People v. Koenig

• Decision Date: 15 December 2020
• Docket Number: C074411
• Citation: 58 Cal.App.5th 771,272 Cal.Rptr.3d 732
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE, Plaintiff and Respondent, v. James Stanley KOENIG, Defendant and Appellant.

58 Cal.App.5th 771

272 Cal.Rptr.3d 732

The PEOPLE, Plaintiff and Respondent,

v.James Stanley KOENIG, Defendant and Appellant.

C074411

Court of Appeal, Third District, California.

Filed December 15, 2020

Certified for Partial Publication.^*

Cliff Gardner, Attorney at Law, 1448 San Pablo Avenue, Berkeley, CA 94702, Rudolph J. Alejo, Berkeley, for Defendant and Appellant.

Kamala D. Harris and Xavier Becerra, Attorneys General, Gerald A. Engler, Chief Assistant Attorney General, Michael P. Farrell, Senior Assistant Attorney General, Stephen G. Herndon, Supervising Deputy Attorney General, Carlos A. Martinez, Supervising Deputy Attorney General for Plaintiff and Respondent.

MURRAY, J.

A jury found defendant James Stanley Koenig guilty of 33 counts of securities fraud and enhancements — mostly involving Corporations Code section 25401¹ — and two counts of residential burglary. He was sentenced to an aggregate term of 42 years eight months. On appeal, defendant raises 15 contentions. As we shall discuss, we conclude the trial court erred by not instructing on mistake of law as to some counts and it erred in failing to define the term "indirect" for the jury as to one count. However, we conclude these errors were harmless and find no merit to the other contentions.

We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

The 33 securities fraud and two burglary counts arose from the sale of securities to 31 individual investor victims. Between 2001 and 2007, each of those investors purchased one or more of 16 different investments (not including supplemental offers) from defendant's company.² And for each of those investments, it was the prosecution's theory that various material omissions or misstatements were made either through the offering documents or during the sale of the investment.

The trial lasted over three months, more than five dozen witnesses testified, and many hundreds of exhibits were introduced. Suffice it to say, we limit our discussion of the facts to those pertinent to the issues raised on appeal.

Dramatis Personae

While many people worked for or were affiliated with defendant's companies (many of whom testified at trial), for purposes of the issues raised on appeal, several individuals and entities are key.

Defendant was the owner of Asset Real Estate and Investment Company, Inc., known as "AREI," the company that issued the investments in question. Defendant also owned outright several other companies involved in those investments. And, he was part owner of several other companies involved.

Back in 1985, defendant pleaded guilty to two felony counts of federal mail fraud. He was sentenced to two-and-a-half years in federal prison, with five years of formal probation, and he was ordered to pay $5,000,000 in restitution. When probation ended in 1993, he signed a $81,187 promissory note for restitution.

In this case, defendant did not personally sell the securities at issue. Instead, all the securities at issue were sold by Gary Armitage.³ Armitage was a full or part owner of several involved companies, and he was charged along with defendant but resolved his case for a 10-year sentence.

Also playing a significant role in the contentions raised on appeal were four attorneys, William Webster, Gilles Attia, Bill Tate, and Bruce Dravis, who advised defendant and AREI. Defendant maintains he relied on their advice regarding disclosure documents created for the investments.

AREI and the Securities Offered

From 2001 to 2007, AREI offered three types of securities at issue. Initially, it would acquire and develop land and facilities — often senior living facilities — financed through the sale of mortgage interests to investors. Investors would buy certificates of interest in a Limited Liability Company, which in turn held the mortgage. Investors would then receive monthly interest payments.

In 2004, AREI transitioned to selling "tenant in common" interests, known as "TICs." For these, AREI would identify senior living facilities and sell ownership interest to investors, who would hold them as tenants in common. Investors would receive monthly lease payments from a master lessee that would manage the facility, pay taxes, and serve as the sole tenant. The master lessee, an affiliate LLC created by AREI, would contract with Oakdale Heights Management Corporation — a company wholly owned by defendant — "to handle all of the daily care and marketing, food service, everything that has to happen in delivering the services at the senior housing community." AREI, for its part, received an "acquisition fee" for the TIC offerings.

In late 2004, AREI began offering the first of two corporate notes at issue. (Corporate Note I) The notes were essentially an unsecured debt offering of AREI. Investors would receive interest on the note. AREI would use the corporate notes to raise cash and to move investors out of poorly performing property investments. AREI began offering the second corporate note (Corporate Note II) in June 2007.

A Brief History of The Fall of AREI

In September 2003, if not earlier, AREI grew concerned about some of its real estate investments. For some, the debt against the underlying asset was such that the investment was "significantly underwater" and investors couldn't be paid off if the asset was sold.

In response, defendant directed a then AREI vice-president to find a way to fix it. In early 2004, that vice-president devised Corporate Note I as the response. As the vice-president explained at trial: "the intent was rather than to have [investors] lose money on the sale of ... those assets, we would move them into the corporate note which would give investors the ability to have the benefit of ... cash flows throughout all of the AREI enterprises." An AREI employee who worked on Corporate Note I testified: "I recall [defendant] and [the then AREI president] commenting that this ... is our get-out-of-jail-free card."

Corporate Note I issued in December 2004. In addition to swapping interests in other investments, interests in the note could be purchased with cash, and through this, AREI raised "working capital," setting the initial cash offering at $1.5 million. But from April 2005 to December 2006, Corporate Note I was supplemented four times, with each supplement raising the cash offering amount, to $5 million, to $6.5 million, to $11.5 million, to finally $21.5 million.

The impetus for raising the debt offering was that AREI properties were underperforming, and in order to meet the obligations of running the properties and paying investors, additional cash was needed. As one employee testified: "Because investments in properties that we had made were not performing at the level that ... were expected to be maintained. And ... there was no interest in ... down-sizing our management operation.... So, in order to maintain our operation and ... supplement cash flow shortfalls of properties ... the [additional debt offering] was needed." The employee also testified: "One of the large uses of proceeds of the corporate note was to lend money to AREI Senior Housing Properties to support some under-performing master lessees."

In May 2006, one of AREI's lenders discovered defendant's convictions and decided it no longer wanted to do business with AREI. AREI then had a pending acquisition that depended on the lender's underwriting. Asked what could be done, the lender demanded that defendant, who then held 100% of AREI, divest to a minority interest.⁴

"It has become apparent to me," defendant wrote in an email to company officers, "that AREI's growth has been hindered by my personal felony conviction in the past." Defendant proposed selling 80 percent of his AREI ownership to its employees for $10 million. But he added, "I also will remain as a consultant to the company ... and will be provided the company truck as an AREI owned vehicle," and "I will also have use of the corporate jet without prior approval ...."

In June, defendant entered into an agreement to sell 51 percent of his shares to Gary Armitage and four company officers. But in August, after the acquisition with the reluctant lender had gone through, defendant called a board meeting, announcing he would unwind the share sale, noting the shares had not yet been issued. And in November, defendant signed a "consent of sole director," appointing AREI's officers, including the president and CEO.⁵

By 2007, multiple tenant in common investments became unprofitable, generating insufficient cash flow to pay investors.⁶ It was the same with Corporate Note I, with some note holders going unpaid by April 2007. When an employee spoke to the Chief Financial Officer about it, she was told, there's no money, and nothing can be done.⁷ Another employee testified that defendant on multiple occasions told him that "Gary's [Armitage] got money coming in."

In late May 2007, Armitage sent an email to defendant listing new funds coming from corporate note investors and directing that certain existing investors be paid with those new funds.

Also around that time, the debt ceiling on the fourth supplement to Corporate Note I was reached, and AREI began preparing Corporate Note II. When an attorney preparing the offering documents asked about AREI's ability to service the debt, an AREI employee explained that the only source for repayment was syndication fees earned for future tenant in common offerings. That employee testified at trial: "There was no steady cash flow or income stream to AREI except through additional syndications which were spotty."

Corporate Note II issued in June 2007. At the same time, defendant proposed rolling AREI's debt obligation into a new company and recapitalize it: "What if we create a new company and roll up the existing note holders into this company by trading stock for cash." He added: "Here is the beautiful thing, once all of the TIC owners are converted or paid off by people who buy in, the return to the investor will be terrific." AREI then owed $45 million on...