Raymond Lee Organization, Inc. v. Securities Commission, 74--480

• Decision Date: 16 September 1975
• Docket Number: No. 74--480,74--480
• Citation: 543 P.2d 75,36 Colo.App. 417
• Parties: , Blue Sky L. Rep. P 71,242 The RAYMOND LEE ORGANIZATION, INC., a New York Corporation, Plaintiff-Appellant, v. SECURITIES COMMISSION of the State of Colorado et al., Defendants-Appellees. . I
• Court: Colorado Court of Appeals

Page 75

543 P.2d 75

36 Colo.App. 417, Blue Sky L. Rep. P 71,242

The RAYMOND LEE ORGANIZATION, INC., a New York Corporation, Plaintiff-Appellant, v. SECURITIES COMMISSION of the State of Colorado et al.,

Defendants-Appellees.

No. 74--480.

Colorado Court of Appeals, Div. I.

Sept. 16, 1975.

Rehearing Denied Oct. 23, 1975.

Certiorari Granted Dec. 22, 1975.

Omer L. Griffin, Denver, Samuel N. Greenspoon, Eaton, Van Winkle & Green-spoon, New York City, for plaintiff-appellant.

J. D. MacFarlane, Atty. Gen., Jean E. Dubofsky, Deputy Atty. Gen., Edward G. Donovan, Sol. Gen., Harry N. MacLean, First Asst. Atty. Gen., Denver, for defendants-appellees.

BERMAN, Judge.

Appellant, the Raymond Lee Organization, Inc., appeals from a judgment dismissing its complaint filed under C.R.S.1963, 1963, 125--1--22 (now § 11--51--121, C.R.S.1973), against defendants, the State of Colorado Division of Securities, Stanley R. Hays, and William J. Anderson, the Commissioner and Deputy Commissioner thereof, respectively. Appellant sought to reverse a cease and desist order entered by defendants (Commission) on April 18, 1972, which directed the Raymond Lee Organization to cease selling various contracts, the Commission having found that the agreements or contracts constituted 'securities' as defined in § 11--51--102(12), C.R.S.1973, and that the sales were being made without compliance with the licensing and registration requirements of § 11--51--104 and § 11--51--106, C.R.S.1973.

The administrative action was commenced on January 7, 1972, when the Commission issued an Order for Production of Documents and an Order to Show Cause, charging appellant to show cause why it should not be required to register the 'securities' being offered for sale to the public. A hearing was held on February 23, 1972. On April 18, 1972, the Commission entered the cease and desist order referred to above, and the Raymond Lee Organization appealed to the district court. We affirm in part and reverse in part.

I.

The first issue presented on review is the appellant's contention that it was denied due process of law on two grounds: First, the Commission violated its own rules in the commencement of the administrative proceedings because no complaint was filed; and, second, the Order for Production of Documents was too broad and covered items over which the Commission had no jurisdiction.

The Securities Commissioner's regulations provide in relevant part:

'Rule 9. Complaints may be made to the Division for the purpose of investigation . . . or the issuance of 'Show Cause' . . . or 'Cease and Desist' orders.

9.20. The commissioner May require that such complaints be made in writing, verified under oath, and containing or setting forth a detailed statement of the specific facts and circumstances relating thereto . . ..

9.40. Upon completion (of the investigation) . . . the commissioner . . . may enter . . . an order for respondent to 'cease and desist' such activities complained of, 'show cause' why such order should not be entered, Or instituting (sic) such other administrative procedure as provided under Rule 10.

10.03. INSTITUTION OF PROCEEDINGS shall be made by the filing with the Division a written complaint . . . or issuance of an order or notice . . . setting forth the facts or conduct warranting a . . . 'show cause' or 'cease and desist' order . . ..' (emphasis supplied)

Rules 9 and 9.20, by use of the word 'may,' make clear that written complaints are discretionary. There is no constitutional requirement that such a complaint be made prior to the commencement of an investigation. See F.T.C. v. Hunt Foods and Industries, Inc., 178 F.Supp. 448 (S.D.Cal.). The Show Cause Order and Order for Production of Documents were issued pursuant to the statutory authority granted in §§ 11--51--118, 119 and 120, C.R.S.1973, and specifically stated that the Order 'is in the public interest' as required by § 11--51--119. Also, the Show Cause Order informed the appellant that it could request a hearing, which it did.

Since the appellant requested the hearing, it is questionable whether Rule 10.03 is applicable, but, assuming Arguendo that it is, that rule provides that proceedings need not be commenced by a complaint, but may be instituted by the issuance of an order setting forth the facts and conduct warranting a 'show cause' order. The Show Cause Order informed the appellant that the Commission had concluded that it was engaged 'in the offering of securities to the public in this state,' in violation of the registration and licensing provisions of the Securities Act. Thus, we find the Order sufficiently set forth 'facts and conduct' warranting a 'show cause' order.

Further, as we noted, a hearing on the issue made by the Order to Show Cause was held at the request of appellant and opportunity to be heard was provided. Finally, in the appellant's letters to the Commission objecting to the jurisdiction of the Commission and requesting a hearing, it did not raise the issue that no complaint had been filed with the Commission. Had appellant pointed out this alleged deficiency at that time, the Commission would have had an opportunity to correct it, if correction was necessary. As a general principle, courts refuse to consider questions on judicial review that have not been urged before the agency. See 3 K. Davis, Administrative Law § 20.06. These letters and the appellant's Motion to Quash and supporting memorandum brief also demonstrate that appellant was fully aware of, and adequately prepared to argue, the merits of the issues. Thus, there was no error in the trial court's ruling that the appellant was not denied due process.

We also find to be without merit the appellant's allegation of a denial of due process because the Order for Production of Documents covered items over which the Commission had no jurisdiction.

First, we note that it is not disputed nor could it be, that there are sufficient minimal contacts by the appellant with this state to allow the Commission to obtain jurisdiction over the appellant. Giger v. District Court, Colo., 540 P.2d 329 (1975); Van Schaack & Co. v. District Court, Colo., 538 P.2d 425 (1975). As to the extent of the Order for Production of Documents, the Commission, acting pursuant to its statutory authority, requested information from the appellant regarding activities, contracts, and clients, whether occurring within or outside the state. Such Order was admittedly broad, but the Commission's power to enforce the Securities Act is equally broad. See § 11--51--120, %.C.r.s./1973. Furthermore, the Cease and Desist Order issued by the Commission did not purport to extend in any way to appellant's activities, contracts, and clients outside the state. Also, only at the investigatory stage did the Commission seek information about the out-of-state activities of appellant over which it could not regulate. Such an investigative procedure is permitted by the holding in Natural Gas Pipeline v. Slattery, 302 U.S. 300, 58 S.Ct. 199, 82 L.Ed. 276.

Hence, we find no violation of due process in the range of documents requested by the Commission for its investigative purposes.

II.

Appellant next contends that the Commission's findings of fact are not supported by competent, material, and substantial evidence. In this regard, appellant contends that this court has the authority to make a determination of the evidence and substitute its own judgment for that of the Commission's where there is no conflict in the testimony.

On review, if the findings of fact are supported by competent, material, and substantial evidence they are conclusive; if not, they are arbitrary and capricious and amount to an abuse of discretion. See § 11--51--121(1)(a), C.R.S.1973; Banking Board v. Turner Industrial Bank, 165 Colo. 147, 437 P.2d 531. The cases cited by appellant do not set a different standard for review; the reversals of administrative actions therein were predicated upon the impropriety of the actions taken under the evidence submitted, not upon the absence of conflicting evidence.

The appellant is involved in the development, research, introduction, and marketing of new products, ideas, and inventions. Besides its general management, there are three departments: engineering, licensing, and marketing. Employees include engineers, persons experienced with new products and inventions, and marketing personnel. The appellant also employs outside contractors, mechanical draftsmen, patent attorneys, patent draftsmen, and illustrators who work with the appellant in the preparation and development of the inventions. The appellant is a New York corporation, and its employees work out of the New York office. The president, Raymond Lee, is the sole shareholder.

The appellant currently utilizes three different form agreements in its arrangements with inventors, the 'Preliminary Product Research Agreement' (Preliminary Agreement), 'Development of Invention Agreement' (Invention Agreement), and the 'Product and Marketing Development Agreement' (Marketing Agreement). In the Preliminary Agreement, appellant, for a fee of $100, examines the inventor's proposal, classifies the proposal as to subject matter, researches the records of prior U.S. patents relating to the proposal, procures copies from the U.S. Patent Office of patents of related inventions, and prepares and presents the results of this investigation, including appellant's procedures for further action, to the inventor.

In the Invention Agreement, for a fee of $675 plus an assignment of a 20% Interest in the invention, the appellant develops and refines the invention for the preparation of suitable illustrations, prepares formal patent drawings and original description (for the inventor to include in a patent application), prepares a sales letter and prospectus covering the general functions of the proposal, contacts prospective manufacturers to seek opportunities to negotiate the sale or...