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Securities and Exchange Commission v. Schooler

United States District Court, Ninth Circuit

July 1, 2013

LOUIS V. SCHOOLER and FIRST FINANCIAL PLANNING CORPORATION, dba Western Financial Planning Corporation, Defendants.


GONZALO P. CURIEL, District Judge.


Before the Court is Defendants Louis V. Schooler and First Financial Planning Corporation d/b/a Western Financial Planning Corporation's (collectively "Defendants") Motion to Dismiss.[1] (Dkt No. 43.) Defendants seek dismissal under Federal Rule of Civil Procedure 12(b)(6) on the basis that the Securities and Exchange Commission ("SEC") has failed to state a claim upon which relief can be granted because the interests offered and sold by Defendants in general partnerships are not securities. As such, Defendants contend the SEC does not have statutory authority to bring its claims against Defendants. Having considered the parties' submissions and for the reasons set forth below, the Court hereby DENIES Defendants' Motion to Dismiss.


On September 4, 2012, the SEC filed a complaint against Defendants, alleging Defendants have violated and continue to violate the anti-fraud and registration provisions of the federal securities laws. (Dkt No. 1, Compl. at 1, 16-19.) The same day, the SEC also filed an ex parte application for a temporary restraining order ("TRO") and, among other requests, orders freezing assets and appointing a temporary receiver. (Dkt No. 3.) Judge Burns granted all relief sought by the SEC. (Dkt No. 10.)

The SEC Complaint alleges, inter alia, that since 2007, Defendants defrauded thousands of investors by offering and selling approximately $50 million worth of general partnership units ("GP units") - i.e., interests in general partnerships organized by Defendants - without disclosing material facts regarding the true value of the underlying land, the mortgages encumbering the properties, and when ownership of the underlying land was transferred from Defendants to the general partnerships ("GPs"). (Compl. at 10.) Specifically, the SEC contends Defendants have violated and continue to violate Sections 5(a), 5(c), and 17(a) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c), 77(q)(a); Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b); and Rule 10b-5, 17 C.F.R. § 240, 10b-5. ( Id. at 19.)

On September 11, 2012, Defendants filed a motion to dissolve or modify the TRO, which was denied on September 13, 2012. (Dkt Nos. 14, 18, 22.) Judge Burns held a hearing on September 17, 2012, on his order to show cause re converting the TRO into a preliminary injunction. ( See Dkt No. 30.) Defendants' primary argument in opposing the preliminary injunction was that the interests in the GPs organized by Defendants are not securities, and therefore the SEC lacks enforcement authority to bring this action. (Dkt No. 21, Resp. to TRO Mot. at 9-22.) After briefing by the parties and oral argument, Judge Burns converted the TRO into a preliminary injunction on October 5, 2012. (Dkt No. 44, "PI Order.") Based on his finding that the GP units sold by Defendants are securities, Judge Burns concluded the SEC had met its burden of establishing a prima facie case that Defendants have violated and continue to violate securities laws. ( Id. at 21-22.)

Also on October 5, 2012, Defendants filed the instant Motion to Dismiss on the basis that the GP interests at issue in this case are not securities. (Dkt No. 43 at 1.) The SEC responded that, having satisfied the more stringent standard for issuance of a preliminary injunction, the SEC's allegations, taken as true, clearly withstand Defendants' Rule 12(b)(6) motion. (Dkt No. 55, Resp. to Mot. Dism. at 1.)


A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is warranted under Rule 12(b)(6) where the complaint lacks a cognizable legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984); see Neitzke v. Williams, 490 U.S. 319, 326 (1989) ("Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law."). Alternatively, a complaint may be dismissed where it presents a cognizable legal theory yet fails to plead essential facts under that theory. Robertson, 749 F.2d at 534. While a plaintiff need not give "detailed factual allegations, " a plaintiff must plead sufficient facts that, if true, "raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545 (2007).

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 547). A claim is facially plausible when the factual allegations permit "the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In other words, "the non-conclusory factual content, ' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Service, 572 F.3d 962, 969 (9th Cir. 2009). "Determining whether a complaint states a plausible claim for relief will... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 129 S.Ct. at 1950.

In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe all inferences from them in the light most favorable to the nonmoving party. Thompson v. Davis, 295 F.3d 890, 895 (9th Cir. 2002); Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Legal conclusions, however, need not be taken as true merely because they are cast in the form of factual allegations. Ileto v. Glock, Inc., 349 F.3d 1191, 1200 (9th Cir. 2003); W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). When ruling on a motion to dismiss, a court may consider the facts alleged in the complaint, documents attached to the complaint, documents relied upon but not attached to the complaint when authenticity is not contested, and matters of which the court takes judicial notice. Lee v. Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001).


Sections 2(a)(1) of the Securities Act and 3(a)(10) of the Exchange Act include investment contracts in their definitions of a "security." 15 U.S.C. §§ 77b(a)(1) & 78c(a)(10). An investment contract is "a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). The requirement that profits be expected "solely" from the efforts of a promoter has been liberally construed; the Ninth Circuit has even done away with the term "solely" altogether for the purpose of determining whether an investment is a security contract. See Burnett v. Rowzee, 2007 WL 2809769, at *4 (C.D. Cal. Sept. 26, 2007) (citing Hocking v. Dubois, 885 F.2d 1449, 1455 (9th Cir. 1989)). Rather, the question is "whether the efforts made by those ...

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