Shorey v. Ariz. Corp. Comm'n

• Decision Date: 17 September 2015
• Docket Number: No. 1 CA–CV 14–0471.,1 CA–CV 14–0471.
• Citation: 238 Ariz. 253,359 P.3d 997,721 Ariz. Adv. Rep. 27
• Parties: David SHOREY and Mary Jane Shorey, husband and wife; Westcap Energy, Inc., an Arizona corporation dba Westcap Solar, Plaintiffs/Appellants, v. ARIZONA CORPORATION COMMISSION, Defendant/Appellee.
• Court: Arizona Court of Appeals

238 Ariz. 253

359 P.3d 997

721 Ariz. Adv. Rep. 27

David SHOREY and Mary Jane Shorey, husband and wife; Westcap Energy, Inc., an Arizona corporation dba Westcap Solar, Plaintiffs/Appellants

v.ARIZONA CORPORATION COMMISSION, Defendant/Appellee.

No. 1 CA–CV 14–0471.

Court of Appeals of Arizona, Division 1.

Sept. 17, 2015.

The Law Firm of Heurlin Sherlock By Bruce R. Heurlin, Catherine N. Hounfodji, Tucson, Counsel for Plaintiffs/Appellants.

Arizona Corporation Commission By Phong Huynh, Phoenix, Counsel for Defendant/Appellee.

Judge KENTON D. JONES delivered the Opinion of the Court, in which Presiding Judge MARGARET H. DOWNIE and Judge JON W. THOMPSON joined.

OPINION

JONES, Judge:

¶ 1 Appellants challenge the superior court's order affirming a decision of the Arizona Corporation Commission (Commission) finding David Shorey and Westcap Energy, Inc. (Westcap) violated Arizona Revised Statutes (A.R.S.) sections 44–1841,¹ –1842, and –1991. We affirm the Commission's determination and hold the enforcement of those statutes to be both constitutional and not preempted by federal law.

FACTS² AND PROCEDURAL HISTORY

¶ 2 Westcap was incorporated in Arizona in 2008 for the primary purpose of installing solar panels. In 2009, Shorey, as Westcap's CEO, agreed with Litchfield Enterprises, Inc. (Litchfield), a Colorado corporation, to have Litchfield “consult” with Westcap to raise $1,000,000 through an offering of dividend-paying convertible preferred stock. Among the terms of the agreement, Litchfield agreed to identify potential investors and assist in preparing documents to present to them. In exchange, Litchfield would receive 10 percent of all monies received from the sale of securities as a “consulting fee.” Neither Shorey nor Litchfield were registered to sell securities within or from Arizona.

¶ 3 Litchfield and Westcap then engaged Intuition Capital (Intuition), a company from Spain also not registered to sell securities within or from Arizona, to solicit foreign investors for the Westcap offering. In exchange, Intuition would receive 65 percent of all investment monies received. With Intuition on board, Litchfield lowered its own commission rate to 7.5 percent. Thus, 72.5 percent of all Westcap security investments were contractually committed to the payment of commissions, leaving only 27.5 percent available to Westcap to obtain a return for the investors.

¶ 4 Pursuant to their agreement, Litchfield and Westcap created a subscription agreement and private placement memorandum to present to potential investors. The private placement memorandum reserved the right to pay commissions and finders' fees as needed, specifically stating:

The Company ... reserves the right to pay commissions to registered brokers or dealers registered with the National Association of Securities Dealers (“NASD”) in connection with the sale of the Shares in which case the proceeds to the Company will be reduced. The Company may also pay finders' fees for introduction to persons or entities that purchase Preferred Stock in this Offering. The amount of any commissions or finders' fees will be within the range of amounts normally paid in similar situations, in which case, the proceeds to the Company will be reduced.

The documents did not specify the amount or percentage of the investment that would actually be paid in commissions or finders' fees. And according to Shorey, the stock offering was never available to U.S. investors, but instead exclusively targeted foreign investors pursuant to Regulation S of the Securities Act of 1933, 15 U.S.C. § 77.³

¶ 5 In March 2010, Intuition began soliciting investors in Europe. When Intuition found an interested investor, it notified Shorey. Shorey then sent documents detailing the proposed transaction to the potential investor by regular mail, email, or Federal Express. The documents instructed the investor to sign and return all documents to Shorey by email or facsimile and to send money via wire transfer to a bank account in Tucson, Arizona under the name “Westcap Energy, Inc., David Shorey, CEO.” When an investor completed the transaction, Shorey immediately transferred 72.5 percent of the funds to Litchfield and Intuition in accordance with their prior agreements.

¶ 6 By August 2010, twenty-four investors had contributed a total of $388,570, of which $281,714 was immediately paid to Litchfield and Intuition. On August 31, 2010, the securities sold were converted into shares of a Nevada corporation, and the offering resumed in Nevada.

¶ 7 In March 2011, the Commission's Securities Division initiated administrative proceedings against Appellants alleging violations of A.R.S. §§ 44–1841 (prohibiting the sale of unregistered securities), –1842 (prohibiting the sale of securities by unregistered dealers and salesmen), and –1991 (prohibiting fraud in the sale of securities).

¶ 8 In March 2013, following an evidentiary hearing, the Commission found Westcap and Shorey offered and sold unregistered securities within or from Arizona in violation of A.R.S. § 44–1841, offered and sold securities from Arizona without being registered as dealers or salesmen in violation of A.R.S. § 44–1842, and made untrue statements and omitted material facts during securities transactions in violation of A.R.S. § 44–1991. The Commission ordered Appellants to offer to rescind the $388,570 of stock sold to the twenty-four investors and held Appellants jointly and severally liable for all monies owed.⁴ The Commission also ordered Appellants to pay $10,000 in administrative penalties to the State of Arizona. Westcap and Shorey were ordered to cease and desist from future violations of A.R.S. §§ 44–1841, –1842, and –1991.

¶ 9 Appellants timely appealed the Commission's decision to the superior court, and the court affirmed. A notice of appeal to this Court was timely filed. We have jurisdiction pursuant to A.R.S. §§ 12–120.21(A)(1), –913, and –2101(A)(1).

DISCUSSION

¶ 10 Appellants do not contest the Commission's conclusion that Westcap and Shorey offered and sold unregistered securities, nor do they claim either Westcap or Shorey was registered to offer or sell securities within or from Arizona. Instead, Appellants argue: (1) A.R.S. §§ 44–1841, –1842, and –1991 do not apply to the Westcap securities offering because, they contend, neither Westcap nor Shorey actually sold the securities, the sales did not occur within or from Arizona, and the sales were not fraudulent; (2) even if the conduct of Westcap and Shorey is proscribed by these statutes, the applicable provisions are preempted by federal law regulating securities sales outside the United States; and (3) application of these statutes to the Westcap offering imposes an unconstitutional burden on interstate commerce.

¶ 11 On appeal from the judgment of the superior court, we determine whether the underlying administrative decision of the Commission “was illegal, arbitrary, capricious, or involved an abuse of discretion.” Eaton, 206 Ariz. at 432, ¶ 7, 79 P.3d 1044 (citing Samaritan Health Servs. v. Ariz. Health Care Cost Containment Sys., 178 Ariz. 534, 537, 875 P.2d 193 (App.1994) ). Each of Appellants' arguments presents a question of law, which we review de novo . Paczosa v. Cartwright Elementary Sch. Dist. No. 83, 222 Ariz. 73, 77, ¶ 14, 213 P.3d 222 (App.2009) (“On appeal, we review de novo the court's application of law to th[e] facts.”); Hutto v. Francisco, 210 Ariz. 88, 90, ¶ 7, 107 P.3d 934 (App.2005) (“We review federal preemption issues de novo. ”); Webb v. State ex rel. Ariz. Bd. of Med. Exam'rs, 202 Ariz. 555, 557, ¶ 7, 48 P.3d 505 (App.2002) (“We apply our independent judgment ... to questions of law, including ... constitutional claims.”).

I. Application of A.R.S. §§ 44–1841, –1842, and –1991

¶ 12 The Arizona Securities Act (ASA), A.R.S. §§ 44–1801 through –2055, constitutes Arizona's “blue-sky laws.” Jennings v. Woods, 194 Ariz. 314, 323, ¶ 40, 982 P.2d 274 (1999). Blue-sky laws “are designed to protect the public from fraud and deceit arising in [securities] transactions.”⁵ State v. Baumann, 125 Ariz. 404, 411, 610 P.2d 38 (1980). Appellants first argue Westcap and Shorey did not engage in prohibited conduct under the ASA because they did not sell the securities, the sales did not occur within or from Arizona, and the sales were not fraudulent. We disagree.

A. Westcap and Shorey Were Unregistered Salespersons Who Sold Unregistered Securities Within or From Arizona.

¶ 13 Under the ASA, “[i]t is unlawful to sell or offer for sale within or from this state any securities unless the securities have been registered ... or are federally covered securities.”⁶ A.R.S. § 44–1841. Appellants do not assert Westcap securities were “federal covered securities” but argue instead that because the offering was made to investors through Intuition, it was not made within or from Arizona. This contention is unpersuasive for two reasons.

¶ 14 First, viewing the evidence in the light most favorable to upholding the Commission's decision, Hirsch, 237 Ariz. at 458 n. 2, ¶ 1, 352 P.3d 925 (citation omitted), we find the offering was not made by Intuition; rather, the offering was created, offered, and sold by Westcap. Although Intuition sought out potential investors for Westcap, consistent with the offering, only Westcap had the authority to close the transaction. Intuition was therefore nothing more than a “go-between,” or intermediary, facilitating sales that ultimately occurred between Westcap and its investors.

¶ 15 Second, the sale of securities to persons outside of Arizona does not require a finding that the sale, itself, was not made within or from Arizona. See Ariz. Corp. Comm'n v. Media Prods., Inc., 158 Ariz. 463, 465–67, 763 P.2d 527 (App.1988). In Media Products, the Commission brought an action against a Delaware corporation to enjoin the sale of unregistered securities, alleging the sale would be made within or from Arizona in violation of A.R.S. § 44–1841. Id. at 464, 763 P.2d 527. The...