People v. Prendergast, No. 02CA1148.

Decision Date09 October 2003
Docket NumberNo. 02CA1148.
Citation87 P.3d 175
PartiesThe PEOPLE of the State of Colorado, Plaintiff-Appellee, v. Brian V. PRENDERGAST, Defendant-Appellant.
CourtColorado Court of Appeals

Certiorari Denied April 12, 2004.1

Ken Salazar, Attorney General, John D. Seidel, Assistant Attorney General, Denver, Colorado, for Plaintiff-Appellee.

Robert T. McAllister, P.C., Robert T. McAllister, Denver, Colorado, for Defendant-Appellant.

Opinion by Judge ROTHENBERG.

Defendant, Brian V. Prendergast, appeals the judgment of conviction entered on a jury verdict finding him guilty of twelve counts of securities fraud and one count of theft. We affirm.

Defendant was in the insurance industry and became involved with various business ventures. In 1995, the National Association of Securities Dealers (NASD) notified him of a pending investigation concerning him. Thereafter, NASD filed a complaint against him, censured him, and barred him from associating with any NASD member. The sanction became final after defendant's appeal was denied.

In 1996, the Commodity Futures Trading Commission (CFTC) filed an administrative action against defendant and obtained a permanent injunction barring him from participating in commodities trading.

In 1997, defendant filed for voluntary personal bankruptcy, and in that same year, he incorporated a start-up company. During 1997 and 1998, he sold shares of equity in the company. He represented to potential investors that the money they paid for the shares would serve as capital for the company and promised them a return on their investments. He also executed promissory notes, typically payable within three months, to certain of the investors.

The company purported to provide a health insurance program and agency in the Middle East in connection with hospital development. But defendant represented to some investors that the company had different business objectives, including smart card technology and investments in various government and foreign bonds.

In 2000, defendant was charged with the theft of approximately $85,000 from six investors. He was also charged with eighteen counts of securities fraud based on his misappropriation of company funds and his failure to disclose material information, including: (1) the risk involved in investing in a start-up business; (2) his pending personal bankruptcy proceeding; (3) his status with the NASD; and (4) investigations of him by the CFTC and the Securities and Exchange Commission (SEC).

Following trial, a jury convicted defendant of one count of theft and twelve counts of securities fraud.

I.

Defendant first contends the trial court erred in instructing the jury on the definition of "materiality." He maintains that the definition given was incorrect because it was a civil, objective standard and was inconsistent with § 11-51-501(1)(b), C.R.S.2002. We disagree.

It is the duty of the trial court to instruct the jury properly on all matters of law. People v. Stewart, 55 P.3d 107 (Colo.2002); People v. Garcia, 28 P.3d 340 (Colo.2001).

We review a jury instruction to which a defendant objected at trial using a harmless error analysis. Under this standard, we will reverse if the error affects the substantial rights of the defendant. Where the error is not of constitutional dimension, it will be disregarded if there is not a reasonable probability that the error contributed to the defendant's conviction. Crim. P. 52(a); People v. Garcia, supra.

In determining the propriety of a particular jury instruction, the instructions should be viewed as a whole. If two instructions are in direct conflict and one of the instructions is an incorrect and clearly prejudicial statement of law, the fact that the other instruction contains a correct statement of law cannot cure the error. People v. Riley, 708 P.2d 1359 (Colo.1985).

The Colorado Securities Act (CSA) is a remedial act intended to protect investors and maintain public confidence in securities markets while avoiding unreasonable burdens on participants in capital markets. Section 11-51-101(2), C.R.S.2002. The CSA is construed broadly to effectuate these purposes. People v. Rivera, 56 P.3d 1155 (Colo. App.2002).

As relevant here, § 11-51-501(1)(b) makes it unlawful for any person in connection with the offer or sale of any security, directly or indirectly, "[t]o 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 light of the circumstances under which they were made, not misleading."

Section 11-51-501(1)(b) is the analogue of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (2002). See § 11-51-101(3), C.R.S.2002; People v. Rivera, supra; see also

17 C.F.R. § 240.10b5 (2002). Thus, interpretations of federal law are persuasive in interpreting the CSA. People v. Rivera, supra.

When construing a Colorado securities statute, however, we apply fundamental principles of statutory construction before resorting to case law regarding similar federal statutes and regulations. Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095 (Colo.1995).

In construing a statute, our primary task is to ascertain and give effect to the intent of the General Assembly, as expressed in the language it selected, giving the words selected their plain and ordinary meaning. If the language is clear and the intent appears with reasonable certainty, there is no need to resort to other rules of statutory construction. People v. Shinaut, 940 P.2d 380 (Colo. 1997). We read and consider statutes as a whole, construing each provision in harmony with the overall statutory scheme, structure, and purpose. Whitaker v. People, 48 P.3d 555 (Colo.2002).

A.

Neither the CSA nor the federal statute or regulations define the term "material." See § 11-51-201, C.R.S.2002; 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b5; see also People v. Riley, supra, 708 P.2d at 1364 n. 4

(in CSA prosecution, looking to definitions of "material" and "fraud" in the context of criminal perjury, civil fraud, and fraudulent misrepresentation).

In Goss v. Clutch Exchange, Inc., 701 P.2d 33, 36 (Colo.1985), a civil action for damages under the CSA, the Colorado Supreme Court held the "standard of materiality adopted with respect to federal securities statutes should be applied in actions arising under the [CSA]." The court concluded a misrepresented or omitted fact was material under the CSA "if there is a substantial likelihood that a reasonable investor would consider the matter important in making an investment decision." Goss v. Clutch Exch., Inc., supra, 701 P.2d at 36.

The Goss court stated that whether the misrepresented or omitted fact is important turns on "whether a reasonable investor would regard it as significantly altering the `total mix' of information made available." Goss v. Clutch Exch., Inc., supra, 701 P.2d at 36 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)).

Other divisions of this court have cited the Goss standard in the context of criminal securities fraud prosecutions. See People v. Rivera, supra

(citing Goss in determining an evidentiary issue); People v. Campbell, 58 P.3d 1148 (Colo.App.2002); see also People v. Riley, supra.

Here, the jury was instructed on the elements of the crime of securities fraud in accordance with § 11-51-501(1)(b):

1. That the defendant ...
3. in connection with the offer, sale or purchase of any security,
4. directly or indirectly,
5. willfully,
6. (a) made any untrue statement of material fact,
—or—
(b) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

The court gave a separate instruction defining "material fact":

A misrepresented or omitted "fact" is considered "material" if there is a substantial likelihood that a reasonable investor would consider the matter important in making an investment decision. Whether or not a misrepresented or omitted fact is important turns on whether a reasonable investor would regard it as significantly altering the total mix of information made available.

Defendant objected to the materiality instruction. He argued that the elements instruction should stand alone, explaining: "There was no attempt in the criminal statute to define [materiality] as what a reasonable person would do. As a matter of fact, it's just the opposite. It's what a person in those factual circumstances would do."

The trial court overruled his objection, reasoning that "the statute upon which liability attaches is the same" for either a criminal prosecution or civil action. We agree.

The CSA's statutory structure demonstrates the General Assembly's intent to define general provisions applicable to both criminal and civil violations.

Part 2 of the CSA sets forth a single set of definitions. Part 5 defines fraud and other prohibited conduct, as alleged here under § 11-51-501. Part 6 establishes criminal and civil liability for violations of § 11-51-501. A "willful" violation is criminal and constitutes a class 3 felony. Section 11-51-603(1), C.R.S.2002.

Civil liability arises from violations of § 11-51-501 under other circumstances. Section 11-51-604(3), C.R.S.2002 (any person who "recklessly, knowingly, or with an intent to defraud" sells or buys a security in violation of § 11-51-501(1) is liable for legal or equitable relief); § 11-51-604(4), C.R.S.2002 (any person who sells a security in violation of § 11-51-501(1)(b) to a person who has imputed knowledge of untruth or omission is liable for limited damages).

Definitions derived from civil law may be applied to criminal statutes. See People v. Riley, supra; see also State v. Ross, 104 N.M. 23, 715 P.2d 471, 475 (Ct.App.1986)

(recognizing reasoning from civil case that securities fraud statute is not identical to common law fraud).

In People v. Riley, supra,

the Colorado Supreme...

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