People v. Mitchell

• Decision Date: 10 April 1989
• Docket Number: Docket No. 106985
• Citation: 437 N.W.2d 304,175 Mich.App. 83
• Parties: , Blue Sky L. Rep. P 73,019 PEOPLE of the State of Michigan, Plaintiff-Appellee, v. Gary Lionell MITCHELL, Defendant-Appellant.
• Court: Court of Appeal of Michigan — District of US

Page 304

437 N.W.2d 304

175 Mich.App. 83, Blue Sky L. Rep. P 73,019

PEOPLE of the State of Michigan, Plaintiff-Appellee, v. Gary Lionell MITCHELL, Defendant-Appellant.

Docket No. 106985.

Court of Appeals of Michigan.

Submitted Sept. 13, 1988.

Decided Feb. 21, 1989.

Released for Publication April 10, 1989.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Robert Ianni and John D. Walter, Asst. Attys. Gen., for the People.

James C. Thomas, P.C. by James C. Thomas, Detroit, for defendant-appellant on appeal.

Before HOLBROOK, P.J., and SAWYER and MURPHY, JJ.

MURPHY, Judge.

Defendant pled no contest in Oakland Circuit Court to one count of violating Sec. 101(2) of Michigan's Uniform Securities Act, M.C.L. Sec. 451.501 et seq.; M.S.A. Sec. 19.776(101) et seq. Defendant's plea, however, was conditioned in part upon his appeal challenging the constitutionality of various provisions of the securities act. Defendant was sentenced to sixteen to thirty-six months imprisonment but remains on bond pending this appeal.

Defendant was originally charged with thirty-six counts of violating various provisions of the state Uniform Securities Act arising out of the now infamous Diamond Mortgage-A.J. Obie mortgage-fraud scheme. Records in the lower court file from the state's Attorney General's office indicate that Diamond Mortgage Corporation and A.J. Obie and Associates perpetrated the largest "ponzie" scheme in the history of this state and one of the largest in the nation. The Attorney General's office also claims that losses in excess of $47,000,000 involving more than sixteen hundred investors had been involved in the mortgage-fraud scheme. Defendant Mitchell, a licensed securities agent, was the president of Diamond Mortgage Corporation and vice-president, treasurer, and compliance officer at A.J. Obie. The lower court record further reveals that defendant's duties as compliance officer included supervising the Obie sales agents to ensure that they were complying with state securities laws and regulations and reviewing sales documents to ensure that the investments were suitable for the investors. The Attorney General's office contended that defendant was aware that undisbursed mortgages were being sold to investors and that defendant was involved in the continued obtaining and selling of invalid mortgages. The Attorney General's office in its sentencing recommendation to the court concluded that while defendant had the duty and responsibility to make this information known to investors, which he failed to do, defendant did not control the funds paid into A.J. Obie and disbursed by Diamond Mortgage Corporation and, other than continuing to draw his salary, defendant did not personally profit from the fraud. Nonetheless, defendant was involved in and had knowledge of two of the fraud schemes as a result of his positions in the companies.

Defendant was bound over on eighteen counts of securities violations and, pursuant to a plea agreement, ¹ pled no contest to the now challenged lone count of violating subsection (2) of Sec. 101 of the securities act. Section 101 of the statute provides:

"It is unlawful for any person, in connection with the offer, sale, or purchase of any security or commodity contract, directly or indirectly:

"(1) To employ any device, scheme, or artifice to defraud.

"(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

"(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person." (Emphasis added.) M.C.L. Sec. 451.501; M.S.A. Sec. 19.776(101).

The penalty provision of the securities act in pertinent part provides:

"Any person who wilfully violates sections 101 ... shall upon conviction be fined not more than $25,000.00, or imprisoned not more than 7 years, or both." (Emphasis added.) M.C.L. Sec. 451.809(a); M.S.A. Sec. 19.776(409)(a).

Defendant first contends that the above provisions are unconstitutional because a violation of Sec. 101 does not require proof of scienter or "guilty knowledge" as a necessary element of the offense. Defendant argues that the word "wilfully" as used in the penalty provision necessarily means that a defendant must specifically intend to mislead or defraud, that is, a defendant must have had the mens rea, scienter, or "guilty knowledge" before violation of Sec. 101 of the statute can be found.

Initially, we note that the purpose of the Michigan Uniform Securities Act is to protect the investing public:

"The act was designed to protect the public from fraud and deception in the issuance, sale, exchange, or disposition of securities within this state by requiring the registration of certain securities and transactions. People v Dempster, 396 Mich 700, 704; 242 NW2d 381 (1976). Its purpose 'is to prevent stockholders and promoters from perpetrating frauds and impositions on unsuspecting investors in hazardous undertakings and to protect credulous and incompetent persons from their own inclinations to speculate in hazardous enterprises.' People v Breckenridge, 81 Mich App 6, 14-15; 263 NW2d 922 (1978), lv den 402 Mich 915 (1978). The act should be broadly construed to effectuate these purposes. Dempster, supra." Fred J. Schwaemmle Construction Co. v. Dep't of Commerce, Corporation & Securities Bureau, 420 Mich. 66, 77-78, 360 N.W.2d 141 (1984).

This Court has once before addressed the intent issue raised by defendant in this case. In People v. Cook, 89 Mich.App. 72, 279 N.W.2d 579 (1979), lv. den. 406 Mich. 1002 (1979), the defendant, who had been charged with seven violations of the Michigan Uniform Securities Act, argued that the trial court, which found the defendant guilty, ² erred because it did "not disclose a finding of specific intent to defraud, which is necessary to a finding of 'wilfulness.' " This Court addressed the element of scienter as it related to a violation of subsections 101(2) and (3) by stating at 89 Mich.App. at 85, 279 N.W.2d 579:

" 'Wilfullness' is a word of many meanings, depending upon the context in which it is used. Zimberg v United States, 142 F2d 132, 137-138 (CA 1, 1944). ⁴ A review of the case law does not reveal a clearly consistent use of the word in the context of securities fraud. See Anno: Element of Scienter as Affecting Criminal Prosecutions for Violation of Federal Securities Law, 20 ALR Fed 227. We find the term wilfullness as used in the Michigan act differs essentially from negligence.

"To wilfully violate subsection 101(2) this defendant must have intended the omission which was found to be material and misleading. To wilfully offend subsection 101(3) he must have intended to engage in the course of conduct found to operate as a fraud. In addition, this defendant must have known or recklessly failed to discover facts that rendered his conduct violative of those subsections. It is insufficient that he could have discovered the facts by due care. On the other hand, he need not have acted with the conscious purpose to mislead or defraud. It is also unnecessary that he know his conduct violated the law. ⁵ Like any element of a crime, knowledge and intent can be inferred." (Emphasis added.)

Therefore, it has been made clear that a "wilfull" violation of Sec. 101(2) only requires that the defendant must have intended the omission which was found to be material and misleading.

In addition to this foregoing authority, other jurisdictions addressing the same issue have reached the same conclusion as did our Court in Cook, supra. For example, in Van Duyse v. Israel, 486 F.Supp. 1382 (E.D.Wis., 1980), the defendant was convicted of violating Sec. 551.41 of the Wisconsin statutes, which is almost identical to Sec. 101 of Michigan's Uniform Securities Act. ³ The Wisconsin court was called upon to interpret the meaning of a "willful" violation of the statute. The court stated:

"Petitioner argues that the State was required to prove that he intended to defraud the persons who invested with him, while the State contends that it was merely required to show that petitioner's conduct was "willful." While it is not altogether clear just where the distinction lies, it appears that petitioner would require that the State prove that he entered into the investment contracts with the purpose or intent of defrauding his investors, while the State would merely require a showing that petitioner knowingly or willfully engaged in conduct which operated as a fraud upon the investors, whether or not petitioner intended that result.

"While the Wisconsin courts have not addressed the intent question, the language of the statutory provisions at issue supports the State's interpretation. Section 551.41(3) speaks of conduct which operates or would operate as a fraud or deceit upon any person. Section 551.58 imposes criminal liability on any person who 'wilfully' violates any provision of the act. Taken together, the plain meaning of the statutory provisions indicates that the State need only prove that the accused wilfully engaged in conduct which operates or would operate as a fraud or deceit upon any person. It is the nature of the act which is dispositive, not the state of mind of the actor. In this sense, the statute imposes a form of strict liability. Once the seller has wilfully engaged in conduct which operates or would operate as a fraud or deceit, he will not be heard to argue that he did not intend the consequences of his acts.

"Accordingly, the State was only required to prove that petitioner wilfully engaged in the type of conduct prohibited by the act." (Emphasis added.) Van Duyse, p. 1387.

Two years later, the Wisconsin Court of Appeals in State v. Temby, 108 Wis.2d 521, 322 N.W.2d 522 (1982), held that the identical securities act violation as occurred in this case, i.e., a subsectio...