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

PEOPLE v. SYDE et al.

Cr. 4563.

Decided: March 26, 1951

Fred N. Howser, Atty. Gen., Frank Richards, Deputy Atty. Gen., William E. Simpson, Dist. Atty., and H. L. Arterberry, Deputy Dist. Atty., Los Angeles, for appellant. Garner, Lillie & Bryant, Los Angeles, for respondents.

The law to be applied in this case has been stated in People v. Gould, Cal.App., 229 P.2d 78, this day decided by this Court.

In this case defendants were charged with criminal conspiracy to violate the Corporate Securities Act, Gen.Laws, Act 3814, § 1 et seq., and also with fifteen counts of substantive offenses of issuing securities without prior approval by the Corporation Commissioner.

The contracts in this case were similar to those in the Gould case.

There were two forms. One form provided that 60% of the profits was to be put into a reimbursement fund, and divided equally among the cast, and 40% of the reimbursement fund was to go to the producers; that the cast was not to exceed twenty-five in number; and that the amount of profits to be divided among the cast was limited to $198 to each, and was to be a refund of the money paid by parents for each member of the cast. These contracts declared that the money paid was for enrollment fees, lessons, and rehearsals, and was not an investment.

The other form contained a straight-out agreement to ‘reimburse artist’ by distributing to the artists 60% of the gross receipts, with no limitation. For this form of contract, trainees' parents paid defendants $98.

Defendants were bound over on preliminary examination. Penal Code, sec. 872. They then appeared in Superior Court and moved to set aside the information under Section 995 of the Penal Code. The motion was denied as to the conspiracy charge, and granted as to all the other counts. The District Attorney appeals from the order.

The trial judge stated that the order was made for the reason that, in his opinion, the contracts did not come under the definition of securities in the Corporate Securities Act.

Defendants argue that the agreements contain no provision for profit or gain; that the trainees or clients of defendants were to be reimbursed only for the sums paid by them for training and rehearsals, and no more.

Neither the word ‘reimburse’, descriptive of the distribution of profits, nor the designation of the fund from which profits were to be paid as a ‘reimbursement fund’ changed the fact that the contracts provided for sharing in the profits of a business enterprise.

All such contracts as these, whether the profit be paid from a reimbursement fund or be designated ‘reimbursement,’ or whether there be a limitation, large or small, on the amount of the profit to be paid, come within the category of profit-sharing agreements as contemplated by the Corporate Securities Act.

Defendants, as did defendants in the Gould case, rely upon People v. Davenport, 13 Cal.2d 681, 91 P.2d 892. As in the Gould case, the Davenport case has no application to the facts in this case.

Defendants in this case rely further upon People v. Steele, 2 Cal.App.2d 370, 36 P.2d 40. Again the facts are readily distinguished. In the Steele case the agreement contemplated no return on the money invested, other than the right to use certain property, and any anticipated profit could come only from operations to be conducted by the complaining witness. Such was not the case here.

Having concluded that such contracts as these come within the purview of the Corporate Securities Act, and must be approved by the Corporation Commissioner before being offered to the public, it necessarily follows that the order in this case must be, and the same is hereby reversed.

DRAPEAU, Justice.

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

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