State v. Kelson

• Decision Date: 02 August 2012
• Docket Number: No. 20100299–CA.,20100299–CA.
• Citation: 284 P.3d 695,714 Utah Adv. Rep. 15,2012 UT App 217
• Parties: STATE of Utah, Plaintiff and Appellee, v. Grace C. KELSON, Defendant and Appellant.
• Court: Utah Court of Appeals

284 P.3d 695

714 Utah Adv. Rep. 15

2012 UT App 217

STATE of Utah, Plaintiff and Appellee,

v.Grace C. KELSON, Defendant and Appellant.

No. 20100299–CA.

Court of Appeals of Utah.

Aug. 2, 2012.

Stephen W. Howard, Salt Lake City, for Appellant.

Mark L. Shurtleff and Karen A. Klucznik, Salt Lake City, for Appellee.

Before Judges McHUGH, ORME, and DAVIS.

OPINION

McHUGH, Presiding Judge:

¶ 1 Grace C. Kelson appeals her convictions for one count of offer or sale of unregistered securities, a third degree felony, seeUtah Code Ann. §§ 61–1–7, –21(1) (2011); one count of sale by an unlicensed broker-dealer, agent, or investment advisor, a third degree felony, see id.§§ 61–1–3, –21(1); three counts of securities fraud, second degree felonies, see id.§§ 61–1–1, –21(2); and one count of pattern of unlawful activity, a second degree felony, see id. §§ 76–10–1603, –1603.5 (2008).¹ We vacate Kelson's conviction for pattern of unlawful activity, and reverse and remand for a new trial on all other charges.

BACKGROUND

¶ 2 Kelson became acquainted with the owners (Owners) of a mortgage company, and later sought assistance from the mortgage company in financing two development projects: a high-end resort near Heber City and another development in Brazil. After these efforts failed to provide sufficient funding, Kelson and the Owners hoped to purchase a letter of credit to fund the developments.² The letter of credit was to serve as collateral, thereby making it easier to find lenders for the project. In this pursuit, Kelson and the Owners sought approximately $125,000 to obtain a letter of credit worth $15 million.

¶ 3 Around October 11, 2001, in response to an inquiry from one of the mortgage company's employees (Employee), Kelson explained that she and the Owners did not have the necessary funds to close a project. Specifically, Kelson noted that she needed about $116,000 in “a couple of days” in order to close the deal. Kelson mentioned that she would be willing to pay a finder's fee to Employee if she could assist in finding someone to provide the money and indicated that the lenders could make their money back “five times.”

¶ 4 After obtaining assurances from one of the Owners that it was a “legitimate deal” and that the money would be returned in approximately two to three weeks when they obtained the letter of credit, Employee approached her family members about investing in the project. Within a day or two, she raised $22,400 from herself, her husband, her daughter, and a friend, which she exchanged for a promissory note dated October 11, 2001, signed by Kelson, which indicated that Employee would receive $249,331.84 in return for the investment by November 11, 2001. Employee's other daughter (Daughter) also invested $20,000 in exchange for a promissory note dated October 11, 2001, stating that she would receive $133,332 within thirty days.

¶ 5 Between October 10 and 12, 2001, Employee called her brother (Brother) to inform him about “getting into an investment” and told him he could get “a pretty good return.” Brother invested $116,000 in exchange for a promissory note signed by Kelson, which was dated October 11, 2001, and indicated that Brother would receive $773,333.33 in return. Brother understood that he was not investing in the project itself, but that his only involvement was in obtaining the letter of credit.

¶ 6 Kelson did not inform Employee, Daughter, or Brother about her financial background, which included over thirty civil judgments against her totaling $750,000. Nor did Kelson inform these individuals that some of the money would be spent on her personal expenses.

¶ 7 All of the promissory notes indicated that S.D.C. Financial Services would make the payments. On October 11, 2001, S.D.C. Financial was registered as a limited liability company with the Utah Division of Corporations, and it opened a bank account on the same day. Kelson was listed as the registered agent and as a member. After the money secured by the promissory notes was deposited in the S.D.C. Financial account, most of it was transferred to an account in Washington, $5,000 was used for legal fees, and Kelson withdrew approximately $25,000 for her personal use. When the S.D.C. Financial account was closed in January 2002, it had a negative balance of over $9,000. The letter of credit was never purchased, and S.D.C. Financial defaulted on its obligations under the promissory notes to Employee, Daughter, and Brother.

¶ 8 On March 5, 2004, the State charged Kelson with three counts of securities fraud; one count of offer or sale of unregistered securities; one count of sales by an unlicensed broker-dealer, agent or investment advisor; and one count of pattern of unlawful activity.

¶ 9 At the trial held on February 24 and 25, 2009, the State called the Director of Enforcement (Director) for the Utah Division of Securities (the Division) as a securities expert. Director testified that notes are presumed to be securities and that “unless that presumption is overcome, it remains a security.” Director explained that there are certain enumerated categories of notes that are not securities and also stated that there are four factors used to determine whether other notes are not securities (four-factor test or Reves test). Director explained how those factors are applied and opined how they might be weighed in this case.

¶ 10 At the close of evidence, Kelson moved for a directed verdict on all counts. The trial court denied the motion. Earlier, the parties had stipulated to the jury instructions. Instruction 25 states,

You are instructed that a “note” is presumed to be a security. However, certain notes have been classified as non-securities; these notes are:

1. the note delivered in consumer financing,

2. the note secured by a mortgage on a home,

3. the short-term note secured by a lien on a small business or some of its assets,

4. the note evidencing a ‘character’ loan to a bank customer,

5. short-term notes secured by an assignment of accounts receivable, or

6. a note which simply formalizes an open-account debt incurred in the ordinary course of business particularly if, as in the case of the customer of a broker, it is collateralized.

A class of notes that resembles one of these exceptions can be added to the list of non-security notes if they meet a four factor test. That test is to:

1. examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it. If the seller's purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” On the other hand, if the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller's cash-flow difficulties, or to advance some other commercial or consumer purpose, the note is less sensibly described as a “security.”

2. [e]xamine the “plan of distribution” of the instrument to determine whether it is an instrument in which there is common trading for speculation or investment.

3. [e]xamine the reasonable expectations of the investing public, and

4. [e]xamine whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary.

¶ 11 The jury convicted Kelson on all counts. At sentencing, Kelson represented herself and asked the trial court to review certain documents. The trial court refused to receive or review the documents before imposing sentence. Kelson now appeals.

ISSUES AND STANDARDS OF REVIEW

¶ 12 Kelson first argues that Jury Instruction 25 violated her constitutional right to a presumption of innocence and the constitutional requirement that the State prove every element of the crime beyond a reasonable doubt. Kelson did not preserve this argument in the trial court and asks us to review it under the doctrine of plain error. See generally State v. Nelson–Waggoner, 2004 UT 29, ¶ 16, 94 P.3d 186. To establish plain error, Kelson must show that “ ‘(i) [a]n error exists; (ii) the error should have been obvious to the trial court; and (iii) the error is harmful, i.e., absent the error, there is a reasonable likelihood of a more favorable outcome for the appellant, or phrased differently, our confidence in the verdict is undermined.’ ” Id.(quoting State v. Dunn, 850 P.2d 1201, 1208–09 (Utah 1993)).

¶ 13 Kelson also argues that counsel was ineffective for stipulating to this instruction. “We consider ineffective assistance of counsel claims raised for the first time on appeal as a matter of law.” State v. Sellers, 2011 UT App 38, ¶ 9, 248 P.3d 70.

¶ 14 Next, Kelson argues that the trial court erred in denying her motion for a directed verdict because it misapplied the Utah Pattern of Unlawful Activity Act. See generallyUtah Code Ann. §§ 76–10–1601to –1609 (2008 & Supp.2011). Whether the trial court properly interpreted the statute is a question of law that we review for correctness. See State v. Steele, 2010 UT App 185, ¶ 12, 236 P.3d 161.

¶ 15 Finally, Kelson argues that the trial court violated her due process rights and rule 22(a) of the Utah Rules of Criminal Procedure when it declined to grant a continuance to allow Kelson to present additional documents to the court. These arguments each present a question of law, “which we review for correctness.” See State v. Wanosik, 2001 UT App 241, ¶ 9, 31 P.3d 615,aff'd,2003 UT 46, 79 P.3d 937.

ANALYSIS

I. The Due Process Implications of Jury Instruction 25

¶ 16 Before analyzing Kelson's claims regarding Jury Instruction 25, we discuss the due process concerns implicated by the instruction. “The Due Process Clause of the Fourteenth Amendment ‘protects the accused against conviction except upon proof beyond a reasonable doubt of every fact necessary to constitute...