The first major case update in the LifeVantage class-action has seen the company granted a partial motion to dismiss.
Plaintiffs Brian Smith and Michael Ilardo sued LifeVantage back in January 2018.
Claims leveled against LifeVantage in the lawsuit include the company is a pyramid scheme. Several counts also pertain to RICO violations, as well as securities fraud.
In response to the lawsuit, LifeVantage filed a Motion to Dismiss.
In its analysis of the motion to dismiss, the court acknowledged the Plaintiff’s assertion that “investment in a pyramid scheme is itself a security”.
This was the foundation of alleged violations of the Securities and Exchange Act, which
forbids the use of “any manipulative or deceptive device or contrivance” that would violate any “such rules and regulations as the Commission may prescribe.”
(And) prohibits the employment of “any device, scheme, or artifice to defraud” as well as “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” when transacting in securities.
To hold up in court, scienter must be proven. That is “a mental state embracing intent to deceive, manipulate, or defraud.
In their motion to dismiss, LifeVantage argued
Plaintiffs cannot assert an “inherently fraudulent” pyramid scheme and expect to survive a motion to dismiss, because Plaintiffs “fail to identify any specific statements.”
The court agreed, describing the “voluminous complaint” as nearing that of a “puzzle pleading”.
Puzzle pleading occurs when a complaint is so voluminous and ineffectively organized as to “place the burden on the reader” to “solve the puzzle” of the plaintiff’s claims.
Plaintiffs’ lengthy Amended Complaint contains no reference to specific statements where the identity of the person making the statement, the time and circumstances of the statement, and the consequences of the statement are clearly stated.
Moreover, statements praising business products and prospects are employed by many businesses to express an optimistic view of themselves to investors. These statements are not considered fraudulent.
That was typically be enough to knock out a securities fraud allegation, however the court ruled that the count survived via scheme liability.
A claim under Rule 10b-5 can be pleaded under a theory of “scheme liability.”
Plaintiffs allege that the business opportunity that they joined was actually an illegal pyramid scheme.
An allegation of scheme liability “hinges on the performance of an inherently deceptive act that is distinct from an alleged misstatement.”
Under a scheme liability framework, Plaintiffs must show that Defendants “participated in an illegitimate, sham or inherently deceptive transaction where [their] conduct or role ha[d] the purpose and effect of creating a false appearance.”
This district has recognized scheme liability.
Therefore, the question on this 12(b)(6) motion is not whether Plaintiffs have identified specific statement
🤖 Quick Answer
What was the outcome of LifeVantage's motion to dismiss in the class-action lawsuit?LifeVantage was granted a partial motion to dismiss in the class-action lawsuit filed by plaintiffs Brian Smith and Michael Ilardo in January 2018. The court acknowledged the plaintiffs' argument that investment in a pyramid scheme constitutes a security, which formed the basis for Securities and Exchange Act violation claims.
What allegations were made against LifeVantage in the lawsuit?
The plaintiffs accused LifeVantage of operating as a pyramid scheme. Additional claims included RICO violations and securities fraud, specifically alleging the company employed manipulative or deceptive devices in violation of Securities and Exchange Act regulations.
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