Byrd et al v. VISALUS, INC. et al

Filing 53

OPINION AND ORDER (1) Granting in Part and Denying in Part Defendants' 39 Motion to Dismiss and (2) Allowing Plaintiffs to File a Second Amended Complaint. Signed by District Judge Matthew F. Leitman. (HMon)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
CAPRECE BYRD, et al.,
Plaintiffs,

Case No. 17-cv-12626
Hon. Matthew F. Leitman

v.
VISALUS, INC., et al.,
Defendants.
__________________________________________________________________/
OPINION AND ORDER (1) GRANTING IN PART AND DENYING IN
PART DEFENDANTS’ MOTION TO DISMISS (ECF #39) AND (2)
ALLOWING PLAINTIFFS TO FILE A SECOND
AMENDED COMPLAINT
In this putative class action, Plaintiffs claim that the Defendants defrauded
them into purchasing equity in Defendant ViSalus, Inc. Defendants ViSalus, Nick
Sarnicola, Ashley Sarnicola, Blake Mallen, Ryan Blair, Todd Goergen, Gary
Reynolds, and Michael Craig (collectively, the “ViSalus Defendants”) have now
moved to dismiss Plaintiffs’ First Amended Complaint. (See ECF #39.) For the
reasons that follow, the motion is GRANTED IN PART and DENIED IN PART.

1 

I1
ViSalus is a Nevada corporation that sells weight-loss shakes and other
products. (See, e.g., First Am. Compl. at ¶¶ 2, 29, ECF #30 at Pg. ID 366, 378.) It
is “run” by its “founders,” Nick Sarnicola, Blair, and Mallen. (Id. at ¶2, Pg. ID 366.)
ViSalus operates using a multi-level marketing (“MLM”) business model.
Under this model, “participants pay money to the program promoter in return for
which the participants obtain the right to: (1) recruit additional participants …; (2)
sell goods or services; and (3) receive payment or other compensation … based upon
the sales of those [individuals that the participant recruits].” F.T.C. v. Five Star Auto
Club, Inc., 2000 WL 1609798, at *1 (S.D.N.Y. June 12, 2000). In other words, a
company using the MLM model “markets its products not through direct sale to
customers, but rather, through sales to individual distributors … who then sell to the
general public” and recruit others to do the same. Virgin Enterprises Ltd. v.
American Longevity, 2001 WL 34142402, at *1 (S.D.N.Y. Mar. 1, 2001); Altaria
Corp. v. Woodbolt Distribution, LLC, 2014 WL 3121899, at *4 (W.D. Tex. July 7,
2014) (describing how companies using the MLM model “use[] promoters to sell
directly to customers and also to enroll other promoters”).

1

The facts in this section are drawn from the allegations in the First Amended
Complaint. The Court accepts Plaintiffs’ factual allegations as true, as it must at this
stage of the proceeding.
2 

ViSalus’ MLM sales and recruiting strategy worked – for a time. “Almost
400,000 people in the United States, including over 200,000 just in 2012 paid money
to become a [ViSalus] distributor.” (First Am. Compl. at ¶3, ECF #30 at Pg. ID 367.)
But, quickly, the market became “saturated as distributors tripp[ed] over each other
in the same [areas].” (Id. at ¶4, Pg. ID 367.) “By the end of 2012, sales [of ViSalus’
products] plummeted.” (Id.) And “[b]y 2014 [ViSalus] was in its second straight
money-losing year with sales off by 80% from their high.” (Id. at ¶8, Pg. ID 369.)
Desperate for cash, the ViSalus Defendants created a new way to make money
that they referred to, at various times, as the “Founders Equity Incentive Plan” (the
“Plan”) and the “March to Equity.” (Id. at ¶¶ 81 86, Pg. ID 403, 407.) Under the
Plan, ViSalus promoters who met certain sales and recruiting benchmarks would
obtain “equity” that would be “equivalent to 6% of [ViSalus].” (Id. at ¶¶ 13, 92, Pg.
ID 317, 416.) This equity would entitle the promoters to receive “generations worth
of dividends.” (Id. at ¶13, Pg. ID 317.) “The goal of the Plan was to raise capital to
cover [ViSalus’] immediate and urgent cash needs” – by providing an incentive for
promoters to buy more product from ViSalus and recruit new distributors – while
“hid[ing] the fact from the investor promoters that the company was selling
worthless equity.” (Id. at ¶81, Pg. ID 403.)
ViSalus “promoted” the Plan with an “announcement on its web page, by
personal and videotaped promotion by [its founders, Nick Sarnicola, Blair, and
3 

Mallen], and through Facebook and other social media.” (Id. at ¶14, Pg. ID 372.) In
one such video, Nick Sarnicola told potential investors that:
 He, Blair, and Mallen had spent $105 million to “buy back” ViSalus
from its previous owner.
 He, Blair, and Mallen were “immediately taking 6% of the equity that
[they] just … acquire[d]” and offering investors “a chance to earn
some of it.”
 Investors could earn “equity,” become “shareholders,” and get
“dividend[s].”
 Participating in the Plan “could mean owning a piece of a multiple
nine figure a year company…,” ownership that investors could “pass
on … to [their] children.”
(Id. at ¶87, Pg. ID 408-15.) In a second video promoting the Plan, Nick Sarnicola
assured investors that they had an opportunity to earn “real money” and “real equity”
through participation in the Plan, and that he, Blair, and Mallen had “set aside six
percent of [ViSalus]” for distributors who participated in the Plan. (Id. at ¶125, Pg.
ID 444.) Participants in the Plan were further promised that they would receive a
specific dividend payment on April 17, 2017. (See id. at ¶17, Pg. ID 374.)
The ViSalus Defendants also recruited individuals to help market the Plan to
potential investors and current ViSalus distributors. One of these individuals was
Defendant Vincent Owens, the pastor of the Household of Faith Empowerment

4 

Temple in Aurora, Colorado.2 (See id. at ¶38, Pg. ID 384.) He “promoted [the Plan]
to dozens or hundreds of people,” including the Plaintiffs. (Id.) Among other things,
Owens and/or his associate Deb Johnson told the Plaintiffs that ViSalus was a
successful, “expanding,” company with “2.2 billion dollar[s] [] to date in sales,” that
six-percent “of [ViSalus] would be available” in “equity” to promoters who
participated in the Plan, and that participants in the Plan would receive “years” of
“dividends,” including “a large payout on April 17, 2017.” (Id. at ¶¶ 165, 169, 183,
259, Pg. ID 483-85, 492, 522.) At the urging of Owens and/or Johnson, each of the
Plaintiffs became ViSalus distributors and invested tens of thousands of dollars in
order to qualify for equity through participation in the Plan. (See id. at ¶¶ 147-262,
Pg. ID 477-523.) Plaintiffs believed that by participating in the Plan, they would
become shareholders in ViSalus and start receiving dividend payments. (See id.)
Plaintiffs now say that they did not receive either the promised equity or any
dividends.
II
Plaintiffs filed this putative class action on August 10, 2017, against the
ViSalus Defendants and Owens.3 (See Compl., ECF #1.) They filed a First Amended

2

Owens is also a Defendant in this action. He has not moved to dismiss the First
Amended Complaint.
3

Owens’ associate, Johnson, is not a party to this action.
5 

Complaint on September 29, 2017. (See First Am. Compl., ECF #30.) In the First
Amended Complaint, the Plaintiffs have brought the following claims:
 Violation of Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rules 10b-5(a)-(c), 17 C.F.R. § 240.10b-5(a)-(c) against
all Defendants;
 Violation of Sections 12(a)(1) and (a)(2) of the Exchange Act against all of
the Defendants except for Reynolds and Ashley Sarnicola;
 Violation of Section 509(2) of the Michigan Uniform Securities Act
(“MUSA”), Mich. Comp. Laws § 451.2509(2) against all Defendants;
 Violation of Sections 501, 502, and 509(3) of the MUSA, Mich. Comp. Laws
§§ 451.2051, 2502, and 2509(3) against all Defendants;
 Violation of Sections 403(1), 509(5), 509(6), and 509(7) of the MUSA, Mich.
Comp. Laws §§ 451.2502, 2403(1), 2509(5), and 2509(6) against all
Defendants; and
 Statutory and common law conversion against Defendants ViSalus, Nick
Sarnicola, Blair, and Mallen.
Plaintiffs also request declaratory and injunctive relief.

Among other things,

Plaintiffs “seek a declaration from the Court[,] in addition to any other monetary or
equitable relief sought, that they and the Class are the immediate owners of 6% of
the ViSalus common stock.” (Id. at ¶331, Pg. ID 582.)
The ViSalus Defendants moved to dismiss Plaintiffs’ claims on October 27,
2017. (See Mot. to Dismiss, ECF #39.) The Court held a hearing on the motion to

6 

dismiss on February 20, 2018. (See ECF #46.) The parties filed simultaneous
supplemental briefs on March 2, 2018. (See ECF ## 49, 50.)
III
In the Motion, Defendants seek relief pursuant to Federal Rule of Civil
Procedure 12(b)(6). Rule 12(b)(6) provides for dismissal of a complaint when a
plaintiff fails to state a claim upon which relief can be granted. See Fed. R. Civ. P.
12(b)(6). “To survive a motion to dismiss” under Rule 12(b)(6), “a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678, (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). A claim is facially plausible when
a plaintiff pleads factual content that permits a court to reasonably infer that the
defendant is liable for the alleged misconduct. See id. (citing Twombly, 550 U.S. at
556). When assessing the sufficiency of a plaintiff’s claim, a district court must
accept all of a complaint’s factual allegations as true. See Ziegler v. IBP Hog Mkt.,
Inc., 249 F.3d 509, 512 (6th Cir. 2001). “Mere conclusions,” however, “are not
entitled to the assumption of truth.

While legal conclusions can provide the

complaint’s framework, they must be supported by factual allegations.” Iqbal, 556
U.S. at 664. A plaintiff must therefore provide “more than labels and conclusions,”
or “a formulaic recitation of the elements of a cause of action” to survive a motion

7 

to dismiss. Twombly, 550 U.S. at 556. “Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.” Id.
In addition, where, as here, Plaintiffs allege fraud under Section 10(b) of the
Exchange Act, they must “state with particularity the circumstances constituting
fraud or mistake” under Rule 9b of the Federal Rules of Civil Procedure. Fed. R.
Civ. P. 9(b). Under this rule, Plaintiffs “must (1) specify the statements that [they]
contend[] were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent. At a
minimum, Plaintiffs must allege the time, place and contents of the
misrepresentations upon which they relied.” Frank v. Dana Corp., 547 F.3d 564,
570 (6th Cir. 2008) (internal punctuation and citations omitted). Finally, Plaintiffs
must also satisfy the pleading requirements of the Private Securities Litigation
Reform Act, 15 U.S.C. § 78u-4 (the “PSLRA”) with respect to their fraud claims
under Section 10(b). See id. Among other things, the PSLRA requires Plaintiffs to
“specify each statement alleged to have been misleading, [and] the reason or reasons
why the statement is misleading. 15 U.S.C. § 78u-4(b)(1).
IV
A
In Count I of the First Amended Complaint, Plaintiffs bring multiple securities
fraud claims under Section 10(b) and Rules 10b-5(a), (b), and (c) of the Exchange
8 

Act. (See First. Am. Compl. at ¶¶ 270-277, ECF #30 at Pg. ID 530-566.) The
ViSalus Defendants argue that the Court should dismiss all of these claims because
(1) the units in the Plan offered to Plaintiffs were not “securities,” (2) even if the
units were “securities,” the alleged misrepresentations or omissions were not made
in connection with the “purchase” or “sale” of the units, (3) Plaintiffs have not
sufficiently pleaded that they relied on any misstatements or omissions, and (4)
Plaintiffs have not sufficiently pleaded a scheme to defraud under Rules 10b-5(a)
and (c). (See Mot. to Dismiss, ECF #39 at Pg. ID 657-74.) The Court concludes that
Plaintiffs have sufficiently pleaded that units in the Plan are securities and that the
alleged misstatements or omissions were made in connection with the purchase of a
security. But it agrees with the ViSalus Defendants that Plaintiffs’ Rule 10b-5(b)
claim fails because Plaintiffs have not sufficiently alleged that they relied on a
particular misrepresentation made by any of these Defendants. The Court also
agrees with the ViSalus Defendants that Plaintiffs’ Rule 10b-5(a) and (c) claims fail
because Plaintiffs have not sufficiently alleged a scheme to defraud separate and
apart from the ViSalus Defendants’ alleged misrepresentations. The Court will
therefore dismiss Plaintiffs’ Section 10b and Rule 10b-5 claims and grant Plaintiffs
leave to amend these claims in a Second Amended Complaint.

9 

1
The ViSalus Defendants first assert that the Court should dismiss all of
Plaintiffs’ securities-fraud claims because (1) those claims “require[] that the
plaintiff [has] purchased a security[,]” (2) the “security” that Plaintiffs have
identified here are units in the Plan,4 and (3) units in the Plan are not securities. (Mot.
to Dismiss, ECF #39 at Pg. ID 657-63.) The Court disagrees.
At the hearing on Defendants’ motion to dismiss, counsel for the ViSalus
Defendants acknowledged that it would be proper for the Court to determine whether
units in the Plan are securities by applying the framework described in United States
Securities and Exchange Commission v. Zada, 787 F.3d 375, 380 (6th Cir. 2015).
Under Zada, a court first determines whether the “instrument” at issue is expressly
identified as a security in 15 U.S.C. § 77b(a)(1). Id. If the instrument does appear
in that list, then it is “presumptively [a] securit[y].” Id. A defendant may “rebut
[this] presumption” by showing that “the [instrument] bears a family resemblance to
a list of instruments that are not securities.” Id. (internal quotation marks omitted).
“Whether the [instrument] bears a resemblance to one of those instruments depends
on four factors: first, the motivation prompting the transaction; second, the plan of
distribution; third, the reasonable expectations of the investing public; and fourth

4

At the hearing on the motion to dismiss, Plaintiffs confirmed that the “securities”
at issue and referred to in the First Amended Complaint are units in the Plan.
10 

whether a risk-reducing factor (for example, another regulatory scheme) makes
application of the Securities Acts unnecessary.” Id.
The Court first concludes that units in the Plan are presumptively securities
under Zada. One of the “instruments” listed in 15 U.S.C. § 77b(a)(1) is “stock,” and
Plaintiffs plausibly allege that units in the Plan are stock. Indeed, as quoted
extensively above, the ViSalus Defendants repeatedly referred to the instrument that
Plaintiffs could acquire as “equity” and referred to the holders of that equity as
“shareholders,” words and phrases commonly-associated with stock.
Moreover, Plaintiffs plausibly allege that the units had “the most common
feature of stock” – the “right to receive dividends.” United Housing Federation, Inc.
v. Foreman, 421 U.S. 837, 851 (1975). Indeed, Plaintiffs allege that the ViSalus
Defendants repeatedly promised in videos and other promotional materials that if
Plaintiffs invested in the Plan, they would receive dividends:
 “But 6% of a billion dollars in dividends is $60 million a year. If we could
get to that size, we’ll be dividending $60 million per year to those promoters
that go to work right now.” (First Am. Compl. at ¶88, ECF #30 at Pg. ID
412.)
 “Twenty years from now, if you own a small piece of this company, you get
a $4,000 dividend for work you did 20 years ago, you haven’t even
mentioned the name ViSalus in 17 years, but you had a $4,000 dividend
check still? Who’s happy? Who’s cashing the check? See guys, this is what
smart people do.” (Id. at ¶88, Pg. ID 413.)
11 

 “I want to be paying dividends that are seven figure dividends to our top
money earners and why don’t you come find out how you can be one. […]
One point eight billion dollars of sales the last few years; what would it have
been like had you owned a piece of that and you were getting a dividend out
of it let alone the commissions that you can earn in this company.” (Id. at
¶125, Pg. ID 445.)
 “If you wanna increase the wealth for decades to come, get as much equity
as you can, but build the company up and then let’s start issuing dividends
to every single one of you shareholders for the rest of your lives.” (Id. at
¶130, Pg. ID 450.)
Accordingly, Plaintiffs have plausibly alleged that units in the Plan are stock, and
thus are presumptively securities under Zada.
The ViSalus Defendants resist the conclusion that units in the Plan are stock.
They argue that “units in the Plan are best characterized as ‘phantom stock’” that are
“based on ‘phantom’ or hypothetical’ shares or units.” (Mot. to Dismiss, ECF #39
at Pg. ID 661.) And they insist that phantom stock “is not a security.” (Id. at Pg. ID
663.) But the ViSalus Defendants themselves repeatedly referred to units in the Plan
as “real equity.” (First Am. Compl. at ¶125, ECF #30 at Pg. ID 444.) For this reason
(and others), the Court cannot conclude as a matter of law at this time that units in
the Plan are “phantom stock.”
The Court next concludes that the ViSalus Defendants have not rebutted the
Zada presumption that units in the Plan are securities. The first factor a court
12 

considers in this analysis is the motivation that prompted the transaction. This factor
“turns on whether the buyers’ purpose was investment (suggesting a security) or
commercial or consumer (suggesting a non-security).” Zada, 787 F.3d at 380
(internal quotation marks omitted). Here, Plaintiffs have plausibly alleged that they
wanted to obtain the “equity” the ViSalus Defendants were promoting so that they
could become shareholders in ViSalus, “provide for their families for years to
come,” and receive the dividend payments that the ViSalus Defendants promised.
(First Am. Compl. at ¶19, ECF #30 at Pg. ID 376; see also, e.g., id. at ¶186, Pg. ID
493.) Plaintiffs have therefore plausibly alleged that they were motivated by an
investment purpose.
“The second factor is the plan of distribution for the instruments. If [an
instrument] is sold to a wide range of unsophisticated people, as opposed to a handful
of institutional investors, the [instrument is] more likely to be [a] securit[y].” Zada,
787 F.3d at 381. This factor also supports the conclusion that units in the Plan are
securities. As in Zada, Plaintiffs have plausibly alleged that the units in the Plan
were sold “to a variety of laypersons.” Id. Indeed, none of the named Plaintiffs claim
to be sophisticated investors, and Plaintiffs have specifically alleged that the ViSalus
Defendants targeted “unsuspecting, unsophisticated investors.” (First Am. Compl.
at ¶11, ECF #30 at Pg. ID 371.)

13 

“The third factor – the reasonable expectations of the investing public –
suggests that [instruments] are securities if a reasonable person would expect the
securities laws to apply to them.” Zada, 787 F.3d at 381. Here, Plaintiffs have
plausibly alleged that they thought they were buying stock in a multi-billion dollar
nutrition company. It is plausible that a reasonable person would expect the
securities laws would apply to that kind of transaction.
Finally, the fourth factor is “whether a risk-reducing factor makes application
of the Securities Acts unnecessary.” Id. In the context of this factor, if “another
regulatory scheme” applies to the instrument, then it may not be necessary to apply
the securities laws in order to regulate that instrument. Id. at 380. Here, the ViSalus
Defendants have not identified any other federal regulation that could regulate the
units in the Plan. The Court thus cannot say that this factor rebuts the presumption
that the units are securities.
In sum, when the Court weighs these factors, it concludes that the ViSalus
Defendants have not rebutted the presumption that units in the Plan are securities.
2
The ViSalus Defendants next argue that even if units in the Plan were
securities, Plaintiffs’ securities-fraud claims still fail because Plaintiffs have not
sufficiently alleged that the ViSalus Defendants made a false statement or omission
in connection with the “purchase” or “sale” of the units. (Mot. to Dismiss, ECF #39
14 

at Pg. ID 663-65.) The ViSalus Defendants insist that the units in the Plan were
never for sale and that the Plaintiffs purchased “ViSalus kits and product,” not units
in the Plan. (Id. at Pg. ID 664.) Therefore, the ViSalus Defendants say, the Plaintiffs
never “purchased” a security. (Id.)
This argument is not without some force. Indeed, Plaintiffs themselves allege
that ViSalus “provided no means for a direct purchase” of units in the Plan. (First
Am. Compl. at ¶13, ECF #30 at Pg. ID 371.) And in at least one of the promotional
videos that Plaintiffs rely upon, Nick Sarnicola told potential investors that they
“can’t buy this equity” and “can’t raise capital to get some, [they] can only go to
work” (i.e., by recruiting enough individuals to sign up as ViSalus promoters to
qualify for an award of equity). (Id. at ¶88, Pg. ID 412.)
However, Plaintiffs plausibly allege that the transaction at issue here was a
“purchase.” The Exchange Act broadly defines the terms “buy” and “purchase” to
“include any contract to buy, purchase, or otherwise acquire,” and it defines the
terms “sale” and “sell” to include “any contract to sell or otherwise dispose of.” 15
U.S.C. § 78c(a)(13)-(14) (emphasis added). “Courts have generally recognized that
[these terms] should be read flexibly in order to effect the securities laws’ remedial
purposes.” In re: American Continental Corporation/Lincoln Savings and Loan
Securities Litigation, 49 F.3d 541, 543 (9th Cir. 1995). And when determining
whether a purchase has occurred, courts “look[] to the substance of [a] transaction
15 

rather than its form.” Id. Likewise, “courts interpreting the purchase and sale
requirement [in the securities’ laws] have generally been guided by the principle that
the anti-fraud goals of [those laws] should not be frustrated by the presence of novel
or atypical transactions.” Id. at 544 (internal punctuation omitted).5

Moreover,

courts applying these principles have repeatedly concluded that a “sale” or
“purchase” has occurred under the Exchange Act where an individual contracted to
acquire an asset or instrument through his or her “labor” or “effort.” See, e.g.,
Rudinger v. Insurance Data Processing, 778 F. Supp. 1334, 1338-39 (E.D. Pa. 1991)
(“An agreement exchanging a plaintiff’s services for a defendant corporation’s stock
constitutes a ‘sale’ under the terms of the Securities and Exchange Act.”); Dubin v.
E.F. Hutton Group, Inc. 695 F. Supp. 139, 146 (S.D.N.Y. 1998) (“It appears wholly
consistent … to conclude that the exchange of an interest in an employee stock plan
in return for the service of an employee can constitute a sale to that employee of a
security.”); Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 560 (2d
Cir. 1985) (“We see no reason why ‘the context requires’ us to hold that an
individual who commits herself to employment by a corporation in return for stock
or the promise of stock should not be considered an investor.”).

5

See also Watts v. Des Moines Register and Tribune, 525 F. Supp. 1311, 1319 (S.D.
Iowa 1981) (noting that a court “must keep in mind that a purchase or sale must be
defined broadly in order to fulfill the purposes of the [securities’ laws] and may in
some cases encompass transactions that bear little resemblance to conventional
purchases and sales”) (internal citation omitted)).
16 

Plaintiffs plausibly allege here, in effect, that ViSalus promised to grant them
units in the Plan in exchange for their successful “labors” and “efforts” selling
ViSalus products and recruiting new distributors. (See, e.g., First Am. Compl. at ¶13,
ECF #30 at Pg. ID 371.) Thus, the Court concludes that Plaintiffs have plausibly
alleged that they “purchase[d]” units in the Plan as that term is defined in the
Exchange Act.
The ViSalus Defendants counter that under the Supreme Court’s decision in
Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014), the Plaintiffs are not
“purchasers” of a security.

The plaintiffs in Chadbourne alleged that “they

purchased uncovered securities [i.e., securities not covered by the Exchange Act] …
but [] that the defendants falsely told the [plaintiffs] that the uncovered securities
were backed by covered securities.” Id. at 1062. The Supreme Court concluded that
the Exchange Act “d[id] not apply” to plaintiffs’ securities-fraud claims because,
among other things, “the plaintiffs d[id] not allege that the defendants’
misrepresentations led anyone to buy or to sell (or to maintain positions in) covered
securities.” Id. (emphasis in original). Defendants assert that just “like the plaintiffs
in Chadbourne – who did not allege that they bought covered securities – Plaintiffs
[here] allege only that they bought the [ViSalus] business opportunity and product;
they do not allege that they ‘bought’ units in the Plan.” (Mot. to Dismiss, ECF #39
at Pg. ID 664.)
17 

Chadbourne does not control here. In that case, the plaintiffs alleged that they
purchased uncovered securities. But here, Plaintiffs have plausibly alleged that that
the units in the Plan that they purchased were covered securities. Thus, unlike the
plaintiffs in Chadbourne, Plaintiffs have plausibly alleged that “defendants’
misrepresentations led [them] to buy … covered securities.” And, as explained
above, the fact that Plaintiffs allege that they did not “buy” or “purchase” units in
the Plan in the traditional sense is no bar to their claims. Plaintiffs have therefore
plausibly alleged that they “purchased” a security.
3
Rule 10b-5(b) makes it is unlawful, “in connection with the purchase or sale
of any security, … [t]o make any untrue statement of a material fact or to omit 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.” 17 C.F.R. §
240.10b-5(b). To state a claim under this rule, “a plaintiff must [plead] and prove:
(1) a material misrepresentation or omission by the defendant, (2) scienter, (3) a
connection between the misrepresentation or omission and the purchase or sale of a
security, (4) reliance upon the misrepresentation or omission, and (5) loss
causation.” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S.
Ct. 157 (2008).

18 

The ViSalus Defendants maintain that, with one exception, “Plaintiffs’ Rule
10b-5(b) claims fail because Plaintiffs have not adequately pled reliance on specific
statements or omissions by the ViSalus Defendants.”6 (Mot. to Dismiss, ECF #39 at
Pg. ID 666-67.) The Court agrees.
Here, 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. (See, e.g., First Am. Compl. at ¶¶ 169, 217-18, 224-25, 235, Pg. ID 48485, 505-09, 513.) And while the First Amended Complaint is replete with references
and quotes from various ViSalus promotional videos and other statements made by
the ViSalus Defendants, Plaintiffs have not specifically pleaded, among other things:
 Which Plaintiffs saw which specific videos (if any);
 When each Plaintiff watched each specific video (i.e., whether it was
before or after they decided to invest in the Plan); or
 Which statements made by which Defendant specifically persuaded
which Plaintiff(s) to invest in the Plan.

6

The ViSalus Defendants concede that Plaintiff Bryant Watts has adequately
pleaded reliance with respect to statements made by ViSalus and Mallen. (See Mot.
to Dismiss, ECF #39 at Pg. ID 669.)
19 

For example, Plaintiff Frank McWhorter alleges that he “first heard about
ViSalus from Plaintiff Caprece Bryd” and that he first signed up as a ViSalus
distributor based upon a “pitch[]” from Owens about the ViSalus “business
opportunity.” (Id. at ¶235, Pg. ID 513.) McWhorter then alleges that he attended
meetings at Owens’ church where Owens would “show attendees ViSalus videos.”
(Id. at ¶237, Pg. ID 513-14.) But McWhorter does not identify what videos he saw,
when he saw them, which, if any, of the ViSalus Defendants spoke in those videos,
or whether those videos convinced him to invest in the Plan (or had anything to do
with the Plan as opposed to the underlying ViSalus business opportunity). And
while McWhorter alleges that “Mallen, Ashley Sarnicola, and Nick Sarnicola
discussed the equity payout checks at the Denver church meetings and also at []
ViSalus regional and national events” (id. at ¶138, Pg. ID 514), he does not say when
those discussions occurred, whether they occurred before or after he decided to
invest in the Plan, or whether he relied on those statements when he decided to
invest.7

7

In Plaintiffs’ response to the ViSalus Defendants’ motion to dismiss, they claim
that “[p]rior to deciding to invest in the equity in January, 2016 and March, 2016 …
McWhorter attended Owens’ church recruitment meetings where Owens showed the
March To Equity presentations and video.” (Pla.s’ Resp. Br., ECF #42 at Pg. ID 716;
emphasis in original.) In support for this proposition, Plaintiffs cite to paragraph
237 of the First Amended Complaint. (See id.) But that paragraph includes none of
the specifics identified in Plaintiffs’ response brief. It says only that Owens would
“show the meeting attendees ViSalus videos,” without identifying which videos
20 

Likewise, Plaintiff Eric Harris alleges that he decided to sign up as a ViSalus
promoter after “Deb Johnson traveled to Oklahoma to pitch the ViSalus business
opportunity and the [Plan].” (Id. at ¶¶ 248-50, Pg. ID 519.) Harris then alleges that
he decided to “invest[] $25,000 in ViSalus to earn equity in December 2016.” (Id. at
¶251, Pg. ID 519.) He “paid to enroll people as customers and distributors in his
business organization because Deb Johnson told him it was the fastest way to make
equity.” (Id. at ¶252, Pg. ID 520; emphasis added.) Harris does not allege that he
attended any ViSalus events nor does he allege he ever saw any ViSalus videos or
promotional materials before he decided to “invest.” Indeed, the only people Harris
alleges that he spoke with about ViSalus were Johnson and Owens.
As a final example, Plaintiff Connie Bates alleges that she decided to
“upgrade[] her [ViSalus] account to become a ViSalus distributer” in November
2016. (Id. at ¶259, Pg. ID 522.) Bates says she was “convinced to invest in the
ViSalus equity” as a result of a personal solicitation by Owens. (Id.) Bates does not
allege that she ever saw any of the promotional videos that are quoted or referenced
in the First Amended Complaint, nor does she allege that she decided to invest based
on the content of those videos. And while Bates does say that she “attended ViSalus
events that featured Blake Mallen, Ashley Sarnicola, and/or Nick Sarnicola” (id. at

were shown, and does not allege that the videos related in any way to the Plan. Nor
does that paragraph identify when Owens showed McWhorter any particular video.
21 

¶258, Pg. ID 522), she neither alleges that these Defendants pitched investing in the
Plan at these events nor that she decided to invest based on any such solicitations.
These allegations therefore do not adequately plead reliance.
Plaintiffs counter that under the Supreme Court’s decision in Affiliated Ute
Citizens of the State of Utah v. United States, 406 U.S. 128 (1972), they need not
plead reliance in order to plausibly state a Rule 10b-5(b) claim. (See Resp. Br., ECF
#42 at Pg. ID 706-711.)

Under Affiliated Ute, where a Rule 10b-5(b) claim

“primarily” involves “a failure to disclose,” reliance is presumed and “positive proof
of reliance is not a prerequisite to recovery.” Id. at 153. But the presumption
described in Affiliated Ute is not applicable here for at least two reasons.
First, the Affiliated Ute presumption “does not apply” because Plaintiffs’
claims “primarily” involve affirmative misstatements, not failures to disclose.
Clayton v. Heartland Resources, Inc., 754 F.Supp.2d 884, 895 (W.D. Ky. 2010)
(declining to apply Affiliated Ute presumption where allegations “primarily”
involved “affirmative misrepresentations”). See also Waggoner v. Barclays, PLC,
875 F.3d 79, 95-96 (2d Cir. 2017) (holding that Affiliated Ute presumption did not
apply “because the [p]laintiffs’ complaint [was] based primarily on allegations of
affirmative misrepresentations, not omissions”). Indeed, in the “overview of claims”
section of the First Amended Complaint, Plaintiffs identify myriad misstatements
and “outright lies” that the ViSalus Defendants told them about the Plan. (See, e.g.,
22 

First Am. Compl. at ¶¶ 15, 17, ECF #30 at Pg. ID 372, 374.) Likewise, Plaintiffs
quote affirmative misstatements at great length from various ViSalus promotional
videos and webinars. (See, e.g., id. at ¶88, ECF #30 at Pg. ID 409-15, quoting alleged
affirmative misrepresentations in promotional video narrated by Nick Sarnicola;
¶119, Pg. ID 431-37, quoting alleged affirmative misrepresentations in Webinar
featuring Nick and Ashley Sarnicola, Blair, Mallen, and Reynolds).

These

allegations demonstrate that the essence of Plaintiffs’ claims are the ViSalus
Defendants’ affirmative misstatements, not their omissions.
Second, Plaintiffs may not rely on the Affiliated Ute presumption because it
only applies where the defendant has “a duty of disclosure” Regents of California v.
Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 384 (5th Cir. 2007), and the
ViSalus Defendants owed Plaintiffs no such duty here. A “duty to disclose under §
10(b) [and Rule 10b-5(b)]” only “arises ‘when one party has information that the
other [party] is entitled to know because of a fiduciary or other similar relation of
trust and confidence between them.’” Nolfi v. Ohio Kentucky Oil Corp, 675 F.3d
538, 549 (6th Cir 2012) (quoting Chiarella v. United States, 445 U.S. 222, 228
(1980)). See also Regents of California, 482 F.3d at 383-84 (holding that Affiliated
Ute presumption did not apply where defendants had no duty to disclose because
they “were not fiduciaries and were not otherwise obligated to the plaintiffs”). Here,
Plaintiffs have not sufficiently pleaded that there was a “fiduciary or other similar
23 

relation of trust and confidence” between themselves and the ViSalus Defendants.
Accordingly, Plaintiffs have not established that they are entitled to rely on the
Affiliated Ute presumption in order to avoid pleading reliance.
While the Court has concluded that Plaintiffs have not sufficiently pleaded the
reliance element of their Rule 10b-5(b) claim, it will provide Plaintiffs the
opportunity to cure that deficiency in a Second Amended Complaint. In such a
pleading, Plaintiffs shall, at a minimum, identify: the specific statements each
Plaintiff individually relied upon, the particular Defendant(s) who made those
statements, when the statements were made, when the Plaintiffs heard the
statements, and whether the statements were made directly to Plaintiffs (and, if not,
how, when, and where Plaintiffs heard the statements).
4
Rules 10b-5(a) and (c) make it illegal to “to employ any device, scheme, or
artifice to defraud” and “to engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in connection with
the purchase or sale of any security.” 17 CFR § 240.10b-5(a), (c). “To state a claim
based on conduct that violates Rule 10b-5(a) and (c), [a] plaintiff must allege that a
defendant (1) committed a deceptive or manipulative act, (2) with scienter, that (3)
the act affected the market for securities or was otherwise in connection with their
purchase or sale, and that (4) defendants’ actions caused the plaintiffs’ injuries.”
24 

Kerrigan v. ViSalus, Inc., 2016 WL 892804, at *15 (E.D. Mich. Mar. 9, 2016)
(quoting In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 492 (S.D.N.Y. 2005)
(emphasis removed) (testing claims under 10b-5(a) and (c) against the same pleading
standard)). Crucially, “[s]cheme liability … hinges on the performance of an
inherently deceptive act that is distinct from an alleged misstatement.” S.E.C. v.
Kelly, 817 F.Supp.2d 340, 344 (S.D.N.Y. 2011). See also Benzon v. Morgan Stanley
Distrib., Inc., 420 F.3d 598, 610 (6th Cir. 2005) (noting that “Rules 10b-5(a) and (c)
encompass conduct beyond disclosure violations”).
The ViSalus Defendants argue that Plaintiffs’ “scheme liability” allegations
under Rules 10b-5(a) and (c) fail to state a cognizable claim because Plaintiffs have
not alleged any specific fraudulent acts apart from their alleged misstatements and
omissions. (Mot. to Dismiss, ECF #39 at Pg. ID 673-74.) The Court agrees. As
described above, in the “overview of claims” section of Plaintiffs’ First Amended
Complaint, Plaintiffs allege that their claims rest primarily on misstatements (and to
a lesser extent omissions), not on a fraudulent scheme that existed separate from
those misstatements. (See, e.g. First Am. Compl. at ¶15, ECF #30 at Pg. ID 373.)
Accordingly, Plaintiffs have failed to identify a viable fraudulent scheme, apart from
a misstatement or omission, that can support liability under Rules 10b-5(a) and (c).
Plaintiffs counter that “the same pyramid scheme deceptive practice as alleged
in Kerrigan [v. ViSalus] forms the basis of the 10b-5(a) and (c) liability.” (Pla.s’
25 

Resp. Br., ECF #42 at Pg. ID 718.) But Plaintiffs do not allege that they were hurt
by the operation of the pyramid scheme described in Kerrigan; they allege that they
were injured by the misstatements and omissions that led to them investing in the
Plan. And Plaintiffs allege that their injuries arose out of their investment in the
Plan, not from the continuation of the pyramid scheme. Thus, Plaintiffs may not
base their Rule 10b-5(a) and (c) claims on the operation of that scheme.
Plaintiffs next maintain that “the entire March to Equity program was a bait
and switch fraudulent device designed to raise money that [D]efendants could not
raise from real equity markets.” (Pla.s’ Resp. Br., ECF #42 at Pg. ID 718.) But
Plaintiffs’ Rule 10b-5(a) and (c) claims are inextricably linked to the ViSalus
Defendants’ alleged misstatements about the Plan. Indeed, Plaintiffs argue in
response to the motion to dismiss that the ViSalus Defendants “promised ownership
rights” in ViSalus and reneged on that promise. (Id.)

Thus, Plaintiffs’ own

description of their claims reveals that their injuries stemmed from statements and
promises that the ViSalus Defendants made, not from a separate course of conduct.
Plaintiffs have therefore failed to plead a viable scheme liability claim.
B
In Count II of the First Amended Complaint, Plaintiffs allege that certain
Defendants violated Section 12(a)(1) and (2) of the Exchange Act when they (1) sold
unregistered securities and (2) made materially false statements and/or omissions
26 

related to the sale of those securities.8 (See First Am. Compl. at ¶¶ 278-87, ECF #30
at Pg. ID 567-70.) Section 12(a)(1) prohibits the selling of unregistered securities.
See 15 U.S.C. § 77l(a)(1); 15 U.S.C. § 77e. Section 12(a)(2) prohibits “any person”
from “offer[ing] or sell[ing] a security … which includes an untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they were made, not
misleading.” 15 U.S.C. §77l(a)(2). To state claim under either provision, a plaintiff
must allege that a defendant either (1) “pass[ed] title, or other interest in the security,
to the buyer for value,” or (2) “successfully solicit[ed] the purchase” of a security.
Pinter v. Dahl, 486 U.S. 622, 642, 649 (1988) (applying test to claim under Section
12(a)(1)); Smith v. Am. Nat’l Bank & Trust Co., 982 F.2d 936, 942 (6th Cir. 1992)
(applying test to claim under Section 12(a)(2)).
Defendants Nick Sarnicola, Blair, Mallen, Goergen, and Craig argue that
Plaintiffs have failed to state a cognizable Section 12 claim as to them because
Plaintiffs have not alleged that any of them passed title and/or directly solicited
Plaintiffs’ alleged purchase of securities. (See Mot. to Dismiss, ECF #39 at Pg. ID
674-77.) The Court agrees that Plaintiffs have not satisfied either prong of the Pinter
test with respect to these Defendants.

8

Plaintiffs’ Section 12 claims are brought against all of the Defendants except for
Ashley Sarnicola and Reynolds. (See First Am. Compl. at ¶281, ECF #30 at Pg. ID
567.)
27 

Plaintiffs first assert that these Defendants “passed title” to Plaintiffs when
“some of the Plaintiffs were [] given a certificate of ownership, signed by Defendants
Blair, Mallen, and Sarnicola.” (Pla.s’ Resp. Br., ECF #27 at Pg. ID 719, citing First
Am. Compl. at ¶172, ECF #30 at Pg. ID 486-87.) But these “certificates” do not
appear to pass title to anything, much less a security. The certificates say only that
“[i]n recognition of your dedication to the Vi mission of transforming Life, Health,
and Prosperity around the world, it is our privilege to welcome you as a qualifier in
the Vi Founders Equity Incentive Plan …. We look forward to sharing in our future
success together, and are proud to partner with you in creating a legacy.” (First Am.
Compl. at ¶172, ECF #30 at Pg. ID 487.) Moreover, Plaintiffs’ other allegations are
fundamentally at odds with their claim that the certificates somehow “passed title.”
Indeed, Plaintiffs claim that they have not received the shares or units in the Plan
that they were promised and that “no shares have been tendered” to them. (Id. at ¶17,
at Pg. ID 374.) Finally, the certificates are not signed by Goergen or Craig at all,
and are signed by Nick Sarnicola, Blair, and Mallen in their capacities as corporate
officers of ViSalus, not in their personal capacities.9 (Id. at ¶172, ECF #30 at Pg. ID

9

The signature block for each individual lists their name and their role at ViSalus
(i.e., “Chief Executive Officer,” “President,” and “Global Ambassador”). (First Am.
Compl. at ¶172, ECF #30 at Pg. ID 487.) The existence of these titles lends further
support to the Court’s conclusion that the certificates were signed in those capacities
and not as individuals.
28 

487.)

These certificates thus do not support Plaintiffs’ allegations that Nick

Sarnicola, Blair, and Mallen personally passed title to them.10
Plaintiffs next maintain that “each” of these Defendants “directly” solicited
the sale of the securities at issue. (Pla.s’ Resp. Br., ECF #42 at Pg. ID 719-20.) But
Plaintiffs have not alleged any facts which, if true, could establish a direct
solicitation by these Defendants. Under the solicitation prong of the Pinter test,
“[b]eing merely a ‘substantial factor’ in causing the sale ... is not sufficient in itself
to render a defendant liable” if the defendant did not solicit the ultimate purchase of
the security. Pinter, 486 U.S. at 654. Here, to the extent the First Amended
Complaint identifies any individuals as the direct solicitors of Plaintiffs’ purchases,
it identifies Owens and Johnson, not any of these Defendants. (See, e.g., First Am.
Compl. at ¶218, ECF #30 at Pg. ID 506, describing how “Owens persuaded [Plaintiff
Renae White] to find the funds to achieve equity in any way possible”; ¶259, Pg. ID
522, describing how Plaintiff Connie Bates was “convinced … to invest in the
ViSalus equity” as a result of representations Owens made).

10

In the First Amended Complaint, the Plaintiffs identify a second certificate that
ViSalus gave to the Plaintiffs. (See First Am. Compl. at ¶187, ECF #30 at Pg. ID
494.) Plaintiffs did not argue in response to the motion to dismiss that this certificate
passed title to them. In any event, that second certificate was also not signed by
Goergen or Craig, and was signed by Nick Sarnicola, Blair, and Mallen in their
corporate, not personal, capacities. (See id.)
29 

In a Second Amended Complaint, Plaintiffs may attempt to re-plead their
Section 12 solicitation claims. If they do so, they must, at a minimum, plead: which
Defendant solicited which Plaintiff, when that solicitation occurred, whether the
solicitation was made directly to Plaintiffs (and, if not, how, when, and where
Plaintiffs heard the solicitation), the content of that solicitation, and facts that could
tend to establish that the identified solicitation led directly to the “ultimate purchase
of the security.”
C
In Count III of the First Amended Complaint, Plaintiffs allege that all of the
ViSalus Defendants violated Section 509(2) of the MUSA when they offered and/or
sold unregistered securities. (See First Am. Compl. at ¶¶288-94, ECF #30 at Pg. ID
572.) Plaintiffs acknowledge that this claim is “parallel” to the claims under Section
12 and that this claim “stands if the Section 12 claim stands.” (Pla.s’ Resp. Br., ECF
#28 at 720 n.24). For the same reasons that the Court dismissed Plaintiffs’ Section
12 claims against each of the ViSalus Defendants except for the ViSalus, it will do
the same with Plaintiffs’ claim under Section 509(2) of the MUSA.
D
In Count V of the First Amended Complaint, Plaintiffs claim that the ViSalus
Defendants violated Sections 403(1), 509(5), and 509(6) of the MUSA when they
provided fraudulent investment advice. (See First Am. Compl. at ¶¶ 310-318, ECF
30 

#30 at Pg. ID 576-79.) Section 509(5) of the MUSA provides that “[a] person acting
as an investment adviser or investment adviser representative that provides
investment advice for compensation in violation of section 403(1), 404(1), or 5063
is liable to the client.” Mich. Comp. Laws § 451.2509(5). And Section 509(6) of the
MUSA states that “[a] person that receives, directly or indirectly, any consideration
for providing investment advice to another person and that employs a device,
scheme, or artifice to defraud the other person or engages in an act, practice, or
course of business that operates or would operate as a fraud or deceit on the other
person is liable to the other person.” Mich. Comp. Laws § 451.2509(6). The MUSA
defines an investment adviser as:
a person that, for compensation, engages in the business of
advising others, either directly or through publications or
writings, as to the value of securities or the advisability of
investing in, purchasing, or selling securities or that, for
compensation and as a part of a regular business, issues or
promulgates analyses or reports concerning securities. The
term includes a financial planner or other person that, as
an integral component of other financially related services,
provides investment advice to others for compensation as
part of a business or that holds itself out as providing
investment advice to others for compensation.
Mich. Comp. Laws § 451.2102a(e).
The ViSalus Defendants argue that this claim fails because Plaintiffs have not
sufficiently alleged that any of the ViSalus Defendants acted as investment advisors

31 

and/or received compensation for investment advice as the MUSA requires. (See
Mot. to Dismiss, ECF #39 at Pg. ID 677-680.) The Court agrees.
Simply put, the First Amended Complaint does not include any allegations
that any of the ViSalus Defendants received any consideration for providing
investment advice, “promulgate[d] [any] analyses or reports concerning securities,”
or engaged in the business of providing investment advice for compensation as the
MUSA requires. Mich. Comp. Laws § 451.2102a(e). Plaintiffs have therefore not
plausibly alleged that any of the ViSalus Defendants were investment advisers.
Plaintiffs insist that the ViSalus Defendants did act as investment advisers
because when they promoted the Plan, they advised Plaintiffs and others to invest in
the Plan. But Plaintiffs do not allege that they paid for any such advice or that the
ViSalus Defendants received compensation in any respect for that advice. Instead,
Plaintiffs allege that they paid for the “equity” in the Plan, or paid for ViSalus
products, not any advice that the ViSalus Defendants may have been offering.11 And

11

In Plaintiffs’ response to the ViSalus Defendants’ motion to dismiss, Plaintiffs
identify paragraphs 19, 152-53, 166-67, 225, 236, 250, and 318 of the First Amended
Complaint as “fully set[ting] forth allegations detailing the amounts Plaintiffs’ paid
as consideration” for the ViSalus Defendants’ investment advice. (Pla.s’ Resp. Br.,
ECF #42 at Pg. ID 723.) But these paragraphs allege only that Plaintiffs purchased
“equity” or purchased ViSalus product. They do not identify any compensation
Plaintiffs paid for investment advice. (See, e.g., First Am. Compl. at ¶19, ECF #30
at Pg. ID 375, alleging that “[e]ach Plaintiff invested between $25,000 and over
$40,000 of hard-earned money they could ill afford to give the Defendants on the
false promises of getting ‘equity’ that would allow them to provide for their families
for years to come”; id. at ¶153, Pg. ID 479, alleging that Plaintiff Byrd “gave Owens
32 

Plaintiffs have not identified any authority under which the ViSalus Defendants
could be deemed investment advisers under the facts that Plaintiffs have pleaded
here. Accordingly, Plaintiffs’ investment-adviser claims under the MUSA fail to
state a cognizable claim.
E
In Counts IV and V of the First Amended Complaint, Plaintiffs bring claims
under various provisions of the MUSA. In Count IV, Plaintiffs bring claims under
Sections 501, 502, and 509(3) of the MUSA. (See First Am. Compl. at ¶¶ 295-309,
ECF #30 at Pg. ID 572-76.) In Count V, in addition to the investment adviser claims
discussed in sub-section D above, Plaintiffs purport to bring claims under four
additional sub-sections of Section 509 the MUSA. (See id. at ¶¶ 313-14, Pg. ID 57778). The Court will not permit Plaintiffs to lump numerous alleged violations of
different statutes and statutory sub-sections in a single count.
Plaintiffs may re-allege claims for violations of the MUSA in a Second
Amended Complaint. However, Plaintiffs must plead each alleged violation of a
provision of the MUSA in a separate count. In other words, Plaintiffs may not bring
claims under various sub-sections of the MUSA jointly in the same count. In each

her credit card information and purchased the $999 kit for [her son’s] business”; id.
at ¶225, Pg. ID 509, alleging that Plaintiff Herl “and her husband signed up as
ViSalus distributors … [and each] purchased the $999 [ViSalus] kit. [Herl] was
hoping to be able to sell some products but her main goal was to earn equity so that
she could receive a payout check in April 2017.”)
33 

count, Plaintiffs shall, at a minimum, separately identify for each Defendant what
statute (and, if applicable, what sub-section of that statute) forms the basis of the
alleged claim against that Defendant and what facts could tend to support that claim.
F
Finally, in Count VI of the First Amended Complaint, Plaintiffs allege that
Defendants ViSalus, Nick Sarnicola, Blair, and Mallen are liable for common law
and statutory conversion. (See First Amended Compl. at ¶¶ 319-327, ECF #30 at Pg.
ID 579-81.) Plaintiffs’ conversion claims are not sufficiently pleaded against Nick
Sarnicola, Blair, and Mallen. Plaintiffs have, however, sufficiently pleaded their
conversion claims against ViSalus.
1
Common law conversion under Michigan law involves “any distinct act of
dominion wrongfully exerted over another person’s personal property in denial of or
inconsistent with his rights therein.” Thoma v. Tracy Motor Sales, Inc., 104 N.W.2d
360, 362 (Mich. 1960). See also Aroma Wines & Equip., Inc. v. Columbian Distrib.
Servs., Inc., 871 N.W.2d 136, 145 (Mich. 2015) (same, citing Thoma). A commonlaw claim for the conversion of money is available only in very narrow
circumstances. Specifically, a plaintiff must allege that the defendant had “an
obligation to return [certain] specific money entrusted to his care.” Head v. Phillips
Camper Sales & Rental, Inc., 593 N.W.2d 595, 603–04 (Mich. App. 1999). In
34 

Kerrigan v. ViSalus, Inc., 112 F.Supp.3d 580, 615-16 (E.D. Mich. 2015), this Court
held that plaintiff promoters did not state a sufficient common-law conversion claim
for the conversion of money against individual defendants (including Nick
Sarnicola, Blair, and Mallen) because, among other things, “Plaintiffs [did] not
allege that any of those Defendants received the ‘specific money’ that Plaintiffs had
paid to ViSalus.” Id. at 616.
The Plaintiffs here fare no better against Nick Sarnicola, Blair, and Mallen
than did the plaintiffs in Kerrigan. Like those plaintiffs, the Plaintiffs in this case
have not alleged that Nick Sarnicola, Blair, or Mallen had an obligation to return
specific money to them or that Nick Sarnicola, Blair, or Mallen ever received the
specific money Plaintiffs “invested” in the Plan. And, as in Kerrigan, “it is difficult
to see how Plaintiffs could allege the receipt of ‘specific money’ by any Defendant
(other than ViSalus) under the circumstances here.” Id. Indeed, Plaintiffs allege that
“ViSalus,” not Nick Sarnicola, Blair, or Mallen, “obtained Plaintiffs’ money….”
(First. Am. Compl. at ¶332, ECF #30 at Pg. ID 215.) Accordingly, Plaintiffs have
failed to state viable common-law conversion claim against Nick Sarnicola, Blair,
and Mallen. (Plaintiffs’ common-law conversion claim against ViSalus does state a
viable claim.12)

12

ViSalus argues that Plaintiffs’ common-law conversion claim fails against it
because “Plaintiffs do not allege that ViSalus failed to provide” Plaintiffs “what they
paid for.” (Mot. to Dismiss, ECF #39 at Pg. ID 683.) But Plaintiffs do allege that
35 

Plaintiffs counter that Nick Sarnicola, Blair, and Mallen may be liable for
ViSalus’ common-law conversion because, under Michigan law, a corporate officer
may be liable for a corporation’s conversion where the officer personally participates
in that conversion. See, e.g., MAS, Inc. v. NoCheck, LLC, 2012 WL 13006045, at
** 5-6 (E.D. Mich. Aug. 21, 2012); Citizens Ins. Co. of Am. v. Delcamp Truck
Center, Inc., 444 N.W.2d 210 (Mich. App. 1989). But this authority is no help to
Plaintiffs. In MAS and Citizens Insurance, the individual defendants had a direct
role in the transaction that constituted the alleged conversion. For example, in MAS,
the individual defendant “actively participated in the conversion of the funds” by
personally “initiating” the wire transfers at issue. MAS, 2012 WL 13006045, at **
5-6. And in Citizens Insurance, the defendant officer “actively participated” in the
conversion where he personally refused to return an overpayment to the plaintiff.
Citizens Insurance, 444 N.W.2d at 213.
In stark contrast here, Plaintiffs have not sufficiently alleged that Nick
Sarnicola, Blair, and Mallen personally played a role in the specific financial
transaction through which their funds were converted (i.e., the specific solicitation
that led to Plaintiffs investing in the Plan). Thus, this case differs from, and is not
controlled by, MAS and Citizens Insurance.

they never received their shares of ViSalus and never received any dividends
(including the specifically promised April 17 dividend). (See, e.g., First. Am. Compl.
at ¶324, ECF #30 at Pg. ID 580.)
36 

2
Michigan’s statutory conversion law allows for a plaintiff to recover treble
damages where the plaintiff is damaged by “[a]nother person’s stealing or
embezzling property or converting property to the other person’s own use.” Mich.
Comp. Laws § 600.2919a(1)(a). This requires a plaintiff to plead “that the defendant
employed the converted property for some purpose personal to the defendant’s
interests.” Aroma Wines, 871 N.W.2d at 138.
Here, Plaintiffs have not pleaded any facts that could tend to establish that
Nick Sarnicola, Blair, or Mallen used Plaintiffs’ money for their personal interests.
Indeed, as explained above, Plaintiffs have pleaded that they paid ViSalus for the
units in the Plan, not Nick Sarnicola, Blair, or Mallen. And Plaintiffs have further
alleged that their money was used to support the allegedly-phony ViSalus pyramid
scheme, not that it was used for Nick Sarnicola, Blair, or Mallen’s own personal
interests. (See First. Am. Compl. at ¶81, ECF #30 at Pg. ID 401, alleging that “[t]he
goal of the Plan was to raise capital to cover [ViSalus’] immediate and urgent cash
needs….”) Moreover, Plaintiffs did not address this argument in their response
brief, and the Court therefore considers the statutory conversion claim against these
Defendants abandoned. See, e.g., Phillips v. UAW Int’l, 149 F. Supp. 3d 790, 798
(E.D. Mich. 2016) (“A plaintiff abandons undefended claims.”) (citing Doe v.
Bredesen, 507 F.3d 998, 1007-08 (6th Cir. 2007)).
37 

V
For the reasons stated above, the ViSalus Defendants’ motion to dismiss (ECF
#39) is GRANTED IN PART AND DENIED IN PART as follows:
 With the exception of Plaintiff Watts’ Rule 10b-5(b) claim against Defendants
Mallen and ViSalus, Counts I, II, IV, and V are dismissed against all of the
ViSalus Defendants;
 Count III is dismissed against all of the ViSalus Defendants except for
ViSalus; and
 Count VI is dismissed against Defendants Nick Sarnicola, Blair, and Mallen
only.
Plaintiffs may file a Second Amended Complaint by no later than May 4,
2018.
IT IS SO ORDERED.
/s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE
Dated: April 5, 2018
I hereby certify that a copy of the foregoing document was served upon the parties
and/or counsel of record on April 5, 2018, by electronic means and/or ordinary
mail.
s/Holly A. Monda
Case Manager
[phone]
38