Wednesday, August 30, 2006
Court: Pyramid Scheme Program Violated State Securities Law
By TINA BAY, Staff Writer
This district’s Court of Appeal yesterday upheld the convictions of Mercedes and Felix Navarrete and Joan Frederick, founding members of the now-defunct local pyramid scheme called La Luz De Oro.
In affirming the convictions, Div. 6 among other things agreed with the jury’s finding that the scheme’s “co-dueno,” or “co-owner,” interest program amounted to the illegal and fraudulent sale of securities.
The co-dueno program provided that members would become co-owners of La Luz De Oro—meaning “The Light of Gold”—in exchange for making payments and recruiting members. LLDO’s co-owners were entitled to share in its annual profits.
The justices said sufficient evidence supported the jury’s conclusion that the program was a security within the meaning of the Corporations Code.
Writing for the court, Presiding Justice Arthur Gilbert, explained that the code’s expansive definition of a “security” in Sec. 25019 includes an “investment contract”—defined as “a contract or transaction in which a person entrusts money or other capital to another, with the expectation of deriving a profit, income or some financial benefit from a business enterprise, the failure or success of which is dependent upon the managerial efforts of other persons.”
After hearing testimony by LLDO members that they believed they were investors and co-owners of LLDO, Gilbert said, the jury reasonably concluded that the co-dueno program was an investment contract and that Mercedes and Felix were guilty of illegally and fraudulently selling securities in violation of California securities law.
“LLDO members, many of whom were poor and uneducated, were not in charge and could not influence the management of LLDO,” Gilbert added. “The success or failure of LLDO rested upon defendants’ managerial efforts, not the efforts of its members.”
Mercedes, Felix, and Frederick were the last of nine individual defendants to be convicted in connection with LLDO on charges including operation of an endless chain scheme, violation of state securities laws, and grand theft. The other defendants were convicted in separate proceedings either after trial or pleading no contest to particular counts.
Mercedes founded LLDL in 2000, becoming the entity’s chief executive officer after its incorporation in 2001. Felix, her husband, and Frederick, her daughter, served as the corporation’s secretary and treasurer, respectively.
LLDO allegedly targeted low-income Latinos in the Los Angeles region, luring them to enroll in the group by offering to purchase cars and dream homes for them if they joined and recruited other members. Members were unaware that Mercedes in 1999 had been convicted of theft in Michigan involving a similar scheme.
Along with increasing LLDO’s membership, LLDO participants were required to pay meeting and membership fees and to join various “investment” programs, which included making monthly purchases of prepaid telephone calling cards and buying a “co-dueno” or “co-owner” interest in LLDO. Members were promised returns on their investments.
Following the Better Business Bureau’s investigation into LLDO that was triggered by consumer complaints, plainclothes Los Angeles police officers in 2001 uncovered the scheme.
The financial consequences of LLDO’s operations included a nearly $2.25 million loss to Mitsubishi Motor Credit, which repossessed over 150 automobiles purchased by LLDO members. After LLDO leaders in their capacity as Mitsubishi salesmen helped the members purchase cars by falsifying their credit applications, LLDO subsequently made none of the promised payments.
Los Angeles Superior Court Judge Tricia Ann Bigelow issued prison sentences of 20 years for Mercedes, 12 years for Frederick, and 10 years for Felix. The judge also ordered restitution payments of approximately $10 million by Mercedes and Felix and approximately $9.75 by Frederick, to claimants that included individual LLDO members, Mitsubishi Motor Credit, and the California Franchise Tax Board.
“The conviction of defendants ends the chain, but not the losses to countless victims.”
The case is People v. Frederick, B163699.
Copyright 2006, Metropolitan News Company