State v. Walsh

• Court: United States Court of Appeals (Ohio)
• Writing for the Court: WHITESIDE; STRAUSBAUGH, P. J., and MOYER
• Citation: 20 O.O.3d 178,420 N.E.2d 1013,66 Ohio App.2d 85
• Decision Date: 18 December 1979
• Parties: , Blue Sky L. Rep. P 71,631, 20 O.O.3d 178 The STATE of Ohio, Appellee, v. WALSH, Appellant.

Page 85

66 Ohio App.2d 85 420 N.E.2d 1013, Blue Sky L. Rep. P 71,631, 20 O.O.3d 178 The STATE of Ohio, Appellee,
v.
WALSH, Appellant. Court of Appeals of Ohio, Tenth District, Franklin County. Dec. 18, 1979. [420 N.E.2d 1014]
Syllabus by the Court

1. In order to constitute a violation of R.C. 1707.44(G), defendant must have engaged in a fraudulent act or practice in selling securities; thus, the act or practice must have been one in connection with the sale of the security, rather than an act or practice committed subsequent to the sale.

2. A promise or representation made

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in connection with the sale of a security is not rendered fraudulent by the subsequent violation of the promise or by a change of circumstances; unless, at the time of the sale there was no intention to keep the promise, or it was known that the circumstances would change.

3. Although R.C. 1707.44(G) utilizes the word "knowingly," R.C. 1707.29 has the general effect of defining "knowingly" more in terms of "negligently" as defined by R.C. 2901.22(D), rather than "knowingly" as defined by R.C. 2901.22(B); thus, for the purpose of fraudulent acts in selling securities in violation of R.C. 1707.44(G), a person is criminally liable if he represents facts to be different than he should have known them to be if he had exercised reasonable diligence to ascertain the facts.

4. R.C. 1707.44(G), properly construed and applied, is not overly broad, vague, imprecise or so indefinite that men of common intelligence cannot ascertain its meaning.

5. In a prosecution for a violation of R.C. 1707.44(G), it is error for the court to charge the jury upon the nature and purpose of the Blue Sky Law (R.C. Chapter 1707) where the charge does not relate to material issues of fact in the case and where there was no evidence of record either supporting or requiring the giving of the charge.

6. Although under special circumstances an expert may testify as to the meaning of words of art used in a document, the construction of such a document is ordinarily a question of law for the trial court.

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George C. Smith, Pros. Atty., Alan C. Travis, Karen L. Martin and Richard A. Curtin, Columbus, for appellee.

[420 N.E.2d 1015] Robins, Preston & Beckett Co., L.P.A. and John A. Sentz, Jr., Columbus, for appellant.

WHITESIDE, Judge.

Defendant-appellant, Eugene Walsh, appeals from his conviction in the Court of Common Pleas of Franklin County of a securities violation and raises eight assignments of error, as follows:

"1. The court erred in giving a special charge offered by the prosecution which is contrary to the presumption of innocence of a defendant.

"2. The court erred in its charge by making reference to civil liability in this criminal proceeding.

"3. The court erred in not granting a new trial after allowing the prosecution to make remarks in final argument which were not only not substantiated by evidence in the record, but were contrary to the uncontroverted evidence in the record.

"4. The court erred in not granting a motion for acquittal at the close of the prosecutor's case.

"5. The court erred in not granting a motion for acquittal after the verdict of the jury.

"6. The court erred in not striking the testimony of Phil Musser who based his answers on inadmissible evidence which was not in the record.

"7. The court erred in not striking the testimony of Phil Musser for his testimony violated the best evidence rule.

"8. Section 1707.44G (sic) of the Ohio Revised Code is unconstitutional, being overly broad, vague and imprecise, fails to state ascertainable standards of guilt, and is so indefinite that men of common intelligence must guess at its meaning and be uncertain as to its application."

Defendant, an attorney and a petroleum and natural gas engineer, together with a codefendant, Paul Plunket (hereinafter, "defendant" refers to Eugene Walsh), a securities salesman, formed a corporation to engage in the business of drilling oil and gas wells. They obtained an assignment of an

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oil and gas lease, obtained a driller, filed a securities registration with the Ohio Division of Securities and began to sell 37 shares in the venture, representing 80 percent thereof, at a price of $5,000 each.

The registration stated that the underwriter would receive a commission in an amount equal to 15 percent of the sale price of the securities and that an amount not to exceed $8,500 of the proceeds would be used for administrative expenses. The offering circular, which, together with other documents, was given to each investor, indicated that the underwriter's commission would be 15 percent, that the proceeds from the sale of the securities would be placed in a special drilling account, that the venture was contingent upon the sale of the shares offered, that any excess of proceeds over drilling and other expenses would constitute profit to the corporation and that if the proceeds proved to be inadequate, then the remainder of the costs would be borne by the corporation. In addition, defendant and Plunket executed an agreement agreeing to purchase the necessary number of shares to complete a well if an inadequate amount of shares was sold.

Despite their efforts, only six full shares and two half shares were sold, realizing proceeds of $35,000. None of the proceeds of the sale were placed in a special drilling account; but, instead, all but $8,700 thereof was expended either for corporate purposes, including salary to defendant, or for personal use by Plunket. Being unable to sell the offerings, defendant and Plunket sold their stock in the corporation to another promoter, who assured them he could get the offerings sold. The major asset of the corporation was a certificate of stock in another corporation which was allegedly worth $30,000 and which could be converted to cash upon the exercise of an option. Defendant and Plunket sold their stock in the corporation to the promoter for only one dollar, the stock having doubtful value despite the existence of the certificate-of-stock asset, which was allegedly worth $30,000, and the $8,700 in cash in light of the obligation to [420 N.E.2d 1016] the investors. The promoter, rather than selling further shares or exercising the option of converting the certificate of stock to cash, proceeded to use the corporate funds, the $8,700 in cash, for his own personal use.

Defendant was indicted upon seven counts of grand theft, one count of a securities violation and two counts of selling

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securities without being licensed. Prior to trial, the two counts of selling without a license were dismissed. The jury returned a verdict finding defendant not guilty on the seven counts of grand theft, but guilty on the one count of a securities violation.

In the eighth assignment of error, defendant contends that the statute of which he was convicted of violating is unconstitutional, namely, R.C. 1707.44(G), which provides, as follows:

"No person in selling securities shall knowingly engage in any act or practice which is, in sections 1707.01 to 1707.45 of the Revised Code, declared illegal, defined as fraudulent, or prohibited."

There are three basic elements of the offense so defined: (1) the accused must have engaged in an act or practice either (a) declared as illegal, (b) defined as fraudulent, or (c) prohibited in R.C. Chapter 1707; (2) the accused must have engaged in such act or practice knowingly; and (3) the accused must have engaged in such act or practice in selling securities.

We find that the statute is not overly broad, vague or imprecise. The fact that one must look to other provisions of R.C. Chapter 1707 to ascertain whether an act or practice is declared illegal, defined to be fraudulent or prohibited does not render R.C. 1707.44(G) unconstitutional. In addition, defendant has not identified the other provisions of R.C. Chapter 1707 which he contends are overbroad, vague or imprecise.

Unfortunately, the indictment did not allege any specific act or practice claimed to constitute the violation. However, motions for a bill of particulars and an amended bill of particulars were sustained. Although not as precise as might be desirable, the amended bill of particulars alleges that defendant engaged in "fraudulent acts" as defined by R.C. 1707.01(J). It further alleges that the registration for the securities contained false representations indicating that the corporation, Hydro-Carbon Energy Corporation (hereinafter referred to as Hydro-Carbon), had a valid oil and gas lease for certain real estate and false representations as to the net worth of the corporation. In addition, the amended bill of particulars alleges that defendant made false promises, agreeing to purchase any unsold shares so that sufficient funds would exist for commencing and completing the drilling, that defendant

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agreed to follow a certain procedure if he sold his interest in Hydro-Carbon and that he failed to follow the procedure in selling his interest. Unfortunately, there are several references in the amended bill of particulars to alleged false representations in the registration application for purpose of securing qualification of the securities, which would constitute a violation of R.C. 1707.44(B), rather than R.C. 1707.44(G). However, there are also allegations in the amended bill of particulars that defendant made these false representations in selling securities. It is further alleged that defendant's sale of the corporate stock for one dollar constituted a "fraudulent act" in violation of R.C. 1707.44(G).

Unfortunately, the charge of the court to the jury was only in the general terms of R.C. 1707.44(G), without reference to the specific alleged fraudulent acts which the defendant was alleged to have committed by the amended bill of particulars; and no such specific instruction was requested by any party. However, this does not render the statute, itself, unconstitutional.

Since...