*1
No. 27096. Supreme Court of South Carolina.
Heard Oct. 2011. Decided Feb. 2012. Rehearing April Denied *2 Mathias, Wilkins, E. and Andrew William W. Kirsten Small Pruet, Greenville, for Appellant. all of Nexsen of Wilson, Alan
Attorney Deputy Attorney General Chief Gen- Assistant Attorney eral John W. McIntosh and General Wil- Blitch, Jr., Columbia, Respondent. liam M. all of Justice PLEICONES. three criminal securi charged with offenses:
Appellant 35-1-501(3) § (Supp. ties fraud violation of S.C.Code Ann. 2010);1 false or statements to the making misleading § Commission in violation of Ann. 35-1- Securities S.C.Code and criminal in violation of (Supp.2010); conspiracy (2003). § Ann. 16-17-^110 He S.C.Code was convicted fraud, securities a false acquitted making misleading statement and and received a sentence. conspiracy, five-year appeals, alleging judge He now the trial abused his discretion investors, in permitting testimony from that he erred in motion, denying appellant’s directed verdict he com mitted reversible error in affirm. charging jury. We
FACTS Appellant and several other businessmen invested in a in the 1970s that leased That company railroad box cars. eventually declared but with company bankruptcy, emerged (DTA). DTA, one asset: a deferred tax asset This which could carried on a future company’s be forward books to offset profits, depending company fluctuated value on whether the a This anticipated making profit. post-bankruptcy company 1991, In acquired was known as NRUC. NRUC Pickens- (Cl). Investors, based Inc. company, Carolina 1963, had been founded in for the originally purpose Cl Cl, cemetery loans to individuals making purchasing plots. which was funded notes and subordinated debentures sold investors, exclusively eventually to South mak- began Carolina and, 1970, in non- ing small household loans was involved conforming Non-conforming and sub- subprime mortgages. are made to who cannot prime mortgages persons qualify regular (conforming) mortgages: non-conforming mortgages statute, Appellant actually predecessor under the 1. indicted 35-1-1210(3) (1987), repealed § re- S.C.Code Ann. which was and 1, 35-1-501(3) placed by January § effective risk of reflecting greater interest rate carry higher default. investors to redeem their allowing had a policy
Cl maturity time fifteen minutes’ any prior debentures at notice, at a interest rate. Cl’s investments albeit reduced insured, it but because made loans to federally were not required by who could not meet the credit standards persons lenders, average than mortgage paid higher conforming the notes and debentures. interest rates on later Emergent renamed and subsequently NRUC was (HGFin).2 HGFin, the parent company, HomeGold Financial subsidiaries, a number of other financial one of acquired which, HomeGold, (HGInc), subprime Inc. became a lender. Thereafter, monies through while Cl continued raise debentures, sale of notes and those funds were loaned to subsidiaries, to ex primarily HGFin and its other and used business of those pand operations pay expenses business entities. 1995-97, very were
During period companies HGFin went itself of profitable. public, divesting HGFin financial services becoming pure several subsidiaries 1997, HGInc, entity. subsidiary, In late lender subprime leader, lost its who took much of his team with him. That loss, with a worldwide credit crisis caused coupled losses. In an effort to recover HGInc to suffer enormous viability, economic HGFin sold most of its other financial subsidiaries, keeping only service HGInc and CL From until declared bankruptcy HGFin HGFin HGInc3 operating profit. never had an The retail relies on “warehouse mortgage lending business large Essentially, lines” from lenders in order to operate. *4 warehouse lines the for the provide working capital lending business, lines, stability and the of those which is dependent lender, large the bank’s confidence the is critical to upon mortgage lender’s business. company parent 2. We will refer to the as HGFin for the remainder of opinion. bankrupt- 3. HGInc was sold to EMMCO before HGFin and Cl's 2003 cies. In efforts to with keep operational, its HGInc hope (the could to all the monies loaned to repay Cl Cl HGInc debt), intercompany HGFin shrank both the number of sub- sidiaries and the operational aspects Eventually, HGInc. began merger partner HGFin to look for a for in order HGInc to save the business. After merger prospects several fell Carolina, through, HGFin settled Lexington, South HomeSense, subprime lender called which was owned Ronald who at the time Sheppard. Appellant, between merger HomeSense and HGInc was CEO of both HGInc, HGFin and chairman of the board of both HGFin HGInc, board, and on Cl’s was the leading proponent of the HomeSense merger. First, was not a merger HomeSense-HGInc success. diligence completed merger
due after the demonstrated that significantly HomeSense had overstated its net worth. HGInc a mutual Sheppard subsequently indemnity canceled agreement in exchange Sheppard’s remaining guarantor Second, on certain HomeSense debts. to Sheppard proved be an leadership style abrasive leader whose and aggressive a number of accounting maneuvers caused HGInc and HGFin placed officers and executives to leave. also Sheppard person- al on the books to expenses company using HGInc subsidize his extravagant lifestyle. the merger, appellant employee,
After ceased to be an but boards, remained as chair of both the HGFin and HGInc remained on He supplied Cl’s board. continued to be with an office, assistant, salary. an administrative and a Over next three the financial years, decisions made on behalf of resignations by HGInc resulted numerous and oth CFOs addition, ers. the HGInc-HomeSense merger permitted (CIT) largest HGInc’s warehouse lender to end the relations line, As a result of the loss of hip.4 CIT’s warehouse HGFin woes, and HGInc’s continued financial and their reliance on Cl business, money investor it became stay increasingly difficult for warehouse HGInc obtain sufficient lines to fund its loans even as it to increase its share of the began subprime market. mortgage struggle HGFin and HGInc continued to 4. The contract between HGInc and CIT allowed lender to end the relationship upon change corporate in HGInc's structure. *5 among companies the debts and assets began moving
and to hide its financial difficulties. order the fact on predicated large part was defense Appellant’s by- were place approved maneuvers that took that the financial Firm vetted and auditors, Wyche that the Law outside filings pro- companies’ governmental all of the approved above, jury acquitted appellant As stated spectuses. misleading statements State Securities making false auditors’ how- approval, Reliance the outside Division. auditors ever, agreed For the outside misleading. example, DTA from million to an increase in the value of the $12 $22 to million, in HGInc’s unaudited third urged by appellant, as testified, however, that had he The auditor quarter 10-Q. made change being in valuation was been told that this in that equity to net positive because HGInc needed show licenses, mortgage in order for it to renew its state quarter a red and alerted flag” that information would have “raised finances. him to the nature of HGFin’s precarious CIT, while the auditor was aware that HGInc’s Similarly, lender, withdrawing was its line of credit warehouse largest the auditor was never told following merger, HomeSense lender had told and others that that this secured to be because it “didn’t want ending relationship was lady County during in front of a little old Pickens standing this information would have bankruptcy proceeding.” Again, auditors, that a secured indicating a red for the flag raised Moreover, fearful of financial worth. creditor was HGInc’s there was evidence that the auditors were not informed management in violation of their regulatory inquiries, certain letter. time, the in the retail only thing keeping
Over HGInc business was the influx of cash from Cl investors. mortgage Cl, 1999, debt, to In owed HGInc intercompany 2000, million; 2001, million; in the end of about $67 $100 million; more than million. year and at end $243 $144 concerns over By expressed grave the outside auditors debt to Cl and its ability repay intercompany HGInc’s to concern, number they remain a criticized a ability going to continued to of its decisions. HGFin and HGInc accounting that the com- overly projections suggest rely optimistic viability. could recover October auditors panies an valuation of independent HGFin obtain HGInc intercompany to determine whether the debt between HGInc *6 be as An reported “impaired.” impairment and Cl should by fully an the auditors that the borrower cannot opinion repay its debt. 2002, 14, they March the auditors told HGFin that
On a concern” in 2001 audited place “going paragraph HGFin’s A concern” is an “going paragraph financial statements. the in a of doubt whether business will still exist expression Moreover, rejected the accountants a valuation of year. CBIZ, which impairment purposes for debt done HGInc million. approximately had valued HGInc’s net worth $170 then valuation from De- impairment HGFin ordered a loan Touche, at between loitte and which valued HGInc $130-$140 auditors, was the but accepted by million. This valuation the 2001 stood at year-end approxi- because debt owed Cl million, the were mately report auditors $144 result, a intercompany impaired. loan was As HGFin’s con- “going 2001 audited financial statement included both for the impairment” opinion cern” statement and a “loan opinion outside auditors. This stated that impairment repay auditors had determined that HGInc could not $6.7 debt owed to year-end million of the million Cl. $144 acknowledged “going In the Cl April prospectus outside auditors and the loan opinion concern” of HGFin’s but also referred to the CBIZ and Deloitte valua impairment, the terms of the tions. Inclusion of these valuations violated and the two which companies, pro contracts between HGFin were to be public the valuations were not for use and vided loan solely reporting purposes calculating used for financial that the inclusion Although there was evidence impairment. these valuations was to the extent improper misleading HGInc, these price a reliable market for they suggested by Wyche in the were prospectus approved references Cl firm, for and its subsidi which did the securities work HGFin the refer Wyche attorneys they approved aries.5 testified valuation, rejected been though ence to the CBIZ even had making misleading acquitted of or 5. Recall that false Securities Commission. statements to auditor, of both the outside and to the inclusion CBIZ in the as indicative of HGInc’s prospectus Deloitte valuations use, value, of the limitations on their light explicit even view of a material fact. theory management’s it was a run on Cl Throughout struggled. Following HGFin board, which appel- the HGFin from deposits August as chairman in June 2002 but remained as resigned lant had member, attorney. meeting with a This bankruptcy met be in a conser- placed included a discussion whether Cl should was also on Cl’s board. vatorship receivership. Appellant Cl, who were both on only appellant Sheppard, As for board, were aware of this at which the future of meeting Cl’s was discussed. Cl mid-2002, for a begun buyer HGFin had search
HGInc, the retail HGInc’s warehouse mortgage operation. *7 going were reduced or withdrawn as a result of the being lines concern and the loan in the com- opinion impairment opinion officers misled pany’s financial statement. HGFin Cl’s into that outside were inter- believing legitimate buyers board business, ested in when in fact purchasing mortgage HGInc’s no viable deal could be found. Recall that was on appellant 2002, both the board and board. In November HGFin Cl’s agreed Sheppard corpora- the HGFin board to allow to form (EMMCO) buy subprime mortgage tion to HGInc busi- ness, talking receivership about a for Cl. began possible resigned juncture. from the HGFin board at this Sheppard board members who were not also on board Cl HGFin’s plan were unaware for several weeks of this November 2002 to sell to the new business venture. Sheppard HGInc was that
Although Cl board told HGFin HGInc 2002, money were no from in in fact longer taking August Cl keep HGFin continued to use these funds to HGInc busi- 2003, January ness. In asked two board mem- Cl Owen, bers, Earle him a Larry Morris and to meet at restau- Appellant rant. told Morris and Owen HGFin into but minimized the In looking bankruptcy, possibility. Owen, February Larry president of Cl and one of the meeting, Cl board members who was restaurant that, fact, from the learned state securities division HGFin using money was still Cl investors’ to fund obli- HGInc’s gations.
In March matters came to a head. the week During 17, 2003, of March was monitoring money HGFin Cl’s situa- made, closely, tion requiring frequently report deposits Cl and transferring money only as needed for Cl to investor pay board, redemptions. a March 20 call to the Karen Cl Miller, HGFin, then CFO for told the board that Cl HGInc money very should have available soon that ease Cl’s cash flow issues. who had on the Appellant, remained Cl board, resigned night. At 9 am on March Miller $84,000 called and informed that it only Cl would have for the day, and scheduled another board call for 2 pm. Cl At that call, the pm Cl board was informed that was filing HGFin bankruptcy, and that Cl needed to find an attorney repre- sent it. Both Cl and HGFin ceased on that operations Friday, subsequently and both declared bankruptcy.
ISSUES 1) Did the trial court err in five permitting Cl investors to
testify? 2) Did the trial court err in denying appellant’s directed
verdict motion? 3) Did the trial err in charging jury? court
ANALYSIS 1. Investor Testimony
Appellant permitting contends the lower court erred five *8 investors to This not testify. preserved appel- Cl issue is late review.
The contains a partial transcript hearing record from In Judge September before Johnson on 2007. the course of transcript, Judge apparently reviewing this Johnson is pretrial motions, that he him a and states has before motion to exclude testimony.” Judge some “kind of invested Johnson then [sic] says testimony that “a determination of whether or not the investor is relevant and I don’t being by particular tendered know that I can make that all without what hearing at that rule on the motion is” and declines to
testimony juncture. Trial includes “Defendant’s Confidential
The record also to presented This brief was Cottingham Only.” Brief for Judge February the trial commenced on before Judge Cottingham this section: 2009.6 This document contains Testimony Investor testimony from likely attempt will to introduce State money of invested who lost substantial sums individuals However, it appears the notes and debentures of CII. ever testify they these investor witnesses will none of about their Sterling with Jack spoke corresponded to trials, witnesses testified In related previous investments. by Larry made to them misleading to false and statements heart- provided Earle Morris. The investors also Owen and of their losses. The testimony impact about the wrenching objection testimony to such is stated our defendant’s Prejudicial Inves- Unduly Motion to Exclude Irrelevant and on 2007. Testimony August tor filed Rule of the Rules summary, under South Carolina Evidence, to introduce permitted of should not be State prejudicial testimony emotionally charged highly dealings Sterling. who had no with Unless investors than a something merely speculative more proves and the false statements of Sterling connection between others, testimony probative Sterling’s guilt. is not is to to the amount of prepared stipulate Since defense bankruptcy losses from the of CII and flowing investor HomeGold, any testimony value of from an inves- probative dealings Sterling vastly outweighed tor who had no with seriously which would unduly impact, its prejudicial to a fair trial. jeopardize Sterling’s right any objection no mention of this nor There is document Shortly in the record. before this case any testimony investor attorneys filed appeal, appellant’s appellate was to be heard a motion to the record with the affidavit of his supplement without attorneys, granted prejudice trial which this Court Judge passed away Johnson before the trial.
609 testimony to the investors’ was objection our to find no right for The of this affidavit is appeal. gist preserved (1) 26, 2009; January the confidential trial brief was filed (2) trial, to call investor wit- proposed at when the State
nesses, objected trial to the admis- “strenuously counsel one such in-chambers testimony during sion of their ” meeting.... (1) objection not: when the was clarify This affidavit does trial, testify did not renewed at and since Cl investors whether one or impossible it is to determine sequentially, (2) objection; specify arguments testified without what more (3) motion; or reflect the basis were raised in this in camera the trial court’s ruling. a) Relevance of the inves argues testimony that the Cl
Appellant he the intent question tors was irrelevant to whether had them, as had never met or with him. they spoken to defraud However, that at least one prove the State was convicted, if his sen money, investor lost lost. money tence would be determined the amount See 35-l-508(a) §Ann. investors’ (Supp.2010). S.C.Code Cl “wholly not irrelevant.” testimony was b) Impact evidence antici in his brief that the
Appellant argued
pretrial
of those
testimony
impact
of the investors about
pated
lives,
with the
of the amount
coupled
testimony
losses on their
losses,
should
prejudicial
probative
of the
was more
than
under Rule
We
agree
therefore be excluded
SCRE.
it
of the
is irrelevant to
appears
impact
appellant’s
evidence
in this situation it is critical to know
charges,
criminal
but
exactly
Rule
was and
exactly
argument
what
appellant’s
permitted
the trial
exercised his discretion and
this
why
judge
testimony.
testimony
it
that the Cl investors’
appears
While
pecuniary
have been limited to the amount of their
should
losses,
to limit their
appellant sought
there is no evidence
Rather,
record,
testimony
appears
in this manner.
from
testifying
that he
to exclude these witnesses from
sought
record,
find
error in the
any
all.
this
we are unable to
On
to disallow
deny appellant’s request
trial
decision to
judge’s
testimony. E.g.,
Freiburger,
investors’
State v.
the Cl
*10
(2005)
(appellant’s
present
At the close of the made the State’s directed verdict motion: Honor, time, your At this we’d move for
Attorney: counts, all three but particularly directed verdict on filing the count of the letter to the Securities [state] course, Commission, it clear from the in the because was State, most favorable to the that from all their light witnesses all we’ve heard is that that letter was run firm, Wyche testimony may there was the letter have firm, advice of by Wyche been authorized no doubt reliance, counsel and valid reliance on advice of counsel fully with informed counsel. asking
The Court: You’re for a directed verdict as to what count? two, your Count honor.
Attorney: two, The be to hear glad you. Court: Count from you, your The Thank honor. I think Keith State: Giddens7 said it was I think all we misleading go that’s need to jury. The The fact Court: Yes. that there is some evidence from jury
which the will consider as I rule on the motion for verdict, weight directed not the of it. I conclude that totality based on the of the facts that there is sufficient counts, one, go evidence to forward on all two and three. Honor, Attorney: you Your revisit that? We’ll make appropriate motions at the end of the full case. it, The No question you’re Court: about entitled to have revisited in full. you, Thank Honor.
Attorney: your began purchased 7. Giddens work at Cl when it was HGFin, president Emergent then HGFin’s COO the time of merger merger. with HomeSense. He left after the The And I can handle it better at that time after Court:
hearing anyway. defense Yes, Attorney: sir.
At the end of the testimony, following exchange oc- curred:
The Court: All sir. motions from the right, Any
this time? State, None from the Honor. your State: Any
The Court: from the defendant? Honor, Your our Attorney: we’d renew motions we made earlier at the end of the case for a State’s directed verdict. motions,
The Court: I those and for the reasons accept stated, previously you concluded that the issues to which *11 refer are questions jury. you of fact for the As well know, counts, testimony if there’s some on these various that I’m to send it obligated jury. jury’s to weight concerned with the of it. And there is sufficient evidence in the go case to forward. Your motions are respectfully denied. Thank Honor.
Attorney: you, your Honor, Your I add one more motion Attorney: may Second [Attorney’s] to motion? Yes,
The Court: sir. two, As to count we want Attorney: specifically Second to ask the to dismiss count two regarding Court false state- ments to on the grounds the[state] Securities Commission allege that the indictment failed to the essential element willfulness, grand jury pass did not element, essential and therefore it’s not a criminal offense and the count should be dismissed. motion, your
The Court: I and as I looked at anticipated one, count two count and count one specifically designates part the word “willful.” And count one is a of count two. you Would like to be heard on that? incorporate previous paragraph
The State: Yes. We did in the count. incorporated
The Court: That is there and the word thank call- Again, you “willful” is contained therein. 612 attention, for the reasons but that motion my that to
ing denied. stated also is respectfully denied where there is properly A verdict is directed evidence, circumstantial, reasonably tends which any direct Brandt, v. 393 S.C. guilt. the defendant’s State prove to (2011). a denial of a directed reviewing 591 When 713 S.E.2d all reason verdict, court views the evidence and appellate “an Id. in the most favorable State.” light able inferences omitted). motion, (citation A directed verdict howev general er, Bailey, issue for State v. preserve any appeal. does not (1989). 581 S.C. S.E.2d trial, for which identified only appellant
At count 2, one of the two in the case was count deficiencies State’s proper There is no charges acquitted. of which concerning preserved count 1 for our directed verdict issue case, Bailey, supra. any proper review. had State made, have been denied. Appellant’s motion been it should ways alleged numerous in which he is specifies indictment 35-1-501(3). appellant’s § have In order to withstand violated only need have directed verdict motion on count any allega evidence to one of these presented support some tions. 32(i) alleges appel- of the indictment that after
Paragraph were going place lant learned that the outside auditors statement and loan in HGFin’s going impairment concern statement, which then be includ- audited 2001 financial ed in he prospectus, Cl’s [Cl], officers,
... employees met with directors and *12 securities, in an several of which were investors in [Cl] the com- downplay negative concerning effort to information a efforts to pany put positive spin speculative and [HG]’s misleading return to knew the profitability. [Appellant] officers, employ- information shared with the directors and be to or current potential ees of disseminated [Cl] investors in securities. [Cl] below, the evidence that explained presented appel-
As lant, ... in ... indirectly an act “directly engage[d] another in person” ... as a fraud or deceit operatefd] 35-1-501(3) meeting. with this § violation of connection Owen, board member of long-term and Larry president Cl, to “embellish” pressure testified that he felt enormous would contain both prospectus once he learned the 2002 Cl loan statements. asked impaired Appellant concern and going with the Cl board members and up meeting Owen to set decided that the Cl early April Appellant Cl’s staff (“investment counselors”) who dealt with Cl’s cus employees to them understand how summary help tomers would need and discussed the explain prospectus.8 Owen document, included in this which Owen information to be wife at the typed up meeting. and his handed out Owen, meeting. and an HG officer at this Appellant, spoke The investment counselors were told to play up positives including in the the valuations done CBIZ and prospectus, financial Recall that valua- Deloitte of HGInc’s worth. these tions were restricted to use to determine specifically private As of the impairment only. explained, point loan Owen memorandum and were to and minimize the meeting simplify financial information in the because: negative prospectus know, there money most of our counselors had [Y]ou there their friends had money money their families had just conveyance there and I knew if of some- slightest it thing negative spilled, like that was then could cause run. the memorandum
Appellant helped prepare discussing contents, and he was at and present participated most of its in the There that the of the meeting. purpose was evidence and the memorandum was to divert the April meeting (including attention of investors the investment counselors by directing from the news in the present) grim prospectus having and valuations after optimistic projections out the concern pointed impairment going paragraphs. Indeed, that she left the an investment counselor testified was not “feeling going language concern meeting dire,” it had something part that was that at least because if for the emphasized appraised been that HGInc were sold Rose, member Porter once Chief Investment 8. Former HG Board firm, private equity Liberty partner current in a Officer for Life and company explain prospectus to testified that it is unlawful for a its investors. *13 614 Deloitte, or Cl investors upon
values CBIZ placed her in full. This investment counselor left paid would be Cl, $80,000 in and lost it all when the business closed. any to withstand sufficient evidence presented State jury as the could have directed verdict motion on count misleading knew the found from this evidence would be April meeting information he shared at the 2002 ¶ 32(i). in charged to “investors” as disseminated verdict any did not directed Appellant properly preserve Moreover, supra. motion as to count 1. v. as Bailey, State in as a operated there is evidence that he an act that “engaged § another in violation of 35-1- upon person” fraud or deceit raised, 501(3), have judge had the issue been the trial denying been correct in a directed verdict on count 1. Charge 3. Jury law makes it unlawful an
South Carolina individual act, directly indirectly “engage practice either or in an or operates operate course of business that or would as fraud offer, with person or deceit another connection 35-1-501(3). sale, § An purchase security.” or of a individual willfully punished who violates this statute is accordance 35-1-508; § § with the of cmt. provisions see 35-1-501 “The to be or under culpability required pled proved section e.g. 501 is addressed in the relevant enforcement context ... ” ... proven.... section 508 where “willfulness” must be § is willful within the if the meaning Conduct 35-1-508 is, person intentionally, acts he is aware of what he is doing. person Willfulness does not that the act with require law, an evil motive or with the intent or that the knowledge 35-1-501(3), § § being this case violated. 35-1-508 cmt. 2. Thus, in order to violate the statute there must be evidence that the willful defendant’s conduct was or intentional 35-1-508) (§ something and that he did that would or did (§ 35-1-501). as a fraud or deceit on another operate person or intent that Knowledge his conduct violated securities (cmt.2, law supra) present is not but the State must that the evidence defendant made statements committed that he knew an inves presented danger misleading acts (2008). Morris, tor. 359 S.C. S.E.2d Morris, approved jury charge this Court on mens rea under *14 jury these code sections that informed the it could find the defendant if it found he committed miscon- guilty knowingly duct, or if his actions a of “presented danger misleading or sellers that is either known to or is so buyers [defendant] obvious that must have been aware it was [defendant] [that in misleading].” charging jury We found no error the that it if guilty misleading could find defendant his acts were is, reckless, either intentional or knew severely he his conduct could mislead investors. Id.
Appellant’s jury charged: material element prosecution of the securities fraud
[A] the demonstration of the existence with is called [sic]what scienter. Scienter is a mental state intent to embracing deceive, or defraud. Mere will not manipulate negligence suffer for conviction. Allegations of scienter must be [sic] based on a substantial factual create basis order to [sic] inference that the defendant acted with the strong required state I required charge you of mind as would further [sic]. may showing that scienter be established a of knowing misconduct or severe recklessness. Proof of such reckless- require showing ness would a that the defendant’s conduct was an extreme departure ordinary of care which [sic] present danger a or sellers that misleading buyers is known to the defendant or is so obvious that the defen- have dant must been aware of it. objected to the
Following charge, appellant severe recklessness as it related to count one on the language ground (1) charge statutory is inconsistent with the definition of (2) authority; effectively intent and conflicts with federal lowers the burden of proof, violating right both defendant’s objection to a fair trial and due was overruled process. charge directly on the basis that the was taken from the case Morris, v. supra, recently State which this Court had objection affirmed. no further Appellant lodged charge, object jury nor did he to the trial court’s remedies when the clarification of the subsequently sought charge. §
We first address the issues raised at trial. Neither 35-1- ‘intent,’ § 501 nor 35-1-508 includes the word and we there- charge fore do not understand the contention that the Morris within our statutory definition. We are is inconsistent with for a the level of intent authority to determine because the did legislature violation of the securities statute Morris, supra; Jefferies, mens rea. specify any not (1994). Moreover, Morris, we 316 S.C. S.E.2d not Assembly specify that because the General did held law, mens rea for a violation of the securities we requisite decision to criminalize legislators’ should not weaken misleading of false or statements making types of these 201-202, standard of intent. Id. 656 S.E.2d imposing high at 366. Morris, making
In construed the statute it unlawful to we as a fraud or deceit engage operates conduct (§ 35-1-501) (§ 35-1-508) with the statute person another § that criminalizes an unlawful violation of 35-1-501. so *15 35-1-508, § comments to doing, guided by we were official that only person’s which informed us that willful means intentional, or was not that his state of mind was evil conduct § that he to violate 35-1-501.9 ‘Recklessness’ is one intended intent, ‘knowledge negligence.’ level of criminal as are Jefferies, supra.10 State v. (willfulness)
9. The dissent conflates the conduct standard with the mens Reid, 285, e.g., 2 rea standard. See State v. 383 S.C. S.E.2d 194 fn. 679 ("generally compo- (Ct.App.2009) a crime includes both an reus actus Here, component”). jury charged nent and a mens rea that Sterling only were have could be convicted if he found to acted "knowingly, intentionally, willfully.” jury charged was also accident, Sterling’s any that if conduct was done mistake or willfully, he What is at reason other than could not be convicted. issue Sterling intentionally, mental here is not whether acted but whether his is, Morris, state met the mens rea standard we created in know, that did he known, he that the informa- or was it so obvious that must have presented danger misleading buyers tion he disseminated a or sellers. standards and concludes The dissent conflates the rea conduct/mews person knowing operate that "A must therefore act his conduct will as a another, upon simply consciously disregard that fraud not the risk his may blending directly conduct do so.” This of conduct and mens rea is law or refuted cmt. "Proof of evil motive or intent to violate the knowledge being required” that the law was violated is not for a 35-l-508(a); § § criminal conviction under see also cmt. 6 35-1-501. charge expresses that the allows a 10. The dissent also concern Morris despite showing negligence, a conviction a of mere criminal specific charge negligence that mere is not a sufficient basis. The charge permits upon an accidental creation of Moms a conviction not
617
Jefferies,
higher
intentional connotes a
sense of
Under
Morris,
In
we
approved
awareness than mere recklessness.
recklessness.
equated knowingly
with severe
charge
criminal mens rea
severe recklessness is not a common
While
Morris,
standard,
severe reck-
charge approved
under the
escape liability by
lessness means
that one cannot
simply
eyes
one’s
to what would otherwise be obvious.”
“shutting
tenet of criminal law. See State v.
longstanding
This is
(1975).
Thompkins,
Appellant’s
S.C.
S.E.2d
not violate
definition of intent. Fur-
charge
any statutory
did
ther,
charge
we find no constitutional
in the
infirmity
ap-
addition,
in Morris and
here.
we note that
proved
given
argue against
has not
appellant
sought
Morris/Jeffer-
ies/Thompkins precedents. Finally, appellant’s reliance on
only
as we are
our
authority misplaced,
interpreting
federal
is
The trial
committed no error
judge
state securities statutes.
objections
jury charge.
to the
overruling appellant’s only
seeks to raise additional chal
appeal, appellant
On
jury
party may
It is axiomatic that a
lenges
charge.
change
grounds
objection
appeal. E.g.,
not
his
State v.
(1974).
262 S.C.
CONCLUSION Appellant’s conviction and sentence are AFFIRMED.
TOAL, C.J., BEATTY, J., and E. Acting Justice JAMES MOORE, HEARN, J., concur. concurring part in a dissenting part separate opinion.
Justice HEARN. I concur in I
Respectfully,
part
part.
agree
dissent
majority
Sterling’s challenges
with the
to the circuit
court’s denial of his motion for a
directed verdict and
admissibility
impact testimony
preserved
of investor
are not
However,
for review.11
I
with the
agree
argument Sterling
made at trial and in
brief that the
charge
his
court’s
lowered
rea for a
mens
conviction of securities fraud.
Nevertheless,
prejudicial
I am troubled
nature of the inves-
testimony regarding
impact
tors'
their
had
their
losses
lives
families.
*17
from our
given
Sterling’s jury
The
was culled
charge
Morris,
decision in State v.
376 S.C.
I that a material element of the fraud charge you securities what is the demonstration of the existence of is prosecution called scienter.12 deceive, a mental intent to embracing
Scienter is state Mere will not manipulate negligence or defraud. suffer [sic] for conviction. of scienter must be on a Allegations based strong substantial factual basis in order to create a infer- required ence that defendant acted with the state of mind as [sic].
I
you
may
would further
that scienter
be estab-
charge
by
showing
knowing
lished
a
of
misconduct or severe reck-
lessness. Proof of such recklessness would
a show-
require
ing that the defendant’s conduct was an extreme departure
ordinary
danger
care which would
of
present
misleading
buyers or sellers that is known to the defendant or is so
obvious
defendant must have been aware of it.
down,
jury
When broken
this
to convict
charge permitted
any
based on
one of three different levels of intent:
Sterling
(1)
(2)
misconduct;
conscious
of a known
knowing
disregard
(3)
risk; or
a risk that
should have
disregarding
Sterling
about,
objection
known
but
is
My
charge
did not.
First,
I believe the
charge approved
twofold.
Court
Morris
sanctioning
disregard
a conscious
standard was erro-
correctly charge
neous and thus the circuit court here did not
jury on the law of securities fraud
South Carolina.
the correctness of Morris
Second,
charge,
the circuit
assuming
court’s
in this case
a conviction
charge
permitted
an even lower mens
standard, which
“should have known”
rea
that sanctioned Morris.
than
I
therefore re-
verse and remand for a new trial.
Although
party
objected
no
has
to the circuit court’s inclusion of
fraud,
element
Court held the
scienter as an
of securities
Morris
"statutory
expressly
requirement.
this
376 S.C. at
scheme
forecloses”
below, however,
202 n.
I. Morris, that and intentional knowing In this Court held of securities fraud. for a conviction conduct is not that 35-1- was its belief Section holding grounded This 508(a) not (Supp.2010)13 did of the South Carolina Code intent. 376 at 656 S.E.2d necessary a level of S.C. specify Thus, reluctant to draw “extremely at was Court Id. However, prem this central such itself. [a] distinction[ ]” does, in ise to Morris is erroneous because section 35-1-508 a mens rea fact, states that expressly specify requirement: 35-l-508(a) §Ann. See S.C.Code willfully. must act person (“A this wil[l]fully chap that violates (Supp.2010) person ter....”). willfulness provide,
As the comments to section 35-1-508 in the sense intentionally that a acted requires “proof person she Proof doing. that the was aware of what he or was person the law or that knowledge of evil motive or intent to violate Id. cmt.2. not being required.” the law was violated is Willful- context goes ness this thus a purpose
no further than to denote that the actor had or omission, to commit a act or in which willingness particular that requirement specifically case there is no actor event, injure intended to violate the law or another. requires only prohibited the term “willful” that the act occur that a knows what intentionally, merely implies person doing, he or she is intends to do what he or she is doing, view, agent. is a free this the essence of willfulness is Under doing, that the actor be aware of what he or she is which is intentional, that his or her actions are in contrast to say that which is or accidental. thoughtless (2011). Law 130 Am.Jur.2d Criminal § 21 read with When 35-l-508(a) 35-1-501(3), section criminal- consequently section knowingly intentionally izes actions taken who person 35-l-508(a) prosecution 13. Section is the vehicle for criminal (Supp.2010). of Section 35-1-501 of the South Carolina Code violations 35-1-501(3), Sterling violating provides was indicted for section which offer, person, is unlawful for a in connection with the sale or "[i]t act, purchase security, directly indirectly, engage ... of a or in an operate practice, operates or course of business that or would as a person.” upon fraud or deceit another act, operates course of business that practice, in an engages person. as a fraud another
Morris, however, for securities fraud held that a conviction either misled intentionally will stand when the defendant danger or he “knew there was a that his conduct investors mislead investors.” 376 at 365. S.C. S.E.2d therefore of a recklessness-based con- approved Court there scious standard: the defendant knew disregard investors, proceeded risk his statements could mislead but he (“Recklessness § Criminal Law 127 anyway. Am.Jur.2d of a result subjective particular involves a realization of a risk it, not ignore and a conscious decision to but it does involve conduct, recklessly intentional because one who acts does not result.”); objective have a conscious to cause a see particular *19 315, 185, Rowell, also 487 S.E.2d 186 S.C. (1997) a failure that recklessness “connotes conscious (noting ordinary to exercise due care or care or a conscious indiffer- safety disregard ence to the of others or a reckless rights thereof’). Thus, convict required intentional conduct is not Instead, merely under this standard. the actor must be aware in them. yet engages his actions could mislead and still statute, charge of the I believe this my reading Based rea under section 35-1- does not state the mens appropriate 508(a). in Morris and the Contrary holding to the Court’s case, in this intentional and con- majority’s position knowing A must required person duct is for criminal securities fraud. his will as a fraud knowing operate upon therefore act conduct another, the risk that his simply consciously disregard not a may may persuasive conduct do so. While Morris have from person prohibited rationale in that a should be policy the it is not found in the acting danger, when he knows of of the statute. language conflates majority’s my analysis
As to the
contention that
for one’s conduct
concepts
the
of the mental state
rea,
I
meaningful
I do not
this as
see no
dispute
and mens
Indeed, the
reference
majority’s
difference between the two.
Reid,
194 (Ct.App.2009),
to State v.
383 S.C.
679 S.E.2d
law that most crimes
my position.
validates
It is hornbook
n.
both an actus reus and a mens rea. See id.
require
35-1-501(3)
n. 2.
provides
It be that our emanates from the confu- may disagreement sion occasioned the statute as to the nature of securities fraud. 2 to section 35-1-508 states that “[pjroof Comment knowledge evil motive or intent to violate the law or that the law was violated is not in a being required” prosecution however, 35-1-501(3), violations of section 35-1-501. Section act, in an prohibits “engaging] practice, or course of business operate or would as a fraud or deceit operates offer, sale, another when done “in connection with the person” Thus, security.” of a conduct purchase very proscribed 35-1-501(3) fraud, by section an act evil in which is *20 Anderson, 32, 329, itself. See v. 212 Ga. 90 S.E.2d 331 Huff (1955) (“It appears from the authorities to be the rule without that the offense of exception, obtaining money from another trust, or false pretenses, larceny fraud after are crimes se, malum in that a involving turpitude.”). Proving moral 35-1-501(3) conduct in contravention of section person’s (which intentional, willful, majority acknowl- knowing evil edges required) proof is therefore necessitates the of an sug- motive—an intent to deceive. section 35-1-508 Although not gests required, language scienter is section 35-1- 35-1-501(3) 501 necessitates 'fraud. Because section is the statute, more I believe it controls and intent specific necessary. defraud is
623 Accordingly, I believe Moms was wrongly decided and would reverse Sterling’s conviction because the charge given was taken directly from it. I also believe Sterling was preju- diced the court’s incorrect charge. my opinion, there is not “abundant evidence” that Sterling intentionally defrauded Rather, investors. there is a significant amount of evidence showing Sterling simply was blind to the risks he may have Indeed, juror taken. one sent a note to the court asking if Sterling could be convicted only recklessness, based on severe thereby arguably expressing his view that the State had not shown a course of intentional conduct.
II. Even if Morris did correctly hold that criminal recklessness is sufficient 1—508(a),14 under section I believe the Court 35— may have inadvertently sanctioned the use of a criminal negligence mens rea standard. The charge given in this case followed of Morris wherein the Court portion verbatim a quoted and tacitly approved of a charge which stated that a jury could convict upon finding defendant took steps “which present! danger of misleading buyers ] or sellers that is either known to [the or is so obvious defendant] that [he] must have been aware 201, of it.”15 376 S.C. 656 S.E.2d at suggest Some authorities do that this sort of criminal recklessness 14. satisfy can element for securities fraud. willfulness/intent See Cassese, 92, (2d Cir.2005); United States v. 428 F.3d 98 United States v. Tarallo, 1174, (9th Cir.2004); 380 F.3d Exchange Sec. & Comm’n Steadman, (D.C.Cir.1992); 967 F.2d 641-42 see also State v. Jarrell, 90, 98, ("Extreme 350 S.C. 564 S.E.2d (Ct.App.2002) indifference culpable the nature of ‘a mental state ... and state, therefore is akin to intent.' In this indifference in the context of compared criminal statutes has been disregard- conscious act of created, ing person’s a risk which a conduct has or a failure to exercise (citations ordinary omitted)). or due care.” But see United States v. (8th Cir.1998) (”[T]he O’Hagan, 139 F.3d provides statute negligent or reckless violation of the securities law cannot result in instead, liability; Morris, criminal willfully.”). the defendant must act however, viewed these wholly separate. levels of intent as If this interpretation 35-l-508(a), were adopted respect to be with to section may then correctly Morris have held that recklessness is sufficient even if it did so for a different reason. today’s majority approve The author of substantively did of this Morris, charge but he would not "endorse the instruction as a model *21 624 added). both accordingly This includes charge
365. (emphasis a “should have known” standard. a “known” and the that the of recklessness is notion concept Crucial to the risk, of the and one is not subjectively actor must be aware a risk he should have acting despite reckless for criminally words, § 127. In other 21 Law known. Am.Jur.2d Criminal an solely “cannot be liability predicated for recklessness ‘should have consideration of what a defendant objective ” criminal on the other negligence, known.’ Id. A hallmark of hand, have known about. a risk one should disregarding 162, 166, 473 818 Taylor, (Ct.App. 323 S.C. S.E.2d (“A 1996); person § 21 Law 126 acts Am.Jur.2d Criminal he or she should have been negligence with criminal when unjustifiable risk he or she has aware of substantial created.”). Thus, of the subjective knowledge a defendant’s 21 negligence. risk is irrelevant for criminal Am.Jur.2d Crim Hence, approved § Law of in Morris charge inal 126. negli includes both recklessness and the lower mens rea of gence.
However,
actually
I
not believe the Morris
intend
do
Court
rea
permissible
ed to
of criminal
as a
mens
approve
negligence
Instead, I
as
criminal
only
for securities fraud.
read Morris
may
that one’s conduct
acting
knowledge
with actual
izing
this
never
Apart
language,
mislead investors.
from
Court
Notably, after
negligence
again.
mentioned the
standard
wrote,
this “should have known” standard
Court
quoting
that in order to
differently,
charged
support
“Stated
the court
conviction,
jury
intentionally
needed to find that [Morris]
investors,
or that
knew that
there was
[Morris]
misled
Morris,
that his conduct would mislead investors.”
danger
Clearly,
at 365.
the Court believed the
656 S.E.2d
concerned recklessness.
It
charge
reviewing only
unintentionally
lowered the
accordingly appears
Court
the “should have known”
by implicitly sanctioning
standard
will sustain a
attempting
when
to hold recklessness
language
Jefferies,
conviction for securities fraud.16 See State v.
(Pleicones, J.,
charge.”
n. 12
affd (2010). 2896, 177 this charge 130 S.Ct. L.Ed.2d 619 While facts, I may be warranted under certain do not find them present Accordingly, charge in this case.17 the circuit court’s here did not state the correct law in South Carolina permitted jury Sterling to convict based on criminal negligence. conviction,
Even if for a I still enough recklessness find sufficient evidence in the record that not aware of Sterling was the risks he took to warrant a I finding prejudice. would Sterling’s therefore reverse conviction and remand for new trial.
III.
sum,
I
overrule
Morris and hold that intentional
knowing
conduct is
for a conviction of securities
charge given
Sterling’s jury
fraud. Because the
permitted
willfulness,
something
a conviction on
less than
I would re-
However,
assuming
verse and remand for
new trial.
even
correctly
Morris
held
recklessness is sufficient for crimi-
warranted,
17.
In order to be
the evidence adduced at trial must raise
"(1)
subjectively
high
two inferences:
the defendant
aware of
conduct;
(2)
probability
illegal
existence of the
the defendant
purposely
learning
illegal
contrived to avoid
of the
conduct.” Lara-
Velasquez,
may permit
Heard Jan. 2012. Decided Feb.