Case Name: Gary K. Chow v. Dan Yuan Chiao, et al.
Case No.: 18-CV-322807

Currently before the Court is the demurrer by defendant Dan Yuan Chiao (“Dan”) to the first amended complaint (“FAC”) of plaintiff Gary K. Chow (“Plaintiff”).

Factual and Procedural Background

This is an action for breach of fiduciary duty, breach of contract, and fraud.
Dan, defendant Irene Chiao (“Irene”), and Christopher Patrick Leveriza (“Leveriza”) formed a partnership—defendant Pacific Bay—to provide investment advice and manage investment accounts for clients. (FAC, ¶¶ 2-5 & 8.)

In November 2012, Dan approached Plaintiff about managing his savings. (FAC, ¶ 26.) Dan represented that the defendants would “only invest [Plaintiff’s] savings in low-risk stocks.” (Id. at ¶ 27.) “[Dan] also indicated that [Pacific Bay] would collect a small percentage of [Plaintiff’s] eventual investment returns as compensation for [Pacific Bay’s] investment management.” (Ibid.) Plaintiff allegedly agreed to pay the defendants “reasonable fees billed to him based on gains that the [defendants] created in [Plaintiff’s] Interactive Brokers account.” (Id. at ¶ 57.)

“There were numerous representations during this initial time by the [defendants] that they would invest in sound businesses only, where permanent capital loss was not going to be a significant risk. The [defendants] made it very clear that they were not going to speculate with [Plaintiff’s] money, and that they understood that [Plaintiff] was risk averse and worried about capital loss. Such a representation included the one contained in [Dan’s] email to [Plaintiff] on November 13, 2012 (‘Now I understand that you may be risk averse and worried about permanent capital loss’).” (FAC, ¶ 29.)

On December 21, 2012, Plaintiff received an email from Dan, explaining and attaching the investment principles of Pacific Bay. (FAC, ¶¶ 8 & 25.) In the email and its attachment, the defendants told Plaintiff that “their partnership’s investment strategy would be very conservative, eschewing principal losses, picking investments based on value, and not popularity, and otherwise using the investment principles espoused by Berkshire Hathaway’s Warren Buffet and Charlie Munger to invest their clients’ money.” (Ibid.) The defendants never informed Plaintiff that they were not “registered investment advisors, investment advisor representatives of registered investment advisors, or otherwise licensed to recommend investments, sell investment services, or hold themselves out to be investment managers.” (Id. at ¶ 11.)

On July 18, 2014, Leveriza falsely represented that “he would monitor [Plaintiff’s] account closely, to make sure that his partners … were managing [Plaintiff’s] account with low risk, and to avoid capital loss.” (FAC, ¶ 30.) Leveriza knew, or should have known, that the investments that the partnership had been trading in Plaintiff’s account were very high risk, and were likely to lead to capital loss. (Ibid.) Leveriza not only withheld this material information from Plaintiff, but actively concealed it by representing that he would monitor his partners to ensure low risk investments that would not lead to capital loss in Plaintiff’s account. (Ibid.)

Based on the defendants’ representations, Plaintiff “placed his trust and confidence in the [defendants], and entrusted the majority of his life savings to [them] to manage.” (FAC, ¶¶ 10, 24, 31.) The defendants helped Plaintiff set up an account at Interactive Brokers, where Irene was listed as Plaintiff’s California-based investment advisor. (Ibid.)

Thereafter, the defendants began investing Plaintiff’s savings. (FAC, ¶¶ 10, 24, 31.) The defendants “engaged in a pattern of speculative buying and selling of concentrated positions of a select number of equities, and extensively trading in the options of those equities, gambling with [Plaintiff’s] money, instead of investing it in the low-risk manner that they had represented to him that they would, and otherwise investing [Plaintiff’s] funds unsuitably.” (Id. at ¶¶ 12 & 42.) Plaintiff alleges that the defendants failed to “perform their investment advisory and management services with the due care reasonably to be expected of a person who is an expert of the type for which the [defendants] held themselves out to be.” (Id. at ¶ 13.) In addition, the defendants covered up the losses that Plaintiff sustained. (Id. at ¶¶ 34-38.)

By the middle of 2017, the defendants had lost almost the entire amount entrusted to them by Plaintiff. (FAC, ¶ 13.) “Out of the $110,000 …, all but approximately $300 was lost.” (Id. at ¶¶ 13 & 40.) In addition to those losses, Plaintiff had to pay significant taxes due to short term gains caused by the defendants’ investments. (Id. at ¶ 43.)

Based on the foregoing allegations, Plaintiff filed a complaint against Dan, Irene, Leveriza, and Pacific Bay on February 2, 2018. Plaintiff filed the operative FAC on April 20, 2018. In the FAC, Plaintiff alleges causes of action for: (1) breach of fiduciary duty; (2) breach of contract; (3) constructive fraud; (4) violation of Corporations Code section 25401 et seq.; (5) violation of Corporations Code section 25403; (6) violation of Corporations Code section 25504.1; (7) violation of Corporations Code section 25236, California Code of Regulations section 260.236, and Civil Code section 3372; and (8) fraud.

On December 17, 2018, Dan filed the instant demurrer to the FAC. Plaintiff filed papers in opposition to the demurrer on February 22, 2019. On February 28, 2019, Dan filed a reply.

Discussion

Dan demurs to each and every cause of action of the FAC on the ground of failure to allege facts sufficient to constitute a cause of action. (Dan’s Dem., p. 3:2-20; see Code Civ. Proc., § 430.10, subd. (e).)

I. Request for Judicial Notice

In connection with his demurrer, Dan asks the Court to take judicial notice of three documents that were attached as exhibits to the “Declaration of Gary K. Chow In Support of Plaintiff’s Opposition to Defendant Christopher Leveriza’s Motion to Quash Service of Summons and Dismiss the Case Due to Lack of Personal Jurisdiction,” which was filed on October 5, 2018. Specifically, Dan requests judicial notice of: (1) a 2014 Activity Statement from Interactive Brokers; (2) an Interactive Brokers Account Application for Financial Advisor Clients executed by Plaintiff; and (3) page 3, paragraph 15 of the “Declaration of Gary K. Chow In Support of Plaintiff’s Opposition to Defendant Christopher Leveriza’s Motion to Quash Service of Summons and Dismiss the Case Due to Lack of Personal Jurisdiction.” Dan asserts that the Court may properly take judicial notice of these documents because they are court records.

Plaintiff objects to Dan’s request for judicial notice, arguing that the statements contained in the documents and the proper interpretation of the documents are reasonably disputable.

“Judicial notice is the recognition and acceptance by the court, for use by the trier of fact or by the court, of the existence of a matter of law or fact that is relevant to an issue in the action without requiring formal proof of the matter.” (Unruh-Haxton v. Regents of University of California (2008) 162 Cal.App.4th 343, 364.) Matters subject to judicial notice are listed in Evidence Code sections 451 and 452. (Id. at p. 364.)

Evidence Code section 452, subdivision (d) states that courts may take judicial notice of “[r]ecords of any court of this state.” That provision permits the trial court to “take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached—in the documents such as orders, statements of decision, and judgments—but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.” (People v. Woodell (1998) 17 Cal.4th 448, 455 (Woodell).) Furthermore, the law is clear that a court may not take judicial notice of documents such as sworn declarations, discovery requests, and responses thereto unless those documents contain statements of the plaintiff or his agent that are inconsistent with the allegations in the pleading. (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604-605.)

Here, the Court may properly take judicial notice of the existence of the 2014 Activity Statement from Interactive Brokers and the Interactive Brokers Account Application for Financial Advisor Clients executed by Plaintiff, but the Court cannot take judicial notice of the truth of any statement contained in those documents. (See Woodell, supra, 17 Cal.4th at p. 455.) Similarly, the Court may properly take judicial notice of the existence of page 3, paragraph 15 of the “Declaration of Gary K. Chow In Support of Plaintiff’s Opposition to Defendant Christopher Leveriza’s Motion to Quash Service of Summons and Dismiss the Case Due to Lack of Personal Jurisdiction.” However, the Court cannot take judicial notice of any statements set forth therein because they are not inherently inconsistent with the allegations of the FAC.

Accordingly, Dan’s request for judicial notice is GRANTED IN PART and DENIED IN PART. The request is GRANTED as to the existence of the subject documents. The request is otherwise DENIED.

II. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “ ‘[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice’ [citation].” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732; see Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary fun ction of a demurrer to test the truth of the [ ] allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. [ ] Thus, [ ] the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958 (Align), internal citations and quotations omitted.)

III. Analysis

A. First Cause of Action

Dan initially argues that the first cause of action for breach of fiduciary duty fails to state a claim because Plaintiff does not allege sufficient facts establishing that he owed a fiduciary duty to Plaintiff. Dan acknowledges the allegation in the FAC that he had an investment adviser relationship with Plaintiff. But Dan asserts that he “was not an investment advisor because … he did not provide advisory services and … he did not request or receive compensation.” (Dan’s Mem. Ps. & As., p. 15:24-25.) Dan also contends that the allegation in the FAC that Plaintiff agreed to pay him a reasonable fee for his services is contradicted by the language set forth in the Interactive Brokers Account Application for Financial Advisor Clients executed by Plaintiff. (Id. at p. 15:26-16:6.)

“The elements of a cause of action for breach of fiduciary duty are: (1) existence of fiduciary duty; (2) the breach of that duty; and (3) damage proximately caused by that breach.” (Mosier v. Southern California Physicians Insurance Exchange (1998) 63 Cal.App.4th 1022, 1044; Shopoff & Cavallo LLP v. Hyon (2008) 167 Cal.App.4th 1489, 1509 [“To establish a cause of action for breach of fiduciary duty, a plaintiff must demonstrate the existence of a fiduciary relationship, breach of that duty and damages.”].)

“ ‘Fiduciary duties are imposed by law in certain technical, legal relationships such as those between partners or joint venturers [citation], … trustees and beneficiaries, principals and agents, and attorneys and clients [citation].’ [Citation.]” (Hasso v. Hapke (2014) 227 Cal.App.4th 107, 140.) “The investment adviser/client relationship is one such relationship, giving rise to a fiduciary duty as a matter of law. [Citation.]” (Ibid.) “Corporations Code section 25009, subdivision (a), provides in pertinent part: ‘ “Investment adviser” means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, publishes analyses or reports concerning securities.’ ” (Id. at p. 141.) “It is a question of fact whether one is … an investment adviser [citation] … .” (Id. at p. 140.)

In the FAC, Plaintiff affirmatively alleges that he and Dan had an “investment advisor relationship.” (FAC, ¶ 28.) Dan allegedly approached Plaintiff about managing Plaintiff’s savings, and Dan represented that the defendants would “only invest [Plaintiff’s] savings in low-risk stocks.” (Id. at ¶¶ 26 & 27.) The defendants then invested Plaintiff’s savings. (Id. at ¶¶ 31-34, 37-38, & 42.) “[Dan] also indicated that [Pacific Bay] would collect a small percentage of [Plaintiff’s] eventual investment returns as compensation for [Pacific Bay’s] investment management.” (Ibid.) Plaintiff allegedly agreed to pay the defendants “reasonable fees billed to him based on gains that the [defendants] created in [Plaintiff’s] Interactive Brokers account.” (Id. at ¶ 57.) These allegations are accepted as true on demurrer (see Align, supra, 179 Cal.App.4th at p. 958 [the facts alleged in the pleading are deemed to be true, however improbable they may be]) and are sufficient, for pleading purposes, to show that Plaintiff and Dan had an investment adviser/client relationship.

Furthermore, to the extent Dan’s argument is based on the language set forth in the Interactive Brokers Account Application for Financial Advisor Clients executed by Plaintiff it is not well-taken. The hearsay statements in that document and the proper interpretation of that document are not proper subjects of judicial notice. Thus, Dan’s argument is based on material that cannot be properly considered by the Court on demurrer.

Dan further argues that the first cause of action fails to state a claim because the claim is time-barred by the applicable statute of limitations. Dan contends that “any fiduciary claim cannot arise from [him] performing in accordance” with the parties’ alleged agreement because there was no fiduciary relationship between him and Plaintiff. (Dan’s Mem. Ps. & As., p. 19:17-18.) Dan concludes that a claim for breach of fiduciary duty must, therefore, “stem from enabling or not preventing Plaintiff from entering into said [a]greement of ‘speculative’ investing.” (Id. at p. 19:18-19.) Dan asserts that “[t]his occurred in 11/15/12, over five years ago,” and Plaintiff’s damages accrued no later than 2014.” (Id. at p. 19:19-23.) Dan then concludes that the first cause of action is time-barred by the statute of limitations set forth in Code of Civil Procedure sections 338, subdivision (d), 339, and 343.

Dan’s statute of limitations argument fails to dispose of the first cause of action in its entirety. Dan’s argument does not address the claim to the extent it is predicated on his alleged failure to perform in accordance with the parties’ agreement. Because Dan’s argument does not dispose of the claim in its entirety, his demurrer to the claim is not well-taken. (See PHII, Inc. v. Super. Ct. (1995) 33 Cal.App.4th 1680, 1682 (PHII) [a demurrer does not lie to only a portion of a claim].)

Accordingly, Dan’s demurrer to the first cause of action on the ground of failure to allege facts sufficient to constitute a cause of action is OVERRULED.

B. Second Cause of Action

Dan argues, among other things, that the second cause of action for breach of contract fails to state a claim because the terms of the alleged contract are not sufficiently definite.

“Under California law, a contract will be enforced if it is sufficiently definite (and this is a question of law) for the court to ascertain the parties’ obligations and to determine whether those obligations have been performed or breached.” [Citation.] “To be enforceable, a promise must be definite enough that a court can determine the scope of the duty[,] and the limits of performance must be sufficiently defined to provide a rational basis for the assessment of damages.” [Citations.] “Where a contract is so uncertain and indefinite that the intention of the parties in material particulars cannot be ascertained, the contract is void and unenforceable.” [Citations.] “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.” [Citations.] But “[i]f … a supposed ‘contract’ does not provide a basis for determining what obligations the parties have agreed to, and hence does not make possible a determination of whether those agreed obligations have been breached, there is no contract.” [Citation.]

(Bustamante v. Intuit, Inc. (2006) 141 Cal.App.4th 199, 209 (Bustamante).)
In his second cause of action, Plaintiff alleges that “[he] and the [defendants] entered into an agreement, as reflected in a series of writings referenced in [the FAC]. In the series of writings (‘the agreement’), including [a December 21, 2012 email and its attachment], the [defendants] agreed to invest [his] funds in a way that was extremely safe, and which was extremely unlikely to cause [him] any principal losses.” (FAC, ¶ 56.) Plaintiff further alleges that he “agreed to pay [the defendants] reasonable fees billed to him based on gains that the [defendants] created in [his] Interactive Brokers account.” (Id. at ¶ 57.)

As Dan persuasively argues, the material terms of the contract, as alleged, are not sufficiently definite. Plaintiff alleges that Dan had a duty to “invest [his] funds in a way that was extremely safe, and which was extremely unlikely to cause [him] any principal losses.” (FAC, ¶ 56.) But it is wholly unclear what constitutes an “extremely safe” investment or one that was “extremely unlikely” to cause Plaintiff any loss of principal. There is no way for the Court to ascertain whether Dan complied with this term. Similarly, the nature of the obligation alleged provides no rational method for computing damages. Thus, the conditions for Dan’s performance of the contract, as alleged, are fatally uncertain. (See Bustamante, supra, 141 Cal.App.4th at p. 210 [“Describing the parties’ mutual promises in the most general terms, Bustamante emphasizes the duty to ‘take all steps necessary to obtain adequate funding and to formally launch the company.’ But what steps are ‘necessary’? How can it be ascertained whether a party has complied with this term? How long were they required to continue seeking ‘adequate funding’? … The conditions for performance are fatally uncertain.”]; see also Ladas v. California State Auto. Assn. (1993) 19 Cal.App.4th 761, 771 [“An amorphous promise to ‘consider’ what employees at other companies are earning cannot rise to the level of a contractual duty. … By what standard would a court or a jury determine that the company failed to meet its obligation to ‘consider’ commissions earned by competitors? What would be the relevant market on which such a duty would be predicated? CSAA’s four major competitors? All insurers in the state? Eighty companies nationwide? How would ‘damages’ be calculated? By totalling up all yearly commissions earned by other agents, averaging them and subtracting the difference? By coming up with an ‘industry standard’ factor and increasing CSAA’s unit value ratio by that factor? The nature of the obligation asserted provides no rational method for determining breach or computing damages.”].)

Accordingly, Dan’s demurrer to the second cause of action on the ground of failure to allege facts sufficient to constitute a cause of action is SUSTAINED, with 10 days’ leave to amend.

C. Third and Eighth Causes of Action

Dan argues that the third and eighth causes of action for constructive and actual fraud, respectively, fail to state a claim because: (1) Plaintiff fails to plead the alleged misrepresentations with specificity; (2) many of the alleged misrepresentations are non-actionable statements about future events; (3) Plaintiff does not adequately allege the element of knowledge; (4) Plaintiff does not adequately allege the element of intent to defraud; (5) Plaintiff had actual knowledge of the defendants’ investment strategy and could not have justifiably relied on the alleged misrepresentations; and (6) the claim is time-barred under Code of Civil Procedure section 338, subdivision (d).

Plaintiff’s third and eighth causes of action are based, in part, on allegations of nondisclosure. Specifically, Plaintiff alleges that Dan “withheld many material facts about the investments, including that virtually every investment [the defendants] made for [Plaintiff] would be, and were, speculative in nature, which means that the investment is more likely than most other types of investments to result in a total loss, among other things.” (FAC, ¶ 41.)

The elements of an action for actual fraud based on nondisclosure are: (1) the defendant must have concealed or suppressed a material fact; (2) the defendant must have been under a duty to disclose the fact to the plaintiff; (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff; (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact; and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage. (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 868.)

Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship. (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1131.) “A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests. [Citations.] A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent.” (Michel v. Moore & Associates, Inc. (2007) 156 Cal.App.4th 756, 762 (Michel).) A fiduciary is “ ‘… liable to his principal for constructive fraud even though his conduct is not actually fraudulent. … [A]s a general principle constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another even though the conduct is not otherwise fraudulent. Most acts by an agent in breach of his fiduciary duties constitute constructive fraud. The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, a careless misstatement may constitute constructive fraud even though there is no fraudulent intent.’ [Citation.]” (Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 415.)

Dan’s first two arguments only address the third and eighth causes of action to the extent they are predicated on affirmative misrepresentations allegedly made by the defendants. But the claims, as pleaded, are also based on the alleged nondisclosure of material facts. (FAC, ¶¶ 31, 41-43, & 62-63.) Because Dan’s first two arguments do not address the allegations of nondisclosure, those arguments fail to dispose of the claims in their entirety. (See PHII, supra, 33 Cal.App.4th at p. 1682 [a demurrer does not lie to only a portion of a claim].)
Dan’s third argument addresses the element of knowledge. In the FAC, Plaintiff alleges that Dan was making speculative investments with his savings. (FAC, ¶ 42.) Based on this allegation, it is reasonable to infer that Dan had knowledge of the material fact that he allegedly failed to disclose (i.e., that the investments made for Plaintiff were speculative in nature). (See OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 862 [indicating that the requisite scienter for a claim of nondisclosure is knowledge of the material fact that was allegedly suppressed]; see also Rickley v. Goodfriend (2013) 212 Cal.App.4th 1136, 1141-42 [when analyzing a demurrer, a court must liberally construe the complaint and draw all reasonable inferences in favor of its allegations].)

Dan’s fourth argument addresses the element of intent to defraud. With respect to the eighth cause of action for actual fraud, Plaintiff adequately alleges that Dan withheld material facts in order to induce Plaintiff to allow the defendants to invest his money. (FAC, ¶¶ 78-81.) This allegation of intent is sufficient for pleading purposes. (See Witkin (2008) Cal. Proc. 5th Plead § 728 [“Intent, like knowledge, is a fact. Hence, the averment that the representation was made with the intent to deceive the plaintiff, or any other general allegation with similar purport, is sufficient.”].) Regarding the third cause of action for constructive fraud, Plaintiff is not required to plead facts showing an intent to deceive. (See Civ. Code, § 1573 [“[c]onstructive fraud consists [of]: [¶] 1. Any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; or [¶] 2. In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.”], italics added; see also Michel, supra, 156 Cal.App.4th at p. 762 [“A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent. … Appellants’ negligent nondisclosure/constructive fraud theory relieved them of the burden of needing to prove respondent intended to defraud them, a much easier row to hoe than proving actual intent to defraud for fraudulent concealment.”].)

Dan’s fifth argument—that Plaintiff had actual knowledge of the defendants’ investment strategy and could not have justifiably relied on the alleged misrepresentations—lacks merit because there are no allegations in the FAC, or judicially noticeable material, showing that Plaintiff knew of the speculative nature of the investments made by the defendants.

Lastly, Dan’s statute of limitations argument also lacks merit. To substantiate his statute of limitations argument, Dan needed to demonstrate (1) which statute of limitations applies and (2) when the claims accrued. (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1315, 1316.) The limitations period for a claim predicated on fraud is three years from the date of “the discovery, by the aggrieved party, of the facts constituting the fraud.” (Code Civ. Proc., § 338, subd. (d); see Britton v. Girardi (2015) 235 Cal.App.4th 721, 734; Broberg v. The Guardian Life Ins. Co. of America (2009) 171 Cal.App.4th 912, 921 [“When a plaintiff reasonably should have discovered facts for purposes of the accrual of a case of action or application of the delayed discovery rule is generally a question of fact, properly decided as a matter of law only if the evidence (or, in in this case, the allegations in the complaint and facts properly subject to judicial notice) can support only one reasonably conclusion.”].) In his memorandum of points and authorities, Dan does not point to any allegation in the FAC showing the date that Plaintiff discovered the alleged fraud. Consequently, Dan fails to demonstrate when the fraud claims accrued.

Accordingly, Dan’s demurrer to the third and eighth causes of action on the ground of failure to allege facts sufficient to constitute a cause of action is OVERRULED.

D. Fourth and Sixth Causes of Action

Dan argues that the fourth cause of action for violation of Corporations Code section 25401, et seq., and the sixth cause of action violation of Corporations Code section 25504.1 fail to state a claim because there is no strict privity between him and Plaintiff.

Corporations Code section 25401 makes it illegal to “offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

Corporations Code section 25501 establishes civil liability for a violation of section 25401: “Any person who violates Section 25401 shall be liable to the person who purchases a security from him or sells a security to him, who may sue either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security), unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know (or if he had exercised reasonable care would not have known) of the untruth or omission.”

“In addition to the primary or direct civil liability established in section 25501, the Legislature has expressly extended liability for a violation of section 25401 to specified secondary actors by means of the same secondary liability statutes discussed above with reference to the first cause of action. Sections 25504 and 25504.1 establish joint and several liability on the part of certain actors, including agents who materially aid in the transaction constituting the violation (§ 25504) and persons who materially assist in the violation with the intent to deceive or defraud (§ 25504.1). [Citation.] The two statutes contain slightly different language describing that liability: section 25504 makes its secondarily liable actors ‘liable jointly and severally with and to the same extent as’ the primary actor; section 25504.1 simply makes them ‘jointly and severally liable’ with the primary violator.” (Moss v. Kroner (2011) 197 Cal.App.4th 860, 872–873 (Moss).)

Strict privity is required for any suit resting on an underlying violation of Corporations Code section 25401. (Moss, supra, 197 Cal.App.4th at pp. 872-875.) In other words, only a direct seller or buyer of the security cannot be held liable under that statute. (Ibid.) If “primary liability is stated or established with the privity required by section 25501 and a violation of section 25401, secondary liability may also exist under sections 25504 and 25504.1 for others who participated in the violation in the specific roles listed in those sections without any further need for privity between these secondarily liable actors and the plaintiff.” (Id. at p. 875.)

Here, it is undisputed that Dan was not a direct seller or buyer of securities. Rather, Plaintiff alleges that Dan was making investments on his behalf. Consequently, there is no strict privity as required for a claim for violation of Corporations Code section 25401. Furthermore, secondary liability is not available under Corporations Code section 25504.1 because Plaintiff has not established primary liability with the privity required by Corporations Code section 25501 and a violation of Corporations Code section 25401.

Accordingly, Dan’s demurrer to the fourth and sixth causes of action on the ground of failure to allege facts sufficient to constitute a cause of action is SUSTAINED, with 10 days’ leave to amend.

E. Fifth Cause of Action

Dan argues that the fifth cause of action for violation of Corporations Code section 25403 fails to state a claim because there is no private right of action for a violation of Corporations Code section 25403. (See Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 255 [“Under section 25403, a person who knowingly provides substantial assistance to another person in violation of any provision of the corporate securities law is deemed to be in violation of that provision, to the same extent as the person to whom assistance was provided. [Citation.] However, the civil liability provisions of the statute [citation] do not expressly provide a private right of action for a violation of section 25403, as they do for other specified provisions of the Act. Consequently, the trial court properly sustained the demurrer to this cause of action. [Citations.]”].)

In opposition, Plaintiff concedes that he cannot state a claim for violation of Corporations Code section 25403. (Opp’n., p. 9:2-6.)

Accordingly, Dan’s demurrer to the fifth cause of action on the ground of failure to allege facts sufficient to constitute a cause of action is SUSTAINED, without leave to amend.

F. Seventh Cause of Action

Dan argues that the seventh cause of action for violation of Corporations Code section 25236, California Code of Regulations section 260.236, and Civil Code section 3372 fails to state a claim. Dan states that Civil Code section 3372 “has a strict compensation requirement applying to ‘[a]ny person engaged in the business of advising others for compensation … shall be liable to any person to whom such advisory services are furnished for compensation …’ [citation].” (Dan’s Mem. Ps. & As., p. 24:12-14, italics omitted.) Dan concludes that the seventh cause of action fails to state a claim because “Plaintiff does not allege ever paying or reimbursing [him] and it is clear that [he] assisted Plaintiff in gratuity.” (Id. at p. 24:14-15.)

As an initial matter, Dan’s argument fails to dispose of the seventh cause of action in its entirety. Dan’s argument only addresses the seventh cause of action to the extent it is predicated on Civil Code section 3372. But the seventh cause of action is also based on alleged violations of Corporations Code section 25236 and California Code of Regulations section 260.236. Because Dan’s argument does not dispose of the claim to the extent it is based on those violations, his demurrer to the seventh cause of action is not well-taken. (See PHII, supra, 33 Cal.App.4th at p. 1682 [a demurrer does not lie to only a portion of a claim].)

Moreover, Dan’s argument regarding Civil Code section 3372 lacks merit. Civil Code section 3372, subdivision (a) states:

Any person engaged in the business of advising others for compensation as to the advisability of purchasing, holding or selling property for investment and who represents himself or herself to be an expert with respect to investment decisions in such property, or any class of such property, shall be liable to any person to whom such advisory services are furnished for compensation and who is damaged by reason of such person’s reliance upon such services, for the amount of such compensation and for such damages, unless the person rendering such services proves that such services were performed with the due care and skill reasonably to be expected of a person who is such an expert.

(Civ. Code, § 3372, subd. (a).)

Here, Plaintiff alleges that Dan “indicated … [Pacific Bay] would collect a small percentage of [Plaintiff’s] eventual investment returns as compensation for [Pacific Bay’s] investment management.” (Complaint, ¶ 27.) Plaintiff further alleges that he agreed to pay the defendants “reasonable fees billed to him based on gains that the [defendants] created in [Plaintiff’s] Interactive Brokers account.” (Id. at ¶ 57.) These allegations are sufficient, for pleading purposes, to establish that Dan’s advisory services were furnished for compensation.

Accordingly, Dan’s demurrer to the seventh cause of action on the ground of failure to allege facts sufficient to constitute a cause of action is OVERRULED.