Trivectra v. Ushijima
| Decision Date | 11 September 2006 |
| Docket Number | No. 25312.,25312. |
| Parties | In the Matter of TRIVECTRA, aka Trivectra, Inc.; Curtis N. Gushi; Donovan D. Oda, Respondents-Appellants-Appellants, v. Ryan S. USHIJIMA, Commissioner of Securities, Department of Commerce and Consumer Affairs, State of Hawai'i; State of Hawai`i, Department of Commerce and Consumer Affairs, Appellees-Appellees. |
| Court | Hawaii Supreme Court |
Neal K. Aoki of Koshiba Agena & Kubota, on the briefs, Honolulu, for respondents-appellants-appellants TriVectra, Inc., Curtis N. Gushi and Donovan D. Oda.
Richard A. Young, Securities Enforcement Branch, Department of Commerce and Consumer Affairs, State of Hawai`i, on the briefs for appellees-appellees Ryan S. Ushijima, Commissioner of Securities, Department of Commerce and Consumer Affairs; State of Hawai`i, Department of Commerce and Consumer Affairs.
The appellants-appellants TriVectra, Inc., Curtis N. Gushi, and Donovan D. Oda [hereinafter, collectively, "the Appellants"]1 appeal from the August 27, 2002 judgment of the circuit court of the first circuit, the Honorable Eden Elizabeth Hifo presiding, affirming the February 14, 2002 final order of Ryan S. Ushijima, Commissioner of Securities of the State of Hawai`i Department of Commerce and Consumer Affairs (DCCA) [hereinafter, "the commissioner"]. The commissioner concluded that the Appellants had violated several provisions of Hawai`i Revised Statutes (HRS) ch. 485, the Uniform Securities Act, and ordered them: (1) to cease and desist transacting in securities until they came into compliance with HRS ch. 485; (2) to provide their customers with the option to rescind the customers' contracts with the Appellants; and (3) to pay a fine of $100,000.00.
On appeal, the Appellants allege: (1) that the commissioner's determination that the Appellants' activities constituted the creation of investment contracts was clearly erroneous and an error of law; (2) that the commissioner erred in concluding that the Appellants had violated HRS ch. 485; (3) that the commissioner's issuance of the final order without providing the Appellants an opportunity to respond to the findings of fact (FOFs) and conclusions of law (COLs) contained therein violated the Appellants' statutory rights under HRS § 91-11 (1993);2 (4) that the issuance of the final order sixteen months after the issuance of the original cease and desist order (CDO) and eleven months after the issuance of the hearings officer's recommended order violated the Appellants rights to a final decision within a reasonable time, pursuant to HRS §§ 91-12 (1993)3 and 485-18.7 (1993);4 and (5) that the imposition of a $100,000.00 fine on the Appellants was arbitrary, capricious, and an abuse of discretion. For the reasons discussed more fully infra in part III, the Appellants' arguments are without merit. Accordingly, this court affirms the circuit court's August 27, 2002 judgment.
The present appeal arises out of activities of the Appellants in running an internet-based business. Beginning in late 1999, the Appellants sold online "shopping malls" [hereinafter "OSMs"] that allowed private individuals, [hereinafter "members"], to host a customized website containing links to brand name retailers such as Disney and Warner Bros. Members paid $79.00 for three months of service, which included maintenance, server hosting, and assistance with web design.
TriVectra obtained the bulk of its links to brand-name retailers through the services of Linkshare Corporation, which allowed individuals to register as affiliates and download and run links to retailers free of charge. Oda registered as an affiliate in December 1999, but the commissioner found that, under the terms of the Linkshare agreement, Oda was not authorized to sublicense, transfer, or assign those links to other individuals.5
The terms of the agreement under which the mall owners operated allowed them to make money either (1) through commissions earned from online merchants whenever a purchase was made by a third party using a link from the member's website or (2) by recruiting other people to purchase OSMs. The Appellants sold the OSM program through training meetings and TriVectra's website. In this way, the Appellants testified that they sold between 300 and 400 OSMs by early 2000. Participants later testified that the focus of the meetings was on recruitment of new OSM members rather than on the means by which to generate sales commissions through purchases from OSM websites. During the period leading up to February 23, 2000, a total of $154.43 in purchases was made through all OSMs combined, resulting in total commissions of $6.25.
As for the second method of earning income, i.e., selling OSMs to new customers, members were compensated for recruiting additional mall owners through a multitiered program of "Vectoring," "Power Up," and "Power Up Matching," wherein the successful recruiters were paid commissions depending on the number of new OSM buyers they secured for TriVectra. TriVectra's marketing materials emphasized large potential returns for members through the OSM sales program, demonstrating how commissions totaling $2,097,144 were possible, presupposing the recruitment of 393,216 new investors. The Appellants later informed DCCA investigator Mary Donahue that, of the seventy-nine-dollar fee, TriVectra applied approximately thirty dollars to technical support costs and fifty dollars to paying commissions to individuals who sold additional OSMs to new members.
Following DCCA's investigation, on October 11, 2000, the commissioner issued a Preliminary CDO against the Appellants. Pursuant to an October 18, 2000 request for a hearing filed by the Appellants, DCCA Hearings Officer Richard Marshall conducted a hearing on December 18 and 19, 2000.
One OSM member who testified at the hearing was Lori-Ann Navares, who attend a TriVectra training meeting in late 1999. According to Navares, at the meeting Gushi emphasized earning commissions through the sales of OSMs to others rather than how to earn commissions through operating an OSM. At the meeting, Navares bought ten OSMs for a discounted total of $600.00. She testified that Gushi told her that "if we owned ten stores, I think [we] were part of a certain program where [we] would get a certain commission off of what the company made." Navares also testified that, at a subsequent meeting in early 2000, she paid Gushi an additional $3500.00 for at least forty new OSMs, in reliance on a promise from him to locate buyers for those OSMs:
Q: Why did you pay $3500?
[Navares]: Because that was another special they had; that if—there was only a certain amount of people, and if you signed up and you paid $3500 — I think 40-something stores, that they would find store owners for you.
Q: Who told you this?
[Navares]: Mr. Gushi.
Q: Did Mr. Gushi or Mr. Oda or anyone else ever find 40 other store owners for you?
[Navares]: I think they found a couple.
Q: But not 40?
[Navares]: No, not that I know of.
Navares testified during cross-examination by the Appellants' counsel that Gushi did not represent that he already had the new buyers lined up, but rather that he would endeavor to locate some, and that no specific time frame for providing them was established. It was shortly after Navares paid the $3500.00 that DCCA issued its CDO.
The Appellants maintained that TriVectra did not require an individual to purchase an OSM in order to earn commissions on the sale of OSMs to others. However, Navares testified regarding the issue, in response to inquiries from Marshall, as follows:
[Marshall]: So it was your understanding that you could bring people to meetings, let's say, to promote it; and if they joined—if enough of them joined, you would get money for having brought them in, and their having become members, even if you never bought into the mall web site yourself?
[Navares]: No, you couldn't.
[Marshall]: You could not?
[Navares]: Right.
[Marshall]: So you had to buy into the mall web site first?
[Navares]: Yes.
At the hearing, as part of DCCA's argument that the Appellants engaged in fraudulent activity in violation of HRS ch. 485, the Appellees asserted that TriVectra received the OSM marketing links free of charge from Linkshare, that Oda's practice of assigning those links to members as subaffiliates was in violation of Oda's agreement with Linkshare, and that TriVectra never revealed to potential members that the OSM links could be obtained directly from Linkshare free of charge.
The Appellants admitted that the OSM service provided to TriVectra's customers was available from Linkshare free of charge and that they never so informed the members. Oda asserted, however, that, while Linkshare's software was free, additional technical expertise, provided by TriVectra, was necessary to create and maintain a viable, attractive website. The Appellants also contested the DCCA's assertion that TriVectra assigned subaffiliate links to members in violation of Oda's agreement with Linkshare.
Early in the hearing, DCCA called as a witness Linkshare's General Counsel, Miriam Gadden, who testified by telephone from the mainland that Linkshare had no record of any agreement with Oda to allow him more than one affiliate membership and that hosting 300 to 400 members under his account would be in violation of his agreement with Linkshare. She admitted on cross-examination that Linkshare allowed affiliates in its Signature Program to secure numerous subaffiliates; she further testified, however, that as far as she knew, Linkshare had no written agreement with Oda approving his participation in that program.
On the other hand, the Appellants adduced evidence that Oda contacted Jean-Louis Richiardone at Linkshare on January 24, 2000 and...
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