State v. Agnew, s. 2

• Decision Date: 21 April 1982
• Docket Number: CA-CR,Nos. 2,s. 2
• Citation: 132 Ariz. 567,647 P.2d 1165
• Parties: , Blue Sky L. Rep. P 71,739 The STATE of Arizona, Appellee, v. Royce Emmonds AGNEW and Roger Leroy Beck, Jr., Appellants. 2303, 2 2306.
• Court: Arizona Court of Appeals

Page 1165

647 P.2d 1165

132 Ariz. 567, Blue Sky L. Rep. P 71,739

The STATE of Arizona, Appellee, v. Royce Emmonds AGNEW and Roger Leroy Beck, Jr., Appellants.

Nos. 2 CA-CR 2303, 2 CA-CR 2306.

Court of Appeals of Arizona, Division 2.

April 21, 1982.

Rehearing Denied May 28, 1982.

Review Denied June 22, 1982.

Robert K. Corbin, Atty. Gen. by Bruce M. Ferg, Asst. Atty. Gen., Tucson, for appellee

Carmine A. Brogna, Tucson, for appellant Agnew

Molloy, Jones, Donahue, Trachta, Childers & Mallamo, P. C. by Michael J. Meehan, Tucson, for appellant Beck.

OPINION

BIRDSALL, Judge.

The appellants, Royce Emmonds Agnew and Roger Leroy Beck, were tried together in Pima County in this securities fraud case. Agnew was adjudged guilty and sentenced on 23 counts of securities fraud, A.R.S. § 44-1991, ¹ 8 counts of grand theft by false pretenses, A.R.S. § 13-661(A)(3), 1 count of conspiracy, A.R.S. § 13-331(B), 1 count of false filing, A.R.S. § 44-1992, and 3 counts of embezzlement, A.R.S. § 13-681. The jury found him not guilty of 2 counts of grand theft and the trial court set aside one other guilty verdict of grand theft. Some other charges were dismissed by the court prior to submission to the jury. Concurrent sentences of 7 to 8 years in prison were imposed.

Beck was found guilty of one count of securities fraud. He was found not guilty of one other count of securities fraud and 3 grand theft counts. The trial court directed a verdict on the conspiracy count with which he was charged, and dismissed that count as to him. He was placed on probation with no jail time.

Eight defendants were originally indicted by the state grand jury on November 15, 1978. Three entered pleas prior to the first trial of the case, which ended in a mistrial. By the second trial all the defendants except Agnew, Beck and one other defendant, whose case was dismissed because of his terminal illness, had entered pleas.

Some background is necessary before we discuss the issues raised by the appellants. In 1969 Common Trust 1212 was created as an investment trust. Great Southwestern Trust Corporation served as the corporate trustee of 1212. This was the only activity of the corporation. Individual investors would sign an investment contract called a Trust Indenture, which stated the interest rate to be received by the investor and authorized the Trust Corporation to pool the funds with other similar trust indentures. These investment devices were sold, primarily in Tucson, through the fall of 1972. Investments in real estate or related activities were contemplated.

The principals (two of the other defendants) also owned a small mortgage company called Pima Mortgage Company. In late 1972, Royce Agnew joined the organization. They incorporated a new entity, Twin City Development Company, and expanded their lending activity from mortgage placement fundings into the area of interim construction financing. They also entered into an agreement to purchase an existing VA/FHA mortgage company, Realty Mortgage Company.

Great Southwestern Corporation was next formed to be a holding company for all the existing corporate entities. It was determined that the trust indentures were securities required to be registered under the Arizona securities laws and in December, 1972, the first registration application was filed with the Securities Division of the Arizona Corporation Commission. The securities were duly registered by qualification in January of 1973. This registration was renewed in January, 1974, and January, 1975. In March of 1976, the Trust Corporation defaulted on interest payments to investors in 1212. This was followed by proceedings under the federal bankruptcy laws and an investigation by the Securities Division of the Arizona Corporation Commission.

The only assets of G.S.C. were stock in the various subsidiaries. It operated at a loss throughout its history.

Twin City Development Company developed a single project, Valle Cereza, a townhouse project on Prince Road in Tucson. The project was plagued from the beginning by poor design, construction delays and cost overruns. Poor sales resulted in further delays which caused interest and carrying costs to eat up the project funds. As early as June of 1973, it was predicted that the project would result in substantial losses, and these predictions proved to be accurate.

Another affiliate, Dennis Development Company, was a Phoenix construction company acquired in 1973. It was insolvent at the time it was purchased and continued to incur substantial losses.

Pima Mortgage Company was an inactive, assetless shell. Its function was merged with that of Realty Mortgage Company and in essence it ceased to exist. Realty Mortgage Company was an active mortgage brokerage agency with $250,000 in assets when acquired in 1972. These assets were used to pay the acquisition costs, impairing the company's capital position. As a result it operated at a loss beginning in 1973.

Over its complete life, Trust 1212 had a total of slightly less than $4,000,000 in investment capital and approximately 375 investors. At first these investors received fixed interest payments varying from 7% to 9% depending on the date of investment and on the account funded. A portion of these funds was used to fund mortgages placed by Realty Mortgage Corporation. This was short-term financing on home mortgage purchases of existing houses. This activity was reduced as 1212's cash position deteriorated. The remaining 1212 funds were loaned out in various ways, including construction loans to Owens Development Company in Sierra Vista. Owens was loaned approximately 25% of the total fund balance. It was unable to pay off these loans and was in continuous financial difficulty from 1973 on. Unpaid interest on these loans was capitalized and "rolled over" into new notes. The trust recognized income from this process and paid trustees' fees and investor interest from this "income" despite the fact that it had not been received. The ability of Owens to repay the loans became increasingly questionable from early 1973 on.

Approximately 30% of 1212's assets were loaned to affiliate organizations, primarily after June, 1973. These loans were either inadequately secured or completely unsecured. The borrowed money was used to pay payroll and administrative expenses of the various subsidiaries and the parent corporation. When these loans were made, the entities receiving the funds were without substantial assets or income and unable to repay the loans.

The controlling documents of 1212 contained two major provisions designed to protect investors. First, investors were guaranteed the interest stated in the individual trust agreements. The Trust Corporation contracted to make up from its own funds, even though it had little, any amount by which 1212 common investment income was insufficient to meet the individual interest agreements of the various investors. Second, although self-dealing was allowed in the investment contract, investments in affiliated companies were required to be on the same basis as arms-length transactions and were limited to 15% of the total value of the investment pool.

In preparing the audit for the fiscal year ending June 20, 1973, the auditors noted that the financial condition of the Trust Corporation had deteriorated. Not only was it operating at a continuing and increasing loss, but virtually all of its approximately $130,000 in assets consisted of unsecured obligations of the parent company, G.S.C. The auditors were concerned that, in the event of a deficiency in common trust income, the Trust Corporation would be unable to make good on the guarantee. As a condition precedent to the issuing of an unqualified opinion on the financial statements of the trust, the auditors insisted that the funds advanced to the parent be repaid to the trust corporation. This was accomplished as follows.

In April, 1974, Thomas Cox, the firm's attorney, asked to borrow $125,000 from 1212 to finance the construction of a mobile home park ("The Ranch"). He was asked, and agreed, to borrow an additional $100,000 and lend it to Agnew and another officer. They then loaned the money to G.S.C., which in turn repaid $100,000 in loans to the Trust Corporation. The Trust Corporation then loaned $100,000 to 1212. Since all of the transfers took place within 24 hours, the $100,000 never actually left the Trust. Agnew received a $1,000 commission from this transaction.

The 15% limitation on loans to affiliates was greatly exceeded because of the borrowing of trust funds by the officers, including Agnew, after June 30, 1973. In preparation for the end of the fiscal year on June 30, 1974, and the upcoming audit, they arranged to transfer Realty Mortgage Company from G.S.C. to 1212. Realty Mortgage Corporation had been purchased in 1972 for $350,000. At the time of the purchase Realty Mortgage had $250,000 in cash or cash equivalent assets and had net earnings in excess of $20,000 for the previous year. However, virtually the entire $250,000 had been used to pay the purchase price and Realty Mortgage had gone to a net loss position in excess of $20,000 in the interim period. Nevertheless, the transfer from G.S.C. to 1212 was at the same $350,000 price. This transaction resulted in 1212's books reflecting slightly less than the 15% maximum on inter-company investments.

While all this was going on, the investments in 1212 continued to be marketed to the public. Among the false statements made to investors were:

1) Investments were insured.

2) Investments were guaranteed.

3) There was no risk of loss.

4) The companies were experiencing marked growth and success.

These statements were contained directly or indirectly in advertisements and brochures, and communicated orally to various victim/investors.

The theft counts were for sales of trust indentures to individual investors; the securities fraud counts were for the false representations made to...