State v. Powdrill

• Decision Date: 25 November 1996
• Parties: 95-2307 La
• Court: Louisiana Supreme Court

Page 350

684 So.2d 350

95-2307 La. 11/25/96, Blue Sky L. Rep. P 74,146

STATE of Louisiana v. William Earl POWDRILL, III & Uwe Schmidt.

No. 95-KA-2307.

Supreme Court of Louisiana.

Nov. 25, 1996.

Rehearing Denied Dec. 30, 1996.

Richard P. Ieyoub, Attorney General, Kathleen Elizabeth Petersen, Baton Rouge, for Applicant.

James Harry Askew, Ansel Martin Stroud, III, Peter Joseph Rotolo, Shreveport, for Respondent.

[95-2307 La. 1] JOHNSON, Justice. ^*

This case was brought before the court on direct appeal pursuant to La. Const. Art. V, Sec. 5(D) to determine whether certain provisions of the Louisiana Securities Law are unconstitutional. For the reasons stated herein, we affirm the trial court's finding that La. R.S. 51:712(A)(2) is unconstitutional as applied in the criminal context in that it impermissibly places the burden of proof upon defendants. We reverse the trial court's finding that La. R.S. 51:721(A) and (B) are unconstitutional.

FACTS AND PROCEDURAL HISTORY

On April 22, 1994, defendants William Earl Powdrill, III, a sales representative for the Biedenharn Investment Group, Inc. (B.I.G.), and Uwe Schmidt, vice president of B.I.G., were indicted on 20 and 11 counts respectively, for violating several provisions of the Louisiana Securities Law, formerly known as the Blue Sky Laws. ² La. R.S. 51:701 et seq. Defendants were licensed as securities salesmen for B.I.G., a small stock brokerage firm headquartered in [95-2307 La. 2] Shreveport, Louisiana. During the course of their employment, defendants sold or offered to sell, promissory notes issued by Towers Financial Corporation of New York City (hereinafter, Towers) to numerous investors, most of whom were primarily located in Northern Louisiana.

The bill of indictment alleges that defendants, on behalf of B.I.G. sold or offered to sell promissory notes on behalf of Towers between January 1988 and February 1993 in violation of Louisiana's securities laws. ³ Specifically, defendants were charged with selling the notes at interest rates higher than the rates stated in the offering documents, selling the notes by means of false statements, making false statements regarding the investor's net worth, and falsifying balance sheets indicating that the investor was accredited. B.I.G. was the only broker-dealer in Louisiana licensed to sell the Towers product.

In February, 1993, the Towers empire collapsed. The B.I.G. investors who had purchased these notes from Towers received their last interest payment at that time, and were neither paid further interest on their investments, nor repaid the principal sum of their investments.

Powdrill has been charged under La. R.S. 51:712(A)(2) (five counts) with deliberately making false and/or misleading material oral statements to five investors. Powdrill allegedly stated that the notes were safe, and that there was no reason to expect that the investors could lose their principal investments. Schmidt was charged under La. R.S. 712(A)(2) with deliberately making false and/or misleading material oral statements to investors, all of which allegedly led these investors to conclude that the notes were safe, and that there was no reason to believe that the investors could lose their principal sums. Schmidt was also charged with giving one of the investors written materials to reinforce confidence in the Towers investment, said materials containing false and/or misleading information.

On July 20, 1995, prior to trial, defendants filed a motion to quash the indictment. The trial court ruled in favor of defendants holding that La. R.S. 51:712(A)(2) and La. R.S. 51:721(A) & (B) of the Louisiana Securities Law are unconstitutional. The trial court found that La. R.S. 712(A)(2) and 721(A) impermissibly placed the burden of proof upon defendants in violation of In re Winship, 397 U.S. 358, 90 S.Ct. 1068, 25 L.Ed.2d 368 (1970), and that La. R.S. 721(B) [95-2307 La. 3] denied defendants their constitutional right of confrontation. The state appealed these rulings directly to this court pursuant to La. Const. Art. V, Sec. 5(D).

BACKGROUND

The first securities act was adopted in Kansas in 1911. Comment, Steven M. Axler, "The Blue Sky Laws of Louisiana", 41 Loy.L.Rev. 1 (1995). The notion of securities regulations rapidly spread and by 1929, virtually every state had some form of securities regulation. Id. These statutes were known as "blue sky laws" after a Supreme Court decision describing their purpose as the prevention of "speculative schemes which have no more basis than so many feet of blue sky." Id. Louisiana enacted its first blue sky law in 1920. Landry v. Thibaut, 523 So.2d 1370, 1379 (La.App. 5th Cir.), writ denied, 526 So.2d 809 (La.1988). As evidenced by the stock market crash of 1929, these statutes were inadequate in combatting schemes involving interstate commerce. As a consequence of the failures of the various states' blue sky laws, federal securities laws were enacted. Comment, Steven M. Axler, "The Blue Sky Laws of Louisiana", 41 Loy.L.Rev. 1 (1995).

The purpose of the Securities Act of 1933 is to provide full and fair disclosure of the character of securities sold in interstate commerce, and to prevent fraudulent sales of the same. See Preface to Securities Act of 1933, Pub.L. No. 22-73d, 48 Stat. 74 (1933) (Codified at 15 U.S.C. §§ 77-77bbb (1988)). The provisions of the Louisiana Securities Law, (formerly known as Louisiana Blue Sky Law) are analogous to the provisions of the federal Securities Act of 1933. See Taylor, III, M.D. v. First Jersey Securities, Inc., 533 So.2d 1383 (La.App. 4th Cir.1988). Our courts therefore look to the federal law and jurisprudence interpreting the securities law for guidance in interpreting the Louisiana provisions. Taylor at 1385, citing Gour v. Daray Motor Co., Inc., 373 So.2d 571, 578 (La.App. 3rd Cir.1979), writ granted 376 So.2d 1270 (La.1979), writs dismissed, 377 So.2d 1033 (La.1979).

Section 12(2) of the Securities Act of 1933 creates the liability of sellers of securities who make material misstatements or omissions in prospectuses. Section 12(2) provides:

§ 77l. Civil liabilities arising in connection with prospectuses and communications

Any person who--

[95-2307 La. 4] ...

(2) offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraph (2) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they are made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the persons purchasing such security from him, who may sue either in law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security.... 15 U.S.C.A. § 77l(2).

Analogous to the Securities Act of 1933, La. R.S. 712(A)(2) also creates the liability of sellers of securities who make material misstatements or omissions in prospectuses. Modeled after Section 12(2) of the Securities Act of 1933, La. R.S. 712(A)(2) provides in pertinent part:

§ 712 Unlawful practices

A. It shall be unlawful for any person:

...

(2) To offer to sell or to sell a security by means of any oral or written untrue statement of a material fact or any omission 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, the buyer not knowing of the untruth or omission, if such person shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.

Because the jurisprudence of Louisiana's securities law is relatively undeveloped and there are virtually no cases dealing with criminal prosecutions under this law. Consequently, Louisiana courts have consulted federal decisions for guidance, particularly because this state's securities regulations are modeled after the federal Securities Act of 1933 and the Securities and Exchange Act of 1934. Taylor v. First Jersey Securities, Inc., 533 So.2d 1383 (La.App. 4th Cir.1988), writ denied, 538 So.2d 593, 594 (La.1989); see also, Ek v. Nationwide Candy Division, Ltd., 403 So.2d 780 (La.App. 3rd Cir.1981), writ denied, 407 So.2d 732 (La.1981); Gour v. Daray Motor Co., Inc., 373 So.2d 571, 578 (La.App. 3d Cir.1979), writ granted, 376 So.2d 1270 (La.1979), writs dismissed, 377 So.2d 1033 (La.1979); Goldblum v. Boyd, 341 So.2d 436 (La.App. 2nd Cir.1976). Although the antifraud provisions of Louisiana's securities laws and the federal regulatory scheme are similar, they are not identical. Comment, Steven M. Axler, "The Blue Sky Laws of Louisiana", 41 [95-2307 La. 5] Loy.L.Rev. 1 (1995). The major distinction between the federal Securities Act of 1933 § 712 and La. R.S. 51:712(A)(2), which serves as the crux of the appeal in the present case is that Section 12(2) of Securities Act of 1933 § 712 addresses civil liability only, whereas La. R.S. 51:712(A)(2) encompasses both civil and criminal liability.

I. Constitutionality of La. R.S. 51:712(A)(2)

In order to obtain a criminal conviction, La. R.S. 51:712(A)(2) requires the prosecution to prove that defendants (1) willfully; (2) offered to sell or sold; (3) a security; (4)(a) by means of any oral or written untrue statement of material fact or (b) any omission 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; and (5) the buyer not knowing of the untruth or omission. The "def...