Wednesday, December 26, 2012
Panel Upholds Conviction in Securities Fraud Case
Justices Affirm Guilty Verdicts on Nearly 700 Counts of Bilking Elderly Investors
By KENNETH OFGANG, Staff Writer
An Orange County man who made “outrageously unrealistic promises” to elderly investors and knew he could not possibly keep them was properly convicted of nearly 700 criminal counts, the Fourth District Court of Appeal has ruled.
Div. Three Friday affirmed Jeffrey Gordon Butler’s convictions and sentence of more than 90 years in prison for bilking more than 100 people out of more than $11 million. The panel rejected Butler’s arguments that Judge James A. Stotler gave erroneous jury instructions, and that the evidence only proved that Butler was a bad businessman.
“There is overwhelming evidence establishing that the supposed safe investments marketed by defendant to elderly, unsophisticated investors were extremely risky at best (and Ponzi schemes at worst),” Justice Raymond Ikola wrote. “Defendant withheld obviously material information that would have allowed his investors to see they should not trust defendant by placing their assets at risk.”
Stotler sentenced Butler, 54, after a jury convicted him on 683 counts, including 288 counts of securities fraud, 240 counts of offering an unqualified security, 147 counts of theft from an elder, along with four other securities offenses and four tax crimes. His wife, Peggy Butler, was also convicted on tax charges and sentenced to a year in jail.
The sentencing hearing was held over several days in December 2009 and January 2010, as one victim after another took the stand to tell the judge how their life savings had been wiped out. The victims were in their 70s, 80s, and 90s, and nearly half of them didn’t live long enough to see Butler sentenced, prosecutors said.
The Orange County Register called the case one of the largest elder fraud prosecutions in the county’s history.
Ikola explained that Butler had worked for years in real estate, insurance, public finance, and mortgage processing, and that in the 1980s, he began soliciting purchasers of notes bearing 12 percent interest through newspaper ads. The money was initially used to pay off disgruntled suppliers and others who had dealt with an Arby’s franchisee in Texas whose debt-ridden businesses Butler had taken over, but the investors got nothing and the obligations were discharged in bankruptcy.
Butler later came to California, got an insurance license, and wound up paying a fine and having his license suspended for selling home health care services to senior citizens without proper regulatory approval.
He subsequently formed other companies that sold financial products to seniors, including living wills and trusts, reverse mortgages, annuities, and ultimately investments in companies that were involved in, or alleged to be involved in, various businesses from which the investors were told they could expect large profits.
The prospects of those companies were murky at best, the justice noted. He cited as an example Global Network Providers, a Grenada-based telecommunications company that had a license to compete with the tiny nation’s telecommunications monopoly.
The problem, Ikola explained, was that the company had no equipment or capital, and while some efforts were made to get the business going, Butler—who was promised a commission on the sale of promissory notes, partial ownership of the company, and a salary—failed to provide an offering memorandum or to disclose his commissions, the fact that the business was undercapitalized, his own record of bankruptcy and regulatory violations, or the fact that investors were going to be repaid with the proceeds of other investments, rather than out of GNP’s earnings.
The company was never operational and never generated revenues, so Butler and the other principals were paid entirely with investor funds, in what Ikola said was either a Ponzi scheme or something akin to one.
The counts of which he was convicted were the bulk of the 874 charged in the information, the others having been dismissed at the close of the prosecution’s case, or after the jury deadlocked, or having resulted in acquittal.
The Court of Appeal said the trial judge was not required to give an instruction requiring jurors to find that the defendant knew that the notes were securities.
Under California’s Corporate Securities Law of 1968, Ikola explained, the prosecution is not required to prove such knowledge, although some cases suggest that lack of such knowledge might be an affirmative defense.
Failing to recognize a security when one is marketing one, the justice reasoned, is generally a matter of criminality, not a good faith mistake.
“This is because the definition of a security is broad and flexible, suggesting that a good faith, reasonable appraisal of an investment product will err on the side of classifying such products as securities,” he wrote. “In sum, even if an affirmative defense is theoretically available to defendants on this point, it will be the rare case in which it is appropriate to provide such instruction.”
The case is People v. Butler, 12 S.O.S. 6615.
Copyright 2012, Metropolitan News Company