United States v. McKye
734 F.3d 1104
10th Cir.2013Background
- McKye was indicted on eight securities-fraud counts (15 U.S.C. § 78j(b)) and one count of conspiracy to commit money laundering (18 U.S.C. § 1956(h)) for selling "Premium 60" investment notes via entities he controlled; jury convicted on seven fraud counts and the conspiracy count.
- The investment instruments were labeled "notes," often accompanied by a "blanket assignment" listing small (often unperfected) trust-loan liens; some investors were told the notes were secured by real estate and not securities.
- McKye sought a jury instruction requiring the jury to decide whether the instruments were securities under Reves; the district court refused and instead instructed the jury that the term "security" includes a note.
- At trial the government presented evidence of payments characteristic of a Ponzi-like use of investor funds; McKye testified he attempted to collateralize notes and relied on insurance to reduce investor risk.
- On appeal McKye argued the district court’s instruction was legal error because Reves presumes notes are securities only rebuttably and courts must apply the family-resemblance test; he further argued that question involved factual findings for a jury under Gaudin.
- The Tenth Circuit reversed the convictions, holding (1) whether an instrument is a security is a mixed question of law and fact that can be an element of securities fraud and (2) instructing the jury that a note is a security (without submitting whether these instruments were notes) relieved the government of proving an element and was not shown harmless.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the question of whether an instrument denominated a "note" is a security must be submitted to the jury | McKye: Reves family-resemblance analysis involves factual findings; under Gaudin the jury must decide mixed questions that constitute elements | Government: Whether a note is a security is a question of law for the court (McNabb) and notes are presumed securities | Held: It is a mixed question of law and fact; whether the instrument is a security is an element of securities fraud and the jury must resolve factual predicates applying Reves |
| Whether the district court’s instruction that "a note is a security" was harmless error | McKye: Error deprived jury of required factual determination; evidence contested risk/collateralization so harmlessness not shown | Government: Presented "ample" and uncontested evidence that the instruments were securities; error was harmless | Held: Government failed to show harmlessness; reversal required because the erroneous instruction relieved the government of proving an element and the record citations to support harmlessness were insufficient |
Key Cases Cited
- Reves v. Ernst & Young, 494 U.S. 56 (1990) (presumption that notes are securities subject to the "family resemblance" test)
- Gaudin v. United States, 515 U.S. 506 (1995) (elements requiring factual findings must be submitted to the jury)
- United States v. Lewis, 594 F.3d 1270 (10th Cir. 2010) (securities-fraud elements include that the fraud was "in connection with" the offer or sale of a security)
- United States v. Holly, 488 F.3d 1298 (10th Cir. 2007) (harmless-error principles when jury instructions present alternative grounds for conviction)
- Neder v. United States, 527 U.S. 1 (1999) (constitutional error in jury instructions can be harmless if omitted element was uncontested and supported by overwhelming evidence)
- Hedgpeth v. Pulido, 555 U.S. 57 (2008) (general verdicts after instruction on valid and invalid theories require harmless-error inquiry to assess substantial and injurious effect)