)

20

21 Mr. Kronk has failed to state a claim under the UCL, Cal. Bus. & Prof. § 17200, or

22 the FAL, Cal. Bus. & Prof. § 17500, because he has not alleged any facts to show that he

23 has standing to bring either claim. See Cal. Bus. & Prof. Code § 17204; Californians for

24 Disability Rights v. Mervyn’s, LLC, 39 Cal. 4th 223, 227–29 (2006). Mr. Kronk must

25 allege that he has “suffered injury in fact and has lost money or property as a result” of

26 the alleged fraudulent business practices or false and misleading advertising. Cal. Bus. &

27 Prof. Code § 17204; see also Pfizer, Inc. v. Superior Court, 182 Cal. App. 4th 622, 628,

28 633 (2010) (discussing standing requirement for UCL and FAL which requires that a

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1 class representative plead and prove “actual reliance” on the alleged misrepresentation).

2 Both Mr. Kronk’s UCL claim for fraudulent business practices and FAL claim for false or

3 misleading advertising are premised on his allegations that Defendants squandered the

4 $13.8 million in investors’ funds, including creating a negative cash flow by paying high

5 salaries to the Landwin managers and officers and investing in risky real estate projects

6 that failed, and that Defendants used investors’ funds for projects to benefit themselves.

7 (Second Am. Compl. ¶¶ 104–30, 397.) Mr. Kronk alleges that at the same time,

8 Defendants continued to represent to the investors and to the public that they had never

9 lost any money for any investor and that they generated a high return on investment for

10 their customers. (See id. ¶¶ 104–06, 374–75, 385.) However, Mr. Kronk cannot allege

11 that he relied on any of these allegedly deceptive statements, because Mr. Kronk purports

12 to represent a class of investors who invested in Landwin in 2005, but alleges that

13 Defendants made misleading or deceptive statements in 2006 or 2008. (See id. ¶¶ 176,

14 104–06.) Mr. Kronk does not allege any facts to show that he took any action or failed to

15 take any action as a result of Defendants’ statements in 2006 or 2008. Thus Mr. Kronk

16 does not and cannot allege that he lost his $50,000 investment “as a result” of any of

17 Defendants’ misrepresentations regarding Landwin’s history of providing a high return

18 on investment. Mr. Kronk’s claims under the UCL and FAL are DISMISSED WITH

19 PREJUDICE.

20

21 VIII. Breach of Fiduciary Duty

22

23 Mr. Kronk’s claim for breach of fiduciary duty fails because it is based on

24 allegations of harm to the Landwin entity, rather than harm that is unique to him or the

25 other individual investors, and therefore it must be brought as a derivative claim on

26 behalf of Landwin. See Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031,

27 1035–36 (Del. 2004) (identifying two factors to distinguish between direct and derivative

28 claims, including who suffered the alleged harm and who would receive the benefit of the

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1 remedy). Mr. Kronk alleges that Defendants Landwin Group, LLC, Mr. Dennison, SDC,

2 Mr. Landis, and Sylvia “have a fiduciary responsibility for the safekeeping and use [of]

3 all funds and assets of the Company.” (Second Am. Compl. ¶ 424; see also id. ¶ 425.)

4 Mr. Kronk alleges that the Defendants breached that fiduciary duty by depleting the

5 $13.8 million worth of investments and not generating any return on his and others’

6 investment, and by using the invested funds for other projects for their own personal

7 benefit and at the expense of Landwin instead. (Id. ¶¶ 426–435, 437–38.) Mr. Kronk has

8 not alleged any facts to show that Defendants breached an independent fiduciary duty

9 that they owed to him or to the other members of Landwin individually, or that he and the

10 other class members suffered an injury independent of any alleged injury to Landwin.

11 See Tooley, 845 A.2d at 1039. But despite this Court’s warning in its previous order, ( see

12 Ct. Order at 10, Jan. 28, 2011, Dkt. No. 88), Mr. Kronk has still not alleged any facts to

13 show that he has satisfied the prerequisites to bring a derivative action on behalf of

14 Landwin, nor has he satisfied the pleading requirements set forth in Federal Rule of Civil

15 Procedure 23.1(b). Mr. Kronk’s claim for breach of fiduciary duty is DISMISSED

16 WITH PREJUDICE.

17

18 IX. Violations of the Racketeer Influenced and Corrupt Organizations Act

19 (“RICO”)

20

21 Mr. Kronk’s RICO claims similarly fail because they are premised on allegations

22 of harm that are derivative to the harm caused to the Landwin entity. See Sparling v.

23 Hoffman Constr. Co., 864 F.3d 635, 640–41 (9th Cir. 1988) (holding that there is no

24 shareholder standing to assert RICO claims where the harm is derivative of harm to the

25 corporation). Specifically, Mr. Kronk alleges that Defendants engaged in racketeering by

26 squandering the $13.8 million raised from investors, including using the funds to pay high

27 salaries to the individual defendants rather than invest the funds in real estate, and by

28 using investors’ funds for other projects for their own personal gain and to the detriment

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1 of Landwin. (Second Am. Compl. ¶¶ 310–348.) Mr. Kronk alleges that he and the other

2 class members have been injured by “the loss of value of [their] ownership interests in the

3 cash depleted Company” and “the lost profits” they would otherwise have achieved. ( Id.

4 ¶ 361.) Mr. Kronk’s alleged loss in value of his investment and lost profits are clearly

5 derived from, and dependent on, the harm that Defendants’ conduct caused Landwin.

6 Because Mr. Kronk has not alleged any of the prerequisites to bring a derivative claim on

7 behalf of Landwin, Mr. Kronk cannot state a claim for violations of RICO. Mr. Kronk’s

8 RICO claims are DISMISSED WITH PREJUDICE.

9

10 X. Intentional or Negligent Interference with Prospective Economic Advantage

11

12 Mr. Kronk’s claims against Mr. Reddick and the Marshall Reddick Commercial

13 Real Estate Networks, Inc., for intentional and negligent interference with prospective

14 economic advantage similarly fail because Mr. Kronk has alleged a harm that is

15 derivative to the harm to the Landwin entity. First, Mr. Kronk appears to assert a claim

16 on behalf of Landwin, by alleging that Landwin “has and had an expectancy in continuing

17 and advantageous economic relationships with current and prospective members of the

18 Marshall Reddick Real Estate Network,” (Second Am. Compl. ¶ 442), which Mr.

19 Reddick interfered with by breaching his contract to refer his network of clients

20 exclusively to Landwin, ( id. ¶¶ 443, 445). Indeed, Mr. Kronk alleges that Landwin has

21 already filed a lawsuit against Mr. Reddick for breach of contract in state court. ( Id. ¶¶

22 444–46.) Second, Mr. Kronk alleges that he and the other investors were harmed by Mr.

23 Reddick’s breach of his contract with Landwin because Landwin would have used Mr.

24 Reddick’s network to “earn[] fees” and “Plaintiff and the other Class members would

25 have received an increase in the value of their investments.” (Id. ¶ 448; see also id.

26 ¶ 453.) Mr. Kronk’s allegations that he and the other investors suffered harm because

27 Landwin lost business opportunities and profits describe a harm that is derived from the

28 harm Mr. Reddick caused to Landwin, which cannot form the basis for an individual or

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1 direct cause of action by the investors. See Von Brimer v. Whirlpool Corp., 536 F.2d 838,

2 846 (9th Cir. 1976) (applying California law and holding that shareholder that suffers

3 economic injury as a result of wrongdoing by third party to corporation may not bring

4 individual action for tortious interference with contractual relations or prospective

5 economic advantage against the third party); Sole Energy Co. v. Petrominerals Corp., 128

6 Cal. App. 4th 212, 228–32 (2005) (finding that claim for lost profits belongs to

7 corporation not shareholders). Mr. Kronk has not made any of the required allegations in

8 order to bring derivative action on behalf of Landwin, so Mr. Kronk’s claims for

9 intentional and negligent interference with prospective economic advantage are

10 DISMISSED WITH PREJUDICE.

11

12 XI. Negligent Referral

13

14 Mr. Kronk has adequately alleged that Mr. Reddick negligently referred him to the

15 Landwin investment opportunity. Mr. Kronk alleges that Mr. Reddick owes him a duty

16 of care because he is a member of Mr. Reddick’s real estate network, and Mr. Reddick

17 sent him an email on February 14, 2005 telling him about the opportunity to invest in

18 Landwin and highlighting all of the benefits in the investment. (Second Am. Compl.

19 ¶¶ 29, 401.) Mr. Kronk also alleges that Mr. Reddick breached that duty of care by

20 negligently and unreasonably recommending the investment, ( id. ¶ 402), and that he has

21 suffered damages because he relied on Mr. Reddick’s recommendation in deciding to

22 invest in Landwin and he has lost his entire investment, (id. ¶ 403). Mr. Reddick’s

23 motion to dismiss is DENIED with respect to this claim. 3

24

25 3 Mr. Reddick argues that Mr. Kronk is barred from asserting any cause of action against him because

26 Mr. Kronk signed a broad release of all claims against Mr. Reddick on July 14, 2010 in order toparticipate as a creditor in the reorganization plan that Mr. Reddick submitted to the bankruptcy court.

27 However, Mr. Reddick has not shown that the Court may properly take judicial notice of Mr. Kronk’ssigned release form because it is not part of the public record before the bankruptcy court. Whether or

28 nor Mr. Kronk’s claim is barred by the release is more properly resolved on a motion for summaryjudgment.

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1 XII. Civil Conspiracy

2

3 As this Court noted in its previous order, under California law, civil conspiracy is

4 not a separate tort, but rather a mechanism for imposing vicarious liability on the co-

5 conspirator defendants. Applied Equip. Corp. v. Litton Saudi Arabia, Ltd., 7 Cal. 4th 503,

6 510–11 (1994). Here, Mr. Kronk has adequately alleged a claim for negligence against

7 Mr. Reddick, but he has not alleged any facts to show that any of the other defendants

8 conspired with Mr. Reddick to commit negligence. Mr. Kronk has also failed to state a

9 claim for any other tort against any of the other Defendants. Mr. Kronk’s claim for civil

10 conspiracy is DISMISSED WITH PREJUDICE.

11

12 CONCLUSION

13

14 For the foregoing reasons, Defendants’ motions to dismiss are GRANTED IN

15 SUBSTANTIAL PART. Defendants’ motions to dismiss are DENIED with respect to

16 Mr. Kronk’s claims for violations of California Corporations Code Section 25501.5

17 against Mr. Landis, Mr. Dennison, Mr. Casault, Mr. Andrews and Mr. Reddick and for

18 negligent referral against Mr. Reddick.

19

20

21 DATED: June 7, 2011

22

23

24 CORMAC J. CARNEY

25 UNITED STATES DISTRICT JUDGE

26

27

28

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