Nutek Information Systems, Inc. v. Arizona Corp. Com'n

• Decision Date: 05 November 1998
• Docket Number: CA-CV,No. 1,1
• Citation: 977 P.2d 826,194 Ariz. 104
• Parties: Blue Sky L. Rep. P 74,173, 281 Ariz. Adv. Rep. 34 NUTEK INFORMATION SYSTEMS, INC., Jeffrey A. Shuken, Aks Daks Communications, Inc., Smr Advisory Group, L.C. and Albert Koenigsberg, Plaintiffs-Appellants, v. ARIZONA CORPORATION COMMISSION; Renz D. Jennings, Commissioner; Marcia Weeks, Commissioner and Carl J. Kunasek, Commissioner, Defendants-appellees. 97-0590.
• Court: Arizona Court of Appeals

Page 826

977 P.2d 826

Blue Sky L. Rep. P 74,173, 281 Ariz. Adv. Rep. 34

NUTEK INFORMATION SYSTEMS, INC., Jeffrey A. Shuken, Aks Daks Communications, Inc., Smr Advisory Group, L.C. and Albert Koenigsberg, Plaintiffs-Appellants, v. ARIZONA CORPORATION COMMISSION; Renz D. Jennings, Commissioner; Marcia Weeks, Commissioner and Carl J. Kunasek, Commissioner, Defendants-appellees.

No. 1 CA-CV 97-0590.

Court of Appeals of Arizona Division 1, Department E.

Nov. 5, 1998.

As Amended Nov. 10, 1998.

Review Denied May 25, 1999.

Law Practice of J.B. Grossman, P.A. by J.B. Grossman, Ft. Lauderdale, Florida and Roshka Heyman & DeWulf PLC by Paul J. Roshka, Randall H. Warner, Phoenix, for Plaintiffs-Appellants.

Grant Woods, Attorney General by W. Mark Sendrow, Assistant Attorney General, Robert A. Zumoff, Assistant Attorney General, Phoenix, for Defendants-Appellees.

Carol R. Goforth, Amicus Curiae Fayetteville, Arkansas and Lewis and Roca LLP by John P. Frank, Pamela B. Peterson, Phoenix, for Amicus Curiae.

OPINION

RYAN, Judge.

¶1 The Arizona Corporation Commission ("Commission") found that appellants violated Arizona securities laws by marketing membership interests in limited liability companies involved in telecommunications. This appeal challenges the Commission's conclusion that these interests constituted securities. We agree with the Commission and therefore affirm.

I.

¶2 Appellant, SMR Advisory Group, L.C., ("SMR") is a Texas limited liability company. Appellant, AKS DAKS Communications, Inc., ("ADC") is a Florida corporation. Appellant, Albert Koenigsberg, ("Koenigsberg") is the president and member-owner of SMR and the president and sole shareholder of ADC.

¶3 In the spring of 1994, Koenigsberg began forming and marketing interests in numerous limited liability companies ("LLC") formed in Texas. LLCs are unincorporated entities that have some characteristics of a general partnership and some characteristics of a corporation. Under Texas' LLC laws, neither members nor managers are liable for the LLC's obligations. TEX.REV.CIV. STAT. ANN. art. 1528n § 4.03(A) (West 1997). An LLC may be managed by its members or by a manager. ¹

¶4 The initial members of these LLCs consisted of SMR and individuals who owned 220-222 megahertz ("220 MHz") radio licenses from the Federal Communications Commission ("FCC"). The LLCs were organized to obtain licenses and construct, maintain, and operate five-channel 220 MHz dispatch communications systems. Appellants, Jeffrey Shuken ("Shuken") and his company, Nutek Information Systems, Inc., assisted Koenigsberg and SMR in soliciting additional members for these LLCs.

¶5 In telephone solicitations and written materials, appellants represented that the LLCs intended to enter into a cooperative operating relationship using compatible systems to form an integrated network, the Western Regional Network ("WRN"). The WRN would extend from Washington, south to California, and east into Nevada. Appellants claimed that the WRN would generate substantial revenue for the LLCs and provide services similar to cellular telephones.

¶6 On October 18, 1994, and again on November 7, Shuken spoke with Billy Oliverio, ("Oliverio") an investigator for the Arizona Corporation Commission. Shuken offered Oliverio an opportunity to invest in what he referred to as "Washington 220 Holdings, an L.L.C." Shuken later mailed Oliverio promotional offering materials similar to those sent to other prospective investors. The initial offering materials contained a signature page for the investor to reserve a specific number of units in a particular LLC at the offered rate per unit. Appellants instructed investors to make their checks payable to the particular LLC and remit them to SMR. Some, but not all, of the signature pages informed the investor that SMR would send a Membership Summary at some time in the future, and the investor would have seven days after receipt to request a refund. Appellants collected over $10.4 million from approximately 920 investors, including $147,500 from seventeen Arizona residents.

¶7 SMR combined the investors' funds into a single administrative account and used the funds to purchase communications equipment and pay other expenses. SMR then charged the expenses to the respective LLCs. Koenigsberg was the sole signatory on this account.

¶8 While the appellants were soliciting investors in 1994, each LLC entered into a System Management Agreement with the FCC licensee who was an original member. Under this agreement, the LLC agreed to construct the communications system, manage the system, and administer invoicing and collection of customer accounts. The licensee retained ultimate control over operation of the system. Koenigsberg signed these agreements on behalf of the LLCs as "managing member." In some cases, he did so before the LLC was formally organized.

¶9 During this same period, each LLC also entered into a System Construction and Management Agreement with SMR. Under these agreements, SMR would obtain access to a system by negotiating contracts with FCC licensees, construct a system, maintain and manage it, and collect and receive payments on customer accounts. The agreements recited that the licensees retained ultimate control. SMR was to receive as compensation 25 percent of gross operating revenues each month, with a minimum payment of $800 per month per channel ($4,000 per month for these five-channel systems). Each agreement lasted five years and contained a five-year renewal that could be refused by the LLC only if a court found SMR guilty of gross negligence or fraud. Koenigsberg executed the agreement on behalf of all entities: SMR, the LLCs as attorney in fact, and ADC as authorized agent.

¶10 On November 29, 1994, the Securities Division of the Arizona Corporation Commission initiated proceedings by filing a Notice of Opportunity for Hearing Regarding Proposed Order to Cease and Desist. The notice alleged violations of the registration and anti-fraud provisions of the Arizona Securities Act, Arizona Revised Statutes Annotated ("A.R.S.") sections 44-1801 to -2126.

¶11 In January 1995, the appellants sent the Membership Summary to investors who had previously reserved LLC units. This summary contained information on the following matters: risks; the relationship between the LLCs, ADC, and SMR; financial statements and organizational documents for the LLCs; and contractual arrangements between the LLCs, ADC, and SMR. It informed the investors that they could subscribe to the units previously reserved, or request a refund of the money they had already paid, but must do so within seven days. Appellants considered a failure to timely request a refund as consent to subscribe and a waiver of refund. A condition of subscribing required investors to ratify all prior acts of the LLC.

¶12 The Commission held a hearing in April 1995. It ruled that the membership interests marketed in the LLCs constituted securities and that the appellants had sold unregistered securities in violation of A.R.S. section 44-1841, failed to register as securities dealers or salesmen in violation of A.R.S. section 44-1842, and violated the anti-fraud provision, A.R.S. section 44-1991.

¶13 Appellants then filed this action, seeking judicial review of the Commission's decision. The superior court affirmed. Appellants appealed and we have jurisdiction. A.R.S. §§ 12-2101(B) and 12-913.

II.

¶14 This case presents a question of first impression in Arizona. ² We must decide whether the membership interests in the LLCs constitute "securities," bringing them under the Arizona securities laws. Whether an instrument is a security is a question of law. Vairo v. Clayden, 153 Ariz. 13, 18, 734 P.2d 110, 115 (App.1987); Daggett v. Jackie Fine Arts, Inc., 152 Ariz. 559, 564, 733 P.2d 1142, 1147 (App.1986) (citing United States v. Carman, 577 F.2d 556, 562 (9th Cir.1978)). Our determination of the law, however, must be based on the facts determined by the factfinder in this case the Commission. See Carman, 577 F.2d at 562 ("[T]he ultimate issue of whether or not a particular set of facts, as resolved by the factfinder, constitutes an investment contract is a question of law.").

¶15 In reviewing the facts determined by an administrative agency, we do not reweigh the evidence. Carondelet Health Servs. v. Arizona Health Care Cost Containment Sys. Admin., 182 Ariz. 502, 504, 897 P.2d 1388, 1390 (App.1995). We decide if substantial evidence supports the administrative decision, and we uphold that decision unless the administrative agency acted illegally, arbitrarily, capriciously, or abused its discretion. Id.

¶16 In Arizona, "security" is defined as:

any note, stock, treasury stock, bond, commodity investment contract, commodity option, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, real property investment contract or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

A.R.S. § 44-1801(23). This definition is substantially similar to the definition of securities in both the Securities Act of 1933 and the Securities and Exchange Act of 1934. See Securities Act of 1933, 15 U.S.C.A. § 77(b)(a)(1) (1997); Securities Exchange Act of 1934, 15 U.S.C.A. § 78(c)(a)(10) (1997). Arizona courts therefore look to federal courts for guidance in interpreting the statute. Vairo, 153 Ariz. at 17, 734 P.2d at 114; Rose v. Dobras, 128 Ariz. 209, 211, 624 P.2d 887, 889 (App.1981). Here, we must determine...