State v. Kraklio

Decision Date19 February 1997
Docket NumberNo. 95-1875,95-1875
Citation560 N.W.2d 16
PartiesBlue Sky L. Rep. P 74,144 STATE of Iowa, Appellee, v. Kenneth L. KRAKLIO, Appellant.
CourtIowa Supreme Court

Linda Del Gallo, State Appellate Defender, and Kevin Cmelik, Assistant State Appellate Defender, for appellant.

Thomas J. Miller, Attorney General, Mary Tabor, Assistant Attorney General, and William E. Davis, County Attorney, for appellee.

Considered by HARRIS, P.J., and CARTER, NEUMAN, SNELL, and ANDREASEN, JJ.

NEUMAN, Justice.

Defendant Kenneth Kraklio appeals the judgment and sentence imposed upon his convictions for three counts of securities fraud in violation of Iowa Code section 502.401 (1995). Kraklio seeks reversal on two grounds: (1) that the record contains insufficient evidence on each element of the crimes charged, and (2) his prior punishment for contempt of a court order involving two of the transactions prohibits his conviction here. Because substantial evidence supports the convictions for securities fraud, and no double jeopardy violation has been established, we affirm.

I. Background Facts and Proceedings.

Kenneth Kraklio took part in a promotional scheme that involved filing multi-million dollar claims in a nonexistent lawsuit against the federal government. For $300 apiece, Kraklio agreed to help Iowans file claims that purportedly entitled them to "piggyback" onto a successful class action lawsuit in Colorado that had allegedly recovered damages based on the country's return to the gold standard. The claimants' recovery--which, on average, promised to exceed any loss several thousand times over--would be pegged to losses incurred for agricultural debts, consumer loans, mortgages, deaths of family members, inadequate education, and even damage to reputation for such inconveniences as speeding tickets or arrests.

In an action filed in Wayne County, Iowa, the attorney general secured an order enjoining Kraklio and others from engaging in deceptive practices amounting to consumer fraud in violation of Iowa Code section 714.16(2)(a). Meanwhile, in Scott County, Kraklio promised two undercover agents, posing as Steve and Marilyn Graham, that their multi-million dollar claims would be paid in ninety days when the Colorado lawsuit was settled. He also recruited the couple to sell claim forms under an agreement whereby they would earn fifty dollars out of every $300 and remit the balance to Kraklio. He gave similar information to another undercover investigator who gave him $300 on the promise his claim would be filed by Kraklio in Colorado the following weekend and compensation would be forthcoming without delay.

Kraklio was eventually found in contempt of court for violating the Wayne County injunction in the transaction involving the Grahams. He was sentenced to serve thirty days in jail and ordered to pay a $7500 fine. The State then filed a trial information in Scott County charging him with three counts of securities fraud in violation of Iowa Code section 502.401. Kraklio moved to dismiss, arguing the sale of claims in the lawsuit did not involve "securities" and, furthermore, his punishment for contempt in Wayne County barred any further prosecution for crimes involving the same transaction. The motions were overruled and the case proceeded to trial. A jury found Kraklio guilty as charged and this appeal followed.

II. Scope of Review.

We review challenges to the sufficiency of evidence for errors at law. Iowa R.App. P. 4; State v. Arnold, 543 N.W.2d 600, 602 (Iowa 1996). Review of constitutional issues is de novo. State v. Fox, 491 N.W.2d 527, 530 (Iowa 1992).

III. Sufficiency of the Evidence.

Kraklio contends the State's evidence did not establish the charged offense of securities fraud. In evaluating such a claim, we view the evidence in a light most favorable to upholding the jury's verdict. Arnold, 543 N.W.2d at 602. The verdict is binding on us unless the record contains no substantial evidence to support it. Id. Evidence is substantial if it could convince a rational trier of fact that the accused is guilty beyond a reasonable doubt. State v. Predka, 555 N.W.2d 202, 204 (Iowa 1996).

The Iowa Uniform Securities Act provides:

It is unlawful for any person, in connection with the offer to sell, offer to purchase, sale or purchase of any security in this state, directly or indirectly:

1. To employ any device, scheme, or artifice to defraud;

2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Iowa Code § 502.401.

The threshold question is whether Kraklio's transactions with the undercover agents involved a security. The term "security" is broadly defined by statute to include investment contracts. Iowa Code § 502.102(14). As one court has recently noted, the term "investment contracts" is included within the definition of security "to identify unconventional instruments that have the essential properties of a debt or equity security." De Wit v. Firstar Corp., 879 F.Supp. 947, 977 (N.D.Iowa 1995).

A security's essential properties are traditionally measured by a test set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). See Corporate East Assoc. v. Meester, 442 N.W.2d 105, 107 (Iowa 1989) (adopting Howey test). Under the Howey test, an investment contract is a security if it evidences (1) an investment, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) to be derived from the entrepreneurial or managerial efforts of others. Id.; accord Reves v. Ernst & Young, 494 U.S. 56, 64, 110 S.Ct. 945, 950, 108 L.Ed.2d 47, 59 (1990); State v. Tyler, 512 N.W.2d 552, 556 (Iowa 1994). In fashioning this test, the Howey Court recognized the need for a definition that is flexible, rather than static, "to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Howey, 328 U.S. at 299, 66 S.Ct. at 1103, 90 L.Ed. at 1250.

Kraklio contends on appeal that the State failed to prove that the claims he marketed were investments; that the purchasers had a reasonable expectation of profit in the enterprise; or that any profit realized would be derived from his entrepreneurial or managerial efforts. We shall consider the arguments in turn.

A. Investment. The common meaning of the term "invest" is "to commit (money) in order to earn a financial return." Webster's Ninth New Collegiate Dictionary 636 (1986). In Tyler, where the defendant promised a $20,000 return on a $2000 loan to finance a worthless lawsuit, this court held the promissory note confirming the transaction "clearly evidences an investment." Tyler, 512 N.W.2d at 556. Here, Kraklio solicited $300 payments on the promise of a $14 million recovery. Although Kraklio characterizes the potential recovery as no more than "just compensation," a reasonable jury could find the transaction meets the common definition of investment.

B. Expectation of Profit. Kraklio's principal claim is that the absurdity of the lawsuit is so patently obvious, and the promise of recovery so outrageous, that no reasonable person could maintain an expectation of profit. The record reveals, however, that the gullibility of the average citizen should not be underestimated. Kraklio himself acknowledges in his brief that "[e]very person that the defense called in [this] case was of the firm belief that the money was going to come eventually." Indeed, thirty people attended the "tax seminar" held at a well-respected real estate office where Kraklio assisted them in filling out claim forms. As this court noted under similar circumstances in Tyler, a reasonable person with the limited information provided by the defendant could believe a profit was likely. Kraklio's argument to the contrary is without merit.

C. Entrepreneurial or Managerial Efforts of Others. Kraklio contends that each promised reward turned, not on his entrepreneurial skill, but on the governmental "injuries" suffered by each claimant. Thus he believes the State failed as a matter of law on the management prong of the Howey test. A reasonable jury could find, however, that Kraklio's efforts were key to the success of this scheme. He held himself out as having the education and experience to complete and process the claim forms, obtainable only from him. Only through his expertise could prospective investors partake in the profits available to those who paid their $300.

Kraklio's appeal suggests that it strains credulity to apply legal principles developed for commerce to outlandish facts tinged with anti-government paranoia. In Tyler, however, this court embraced a broad definition of "security." As in Tyler, the end sought to be remedied here is the same one addressed in Howey half a century ago--promoters enticing investors to commit their resources on the promise of a big return. The investors have neither the desire nor the expertise to manage the investment themselves. "[T]hey are attracted solely by the prospects of a return on their investment." Howey, 328 U.S. at 300, 66 S.Ct. at 1103, 90 L.Ed. at 1250. The district court made no mistake in submitting the case to the jury on the facts before it and in accordance with the standards set by Tyler and Howey. No ground for reversal appears.

IV. Double Jeopardy Claim.

In the Wayne County action, Kraklio was permanently enjoined from "collecting any fees whatsoever under the pretense of obtaining damages for Iowa consumers, purportedly through a federal class action lawsuit." The injunction was premised on Kraklio's alleged violation of Iowa's consumer fraud statute, section 714.16(2)(a). The statute prohibits unfair or fraudulent...

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  • State v. Bernacki
    • United States
    • Connecticut Supreme Court
    • 26 Septiembre 2012
    ...Justice Scalia's approach on the basis of a predictive reading of dicta in that state's Supreme Court decisions in State v. Kraklio, 560 N.W.2d 16, 19-20 (Iowa 1997), and State v. Sharkey, 574 N.W.2d 6, 8-9 (Iowa 1997), which had acknowledged, but did not need to resolve the issue on the gr......
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    ...court's ruling on his motion for a new trial. II. Double Jeopardy Claim. Our review of constitutional issues is de novo. State v. Kraklio, 560 N.W.2d 16, 17 (Iowa 1997). Double jeopardy protections are enforced against the states through the Fourteenth Amendment of the federal constitution.......
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