State v. GertschState v. Gertsch
- Reporters:
- , ,
- Before:
- Kidwell
A jury found Marilyn Gertsch (Gertsch) guilty of racketeering, securities fraud, selling unregistered securities, selling securities when not licensed, and money laundering. Gertsch appealed, arguing that the evidence was insufficient to support the jury’s findings, that there were various reversible trial errors, that portions of the indictment failed to properly charge her with an offense, and that her sentences are excessive. On appeal, the State conceded that Gertsch’s conviction for racketeering under
I.
FACTS AND PROCEDURAL BACKGROUND
The following is adapted from the Facts and Procedural History section in the opinion of the Court of Appeals. This case involves a string of conduct by Gertsch that resulted in a cumulative loss of approximately $130,000 to her victims.
In 1997 Gertsch was еmployed by an Idaho school district. In that year Gertsch personally paid for a vacation package offered as a prize in a raffle, which was conducted as a scholarship fundraiser by an association of school district employees. The winner of the raffle received, as promised, a vacation paid for by Gertsch. Although Gertsch was not affluent, she continued to offer similar travel giveaways. The beneficiaries would travel at their own expense to locations like Hawaii or the Caribbean, and upon their return they would present their travel expense receipts to Gertsch. Gertsch would then reimburse the traveler for all of the expenses. In order to cover the costs of these giveaways and personal expenses, Gertsch began soliciting money from acquaintances, co-workers and vacation winners for an “investment.” She promised these individuals that they would be paid a twenty-five percent interest rate on the money they gave to her. Most were told that this was a quarterly rate — the equivalent of 100 percent per annum.
The other details of this “investment” opportunity, as described by Gertsch, varied from persоn to person and were always extremely vague. However, a common thread was that Gertsch represented that she had privileged access to some type of special account to which the investments would be applied and from which the twenty-five percent return would be drawn. Some investors
This case is based upon Gertsch’s transactions with seven individuals, each of whom gave thousands of dollars to Gertsch in reliance upon her promises. Some of these people did receive some interest payments or travel benefits. However, Gertsch eventually became unable to sustain her system of acquiring money from new “investors” in order to pay the travel benefits or interest promised to others, and most of the individuals lost all of the money they had relinquished to Gertsch for her alleged investment program.
The prosecution charged Gertsch with racketeering,
II.
STANDARD OF REVIEW
When considering a case on review from the Court of Appeals, this Court does not merely review the correctness of the decision of the Court of Appeals. Leavitt v. Swain, 133 Idaho 624, 627, 991 P.2d 349, 352 (1999). Rather, this Court acts as though it is hearing the matter on direct appeal from the decision of the trial court; however, this Court does give serious consideration to the decision оf the Court of Appeals. Id.
When the issue is one of law, this Court has free review. Bouten Constr. Co. v. H.F. Magnuson Co., 133 Idaho 756, 760, 992 P.2d 751, 755 (1999). Ordinarily, the standard of review for factual issues relating to a jury conviction is whether there is substantial evidence upon which any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt, and the evidence is reviewed in the light most favorable to the State. State v. Daniels, 134 Idaho 896, 898, 11 P.3d 1114, 1116 (2000).
In this case the Court of Appeals held that the issue of whether securities were involved in a particular transaction is a question of law that is reviewed de novo, citing State Dept. of Fin. v. Resource Serv. Co., Inc., 130 Idaho 877, 950 P.2d 249 (1997). In Resource Serv. Co., Inc. this Court agreed with an opinion of the Ninth Circuit Court of Appeals, which provided that “although chаracterization of a transaction raises questions of both law and fact, the ultimate issue of whether a particular set of facts constitutes [a security] is a question of law.” 130 Idaho at 880, 950 P.2d at 252 (citing United States v. Carman, 577 F.2d 556, 562 (9th Cir.1978)).
However,
Resource Serv. Co., Inc.
was a civil case on appeal from summary judgment, where the facts of the case had
III.
ANALYSIS
A. There Is Sufficient Evidence In The Record To Support The Jury’s Finding That Gertseh Sold Investment Contracts.
At the jury trial, the State sought to show that Gertseh had engaged in the sale of the particular type of security known as an investment contract. Under the Idaho Securities Act, Title 30, Chapter 14, Idaho Code, a “security” is defined as:
[A]ny note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract ....
This definition mirrors federal securities law.
See
The United States Supreme Court has set forth the Howey-Forman test for the existence of an investment contract: (1) an invеstment of money, (2) a common enterprise, and (3) a reasonable expectation of profits to be derived from the entrepreneurial or management efforts of others. S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-03, 90 L.Ed. 1244, 1249-50 (1946); United Hous. Found., Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621, 632 (1975). This Court has adopted the Howey-Forman test to identify investment contracts under the Idaho Securities Act. Resource Serv. Co., Inc., 130 Idaho at 882, 950 P.2d at 254. The district court instructed the jury that an investment contract was the only form of a security relevant to this case, and it properly instructed the jury as to the elements of the Howey-Forman test.
In applying the
Howey-Forman
test, it is important to note that “the federal definition of security ‘embodies a flexible rather than a static principle.’ ”
Resource Serv. Co., Inc.,
130 Idaho at 881, 950 P.2d at 253 (quoting
Howey,
328 U.S. at 299, 66 S.Ct. at 1203, 90 L.Ed. at 1250). The definition of a security was purposefully madе broad so as “to meet the countless and variable schemes devised by those who seek the use of money of others
1. Investment of money
As this Court explained in Resource Serv. Co., Inc., “[a]n ‘investment’ typically involves parting with money for the purpose and in the reasonable expectation of making a profit.” 130 Idaho at 882, 950 P.2d at 254. This Court further explained that the inquiry should focus on the objectively reasonable expectations of the investors. Id. at 882-83, 950 P.2d at 254-55. Because this analysis focuses on the question of whether the investors expected “profits” or something different, it overlaps with the key analysis under the third prong in this case — whether the investors had a “reasonable еxpectation of profits.” Consequently, the question of whether the investors were seeking “profits” or something more akin to interest on a loan will be addressed further under the analysis of the third prong, below. What is clear under this first prong is that the jury, having rendered a guilty verdict after being instructed as to the Howey-Forman test, implicitly found that the victims gave money to Gertsch expecting something in return. The record contains sufficient evidence to support that finding.
2. Common enterprise
To determine if a common enterprise exists, courts have looked for either “horizontal commonality” or “vertical commonality.” See, e.g., S.E.C. v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1134 (9th Cir.1991). There are no Idahо cases defining horizontal or vertical commonality, other than the Court of Appeals decision in this case, which cited federal authority for the definitions. Federal holdings define horizontal commonality as the situation where each individual investor’s fortune is tied to the fortunes of the other investors by the pooling of assets, often combined with the pro-rata distribution of profits. Reynolds, 952 F.2d at 1134. Vertical commonality depends upon the relationship between each individual investor and the promoter and occurs where “the fortunes of the investor are interwoven with and dependent on the еfforts and success of those seeking the investment or of third parties.” S.E.C. v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 (11th Cir.1999). The existence of either form of commonality is sufficient to demonstrate the existence of a common scheme. S.E.C. v. Eurobond Exch., Ltd., 13 F.3d 1334, 1339 (9th Cir.1994). The district court only instructed the jury regarding vertical commonality.
Gertsch asserts that commonality should be measured by her representations to the investors, which she argues can only be characterized as promising them a handsome rate of interest on a loan or account deposit. She emphasizes that she promised her investors a fixed rate of return, that she unconditionally promised to repay them, and that she noted on some documents given to the investors that she was repaying “loans.” However, application of the term “security” turns not on the form or characterization of the transaction but on the economic realities underlying the transaction. Resource Serv. Co., Inc., 130 Idaho at 881-82, 950 P.2d at 253-54 (citing Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564, 569 (1967)). It would be nonsensical to evaluate commonality based solely upon Gertsch’s representations, when the truth of those representations is directly under attack by way of a fraud charge. Securities laws are designed to help ensure that a potential investor is adequately informed when dеciding to invest and is not duped into believing that an investment is risk-free. See Howey, 328 U.S. at 299, 66 S.Ct. at 1103, 90 L.Ed. at 1250. As noted by the Seventh Circuit Court of Appeals, “[i]t would be a considerable paradox if the worse the securities fraud, the less applicable the securities law.” S.E.C. v. Lauer, 52 F.3d 667, 670 (7th Cir.1995). Consequently, it is the true nature of the scheme, as opposed to Gertsch’s characterizations or representations, that is the benchmark for the analysis.
Gertsch was in truth soliciting money as part of a “Ponzi” scheme. “Generally a Ponzi scheme is a phony investment plan in which monies paid by later investors are used to pay artificially high returns to the initial investors, with the goal of attracting more investors.”
In re Bonham,
229 F.3d
The record contains sufficient evidence to support a finding that vertical commonality existed between Gertsch and her victims, in satisfaction of the common enterprise prong.
3. Reasonable expectation of profits to be derived from the entrepreneurial or management efforts of others
Under this prong of the Howey-Forman test, profits are generally defined as either “capital appreciation resulting from the development of the initial investment ... or a participation in earnings resulting from the use of investors’ funds.” Forman, 421 U.S. at 852, 95 S.Ct. at 2060, 44 L.Ed.2d at 632. Those profits are derived from the efforts of others, and the third prong is therefore satisfied, if “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” S.E.C. v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir. 1973). Here, Gertsch’s efforts were essential ones affecting the failure or success of the enterprise, and the investors were expecting a participation in earnings resulting from the use of their funds in some “account” or “business.”
Gertsch again stresses, as to this prong, the view that the transactions in question were more akin to bank loans than capital investments. Specifically, she argues that the combination of an unconditional promise to repay and a promise of a fixed rate of return absolutely precludes a finding that the investors sought profits.
However, in United States v. Carman, 577 F.2d 556, 563 (9th Cir.1978), the court held that investment contracts existed despite the fact that the transactions earned unconditional promises to repay and fixed rates of return. In that case, a trade school sold Federally Insured Student Loan (FISL) notes to a credit union, accompanied by promises to service the loans and to buy back some of the notes upon adequate notice. There was no argument that the notes themselves were securities under the “note” component of the federal act’s definition of a security. Id. Instead, the court focused on the transactions between the trade school and the credit union in their entireties, including the service and buyback promises, in order to determine whether they constituted investment contracts. Id. The court held that the transactions were investment contracts, noting that the transactions placed the credit union in a passive role and that the credit union’s success was dependent upon the trade school’s ability to maintain its accreditation for FISL packages and its continued ability to pay loan refunds to students who dropped out prior to completing their schooling. Id.
Observing the economic realities of the transactions at hand, the investors expected a return on their money akin to an investment return. The investors testified that they never employed their own management skills to the funds. They testified that they were never under the impression that the funds were commercial loans or loans for Gertseh’s personal use. The investors relied upon Gertsch’s efforts, and they were completely passive with regard to attracting new investors and securing payment from those who had promised to invest. They incurred substantial risk, despite the promise of a fixed rate of return. Although the promise of a fixed rate of return could preclude a finding of an investment in some circumstances, the extremely high rate promised by
The record contains sufficient evidence to support the jury’s finding that the investors sought the return of profits to be made from the entrepreneurial or managerial efforts of others.
B. Gertsch’s Conviction And Sentence For Racketeering Are Vacated, But Her Conviction For Monеy Laundering, Under
The State has conceded that there was no “enterprise” to support Gertsch’s conviction for racketeering under
Gertsch was charged with money laundering in violation of
It is unlawful for any person to knowingly or intentionally direct, plan, organize, initiate, finance, manage, supervise, or facilitate the transportation or transfer of proceeds known by that person to be derived from a pattern of racketeering activity as defined in section 18-7803(d), Idaho Code, or a violation of the provisions of chapter 27, title 37, Idaho Code.
However,
... engaging in at least two (2) incidents of racketeering conduct that have the same or similar intents, results, accomplices, victims or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated incidents, provided at least one (1) of such incidents occurred after the effective date of this act and that the last of such incidents occurred within five (5) years after a prior incident of racketeering conduct.
... any act which is chargeable or indictable under the following sections of the Idaho Code or which are equivalent acts chargeable or indictable as equivalent crimes under the laws of any other jurisdiction:
.... diction:
(13) Securities (sections 30-1403 , 30-1403A, 30-1404, 30-1405, 30-1406, 30-1438 and 30-1439, Idaho Code);
Because we affirm Gertsch’s securities convictions under
C. Gertsch’s Claim That Her Due Process Right To A Fair Trial Was Violated Will Not Be Addressed For The First Time On Appeal.
Gertsch argues that she was deprived of her due process “right to a fair trial” under the Fifth and Fourteenth Amendments to the United States Constitution, and Article 1, section 13 of the Idaho Constitution, when the victim/witnesses were allowed to remain in the courtroom while other witnesses were testifying and when the State’s expert witness testified as to “matters of law.” The State’s expert testified аs to the scope of securities disclosures required by law as well as the definitions of “enterprise” and “securi
Gertsch’s argument that victim/witnesses should have been excluded runs contrary to those victims’ constitutional right to be present at Gertsch’s trial. “A crime victim, as defined by statute, has the following rights: ... (4) To be present at all criminal justice proceedings.”
Gertseh never objected to these occurrences, and she did not move the trial court for any affirmative relief based upon them. “The longstanding rule of this Court is that we will not consider issues that are presented for the first time on appeal.” State v. Robbins, 123 Idaho 527, 529, 850 P.2d 176, 178 (1993). Gertseh cites Robbins for the proposition that the denial of due process is a fundamental error that may nonetheless be presented for the first time on appeal.
In Robbins, this Court explained that it “will consider fundamental error in a criminal case, even though no objеction was made at trial.” 123 Idaho at 529, 850 P.2d at 178. The Court explained that fundamental error is “[a]n error that goes to the foundation or basis of a defendant’s rights.” Id. The Court found that the imposition of a vindictive sentence on remand was fundamental error. Id. at 530, 850 P.2d at 179. The Robbins Court relied on State v. Kenner, in which this Court held that a violation of a defendant’s privilege against self-incrimination was fundamental error going to the foundation or basis of a defendant’s rights. Robbins at 530-31, 850 P.2d at 178-79 (citing State v. Kenner, 121 Idaho 594, 597, 826 P.2d 1306, 1309 (1992)).
In this case, Gertseh points to no controlling authority for the proposition that allowing witnesses to remain in the courtroom to observe the testimony of other witnesses affects the foundation or basis of her due process right to a “fair trial” in the same manner as the violations of a defendant’s privilege against self-incrimination and right to be free of vindictive sentencing, found in Robbins and Kenner. The jury was present to observe the testimony and demeanor of all of the victim/witnesses and to judge their credibility, taking into consideration the amount, if any, by which their testimony may have been influenced by a desire to characterize the transactions in accordance with the expert’s testimony or to harmonize their testimony with that of prior witnesses.
Neither has Gertsch pointed to any controlling authority for the proposition that expert testimony that touches on a matter of law affects the foundation or basis of a defendant’s rights. She had the right to confront and cross-examine the expert to demonstrate the impropriety or inaccuracy of his testimony. Moreover, the district court instructed the jury as to the law regarding the matters the expert testified about, and he made it clear that his instructions were the only interpretation of the law that the jury was to apply to the case.
Gertsch cites
State v. Hester
in support of her argument that the expert’s testimony regarding the definition and existence of a security imprоperly invaded the province of the jury. 114 Idaho 688, 760 P.2d 27 (1988). In
Hester,
a case dealing with lewd conduct with a child, this Court held that the expert testimony of a psychologist and a social worker improperly invaded the province of the jury, insofar as they testified as to their
Neither the presence of victim/witnesses during trial, nor the un-objeeted-to testimony of the State’s expert witness, affected the foundation or basis of Gertsch’s rights in this case. Therefore, this Court will not address these issues for the first time on appeal.
D. The Indictment For Money Laundering Will Not Be Vacated Due To Defects In The Racketeering Indictment.
Gertsch argued in her original brief that her racketeering and money laundering convictions should be reversed due to defects in the racketeering indictment. This argument is irrelevant with regard to the racketeering conviction because the State has concedеd that the racketeering conviction should be reversed for lack of evidence. As to the money laundering offense, Gertsch’s argument was based on her theory that the money laundering conviction could not stand if the racketeering conviction was reversed due to a faulty indictment. As noted above, the money laundering conviction can be upheld independently of the racketeering conviction. Consequently, any defects in the racketeering indictment are irrelevant to the money laundering conviction.
E. Gertsch’s Sentences Are Affirmed, Except For The Sentence Related To The Racketeering Conviction.
Because we vacate Gertsch’s racketeering conviction and the related sentence, the longest of the remaining concurrent sentences is ten years with three years fixed.
Gertsch argues that her sentences are unduly harsh, and therefore an abuse of discretion, in light of her age, as well as her “prior history of compliance with the law and also the extraordinary stresses she was under prior to and during the time” of the offenses.
Where a sentence is within the statutory limits, the appellant bears the burden of demonstrating that it is a сlear abuse of discretion. To constitute an abuse of discretion, the sentence must be shown to be excessive under any reasonable view of the facts. A sentence is reasonable if at the time of imposition it appears necessary to achieve the primary objective of protecting society and to achieve any or all of the related goals of deterrence, rehabilitation or retribution applicable to the given case. For the purpose of sentencing review, this Court considers the minimum period of incarceration to be the probable measure of confinement.
State v. Lundquist, 134 Idaho 831, 836, 11 P.3d 27, 32 (2000) (internal citations omitted). Gertsch must show that a minimum term of confinement of three years is unreasonable and therefore an abuse of discretion. The evidence showed that Gertsch had told a long string of lies in order to convince people to give her money for an alleged investment program. Eventually, she deprived her victims of a total of approximately $130,000. Some of the victims were facing “extraordinary stresses” akin to those Gertsch claims to have been facing. She convinced many of the victims to cash in their retirement accounts and college savings accounts held for their children. Some victims completely exhausted their credit card limits by way of cash advances in amounts exceeding $10,000, at an annual interest rate of 36%.
Gertsch has failed to meet her burden to show that her three-year minimum sentence is excessive under any reasonable view of the facts. She has not shown that her sentence fails to serve the objective of protecting society or fails to achieve any or all of the related goals of deterrence, rehabilitation or retribution.
IV.
CONCLUSION
The record contаins sufficient evidence to support the jury’s finding that Gertsch sold investment contracts. Gertsch’s racketeer