*1 S036981.Jan. [No. 1995.] PEOPLE, Plaintiff and
THE Respondent, SIMON, MARTIN Defendant and
JOHN Appellant.
Counsel Coleman, Court,
Thomas F. under for Defend- appointment Supreme *4 ant and Appellant. General, Williamson,
Daniel E. Chief Assistant Lungren, Attorney George Pollack, General, General, John Attorney Carol Wendelin Assistant Attorney Kumar, General, R. and T. for Plaintiff and Sanjay Attorneys Gorey Deputy Respondent.
Opinion Law of BAXTER, J. case arises under the Securities 1968. Corporate This Code, is whether sections 25401 25000 et The issue principal (Corp. seq.)1 means of which criminalize the sale or of securities by purchase misleading or written communications which either contain false or oral facts, offense. We also liability” statements or omit material create a “strict the trial court’s error by consider claims that he was appellant’s prejudiced when of a defendant’s burden of proof to instruct on the failing magnitude section 25110 violating an defense to a charge offering “exemption” securities.2 which the sale of prohibits unqualified of an on defendant’s burden of proof We conclude that failure to instruct was We from the of section 25110 prejudicial. exemption requirements statutory Corporations 1 All Code unless otherwise noted. references are to the security offer or sell a in this state provides: any person Section 25401 “It is unlawful for or oral communication buy buy by in this state means of written or or offer to fact fact or omits to state a material which includes an untrue statement a material made, light the circumstances under which necessary in order make the statements in the made, misleading.” they were Rules of appeal pursuant court to rule 27.5 of the California 2 The was transferred to this Appeal. the Court of Court before decision conclude that the trial court еrred instructing also prejudicially 25401 and 25540 create an offense that does not either sections require of the false or nature of a or of the misleading representation omission, of an materiality negligence failing acquire must, therefore, such The be reversed. knowledge. judgment
I
Background was convicted of seven counts of Appellant by jury selling unqualified securities in violation of section 251103 and five counts of securities selling means of false statements or omissions in violation of 25401. section were based on transactions in which
charges appellant his sold interests in notes4 and limited employee agents promissory partner which created and in he ships appellant Vesper Corporation general partner. actual offeror of the interests was Vesper Corporation, doing business as Tax and Financial Services. Clergy was the Appellant president primary shareholder Vesper Corporation and was the of its that “John Simon manager operations. Appellant stipulated Tax. He owns Tax and Clergy Clergy all of these limited he partnerships for to responsible direct.” manage
Through formed 47 for the Vesper Corporation appellant partnerships of purpose and real were purchasing, managing, Nineteen reselling property. all, formed for the of funds to purpose loaning other there partnerships. were 66 limited in which 870 had of partnerships invested a total people $11,449,883. The in sales the counts on which was convicted5 appellant were made between 1980 and to eight for whom and persons аppellant his in employees Tax and Clergy Financial Services had income tax prepared returns. None of the limited was to sections partnerships qualified pursuant provides: 3 Section 25110 any person any “It is unlawful to offer or sell in this state security (other 25120), in an issuer subject transaction than in a transaction Section whether underwriters, through or not unless qualified such sale has been under Section (and (a) 25112 or 25113 no order under Section 25140 or in subdivision of Section 25143 is respect effect with qualification) to such security exempted unless such or transaction is Chapter (commencing 25100) under part. with Section of this . . .” skill, services, promissory 4 Unsecured notes are securities if the investor relies on the success, solvency, and payment. services the issuer to ensure Code, the People’s judge granted (Pen. 5 At close of the acquittal case the a motion for 1118.1) on six Appellant acquitted by jury jury counts. was the on The § 20 counts. deadlocked on five subsequently prosecutor. counts which were dismissed on motion of the Code, Appellant (Pen. was alleging not convicted on grand several counts theft 1) former alleging subd. from the same practices victims or on the one count fraudulent (§ 25541). 25111, 25112, relationship or 25113. believed that his Appellant preexisting the with from the investors as their the securities tax preparer exempted qualification requirement. and managing involved in of establishing was all
Appellant aspects in sales of interests limited but two the direct only made partnerships, convicted. The others them to investors in of which he was the counts were sold not tell investors his did employees. employees risks, receive and after the investment did some a only making prospectus was did disclose investment in a speculative risks, one that of risk. minimized the investor high degree Appellant telling for a were disclosed in more than prospects partnership project positive that a and risk disclaimer was prospectus only prospectus present because limited it was all required partnership prospectuses. showed obtained investors
Evidence at trial from money usually before for a limited and was held property purchased partnership of escrow accounts market account. authorized the money opening Appellant He and was of all the limited partnerships. aware purchases property by down and he authorized the negotiated purchase price payment, transfer from a make the money partnership purchase.
While advise investors regarding were instructed to appellant’s employees risks, from the money some told to advise investors they be to other partnerships in which invested loaned they might partnership Tax Financial used to finance the Services. operation Clergy Appel- that, in each of the general partner- lant testified that he believed partner he the loans did so when a ships, authority had the to make could had or cash a lending partnership excess cash flow because problem earn and a would lower interest interest higher borrowing partnership pay *6 all of the than either would if it dealt with an outside lender. Substantially the omissions to loans mаde between to disclose material facts related real invested The jury estate after the had buyers money. partnerships have concluded that information was material should this necessarily been disclosed to each investor. the jury knowledge falsity court did instruct a in communications with misleading
statements or nature of omissions It is a offense. investor element of the section 25401 prospective necessary a in which ruled that section 25401 created strict offense instead (1) the scienter or is not an element and instructed jury: knowledge a is made actor’s or at the time material knowledge representation intent irrelevant; a intent to act (2) that commit only proscribed general (3) that if later events make a untrue that section required; representation is violated. The instruction was: complete
“Where the defendant a conduct makes material about representation future, he must act accordance with the representation irrespective what his intent or at was made. the time the representation untrue,
“If his later act makes the statement as he be found promised may in violation of Section 25401.
“In the crime of willfully means of a offering selling security by material to state a material misrepresentation omitting fact (Corporations 25401), Code Section need general intent be shown. ‘When only crime, does that which the law declares to be a person intentionally he is criminal intent—even acting general he not know that his though may ” act conduct is unlawful.’ In the instructions on section was told that a defendant has jury the burden of that securities are proof from the exempt qualification require- However, ment of section 25110. the court did not advise the that this jury burden was met if the defendant offered evidence that an enough exemption to raise a applied reasonable doubt that of the limited registration interests was required Securities Corporate Law of 1968. contends that
Appellant these instructions were erroneous.
II Section 25110: Burden of Proof A limited partnership interest be a may security as defined section Securities Corporate Law of 1968 (§ et because the seq.) investor provides that will capital be risked in the and is not enterprise involved in (Silver management. Hills (1961) Club v. Sobieski Country Cal.2d 811 1135]; 361 P.2d Cal.Rptr. 87 A.L.R.2d People Graham 318]; Cal.App.3d see also Comment, Limited Partnerships Securities Law: Restrict California ing Public Sale Limited Interests Partnership 13 U.C. Davis 618; Comment, L.Rev. Is a Limited Interest a Partnership ?: The ‘Security’ Current State and Federal Add a Dimen Legal *7 California Definitions sion to Economic Speculation 16 Santa 311.) Clara L.Rev.
Section 25110 makes it to sell an illegal unless unqualified security itself, the sale, security Therefore, not the individual is exempt. security (f) subdivision it was to be under section 25102 because alleged exempt whom the to with issuer had a business or persons prior personal sold only if an interest in that is to security sold relationship exempt any person the does not does not contest who meet that qualification. Appellant limited interests he his characterization of the partnership employees trial, however, sales He at that the sold as securities. claimed unqualified with all were made to persons from because exempt qualifiсation had a whom he and/or Tax and Financial Service preexisting personal Clergy or business relationship. 25102, (f), Section creates the on which subdivision presently exemption if the of securities are no more than relied. It sales to appellant applies her each she is for his or of whom that he or persons represents purchasing sale, of an own account and not for the sale is not made through publication advertisement, or and if the either have “purchasers preexisting personal officers, the of its direc- business with offeror or any partners, relationship financial or or reason of their business or tors controlling persons, or business or their professional financial experience experience are not issuer, advisors who are unaffiliated and who compensated by or indirectly, issuer or of the any selling agent directly affiliate to their own could be assumed have the capacity protect reasonably interests in connection with the transaction.” in this were made to Novem-
Some sales involved prosecution prior 1, date, an (f) subdivision of section 25102 created ber 1981. Prior to that sale, transaction not involving any public offer in a exemption “[a]ny or limited bona fide venture general joint offering, any partnership, 1.7, 665, 2042.) (Stats. ch. Under interest. . . .” § (former rule it and the regulation statute as then read implementing 260.102.2, now tit. Cal. Code Regs., Rules of Comr. see Corp.; 260.102.12; rules), could references to are to these a defendant all rules an if offer was more than 25 with sales persons claim to no exemption or sale no more than only offering 10 of those persons by showing the issuer was not a because it was to with whom “public offering” persons business (People had a preexisting personal relationship. 513].)7 Feno Cal.App.3d an Law of the burden of Securities Corporate assigns proving “In under defendants. Section exemption provides: proceeding persons named 6 Respondent partnerships does not claim that the limited or notes sold to the had nonexempt counts of interests them appellant was convicted were because offeror. requisite prior relationship sold to other who did not have with the persons been though unqualified appellant of which was convicted 7Even some of the sales of securities 1, 1981, allegedly were to November the date on which the amendment prior made (f) effective, language of only instructed in the subdivision of section 25102 became the court the amended statute. making appellant’s greater under the This error had burden than it had been the effect required as he was to show also pre-November version of statute inasmuch *8 law, an from a the of an proving exemption exception this burden defense is the it.” an claiming definition is Because exemption upon the of guilt unqualified not collateral to defendant’s of a charge selling securities, however, doubt to reasonable a defendant’s burden is raise a only 501; Code, Code, Pen. that the (Evid. defendant sold securities. nonexempt § 719, 1096; v. Cal.3d People Figueroa § 715 P.2d
The on trial court is to instruct the has the required jury party on burden of and on the nature of that burden. “The cоurt all proof proper occasions shall instruct the as to which bears the burden of jury party proof on each issue and as to whether that burden that a raise requires party a the existence or a concerning reasonable doubt nonexistence that he of fact establish the existence or nonexistence a aby preponderance the fact of evidence, by convincing clear and a reasonable proof, by proof beyond Code, 502, (Evid. added.) doubt." italics The that the requirement instruct the court on nature of the burden of to an piroof applies exemption in a defense securities v. (People Figueroa, supra, 41 corporate prosecution. 714, 722.) Cal.3d
The court instructed the it jury section makes unlawful offer or to sell an the unqualified unless is security security exempt. instruction only the burden of regarding was: “The burden proof proving an the exemption upon defendant.”
Appellant contends that the trial court committed reversible error in the failing instruct that his burden a jury raise reasonable only doubt that the securities were not *9 the
counts does not itself establish that case was close with to the respect which was convicted. counts on appellant erred, concede that the but that argue
The court those counts were People and the does not We not close error reversal. When the require disagree. court, considered in of the instructions evidence is the light actually given by it is that a result more favorable to have would ensued probable appellant a had the been instructed that burden was to raise appellant’s only jury doubt in minds he jurors reasonable the that sold securi- unqualified ties, i.e., a reasonable doubt limited interests he sold were not exempt.
The trial court instructed the on from statutory language the exemption qualification relied requirement. on the for sales Appellant exemption made officer, director, persons whom the or an offeror controlling the person of offeror had a preexisting business No instruction relationship. on the of given nature the the relationship necessary satisfy statute.8 Therefore had to show that the appellant only investors had a business prior (f), 8 Section “personal” subdivision does not further define the or “business” relationship purchasers security necessary between the and issuer of a which is to claim however, 260.102.12(d)(1) this exemption qualification requirement. from the Rule provides, “ ‘preexisting personal that relationship’ any relationship consisting business includes of personal or business contacts of a nature reasonably and duration such would enable a character, prudent purchaser to of general be aware and business acumen business and person financial relationship circumstances with whom such The exists.” rule also provides description its required relationship that the nature of the not does create a presumption relationships statutory that other are within the definition and determi statutorily nation of whether the relationship defined to be exists is made without reference to the subsection. disclaimer, Notwithstanding 260.102.12(d)(1) the rule’s rule nature describes the relationship contemplated by relationship section 25102. The described rule in the contem- plates acquaintance. more than mere If qualification requirement purpose is to serve law, corporate (Southern unsophisticated securities which is to protect investors Cal. First Quincy Nat. Bank v. Cass Associates Cal.3d 675 [91 478 P.2d 37]), the relationship must be one of sufficient duration and nature the offeror of that security has reason to believe the is able honesty investor to assess the issuer’s (See Volk, competence. (rev. 1994) 1 Marsh & Practice under the Cal. Securities Laws ed. [c], 4-28.8(1) Volk].) guidelines & suggested by Marsh the rule § 402A[2] [hereafter are purpose. consistent with possibility types We do not rule out other may relationships form a on relying basis investor be an would warranted on a person unqualified offers who or sells securities the investor. prior relationship Whether warranting unregistered reliance on the seller of an objective exists is an reasonably test and looks to prudent what a investor would be aware of about prior personal the offeror from the relationship. or business is This test intended to protect investors on placing the offeror the establishing burden of that the nature and relationship duration of the one reasonably prudent that would enable a investor to assess Tax Financial with him or with Services. this relationship Clergy case, because was the issuer the securities and Vesper Corporation officer, director, defendant was controlling Vesper Corpo- ration, *10 could be with either required relationship appellant Vesper Financial All Corporation, which did business Tax and Services. Clergy of die were persons to whom sold limited interests partnership appellant clients of the Tax Financial Services. The evidence Clergy regarding and and Tax Financial Services prior between relationships appellant Clergy the and in the he named counts in which was convicted purchasers violating section 25110 is as follows: I, Nordstrom,
The investor in count met in October 1986. Norma appellant tax Her return was his Gunther in 1980 and Keith prepared employee In years. 1985 she asked Gunther about invest- subsequent February making $10,000 ments. Ms. Nordstrom in limited “Hesperia invested 19” part- At that she had met had never heard of nership. point appellant, Vesper and that was unaware had connection to Corporation, appellant Clergy and Tax Financial Services had no Vesper Appellant Corporation. per- contact sonal with was evidence her. There of a business prior relationship years’ of five duration with Tax and Services Clergy Financial at the time investment, made her she however. (count
Janet Taylor VII) referred to Tax and Financial Ser- Clergy minister, for tax vices return in 1983 her a friend of defend- preparation In ant. she met who her to an April appellant, introduced employee her return. assigned prepare tax She spoke appellant with an hour at the most. They discussed Ms. Taylor’s friend and what had done appellant with friend’s In finances. June with Ms. spoke employee about in Taylor limited He came to her home and investing she partnerships. $5,000 invested in the Center “University Investors” limitеd She partnership. knew appellant was to be general who partner managed partner- She had heard of ship. and in mind Vesper Corporation her appellant, Clergy Tax Financial Services and Vesper Corporation “synonymous.” $5,000 also She invested in “Adelanto III” limited in June 1983. did not Appellant recall with Ms. meeting as of personally Taylor, June 1983 she had been to the Tax and Clergy Financial Services office only once, in for tax April 1983 return there was evidence preparation. Again a business with Tax Clergy and Financial services and with relationship appellant. (count
Neal Shaver X) employed Tax and Financial Services to Clergy his tax prepare returns met with an again 1984. He employee Volk, general (See op. cit. business and financial circumstances of Marsh & the issuer. supra, [ii], 4-28.9.) 402A[2] [c] jury Because was not instructed that this it applied, test should be does not enter into our assessment of appellant prejudiced whether actually in the instructions by the error given. who the tax returns for prepared Shaver and his In wife. 1984 the employee told Shaver about one of the limited In Shaver partnerships. July $7,000 invested in the “Commercial August Investors II” In partnership. $5,000. $30,000 1984 he invested another he invested September 1984 the “Commercial Income Investors IV” that appellant He knew partnership. would be the met in these he first general partner appellant but partnerships, in 1985. He dealt with not recall meeting did only employee. Appellant had a Shaver. There was evidence that Shaver personally prior therefore business of more than a duration with Tax and relationship Clergy year’s Financial Services when he made his and that first purchase relationship extended to the time he made his subsequent purchases. *11 (count XIII) Evers first met in and after
Verlyne 1980 that time appellant Tax and employees Financial Services her taxes. An Clergy prepared discussed employee with her and her first investment was investing $37,000 interest in the “Reeves Street” in November She 1980. also invested in “El Cajon” that month. In March partnership during 1981 she in invested “Victorville In Investors.” she February 1983 invested 1984, $81,130 in In “Adelanto 20.” she May and her husband invested of his retirement check in “Commercial Income Investors II.” Ms. Evers knew that owned and was in appellant Tax and Financial Services and charge Clergy would the limited but she did manage not discuss investments partnerships, with All of the appellant. investments were handled an by The employee. she, too, evidence was such that the could believe that had an jury existing business with relationship Tax Financial Services at the time of Clergy the first and that the purchase continued relationship time she through made her last purchase. (count XXV)
Duane met in Tellinghuisen when he went to appellant Tax and Financial Services to have Clergy his tax returns He prepared. continued to have his tax returns Tax and Financial prepared by Clergy Services until but did not them each appellant personally prepare year. Four other did them employees during time. built a Tellinghuisen returns, of confidence relationship and trust in of tax appellant’s preparation but had no other business with In one dealings appellant. of appellant’s mentioned investment employees He had hаd opportunities Tellinghuisen. no business other than tax with Tax and Finan- dealings preparation Clergy $5,000 cial Services In 1980. he invested in what he prior February believed was the “Olive Street” limited He was told that partnership. appel- lant would the limited He had heard of manage partnership. Vesper Corpo- ration and believed that was it as a appellant managing separate corporation. $12,250 In he invested in June the “Adelanto 20” limited partnership. have believed that this could investor had a business relation- jury prior Tax and Financial with Services of more than 10 duration ship Clergy years’ his first purchase. when he made XVI) met a Tax Services em- (count Clergy
Cecil Gates and Financial had returns by at a seminar and his tax ployee regularly prepared in one about investing He contacted in employee. employee 1981, he invested of the limited In October December partnerships. $10,000 he In early the “Lakewood Ltd.” limited partnership. $6,000 Additional invested “Victorville Investors” limited partnership. sums were were made. invested in when “assessments” subsequent years Gates had no with August contact until personal appellant September 1986, but the of a evidence was business with Tax and relationship Clergy Financial Services. victim
Caroline French was the in count IV. She and her husband met to have tax their returns He appellant prepared. personally prepared tax returns for Mrs. French until the business and another expanded assigned them. Mr. Mrs. also with prepare French met various Tax employees Clergy and Financial Services. When financial doing invested in annuities an planning, оutside recommended they company inheritance, defendant. In when Ms. French she received an and her husband sought with investments from help October she appellant. $10,000 invested ain note promissory said would be a loan appellant *12 to as him he entered the “Elizabeth Gardens” She also partnership. invested $12,000 in the “Aloha Gardens” at that time. Ms. French testi- fied that she and her husband had contacts with “ongoing” who appellant, was their advisor financial from the time he first their tax prepared returns until they made their investments 1980. testified that he had Appellant business contacts Mrs. many with French. On this count there was evidence of a business with both prior relationship and Tax Clergy and appellant Financial Services.
Some of these investors did not deal with appellant personally. had They Services, done business with Tax and Financial Clergy however. Although some were not aware that their business with relationship Vesper Corporation, since the did corporation business under the name of only Services, Tax and Financial Clergy with the issuer of the relationship securities existed. The evidence was such that a instructed properly jury could believe business prior between those investors and relationship Tax and Financial Clergy Services the sales to these might qualify investors for the The exemption. could also believe jury that Mrs. French had a prior business with relationship appellant so to personally, qualify sale her so, for the If well exemption. jury have had a might reasonable doubt that the securities were not exempt.
The instructed, if possibility jury, have had a properly might reаsonable doubt that the securities sold to these investors were nonexempt because, in addition to above strong the evidence regarding purchas-
ers’ business with and/or Tax and Financial relationships appellant Clergy Services, defendant handled offered the of an who testimony attorney expert (f) matters basis. She subject regular subdivision of section 25102 on a with an testified that in her referred to a tax who is opinion person preparer returns, tax indication that the tax for doing has a preparer good reputation tax submits relevant is given good information to the personal preparer, circumstances, advice with of the individual’s planning special knowledge and sees the comes back after the individual year year, during period successful, tax is a who business preparation growing seemingly satisfies the of the statute.9 test “preexisting relationship” of the court’s failure to instruct assessing prejudicial impact burden was to offer evidence of a business appellant’s only relationship prior and/or sufficient to raise a reasonable appellant Vesper Corporation doubt in the minds as to whether he sold jurors’ securities that were not we consider the instructions that were the evidence exempt, given There was evidence of prior contacts between investors relationships. and/or appellant business as Tax and Vesper Corporation doing Clergy Financial Services which could establish an in each case. That exemption evidence was unrebutted. We conclude therefore that it is reasonably prob- able that an outcome more favorable to been have reached appellant might had the been instructed that jury properly burden was appellant’s only raise a reasonable doubt that the securities he sold exempt.10 (People 243].)11 Watson 46 Cal.2d 836-837 P.2d error was and necessitates reversal of the entered on prejudicial judgment each of the counts of section violating 25110. *13 assessing prejudice signal approval 9 Our consideration of this evidence in does not expert testimony legal questions—here admission of on relationship required the nature of the by exemption. statute to claim an arguments 10 Wehave reviewed the of counsel in an effort to determine if the nature of the might conveyed burden have been jury during closing argument. anything, to the It was not. If argument jury appellant would have led the to believe that had to do more than raise a appellant exempt. reasonable doubt as to whether the securities sold were prosecutor repeated judge’s prove advice that the defendant “has to that he was exempt provisions from the prove exempt you of 25110. If he does not that he was doubt, proven believe that I have all beyond you these elements a reasonable must find the guilty though again defendant even he he never intended to violate the law.” Later told the
jury
prove
dealing
selling
that the “defendant has to
that the
he’s
with when he’s
them
one,
sophisticated
they
relationship
investor or
have a business
to the
offeror.” Defense counsel did
during closing argument.
not address the burden
Wаtson,
People
supra,
11 Becausewe conclude that
required
reversal is
under
46 Cal.2d
818, 836-837, we need not
omitting
decide
in
the instruction of the
here whether the error
defendant’s
application
burden is one of federal
that necessitates
constitutional dimension
Chapman
test for
(Chapman
reversible
In v. Johnson People Cal.App.3d 366] (Johnson), the Court of considered Appeal these the federal provisions securities laws after which the Law Corporate Securities that, patterned, and concluded “willful” notwithstanding requirement section the California did not intend to make falsity a statement an element of the offense of securities selling means of false or misleading statements. Johnson, here, as interests in limited which were formed partnerships
for the purpose constructing and were sold managing property unqual- ified securities. When increases the costs of unanticipated construction were experienced, and funds cover the inadequate increased expenses, funds were transferred “temporarily” among partner- defendant, ships to meet cash flow needs. The who was the issuer and general had partner, not advised investors such transfers would be made and had told those who be inquired funds would not commingled. *14 The trial court did not instruct that violation of section 25401 requires “scienter,” i.e., guilty at or knowledge omission representation time.the conviction, occurs. The Court of affirmed the Appeal holding although California’s (1933 securities law is after the Securities Act of patterned 1933 Act) (15 U.S.C. 77a et which had been construed in United seq.), States v. § (S.D.N.Y. 1974) 670, 712, Koenig 388 that the F.Supp. requiring proof defendant knew of the of his or acted with reckless falsity representations
508 truth, for the the California disregard intended section 25401 to willful conduct and apply did not make of a falsity knowledge statement an element of the offense.
The Johnson court ‘knowing “It is settled that the omission of explained: from ly’ statute penal indicates that is not an element of guilty knowledge 695, the offense. (People (1963) v. Kuhn 216 Cal.App.2d Cal.Rptr. [31 253].) Had the Legislature intended to require proof guilty knowledge 25540, scienter under section it could have so stated the word using by Willfulness ‘knowingly.’ does not of evil motive intent to require proof violate the law or (1974) v. Clem knowledge illegality. (People 539, 542-543 Cal.App.3d Cal.Rptr. 359]—according legislative [114 25540, evidence of faith or history advice of counsel is not a good defense; (1982) v. Gonda People Cal.App.3d Cal.Rptr. knowledge is not a defense to violation of illegality 295]—lack law franchise.)” (Johnson, sale of regulating 1375.) supra, Cal.App.3d Johnson has been followed in People Baumgart Cal.App.3d defense to the section 25401
Appellant’s was that he had in- charges structed all of his over the for the employees go prospectus partnership which an investor was interested line line and to the risk factors explain to them. He did this himself. The with the arose after problems partnerships the sales were made and they at the time of the sales. unanticipated some of the limited Although did not partnership agreements give general to lend partner express authority power property, was included in others in the The loans of mid-1980’s. between money were made when partnerships that were unforeseen at the time the problems investors their interests acquired some “as- developed, leaving partnerships rich,” set but “cash poor.” contends that a criminal violation
Appellant of section by making an untrue statement of a material fact or a material fact omitting regarding sold, offered for sale or security being occurs if the defendant knew or only should have known that the statement untrue or the misleading material, omission and that this must be determined in of the circum- light stances at the time of the offer or sale of the On that existing basis security. he arguеs court erred in that if a defendant makes instructing jury conduct, a material about representation future he must act in accordance with the representation of his intent or at the time the regardless made, representation that if a later act makes the representation untrue, a violation has occurred. He concedes that the trial court was bound Sales, Auto Equity Inc. v. Superior Court 57 Cal.2d 455-456 *15 Johnson, 321, 937], to follow supra, Cal.App.3d 369 P.2d 1369, but that was decided. We argues wrongly agree. Johnson that Johnson to construe section failed
Appellant’s argument properly 25540, the of 25401 and and on construc- history based on sections tion of the federal securities law after which these sections were patterned. on Our conclusion rests on those factors and the of Legislature’s requirement before civil attach under section 25501.12 guilty knowledge liability may of section 25540 nor to history Neither reference language federal law after which section resolves this patterned question civil, since violations of section 25401 be the basis for administrative may or as well as sanctions. In this ascertaining intent in case we penal, legislative must look to the entire scheme of the Law Securities of regulatory Corporate and to the in the into which a criminaí place regulatory hierarchy violation of section 25401 falls. The Johnson court relied on the principally of section 25540. It did not consider the language full scheme. regulatory doWe so after also other indicia of considering legislative intent.
The legislative intent section 25540 underlying does itself answer the face question we here because the penalties that section prescribes apply violations any provision Securities Law of Corporate 1968, or including violations rules orders under that or law promulgated of which the violator had We hesitate to assume knowledge. intended that scienter be an
Legislature element of every regulatory aspect Securities Law of 1968.13 Corporate Section 25540 is modeled after 32(a) section of the Securities Exchange (1934 Act) Act (15 Volk, (Marsh U.S.C. 78a et & cit. seq.). op. § permits 12 Section25501 damages an action for purchases rescission who a plaintiff sold in violation of section 25401. The who may establishes a violation interest, rescind and paid plus recover the damages longer consideration if he or she no security, proves owns “unless the plaintiff concerning defendant that the knew the facts the untruth (or or omission or that the defendant exercised reasonable care and did not know known) if he had exercised care reasonable would not have of the untruth or omission.’-’ (§25501.) (Stats. Sections 25401 and 25501 part were enacted as legislation. the same 1968, 88, 2, pp. 279-280.) ch. § tempered 13This reluctance is by recognition Legislature somewhat now has extremely heavy penalties attached to criminal provisions Corporate violations of some Securities Law of In Legislature 1968. a 1993 amendment of section 25540 the increased the million, maximum fine for 25400, 25401, $1 most violations violations of sections 25402, 25403, (Stats. 1993, 2; 762, $10 2.5.) million. ch. Stats. ch. § § three, two, of imprisonment term years, increased to term five no county jail (Stats. 1988, option. 4431.) ch. generally presume We penalty would not attach a substantial ato strict “ penalties” offense. ‘significant “Harsh are determining consideration in whether ” (United statute should be dispensing construed as with mens rea.’ v. States X-Citement Video, _ _ _, 372, 380, 464, 468]; Inc. U.S. Staples L.Ed.2d S.Ct. United *16 510 25501, 14-79.)14 civil Sections 25401 and which authorizes
supra, p. private 25401, of the actions for violation of section are modeled after provisions & ( Securities Act of of Marsh 1933 and the Securities Act 1934. Exchange Volk, 111) op. 14-4.) 12(2) (15 cit. Section of the Act U.S.C. supra, 1933 p. § creates civil for sellers who make false and statements liability misleading however, 25401, 12(2) sale of of securities. Unlike section section federal act on the includes an scienter the burden express provision, placing defendant to lack of of an untruth or omission of a material prove knowledge who— [¶] fact. It . . . provides: security offers or sells “Any person [¶] (whether .) or not . . the use of means or instruments of exempted by any mails, or communication in interstate commerce or of the transportation communication, untrue means of a or oral which includes an prospectus statement of a material fact or omits to state a material fact necessary statements, order to make the of the circumstances which light they under made, (the not of such untruth or misleading purchaser knowing omission), and who shall not sustain the burden of that he did not proof known, know, of of such and in the exercise reasonable care could not have omission, untruth or shall be liable to the such person purchasing (15 77l.) .” U.S.C. . . . § of lack of of an affirmative defense
Notwithstanding express provision 12(2) section of the Act has been construed as 1933 knowledge, creating strict for liability permitting recovery negligent misrepresentations. (S.D.N.Y. 1991) (Drexel Burnham Lambert Group Microgenesys 660; Pierce, (S.D. Basile v. Merrill Fenner & Smith Ohio Lynch, F.Supp. 580; 807.) 1982) (Ala. 1989) Banton v. 557 So.2d Hackney F.Supp. decisions which have read the scienter defense out of the statute postdate California Securities Law of adoption Corporate however, section 25401 is a and would not an inference the part, support __, 608, 623, 511 U.S. Even the initial States L.Ed.2d S.Ct. $15,000 (Stats. years’ penalty, up imprisonment to 10 and/or a fine ch. a term stated, 285), significant. Although, rely penalty for the reason we do not on the dispositive, strongly implies section authorized the 1993 amendment a current understanding regulatory provisions that neither section 24501 nor legislative those other Corporate liability Securities Law 1968 create a strict offense. encourage Legislature clarify Corporate which of the criminal We violations (a) (b) punishable Securities Law of that are under either subdivision section liability 25540 are strict require offenses what mental states are elements those which scienter. 78ff, 32(a), 14 Section as codified at 15 United States Code section now reads in relevant part: “Any person any willfully any provision who violates of this title ... rule or regulation thereunder the violation of which is made unlawful or the observance of which is required imprisoned under the upon terms of this title . . . shall conviction be fined ... ; subject ... or both . . no imprisonment . but shall be under this section regulation proves violation of rule or if he that he had no of such rule or regulation.” Californiа intended that section 25401 state a strict *17 at the time law was enacted. offense our down, moreover, those
Since decisions were handed the United States held, Court of the Ninth for Circuit has consistent with the Appeals language Act, 12(2) section that the knew the 1933 exists if seller only (9th or (Casella should have the known were false. v. Webb representations 805; Shearson, Co., 1989) Cir. Inc. 883 F.2d see also Odette & v. Hammill (S.D. 946.) 1975) N.Y. 394 F.Supp. 10(b)
Section of the 1934 Act makes it “for directly unlawful any person, (b) To indirectly, ... .... use or in connection with employ, [¶] [¶] the or sale on purchase a national securities any registered not so exchange any security registered, any manipulative deceptive in device or contrivance contravention of the such rules and regulations and Exchange (15 . [Securities . . .” U.S.C. may prescribe Commission] 10b-5, statute, Rule this 78j.) adopted (b) under in it section that provides § is unlawful make untrue statement of material fact or to omit “[t]o state a material fact made, in order to the necessary make statements made, light circumstances which under not mislead they ... ing, connection with the (17 or sale of purchase any security.” (1994).) C.F.R. 240.10b-5 seeks to invoke
Appellant the rule that awhen state statute is on modeled a federal statute we presume that Legislature intended to adopt construction (Los employed by federal courts. Met. Transit Angeles Authority (1960) Brotherhood Railroad Trainmen 54 Cal.2d 688- 905].) rule, however, 355 P.2d He CaLRptr. misstates it cannot be reliably here. The rule applied statutes enacted subse- applies quent to construction judicial (Id., 688.) of the federal act. at Not p. only of section 25401 language 10(b) different from that section materially Act, of the 1934 but there was no settled construction of the federal statute 10b-5, or rule it, under time at the adopted section 25401 was enacted. time,
At that
10b-5,
what was then a
rule
leading case
construing
United States Court of
for the
Appeals
Second Circuit had held that scienter
unnecessary
obtain
relief
injunctive
against misleading statements by
corporation
left
open
possibility
could be recovered
damages
for misstatements made
(Securities
negligently.
and Exchange Com’n v.
Texas
(2d
Co.
Sulphur
1968)
Cir.
If Ernst supra, filed, when the lawsuit to that decision was some as of 1968 leading that 10(b) had construed section of the Act as recovery courts 1934 permitting And, before the when the case was argued for negligent misrepresentation. Commission, court in as amicus Securities high Exchange curiae, intended to bar all false and argued Congress deceptive practices (425 of whether the conduct was or intentional. U.S. at regardless negligent 679-680].) L.Ed.2d at The most that can be said regard 198 p. pp. [47 is that said to court; of the rule 10b-5 understanding language high to whether
“Courts and commentators have differed with long regard action, or scienter is a element of such a cause of whether necessary (425 conduct alone is sufficient.” U.S. at at negligent p. L.Ed.2d [47 679], omitted.) fn. Act, which, 32(a)
Section
like
section
establishеs
been
“willful”
has
regulations,
violations
securities laws and
penalties
holds
construed
some
courts as
One decision
federal
scienter.
requiring
do the
that a
both
must show
defendant intended
plaintiff
even
act and that he or she
aware
proscribed
wrongful,
that it
unlawful,
he or she did
though
not know that it was
in order to establish
1978)
(United
defendant acted
(2d
v.
Cir.
States Chiarella
“willfully.”
348,100
F.2d
revd. on other
L.Ed.2d
U.S. 222
grounds
S.Ct. 1108].) The
act of
false or
statements
proscribed
making
misleading
material
has
omitting
facts also
been held
include lack of
faith
good
statement,
or materiality
nature of a
falsity misleading
of an
(United
796;
omission.
(2d
States v.
1969)
Simon
Cir.
F.2d
Bank of
America Nat. Trust &
Ass’n
1939)
Sav.
Other decisions (see, hold that intent to the act do is proscribed enough 499; United e.g., (2d 1972) States v. Cir. 464 F.2d United States Schwartz (2d Dixon 1976) Cir. 1388) 536 F.2d with few again, exceptions, decision 32(a) construing section Act the enactment of postdate Securities Law Corporate 1968.
Appellant’s argument that the in Johnson court erred holding failure of the to Legislature use the word in “knowingly” section 25540 reflects an intent to create a strict offense find liability does support comments of former Commissioner of Robert H. Volk and Corporations Marsh, Jr., Professor Harold who had for major responsibility drafting Volk, Securities Corporate (Marsh Law of 1968. & cit. op. supra, 1-38 pp. 1-45.) describe They the Johnson as “a holding totally unwarranted and erroneous interpretation Code Section Corp. (Id., 25540. . . .” at p. 14-78.) believe that section They 25540 was intended impose liability an only intentional misstatement. Code
“Corp. Section 25540 was as a shortened version of copied Section 32(a) of the Securities Act Exchange of 1934. The dis- court [Johnson] the federal missed] cases an requiring intentional misstatement for viola- section, tion of on the basis that the legislature, because it did not use the word section, as defined in ‘knowingly’ a Penal Code intended to punish conduct as criminal even though defendant did not know that statement made was false. As the persons responsible for primarily sections, of these drafting we can state that this flatly fictional purely Volk, (Marsh account of the intent.” & legislative cit. op. supra, 14-79 pp. 14-80, omitted.) fns.
While the views of former Commissioner Volk and Professor Marsh no draftsmen, doubt reflect their intent as these statutes we construing must ascertain the intent of the Legislature when the Securities Law of Corporate however, because, Their 1968 was views are adopted. persuasive, focus- on the of section 25540 to a ing application criminal violation of section 25401, confirm that intent they legislative to criminal respect violations alone, of section not section 25540 is crucial.
The parties have not supplied any legislative Bill No. history Assembly (1968 Sess.), Reg. the bill which established the Securities Law Corporate in the form of committee counsel reports, legislative analysis, other materials shown to have been considered either house Legislature, we have found none. The presumably aware, however, that the 1968 law was based on the federal model. It may acts, therefore, also have been aware of the of those and in legislative history “there is no indication that history of criminal or civil any type is to (Ernst attach the absence of scientеr.” & Ernst v. Hochfelder, supra, U.S. L.Ed.2d and effect of section considering language we must construe “ context, that section ‘in in mind the keeping and statutes statutory purpose, harmonized, sections to the same statutory relating must be both subject ” *20 other, and with internally (Walnut each to the extent Creek possible.’ Manor v. Fair & Employment Com. 54 Cal.3d 268 Housing 704].) 814 Cal.Rptr. P.2d The section must be construed with reference to the entire of of system which it is a regulation (People Comingore part. Cal.3d 570 P.2d This man- dates that we consider the scheme of the Securities regulatory Corporate Law of 1968.
The statutes with which we are concerned are found two parts Securities Law of Corporate 1968: 25400 et (§ part seq.) part (§ 25500 et Part 5 identifies “Fraudulent and Prohibited seq.). Practices.” It identifies those “unlawful acts” that be committed offerors of may by securities or corporate insiders. Section 25401 is one of the in the provisions “Fraudulent and Prohibited Practices” Part 6 of the Securities part. Corporate Law of 1968 “Enforcement.” It governs creates three methods of enforce- ment of the 5 in provisions part the administrative chapters establishing enforcement 25530), Commissioner of powers the (§ Corporations civil (§ 25501), violators liability and the criminal sanctions for violations (§25540). the Securities Law of 1968 Civil for Corporate in this are the criminal violation of section is included as part, 25540). (§ for violation penalties any
Thus, to the conduct section 25401 is a three-tiered proscribed by subject false sale of means of system on securities regulation. prohibition facts, or statements or omission of material like аll misleading regulatory to the Law of first provisions subject Securities Corporate Cor- administrative Section the enforcement. Commissioner gives and, it the the conduct he deems enjoin to where porations power proscribed interest, be in the of injured seek relief on behalf public ancillary That section now persons. provides15 pertinent part: “(a) Whenever it to the has engaged commissioner that appears any person is about or act or violation of engage any any a practice constituting hereunder, of this division or rule or order commissioner provision any in the commissioner’s an may discretion action in name of the bring of the State of California in the court to acts or people superior enjoin or to enforce or with this law or rule order hereun- practice compliance any der. or Upon showing restrain- proper permanent preliminary injunction, order, receiver, monitor, or writ of mandate ing shall be and a granted conservator, or other or officer of court designated fiduciary be may assets, for the defendant the defendant’s other appointed or any ancillary relief be may granted appropriate.
“(b) interest, If the commissioner determines it is in the public commissioner include in (a) action authorized may subdivision relief, to, for claim not limited ancillary including but a claim restitution on disgorgement behalf of the damages act or persons injured by action, practice constituting matter of the court shall subject have to award additional jurisdiction relief.” *21 addition, 1981,
In since the commissioner seek a civil of may penalty up $2,500 to for each violation of any provision Securities Corporate of Law or 1968 of rule or any 25535.) order under the law. (§ An enforcement action the commissioner by to future enjoin sales by means of false or misleading statements is designed to protect public (People 10, (1977) Land Research Co. Cal.3d Cal.Rptr. [141 Pacific 15 Theseveral charged amendments this section since date of the offenses this case are not relevant here. 125]; 569 P.2d (1986) v. Martinson People 188 Cal.App.3d reason,
[233 For that it is Cal.Rptr. irrelevant that the defendant knows that the statements omissions are false or misleading. light the language of section it is reasonable to conclude that the Legisla- ture did not intend to members of the permit be harmed such public by sales because the offeror was simply unaware that his or her sales pitch The small civil misleading. authorized relatively penalty that admin- implies istrative enforcement of section 25401 was permissible of whether regardless a violation or threatened violation of that section was a violation. knowing
However, enforcement, at the next level of a civil action an by injured investor, the did Legislature expressly provide recovery damages aware, if the offeror was permissible only or with reasonable care would aware, have been that statements which the sale was by made were false Section 25501 misleading. provides: who violates Section “Any person 25401 shall be liable to the who from him or a purchases security him, sells a who sue either for may (if rescission or fоr damages defendant, be, or the plaintiff as the case no owns the may longer unless the security), proves that the plaintiff knew the concern- defendant facts the untruth or ing omission or that the exercised reasonable care defendant (or and did not know he had exercised reasonable care would not have if known) of the untruth or (Italics added.) omission. . . .” In this one intended provision, administrative supplement regulation Musick, (see enforcement Peeler & Garrett v. Insurance Employers _ _ (1993) Wausau U.S. 2085]; L.Ed.2d 113 S.Ct. Randall v. [124 525, 542, Loftsgaarden 478 U.S. L.Ed.2d 106 S.Ct. purpose creating cause of action for violation of a private 3143] [one statute is to regulatory administrative supplement regulation industry fraud and deterring full disclosure of encouraging material information in securities transactions]), has limited Legislature provided remedy reflecting the actual loss of the but if purchaser, permits recovery only the seller was aware or was negligent to be aware that his failing representations It misleading. would be unreasonable therefore to conclude that enforcement, when the created the third tier criminal prosecution with sentence to state and/or a fine con- prison upon viction, it intended to element dispense scienter while a much permitting sanction. greater we question face here is similar to that considered the Court of v. Calban
Appeal People Cal.App.3d 441]. *22 There the was whether question of the of an knowledge falsity affidavit was an element of the offense defined in former section 29218 of the Elections 29780), for impris- Code section which (see provided Code now Elections initiative, a a for false affidavit an making concerning onment and/or fine of that other provisions or recall court noted referendum petition. when committed Code same conduct Elections which prohibited knowingly and to a “who officials applied only public employees affidavit,” that return, or false certificate concluded makes require- to with knowledge could not have intended Legislature dispense why in “We see no reason logic public policy ment for private persons. of criminal culpa- intend a standard would Legislature apply higher to of knowl- absolute for a false affidavit filing regardless bility—i.e., liability with officials of the as contrasted falsity—to persons public edge private Thus, that the of a knowledge requirement we conclude omission employees. to legislative oversight, section 29218 was due simply from [Elections Code] (65 of such a must be the statute.” requirement part implied omitted.) at fn. Cal.App.3d not to could have intended reasoning
Similar suggests a of an omission materiality statement or knowledge falsity require available, before in while a civil action recovery permitting imposition knowledge of substantial on the offeror regardless penalties false or of the offeror that which a was sold were statements or at in misleading, negligence failing least of the offeror’s criminal relate obtain and accurate information. The section provision civil on a that he or she defendant avoid permitting showing (or reason- “exercised reasonable care and did not know if he had exercised known)” would nature of a able care not have the false or misleading to avoid leads conclusion statement omission order civil to a liability, that either criminal or actual also must be an element negligence of a criminal violation of section 25401. that, statute, construction
This is consistent the rule construing the court must to avoid a will lead unreasonable construction that attempt results. “If leads to the arbitrary two constructions are possible, more reasonable result be rel. v. Windsor should ex Riles adopted.” (People Inc. In this University, Cal.App.3d 378]. context, is rule of of that construction that conduct application suggests more, less, (See of criminal culpable required imposition penalties. Garcetti 5 Cal.4th Williams v. 573-574 Cal.Rptr.2d Moreover, since we are considering penal P.2d application constructions, 24501, a whose of two language section statute is susceptible more to the must construction favorable ordinarily adopt the court doubt, “The is entitled to the reasonable every offender. defendant benefit fact, out the true it arise of a or as to question interpretation whether *23 518
words or the construction of in (In used a statute.” language re Tartar (1959) 52 553]; Cal.2d P.2d see also [339 v. People Piper Cal.3d 899]; Cal.Rptr. 722 P.2d People Craft Cal.3d 715 P.2d court, The trial that a believing criminal violation of section 25401 was a offense, that, strict liability also assumed since section 25401 did not require or at least criminal a seller of negligence, also security may become subject criminal prosecution and if statements which punishment are true or believed to be reasonаbly true when made later to be prove inaccurate no fault through or lack of care of the seller. The result was that when, here, fact, is prosecution based on the omission to state a material if, the seller be found might sale, even guilty at the time of the offer or seller had no reason to know that the unstated fact was or might become “material.” The significance scienter requirement readily apparent in a case such as this where the falsity nature of the misleading statements and/or by his appellant and the employees of the omissions materiality determined on the basis of events which occurred some time after appellant sold interests,16 the limited and the partnership defendant on acquittal related fraud and embezzlement reflects the charges conclusion that jury’s he did not intend at the time he sold the securities to obtain the investors’ funds his fraudulent representations his omissions to reveal material information. whether the considering intended Legislature impose pen-
alties on a seller of securities for the failure to advise investors of facts which in invest, have been retrospect might material the decision to but whose would not have been materiality anticipated by reasonably compe- seller, tent we must that the recognize again declined expressly to permit And, in civil recovery actions based on moré conduct. egregious 16 In closing argument, his prosecutor emphasized following statements and omis warranting sions as conviction under section 25401: Neither appellant nor the prospectus advised Ms. Nоrdstrom funds Hesperia from the Geldtco, 19 limited partnership half-owner; would be transferred to of which defendant was that Geldtco was to improvements; construct Hesperia and that was never formed and purchased had property. no Ms. Evers was not told that the partnership Reeves Street purchase funds would be used to property. Victorville account, Mr. Gates money go was told his would into an individual retirement but money put partnership into a concerning account prospectus. which he had not seen the Tellinghuisen Mr. was not told money he partnership invested the Olive Street for property in Rialto would be used in Bell Gardens. Mr. Adams was never told that the Las Gaviotas in which he invested was not formed, property purchased, was not and funds invested were transferred to other accounts. The failure to tell only way investors defendant could pay off investors was depositing money from other accounts was a material omission. *24 Law context, this Securities after shortly Corporate it is noteworthy for the Second Court of the United States Appeals 1968 was enacted Ob-5, that, made conjunction Circuit 1 whether a statement held under rule whether issuance of the with is and misleading the sale of a security on due must be based resulted from a lack of diligence statement misleading known, known, at the time the the facts which could have been Co., v. Texas (Securities Sulphur supra, issued. Com’n Exchange Gulf 833, 862-863.) 401 F.2d remedies more that other sanctions and are must also recognize We was not at the time a utilized for conduct which contemplated commonly of funds The transfer betwеen entrusts another with property. party here, it was not occurred since among pur- limited which partnerships as described in of the partner or the general poses powers was a breach limited and was not authorized partners, the prospectus intent to with the deprive Had it been done partnership agreement. invested, been have might of the funds defendant they limited partners offense, statute, A even one which creates a regulatory convicted of theft. events that occur subsequent criminalizes conduct on the basis of which conduct, constitutionality. would be both unusual and of doubtful of, mindful rea is the rule we are existence of a mens Finally, “[t]he to, rather than the of Anglo-American exception principles 494, (Dennis (1951) States 341 U.S. 500 L.Ed. v. United jurisprudence.” [95 1137, 1147-1148, 857]; United States 71 S.Ct. see also United States v. 854, 868-869, 422, S.Ct. Co. 438 U.S. L.Ed.2d Gypsum [57 356, 2864]; L.Ed.2d United States v. Freed 401 U.S. [28 364-365, Brennan, (conc. J.); United States v. Balint 91 S.Ct. opn. 1112] 604, 605-606, (1922) 258 U.S. 252-253 L.Ed. S.Ct. [66 offenses Court has welfare” indicated that Supreme regulatory “public rea, scienter, intent element are which mens or wrongful dispense but it has done so on constitutionally assumption permissible, for those conduct health or the penalty threat to poses public safety, small, offenses is the conviction does not do “grave damage usually (1952) 342 U.S. (Morissette an offender’s v. United States reputation.” 288, 297, 240].)17 observed that L.Ed. 72 S.Ct. It has also “[w]hile law and do not offenses are not unknown to the criminal strict-liability Freed, supra, 17 In United States upheld conviction under a 401 U.S. the court regulatory carry impris term of require statute which did not scienter and did a substantial transfer, (10 years). of “firearms” which regulated registration, onment The lаw and taxation grenades. possessed The defendant the law defined include destructive devices and hand dismissing order the latter in violation of the law. The court reversed a district court scienter, allege holding regulatory was “a measure in the indictment for failure to that the law theory hardly public safety, may premised well on the that one would interest of the which be [citation], offend constitutional the limited circum- invariably requirements stances Congress has created this Court has such recognized offenses, [citations], (United attest to their status.” generally disfavored Co., States v. United States 437-438 Gypsum supra, U.S. 854, 867-868].) L.Ed.2d *25 offenses, this limited of
Notwithstanding such an acceptance acceptance that is to mens rea qualified by court’s refusal abandonment of a permit if requirement the statute involves conduct that a common would constitute offense, law malum in se the court continues to concern about the express due of process implications welfare offenses which regulatory public strict fault impose or awareness that the conduct is regardless concern prohibited. This is reflected the court’s whenever attempt, possi ble, statutes, to such intent or awareness federal and its admonition imply that are such statutes more to if pass constitutional muster likely they (See, activities. United regulate dangerous e.g., States v. International Min’ls 178, 183, (1971) 402 U.S. Corp. 564-565 L.Ed.2d 91 S.Ct. [29 1697]. [“Pencils, floss, dental also be But paper clips may regulated. they bemay which raise substantial due type products if might process questions did not . rea’ Congress . . ‘mens as to each require ingredient offense.”].) The was whether question International Min’Is due Corp. process conviction of a defendant who did not know his act permitted was a statute therefore have acted prohibited by regulatory not may rea, mens The court reasoned that the act was so inherently that dangerous acid) with the dealing matter would be person regulated (sulphuric aware that there laws or their regulations governing handling possession. In Lambert v. U.S. 225 L.Ed.2d 78 S.Ct. [2 California contrast,
240],
the court set
a
aside
conviction for failure of a person
convicted of a
felony
under
The court
register
ordinance.
held
municipal
that a conviction of a
had
who
no
requirement
violated due
because the conduct was
“It is
process
unlike
wholly passive.
acts,
commission
or the
to act
failure
under circumstances that should
(401
be surprised
possession
grenades
that
learn
is not
act.”
p.
hand
an innocent
U.S. at
362],
p.
omitted.)
L.Ed.2d at
fn.
[28
States,
Staples
U.S__[128
608, 623-624,
supra,
v. United
L.Ed.2d
S.Ct.
1802], however,
Freed, again
the court refused to
emphasizing
felony
extend
offenses
punishment
“public
bear harsh
type
are not the
in which
welfare” offenses
the court
readily dispense
will
requirement
with a mens
when construing
rea
a statute.
Here, again, public safety is not involved and it cannot be
an
assumed that
individual would
realize
making
a statement he
to be
failing
believed
true or
information
to reveal
about
sold,
contemplated
acts that were
at the time a
thus
did not seem
material, was criminal.
(Id.,
his deed.”
228 L.Ed.2d at
to the
at
consequences
p.
alert the doer
court
the conviction of a corporate president
affirmed
recently
Morе
of food
distributed
products
who
to maintain
integrity
failed
(1975)
This court has also assumed that regulatory prohibitum health is to are where the constitutionally permissible purpose protect public v. Vogel and the are penalties relatively light. (People safety *26 798, 801, 850].) are to fn. 2 P.2d Other offenses subject Cal.2d [299 or offense of Penal Code section 20: “In crime every public requirements union, intent, or criminal a of act and there must exist or joint operation this has not had the occasion to consider court negligence.” Although to the of the welfare or crime exception permissible scope public regulatory element of rule that some of criminal intent or is a negligence necessary type offense, state to a has not been in this criminal applied exception which, 25401, not involve which threatens offenses like section do conduct terms. The health or and are safety lengthy prison public punishable continues to be to crimes described restricted type exception 1052, (1992) 1057 Vogel. (See, v. Matthews 7 e.g., People Cal.App.4th [9 waste]; (1989) 211 v. Martin People of hazardous Cal.Rptr.2d [storage 348] 770, 699, 86 A.L.R.4th 714 Cal.App.3d Cal.Rptr. [transportation [259 383] waste]; (1983) Co. of hazardous v. Chеvron Chemical People disposal 50, 143 53-54 of wastes into Cal.App.3d Cal.Rptr. [discharge 537] [191 watercourse]; (1980) Pest Bd. Aantex Control Co. v. Structural Pest Control Cal.App.3d Cal.Rptr. poison].) [166 763] [unlicensed however, have from the impo
We a trend recognized, “prevailing ‘away sition of criminal sanctions in the absence of where the governing culpability statute, otherwise, or no intent policy by implication expresses legislative to (People be served strict v. by imposing liability.’ Hernandez 529, 673, 1092]; 361, .). . Cal.2d 393 P.2d A.L.R.3d Cal.Rptr. [39 health, not one is of that class of crimes that affects public Eavesdropping for which most without any welfare or strict is often safety liability imposed (see (1952) 342 U.S. ingredient of intent Morissette v. United States 288, 295-296, 240]; (1956) 46 L.Ed. v. Vogel 253-254 72 S.Ct. People [96 850]), fn 2 there is indication that Cal.2d P.2d no other intended to criminal sanctions in the absence of Legislature impose criminal intent.” Court 70 Cal.2d (People Superior 449 P.2d We need not decide here whether it is constitutionally permissible million a $10 a criminal of three fine of as much as impose penalty years now for which is under section 25540 to advise permitted omitting to be investor in a of facts not known to the issuer potential material, which, seller, or for unknown to the making representation not true. It is that the due enough recognize process implications a criminal of that for such conduct are suffi- penalty magnitude imposing if cient to raise a substantial as to the of section 25401 it is question validity criminal construed as a strict offense. creating liability We conclude therefore that nature knowledge falsity misleading omission, of a statement or of the of an or criminal materiality negligence them, and discover are elements of the criminal offense failing investigate described in section 25401.18We did not intend to presume enact a statute of doubtful If or criminal validity. negligence offense, not element of the be an criminal would penalties imposed civil action is conduct less than that for which culpable recovery private For all of an unreasonable scheme. permitted, application statutory enacted, these reasons we conclude that when section 25401 was the Legis- lature did not intend to create a strict offense. This con- *27 is the construction of the struction consistent with the drafters’ intent and federal law after which section 25401 is patterned.19 erred, therefore,
The trial court
that
a
instructing
only general
intent need be shown in the crime of
selling security
willfully offering
conclusion, Johnson, supra,
Cal.App.3d
18 Tothe extent
that it is inconsistent with this
disapproved.
is
argument
imposition of
unnecessary
appellant’s
19 Thisconclusion makes it
to consider
that
felony penalties
publication
speech in
or constructive
for
of commercial
the absence
actual
(See
knowledge
guilty
speech
violates the free
clauses of the state and federal Constitutions.
Smith v.
banning
The court also erred future, in accordance he must act in the about conduct representation at intent or was of what his irrespective that representation at made defendant made. The representations time the representation are instruction was related sold to which this time the securities were is also those inconsistent with representations The conduct that was unclear. on an affirmative to have relied not unclear as the prosecution appears that funds would be to advise the buyers but the failure representation, loans would be to anоther or that from one limited partnership transferred to the have been directed them. The instruction may made between among investment in which an that in one instance the limited partnership evidence the investors and did not buy was made was never funded fully property were led to believe would be purchased.
However, issuer is aware or of criminal unless an liability, purposes that a material should have been aware at the time of the sale representation material, untrue, have known that an unstated fact knew or should of a material he has not sold the means of an untrue statement 25401. of section meaning fact or omission to state material fact within an omission truth or of a and the materiality falsity representation knew or should have must be determined on the basis of what the seller known at time of the sale. that a
The evidence in this case that it is reasonably probable suggests been reached absent these result more favorable to have appellant might Watson, 836-837.) errors. The judgment Cal.2d (.People supra, therefore, must, conviction on all counts violation of section charging *28 be reversed.
V
Disposition The is reversed. judgment J.,
Lucas, J., Kennard, J., Arabian, J., J., C. George, Werdegar, concurred. act.”].) v. First Interstate Central Bank unless he aids and abets or commands See also _ _
Bank, supra, U.S. L.Ed.2d [128 119]. MOSK, J. dissent. I in 1989 the Court v. Johnson Appeal People Cal.App.3d held, (Johnson), “It Cal.Rptr. is settled that the 366]
omission of from a statute indicates that ‘knowingly’ penal knowledge guilty is not an element of the offense. Had the to intended Legislature [Citation.] require or scienter under proof guilty knowledge [Corporations Codе] section it could have so stated the word by using ‘knowingly.’ Willfulness does not of evil motive or intent to law violate the require proof knowledge illegality. [Citations.]” court, A petition review Johnson was with this and promptly filed with no rejected votes Have there any justice grant. been any develop- ments in the at this late date ensuing years justify overruling prevail- law? The answer be ing must negative.
Indeed, rule, with full of the Johnson Legislature reconsidered Code section 25540 and increased the maximum Corporations violation, fine for its but took no action to include an element of intent. As this court reiterated Harris v. Growth Investors XTV Capital “ 873], 52 Cal.3d 805 P.2d ‘[W]hen amends a statute without Legislature altering portions provision construed, that have been previously judicially presumed to have been aware of and to have in the acquiesced judicial previous ” construction.’
The seem to fail to that there are malum majority appreciate prohibitum crimes crimes the absence punishable despite of criminal intent. Such are based on the violation of in nature and generally statutes are regulatory that affect innocent victims. It is clear that the of the securities law purpose is to fraudulent—even fraudulent— protect public against unknowingly stock and investment schemes. enactment not be as strict in its on stock legislative may requirements as the it more
promoters’ find majority might prefer. They palatable criminal intent. But the bottom line is that the require specific Legisla- ture has not seen fit to either its impose originally requirement, reconsideration statute. subsequent statutes is not thе function of this review
Rewriting court. We must those *29 (213 has us. As the Johnson case held at given Cal.App.3d 1375), “It is settled that the omission of from statute ‘knowingly’ penal indicates that is not an element of the offense." We have guilty knowledge no to add that element. right in the trial court’s if there were errors conclude that
I further instructions, harm- words of my colleagues—mere are—in the frequent they less errors.
I would affirm the judgment. Mosk, was denied March for a 1995. rehearing petition
Respondent’s J., should be granted. petition opinion notes state He of the exempt. evidence on the the whether limited interests he sold question from exempt qualification was such that he was four of the on acquitted counts violation of section and the on charging deadlocked jury count. fifth Inasmuch as each count involved the circum- relationship investor, however, stances of a different the and deadlock on some acquittal the investor had represented that he was purchasing or she for the investor’s own account and any not with view to security, sale in connection with distribution of the offer accomplished by publication and sale was not advertisement. retrial, 1,1981, On distinguish the court should alleging pre- post-November counts accordingly sales and possibly prejudicial instruct to avoid ex post application facto (See amended version Miller of the statute. Florida U.S. 429-430 [96 351, 359-360, 2446]). L.Ed.2d failing 107 S.Ct. Because we conclude that the error in instruct on the prejudicial respect nature burden proof defendant’s to all of convictions, verdicts, section any, we need not consider on if impact pre-November trial court’s failure to instruct under exemption. version of the