The PEOPLE, Plaintiff and Respondent, v. Albert Franklin COLBY, aka Abraham Faval Cohen, Defendant and Appellant.
Defendant, Albert Franklin Colby was convicted by a jury of 20 counts each of grand theft (Pen.Code, § 487.1), sale of securities by false pretenses (Corp.Code, § 25401), offering for sale of unqualified securities (Corp.Code, § 25110), and violating an order of the Corporations Commissioner (Corp.Code, § 25540).
The jury further found with respect to 33 of the counts that the defendant took property in excess of $25,000 within the meaning of Penal Code section 12022.6, subdivision (a). Defendant admitted outside the presence of the jury 19 prior felony convictions for grand theft and corporate security violations under section 667.5, subdivision (b) of the Penal Code. The defendant was sentenced to the state prison for 10 years. He appeals. We affirm.
ISSUE ON APPEAL
Did the trial court err in permitting the prosecutor to ask three of the victims whether the defendant had disclosed to them his prior convictions for security violations and theft?
Between February 1978 and December 1979, defendant induced 22 people to join and invest their money in one of several different “companies” organized and operated by defendant out of the World Trade Center, located at 350 South Figueroa Street in Los Angeles. The “companies” were named the International Trade Network, International Marketing Network, World Income Opportunities, and World Capital Network. All but two of the investors were solicited by means of ads placed by defendant in newspapers throughout the nation.
Except for minor variations in the representations made by defendant to the investors, his mode of operation in dealing with each of them was basically the same. The experience of victim Anoush (aka Alan) Taheri, the prosecution's first witness, is representative of defendant's relationship with all of the investors:
In August 1978 Taheri was living in Dallas, Texas where he owned and operated a restaurant. Taheri was also an architect and spoke six or seven Middle Eastern languages. Sometime in mid August, Taheri saw an ad in the Dallas Morning Star which read in part: “Arab oil money. Source of funds from the Middle East. Looking for individual with business background․ Salary, pension fund, world wide traveling․ $25,000 rebatable deposit.” Thereafter, Taheri telephoned defendant and arranged to meet with him in his office, located on the ninth floor of the World Trade Center in Los Angeles.
During their first meeting toward the end of August defendant explained to Taheri that World Trade Network was a new organization established to match lenders with qualified borrowers for a commission. To aid in matching these lenders and borrowers, defendant told Taheri that he was going to set up a computer system. In fact, defendant introduced Taheri to Jerry Pick, whom he had allegedly hired to set up a computer program utilizing over 8,000 sources of Arab funding. Pick told Taheri that one of their Arab sources had “50 billion dollars.” Pick also represented to Taheri that World Capital Network had access to the Teamsters and police pension funds.
Should Taheri decide to join World Capital Network, he would act as a “broker-type agent” for the organization and, according to defendant, would make a “minimum of $200,000 or more” annually in commission. Additionally, Taheri would receive a monthly salary of $2,500, plus expenses, a pension plan and medical benefits. However, in order to join the World Capital Network, Taheri would have to put up a $25,000 deposit which would be returned to him in six months with interest. This deposit was necessary to protect defendant's “valuable sources of funding.”
Prior to joining World Capital Network, Taheri had five separate meetings with defendant. Defendant explained to him that, although World Capital Network was a new organization, he had another company called International Marketing Network, which had been operating very successfully for six or eight months. It occupied seven large rooms on the first floor of the World Trade Center. Taheri toured the offices of International Marketing Network, where he saw approximately 20 people working at their desks. This operation seemed impressive to Taheri. On his visits to Los Angeles, defendant wined and dined Taheri in expensive restaurants, tipping everyone generously. At Francois' defendant was referred to as “Prince Albert” because of his generosity toward the employees. From defendant's extravagant entertaining, Taheri concluded that he must be a very successful and wealthy businessman.
On December 5, 1978, Taheri gave defendant $15,000 ($10,000 less than the amount originally demanded) and, in return, Taheri received a promissory note from defendant in the amount of $15,000. On that same date, Taheri went to work for World Capital Network and was named “Secretary General” of the organization. As such, he occupied an office on the ninth floor adjacent to defendant's office.
During the approximately six months that Taheri worked at World Capital Network, he sent out over 700 letters to people in the Middle East, soliciting them to invest their money in that organization. In response to the letters sent out by Taheri he received about 30 letters. Only one person indicated any interest in investing in the United States. Taheri also answered most of defendant's European mail, which was primarily from people seeking additional information about defendant's investment companies.
A couple of months after Taheri commenced working at World Capital Network, he began receiving complaints from employees of both World Capital Network and International Marketing Network that they were not being paid their salaries. On numerous occasions Taheri informed defendant of these complaints and was repeatedly assured that defendant would take care of this problem. However, with respect to the employees of International Marketing Network, defendant explained that his monthly expenses for that organization were rent ($5,000), telephone ($2,000), telex and twix ($1,000), as well as the secretaries' wages, and the employees were doing nothing in return to earn their salaries.
It was not long after Taheri began working at World Capital Network that he concluded that defendant had no funding sources at all. Therefore, in order to protect his own investment, he started seeking out his own contacts. Through his father who lived in the Middle East, Taheri received an offer to buy 200,000 barrels of crude oil from an oil producer in Abu Dhabi. In order to accept the offer, Taheri had 48 hours in which to fly to London to sign the contract, which he would then sell to an oil company in the United States. This deal would have netted $10,000 a day in commissions for three years.
Taheri told defendant about the potential oil contract and asked him for the necessary $8,000 it would take to fly to London to consumate the deal, explaining to him that he would keep 75% of the commission for himself and would give the remaining 25% of the commission to World Capital Network to pay the employees back salaries. Because Taheri had helped influence some of those persons to join World Capital Network, he felt responsible for their predicament.
Defendant informed Taheri that a Mr. Bushour was coming from New York and that Taheri would then get his ticket to London to sign the oil contract. While in Los Angeles, Bushour talked to Taheri, who informed him of the financial condition of World Capital Network and that defendant was a “crook.” A couple of days later, defendant told Taheri that he had “blown” his trip to London because, as a result of Taheri's conversation with Bushour, Bushour had decided not to join World Capital Network. Defendant then ordered Taheri to leave and terminated his employment with World Capital Network.
Like everyone who put up money to join one of defendant's organizations, Taheri's $15,000 deposit was never refunded to him. After the six month period during which the promissory note matured, Taheri wrote a letter to defendant asking for his money, but to no avail. Moreover, he did not receive any of the company's profits or any medical benefits as defendant had promised. In July 1979 Taheri wrote a letter to Los Angeles Police Officer Robert Nieto, the investigating officer on this case.
About three months after Taheri began working for defendant, defendant told Taheri “Let me tell you how you can become millionaire overnight.” “Take life insurance on my life and come here one day, tell me anyone here made a deal and I jump out of that window. Then you can become millionaire the next day.” On one occasion when Taheri reported to defendant that various holders of defendant's promissory notes were “very, very mad” and were going to sue defendant for collection on the notes, defendant responded “those notes mean nothing.” Taking a promissory note from his drawer, defendant added: “OK. Go down stairs, make a hundred of these for me right now.”
Some of the other representations made by defendant were as follows: Roger Caron invested $45,000 with International Marketing Network between May and July 1978. One of the various representations made to Caron by defendant before Caron invested his money was that the company had a computer on the third floor whose function it was to connect buyers and sellers of commodities. Several weeks after going to work at the International Marketing Network, Caron went to the third floor to locate that computer, but did not find it. He asked defendant where the computer was and defendant admitted there was no computer but that there would be shortly.
The board of directors of International Marketing Network, of which Caron was a member, asked defendant about the books and ledgers of the company. Defendant told Caron that he did not have any books or ledgers.
Has Simm, who became the “controller” of International Marketing Network in August of 1978, found no formal records for the company. Defendant informed Simm that he had been too busy to establish and maintain accurate accounting records. Simm discovered that the portions of the company defendant had promised the investors added up to 125 percent.
Defendant represented to Dennis Baldwin that World Income Opportunities had assets “in the millions” and that he himself had assets “in the millions.” Baldwin believed these representations.
According to George Yanase, Supervising Corporations Counsel for the Enforcement Division of the Department of Corporations, a person offering securities to the public must furnish prospective investors with a “prospectus” (or a “public offering circular”). This prospectus must contain the past history of the person making the offering, including his business history, his personal history, and past convictions for securities violations or theft.
Before trial defendant admitted 19 prior convictions. These convictions, occurring in 1973, were for 11 counts of grand theft and 8 counts of violations of the corporate securities law. Prior to trial the prosecutor brought to the court's attention his intent to ask certain witnesses whether the defendant had informed them of his prior convictions. It was stipulated, among other things that the victims would testify that had they known of defendant's prior convictions they would not have invested their money with him. The trial court ruled that defendant's failure to disclose his convictions to potential investors was a material misstatement and that the investors could be examined “as to the potential effect of that material omission․ Upon their state of mind at the time they entered into the transaction.”
At trial, only three named victims were actually asked whether defendant had disclosed his theft and security convictions.
The first such witness was Richard Kieta who testified that defendant had stated he was a successful businessman. Before investing Kieta called the Secretary of State in Sacramento to ask about defendant's business dealings and was informed that to their knowledge that defendant's dealings were sound. Defendant acted personally with Kieta and referred to himself as a “father figure.” Defendant did not tell Kieta that he had been convicted of security violations and theft. He did not tell Kieta about ever having any problems in the past; according to defendant “everything was great.”
John Houck testified that defendant's business background was important to him as a potential investor. Houck called the Better Business Bureau but they “couldn't give him anything․” Houck trusted defendant, who appeared by his speech to be a “real religious person.” Defendant would say “God bless you and your wife․” Defendant stated: “Well I would die on my mother's grave if this wasn't true.” Defendant did not reveal his theft and securities violation convictions to Houck.
The final witness to be asked about defendant's failure to mention his convictions was Abula Hamad. Defendant's “honesty” was a factor causing Hamad to invest in International Marketing Network. Hamad tried to check information defendant gave him but “couldn't get any information except from the Los Angeles Tax Office” which office “didn't give [him] any valuable information except the name and the name was changing [apparently from International Trade Network] and he didn't own no taxes or anything.” In his initial discussion about investing, defendant swore to Hamad that “He never cheats anybody” and stated “… I light a candle for my mother once a week․” Hamad was unaware that defendant had been convicted of security violations and theft. This would have been an important factor to Hamad had he known it.
Other witnesses although not questioned about defendant's failure to disclose his convictions, testified as to similar personal vouchers by defendant as to his honesty.
Corporations Code section 25401 provides as follows: “It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstance under which they were made, not misleading.” (Emphasis added.)
Was the omission from defendant's presentation to potential investors concerning his previous convictions “material” within the meaning of the above statute? If it was, it becomes an essential element of the offense and must be proved by the prosecution. There appear to be no California cases on the matter, but the Attorney General has cited federal authorities which provide a workable definition of “material” in the analogous wording of section 10b and 14a of the Securities Exchange Act of 1934 (15 U.S.C. § 78j, 78n(a) and the Securities and Exchange Commission's Rule 10b-5 (17 C.F.R. § 240.10b-5). “It shall be unlawful for any person․” “(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading․” The similarity between the wording of the federal rule and the California statute is remarkable.
“A statement or omitted fact is considered material if it is substantially likely that a reasonable investor would consider the matter important in making an investment decision.” (Austin v. Loftsgaarden (8th Cir.1982) 675 F.2d 168, 176; see also TSC Industries, Inc. v. Northway, Inc. (1976) 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757.)
We consider this language persuasive.
The fact that the material omissions relate to criminal behavior does not abrogate the rule requiring their disclosure. (See United States v. Johnson (5th Cir.1974) 496 F.2d 1131, 1135, cert. den. 420 U.S. 972, 95 S.Ct. 1391, 43 L.Ed.2d 651.) [Material omission was defendant's failure to inform investors of his previous fraudulent activity.]
Appellant misunderstands the purpose for which the witnesses were asked about the defendant's nondisclosure of his previous felony convictions. The questions were not asked in order to impeach the credibility of the defendant (impossible, since the defendant did not testify). Nor were the questions asked in order to show evidence of the defendant's character under Evidence Code 1101, et seq. Rather, the questions were asked in order to establish an essential element of the prosecution's case, specifically, that the defendant had failed to comply with Corporations Code section 25401 in that he had omitted to state a material fact as required by that statute. It can scarcely be doubted that his prior convictions were material facts, probably the most material facts for the investors. Prior to trial, it was stipulated that the victims would testify that, had they known of defendant's prior convictions, they would not have invested their money with him. This stipulation made outside the presence of the jury had the effect of an offer of proof by the prosecution. In addition, the conduct of the victims in attempting to check out the defendant's background shows the importance that they gave to ascertaining whether or not they were dealing with a reliable individual. And, of course, there was the testimony of the victims that in fact this was material information to them without which they would have not consummated the deal. Indeed, we cannot think of an instance where the background of the defendant would be as important as under the circumstances of this case. The victims were contacted through advertisements in newspapers by a person whom they had never known and parted with large amounts of cash on an unsecured basis, largely on trust and their impression of defendant's credibility and honesty. Doubtlessly, the disclosure before the jury that the defendant had suffered prior felony convictions for similar offenses were damaging to the defendant, but that was a problem of the defendant's own making.
The situation is analogous to one in which a person previously convicted of a felony is found in possession of a concealable firearm. (Pen.Code, § 12021.) The prior felony conviction then is an essential element of the offense and must be proved by the prosecution. That proof, of course, may be damaging to the defendant, but is not offered to impeach his testimony nor to show by character evidence that he is predisposed to criminality.
We hold that the questions complained of referred to undisclosed material facts which the defendant had a duty to disclose. His failure to do so constituted a violation of Corporations Code section 25401. The witnesses were properly questioned concerning this element of the offense. We find no error.
The judgment is affirmed.
IDEMAN, Associate Justice.* FN* Assigned by the Chairperson of the Judicial Council.
KLEIN, P.J., and DANIELSON, J., concur.