Tuesday, February 7, 2006
S.C. Says Good Faith Is Defense to Unregistered-Securities Charge
By KENNETH OFGANG, Staff Writer/Appellate Courts
Staff Writer/Appellate Courts
A defendant’s good faith belief that a class of securities is exempt from registration requirements is an affirmative defense to a charge of selling unregistered securities, the state Supreme Court unanimously ruled yesterday.
The justices disagreed with both Los Angeles Superior Court Judge William Fahey, who said the offense was a general intent crime, and with the Court of Appeal, which ruled that guilty knowledge or criminal negligence is an element of the offense and must be proven by the prosecution.
The court, however, upheld the conviction of Javier O. Salas of selling unregistered securities as part of a real estate investment scheme. No reasonable juror would have believed that Salas, who managed the scheme by himself and admitted on the witness stand that he was familiar with the registration requirement, had a good faith belief that the company was exempt, Justice Joyce L. Kennard said.
The decision could ultimately wipe out the conviction of Stephen Patrick, a salesman who worked for Salas. The high court sent Patrick’s case back to the Court of Appeal for a determination as to whether he presented enough evidence of good faith to be entitled to a jury instruction under yesterday’s decision.
The Court of Appeal had ruled that Patrick was entitled to a new trial.
The prosecution of Salas, Patrick, and a third man, who was not a party to the appeal, grew out of the 1990 formation of American Joint Ownership Interests, Inc. Salas, who had been involved in other real estate developments, created a number of investment vehicles through AJOI, including a partnership that was to buy a property at 201 Boylston St. in Los Angeles.
In 1995, the company’s sales manager resigned and sent investors—all of whom apparently became involved after being cold-called—a letter advising them of improprieties related to the investments. In 1997, the company went into receivership and Patrick and Salas were eventually charged with selling unregistered securities and selling securities by misrepresentation or omission of material facts.
The parties stipulated that the partnership interests were securities and that they were not registered. The defense, however, claimed that they were exempt under a provision saying that registration is not required if there are no more than 35 investors and all of them had a preexisting business relationship with the issuer or “could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction.”
An examiner for the Department of Corporations testified that bank records showed that there were 48 investors.
Salas testified that the examiner had included a number of people who either had not invested in 201 Boylston or who had rescinded their investments and been given refunds. He also said that all of the investors had previously invested with him or with other corporate officers, but acknowledged that calls were made from lists supplied by persons who were involved in real estate investments but were not officers of his company.
He testified that Patrick had no managerial responsibility. Patrick testified to the same effect, and also said he thought the securities were “totally exempt.”
Fahey instructed the jury that the securities were exempt from registration if there were no more than 35 investors, all of whom had preexisting relationships with the seller or had sufficient experience to be considered “sophisticated investors,” and that good faith was not a defense.
Salas and Patrick were convicted of selling unregistered securities, but jurors deadlocked on the misrepresentation-or-omission charge. Fahey sentenced Salas to three years in the Los Angeles restitution center and Patrick to three years on probation, including one year in the county jail.
The Court of Appeal held that the judge should have instructed on the duty to prove guilty knowledge or criminal negligence, but affirmed as to Salas, finding the error to be harmless. As to Patrick, who did not know how many investors were involved, the court said the error was prejudicial.
No Strict Liability
Justice Joyce L. Kennard, writing for the high court, said that the Legislature could not have intended to create a strict liability offense, since the crime does not involve harm to the public health or safety and the penalties are severe.
She cited previous high court decisions holding that a defendant cannot be convicted of making a false tax return absent proof of “bad faith or evil intent,” cannot be convicted of manufacturing methamphetamine absent proof the defendant knew the substance was methamphetamine, cannot be convicted of carrying a concealed dirk or dagger absent knowledge that the weapon was concealed on his or her person and was capable of stabbing, cannot be convicted of possessing an assault weapon absent knowledge that the gun possessed the statutory attributes of an assault weapon, and that willful failure to register as a sex offender is a crime only if the defendant knew of the registration requirement.
Kennard went on to say, however, that other high court decisions have held that where the requisite knowledge would be uniquely within the possession of the defendant, as is the case with the securities law, the burden of presenting evidence that such knowledge was lacking is properly placed on the defendant.
The case is People v. Salas, 06 S.O.S. 600.
Copyright 2006, Metropolitan News Company