Billingsley v. Ariz. Corp. Comm'n

• Decision Date: 19 November 2019
• Docket Number: No. 1 CA-CV 18-0630,1 CA-CV 18-0630
• Parties: JUSTIN C. BILLINGSLEY, et al., Plaintiffs/Appellants, v. ARIZONA CORPORATION COMMISSION, Defendant/Appellee.
• Court: Arizona Court of Appeals

JUSTIN C. BILLINGSLEY, et al., Plaintiffs/Appellants, v. ARIZONA CORPORATION COMMISSION, Defendant/Appellee.

No. 1 CA-CV 18-0630

ARIZONA COURT OF APPEALS DIVISION ONE

November 19, 2019

NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

Appeal from the Superior Court in Maricopa County

No. LC2017-000498-001

The Honorable Patricia A. Starr, Judge

AFFIRMED

COUNSEL

Justin C. Billingsley, Brewster, NY

Plaintiff/Appellant

Arizona Corporation Commission, Legal Division, Phoenix

By Paul Kitchin

Counsel for Defendant/Appellee

MEMORANDUM DECISION

Judge Kent E. Cattani delivered the decision of the Court, in which Presiding Judge Maria Elena Cruz and Judge Kenton D. Jones joined.

CATTANI, Judge:

¶1 Justin Billingsley and his wife appeal from the superior court's ruling affirming the decision by the Arizona Corporation Commission ("ACC") finding Billingsley violated the Arizona Securities Act and ordering him to pay restitution and administrative penalties. For reasons that follow, we affirm.

FACTS AND PRODECURAL BACKGROUND

¶2 This case involves the offering of securities in the form of a small number of promissory notes to fund LoanGo Corporation, a now-defunct start-up business. LoanGo, created by Jeffrey Scott Peterson, John Keith Ayers, and Billingsley in mid-2011, was conceived as an online payday lending company. Peterson, Ayers, and Billingsley were equal owners of the start-up, and the three were its only directors. In September 2011, the three directors approved a resolution that authorized raising $3,000,000 in capital for the company.

¶3 Initially, LoanGo retained a securities attorney and worked with a New York-based investment firm as placement agent for the anticipated offering. Although the New York firm participated in drafting a private placement memorandum, it did not ultimately sell any LoanGo securities.

¶4 Instead, Billingsley, an insurance provider who was not registered with the ACC as a securities salesman or dealer, sold LoanGo promissory notes to five individuals between September 2011 and April 2012. Billingsley had previously met the investors during insurance seminars he conducted at an RV park in Casa Grande, and he had sold them annuities. Billingsley persuaded these five investors to purchase a total of $250,000 in LoanGo notes. Each note had a one-year term and was to earn 18% interest, with monthly interest payments to begin 60 days after execution. But LoanGo never made any payments on the notes, either interest or principal.

¶5 In mid-2015, the ACC filed a notice with proposed order alleging that LoanGo, Billingsley, Peterson, and Ayers had violated Arizona securities law in connection with the sale of the notes.¹ The notice alleged registration violations (sale of unregistered securities by unregistered dealers or salesmen) as well as fraud in connection with the sale. The notice also joined Billingsley's wife, but only "for purposes of determining the liability of the marital communit[y]."

¶6 The administrative proceedings led to a three-day hearing before an administrative law judge ("ALJ"). Two of the investors—R. and J.—testified. The other three investors—E., S., and G.—did not testify, but an ACC investigator who had spoken with them during the LoanGo investigation related their experiences without objection from any party. See A.R.S. § 44-1973(B); Ariz. Admin. Code ("A.A.C.") R14-3-109(K); see also Brown v. Ariz. Dep't of Real Estate, 181 Ariz. 320, 328 (App. 1995).

¶7 E. purchased a $30,000 LoanGo note from Billingsley in September 2011. The next month, R. purchased a $45,000 note, G. a $25,000 note, and S. a $50,000 note. Billingsley sold J. two LoanGo notes, $70,000 in February 2012 and $30,000 in April 2012. All five affirmed that they had met Billingsley at the RV park and had purchased annuities or other insurance products from him in the past.

¶8 The investors described purchasing the LoanGo notes with little to no disclosure or explanation from Billingsley. Even though any investment in LoanGo was (as Billingsley admits) speculative and involved a high degree of risk, Billingsley told S. "repeatedly" that LoanGo notes were low risk and told E. that LoanGo was low risk and "a great investment, great opportunity." Billingsley did not discuss risk level with J. or R. at all, even though he knew R. was only interested in low-risk products.

¶9 R., E., S., and J. related that Billingsley did not give them any documentation of any kind before they purchased the notes, and they did not speak to anyone else about LoanGo before investing. R., E., and J. explained that they invested in LoanGo without more information because they trusted Billingsley in light of their prior business dealings with him. R., E., S., and J. further stated that Billingsley never told them that any portion of the invested funds would be used to pay him a commission (hewas a director of the company, not a registered securities salesman) or to cash out prior loans to the company from two of the founders (Peterson and Billingsley), rather than for operating the company and funding payday loans. And although the notes sold to E., R., G., and S. were in default before J.'s investment, Billingsley did not tell J. about the already existing defaults.

¶10 According to the investors, each had a net worth at the time of investment of less than $1,000,000. The four married investors had annual household incomes of under $300,000, and the other's annual income was less than $200,000. Although these financial thresholds are important in determining how securities regulations apply and what disclosure is required, J. noted that Billingsley never inquired as to his financial status, and R. testified Billingsley knew she did not meet those thresholds based on their prior dealings.

¶11 Billingsley testified on his own behalf, in large part contradicting the investors' accounts. He acknowledged that he had met all five investors at insurance and annuity sales events he conducted at an RV park, and he agreed that all five had previously purchased annuity products from him. Billingsley claimed, however, that before each investment, he provided each investor with a private placement memorandum prepared by the New York investment firm describing in detail the potential risk involved with investing in LoanGo and the use to which the funds would be put. And although he stated that he neither knew nor inquired as to the investors' income or net worth, Billingsley asserted that a representative from the New York firm had spoken with each investor telephonically before any investment to ensure they met the necessary wealth or income thresholds.

¶12 Ultimately, an ALJ issued a recommendation and, over Billingsley's written exceptions opposing the recommendation, the ACC adopted an opinion and order finding him to have violated the Arizona Securities Act in connection with the sale of the LoanGo notes. Specifically, the ACC found that the LoanGo notes were securities, that the notes were not exempt from the registration requirement generally applicable to securities, and that Billingsley had violated registration requirements by offering unregistered securities for sale and selling securities without being registered as a securities salesman or dealer. Additionally, the ACC found that Billingsley had committed securities fraud by misrepresenting the level of risk involved and by omitting material facts regarding both the use of the funds and, as to J., the prior defaults. The ACC ordered Billingsley to cease and desist the unlawful conduct and imposed $250,000 in restitution and$15,000 in administrative penalties against Billingsley and his marital community.

¶13 Billingsley filed a request for rehearing, which was denied by operation of law. See A.R.S. § 44-1974 (rehearing request deemed denied if not granted within 20 days). Billingsley then sought judicial review in the superior court, and that court affirmed. See A.R.S. §§ 12-902(A), 44-1981. This appeal followed. We have jurisdiction under A.R.S. § 12-913. See Svendsen v. Ariz. Dep't of Transp., 234 Ariz. 528, 533, ¶ 13 (App. 2014).

DISCUSSION

¶14 On judicial review of the ACC's decision enforcing securities laws, we independently review the administrative record to determine whether the action was unlawful, arbitrary, capricious, or an abuse of discretion. See A.R.S. § 12-910(E); Shorey v. Ariz. Corp. Comm'n, 238 Ariz. 253, 257, ¶ 11 (App. 2015); Nutek Info. Sys., Inc. v. Ariz. Corp. Comm'n, 194 Ariz. 104, 108, ¶ 15 (App. 1998); see also Parsons v. Ariz. Dep't of Health Servs., 242 Ariz. 320, 322, ¶ 10 (App. 2017). We do not reweigh the evidence, but rather assess whether substantial evidence supports the decision. E. Vanguard Forex, Ltd. v. Ariz. Corp. Comm'n, 206 Ariz. 399, 409, ¶ 35 (App. 2003). Substantial evidence exists as long as the evidentiary record supports the decision, even if the record would also support a different conclusion. Id.; see also DeGroot v. Ariz. Racing Comm'n, 141 Ariz. 331, 336 (App. 1984). We review legal determinations de novo. McGovern v. Ariz. Health Care Cost Containment Sys. Admin., 241 Ariz. 115, 118, ¶ 8 (App. 2016).

¶15 Billingsley's appeal challenges the ACC's decision in four respects. First, he argues the LoanGo notes were exempt from registration, contrary to the ACC's finding of registration violations. Second, he claims the securities fraud findings lacked sufficient factual and legal support. Third, he asserts the ACC lacked authority to assess liability against his marital community. And fourth, he claims the ACC's decision failed to adequately address his exceptions. We address each contention in turn.

I. Registration Violations and Exemptions.

¶16 Unless subject to a statutory exemption, "any note" is a security for registration purposes under Arizona law. A.R.S. § 44-1801(27); State v. Tober, 173 Ariz. 211, 212-14 (1992). Generally, sale of an...