State v. Brewer

• Decision Date: 13 February 1996
• Parties: STATE of Tennessee, Appellee, v. James A. BREWER and C. Donald Frost, Appellants.
• Court: Tennessee Court of Criminal Appeals

Page 1

932 S.W.2d 1

STATE of Tennessee, Appellee, v. James A. BREWER and C. Donald Frost, Appellants.

Court of Criminal Appeals of Tennessee at Nashville.

Feb. 13, 1996.

Lucien Dale, Nashville, for appellant, Brewer.

David L. Raybin, Hollins, Wagster & Yarbrough, P.C., Nashville, for appellant, Frost.

Charles W. Burson, Attorney General, Byron M. Jones, Assistant Attorney General, Victor S. Johnson, III, District Attorney General, Paul DeWitt, Byron M. Jones, Asst. Dist. Attorneys General, Nashville, for appellee.

OPINION

SCOTT, Presiding Judge.

The appellant James A. Brewer was convicted of fourteen counts and the appellant C. Donald Frost of sixteen counts, respectively, of violating the securities laws of the State of Tennessee. Both appellants were also convicted of four counts of obtaining money by false pretenses. Each appellant received an effective sentence of seven and one half years, being ordered to serve one hundred days in confinement in the Davidson County Workhouse with the balance of the sentences to be served on probation. The appellant Brewer was ordered to pay fines in the sum of $3,600.00 and the appellant Frost was ordered to pay fines in the sum of $4,200.00. In addition, both appellants were required to perform two hundred fifty hours of community service work and to make restitution to the victims of their crimes.

In this appeal, the appellants raise the following issues:

(1) Whether the trial court properly instructed the jury concerning the definition of an "investment contract" under the Tennessee Securities Act;

(2) Whether the trial court's instructions to the jury in defining an "investment contract" violated the appellant Frost's due process rights (3) Whether the trial court erred in refusing to dismiss the indictment on the ground that the Tennessee Securities Act of 1980 as codified in Title 48, Chapter 2 of the Tennessee Code Annotated is unconstitutionally ambiguous, thereby denying the appellant Brewer of his right to a fair trial;

(4) Whether the trial court properly charged the jury on the elements of the offense of misrepresenting or omitting material facts in connection with the sale of a security;

(5) Whether the trial court properly prevented the appellants from presenting a defense based upon a good faith reliance on the advice of counsel that the enterprise was not subject to securities laws;

(6) Whether the trial court erred in its refusal to bifurcate the trial in the lower court;

(7) Whether the evidence adduced at trial was sufficient to sustain the jury's determination that the appellant Frost was guilty of obtaining money by means of false pretenses;

(8) Whether the evidence adduced at trial was sufficient to sustain the jury's determination that the appellant Frost was guilty of fraud in the sale of securities to Faron Young;

(9) Whether the convictions on all of the counts other than Count One merged with Count One;

(10) Whether the trial court erred in permitting the State to introduce evidence of the appellant Frost's prior criminal conviction and civil injunctions levied against him;

(11) Whether the trial court erred in failing to require the state to disclose to the appellant Frost certain statements made by witnesses for the State which were potentially exculpatory;

(12) Whether the trial court improperly failed to grant a mistrial due to the introduction of testimony concerning a recent bankruptcy by the appellant Frost;

(13) Whether testimony that an individual named Mr. Stanley had made threats of physical violence toward one of the victims in this case was irrelevant and unduly prejudicial to the appellant Frost;

(14) Whether the combination of errors which occurred in the lower court denied the appellant Frost a fair trial.

FACTS

In September of 1987, appellants and others undertook to establish a private wholesale store, whereby the initial capital for purchasing and stocking the building was to be secured by the selling of items of merchandise to individuals who sought to join their wholesale club. After consulting with an attorney as to the legality of the business under Tennessee law, a corporate charter was secured for the enterprise under the name "U.S.A. Wholesale Club, Inc." The appellant Brewer was the president and a director of the corporation. The appellant Frost was the national sales director of the corporation. At the time the business was terminated, each appellant owned 27.5% of the corporation's stock.

Prior to beginning the enterprise, the appellants consulted with an attorney regarding the legality of their proposed business under Tennessee law. ¹ They were advised that the venture would not violate the Tennessee Consumer Protection Act, but were not advised concerning securities laws because the attorney did not believe that the appellant's proposed business activity involved securities. The appellants testified that they relied upon this advice in deciding to engage in the enterprise.

The appellants planned to initially establish a wholesale store in Nashville and then expand by opening stores in Memphis, Knoxville, Chattanooga, and Jackson. The Nashville, Knoxville, and Memphis stores were to be limited to 6,500 associate and executive members and the Jackson and Chattanooga stores were to be limited to 5,500 associate and executive members. The appellants told prospective members that they planned to eventually open one hundred stores across the country.

To raise the initial capital necessary for the opening of the store in Nashville, the appellants and others began to hold promotional meetings in which they sold specialty products and attempted to convince individuals to join the club. The specialty products included a water purification system, cookware, a vacuum cleaner, various items of jewelry, and other items. The price of these products as offered to the public varied at times but was announced, at least initially, as $995.00 per item. However, each product had a wholesale value of approximately two hundred dollars. ² The proceeds from the sale of each $995.00 product was distributed as follows: $438.00 went for operating expenses, $182.00 went to "overrides," $175.00 went to commissions, and approximately $200.00 went to cover the cost of the product.

The appellants told potential purchasers that the price of the specialty products had been greatly marked up in order to facilitate the purchase of a building and inventory for the wholesale store. Individuals could become members of the club through facilitating the sale of specialty products by inviting their friends to sales meetings conducted by the appellants ³ or by purchasing the products themselves. ⁴ The motivating factors for becoming a member of the club were the attainment of (a) commissions from the sale of specialty products to individuals that the member brought to the sales meetings and (b) the right to distribute buyer cards to be used at the wholesale store when it opened. The appellants told potential members that the buyer cards distributed by a member would entitle that member to a commission on every item purchased at the wholesale store with one of the cards. The potential for hard working members to make enormous commissions was heavily stressed. ⁵

The program had three levels of participation. The first level, called a "temporary associate," was obtained by a person who registered with the club by paying a twenty-five dollar fee and began attending training meetings. Once a temporary associate either brought a guest to a meeting who then purchased a specialty product or the temporary associate himself bought a specialty product under a fabricated name, he became locked in as one of the 6,500 "permanent associates." Permanent associates were entitled to receive a one hundred dollar commission on the sale of any specialty product to an individual the associate invited to a sales meeting. In addition, permanent associates were to receive twenty-five buyer cards which they could distribute to family members, friends, and others. Once the wholesale store opened, permanent associates were to receive a four percent commission on all merchandise sold to a holder of one of their buyer cards.

Once five specialty product sales were credited to a permanent associate, the associate was upgraded to "executive member" status. Executive members of the club were to receive commission in the amount of $175.00 on the sale of any specialty product to one of their invitees. They also were to receive a $75.00 commission on sales of any specialty products made to individuals invited to club sales meetings by any associate member in their sales organization. Moreover, executive members were entitled to receive more buyer cards than permanent associates. Finally, they were to earn a six percent commission on all merchandise purchased at the wholesale store by a holder of one of their buyer cards and a two percent commission on all store sales to holders of buyer cards distributed by permanent associates within their organization.

Although some members of U.S.A. Wholesale Club were pleased with the enterprise, many others were not. Some members testified that they never received commissions that they were due from their sales. Others testified that the appellants had misrepresented information about the enterprise and failed to disclose certain material information about their past business activities. The facts of several of these misrepresentations merit more detailed explanation.

First, the appellants told people at sales meetings that a substantial portion of the purchase price of the specialty products would be set aside for the acquisition of a building and inventory. Securities Division investigators subsequently discovered that those statements were untrue. Bank records revealed that the appellants had deposited $758,436.00 into the wholesale club's corporate account and had withdrawn $756,000.00 therefrom. ⁶

There was also evidence...