Eastern Vanguard Forex, Ltd. v. Arizona Corp. Com'n

• Decision Date: 30 October 2003
• Docket Number: No. 1 CA-CV 01-0476.,1 CA-CV 01-0476.
• Citation: 206 Ariz. 399,79 P.3d 86
• Parties: EASTERN VANGUARD FOREX, LTD.; Eastern Vanguard Group Limited; K. (David) Sharma; Sammy Lee Chun Wing; Peter Suen Suk Tak; Michael E. Cho; To Fai Cheng; Jean Yuen; Wing Ming Tam and Guo Quan Zhang, Plaintiffs-Appellees, Cross-Appellants, v. ARIZONA CORPORATION COMMISSION, an administrative agency of the State of Arizona, Defendant-Appellant, Cross-Appellee.
• Court: Arizona Court of Appeals

79 P.3d 86

206 Ariz. 399

EASTERN VANGUARD FOREX, LTD.; Eastern Vanguard Group Limited; K. (David) Sharma; Sammy Lee Chun Wing; Peter Suen Suk Tak; Michael E. Cho; To Fai Cheng; Jean Yuen; Wing Ming Tam and Guo Quan Zhang, Plaintiffs-Appellees, Cross-Appellants, v. ARIZONA CORPORATION COMMISSION, an administrative agency of the State of Arizona, Defendant-Appellant, Cross-Appellee.

No. -0476.

Court of Appeals of Arizona, Division 1, Department B.

October 30, 2003.

Roshka Heyman & DeWulf, PLC, By Alan S. Baskin, Phoenix, Attorneys for Plaintiffs-Appellees/Cross-Appellants.

Terry Goddard, Attorney General, By Kathleen Coughenour DeLaRosa, Special Assistant Attorney General and Moira A. McCarthy, Assistant Attorney General, Phoenix, Attorneys for Defendant-Appellant/Cross-Appellee.

OPINION

HALL, Judge.

¶ 1 This is an appeal and a cross-appeal from the superior court's partial affirmance and partial reversal of an Arizona Corporation Commission (Commission) decision. The Commission appeals from the superior court's reversal of its finding of "control liability" under the Arizona Securities Act¹ as to three individuals—To Fai Cheng (Cheng), Jean Yuen (Yuen), and K. David Sharma (Sharma).

¶ 2 Cheng, Yuen and Sharma, as well as Sammy Lee Chun Wing (Wing), Peter Suen Suk Tak (Tak), and Guo Quan Zhang (Zhang), cross-appeal from the superior court's award of attorneys' fees to them, arguing they were entitled to a greater award.² In addition, all of those individuals, as well as two entities (Eastern Vanguard Forex Ltd. (EVFL) and Eastern Vanguard Group Limited (EVGL)) and two other individuals (Michael E. Cho (Cho) and Wing Ming Tam (Tam)),³ cross-appeal from the court's determination that the Commission had jurisdiction to conduct an administrative hearing in this case. They assert that federal law preempts state regulation of the off-exchange foreign currency trading transactions at issue.

¶ 3 For the reasons discussed, we affirm the superior court's finding that the Commission had jurisdiction over this matter but reverse its determination that the Commission failed to establish the "control liability" of Cheng, Yuen, and Sharma and its award of attorneys' fees to Cheng, Yuen, and Sharma. Because Wing, Tak, and Zhang are entitled to their attorneys' fees incurred during the administrative proceedings as well as the superior court proceedings, we remand this matter for a recalculation of their fees.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 4 In February 1998, the Securities Division of the Commission initiated an administrative proceeding against Forex Investment Services Corporation (FISC), EVFL, EVGL, Sharma, Wing, Tak, Cho, Cheng, Yuen, Tam, Zhang, James Simmons, Jr. (Simmons), and Tokyo International (Tokyo). The Commission asserted that FISC, EVFL, EVGL, Sharma, Simmons, Cho, Cheng, Yuen, Tam, and Tokyo had committed primary violations of the registration and anti-fraud provisions of the Arizona Securities Act, namely Arizona Revised Statutes (A.R.S.) sections 44-1841, -1842, and — 1991 (1994 & Supp.1998).⁴ The Commission further alleged that Cheng, Yuen, Tokyo, Tam, and Zhang were liable under A.R.S. § 44-1999 (Supp.1998)⁵ as controlling persons of FISC, and that Sharma, EVGL, Wing, and Tak were liable under the same statute as controlling persons of EVFL.

¶ 5 The above individuals and entities promoted leveraged trading in the foreign exchange market (the "Forex" market) by individual investors or their representatives. FISC, an Arizona corporation, advertised for foreign currency traders and trained individuals as traders in foreign currency. Cheng and Yuen were officers, directors, and shareholders of FISC.

¶ 6 FISC customers opened accounts with EVFL, a British Virgin Islands foreign currency trading company whose primary trading office is in Macau, on China's Pacific Coast. EVFL is wholly-owned by EVGL, another British Virgin Islands company. Sharma was a director of EVFL until August 1, 1997. Wing and Tak were officers of EVGL.

¶ 7 Pursuant to a January 1, 1997 agreement, EVFL agreed to pay FISC $20,000 monthly plus $50 per "position closed" in exchange for FISC providing training and facilities for foreign currency traders. On that same date, Tokyo and FISC entered into an agreement whereby Tokyo agreed to provide management consulting services to FISC and handle settlement of FISC orders. Tokyo was a branch office of EVFL located in San Francisco. Zhang was an officer and director of Tokyo. The Tokyo-FISC agreement also placed Tam, Tokyo's general manager, in "charge of" FISC. Tam hired Cho as FISC's marketing manager—a position Cho held from January 1997 through October 1997. Simmons, initially a FISC trader, was FISC's assistant marketing manager from June 1997 through October 1997. After Cho left FISC, Tam promoted Simmons to the marketing manager position, which he held until December 18, 1997.

¶ 8 The Forex trading at issue involved buying or selling (on margin⁶) fixed amounts of four currencies—the German Mark, the Swiss Franc, the British Pound, and the Japanese Yen. Each currency lot was priced in United States dollars based on fluctuating currency exchange rates reported on the Interbank Network, a global communication network of international banks.

¶ 9 Investors opened EVFL trading accounts through FISC by paying at least $10,000 as "Guarantee Money" and executing an EVFL "Customer's Agreement" and other documents. FISC deposited investor funds into EVFL's California bank account as an "initial margin" to secure trading transactions, and sent copies of the customer agreements to EVFL. FISC and EVFL did not execute trades on an organized trading exchange. Rather, FISC provided leveraged foreign currency trading services to its customers by relaying investor buy or sell orders through the FISC and Tokyo offices to the EVFL office in Macau. Currency dealers in Macau contracted directly with international monetary companies.

¶ 10 In the administrative proceeding, the Commission concluded that the leveraged foreign currency accounts offered by EVFL through FISC were "securities" within the meaning of the Securities Act, and that they were neither registered nor exempt from registration under the Securities Act. The Commission further concluded that FISC, EVFL, Simmons, and Cho had offered or sold these unregistered securities within or from Arizona and that they had offered or sold them while not registered as dealers or salesmen in violation of §§ 44-1841 and -1842. The Commission determined that in connection with the offer and sales of such securities, FISC, EVFL, Simmons, and Cho also violated the anti-fraud provisions of § 44-1991. Specifically, the Commission determined that EVFL salespeople misled investors by giving false information of the business and investment experience of EVFL and FISC, the financial condition of EVFL, the various charges incurred by investors, and the risks attendant to Forex trades. This misleading information caused investors to sustain substantial losses. Nineteen of the twenty-one EVFL investor accounts opened through FISC sustained losses totaling $338,439.62. Accordingly, the Commission found these entities and the individuals involved primarily liable for violations of the registration and anti-fraud provisions of the Securities Act.

¶ 11 The agency further concluded that EVGL, Sharma, Wing, and Tak were liable as controlling persons of EVFL under § 44-1999. Finally, the Commission found Tokyo, Cheng, Yuen, Tam, and Zhang liable as controlling persons of FISC under § 44-1999(B).

¶ 12 The Commission ordered the various entities and individuals to cease and desist from further securities violations. It also held FISC and EVFL jointly and severally liable with controlling persons Cheng, Yuen, Tokyo, Tam, Zhang, Sharma, EVGL, Wing, and Tak, and ordered them to pay $336,086.41 in restitution to various investors. See Arizona Administrative Code Regulation 14-4-308 (giving the Commission authority to require restitution). The Commission further ordered Simmons and Cho to pay additional restitution to various clients. Finally, the Commission imposed administrative penalties as follows—FISC and EVFL to pay $150,000 each; Sharma, Cho, Cheng, Yuen, Tokyo, and Tam to pay $100,000 each; and Simmons to pay $25,000.

¶ 13 EVFL, EVGL, Sharma, Wing, Tak, Cho, Cheng, Yuen, Tam, and Zhang appealed the ACC's decision to the Maricopa County Superior Court.⁷ Following briefing by the parties, the superior court found that the Commission had jurisdiction over the matter.⁸ The court also upheld the ACC's findings and rulings, except for the finding of controlling person liability as to Cheng, Yuen, Sharma, Wing, Zhang, and Tak.

¶ 14 Pursuant to A.R.S. § 12-348(A)(2) and (I)(1) (Supp.2000), Sharma, Wing, Tak, Cheng, Yuen, and Zhang moved for their attorneys' fees and expenses incurred in both the administrative proceeding and the superior court action. They sought approximately $168,000 in fees and $18,000 in expenses. The Commission objected to this fee request, arguing that these individuals were not entitled to fees or, alternatively, were not entitled to the sums requested. The superior court awarded fees of $4,000 plus the costs of the lawsuit, deciding to only award fees and costs associated with the filing of the lawsuit, not those arising out of the administrative proceeding. ¶ 15 Sharma, et al., moved for reconsideration of their fee request and sought findings on the ruling regarding the fee issue. Meanwhile, the Commission moved for reconsideration on the control liability issue. The superior court denied both motions for reconsideration, and entered judgment in accord with its prior rulings.

¶ 16 The Commission then filed this appeal, challenging the superior court's determination that Cheng, Yuen, and Sharma were not liable as controlling persons under § 44-1999(B). EVFL, EVGL, Cho, Tam, Sharma, Yuen, and Cheng cross-appealed from the court's...