People v. Simon, No. S036981

• Court: United States State Supreme Court (California)
• Writing for the Court: BAXTER; LUCAS; MOSK
• Citation: 9 Cal.4th 493,37 Cal.Rptr.2d 278,886 P.2d 1271
• Parties: , 886 P.2d 1271, Blue Sky L. Rep. P 74,010, 63 USLW 2512 The PEOPLE, Plaintiff and Respondent, v. John Martin SIMON, Defendant and Appellant.
• Docket Number: No. S036981
• Decision Date: 23 January 1995

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37 Cal.Rptr.2d 278 9 Cal.4th 493, 886 P.2d 1271, Blue Sky L. Rep. P 74,010, 63 USLW 2512 The PEOPLE, Plaintiff and Respondent,
v.
John Martin SIMON, Defendant and Appellant. No. S036981. Supreme Court of California,
In Bank. Jan. 23, 1995.
Rehearing Denied March 16, 1995.

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[9 Cal.4th 496] [886 P.2d 1273] Thomas F. Coleman, Los Angeles, under appointment by the Supreme Court, for defendant and appellant.

Daniel E. Lungren, Atty. Gen., George Williamson, Chief Asst. Atty. Gen., Carol Wendelin Pollack, Asst. Atty. Gen., John R. Gorey and Sanjay T. Kumar, Deputy Attys. Gen., for plaintiff and respondent.

BAXTER, Justice.

This case arises under the Corporate Securities Law of 1968. (Corp.Code, § 25000, et seq.) ¹ The principal issue is whether sections 25401 and 25540, which criminalize the sale or purchase of securities by means of oral or written communications which either contain false or misleading statements or omit material facts, create a "strict liability" offense. We also consider appellant's claims that he was prejudiced by the trial court's error in failing to instruct on the magnitude of a defendant's burden of proof when offering an "exemption" defense to a charge of violating section 25110 which prohibits the sale of unqualified securities. ²

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We conclude that failure to instruct on defendant's burden of proof of an exemption from the requirements of section 25110 was prejudicial. We [9 Cal.4th 497] also conclude that the trial court erred prejudicially in instructing that sections 25401 and 25540 create an offense that does not require either (1) knowledge of the false or misleading nature of a representation or of the materiality of an omission, or (2) criminal negligence in failing to acquire such knowledge. The judgment must, therefore, be reversed.

I BACKGROUND

Appellant was convicted by a jury of seven counts of selling unqualified securities in violation of section 25110 ³ and five counts of selling securities by means of false statements or omissions in violation of section 25401. The charges were based on transactions in which appellant or his employee agents sold interests in promissory notes ⁴ and limited partnerships which appellant created and in which he or Vesper Corporation was the general partner. The actual offeror of the partnership interests was Vesper Corporation, doing business as Clergy Tax and Financial Services. Appellant was the president and primary shareholder of Vesper Corporation and was the manager of its operations. Appellant stipulated that "John Simon is Clergy Tax. He owns Clergy Tax and all of these limited partnerships he was responsible for to manage and direct."

Through Vesper Corporation appellant formed 47 partnerships for the purpose of purchasing, managing, and reselling real property. Nineteen were formed for the purpose of loaning funds to other partnerships. In all, there were 66 limited partnerships in which 870 people had invested a total of $11,449,883. The sales in the counts on [886 P.2d 1274] which appellant was convicted ⁵ were made between 1980 and 1985 to eight persons for whom appellant and his employees in Clergy Tax and Financial Services had prepared income tax returns. None of the limited partnerships was qualified pursuant to sections [9 Cal.4th 498] 25111, 25112, or 25113. Appellant believed that his preexisting relationship with the investors as their tax preparer exempted the securities from the qualification requirement.

Appellant was involved in all aspects of establishing and managing the limited partnerships, but made only two of the direct sales of interests in them to the investors in the counts of which he was convicted. The others were sold by his employees. The employees did not tell the investors of the risks, and only after making the investment did some receive a prospectus which did disclose that the investment was in a speculative security with a high degree of risk. Appellant minimized the risks, telling one investor that the prospects for a partnership project were more positive than disclosed in the prospectus and that a risk disclaimer in the prospectus was present only because it was required in all limited partnership prospectuses.

Evidence at trial showed that money was usually obtained from investors before property was purchased for a limited partnership and was held in a money market account. Appellant authorized the opening of escrow accounts and was aware of all purchases of property by the limited partnerships. He negotiated the purchase price and down payment,

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and he authorized the transfer of money from a partnership to make the purchase.

While appellant's employees were instructed to advise investors regarding some risks, they were not told to advise the investors that money from the partnership in which they invested might be loaned to other partnerships or used to finance the operation of Clergy Tax and Financial Services. Appellant testified that he believed that, as general partner in each of the partnerships, he had the authority to make the loans and did so when a partnership had excess cash or a cash flow problem because a lending partnership could earn higher interest and a borrowing partnership would pay lower interest than either would if it dealt with an outside lender. Substantially all of the omissions to disclose material facts were related to loans made between the real estate partnerships after the buyers had invested money. The jury necessarily concluded that this information was material and should have been disclosed to each investor.

The court did not instruct the jury that knowledge of the falsity of statements or misleading nature of omissions in communications with a prospective investor is a necessary element of the section 25401 offense. It ruled instead that section 25401 created a strict liability offense in which scienter or knowledge is not an element and instructed the jury: (1) that the actor's intent or knowledge at the time a material representation is made is irrelevant; (2) that only a general intent to commit the proscribed act was [9 Cal.4th 499] required; and (3) that if later events make a representation untrue that section is violated. The complete instruction was:

"Where the defendant makes a material representation about conduct in the future, he must act in accordance with the representation irrespective of what his intent or knowledge was at the time the representation was made.

"If his later act makes the statement as promised untrue, he may be found in violation of Section 25401.

"In the crime of willfully offering or selling a security by means of a material misrepresentation or omitting to state a material fact (Corporations Code Section 25401), a general [886 P.2d 1275] criminal intent need only be shown. 'When a person intentionally does that which the law declares to be a crime, he is acting with general criminal intent--even though he may not know that his act or conduct is unlawful.' "

In the instructions on section 25110, the jury was told that a defendant has the burden of proof that securities are exempt from the qualification requirement of section 25110. However, the court did not advise the jury that this burden was met if the defendant offered enough evidence that an exemption applied to raise a reasonable doubt that registration of the limited partnership interests was required by the Corporate Securities Law of 1968.

Appellant contends that these instructions were erroneous.

II

SECTION 25110: BURDEN OF PROOF

A limited partnership interest may be a security as defined by section 25019 of the Corporate Securities Law of 1968 (§ 25000 et seq.) because the investor provides capital that will be risked in the enterprise and is not involved in management. (Silver Hills Country Club v. Sobieski (1961) 55 Cal.2d 811, 13 Cal.Rptr. 186, 361 P.2d 906; People v. Graham (1985) 163 Cal.App.3d 1159, 1168, 210 Cal.Rptr. 318; see also Comment, Limited Partnerships and the California Securities Law: Restricting the Public Sale of Limited Partnership Interests (1980) 13 U.C.Davis L.Rev. 618; Comment, Is a Limited Partnership Interest a 'Security'?: The Current State of the California and Federal Definitions Add a Legal Dimension To Economic Speculation (1976) 16 Santa Clara L.Rev. 311.)

Section 25110 makes it illegal to sell an unqualified security unless the security itself, not the individual sale, is exempt. Therefore, a security [9 Cal.4th 500] alleged to be exempt under subdivision (f) of section 25102 because it was sold only to persons with whom the issuer had a prior business or personal relationship is not exempt if an interest in that

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security is sold to any person who does not meet that qualification. Appellant does not contest the characterization of the limited partnership interests he and his employees sold as unqualified securities. He claimed at trial, however, that the sales were exempt from qualification because all were made to persons with whom he and/or Clergy Tax and Financial Service had a preexisting personal or business relationship. ⁶

Section 25102, subdivision (f), presently creates the exemption on which appellant relied. It applies if the sales of securities are to no more than 35 persons each of whom represents that he or she is purchasing for his or her own account and not for sale, the sale is not made through publication of an advertisement, and if the "purchasers either have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors or controlling persons, or by reason of their business or financial experience or the business or financial experience of their professional advisors who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in...