People v. Feno

• Decision Date: 18 April 1984
• Docket Number: Cr. 15196
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 72,027 The PEOPLE, Plaintiff and Respondent, v. Joseph Earnest FENO, Defendant and Appellant.

Page 513

201 Cal.Rptr. 513

154 Cal.App.3d 719, Blue Sky L. Rep. P 72,027

The PEOPLE, Plaintiff and Respondent, v. Joseph Earnest FENO, Defendant and Appellant.

Cr. 15196.

Court of Appeal, Fourth District, Division 1, California.

April 18, 1984.

Hearing Denied June 21, 1984.

Reniche & Krause and James C. Krause, San Diego, for defendant and appellant.

John K. Van de Kamp, Atty. Gen., Michael D. Wellington and M. Howard Wayne, Deputy Attys. Gen., for plaintiff and respondent.

WIENER, Associate Justice.

Joseph Earnest Feno appeals from the judgment entered on jury verdicts convicting him of selling securities in violation of the Corporate Securities Law of 1968. (Corp.Code, §§ 25110, 25540.) ¹ For the reasons set forth below, we reverse the judgment.

Factual and Procedural Background

In late 1978 Feno left his employment as a meatcutter and started a used car business. Thinking additional capital would enable him to make more money, he advertised in two local newspapers that he had an excellent investment opportunity. Several people responded. Feno's deal was simple: the investor would give him money so he could purchase used cars at auctions, Feno would then recondition the cars selling them at a profit to be shared with the investor. Each investor had his or her own financial arrangement, but each signed a similar "investor's contract." Although some of the investors knew others also were investing, each investor "owned" specific cars and would make money only when those particular cars were sold. Feno's sales technique included his suggestion the investors could become involved in the business. For example, at his suggestion some of the investors obtained vehicle salespersons' licenses (Veh.Code, §§ 11800, 11802), permitting them to sell "their" cars. As a practical matter they sold no cars and generally refrained from participating in the business. On occasion some offered advice such as pooling their money or hiring a secretary and buying economy cars, but Feno was neither compelled to nor did he always follow that advice. Under the investor's contract each investor had the option of receiving his or her entire investment back upon 90 days' notice.

Feno testified he wanted participation from the investors and some advice and guidance. He acknowledged, however, the investors were relatively uninformed about the used car business, and that his business success did not require professional or managerial skill on their part. Feno conceded any profit expected was solely from his efforts in being able to select and market cars, and the investors had no authority to run the business.

In 1980 Feno's economic bubble burst. Although he was able to return modest amounts of money to the investors, he declared bankruptcy and, with only one exception, paid back none of the original investments.

A jury found Feno guilty of seven counts of selling securities in violation of section 25110. Six different victims were involved. Feno was placed on probation for five years on the condition he pay $51,000 restitution (Pen.Code, § 1203.1), dismiss an action he filed in his bankruptcy proceeding to enjoin further state court prosecution and serve a period of 90 days on work furlough. This appeal ensued.

Introduction

Before addressing the specific issues Feno raises, we present a brief overview of the pertinent statutory provisions.

Section 25110 declares: "It is unlawful for any person to offer or sell in this state any security in an issuer transaction ... unless such sale has been qualified under Section 25111, 25112 or 25113 ... or unless such security or transaction is exempted under Chapter 1 (commencing with Section 25100) of this part."

Section 25540 makes it a crime for any person to willfully violate any provision of the Corporate Securities Law. Criminal violations of section 25110 are strict liability offenses. (People v. Clem (1974) 39 Cal.App.3d 539, 541-543, 114 Cal.Rptr. 359.) The offer or sale of a "security" ² is a key element of such an offense which the prosecution must prove beyond a reasonable doubt. (In re Winship (1970) 397 U.S. 358, 364, 90 S.Ct. 1068, 1072, 25 L.Ed.2d 368; People v. Roder (1983) 33 Cal.3d 491, 497, 189 Cal.Rptr. 501, 658 P.2d 1302.) By raising a reasonable doubt on the security issue, a defendant is entitled to an acquittal. (Pen.Code, § 1096.)

Even if he concedes the offer or sale of a security, or fails to raise a reasonable doubt on the issue, a defendant may still gain acquittal under section 25110 by showing (1) the sale of the security was qualified, or (2) the security itself was exempt, or (3) the securities transaction was exempt. The defendant has the burden of proving these affirmative defenses. (§ 25163; People v. Skelton (1980) 109 Cal.App.3d 691, 724, 167 Cal.Rptr. 636, cert. den., 450 U.S. 917, 101 S.Ct. 1361, 67 L.Ed.2d 343; People v. Park (1978) 87 Cal.App.3d 550, 566-567, 151 Cal.Rptr. 146.) An exemption thus operates to exclude a security or a securities transaction from the securities regulation provisions that would otherwise apply. (See §§ 25100-25105.)

At the time of Feno's transactions with the investors, former section 25102, subdivision (f) provided an exemption from the provisions of section 25110 for transactions involving nonpublic offerings of certain types of securities: "(f) Any offer or sale, in a transaction not involving any public offering, of any bona fide general partnership, joint venture or limited partnership interest ...." (Stats.1979, c. 665, § 1.7, p. 2042.) ³ Although somewhat unclear, this exemption implicitly distinguishes between joint venture interests which are securities (see §§ 25010, 25013) and those which are not. The distinguishing characteristic is whether the interest represents a passive investment or an active participation in the venture on the part of the interest holder. (See People v. Skelton, supra, 109 Cal.App.3d at pp. 712-713, 167 Cal.Rptr. 636; People v. Park, supra, 87 Cal.App.3d at pp. 563-564, 151 Cal.Rptr. 146; see also 2 Ballantine & Sterling, Cal. Corporation Laws (1983) § 444.02.) Joint venture interests representing passive investments are securities and therefore are exempt if offered or sold in nonpublic transactions. However, those interests involving active participation in the venture are not securities and thus are outside the scope of the Corporate Securities Law. Such interests can be offered or sold without being qualified or exempted as otherwise required by section 25110.

We admit to some puzzlement over the meaning of the term "bona fide" as included in former section 25102, subdivision (f). If a "bona fide" interest in a joint venture involves active participation in and control of the business (see People v. Park, supra, 87 Cal.App.3d at pp. 562, 564, 151 Cal.Rptr. 146; see also Weinstock v. L.A. Carpet, Inc. (1965) 234 Cal.App.2d 809, 813-814, 817, 44 Cal.Rptr. 852), ⁴ subdivision (f) becomes internally contradictory because it makes no sense to provide an exemption from securities regulation for an interest which is not a security. On the other hand, if a "bona fide" interest in a joint venture represents a passive investment, then the term "bona fide" seems redundant and unnecessary as stating a given (i.e., a joint venture interest which is a security is exempt from securities regulation if offered or sold in a nonpublic transaction). Neither interpretation is appealing in light of the standard canons of statutory construction, since the former is inharmonious and the latter is surplusage. (See People v. Black (1982) 32 Cal.3d 1, 5, 184 Cal.Rptr. 454, 648 P.2d 104.) Regardless of the statutory lack of neatness, given our obligation to adopt the construction more favorable to the defendant (People v. Davis (1981) 29 Cal.3d 814, 828, 176 Cal.Rptr. 521, 633 P.2d 186), we apply the latter interpretation.

Discussion

I

At trial Feno conceded his contracts with the investors were not exempt and their sale was not qualified. Feno also conceded his transactions with the investors were not exempt, except as to counts 2 and 4 which he argued were nonpublic and thus within the scope of former section 25102, subdivision (f). ⁵ Thus, except as to counts 2 and 4, the only disputed issue at trial was whether Feno's transactions with the investors involved the sale of a "security" within the meaning of section 25019. (See fn. 2, ante.)

To prove this essential element the prosecution presented an "investment contract" theory. Feno countered by characterizing the transactions as either personal services contracts or joint ventures involving active participation and control by the investors. Neither type of arrangement is a security. (People v. Syde (1951) 37 Cal.2d 765, 768-769, 235 P.2d 601; see Osuna v. Russell (1959) 176 Cal.App.2d 110, 112-113, 1 Cal.Rptr. 289; Oakley v. Rosen (1946) 76 Cal.App.2d 310, 314-315, 173 P.2d 55; see also 2 Ballantine & Sterling, Cal. Corporation Laws, supra, § 444.02.) Both Feno and the prosecution submitted jury instructions to the court. A considerable portion of the court's and counsel's debate over those instructions concerned the definition of joint venture and the proper relationship between that concept and the security and exemption issues under section 25019 and former section 25102, subdivision (f).

As we shall explain, the trial court correctly instructed the jury that Feno had the burden of proving any exemption he claimed, but erred in describing all joint ventures as being "exempt" from securities law regulation. This error, considered together with the prosecutor's incorrect argument that Feno had the burden of proving a "joint venture exemption," and further exacerbated by the court's erroneous failure to instruct on Feno's defense burden of proof, lessened the prosecution's burden of proving the "security" element of the offense beyond a reasonable doubt. We conclude the court's instructional errors were prejudicial and therefore...