State v. Moore, 890558-CA

• Decision Date: 08 November 1990
• Docket Number: No. 890558-CA,890558-CA
• Citation: 802 P.2d 732
• Parties: STATE of Utah, Plaintiff and Appellee, v. Michael R. MOORE, Defendant and Appellant.
• Court: Utah Court of Appeals

Page 732

802 P.2d 732

STATE of Utah, Plaintiff and Appellee, v. Michael R. MOORE, Defendant and Appellant.

No. 890558-CA.

Court of Appeals of Utah.

Nov. 8, 1990.

James N. Barber, Salt Lake City, for defendant and appellant.

R. Paul Van Dam, State Atty. Gen., Barbara Bearnson, Asst. Atty. Gen., for plaintiff and appellee.

Before BENCH, BILLINGS and GREENWOOD, JJ.

GREENWOOD, Judge:

Appellant Michael R. Moore appeals his conviction of eight counts of securities fraud, in violation of Utah Code Ann. § 61-1-1(2) (1989). We affirm.

BACKGROUND

This case arises from Moore's sale of promissory notes to eight Utah investors between October 11, 1982 and April 15, 1983. The notes were issued by American Factoring Corporation (AFC), of which Moore was founder, president, and director. AFC was incorporated in 1981. A total of over $290,000.00 was paid to AFC by the eight investors. ¹

A prospectus issued by AFC in September 1982 described AFC's business to be primarily "factoring." As defined in the prospectus, factoring consists of the purchase of short-term notes and accounts receivable of other businesses at a discount, then collecting on those notes and receivables when due. The difference between the discounted purchase price and collection of the notes and receivables at face value is profit to the factoring company. The discount at which AFC was to purchase the notes and receivables was calculated so that, upon collection, AFC would realize a gross return of five to fifteen percent per month, or a minimum of sixty percent per year, on its factoring outlays.

The prospectus stated that AFC would pursue several measures to protect the funds it used to purchase notes and receivables from its factoring clients. First, AFC would require a personal guarantee from principals of its clients that any notes or receivables that proved to be uncollectable would be repurchased from AFC. Second, AFC would require delivery of additional security from its clients to protect AFC's interest in the event of uncollectable accounts. Finally, AFC would "attempt[ ] to make the necessary verification of the existence and collectability of all such accounts purchased...."

AFC raised the cash for purchasing notes and receivables through the sale of its own promissory notes. The high rate of return on its factoring business was supposed to enable AFC to pay high interest to those investing in AFC's promissory notes. For six-month, one-year, and two-year notes, respectively, the prospectus indicated that AFC would pay twenty-four, thirty, and thirty-six percent per year in interest. Notes in a principal amount of $20,000 or more would pay an additional three percent. Investors could choose to receive monthly interest payments or to allow the interest to compound over the term of the notes.

AFC's business did not consist solely of factoring, however. The prospectus indicated that AFC investor funds would also be used "to conduct asset-secured financial services other than its primary business of factoring." Such services would include making loans secured by accounts receivable, inventory, equipment, and real estate. These additional services, according to the prospectus, would allow AFC flexibility "to take better advantage of changing economic trends."

The AFC prospectus also warned potential investors that the promissory notes were speculative, unsecured, ² nonguaranteed obligations of AFC. The financial risk entailed by AFC's operations would be borne largely by the purchasers of its promissory notes. Investors were warned that AFC's success depended on future, uncertain general economic conditions. Finally, the prospectus stated that it spoke "only as of its date," and that no representations about AFC other than those contained in the prospectus were authorized.

The promissory note sales in question were made in Duchesne and Uintah counties by AFC sales representative Glen Bingham. Bingham provided a copy of the AFC prospectus to each of the eight investors. However, instead of limiting his sales pitch strictly to the contents of the prospectus, he also told investors that the security required by AFC from its factoring clients consisted of collateral worth two to four times the face value of the factored notes and receivables. Bingham obtained this information by reviewing AFC documents made available to him by Moore. These documents consisted largely of deeds and appraisals on real property.

Based on the representations of the prospectus and Bingham, each of the eight investors purchased two-year notes from AFC. Subsequently, this "pretty, great" investment scheme failed. About May 1983, AFC suspended its promissory note offering because its major debtor clients appeared to be in default, posing a serious risk that AFC would be unable to make good on the obligations to its investors. At the time of Moore's trial, over five years later, none of the eight investors involved here had received any repayment of the principal amount of their notes. Four of the largest investors, accounting for $215,000 of the total invested, had received a total of $62,505 in monthly interest payments; however, no interest had been paid after December 1983, and none of the other investors received any interest.

After an investigation of AFC by the Utah Attorney General's Office, an original information charging Moore with securities fraud in connection with the promissory note sales was filed on October 5, 1987. The information was amended at the start of trial, September 19, 1988, deleting a charge involving a ninth AFC investor who had died, and narrowing the remaining eight charges to allege violations only of Utah Code Ann. § 61-1-1(2), which provides:

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

. . . . .

(2) 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.

Moore's jury trial lasted five days. The section 61-1-1(2) violation alleged by the State consisted of untrue statements and omissions made by Moore through the AFC prospectus and sales representative Bingham. The State charged that, contrary to these representations, AFC had not been primarily engaged in factoring, that AFC's factoring and loan outlays were not adequately secured, and that AFC's efforts to check on the existence and collectability of the accounts factored for its clients were inadequate.

The State's witnesses included all eight of the involved investors, former AFC employees, three AFC clients, and a certified public accountant called as an expert. Extensive exhibits related to AFC transactions were introduced in connection with most testimony.

Each investor recalled the description of factoring as a prominent feature of the prospectus and Bingham's sales pitch. Four investors testified that they would have been concerned had they learned that AFC was not actually engaged in factoring. ³ All but one investor specifically remembered the assurance that AFC's factoring outlays would be protected by collateral at two to four times the value of the factored accounts and notes.

On cross-examination, Moore's counsel attempted, with varying success, to elicit admissions from the investors that the exact nature of AFC's activities was of less concern to them than the high interest offered on the AFC notes. He also confronted them with the prospectus language describing AFC's "other activities" besides factoring, as well as the warnings of the speculative nature of the investment.

Several witnesses provided evidence that AFC was not primarily engaged in factoring. Former AFC employees were unable to identify any AFC personnel actually engaged in seeking notes and accounts to purchase, nor anyone charged with collecting on such notes and accounts.

AFC's two largest clients testified that they had received loans from AFC that were structured to look like factoring. ⁴ One of these clients, Harold Jay Dent, had an agreement with Moore whereby the loans would not be repaid, but instead converted into AFC's equity in a joint land speculation scheme. Dent testified that he had, with Moore's knowledge, pledged third-party promissory notes that were unsupported by any real debt as collateral for these loans. The other client, Lynn Bogart, also borrowed money for real estate speculation. Bogart testified that he had, at Moore's request, created phony accounts receivable to give the appearance of factoring. Moore had even assisted in creating these phony receivables. A third major client, Mark Wood, had asked AFC to collect on apparently genuine receivables he had pledged as security for an AFC loan and was refused.

The State's expert witness testified that, in his opinion, AFC had not used the funds obtained from its investors as the prospectus said it would. He stated that AFC had not been engaged in factoring while the prospectus was in effect. He also noted that together, Dent and Bogart accounted for sixty-nine to eighty-one percent of AFC's total cash outlays; ⁵ the reliance on so few clients for most of its business was a significant difference from usual factoring practice.

Several witnesses testified that the Dent and Bogart loans were never repaid, but simply rolled over, along with accrued interest, into new loans. AFC thus received practically no net income from these loans. A former AFC bookkeeper testified that the bulk of cash coming into AFC at all times was investor funds, not factoring proceeds.

Moore's counsel intensively cross-examined the State's witnesses regarding whether AFC actually engaged in factoring. He invited the inference that unknown AFC personnel could have been engaged in buying and collecting on notes and accounts to factor. Bogart was impeached on the basis of fraud convictions, in an attempt to show...