November 19, 2017

Tenth Circuit: Jury Instructions Sufficient to Apprise Jury of Elements of Crime

The Tenth Circuit Court of Appeals issued its opinion in United States v. Wright on Tuesday, February 21, 2017.

Bruce Carlton Wright was convicted on one count of conspiracy to commit bank fraud in violation of 18 U.S.C. §§ 1349 and 1344, and on eleven counts of bank fraud in violation of 18 U.S.C. § 1344. Wright was sentenced to thirty-three months imprisonment and ordered to pay restitution to the bank involved. Wright appealed, claiming the district court erred by: (1) not including intent to defraud as an element of conspiracy to commit bank fraud in the jury instruction; (2) responding to a written question from the jury by directing the jury to consider each count of the indictment separately; (3) denying Wright’s motion for new trial based on a Brady violation; (4) improperly calculating of the bank’s loss amount under USSG § 2B1.1(b)(1); and (5) improperly calculating of the restitution amount.

Because Wright did not properly object during his original trial in relation to his first, second, fourth, and fifth claims on appeal, the court reviewed them under the plain-error standard, which requires a plaintiff to establish an “error, that is plain, which affects substantial rights, and seriously effects the fairness, integrity, or public reputation of judicial proceedings.” The court stated that a plain error affects a defendant’s substantial rights if there is a reasonable probability that, if the error had not occurred, the result of the proceeding would have been different.

Concerning Wright’s first claim, that the court erred by not including the necessary element of intent to defraud to convict on a charge of conspiracy to commit bank fraud in the jury instruction, the court reviewed the jury instructions in light of the context of the entire trial to see if the instructions accurately stated the law and provided the jury with a correct understanding of the facts of the case. The court rejected this claim, saying that Wright could not show error because, while the court did not list intent to defraud in the instruction, the omission was cured because the instruction relating to committing bank fraud did incorporate “intent to defraud” by requiring an agreement to commit bank fraud.

During deliberations, the jury asked the judge if it they had to find Wright guilty on count 1 in order to convict him on any of the subsequent counts. Over objection of counsel, who agreed with the legal answer provided by the court but requested different phrasing, the judge responded, “No, you must consider each count separately.” On appeal, Wright contends that the answer should have been “Yes,” because, citing Pinkerton v. United States, the conviction would have been based on the acts of a co-conspirator and not his own acts (as his co-conspirator was testifying at his trial). The court stated that Wright had waived his ability to assert error under Pinkerton by failing to object on that basis at the district court level.  Instead, because Wright had generally objected to the instruction, the court reviews for plain error. However, because Wright argued under an abuse of discretion, and not plain error he waived his right to argue the claim.

In support for his motion for new trial, Wright argued that the government withheld a victim impact statement that the bank president had prepared for his coconspirator’s sentencing. Wright claimed that the information would have helped him to impeach his co-conspirator at his own trial. In their assessment of Wright’s motion, the court stated that Wright would have to show the prosecution suppressed material evidence that was favorable to Wright.  While the court determined the statement was not given to Wright prior to the trial, and that it was favorable to him, he failed in showing that the information included in the impact statement was material enough that it could have undermined confidence in the outcome of the case because Wright already attacked his co-conspirator’s credibility extensively at trial.

In calculating Wright’s sentence and amount of restitution he would be required to pay to the victims, the district court looked to the amount of Wright’s fraudulent draw requests, and determined he owed to be $1,094, 490. Wright was provided the sum in the presentencing report, which he accepted. Because the Bank recovered sums due to its sale, the sales price should be subtracted from the outstanding loan balance to calculate restitution to avoid a windfall to the victim. However, because the amount of restitution and sentence is a factual question, Wright was required to object at the district court level for it to rise to the level of a plain error reviewable on appeal. Wright accepted the amount in the pre-sentencing report, and the court held that Wright had accepted the calculation of restitution and his sentence as correct.

The Tenth Circuit Court of Appeals affirmed the district court’s rejection of Wright’s motion for new trial and rejected Wright’s other claims as to the amount and length of his sentence.

Colorado Court of Appeals: Plaintiff Need Only Demonstrate Prima Facie Showing of Personal Jurisdiction to Defeat Rule 12(b) Motion to Dismiss

The Colorado Court of Appeals issued its opinion in Rome v. Reyes on Thursday, June 15, 2017.

Ponzi Scheme—Investments—Insurance—Fraud—Personal Jurisdiction—Long Arm Statute—Colorado Securities Act—C.R.C.P. 12(b)(2)—C.R.C.P. 9(b).

This case arises out of a Ponzi scheme that defrauded at least 255 investors out of $15.25 million dollars. To implement the scheme, Schnorenberg formed KJS Marketing, Inc. in Colorado to obtain funds for investment in insurance and financial products sales companies. Schnorenberg hired Reyes, a California resident, and Kahler, a Wyoming resident, to solicit investor funds on behalf of KJS and its successor company, James Marketing. Rome, the Securities Commissioner for the State of Colorado, brought claims against Schnorenberg, Reyes, and Kahler for securities fraud, offer and sale of unregistered securities, and unlicensed sales representative activity. The Commissioner also sought a constructive trust or equitable lien against Schnorenberg’s mother (among others), who resides in Wyoming, as a “relief defendant,” based on allegations that she received some of the improperly invested funds. Reyes, Kahler, and Schnorenberg’s mother moved to dismiss all claims against them under C.R.C.P. 12(b)(2) for lack of jurisdiction. Reyes and Kahler also sought dismissal of the securities fraud claim on the ground that it failed to meet the C.R.C.P. 9(b) particularity requirements. (Neither Schnorenberg nor KJS is a party to this appeal.) The district court granted all of these motions without conducting an evidentiary hearing. In written orders, the court concluded that it lacked personal jurisdiction over each of the nonresident defendants, and that the Commissioner’s securities fraud claim failed to “link any particular factual allegations to actual false representations” made by Reyes or Kahler.

On appeal, the Commissioner contended that the district court erred in dismissing the claims against Reyes, Kahler, and Schnorenberg’s mother for lack of personal jurisdiction. Here, the Commissioner sufficiently alleged that Reyes and Kahler violated the Colorado Securities Act (CSA) because the transactions at issue pertained to securities that originated in Colorado. Taking the allegations together, the activities of Reyes and Kahler made it reasonably foreseeable that they could be haled into a Colorado court to answer the allegations. Further, the exercise of jurisdiction over them does not offend due process principles. Schnorenberg’s mother received funds from her son that had been transferred from Colorado accounts, and she knew or should have known that the money came from investors in her son’s “Colorado-based investment scheme.” The Commissioner’s action against Schnorenberg’s mother arises from her activities’ consequences in Colorado, and it is reasonable to exercise jurisdiction over her, despite the somewhat limited nature of her direct contacts with Colorado.

The Commissioner also argued that the district court erred in dismissing the claims against Reyes and Kahler under the CSA on the ground that the Commissioner failed to meet his pleading burden under Rule 9(b). The Commissioner’s complaint provided sufficient particularity to give Reyes and Kahler fair notice of the claim for securities fraud and the main facts or incidents upon which it is based.

The judgment was reversed and the case was remanded.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Securities Company Not Liable for Outside Bad Acts of Its Broker

The Colorado Court of Appeals issued its opinion in Houston v. Southeast Investments, N.C., Inc. on Thursday, May 18, 2017.

InvestmentsColorado Securities ActControl Person Liability.

Sorenson created and owned 1st Consumer Financial Services, Inc. (CFS). Around early 2011 Sorenson hired Hornick to work for CFS. Southeast Investments N.C., Inc. (Southeast) was an authorized and registered broker-dealer of securities at all relevant times. In February 2013 Sorenson signed an independent contractor agreement and registered representative agreement with Southeast that prohibited him from engaging in business activities not involving Southeast without disclosing such activities to Southeast and obtaining written approval. In spring 2013 Houston, a retired, unmarried woman, agreed to Hornick’s requests and liquidated her entire retirement savings and transferred the money into a self-directed IRA account to be managed by Hornick. Ultimately these funds were invested in CFS and Houston was unable to obtain a return of the money. Houston sued a number of parties under various theories of liability, including a control person liability claim against Southeast. The district court concluded that, as a matter of law, Southeast was not a control person with regard to Sorenson’s conduct underlying Houston’s securities fraud claim, and Southeast was entitled to summary judgment.

The sole issue on appeal was whether the district court erred in granting summary judgment for Southeast, based on its conclusion that, as a matter of law, Southeast was not liable as a control person under C.R.S. § 11-51-604(5)(b) of the Colorado Securities Act (the Act). A plaintiff establishes a prima facie case of control person liability where the plaintiff demonstrates that (1) a primary violation of securities fraud occurred and (2) the defendant was a controlling person. As a general rule, a broker-dealer is statutorily in control of its registered representatives as a matter of law. However, a broker-dealer is not in statutory control of its registered representative’s underlying conduct when all of the following factors are undisputed: (1) the plaintiff did not reasonably rely on the registered representative’s relationship with the broker-dealer in making plaintiff’s investment; (2) the plaintiff invested in markets other than those promoted by the broker-dealer; (3) the registered representative did not rely on its relationship with the broker-dealer to access the securities market to sell the subject securities to the plaintiff; and (4) the broker-dealer did not know of, or have a financial interest in, the investor’s business with the registered representative.

Here, Sorenson hid his conduct from Southeast by failing to notify Southeast of his outside securities sales on behalf of CFS and by using undisclosed, private email accounts to engage in the subject transactions. No one from Southeast knew about Sorenson’s involvement with Houston. Sorenson did not use Southeast’s access to the securities markets to promote or conduct his deals with Houston (through Hornick), because CFS was a private venture created and owned by Sorenson. Southeast never held any of Houston’s money because Sorenson never opened a Southeast account for Houston. Southeast accordingly had no financial interest in Houston’s investments with Sorenson. Houston did not rely on Sorenson’s relationship with Southeast in deciding to invest with Sorenson. Thus, Southeast was not in control of Sorenson with respect to his conduct underlying this case, and Southeast was entitled to judgment as a matter of law on the issue of control.

The judgment was affirmed.

Summary provided courtesy of The Colorado Lawyer.