U.S. v. Dahlstrom, s. 97-21031

• Decision Date: 13 July 1999
• Docket Number: Nos. 97-21031,97-20237,s. 97-21031
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Karl L. DAHLSTROM and Karla D. Dahlstrom, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 677

180 F.3d 677

UNITED STATES of America, Plaintiff-Appellee, v. Karl L. DAHLSTROM and Karla D. Dahlstrom, Defendants-Appellants.

Nos. 97-21031, 97-20237.

United States Court of Appeals Fifth Circuit.

July 13, 1999.

Kathlyn Giannaula Snyder, Paula Camille Offenhauser, Asst. U.S. Attorneys, Houston, TX, for Plaintiff-Appellee.

David L. Botsford, Austin, TX, for Dahlstrom.

Appeals from the United States District Court for the Southern District of Texas.

Before KING, Chief Judge, and REYNALDO G. GARZA and JOLLY, Circuit Judges.

REYNALDO G. GARZA, Circuit Judge:

Karl Dahlstrom ("Dahlstrom") and Karla Dahlstrom, Dahlstrom's daughter, appeal their convictions and sentences for securities laws violations.

In February of 1991, Dahlstrom approached Richard Beeman ("Beeman"), a business associate, to discuss the production and marketing of Uni-snuff, a gel like substance designed to extinguish oil well fires like the ones raging in Kuwait at the time. Prompted by their discussion, Beeman organized a group of twenty to twenty-five potential investors in Boise, Idaho, for a meeting with Dahlstrom.

At the meeting, Dahlstrom demonstrated the product by showing a videotaped recording of the product putting out a mock oil well fire. He explained that as a result of Saddam Hussain's invasion of Kuwait, the Kuwaity government had expressed an interest in Uni-snuff and that he was looking for investors who would invest a minimum of $10,000. He stated at the meeting that the product's ingredients were approved by the Environmental Protection Agency ("EPA"), that the product was going to be studied by a professor at Louisiana State University, and that contracts for the sale of Uni-snuff were currently pending in Kuwait. He failed to disclose the risks involved with the investment, primarily, that the product's shelf life rendered it commercially useless.

Approximately ten of the investors gathered at the Boise meeting decided to invest in the product. On April 10, 1991, Dahlstrom incorporated Inferno Snuffers, Inc. ("ISI") for the sole purpose of producing and marketing Uni-snuff. On April 19, 1991, ISI signed a six-month lease for office space and lab facilities for $19,000. The office and lab facilities were in a complex owned by Dahlstrom in Bryan, College Station. Tension grew as costly expansions were made to the facility, company vehicles were bought, and large salaries were paid without the investors' approval.

Dahlstrom authorized demonstrations and encouraged the selling of securities to meet the ever increasing need for investment money. Although prior attempts to market the product in Mexico and in Kuwait had failed, investors were told that the product was out of the prototype stage and that it had been successfully tested on all types of fires. Dahlstrom was aware that the product would separate and rot if it remained in a mixed solution for a few days. He had also been informed that mixing the components at the scene of an actual fire had been overly burdensome and impractical. A report by one of the officers also showed that, although a freshly mixed batch of Uni-snuff would put out regular fires on land, the product did not perform as expected on oil well fires. Despite this information, Dahlstrom continued to hold demonstrations at ISI's facility and covered-up for the product's deficiencies by mixing a fresh batch of Uni-snuff on a daily basis. Investors and contract brokers were continuously reassured that the product was commercially viable.

Karla Dahlstrom was in charge of sending promotional material to potential investors. The promotional materials falsely stated that the company had contracts with two fire fighting companies, when in fact it had negotiated with two contract brokers who were trying to secure a sales contract for ISI. One of the documents falsely stated that the product absorbed enormous amounts of heat without dissipating, which was not true because it evaporated at the same temperature as water. The materials also stated that the flashpoint of the product greatly exceeded the melting point of aluminum, which was also not true. Claims were made that the product was nontoxic and environmentally safe, however, samples of the product had never been sent to the EPA and there was no data to support this conclusion. Videotapes of the product were continuously used as promotional material to attract investors. The recordings falsely stated that the product had passed Kuwait inspections and was the only fire fighting chemical approved by the Kuwait Oil Company. Investors were told that multi-million dollar contracts were being negotiated with potential buyers and that a patent was pending. Except for a few investors who went to the laboratory and saw the product rotting away, most of the investors and contract brokers were misled into believing that the product was in fact commercially viable and that all of Dahlstrom's assertions were true.

By July of 1991, ISI had exceeded the number of investors permitted under securities laws for non-registered corporations. Rather than turning investors away, investors were placed into trusts. Richard Lopez, who had previously applied for a license to sell public securities, became concerned that the "piggybacking" scheme was illegal and informed Dahlstrom and Karla Dahlstrom about his concerns. Karla Dahlstrom, who was in charge of placing the investors in the trusts, complained that she was signing documents that Dahlstrom did not want to sign. Dahlstrom argued that the thirty-five investor limit could be circumvented by placing the added investors into trusts and that it was a grey area of the law that could never be proven. ¹

Concerns regarding the unregistered sales of securities by non-brokers also grew as more people invested and commissions were paid. Two ISI employees informed Dahlstrom that a license was required if the person selling the securities received a fee. Dahlstrom tried to circumvent the law by designating the commissions as "consulting fees." Don Ballard ("Ballard"), who had three million shares of ISI, was paid 10% commission fee off of the $80,000 to $100,000 he raised for ISI through a trust. Thirty to forty investors were placed under Ballard's family trust though they had no relationship to Ballard. Dahlstrom hoped to remedy this problem later by merging with a public corporation.

In September of 1991, Dahlstrom received a letter from the State Securities Board advising him that it had information that ISI was offering and selling securities to the general public. The letter advised that under Texas law, securities offered for sale to the general public had to be registered and had to be sold by registered dealers, unless an exemption could be found. The letter also advised that the antifraud provisions of the Securities Act applied to the offer and sale of securities and to all statements and representations in connection therewith.

Shortly after receiving the letter from the State Securities Board, Dahlstrom's attorney suggested that they stop selling stock until they received proper advise from a competent securities attorney. A meeting that same month with a law firm undeniable revealed that the money had been raised improperly and that a recision offer was needed. The firm informed both Dahlstrom and Karla Dahlstrom that they had to stop piggybacking new investors and that the problem with the product's shelf life had to be fully disclosed. Furthermore, investors should be given the opportunity to either: (1) sell back their stock to ISI; or (2) keep their investment after the disclosure was made.

Despite counsel's advise, Dahlstrom and Karla Dahlstrom continued to sell securities through November and October of 1991. An audit later that year revealed that the company had raised $1.6 million by selling stock through September 30, 1997, and another $.0458 million through December of 1991. There was a total of 706 investors who resided in twenty-five different states. The audit reflected no sales of the product for the company and a net loss throug@h December of 1991, of $1,036,279 and $2,114,143 through April of 1992. It wasn't until April of 1992 that a formal recision offer was made available to stockholders. The company, however, did not have enough money to fund the recision offer.

Dahlstrom and Karla Dahlstrom were indicted on August 14, 1996 for committing fraud in connection with the purchase and sale of securities and in the offer and sale of securities ("Count II and III"), for selling unregistered securities ("Count IV"), for acting as an unregistered broker or dealer in the sale or purchase of securities ("Count V"), for mail fraud ("Count VI through Count XVI"), and for conspiracy to commit the same violations ("Count I") in violation of 15 U.S.C. §§ 77e(a) and (c), 77q(a), 78o(a)(1), 78j(b), and 18 U.S.C. §§ 2, 371, 1341. The jury convicted Dahlstrom on Counts II through VI, Counts IX though XIV, and XVI; Karla Dahlstrom was convicted on Counts IV and V. Dahlstrom was sentenced to seventy-eight months imprisonment on Count II and sixty months on the remaining counts, to run concurrently. Karla Dahlstrom was sentenced for forty-six months imprisonment. Dahlstrom and Karla Dahlstrom (collectively "the Dahlstroms") were ordered to jointly pay $1,997,003 in restitution.

This appeal followed.

I.

On May 11, 1992, a group of ISI employees and a Sheriff arrived at the Dahlstroms' place of business. The ISI employees forced themselves into Karla Dahlstrom's office and proceeded to remove ISI property. The Dahlstroms argue that the bulk of the documentary evidence used against them at trial was illegally seized in violation of their Fourth Amendment rights. They contend that the Sheriff's presence gave the unauthorized act an air of legality and that this inhibited their attempts to retain control of the documents. The Dahlstroms also assert that the district court erred in finding that the...