People v. ThompsonPeople v. Thompson
SUMMARY
June 14, 2018
2018COA83
No. 14CA1332, People v. Thompson — Crimes — Securities — Fraud and Other Prohibited Conduct
A division of the court of appeals applies the family resemblance test, introduced in Colorado by People v. Mendenhall, 2015 COA 107M, to conclude that substantial evidence supports (1) a decision that the promissory note is a security and (2) the criminal conviction for securities fraud. The division further concludes that the laws regarding the definition of a security and the unit of prosecution for securities fraud werе not well settled at the time of defendant’s conviction, and, because these issues were not raised before the trial court, any error with respect to these laws was not obvious and does not constitute reversible error. The division affirms the conviction and sentence for two counts of securities fraud and one count of theft.
I. Background
¶ 2 The People charged defendant based on transactions he had entered into with the victims, Tom and Debbie Witt (the Witts). Defendant was the sole member of SGD Timber Canyon LLC, (SGD), whiсh held an interest in sixty-three undeveloped lots in the Timber Ridge subdivision. By October 2009, these lots were in foreclosure, and in February 2010, SGD filed for bankruptcy. Defendant did not disclose either of these facts to the Witts when he negotiated the transactions that gave rise to this case.
¶ 3 The Witts loaned defendant $200,000 to acquire a lot in Timber Ridge and another $200,000 for construction of a home on the lot, with the understanding that the loans would be repaid with a profit share of as much as $400,000 when the home was sold to a prequalified buyer. In September 2010, the Witts wired $400,000 to defendant’s accounts.
¶ 4 Later, at defendant’s urging, the Witts increased the loan amount to $2.4 million and converted their investment into a
¶ 5 The Witts wired an additional $2 million to defendant’s account in October 2010, and the parties executed a promissory note and guarantee agreement. Pursuant to the documents, defendant agreed to repаy the loan with a “profit” of $240,000, all bank fees, and 8% annual interest by January 2011. The promissory note was “secured by” defendant’s “primary and second residences,” with collateral to convert to twenty-four lots in Timber Ridge “upon closing and final purchase of Timber Ridge.”
¶ 6 Defendant did not tell the Witts that the collateralized properties were “heavily leveraged.” He incorrectly listed the address of his “second residence” on the note. He represented the value of the Timber Ridge development to be $31 million, but
¶ 7 Defendant used the money on items not related to Timber Ridge, including payment of his own attorney fees, checks made out to himself or for “cash,” and paying off the note on, and making improvements to, his “second residence.”
¶ 8 In December 2010, Flagstar Bank completed foreclosure proceedings. Defendant did not tell the Witts of the foreclosure and instead told them that he was “moving forward” with the property. But he never developed the property in Timber Ridge.
¶ 9 In January 2011, when the Witts’ note came due, defendant defaulted on the рayment. He attempted to negotiate a new note with them, offering additional collateral, but the Witts refused. Defendant thereafter filed for personal bankruptcy, and his “primary residence” was sold at a public trustee sale. The Witts did not receive any money from the sale. Defendant eventually repaid
¶ 10 The People charged defendant with two counts of securities fraud, under
¶ 11 A jury found defendаnt guilty of all three counts. The trial court sentenced him to twelve years in the custody of the Department of Corrections for each of the securities counts, to be served concurrently, and eighteen years for the theft conviction, to be served consecutively to the other sentences.
¶ 12 On appeal, defendant claims that (1) insufficient evidence supports his securities fraud convictions; (2) the trial court erred by tendering an inaccurate jury instruction regarding the definition of a security; (3) insufficient evidence supports his theft conviction; (4) the trial court erred by admitting propensity evidence; (5) the two securities convictions must be merged; and (6) his sentences must
II. Sufficient Evidence of Securities Fraud
¶ 13 First, defendant claims that the evidence is insufficient to support his securities fraud convictions because the promissory note and guarantee he provided to the Witts do not constitute a security. The jury was instructed, as relevant here and pursuant to
A. Definition of a Security
¶ 14 The securities fraud statute requires that fraud must be perpetrated in connection with the offer, sale, or purchase of any security.
¶ 15 The federal definition of securities, on which Colorado’s definition is based, is purposely broad “to regulate investments, in whatever form they are made and by whatever name they are called.” Reves v. Ernst & Young, 494 U.S. 56, 61 (1990). Recognizing “the virtually limitless scope of human ingenuity, especially in the creation of ‘countless and variable schemes devised by those who seek the use of the money of оthers on the promise of profits,’” Congress enacted a definition of “security” sufficiently
¶ 16 In 2015, the year after defendant’s trial, a division of this court held that the “family resemblance” test adopted by the Supreme Court in Reves applies to determine when a note is a security under the Colorado Securities Act (CSA). Mendenhall, ¶ 37.1
¶ 17 Under the family resemblance test, a note is presumed to be a security, but that presumption may be rebutted by a showing that the note strongly resembles instruments such as
notes delivered in consumer financing; notes secured by a mortgage on a home; short-term notes secured by a lien on a small business or some оf its assets; notes evidencing a “character” loan to a bank customer; short-term notes secured by an assignment of accounts receivable; notes which simply formalize an open-account debt incurred in the ordinary course of business; and notes evidencing loans by commercial banks for current operations.
B. Standard of Review
¶ 18 Defendant did not argue at trial that his promissory note was not a security, or that not all notes are securities. But he frames his claim on appeal as a sufficiency of the evidence claim and asserts that preservation is “not required.” Though he moved for judgment of acquittal, he only argued that the evidence was generally insufficient to support a finding of guilt on any of the charges. The People agree with defendant’s statement regarding issue preservation.
¶ 19 Ordinarily, a defendant may raise a sufficiency claim for the first time on appeal. People v. Garcia, 2012 COA 79, ¶ 35. When reviewing for sufficiency, we view the evidence in the light most favorable to the prosecution to determine if the conviction was supported beyond a reasonable doubt. Id. at ¶ 34. But defendant’s argument is no ordinary sufficiency challenge; rather, his claim is premised solely on a novel interpretation of the securities fraud statute.
¶ 20 Some divisions of this court have hеld that when a defendant does not raise a sufficiency of evidence claim turning on a statutory interpretation in the trial court, his argument on appeal provides a basis for is reversal only if any error is plain. See People v. Kadell, 2017 COA 124; People v. Maestas, (Colo. App. No. 11CA2084, Jan. 15, 2015) (not published pursuant to C.A.R. 35(f)) (cert. granted Oct. 26, 2015); People v. Lacallo, 2014 COA 78, ¶¶ 6, 20.
¶ 21 Other divisions have held that even in absence of preservation, we may reverse a conviction if it fails the substantial evidence test. See People v. McCoy, 2015 COA 76M, ¶ 37 (cert. granted Oct. 3, 2016).
¶ 22 We need not resolve this conflict, because we conclude that even applying the broader substantial evidence test, defendant’s claim fails.
C. Analysis
¶ 23 Defendant does not argue that applying the definition of a security as it existed at the time of his trial — the “presence of an investment in a common enterprise that is premised on a reasonable expectation of profits to be derived from the entrepren[e]urial or managerial efforts of others” — was not
¶ 24 We reject defendant’s first argument. Under Reves, a note is presumed to be a security. 494 U.S. at 65. Citing a second circuit case, defendant argues that the presumption only applies if the note is for a period of longer than nine months. See Exch. Nat’l Bank v. Touche Ross & Co., 544 F.2d 1126 (2d Cir. 1976). But Reves explicitly declined to decide the question whether a note fоr a term of less than nine months was excepted from the presumption. 494 U.S. at 71. And Mendenhall makes no mention that the note must extend for at least nine months to be presumed a security. See Mendenhall, ¶ 32. Further, other circuit courts have held that the presumption does apply to notes maturing in less than nine months unless they are commercial paper. See, e.g., Sec. & Exch. Comm’n v. Reynolds Enters., Inc., 952 F.2d 1125, 1131-32 (9th Cir. 1991) (finding nine-month exception does not apply to notes that
¶ 25 Nor do we agree with defendant’s argument that consideration of the family resemblance factors is sufficient to rebut the presumption that the promissory note is a security. Instеad, we conclude that three of the four factors support a conclusion that the promissory note is a security.
¶ 26 The four factors are described as follows:
First, we examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it. If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or tо advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a “security.”
Second, we examine the “plan of distribution” of the instrument, to determine whether it is an instrument in which there is “common trading for speculation or investment[.]” Third, we examine the reasonable expectations of the investing public: The Court will consider instruments to be “securities” on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not “securities” as used in that transaction.
Finally, we examine whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary.
Reves, 494 U.S. at 66-67 (citations omitted).
¶ 27 With respect to the first factor, based on the Witts’ testimony alone, a reasonable jury could infer that defendant’s purpose was to raise money for the development of Timber Ridge properties and that the Witts’ interest was primarily to profit from advancing money to defendant. There was no suggestion that the Witts were purchasing a “minor asset” or a consumer good. The note promises that defendant will repay the $2.4 million, in addition to $240,000
¶ 28 As to the second factor, the record does not include any evidence that the instrument obtained by the Witts was traded under a “plan of distribution.” But a transaction between only two entities may still be a security. See Nat’l Bank of Yugoslavia v. Drexel Burnham Lambert, Inc., 768 F. Supp. 1010, 1015-16 (S.D.N.Y. 1991) (applying Reves).
¶ 29 With respect to the third factor, no evidence indicated the reasonable expectations of an “investing public,” but the Witts’ expectation was that they would obtain a profit on their investment, plus interest, within a period of time. The Witts, as the investing public, would therefore reasonably view the transaction as an investment and the note as a security. See id. at 1016.
¶ 30 Finally, defendant suggests no “regulatory scheme,” and we are not aware of one, that so significantly reduced the investment risk as to make application of the CSA unnecessary. He suggests that the availability of a civil suit against him satisfies the Reves requirement of a “regulatory scheme,” but we disagree. Although civil suits provide a remedy for victims of fraud, the civil system
¶ 31 For these reasons, we conclude that the Witts’ investment, memorialized by the promissory note, was a transaction protected by the CSA. And it did not strongly resemble the family of transactions that are not securities.
¶ 32 In sum, we сonclude that, after applying the four-factor test announced in Reves and adopted by Colorado in Mendenhall, the evidence, viewed as a whole and in the light most favorable to the prosecution, was “sufficient to support a rational conclusion that the defendant is guilty of [securities fraud] beyond a reasonable doubt.” McCoy, ¶ 37.
III. Jury Instruction Defining “Security”
¶ 33 In instructing the jury, the trial court included the statutory definition of “security,” which includes “any note.” See
¶ 34 Plain error is error that is obvious. Obvious errors “must contravenе (1) a clear statutory command; (2) a well-settled legal principle; or (3) Colorado case law.” Scott v. People, 2017 CO 16, ¶ 16 (quoting People v. Pollard, 2013 COA 31M, ¶ 40). “Moreover, an erroneous jury instruction does not normally constitute plain error where the issue is not contested at trial[.]” People v. Miller, 113 P.3d 743, 750 (Colo. 2005). Because plain error requires that the error be obvious and any legal principles be “well settled,” we only consider the status of the law at the time of trial. People v. O’Connell, 134 P.3d 460, 465 (Colo. App. 2005).
¶ 35 Definitional jury instructions that accurately track the language of the applicable statute are generally proper and sufficient. People v. Houser, 2013 COA 11, ¶ 76.
¶ 36 Mendenhall was decided after defendant’s trial. Though federal case law concerning the Federal Securities Exchange Act of 1934 and the Federal Securities Act of 1933 is persuasive, it does not settle the law governing the CSA. See United States v. McKye, 734 F.3d 1104, 1110 (10th Cir. 2013) (“[T]he district court erred
¶ 37 Accordingly, we conclude that, at the time of defendant’s trial, the law was not well settled, and any error in the given jury instruction would not have been obvious or plain. See People v. Valdez, 2014 COA 125, ¶ 27 (“[W]here the law is unsettled, the trial court’s alleged error with respect to the law cannot constitute plain error.”); see also People v. Howard-Walker, 2017 COA 81M, ¶¶ 56-57 (finding no plain error on evidentiary issue where latest supreme court formulation occurred over a year after trial and no appellate case directly addressed particular issue raised) (cert. granted May 21, 2018).
IV. Two Convictions for Securities Fraud and Double Jeopardy
¶ 38 Defendant claims that his two convictions and sentences for securities fraud violated double jeopardy because they are alternative ways of committing the same offense, and therefore the two counts should be merged. But he did not raise this claim
A. Law of Merger and Double Jeopardy
¶ 39 We review de novo whether merger applies to criminal оffenses. People v. Zweygardt, 2012 COA 119, ¶ 40. An unpreserved double jeopardy claim is reviewable for plain error. Reyna-Abarca v. People, 2017 CO 15, ¶¶ 45-46.
¶ 40 Unless a statute expressly authorizes multiple punishments for the same criminal offense, the Double Jeopardy Clauses of the United States and Colorado Constitutions prohibit “the imposition of multiple punishments for the same criminal conduct.” Woellhaf v. People, 105 P.3d 209, 214 (Colo. 2005); see
¶ 41 In determining whether offenses are factually distinct, we consider factors including the time and location of the events, the defendant’s intent, and whether the People presented the acts as legally separable. See Quintano v. People, 105 P.3d 585, 591-92 (Colo. 2005). However, no one factor is dispositive and the inquiry ultimately focuses on “all the evidence introduced at trial to determine whether the evidence on which the jury relied for conviction was sufficient to support distinct and separate offenses.” Id. at 592.
¶ 42 If a defendant is convicted of multiplicitous counts, the proper remedy is to merge the multiplicitous convictions. See People v. Rhea, 2014 COA 60, ¶¶ 16-17.
B. Multiplicity Not Obvious
¶ 43 A person commits securities fraud in Colorаdo when, in connection with the offer, sale, or purchase of any security, he
(b) . . . make[s] any untrue statement of a material fact or [omits] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or
(c) . . . engage[s] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
¶ 44 Defendant was charged with one count of securities fraud by means of an untrue statement or material omission under
¶ 45 In closing argument, the prosecutor argued that defendant committed two separate offenses because (1) he did not disclose the foreclosure or the bankruptcy to the Witts; and (2) he took their money, put it in in his main bank account, and started to spend it. The jury instructions state the elements of each charge, but do not specify the conduct relating to each instruction. The jury returned one verdict as to each count, but the general verdict forms do not indicate what conduct supports each verdict.
¶ 46 We agree with defendаnt that the General Assembly prescribed only a single unit of prosecution for securities fraud. See People v. Abiodun, 111 P.3d 462, 466 (Colo. 2005) (holding that when the legislature joins “a number of acts . . . as a disjunctive series,”
¶ 47 Accordingly, defendant‘s two convictions and sentences could be supported only if his alleged offenses were “factually distinct” under Quintano.
¶ 48 The evidence of defendant‘s false statements and material omissions in obtaining the loans supports a conviction under
¶ 50 Applying the federal standard, we cоnclude that defendant was charged with and convicted of multiplicitous counts of securities fraud because the evidence showed a sale of one security, to one
V. Sufficient Evidence of Theft
¶ 51 Defendant was charged with one count of theft under
¶ 53 The Witts testified at trial that they had agreed the money was to be used for the development of Timber Ridge, as a “no risk” investment in the project. And an investigator testified that defendant used the funds to pay his own attorney fees, to improve the house that his wife continued to occupy at the time of trial, and for other personal expenses.
¶ 54 Defendant‘s argument that he failed to repay the Witts because they refused to release a lis pendens on his “second residence” is without merit because this supposed buyer did not surface until March 2013, well after defendant hаd defaulted on the loan to the Witts and after he was criminally charged. The argument does not affect this conclusion. See People v. Pedrie, 727 P.2d 859, 863 (Colo. 1986) (holding that the return of stolen property is not a defense to a theft charge).
¶ 55 We conclude that, viewing this evidence in the light most favorable to the prosecution, it is sufficient to support a rational conclusion that defendant knowingly obtained the Witts’ money by deception and intended to permanently deprive them of it.
VI. Admissibility of Evidence of Other Transactions
¶ 56 In a pretrial motion, the prosecution requested the trial court to allow evidence that in 2010 defendant had obtained money from another person under false pretenses by entering into an agreement to sell a lot in Timber Ridge that he did not own. The prosecution argued the evidence was relevant to show identity, knowledge, motive, intent, modus operandi, and lack of mistake or accident. Over defendant‘s objection, the court ultimately allowed the evidence to show identity, knowledge, motive, and lack of mistake or accident, and gave the jury an instruction limiting use of witnesses’ testimony to those purposes.3
A. Applicable Law and Standard of Review
¶ 58 Under
¶ 59 Under Spoto, the
(1) relate to a material fact; (2) be logically relevant; (3) have a logical relevance that “is independent of the intermediate inference, prohibited by
CRE 404(b) , that the defendant has a bad character” and committed the crime charged because he acted in conformity with that bad character; and (4) have a probativevalue that is not substantially outweighed by the danger of unfair prejudice.
Perez v. People, 2015 CO 45, ¶ 25.
¶ 60 That other act evidence may imply a defendant‘s bad character does not preclude the evidence so long as it is offered for a permissible purpose. Spoto “does not demand the absence of the inference but merely requires that the proffered evidence be logically relevant independent of that inference.” People v. Snyder, 874 P.2d 1076, 1080 (Colo. 1994).
¶ 61 Because defendant objected to the admission of the evidence, we review the trial court‘s admission of other act evidence for abuse of discretion. The decision will not be disturbed unless it was arbitrary, unreasonable, or unfair. People v. Osorio-Bahena, 2013 COA 55, ¶ 21.
¶ 62 In ruling on the
¶ 63 Defendant argues that the evidence was not logically relevant to prove identity, motive, knowledge, or absence of mistake. We are not persuaded.
¶ 64 Defendant‘s explanation of his transaction with the Witts was that (1) it was a legitimate business deal; (2) he had no intention to defraud or deceive them; (3) he intended to perform according to the agreement; and (4) he was unable to do so because of unfortunate or unexpected business consequences beyond his control.
¶ 65 Evidence that the defendant had permanently deprived another invеstor of his money, by similar false promises and deceptive statements involving the same project, is logically relevant to prove that his motive was not to enter into a legitimate business agreement with the Witts, and that his inability to return the Witts’ investment was not due to a mistake or accidental circumstances beyond his control.
¶ 66 We conclude that the probative value of introducing the prior act was not substantially outweighed by the danger of unfair prejudice, “especially because the court gave a limiting instruction.” People v. Cooper, 104 P.3d 307, 309 (Colo. App. 2004); see Garcia, ¶ 20 (“We presume that the jury followed the court‘s [limiting] instructions, absent evidence to the contrary.“). We further conclude that the district court‘s admission of thе prior act evidence
VII. Sentencing
¶ 67 Finally, defendant argues that his sentence for theft must run concurrently with the concurrent sentences for securities fraud because the crimes are based on identical evidence. We disagree.
A. Standard of Review and Applicable Law
¶ 68 The parties agree that defendant did not preserve this issue for review. As such, we review for plain error. See Reyna-Abarca, ¶ 47.
¶ 69 Although a sentencing court generally has discretion to impose concurrent or consecutive sentences on a defendant convicted of multiple crimes, consecutive sentences are statutorily prohibited if identical evidence supported each count.
B. Analysis
¶ 70 We agree with the People that the theft and securities fraud charges were not necessarily based on identical evidence, and therefore decline to disturb the sentencing court‘s discretion.
¶ 71 The convictions for securities fraud were predicated on the misstatements and material omissions made by defendant to the Witts in connection with the sale of a security, an element of evidence for securities fraud not required for theft. Defendant‘s retention and use of the funds obtained from the Witts for pеrsonal benefit knowingly permanently deprived them of its use, an element of evidence not required for securities fraud.
VIII. Conclusion
¶ 73 The judgment and sentence are affirmed.
JUDGE WEBB and JUDGE FOX concur.