PEOPLE of the State of California, Plaintiff and Respondent, v. Joseph C. FIGUEROA and Dennis C. Figueroa, Defendants and Appellants.
In this case we hold that a defendant charged with the crime of selling unqualified securities in violation of Corporations Code section 25110, who defends on the basis the security is exempt from registration, is entitled to have the jury instructed that his burden of proof on his defense is to raise a reasonable doubt that registration of the security is required by law. We also hold that one element of the crime is whether the instrument is a security. The jury must find the presence of each element of a crime, thus it was error to instruct the jury that the interest or instrument is a security as a matter of law.
Joseph and Dennis Figueroa appeal from a judgment of conviction for one count of selling unqualified securities. (Corp.Code, §§ 25110, 25540.) They had defended on the grounds they had made a private offering. Joseph was charged with eight additional counts of the same offense; Dennis was charged with five additional counts. The jury deadlocked on these additional charges for which a mistrial was declared. The charges were later dismissed provided they could be considered for restitution purposes.
Arlo Kurrle responded to an advertisement which appeared in the San Jose Mercury in mid-March 1979. The ad said “Solar & Energy Business. Partner wanted with $7,000 or more. Active or nonactive.” Kurrle called one of the two phone numbers listed and spoke to Joseph Figueroa, who described an existing insulation business and his desire to expand into solar energy.
Kurrle met Joseph and his son, Dennis, the next day. Kurrle was told about Figueroa Insulation & Energy Co., Inc. (Insulation) of which Dennis was president. The new solar energy business would also be a corporation. Kurrle also learned of two other businesses: Figueroa Financial Insurance Services, Inc. (Insurance) and Figueroa Business & Financial Consultants (Financial). They proposed that Kurrle make a $10,000 loan to the Figueroas, for the purchase of insulation equipment and installation of telephones for solicitation. Kurrle loaned $10,000 to the Figueroa businesses in five separate installments evidenced by five two-year notes. The notes were to earn 10 percent interest annually and Kurrle had the option to take payment in cash or shares of the company.1 The fourth loan installment was the basis for the charge on which the Figueroas were convicted. The loan, for $2,500, was made by a check payable to Dennis and witnessed by a corporate promissory note from Insulation.
A few days after his initial meeting with the Figueroas, Kurrle met with Joseph to discuss Kurrle's potential involvement in the management and operation of the companies. He began working in the Figueroa office shortly after making the first loan, and he stayed for about four months. He worked primarily for Joseph and Financial, updating lists and contacting potential lenders. Kurrle also accompanied Dennis on sales calls for Insulation and helped with some demonstrations. Kurrle was made Secretary/Treasurer of Financial and Insulation, and he was a signatory on their bank accounts.2
Defendant's burden of proof of the defense of exemption.
The Figueroas 3 first contend the trial court erred in failing to specify for the jury the precise degree or quantum of their burden to prove they came within an exemption from registration under Corporations Code section 25110.4 Section 25163 provides “[i]n any proceeding under [the Corporate Securities Law], the burden of proving an exemption or an exception from a definition is upon the person claiming it.” Since appellants claimed they came within a private offering exemption to section 25110, they bore the burden of proving this. (See People v. Park (1978) 87 Cal.App.3d 550, 566–567, 151 Cal.Rptr. 146 [state did not bear burden of proving lack of private offering exemption in prosecution under section 25110]; People v. Murphy (1936) 17 Cal.App.2d 575, 585–586, 62 P.2d 592.) Joseph's proposed instruction therefore was partially erroneous, as it placed the burden on the state to disprove any exemptions.5 Section 25163, places this burden of proof on the Figueroas, but does not define the quantum or degree of that burden.
The court is required to instruct the jury on both the assignment and the magnitude of burdens of proof. (Evid.Code, § 502.) Section 502 presents four degrees of burdens of proof: “that a party raise a reasonable doubt concerning the existence or nonexistence of a fact or that he establish the existence or nonexistence of a fact by a preponderance of the evidence, by clear and convincing proof or by proof beyond a reasonable doubt.” Evidence Code section 501 provides “[i]nsofar as any statute, except section 522, assigns the burden of proof in a criminal action, such statute is subject to Penal Code section 1096.” 6 The Law Revision Commission comment on Evidence Code section 501 notes that “where a statute allocates the burden of proof to the defendant on any [issue other than insanity] relating to the defendant's guilt, the defendant's burden is merely to raise a reasonable doubt as to his guilt.”
The issue of the defendant's precise burden of proving he or she comes within an exemption to the securities registration law is one of first impression in California.7 In People v. Tewksbury (1976) 15 Cal.3d 953, 127 Cal.Rptr. 135, 544 P.2d 1335, the court discussed the degrees of burdens of proof which may be placed on a defendant in a criminal case. “[W]hen there is placed upon an accused the burden of interjecting a factual contention which, if established would tend to overcome or negate proof of any element of the crime charged as otherwise established by the People, the accused need only raise a reasonable doubt as to the existence or nonexistence of the fact in issue.” (Id., at p. 963, 127 Cal.Rptr. 135, 544 P.2d 1335.) Examples of such instances include unconsciousness and alibi defenses. (Id.) On the other hand, defendants may be required to prove by a preponderance of the evidence defenses “which raise factual issues collateral to the question of the accused's guilt or innocence and do not bear directly on any link in the chain of proof of any element of the crime.” (Id., at p. 964, 127 Cal.Rptr. 135, 544 P.2d 1335.) Among such instances are entrapment defenses and challenges to testimony as being hearsay or that of an accomplice. (Id., at pp. 964–968, 127 Cal.Rptr. 135, 544 P.2d 1335.)
Jefferson's Evidence Benchbook makes a similar distinction on the defendant's burden of proof. “On any issue of defendant's guilt that is in the nature of an affirmative defense, the burden of proof assigned to defendant shall be merely to raise a reasonable doubt as to his guilt; ․ [o]n a guilt issue other than whether defendant committed the criminal acts charged, the burden of proof assigned to defendant may be fixed at proof by a preponderance of the evidence.” (2 Jefferson, Cal.Evidence Benchbook (2d ed. 1982) § 45.1, p. 1640.)
An exemption defense to a prosecution under the state securities law is an affirmative defense which is not “collateral” to the defendant's guilt. Unless the Legislature provides otherwise, the defendant's burden of proof is merely to raise a reasonable doubt that the offering did not require registration. Here the trial court erred by refusing to instruct on this degree of the defendants' burden of proof.
The court's error was compounded by its instruction which said “[i]t is unlawful for any person to offer or sell in this state any security unless such sale has been qualified or unless such security has been exempted with the California Corporations Commissioner.” (Emphasis added.) This instruction gives the erroneous impression that the Figueroas had to apply for and receive a formal exemption from the Corporations Commissioner.
The jury deliberated two days and deadlocked on three related charges where the only defense was a private offering exemption. During deliberations, the jury requested copies of the instructions on exemptions. This was a close case and it is reasonably probable that a result more favorable to the defendants would have occurred had appropriate instructions been given. (See People v. Watson (1956) 46 Cal.2d 818, 836, 299 P.2d 243.)
Determination the instrument was a security.
The Figueroas also contend the trial court erred in instructing the jury that the promissory notes constituted securities as a matter of law.8 One of the elements of the crime of violating Corporations Code section 25110 is that the instrument sold by the defendant must be a security. In a criminal prosecution, the state is required to prove every element of the crime beyond a reasonable doubt. “The judge ․ may not instruct the jury that as a matter of law some element of the crime charged has been adequately proved.” (People v. Shavers (1969) 269 Cal.App.2d 886, 888–889, 75 Cal.Rptr. 334 (italics omitted).) See also Brotherhood of Carpenters v. U.S. (1947) 330 U.S. 395, 408, 67 S.Ct. 775, 782, 91 L.Ed. 973; United States v. Ragsdale (5th Cir.1971) 438 F.2d 21, 27.) By its instruction, the court erroneously decided one element of the offense as a matter of law, encroaching on the role of the jury and compelling reversal.9
Evidence of buyer's participation in the business.
Finally, we consider the Figueroas' argument that the trial court erred in refusing to admit testimony on Kurrle's participation in the businesses.10 They maintain this evidence was relevant to the “security” element, relying on cases holding that investments in “personal services contracts” are not “securities” under section 25019. “An agreement to render personal services for compensation cannot be considered a security even though the sale of a beneficial interest in such an agreement may come within the statute. [¶] It is settled that the Corporate Securities Law was not intended to afford supervision and regulation of instruments which constitute agreements with persons who expect to reap a profit from their own services or other active participation in a business venture.” (People v. Syde (1951) 37 Cal.2d 765, 768, 235 P.2d 601.)
Although Kurrle may have participated actively in the Figueroa businesses, he could not “expect to reap a profit” from his participation as it had no effect on his investment. The corporate promissory note of April 27 provided that Kurrle would be paid 10 percent interest, payable in two years. Kurrle also had a written agreement with the Figueroas giving him the option of taking repayment in an equivalent amount of corporate shares. Whichever form of repayment he might choose, the return on his investment would be the same; it did not depend on his participation in any of the companies. Given this evidence, the court committed no error by ruling that testimony on Kurrle's business participation was irrelevant.
The judgment is reversed.
1. It is unclear which company Kurrle believed he was investing in.
2. Four of the additional charges against Joseph and three of the additional charges against Dennis involved Kurrle's loans. The remaining charges involved limited partnership purchases by other investors whose facts are not summarized.
3. Pursuant to rule 13 of California Rules of Court, Dennis and Joseph joined in all issues raised by the other.
4. All section references are to the Corporations Code, unless otherwise indicated.
5. Joseph's proposed instruction stated in relevant part:“the defendants have asserted that they were exempted from such qualification with the Commissioner of Corporations because of the “private exemption” offering. [¶] In this regard, you are instructed that if the proved circumstances or evidence raise a reasonable doubt that registration was required by law, then you must give the defendant or defendants the benefit of that doubt and acquit him/them of those charges. In view of the defense raised, before you can convict any defendant of any charge of offering and selling securities without a permit, the evidence must show beyond a reasonable doubt that such offers and sales were not exempted.”
6. Evidence Code section 522 places the burden of proof on the defendant to prove his insanity by a preponderance of the evidence. Penal Code section 1096 states the presumption of innocence and the prosecution's burden of proving guilt beyond a reasonable doubt.
7. Several cases from other jurisdictions require defendants to prove their presence within an exemption by a preponderance of the evidence. (See State v. Goetz (N.D.1981) 312 N.W.2d 1, 9–10; United States v. Tehan (6th Cir.1966) 365 F.2d 191, 194–196.) These cases do not explain the choice of that degree of burden of proof. Other cases require a lesser degree of proof. (See Commonwealth v. David (1974), 365 Mass. 47, 309 N.E.2d 484, 488 [an exemption defense “requires the defendant to satisfy a burden of production of evidence before the Commonwealth must meet its burden of persuasion.”] ) The State of Ohio amended its securities statute to clearly set its burden of proof. (See State v. Frost (1979), 57 Ohio St. 121, 387 N.E.2d 235, 237 n. 1 [Ohio Revised Code, § 2901.05(A) was amended to read “[t]he burden of going forward with the evidence of an affirmative defense, and the burden of proof, by a preponderance of the evidence, for an affirmative defense is upon the accused.”] )
8. The court told the jury:“You are also instructed that the promissory notes received by Arlo Kurrle are securities as defined in section 25019 of the Corporate Securities Act.”Section 25019 provides in relevant part:“ ‘Security’ means any note; stock; treasury stock; membership in an incorporated or unincorporated association; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease; any beneficial interest or other security issued in connection with a funded employees' pension, profit sharing, stock bonus, or similar benefit plan; or, in general, any interest or instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. All of the foregoing are securities whether or not evidenced by a written document.” (Emphasis added.)
9. We sympathize with the trial court's desire to instruct the jury that an instrument is a security. The definition of the term “security” has troubled lawyers and judges for decades. Therefore, in close cases, it may be very difficult for a jury to be able to reach unanimous agreement that a particular instrument is a security, but this is required by the federal and state constitutions when criminal sanctions are applied to securities law violations. While the trial court may not decide this securities issue, it is entitled to comment on the evidence. (Cal. Const., art. VI, § 10; Pen.Code, §§ 1093(6), 1127.) The court may make comments before jury deliberation as long as they are nonargumentative and do not remove the jury's role as trier of fact. (People v. Cook (1983) 33 Cal.3d 400, 408, 189 Cal.Rptr. 159, 658 P.2d 86.) The trial court below might have commented that it believed the promissory notes were securities but that the jury must decide this issue itself.
10. We discuss this issue because it is likely to be raised upon a retrial. The Figueroas' remaining arguments need not be addressed.
KING, Associate Justice.
LOW, P.J., and HANING, J., concur.