Black Diamond Fund, Lllp v. Joseph

• Citation: 211 P.3d 727
• Decision Date: 28 May 2009
• Docket Number: No. 08CA0883.,08CA0883.
• Parties: BLACK DIAMOND FUND, LLLP, Wealth Strategy Partners, and Harvey Altholtz, Plaintiffs-Appellants, v. Fred J. JOSEPH, Colorado Securities Commissioner, and Colorado Division of Securities, Defendants-Appellees.
• Court: Colorado Court of Appeals

211 P.3d 727

BLACK DIAMOND FUND, LLLP, Wealth Strategy Partners, and Harvey Altholtz, Plaintiffs-Appellants, v. Fred J. JOSEPH, Colorado Securities Commissioner, and Colorado Division of Securities, Defendants-Appellees.

No. 08CA0883.

Colorado Court of Appeals, Div. IV.

May 28, 2009.

Isaacson Rosenbaum P.C., David A. Zisser, Denver, Colorado, for Plaintiffs-Appellants.

John W. Suthers, Attorney General, Russell B. Klein, Assistant Attorney General, Denver, Colorado, for Defendants-Appellees.

Opinion by Judge RICHMAN.

Black Diamond Fund, LLLP (BDF), an issuer of limited partnership interests; Wealth Strategy Partners (WSP), the general partner of BDF; and Harvey Altholtz, the individual member of WSP who conducted the activities of BDF (collectively respondents), appeal from a final order of the Colorado Securities Commissioner directing them to cease and desist from committing or causing any violations of sections 11-51-301, -401, and -501, C.R.S.2008, of the Colorado Securities Act (CSA), or engaging in conduct in violation of any provision of the CSA. We affirm in part, reverse in part, and remand with directions.

The Commissioner's order adopts findings of fact and conclusions of law entered by a three-member panel of the Commission after a contested hearing conducted pursuant to section 11-51-606(1), C.R.S.2008. The panel found and concluded that respondents had violated the CSA, specifically through (1) the sale of unregistered securities in violation of section 11-51-301; (2) the employment of an unlicensed securities sales representative in violation of section 11-51-401(2); and (3) the offer and sale of securities in violation of section 11-51-501(1). The panel recommended that the Commissioner issue a cease and desist order against respondents.

Respondents seek judicial review of the Commissioner's order, a final agency decision, pursuant to sections 11-51-607 and 24-4-106 C.R.S.2008, contending that the order is not supported by substantial evidence, is not consistent with legal authority, and imposes arbitrary and capricious sanctions. We agree that the Commissioner's one express finding that respondents sold securities "in a fraudulent manner" is not supported by the evidence and remand for correction as to that aspect of the order, but we affirm all other aspects of the Commissioner's order finding violations of the CSA.

I. Standard of Review

Section 11-51-607(1) provides that "[a]ny person aggrieved by a final order of the securities commissioner may obtain a review of the order in the court of appeals pursuant to the provisions of section 24-4-106(11), C.R.S." The standard for review of such actions is found in section 24-4-106(7), which provides that the court shall affirm the agency action unless it finds, insofar as pertinent here, that the agency action was arbitrary and capricious, an abuse of discretion, or based on findings of fact that are clearly erroneous on the whole record, unsupported by substantial evidence, or otherwise contrary to law. In making these determinations, the court shall "review the whole record or such portions thereof as may be cited by any party" and "determine all questions of law and interpret the statutory and constitutional provisions involved and shall apply such interpretation to the facts duly found or established." § 24-4-106(7).

An appellate court must consider whether the Commissioner's decision is supported by "substantial evidence" in the record viewed as a whole. Colorado Office of Consumer Counsel v. Pub. Utils. Comm'n, 786 P.2d 1086 (Colo.1990); Westmark Asset Mgmt. Corp. v. Joseph, 37 P.3d 516, 520 (Colo.App.2001). Substantial evidence is the quantum of probative evidence that a fact finder would accept as adequate to support a conclusion, without regard to the existence of conflicting evidence. Westmark Asset Mgmt., 37 P.3d at 520.

We review an agency's conclusions of law de novo. Sigala v. Atencio's Market, 184 P.3d 40, 42 (Colo.2008); Davison v. Indus. Claim Appeals Office, 84 P.3d 1023, 1029 (Colo.2004). "Although a reviewing court gives some deference to an agency's reasonable construction of a statute, the agency's interpretation will be overturned on appeal if it is `clearly erroneous, arbitrary, or otherwise not in accordance with the law.'" Sigala, 184 P.3d at 42 (quoting Davison, 84 P.3d at 1029).

II. Background

BDF conducted an offering of up to $10 million in partnership interests as described in a confidential private placement memorandum (PPM) dated April 18, 2007. There is no dispute that these interests are securities as defined by the CSA. BDF offered the securities primarily through persons described by Altholtz as "finders" and to whom respondents would pay a five percent finder's fee upon completion of each subscription with BDF. Altholtz testified that there were at least fifty finders nationwide and at least five in Colorado, and that William Allan Gay was one such finder operating in Colorado.

On December 14, 2006, Gay had entered into a Letter of Consent with the National Association of Securities Dealers (NASD) which permanently barred him from associating with any member of the NASD in any capacity. The bar arose from the fact that Gay had engaged in private securities transactions without approval of his employer firm and had sold at least forty-six promissory notes for $4.6 million in violation of NASD conduct rules.

On May 10, 2007, Gay entered a Stipulation and Consent with the Colorado Division of Securities revoking his investment advisor license due to his bar by the NASD. On October 24, 2007, the Denver District Court entered a permanent injunction which enjoined Gay from "associating in any capacity with any broker-dealer, sales representative, promoter, issuer, financial planner, [or] investment advisor ... engaged in business in Colorado."'

Altholtz had known Gay for approximately ten years and personally arranged for Gay to act as a finder in the BDF offering. Altholtz was aware in May 2007 that Gay was "having problems" with the Securities Division, but testified he thought they were resolved when Gay surrendered his investment advisor license. Altholtz testified that when he learned Gay lost his investment advisor license, he consulted with counsel and was advised that that fact should not have an impact on Gay's ability to act as a finder in connection with BDF's offering. When Altholtz learned in January 2008 of the permanent injunction, he terminated BDF's relationship with Gay.

Altholtz knew that Gay was marketing the BDF securities to Colorado residents by inviting them to "free lunch" and "free dinner" investment seminars which Gay sponsored. Altholtz claimed that he was aware of restrictions against publicly advertising and engaging in general solicitation of a purportedly exempt offering under SEC Rule 506 of Regulation D, but he did not convey information about such restrictions to Gay and had no written agreement with Gay restricting his agency or placing limitations on his ability to solicit investors.

One investor who attended a seminar sponsored by Gay in July 2007 testified that she received an invitation to the seminar through the mail, as did most of the people in her neighborhood, although she had no prior relationship with Gay. At the seminar, Gay described investments generally but did not specifically refer to the BDF offering. Approximately one month after the seminar, and at subsequent meetings, Gay discussed the BDF investment opportunity with her, and she invested more than $300,000 in BDF.

Another seminar, consisting of both a luncheon and a dinner and held on November 13, 2007, was co-sponsored by Altholtz, who testified that he authored the written invitation sent to prospective attendees. The invitation, sent over Gay's signature, stated that Gay has "been in the investment business for quite some time, having seen many different investment vehicles come and go" and that he wished to report "that the most interesting, and by far the most lucrative investment model" he had ever encountered came "by way of a long time friend from the east coast," later identified in the letter as Altholtz. Altholtz attended both seminars on November 13, 2007, made presentations about PIPE (Private Investment in Public Equity) investments generally, and used BDF as a sample investment.

Altholtz testified that he had little direct contact with investors other than at the November 13, 2007 seminar. The panel found Altholtz's activities related to the offering included (1) making presentations and responding to occasional questions, (2) receiving subscription agreements from investors and through finders such as Gay and, ultimately, accepting them, and (3) paying finders.

The panel found that Gay was an agent for BDF whose activities included (1) locating prospective investors, (2) discussing BDF with them, (3) obtaining signed subscription agreements and checks from investors, and (4) sending the agreements and checks to Altholtz. The panel found, and it was uncontested, that Altholtz had an oral agreement with Gay to pay him five percent of the amount invested by each investor Gay introduced to BDF. WSP issued at least twenty-nine checks payable to Gay for sales commissions based on investors he brought to BFD between May 10 and December 7, 2007.

BDF had filed a Form D with the Securities Division, claiming the availability of a Rule 506 exemption under Regulation D. The PPM described the offering as being conducted pursuant to Section 4(2) of the Securities Act of 1933 and in a manner "[c]onsistent with Rule 506 of Regulation D promulgated under the Securities Act of 1933." The panel found that respondents' conduct amounted to general advertising or public solicitation, contrary to the rules promulgated under Regulation D.

III. Analysis

A. Sale of Unregistered Securities

The sale of unregistered securities in Colorado violates section 11-51-301, unless the securities are...