State v. Johnson
| Decision Date | 17 December 2009 |
| Docket Number | No. 20070909-CA.,20070909-CA. |
| Citation | 2009 UT App 382,224 P.3d 720 |
| Parties | STATE of Utah, Plaintiff and Appellee, v. Jamis M. JOHNSON, Defendant and Appellant. |
| Court | Utah Court of Appeals |
Rodney G. Snow, Walter A. Romney Jr., and Aaron D. Lebenta, Salt Lake City, for Appellant.
Mark L. Shurtleff, Atty. Gen. and Karen A. Klucznik, Asst. Atty. Gen., Salt Lake City, for Appellee.
Before Judges THORNE, ORME, and McHUGH.
¶ 1 Jamis M. Johnson appeals his criminal conviction for securities fraud, a violation of the Utah Uniform Securities Act (the Securities Act), see Utah Code Ann. §§ 61-1-1 to -30 (2006 & Supp.2009),1 and the accompanying restitution order entered by the trial court. We affirm in part and reverse and remand in part.
¶ 2 In the summer of 2000, two dairymen held a family dairy farm as the sole members of a limited liability company (the LLC). In July 2000, the dairymen learned that A. Paul Schwenke "was interested in meeting some dairy farmers to talk about some investment." During July and August 2000, the dairymen had a series of meetings with Schwenke, Johnson, and several other individuals to discuss the proposed investment. Before attending the first meeting, Johnson did not know the details of Schwenke's plan.3 Schwenke introduced Johnson as "a high powered lawyer" and a "security expert from out of New York," which one of the dairymen said "lent a great deal of credibility" to Schwenke's presentation. Neither Schwenke nor Johnson disclosed that Johnson was the subject of ongoing disciplinary proceedings by the Utah State Bar for misappropriating client funds.4 Johnson was also subject to three tax liens, totaling $1,669,562.89, against his property and had a Small Business Administration judgment against him. Johnson did not disclose these facts at the meeting. Nor did Johnson tell the dairymen that Schwenke was an attorney who had been disbarred for misappropriating client funds and that Johnson was pursuing legal action against Schwenke over a failed business deal.
¶ 3 At the meetings, Schwenke proposed that the dairymen invest in American-Dairy. com, Inc. (American-Dairy), a company that Schwenke had recently incorporated. Schwenke said his plan was to obtain 10,000 to 15,000 cows, "go online" with the company, and "show investors their cows over the internet." Schwenke also indicated that he would obtain financing by selling stock in an initial public offering. Johnson explained how stocks would work in the public company. Schwenke and Johnson told the dairymen that there were some risks associated with any stock transaction, but they did not elaborate. The dairymen described the farm, including the number of cows, the need to expand to become profitable, and the need to refinance a "substantial loan" against the dairy to complete the transaction.
¶ 4 At a second meeting on August 2, 2000, Johnson reviewed a draft of a stock purchase/trade agreement with the dairymen.5 At the request of one of the dairymen, Johnson again explained how the public offering would work, stating that the share prices in an initial public offering would start at a minimum of $4 per share and might be as high as $8 per share.
¶ 5 Following the August 2 meeting, the dairymen's personal attorney reviewed the draft agreement and added a provision voiding the transaction if American-Dairy had not registered its stock for a public offering within two years. On August 9, 2000, the dairymen returned to Schwenke's office and signed the revised agreement (the Agreement), thereby transferring all the farm's assets, including the real estate, equipment, and livestock associated with the farm, to American-Dairy in exchange for stock in the company.
¶ 6 Johnson signed the Agreement on behalf of American-Dairy as the company's CEO and signed stock certificates issuing 200,000 shares to the dairymen. Although the Agreement recites that American-Dairy had issued "10,000,000 shares of .001 cents par value common stock," no other shares were issued, making the dairymen the sole shareholders. The dairymen also signed proxy agreements naming Schwenke as their "attorney and agent," which empowered Schwenke to vote their shares at all shareholder meetings "for the transaction of any business."
¶ 7 Following the execution of the Agreement and the transfer of assets, Johnson had no additional direct contact with the dairymen. The parties never discussed whether Johnson would remain as American-Dairy's CEO, although the record reflects that Johnson continued to have some involvement in that capacity, as evidenced by his signature on American-Dairy's bankruptcy petition and his preparation of a temporary restraining order on behalf of the company.
¶ 8 For the most part, the dairymen continued to manage the day-to-day operations of the farm. However, because the warranty deed had been transferred to American-Dairy, they could not obtain any bank financing. The dairymen also testified that Schwenke moved an additional 200 to 250 cows onto the farm, refused to allow the dairymen to lease out an unused portion of the farm, and obtained a $50,000 loan against the farm on which he never made any payments.6 Eventually, creditors foreclosed on the farm and its equipment. As part of the foreclosure proceedings, one of the dairymen also forfeited a $70,000 certificate of deposit which had previously been used as collateral for a loan to purchase cattle.
¶ 9 On October 24, 2005, Johnson and Schwenke were charged as co-defendants with one count each of securities fraud, a second degree felony, see Utah Code Ann. § 61-1-1 (2006); id. § 61-1-21(2)(b) (Supp. 2009), and theft by deception, a second degree felony, see Utah Code Ann. §§ 76-6-405, -412 (2008). The trial court later severed Johnson's and Schwenke's cases, and granted the State's motion to dismiss the theft by deception charge against Johnson. After several defense attorneys withdrew, Johnson represented himself at trial.7
¶ 10 The State called Michael Hines, the Director of Enforcement for the Utah Division of Securities, to testify as an expert witness. After the trial court qualified Hines as an expert, see generally Utah R. Evid. 702 (), the State questioned Hines about various topics related to securities transactions. Hines testified that the purposes of securities laws are to prevent fraud and to protect investors. Hines also testified that, unlike other sales, the securities market is a "seller beware" market, meaning "the seller has to make sure ... [he or she] disclose[s] all material facts to an investor." Hines defined the kind of material facts that must be disclosed under section 61-1-1 of the Securities Act as those that "a reasonable prudent investor ... would want to know," adding that officers of a corporation have a specific duty to disclose material facts about their backgrounds. Hines further testified to the hypothetical types of statements and omissions that would violate section 61-1-1, and to the meaning of a direct or indirect connection to the sale of a security under the Securities Act.
¶ 11 Johnson repeatedly objected to Hines's testimony on the grounds that Hines was misstating the law and impermissibly stating legal conclusions as to what the law is. In response, the trial court allowed Johnson to cross-examine Hines regarding the alleged misstatements, and orally instructed the jury that
the court is going to indicate to the jury that at some point in this trial the court is going to give you instructions with respect to ... issues of law that will govern your deliberations. And ... at that time ..., the court will instruct you as to what the law is.
¶ 12 Johnson conducted a thorough cross-examination of Hines, questioning him about the meaning of section 61-1-1, how the statute would be applied in different hypothetical situations, including what additional disclosures a person like Johnson would be required to make before completing a transaction similar to the one at issue. To rebut Hines's testimony, Johnson called Nathan Dredge, a securities attorney and former securities analyst, as an expert witness. Dredge also testified to the purpose of state securities laws, the definition of a security, what constituted material facts, and whether Johnson had an affirmative duty to disclose certain facts in this case. Dredge's interpretation of those issues differed from the interpretation in Hines's testimony. In addition to Dredge's testimony, Johnson testified on his own behalf and called Schwenke as a defense witness.
¶ 13 On March 7, 2007, after deliberating for six hours, the jury found Johnson guilty of securities fraud. On June 6, 2007, the trial court sentenced Johnson to a suspended prison term of one to fifteen years, thirty-six months of supervised probation, six months in the Millard County Jail, and an additional six months of electronically monitored home confinement. The trial court further imposed a $5000 fine and "set [c]ourt ordered restitution ... at $125,000, the same as [the court] ordered for ... Schwenke," to be paid jointly and severally by Johnson and Schwenke.
¶ 14 On June 15, 2007, Johnson filed a timely objection to the restitution order and requested a hearing on the issue. Johnson filed a timely motion for a new trial on June 20, 2007. The trial court entered final judgment on July 2, 2007, and denied Johnson's motion for new trial on October 10, 2007. The trial court held a restitution hearing on October 10 and 24, 2007, and entered its final restitution order on December 5, 2007, ordering $120,000 in restitution, to be paid jointly and severally by Johnson and Schwenke.
¶ 15 On November 8, 2007, after the restitution hearing but before entry of the final restitution order,...
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