People v. Terranova

• Decision Date: 30 December 1976
• Docket Number: No. 75--790,75--790
• Citation: 38 Colo.App. 476,563 P.2d 363
• Parties: , Blue Sky L. Rep. P 71,352 The PEOPLE of the State of Colorado, Plaintiff-Appellee, v. William M. TERRANOVA, Defendant-Appellant. . I
• Court: Colorado Court of Appeals

Page 363

563 P.2d 363

38 Colo.App. 476, Blue Sky L. Rep. P 71,352

The PEOPLE of the State of Colorado, Plaintiff-Appellee, v. William M. TERRANOVA, Defendant-Appellant.

No. 75--790.

Colorado Court of Appeals, Div. I.

Dec. 30, 1976.

As Modified On Denial of Rehearings Feb. 24, 1977.

J. D. MacFarlane, Atty. Gen., Edward G. Donovan, Sol. Gen., Thomas P. Casey, Chief Appellate Deputy Dist. Atty., Lucy Marsh Yee, Deputy Dist. Atty., Denver, for plaintiff-appellee

David A. Sorenson, Denver, for defendant-appellant.

STERNBERG, Judge.

Defendant William Terranova was charged in a five count information with the following offenses: (1) Theft, (2) Conspiracy to Commit Theft, (3) Fraudulent Practices in Connection with the Sale of Securities, (4) Sale of Securities Without a License, and (5) Sale of Unregistered Securities. Terranova was convicted by a jury on all five counts and he appeals alleging error on Counts 1, 3, 4 and 5. We affirm as to Counts 4 and 5, and reverse as to Counts 1 and 3.

The relevant facts are these: In late 1973, Terranova became involved with one James Westover in connection with the anticipated purchase of the Little King Ranch near Granby, Colorado. This ranch is an elaborate and luxurious development containing 117 acres upon which are located guest houses and other buildings, together with tenant recreational facilities capable of accommodating 120 people. Title to the ranch was held by a bank which had foreclosed on it at the time of the bankruptcy of its previous owner. Westover and a group of wealthy, and in some instances prominent, persons from this country and abroad became interested in purchasing the property and developing it into a private club for affluent members. To this end they formed a Colorado corporation, Little King Ranch, Limited, which was to acquire the property. Terranova became secretary and treasurer of the corporation.

Terranova, Westover, and others involved with the corporation met about five times with two individuals who were undercover agents for the Colorado Crime Strike Force. The agents masqueraded as underworld figures who had large sums of money to invest. Numerous representations were made to the agents regarding the ranch. Among these representations were the assignment of a grossly inflated value to the ranch, a claim that certain nationally prominent A meeting was held to consummate the sale at which Terranova produced a stock certificate signed by him and the corporation's attorney who had allegedly received a power of attorney from the corporation's president. The agent testified that Terranova said the stock was registered, and the agent then called the corporation's attorney who verified the registration and said the stock could be sold. Having supposedly obtained the attorney's advice that the stock could be sold, the agent consummated the purchase and Terranova and others were arrested.

and wealthy individuals would be part of the organization, and a claim that 337 millionaires had been enlisted as members. Subsequently, Terranova and others offered to sell the agents a 'membership' in the ranch for $6,000 and stock in the Little King corporation 'worth' $42,000 at a fifty percent discount. The agents agreed to purchase $20,000 worth of stock.

It is undisputed that no power of attorney had been obtained, that the stock was not registered, that it was valueless, and that Terranova did not have a security salesman's license. And, the corporation did not acquire title to the ranch.

SCIENTER

At trial, when the corporation's attorney was called to testify as to the advice he had given Terranova regarding the legality of the sale of the stock, his testimony was curtailed. This ruling was based on the judge's determination that scienter, I.e., intent to deceive, manipulate, or defraud, was not an element of Counts 3, 4 and 5 and thus reliance on advice of counsel was irrelevant.

That ruling is the basis of Terranova's first contention of error. We hold that scienter is an element of the crime charged in Count 3 (the Fraudulent Practices charge,) but that it is not an element of Count 4 (the Sale Without a License charge) and Count 5 (the Sale of Unregistered Securities charge).

The jury instruction relating to those counts read as follows:

'With respect to Counts Three, Four and Five, the offenses charged Are all crimes of strict liability, requiring no proof of specific intent. Intent to commit the crime need not be shown, only the intent to act. The voluntary commission of the forbidden act constitutes the crime charged. This is what is meant by the act of the defendant being done 'willfully.'

'The requirement for criminal liability of these crimes is the performance by a person of conduct which includes a voluntary act or the omission to perform an act which he is physically capable of performing.' (emphasis supplied)

Thus, if scienter is an element of any of the above counts the jury instruction was improper.

The statute under which Terranova was convicted in Count 3, C.R.S. 1963, 125--1--1, now § 11--51--123, C.R.S. 1973, provides that:

'(1) It is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly:

(a) To employ any device, scheme, or artifice to defraud;

(b) 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; or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.'

This section is identical to § 101 of the Uniform Securities Act, which Act Colorado has adopted. In Uniform Securities Act § 101, 7 Uniform Laws Annot. 695 (Commissioner's Note), it is stated:

'This section is substantially the Securities & Exchange Commission's Rule X-- 10B--5, 17 Code Fed.Regs. § 240.10b--5 . . ..' ¹

While there are no Colorado cases construing the pertinent section of our Uniform Securities Act, our Supreme Court, in interpreting other sections, has stated that, 'insofar as the provisions and purposes of our statute parallel those of the federal enactments, such federal authorities are highly persuasive.' Lowery v. Ford Hill Investment Co., Colo., 556 P.2d 1201, (announced November 15, 1976). See also Sauer v. Hays, 36 Colo.App. 190, 539 P.2d 1343 (1975). Consequently we look to Federal court interpretation of Rule 10b--5 and the nature of the intent required to sustain a violation of the rule.

Since the promulgation of Rule 10b--5, Federal court decisions have been at odds as to whether scienter was an element in a charge of violation of the rule. See Annot., 20 A.L.R.Fed. 227.

The recent case of Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), however, appears to have resolved the inconsistencies previously present in this area. The specific issue resolved by the United States Supreme Court in that case was whether a private cause of action for damages would lie under § 10(b) of the Security Exchange Act of 1934 and Rule 10b--5 in the absence of any allegation of 'scienter'--intent to deceive, manipulate or defraud.

The court traced the legislative history of the Securities Exchange Act and Rule 10b--5 and held that, in an action for civil damages under § 10(b) of the Securities Exchange Act of 1934 and Securities & Exchange Commission Rule 10b--5, some element of scienter was necessary and liability could not be imposed for negligent conduct alone, and therefore in the absence of an allegation of intent to deceive, manipulate, or defraud on the defendant's part, such an action could not be maintained.

While the rule enunciated in Ernst & Ernst relates to civil liability, nevertheless, we note that in Ernst & Ernst, the Supreme Court, in referring to a Senate report discussing the various abuses that give rise to the need for regulation of the stock exchange, stated:

'Significantly, we think in the (Report's) discussion of the need to regulate (manipulative practices) there is no indication that any type of Criminal or civil liability is to attach in the absence of scienter.' (emphasis supplied)

Consequently, while certain violations of the Federal Act are strict liability offenses (E.g., § 11(a) of the Securities Act of 1933--liability of issuers for misrepresentation in Registration Statement, See Ernst & Ernst, supra), the offense here at issue is not of that type. Thus, submission of the above quoted jury instruction, which made misrepresentation in connection with the sale of a security a strict liability offense, was error. See Resort Car Rental System, Inc. v. Chuck Ruwart Chevrolet, Inc., 519 F.2d 317 (10th Cir. 1975). See also United States v. Danser, 26 F.R.D. 580 (D.Mass. 1959); Frank v. United States, 220 F.2d 559 (10th Cir. 1955).

In view of our analysis above, we further hold that advide of counsel is relevant to the fraudulent practices charge (Count 3), and Terranova should be entitled to show, if he can, that he sold the securities based upon his good faith reliance on such advice that he could do so legally. See, e.g., United States v. Danser, supra. However, reliance on advice of counsel is not an absolute defense to the above charges, but rather merely a factor for the jury to consider. See United States v. Piepgrass, 425 F.2d 194 (9th Cir. 1970); Tarvestad v. United States, 418 F.2d 1043 (8th Cir. 1969), Cert. denied, 397 U.S. 935, 90 S.Ct. 944, 25 L.Ed.2d 116. See generally Note, Reliance on Advice of Counsel, 70 Yale L.J. 978 (1961). Should there be a retrial on the charge of having violated the fraudulent practices provisions of the Securities Act, the jury should be instructed that good faith is a defense and that scienter must be shown. Simple negligence alone cannot be the basis of liability. See Ernst & Ernst v. Hochfelder, supra, at n.12, and accompanying text.

We agree with the...