LUIS PINO V. CARDONE CAPITAL, LLC

Citation: Not availableDocket: 21-55564

Court: Court of Appeals for the Ninth Circuit; December 20, 2022; Federal Appellate Court

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Luis Pino filed a lawsuit against Grant Cardone and several related entities, alleging violations of the Securities Act of 1933 due to material misstatements or omissions in real estate investment offerings. Pino claimed under Section 12(a)(2) against all defendants and under Section 15 against Cardone and Cardone Capital. The district court dismissed all claims, ruling that Cardone and Cardone Capital did not qualify as 'sellers' under Section 12(a)(2). On appeal, the Ninth Circuit panel reversed part of the district court's decision, determining that Pino adequately alleged Cardone and Cardone Capital were engaged in solicitation of investments and could be considered statutory sellers. Additionally, the panel found that some statements made by the defendants were actionable under the Securities Act. As a result, the panel affirmed in part and reversed in part the district court's dismissal of Pino's claims.

Cardone founded Cardone Capital, LLC in 2017, serving as its CEO and sole Manager. The company manages investments in real estate by pooling funds from various investors through Cardone Equity Fund V, LLC and Cardone Equity Fund VI, LLC. Both funds are designated as emerging growth companies under the 2015 U.S. JOBS Act, allowing them to utilize crowdfunding while benefiting from reduced regulatory requirements. Investments in these funds are governed by Regulation A, which permits exemptions from SEC registration but mandates the submission of an offering statement on Form 1-A, subject to SEC qualification. Fund V began accepting subscriptions on December 12, 2018, raising $50 million by September 20, 2019, and Fund VI started on October 16, 2019, achieving the same amount by June 25, 2020.

Plaintiff Luis Pino claims to have invested $10,000 in Funds V and VI after attending a marketing event titled the "Breakthrough Wealth Summit." He initiated a putative class action in 2020, alleging violations of Section 12(a)(2) of the Securities Act against all Defendants and Section 15 against Cardone and Cardone Capital. Pino contends that the Defendants made false or misleading statements in various social media posts and a YouTube video from February to December 2019. Notably, in a YouTube video dated April 22, 2019, Cardone promised a 15% annualized return for investors, while other posts included claims of substantial cash flow and high returns.

Pino claims that the communications from Cardone and Cardone Capital were materially misleading, lacking cautionary language about the speculative nature and risks of investing in Funds V and VI, and containing only a standard legend required by SEC Rule 255. The defendants filed a motion to dismiss under Rule 12(b)(6), which the district court granted, determining that Cardone and Cardone Capital did not qualify as statutory sellers under Section 12(a)(2) of the Securities Act. Pino appeals this decision, asserting jurisdiction under 28 U.S.C. § 1291.

The court reviews dismissals de novo, accepting the complaint's factual allegations as true while requiring more than mere conclusory statements to establish a plausible claim. Section 12(a)(2) imposes liability on those who offer or sell securities through misleading communications, necessitating proof that the defendants are statutory sellers, the sale was via a prospectus or oral communication, and the communication contained misleading omissions or statements. 

The district court concluded that Cardone and Cardone Capital's social media posts did not constitute direct solicitation of investments, nor did Pino allege reliance on such posts. Thus, they did not meet the criteria for being sellers under Section 12(a)(2). Consequently, without a primary violation of the Securities Act, the claims against them under Section 15, which imposes secondary liability for controlling violators, were also dismissed. Pino argues that this dismissal was incorrect, citing the Supreme Court's ruling in Pinter v. Dahl, which allows for liability as a seller through either transferring title to securities or engaging in solicitation for personal financial gain. However, the FAC does not assert that Cardone or Cardone Capital transferred title, precluding them from qualifying as sellers under this definition.

Cardone and Cardone Capital had financial interests in the Funds, receiving 35% of the profits, with Cardone controlling Cardone Capital. The key issue is whether they engaged in solicitation as defined under the Securities Act. The Court must determine if solicitation requires direct targeting of individual purchasers or if indirect communications, such as social media posts and videos, suffice. The Eleventh Circuit's decision in Wildes v. BitConnect Int’l PLC established that public videos can constitute solicitation even without direct targeting of buyers, provided there is an effort to persuade potential investors. The court emphasized that the Securities Act does not differentiate between direct and mass communications, aligning with historical interpretations that included various forms of public advertising. The Act allows for broad liability for anyone offering or selling securities through misleading communications. It defines "offer" to encompass all solicitation efforts, including mass communications, indicating that solicitation does not necessitate direct or personal engagement with individual purchasers. Moreover, the Supreme Court’s ruling in Pinter supports extending liability to those who solicit purchases for their own financial gain, reinforcing the Act's purpose of ensuring full and fair disclosures in securities sales. Thus, Cardone and Cardone Capital's actions may qualify as solicitation under the Securities Act.

Liability for solicitors of securities sales should extend beyond those who merely pass title, aligning with the Securities Act’s objective to protect purchasers from material misstatements and omissions by promoters, who typically have better access to information. The Court's interpretation in Pinter emphasizes that civil liability under Section 12(1) should create a deterrent effect on solicitors, as solicitation is a critical phase in the sales process where buyers are most vulnerable to misinformation. Solicitors, including brokers, often control the information flow to potential investors, increasing the risk of injury at this stage. Congressional intent appears to encompass solicitation under Section 12(1), and there is no indication that Congress intended to limit liability to specific types of solicitations or require a strict buyer-seller relationship akin to contractual privity. Defendants argue that a relationship must exist between the purchaser and seller, which they claim cannot arise from broadly distributed communications. However, the Supreme Court has interpreted 'seller' to include those who solicit sales, although it did not clarify what constitutes solicitation. In this case, social media advertisements, such as Instagram posts and YouTube videos, exemplify the kind of solicitations that can lead to investor harm due to incomplete information. The Defendants extensively used social media to attract investors for the Funds, indicating their significant role in the sales process. Concluding that their social media activities do not fall under the Act’s protections would contradict the intended remedial purpose of Congress.

The Eleventh Circuit's interpretation of the Securities Act indicates that a seller is liable for soliciting a security regardless of the medium used, meaning that a personal recommendation and an internet video would be treated similarly. Consequently, the Act does not necessitate that a solicitation be directed at a specific plaintiff. The First Amended Complaint (FAC) alleges that Cardone and Cardone Capital solicited investments in Funds V and VI through various means, including the "Breakthrough Wealth Summit" and extensive social media activity. It is also claimed that both defendants had a financial stake in these securities, as evidenced by the offering statements detailing compensation linked to capital contributions and distributions to Cardone Capital, which Cardone controls. Under section 12(a)(2), the plaintiff, Pino, is not required to demonstrate reliance on specific misstatements. Therefore, Pino has plausibly established that Cardone and Cardone Capital qualify as statutory sellers under this section. The district court's dismissal of Pino’s claim against them was incorrect, affecting his additional claim under section 15 due to its reliance on a primary violation of the Securities Act. The appellate court affirmed the district court's dismissal in part and reversed it in part, with each party responsible for their own appellate costs.