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Ninth Circuit Revives Action Against Investing Influencer
Opinion Says Plaintiff Plausibly Alleged Claims Based on Defendant’s Social Media Pronouncements About Likely Rate of Return, Failure to Disclose SEC Letter Raising Issues With Projections
By Kimber Cooley, associate editor
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GRANT CARDONE real estate investor |
The Ninth U.S. Circuit Court of Appeals yesterday revived an action against a popular real estate investor based on social media statements purportedly opining that those committing their money to one of his company’s equity plans could expect an internal rate of return of 15%, finding that the pleading plausibly alleged claims for making “oral communications” containing material misstatements in violation of the Securities Act.
At issue is whether the challenged statements amount to “misleading opinions” under the standard set forth by the 2015 U.S. Supreme Court case of Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund, which held that a statement of opinion can qualify as an actionable material misstatement under the act if the belief was not sincerely held and contained objectively false elements.
Grant Cardone made the statements at issue on social media, boasting on Instagram that investors who opted in to his real estate ventures could double their money and telling viewers on YouTube:
“[Y]ou’re gonna walk away with a 15% annualized return. If I’m in that deal for 10 years, you’re gonna earn 150%....You can tell the SEC that’s what I said it would be…some people call me Nostradamus, because I’m predicting the future dude, this is what’s gonna happen.”
Cardone is the founder of Cardone Capital LLC, which pools money from numerous investors to make property purchases across the country. The entity manages two funds, Cardone Equity Funds V and VI.
Each fund is categorized as an “emerging growth company” under the 2015 U.S. Jobs Act, which allows for the sale of securities through crowdfunding. They offer opportunities for the “everyday” investor under Regulation A of the Securities Act of 1933, which exempts smaller public offerings from the SEC registration while still requiring filings and qualification by the agency.
An unaccredited investor—or one who does not meet wealth or financial sophistication criteria under SEC guidelines—named Luis Pino invested $5,000 in each of two funds managed by Cardone Capital in 2019.
He filed a putative class action against Cardone, Cardone Capital, and the two funds in 2020, asserting causes of action under §12(a)(2) of the Securities Act, found at 15 U.S.C. §771(a)(2), which creates liability for any person who offers or sells a security through an “oral communication” that contains a material misstatement or omission. He was substituted after his death by his daughter and successor-in-interest, Christine Pino.
In the operative complaint, the plaintiff alleges that Cardone’s social media posts about the projected internal rate of return and disbursements amounted to material misstatements, citing a July 2018 letter from the SEC asking Cardone to remove those same projections from an offering circular. Cardone allegedly removed the language from the circular but continued to make similar projections in his online communications.
After the defendants filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), District Court Judge John F. Walter of the Central District of California found that the plaintiff had waived subjective falsity by disclaiming fraud in the complaint and that, even if she had not, the pleading failed to plausibly allege subjective and objective falsity. He also found any alleged omission to be insufficient because the letter was publicly available online.
Having previously dismissed an earlier pleading for failure to state a claim, he granted the relief with prejudice.
Yesterday’s decision, authored by Senior Circuit Judge M. Margaret McKeown, reverses the dismissal. Circuit Judges Lucy H. Koh and Anthony D. Johnstone joined in the opinion.
Disclaiming Fraud
McKeown wrote that “[t]he district court erred in reasoning that Pino’s fraud disclaimer doomed her subjective falsity claim,” noting:
“The district court, citing Omnicare, concluded Pino cannot proceed with her misstatement claim because she ‘disclaimed any and all allegations of fraud.’ A careful reading of Omnicare does not support this analysis….
“….Although the Court references a fraud waiver, that reference merely underscores that plaintiffs did not argue subjective disbelief at all, and instead argued defendant’s sincerely held opinion proved wrong.”
Turning to the allegations in the pleading relating to subjective falsity, she said:
“Pino’s allegation of Cardone’s subjective disbelief is both strong and reasonable: Cardone made a projection of 15% [internal rate of return] and relatedly high distributions in its initial offering circular. The SEC reviewed the offer and in a letter to Cardone stated these projections lacked backing and should be removed. Cardone pushed back on other criticisms from the SEC, but not this one, suggesting Cardone did not truly believe its own projections and lacked evidence to rebut the SEC. Even so, Cardone continued to repeat the [return rate] and distribution projections in other communications to would-be investors on social media.”
The jurist acknowledged that “the SEC’s letter itself did not take a position on the subjective belief or objective falsity of the projections” but said that “Cardone’s telling reaction to the SEC letter—removing the projections without any rebuttal or comment—evinces Cardone’s subjective disbelief.” Under these circumstances, she concluded:
“Construing the facts in the light most favorable to Pino plausibly supports the claim that Cardone did not believe these projections in the first place.”
Objective Falsity
As to objective falsity, McKeown remarked:
“The district court held Pino did not allege objective falsity and…could not, because the Funds’ SEC Form 1-K filings purportedly projected performance in line with the 15% IRR projection. This approach elevates Cardone’s self-serving statements over other evidence….Pino points out that the projections lacked a basis, no prior funds had performed to this level, and the properties for the Funds had not yet been purchased to argue these projections were objectively untrue when made and alleges as much in her complaint.”
Addressing the failure to disclose the SEC letter, the judge explained that “constructive knowledge does not bar recovery for §12 claims.”
Rejecting the defendants’ argument that the document’s public availability meant that there was no omission in the first place as a “backhanded effort to get around the insufficiency of constructive knowledge,” she declared:
“[T]he narrow inquiry is whether the specific ‘statement(s), in the light of the circumstances under which they were made,’ were misleading for what they omitted—not whether, as Cardone argues, having a fact publicly available elsewhere means it was not omitted….By its nature, a misleading omission suggests that a contrary fact could exist and may have been disclosed elsewhere, but not as part of the statement in question.”
The case is Pino v. Cardone Capital LLC, 23-3512.
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