July 15, 2018

Colorado Court of Appeals: Promissory Note is a Security, Therefore Conviction for Securities Fraud Appropriate

The Colorado Court of Appeals issued its opinion in People v. Thompson on Thursday, June 14, 2018.

Securities Fraud—Jury Instruction—Double Jeopardy—Propensity Evidence—Theft—Sentencing.

Defendant was the sole member of SGD Timber Canyon LLC (SGD), which held an interest in 63 undeveloped lots in the Timber Ridge subdivision. The lots went into foreclosure, and in February 2010 SGD filed for bankruptcy. Defendant did not disclose these facts to the Witts, who later loaned defendant $200,000 to acquire a lot in Timber Ridge and another $200,000 for construction of a home on the lot, with the understanding that the loans would be repaid with a profit share of as much as $400,000 when the home was sold to a prequalified buyer. Later, at defendant’s urging, the Witts increased the loan to $2.4 million and converted their investment into a “bridge loan” to defendant, who represented that the proceeds would be used for continued development of Timber Ridge. The parties executed a promissory note and guarantee agreement. The promissory note was secured by defendant’s primary and secondary residences with collateral to convert the 24 lots in Timer Ridge upon closing and final purchase of Timber Ridge.

Defendant used the money on items not related to Timber Ridge and never developed the property there. Defendant defaulted on the note. He eventually repaid the Witts $70,000. Ultimately, the Witts sued defendant but did not recover any further monies from him. A jury found defendant guilty of two counts of securities fraud and one count of theft, and he was sentenced to 12 years in the custody of the Department of Corrections for each of the securities counts, to be served concurrently, and 18 years for the theft conviction, to be served consecutively to the other sentences.

On appeal, defendant claimed that the evidence was insufficient to support his securities fraud convictions because the promissory note and guarantee he provided to the Witts did not constitute a security. The “family resemblance test” applies to determine when a note is a security under the Colorado Securities Act (CSA). Under the family resemblance test, a note is presumed to be a security, but that presumption may be rebutted by a showing that the note strongly resembles other financial instruments. Here, the Witts’ investment, memorialized by the promissory note, was a transaction protected by the CSA and did not strongly resemble the family of transactions that are not securities. The evidence was sufficient to support the securities fraud convictions.

Defendant also argued that the trial court erred by tendering an inaccurate jury instruction regarding the definition of a security. Defendant did not object to the definition of security that was given to the jury, nor did he tender an alternative instruction. The law regarding the definition of a security was not well settled at the time of defendant’s trial, and thus any error in the jury instruction would not have been obvious or plain.

Defendant also claimed that his convictions and sentences for securities fraud violated double jeopardy because they are alternative ways of committing the same offense, and therefore the two counts should be merged. Defendant failed to raise this issue before the trial court. Here, defendant was charged with and convicted of multiplicitous counts of securities fraud because the evidence showed a sale of one security to one investor based on one set of false or misleading statements. But the law was not well-settled concerning the proper unit of prosecution, so there was no plain error.

Defendant further contended that there was insufficient evidence to support his theft conviction. Although the funds were supposed to be used to develop Timber Ridge, defendant used the funds to pay his own attorney fees, to improve the house that his wife continued to occupy at the time of trial, and for other personal expenses. Therefore, there was sufficient evidence to support the conclusion that defendant knowingly obtained the Witts’ money by deception and intended to permanently deprive them of it.

Defendant also argued that the court erred by admitting propensity evidence that defendant had previously attempted to sell a lot in Timber Ridge that he did not own. However, the evidence was logically relevant to prove identity, motive, knowledge, and lack of mistake, and the probative value was not substantially outweighed by the danger of unfair prejudice.

Lastly, defendant argued that his sentence for theft must run concurrently with the concurrent sentences for securities fraud because the crimes are based on identical evidence. Here, different evidence supported each offense, so there was no sentencing error.

The judgment and sentence were affirmed.

Summary provided courtesy of Colorado Lawyer.

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