People v. Milne, 83SA451

• Citation: 690 P.2d 829
• Decision Date: 05 November 1984
• Docket Number: No. 83SA451,83SA451
• Parties: Blue Sky L. Rep. P 72,140 The PEOPLE of the State of Colorado, Plaintiff-Appellee, v. William Theodore John MILNE, Defendant-Appellant.
• Court: Supreme Court of Colorado

Page 829

690 P.2d 829

Blue Sky L. Rep. P 72,140

The PEOPLE of the State of Colorado, Plaintiff-Appellee, v. William Theodore John MILNE, Defendant-Appellant.

No. 83SA451.

Supreme Court of Colorado,

En Banc.

Nov. 5, 1984.

Rehearing Denied Nov. 26, 1984.

L. Duane Woodard, Atty. Gen., Charles B. Howe, Deputy Atty. Gen., Richard H. Forman, Sol. Gen., Valerie J. Petersen, Asst. Atty. Gen., Denver, for plaintiff-appellee.

Elvin L. Gentry, Colorado Springs, for defendant-appellant.

ERICKSON, Chief Justice.

The defendant, William Milne, appeals his conviction for selling securities without a license. Section 11-51-104(1), 4 C.R.S. (1973). ¹ He claims that he cannot be convicted under the statute for the following reasons: (1) the notes he sold are not securities; (2) his acquittal on the charge of failure to register securities is inconsistent with his conviction for failing to obtain a license to sell securities; and (3) parts of the Colorado Securities Act are unconstitutionally vague and overbroad. He also asserts that the imposition of restitution as a condition of probation for his conviction on the charge of failing to obtain a license is improper. We affirm.

I.

In 1963, the defendant acquired an interest in and became president of the Valley Loan Association (VLA), a small corporation in Lamar, Colorado, engaged primarily in the business of extending consumer finance loans. During his initial association with VLA he restricted his activities largely to insurance, but in later years he became more directly involved in the corporation's financing and consumer loans. He acquired complete ownership of VLA in 1968.

Prior to and throughout the defendant's association with VLA, the corporation issued "investment notes" to various purchasers. The notes ranged in amount from $2,000 to $8,000 and originally paid interest quarterly at rates ranging from seven and one-half to ten percent per annum. ² The notes stated a five-year maturity date and contained a provision that they could become due and payable at the option of the holder upon sixty days written notice. Money obtained from the notes was used to finance consumer purchase money loans and, during a period when VLA was experiencing financial difficulties, to meet interest payments on outstanding notes.

In late 1979 and early 1980, VLA experienced serious financial difficulties and was unable to satisfy the demands made for repayment of the principal due on outstanding notes. The defendant attempted to meet the corporation's payment obligations by mailing corporate checks to the noteholders, but the checks were later returned unpaid. The defendant declared bankruptcy in 1981, and his personal liability to the holders of the notes was ultimately discharged in the United States Bankruptcy Court.

As a result of complaints made by unpaid noteholders to the El Paso County district attorney, a criminal information was filed against the defendant on March 19, 1982, charging him with failing to register securities, § 11-51-106, 4 C.R.S. (1973), selling securities without obtaining a license, § 11-51-104, 4 C.R.S. (1973), violations of the Colorado Savings and Loan Act, ³ §§ 11-41-103 & 127, 4 C.R.S. (1973), and twelve counts of fraud by check, §§ 18-5-205(2) & (3)(d), 8 C.R.S. (1978). The case was tried before a jury, and a verdict of guilty was returned only on the licensing charge. The defendant's motion for judgment non obstante veredicto, judgment of acquittal, or new trial was denied by the district court, and he was sentenced to five years of probation. As a condition of probation, the district court ordered the defendant to pay restitution to the unpaid noteholders.

II.

The defendant claims that he cannot be convicted under Colorado's Securities Act because the notes issued by VLA are not securities. We do not agree.

While this court is not bound by federal law in the interpretation of the Colorado Securities Act, we have held that federal authorities that interpret provisions parallel to the Colorado act are highly persuasive. Lowery v. Ford Hill Investment Company, 192 Colo. 125, 556 P.2d 1201 (1976); Raymond Lee Organization v. Division of Securities, 192 Colo. 112, 556 P.2d 1209 (1976). Colorado's statutory definition of the term "security" includes "any note ... evidence of indebtedness ... participation in any profit sharing agreement ... investment contract ... or, in general, any interest or instrument commonly known as a security ...." § 11-51-102(12), 4 C.R.S. (1973). The definition is virtually identical to the definition of "security" in the federal securities act. See 15 U.S.C. § 77b(1) (1982). As we stated in Lowery, the broad scope of the statutory definition evinces "a legislative intent to provide the flexibility needed to regulate the various schemes devised by those who seek to use the money of others with the lure of profits." 192 Colo. at 130, 556 P.2d at 1205.

We cannot agree that the "investment notes" issued by VLA are not securities. As "notes," they fall squarely within the language of section 11-51-102(12). Furthermore, the instruments meet the interpretative test which was developed in SEC v. W.J. Howey Company, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) and adopted by this court in Lowery, 192 Colo. at 130, 556 P.2d at 1205. See SEC v. World Radio Mission, Inc., 544 F.2d 535 (1st Cir.1976) (interest bearing notes payable in seven years with 90 day acceleration clause and increases in interest rate are securities under a literal reading of the federal securities act and the interpretive test).

The touchstone of a security is the presence of an investment in a common enterprise that is premised on a reasonable expectation of profits to be derived from the entreprenurial or managerial efforts of others. United Housing Foundation v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975); Howey, 328 U.S. at 298-99, 66 S.Ct. at 1102-03; Lowery, 192 Colo. at 130, 556 P.2d at 1205. Here, each of the noteholders entrusted money with the defendant in return for "investment notes," with the expectation of receiving periodic interest payments in addition to repayment of the principal amount. The interest rates were raised periodically to induce the holders to retain the notes, to encourage further purchases, and to attract additional purchasers who were "interested in [the] favorable return" the notes provided. The holders invested with the primary purpose of receiving profits.

The holders also invested in a "common enterprise" insofar as the return on their money paid to VLA was dependent upon the continuing operation and success of the business. Should the corporation become insolvent or sustain substantial financial losses, as was actually the case, the source of the fund from which payment was to be made would be lost. See, e.g., H. Bloomenthal, Securities Law Handbook, (1983) at 22. Moreover, the investors' expectation of profit derived solely from the managerial efforts of others. Payment of the promised return depended solely upon the ability of the defendant and other VLA officials to successfully manage and operate the corporation. The investors had no ability to control or manage the funds they invested or otherwise ensure that their promised return was actually paid.

We therefore conclude that the VLA "investment notes" are securities within the meaning of the Colorado Securities Act. ⁴

III.

The defendant claims that the obligation to obtain a license to sell securities does not apply to persons dealing in exempt securities or exempt transactions. He claims that his acquittal on the charge of failure to register securities constitutes a finding that either the securities he sold or the transactions underlying his sales were exempt, and that such a finding is inconsistent with his conviction for failing to obtain a securities license. He also argues that the application of the licensing requirement of section 11-51-104 to persons transacting business in exempt securities or transactions would render the licensing requirement unconstitutionally vague and overbroad. We reject both of the defendant's assertions.

A.

The licensing provision of Colorado's Securities Act does not allow "any person to transact business in this state as a broker-dealer, issuer-dealer, or salesman unless he is licensed under this article." § 11-51-104(1), 4 C.R.S. (1973). A broker-dealer is "any person engaged in the business of effecting transactions in securities for the account of others or for his own account." § 11-51-102(1), 4 C.R.S. (1973) (emphasis supplied). A salesman is defined in section 11-51-102(9), 4 C.R.S. (1973), as "any individual, other than a broker-dealer or issuer-dealer, who represents a broker-dealer or issuer-dealer in effecting or attempting to effect purchases or sales of securities" (emphasis supplied).

The statutory scheme of the Securities Act supports the requirement of obtaining a license even if the securities or the transactions are exempt. The licensing provision of section 11-51-104 is not contingent upon dealers or salesmen engaging in the sale of registered securities, but rather applies to any person acting as a dealer or salesman. The statute also fails to provide an exemption from licensing for persons dealing in exempt securities or transactions in any of the definitional provisions. ⁵ Moreover, while the statute expressly exempts specified securities and transactions from the registration requirement of section 11-51-106 and from the requirement to file sales literature under section 11-51-115, it does not provide a similar exemption from the licensing provision of section 11-51-104. See §§ 11-51-114(1) & (2), 4 C.R.S. (1973).

The statutory framework enacted by the General Assembly requiring dealers and salesmen of securities to obtain a license, even if the securities or underlying transactions are exempt, is not irrational. We have held that commercial and business...