Shudak v. Azcc, 1 CA-CV 15-0544

Background

From Jan 2008–Jul 2009 Patrick Shudak offered and sold unregistered membership units in Parker Skylar & Associates, LLC (PSA) while neither he nor PSA were registered under the Arizona Securities Act (ASA).
Promotional materials and subscription documents represented investor funds would be used to acquire and develop real property, but Shudak transferred investor funds to personal and related business accounts and added an unauthorized co-signatory to PSA bank accounts.
Shudak granted a private lender a security interest in all PSA assets and transferred a 20% interest to that lender without disclosing the loan or perfected lien to investors; PSA membership units were also oversubscribed (assigning more than 100% of units).
The ACC’s Securities Division filed an enforcement Notice; after a three-day hearing (Shudak did not attend or testify) an ALJ-record was created and a second ALJ authored a 50‑page Recommended Opinion and Order (ROO) later adopted by the ACC.
The ACC found violations of the ASA (including fraud and offer/sale of unregistered securities), ordered $1,996,500 restitution (net, subject to offsets) and a $150,000 administrative penalty; the superior court affirmed and this appeal followed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether substantial evidence supports that the offering was not exempt from registration	Shudak: offering was a private placement exempt under A.R.S. §44‑1844(A)(1) (fewer offerees, sophistication, size/manner, relationships)	ACC/Division: Shudak failed to meet burden to prove exemption; record shows no strict compliance and Shudak presented no testimony	Held: Substantial evidence supports ACC; Shudak bore burden and did not prove exemption
Whether Shudak can be liable as a control person of PSA	Shudak: PSA could not be primarily liable, so he cannot be a control person	ACC: PSA was found to have committed fraud (unchallenged); control liability follows and joint/several relief is authorized	Held: Control-person finding stands; PSA’s unappealed liability forecloses Shudak’s argument
Whether restitution and penalty were lawful and supported	Shudak: restitution/penalty arbitrary, unsupported, and excessive (no proof of multiple violations or exact investor losses)	ACC: restitution based on bankruptcy, bank records, and documents; penalty within statutory cap given multiple violations across investors	Held: Restitution ($1,996,500 net, subject to offsets) and $150,000 penalty are supported and not excessive given statutory maximums
Whether due process was violated by (a) ROO authored by ALJ who did not preside and (b) findings based on previously undeclared fraud theories	Shudak: second ALJ lacked firsthand credibility observations; certain findings (commingling/co‑signatory) were not pled or tried	ACC: case‑management substitution was permitted by rules; ALJ who heard the evidence saw no credibility issues; commingling/co‑signatory were within asserted fraud theories and were in evidence	Held: No due process violation — credibility was not central, substitution was permissible, and Shudak had notice and opportunity to be heard on the matters decided

Key Cases Cited

Shorey v. Arizona Corp. Comm'n, 238 Ariz. 253 (App. 2015) (standard for reviewing ACC decisions)
Baumann, 125 Ariz. 404 (1980) (burden to prove statutory exemption requires strict compliance)
E. Vanguard Forex, Ltd. v. Arizona Corp. Comm'n, 206 Ariz. 399 (App. 2003) (deference to agency interpretation of statutes it administers)
Ohlmaier v. Indus. Comm'n of Arizona, 161 Ariz. 113 (1989) (discussion of when live testimony and single factfinder are required for credibility determinations)
Adams v. Indus. Comm'n of Arizona, 147 Ariz. 418 (App. 1985) (distinguishable precedent where substituted decision turned on claimant credibility)
Mathews v. Eldridge, 424 U.S. 319 (1976) (due process requires notice and opportunity to be heard)