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District Court of Appeal, Second District, Division 1, California.

PEOPLE v. GOULD et al.

Cr. 4549.

Decided: March 26, 1951

Cletus J. Hanifin, Los Angeles, for appellants. Edmund G. Brown, Atty. Gen., Frank Richards, Deputy Atty. Gen., William E. Simpson, Dist. Atty., Robert Wheeler, Deputy Dist. Atty., Los Angeles, for respondent.

Defendant, Ruth Gould, was a teacher of dancing and drama. She named her place of business and professional teaching, ‘Studio of Theatre Arts.’ Her brother, the other defendant, worked for her. In parts of his time he kept books for the studio, took care of the funds, sent notices to students, signed contracts, and performed other duties. Concededly he was an employee, with no interest in the profits of the studio.

One of Miss Gould's enterprises was to teach children to take parts in television shows. Boys and girls were trained in dancing and drama. Then a certain number took part in a show, filmed to be broadcast by television, if a purchaser could be found.

Written contracts were prepared by defendants, to be signed by parents of children, providing for a specified number of lessons in dancing and drama. Most of the contracts cost parents $150 for each child.

If defendants had stopped there, and agreed only to teach the children, no trouble would have followed. But, in addition to teaching the children, five contracts between Miss Gould and parents had clauses providing that from production of television films, ‘Forty percent (40%) of the net profit shall be divided equally among the participants upon the sale and payment of the production.’ Three additional contracts provided for a division of profits up to $150 paid by parents for each boy and girl.

The District Attorney filed an information, charging defendants with eight counts of violation of the Corporate Securities Act, Gen.Laws, Act 3814, § 1 et seq. They were tried by the court without a jury. Defendant Miss Gould was convicted on all eight counts; her brother was convicted on four counts based upon contracts which he signed as agent for his sister. Defendants were granted probation, with suspended county jail sentences, and fined.

Defendants appeal from the judgments, and contend: First, that the brother bookkeeper was an employee only, and that although he signed some of the agreements for his sister, he was not a party to any of them; and secondly, that the contracts themselves did not constitute ‘securities' within the meaning of the Corporate Securities Act.

The principal question here involved is whether the contracts were such securities. All of the other facts necessary to uphold the convictions were stipulated to, or are supported by the evidence. Therefore, this phase of the case will be first considered.

The Corporate Securities Act provides that a ‘security’ is any certificate of interest or participation; any certificate of interest in a profit-sharing agreement; or beneficial interest in title to property, profits, or earnings. It further provides that every officer, agent, or employee of any company and every other person, who knowingly authorizes, directs, or aids in the issue or sale of any security contrary to the provisions of the Act is guilty of a public offense.

The language used in the agreements compels the conclusion that the contracts embody profit sharing, and thus fall within the provisions of the Corporate Securities Act. While the last three counts refer to contracts in which the amount of profit to be shared is limited to $150, such limitation may not take such contracts out of the legislative requirement that they must first be approved by the Corporation Commissioner. Otherwise, the law could be circumvented by the simple expedient of fixing a limitation—any limitation great or small—on the amount of profits to be shared.

Even though the proceeding is penal, a statute regulating the sale of securities is to be construed according to the fair import of its terms with a view to effect the object of the statute as well as to promote justice. People v. Jackson, 24 Cal.App.2d 182, 74 P.2d 1085.

It is the substance not the form of agreements which determines the real character of the transactions. Domestic & Foreign Pet. Co., Ltd. v. Long, 4 Cal.2d 547, 51 P.2d 73.

Any certificate of interest in a profit-sharing agreement is a security. People v. Marr, 46 Cal.App.2d 39, 115 P.2d 214. A contract providing for services of experts in raising chinchillas, and sharing in profits of the enterprise, is a security within the purview of the Corporate Securities Act. Hollywood State Bank v. Wilde, 70 Cal.App.2d 103, 160 P.2d 846.

If a writing issued by an individual creates a present right to a present or a future participation in the profits of an enterprise undertaken for profit it constitutes a security. People v. McCabe, 60 Cal.App.2d 492, 141 P.2d 54; People v. Hoshor, 92 Cal.App.2d 250, 206 P.2d 882.

Defendants argue that all of the contracts come within the class under consideration by our Supreme Court in People v. Davenport, 13 Cal.2d 681, 91 P.2d 892, and therefore, are not securities contemplated by the Corporate Securities Act.

People v. Davenport has no application to the facts in this case. In that case the defendant entered into an agreement to buy building and loan certificates, and to pay for them in twenty-five monthly installments, with interest on deferred payments. The defendant proposed to sell the certificates and use the money to purchase Mexican gold and silver bullion, from which he proposed to make a large profit. The seller of building and loan certificates was not given any interest in the defendant's business; all he was to get was the amount agreed to be paid him for his certificates, with interest.

In the Davenport case the Supreme Court declined to consider what the defendant intended to do with the money, and held that an agreement to pay interest does not make a transaction a security within the meaning of the Corporate Securities Act, the purchaser having the right to be paid in any event.

In fairness it should be said that defendants had legal advice to the effect that their contracts did not violate the law. And there was no fraud, or failure of performance in any respect. What was done was done in good faith. Television films called ‘Samson's Dilemma,’ ‘The Timid Bandit,’ and ‘Ghost of a Chance’ were made by the children and Miss Gould, but up to time of the trial had not been sent out over any television station. The legal offense committed by defendants was the making and entering into the agreements without first having secured a permit to issue securities from the Commissioner of Corporations.

However, innocence of any intent to violate the terms of the Corporate Securities Act is no excuse for its violation. Where the defendant does the prohibited act with a knowledge of the facts which bring his act within the provisions of the statute he becomes amenable to the law. For the effective protection of the public, the burden is placed upon the individual to ascertain at his peril whether his act is prohibited by statute. People v. McCalla, 63 Cal.App. 783, 220 P. 436; People v. Aresen, 91 Cal.App.2d 26, 204 P.2d 389, 957.

The parents of the children were to share in the profits or proceeds of the enterprise. While the children were to take parts in the television shows, neither they nor their parents had any part in the conduct of the enterprise, as was the case in Austin v. Hallmark Oil Co., 21 Cal.2d 718, 134 P.2d 777.

If defendants were advised, or the contracts were drawn, in the light of People v. Davenport, supra, the scrivener did not think the problem through, because the test is whether the security contemplates sharing in profits by the holder thereof. When this test is applied, all of the contracts in this case, including the last three, must be held to come within the Corporate Securities Act.

With reference to defendants' first contention, that the brother was an employee only, little need be said. The statute includes every person who unlawfully aids in the issue of any security which requires the approval of the Corporation Commissioner. All persons, officers, and agents of the issuer who personally participate, or aid in any way, in violation of the permit provisions of the Corporate Securities Act are civilly liable. Mary Pickford Co. v. Bayly Bros., Inc., 12 Cal.2d 501, 86 P.2d 102. The same rule applies to criminal liability.

The judgments are affirmed.

DRAPEAU, Justice.

WHITE, P. J., concurs. DORAN, J., dissents.

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