Visalus securities fraud lawsuit partially dismissed, case not over
Roughly nine months ago a lawsuit was filed against Visalus alleging securities fraud.
Allegations in the lawsuit pertain to Visalus’ Founders Equity Incentive Plan, through which an estimated $15 million was invested in virtual shares.
Those who invested were promised shareholder status and “dividend payments”, which never materialized.
The lawsuit is an attempt by three Visalus investors, who collectively lost tens of thousands of dollars, to get an answer as to where their money went.
Rather than come clean and work to redress investor losses, Visalus are fighting the lawsuit.
On October 27th Visalus filed a Motion to Dismiss, alleging the affiliate plaintiffs “failed to state a claim upon which relief can be granted”.
A hearing on the motion was held on February 20th and a decision reached and published on April 5th.
In their dismiss motion, Visalus argued the Founders Equity Incentive shares it sold to affiliates weren’t securities.
Contrary to the obvious, Visalus argued in court that Founders Equity Incentive shares were “phantom stock” and thus not a security.
The court acknowledged that despite this representation, Visualus themselves ‘repeatedly referred to units in the (Founders Equity Incentive) Plan as “real equity.”‘
The court disagreed with Visalus and concluded Founders Equity Incentive shares were indeed securities.
The court also concluded Visalus had, as alleged by the Plaintiff affiliates, made misstatements and omissions in its offering of securities.
Visalus did however prevail on its assertion that the Plaintiff affiliates failed to identify specific misrepresentations made by Visalus and its management.
Plaintiffs (except for Watts) have not sufficiently pleaded that they relied on any specific statements or omissions from the ViSalus Defendants that led to their investment in the Plan.
Indeed, most of the named Plaintiffs appear to allege that they relied upon and were persuaded to invest in the Plan as a result of personal pitches they heard from Owens and his associate Johnson, not from the ViSalus Defendants.
This saw claims tied to Rule 10b-5(a) and (c) fail as presented in the Plaintiff affiliate’s First Amended Complaint.
Note that Visualus affiliate Vincent Owens is also a named defendant in the lawsuit, however this Motion to Dismiss was filed by Defendants Nick Sarnicola, Ashley Sarnicola, Blake Mallen, Ryan Blair, Todd Goergen, Gary Reynolds and Michael Craig.
Based on analysis by the court, some counts have been dismissed against all named defendants and others against all except Visalus itself.
The Plaintiff affiliates have been given until May 4th to file a Second Amended Complaint that addresses deficiencies in the First Amended Complaint.
From my point of view the big victory here was the court acknowledging Founders Equity Incentive shares were securities.
Quite obviously the Plaintiff affiliates didn’t invest in the shares for any other reason than income representations made to them, so the task now is to identify specific representations.
Easier said than done given this all dates back to 2016, however not impossible.
Pending regulatory intervention, the alternative is Visalus came up with a virtual shares scheme, solicited over $15 million dollars of investment from affiliates through it, screwed everybody over… and they keep every dollar invested.
As as the time of publication the Plaintiff affiliates have not yet filed a Second Amended Complaint.
Update 5th May 2018 – A Second Amended Complaint was filed on May 4th.
Update 28th September 2018 – As of September 6th the case has been referred to mediation.