People v. Keating

• Citation: 21 Cal.App.4th 145,25 Cal.Rptr.2d 810
• Decision Date: 21 December 1993
• Docket Number: No. B059314,B059314
• Court: California Court of Appeals
• Parties: The PEOPLE, Plaintiff and Appellant, v. Charles H. KEATING, Jr., et al., Defendants and Respondents.

Page 810

25 Cal.Rptr.2d 810

21 Cal.App.4th 145

The PEOPLE, Plaintiff and Appellant, v. Charles H. KEATING, Jr., et al., Defendants and Respondents.

No. B059314.

Court of Appeal, Second District, Division 1, California.

Dec. 21, 1993.

Gil Garcetti and Ira Reiner, Dist. Attys. (Los Angeles), Harry B. Sondheim and Patrick D. Moran, Deputy Dist. Attys., for plaintiff and appellant.

Thomas S. Sayles, Corporations Com'r, G.W. McDonald, Asst. Corporations Com'r, Alan S. Weinger and George A. Crawford, Counsel, Los Angeles, for amici curiae on behalf of appellant.

Kirkland & Ellis, Stephen C. Neal, Philip S. Beck, Jeffrey S. Powell and Scott D. Devereaux, Chicago, IL, Layman, Jones & Dye, David W. Wiechert and Dina M. McKenna, Irvine, for defendants and respondents.

No appearance for defendant and respondent Wischer.

ORTEGA, Acting Presiding Justice.

The People appeal from orders sustaining demurrers without leave to amend (Pen.Code, § 1002 et seq.) and setting aside (Pen.Code, § 995), and judgments dismissing, all counts of a second amended indictment charging defendants Charles H. Keating, Jr., and Ray C. Fidel with selling unqualified securities. (Corp.Code, §§ 25110, 25540.) ¹ The People theorized that the defendants violated the Corporate Securities Law by selling securities (bonds) without complying with certain terms and conditions of the qualification granted by the Corporations Department authorizing the sale. The defendants successfully argued that such acts are not crimes under the Corporate Securities Law. We conclude that selling securities without complying with the terms and conditions of the qualification authorizing their sale is a crime, and the trial court erred in holding otherwise. We reverse the orders and judgments and reinstate the dismissed charges. ²

FACTS

From 1986 through April 1989, Keating was chief executive officer of American Continental Corporation (ACC). Lincoln Savings was an ACC subsidiary. During that period, ACC sold a series of securities known as subordinated debentures, debt instruments, or bonds, to Lincoln customers in Lincoln's California branches. In order to sell such securities legally in California, they had to be "qualified" by the Corporations Department. ³

Securities may be qualified in several ways. ACC chose coordination, the method regulated by section 25111. Essentially, securities for which registration statements are filed under the federal Securities Act may be qualified for California sale by filing copies of the registration statement and other related documents with the Corporations Department. ⁴

As with all applications for qualification by coordination, the department required ACC to produce a list of all ACC employees authorized to sell the bonds and to name one of its officers to supervise the selling agents. The department also required that 1) all selling agents be ACC employees; 2) the selling agents receive no bonuses or additional compensation for bond sales; and 3) the agents provide a prospectus explaining the bonds' financial structure before or during the sale. These requirements were designed to insure that 1) all sales were made by agents covered by the mandatory bond ACC was required to post, and buyers would not confuse the non-insured, high risk ACC securities with federally insured certificates of deposit sold by Lincoln; 2) the selling agents lacked motivation for overreaching during sales; and 3) potential buyers had accurate information about the bonds before deciding to buy. Keating does not dispute that these three conditions were part of the qualification authorizing the sales.

Regarding each relevant dismissed count, ACC failed to meet at least one of three conditions: either 1) the selling agent was a Lincoln, not ACC, employee; 2) the selling agent received a bonus for the sale; and/or 3) the buyer either never was given a prospectus or was mailed one after the completed sale. For purposes of appeal, Keating does not dispute that 1) the sales in the relevant dismissed counts violated the conditions of the qualification or 2) he knew of these acts by ACC or Lincoln employees.

Regarding the relevant dismissed counts, the trial court either sustained demurrers without leave to amend or granted motions to set them aside, and later entered judgments dismissing them, accepting Keating's argument that selling qualified securities in violation of the conditions in the authorizing qualification was not a crime.

DISCUSSION

"On appeal from a judgment entered on demurrer, the allegations of the [indictment] must be liberally construed with a view to attaining substantial justice among the parties. [Citation.] If there is any reasonable possibility the plaintiff can state a good cause of action, it is error and an abuse of discretion to sustain the demurrer without leave to amend. [Citations.]" (State of California ex rel. State Lands Com. v. County of Orange (1982) 134 Cal.App.3d 20, 26, 184 Cal.Rptr. 423.)

"The function of a demurrer is to test the sufficiency of the [indictment] by raising questions of law. [Citation.] The [indictment] must be given a reasonable interpretation and read as a whole with its parts considered in their context. [Citation.] A general demurrer admits the truth of all material factual allegations of the [indictment]; plaintiff's ability to prove the allegations, or the possible difficulty in making such proof, does not concern the reviewing court. [Citation.] 'As a reviewing court we are not bound by the construction placed by the trial court on the pleadings but must make our own independent judgment thereon, even as to matters not expressly ruled upon by the trial court.' [Citation.]" (Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232, 238-239, 282 Cal.Rptr. 233.) Thus, we independently review this legal issue based on undisputed facts.

In support of the trial court's ruling, relying on established principles, Keating argues that the Corporate Securities Law does not, on its face, prohibit selling qualified securities in violation of conditions in the authorizing qualification. " 'The fundamental rule of statutory construction is that the court ascertain legislative intent so as to effectuate the purpose of the law.... [T]he court cannot create an offense by enlarging a statute, by inserting or deleting words, or by giving the terms used false or unusual meanings. [Citation.] The court must give effect to statutes according to the usual, ordinary import of the language employed in framing them. When statutory language is clear and unambiguous, there is no need for construction, and courts should not indulge in it.' [Citation.]" (People v. Baumgart (1990) 218 Cal.App.3d 1207, 1219, 267 Cal.Rptr. 534.)

Moreover, "a fundamental principle of our tripartite form of government [is] that subject to the constitutional prohibition against cruel and unusual punishment, the power to define crimes and fix penalties is vested exclusively in the legislative branch. [Citations.] Stated differently, there are no common law crimes in California. [Citations.] '... In order that a public offense be committed, some statute, ordinance or regulation prior in time to the commission of the act, must denounce it....' [Citation.] [p] Settled rules of construction implement this principle. Although the Penal Code commands us to construe its provisions 'according to the fair import of their terms, with a view to effect its objects and to promote justice' (Pen.Code, § 4), it is clear the courts cannot go so far as to create an offense by enlarging a statute, by inserting or deleting words, or by giving the terms used false or unusual meanings. [Citation.] Penal statutes will not be made to reach beyond their plain intent; they include only those offenses coming clearly within the import of their language. [Citation.] Indeed, 'Constructive crimes--crimes built up by courts with the aid of inference, implication, and strained interpretation--are repugnant to the spirit and letter of English and American criminal law.' [Citation.]" (Keeler v. Superior Court (1970) 2 Cal.3d 619, 631-632, 87 Cal.Rptr. 481, 470 P.2d 617.) Keating concludes that contrary authority either is dicta, or construed a section of the Corporate Securities Law which did not survive its 1968 amendment.

In response, the People and Department "emphasize [that] the main objective of the securities law is to protect the public against the imposition of insubstantial, unlawful and fraudulent stock and investment schemes and to promote full disclosure of all information that is necessary to make informed and intelligent investment decisions. [Citation.]" (People v. Baumgart, supra, 218 Cal.App.3d at p. 1220, 267 Cal.Rptr. 534.) Without relying on legislative history, the People argue sections 25110-25111 prohibit selling qualified securities in violation of the terms of the authorizing qualification, and that case law and commentary support them.

We agree with the People and Department. First, section 25111, subdivision (c), which defines the proper method of qualification by coordination, expressly states that "qualification of the sale of securities under this section automatically becomes effective (and the securities may be offered and sold in accordance with the terms of the application as amended ) at the moment the federal registration statement becomes effective...." (Emphasis added.) The emphasized portion of section 25111 states that securities qualified by coordination must be sold in accordance with the terms of the application. Thus, contrary to Keating's argument that the statute does not prohibit his conduct, since the qualification includes all the terms of the application and any conditions required by the Department, section 25111 expressly prohibits sales of qualified securities in violation of conditions imposed by the Department. Keating does not dispute that section 25110 makes it "unlawful" to sell...