PEOPLE v. Roger C. Sala, Respondent.

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Supreme Court, Appellate Division, Third Department, New York.

The PEOPLE of the State of New York, Appellant-Respondent, v. Roger V. SALA and John W. Donovan, Respondents-Appellants. Roger C. Sala, Respondent.

Decided: July 29, 1999

Before:  CARDONA, P.J., MERCURE, PETERS and SPAIN, JJ. Eliot Spitzer, Attorney-General (Joseph J. Hester of counsel), New York City, for appellant-respondent. Eugene P. Devine, Public Defender (Theresa M. Suozzi of counsel), Albany, for Roger V. Sala, respondent-appellant. Daniel G. Moriarty, Albany, for John W. Donovan, respondent-appellant. Jeffrey S. Berkun, Albany, for Roger C. Sala, respondent.

Appeals (1) from a judgment of the Supreme Court (Sheridan, J.), rendered January 8, 1997 in Albany County, upon a verdict convicting defendant John W. Donovan of the crimes of scheme to defraud in the first degree, fraud in the sale of securities (16 counts) and grand larceny in the third degree (six counts), (2) from a judgment of said court, rendered January 8, 1997 in Albany County, upon a verdict convicting defendant Roger V. Sala of the crimes of scheme to defraud in the first degree, fraud in the sale of securities (16 counts), grand larceny in the third degree (six counts), failure to register as a commodity broker-dealer and failure to register as a commodity investment advisor, and (3) from an order of said court, entered January 8, 1997 in Albany County, which partially granted defendants' motions to set aside the verdict and dismissed certain counts of the indictment.

I

Following an investigation into the investment activities of codefendant First Meridian Planning Corporation, defendants and several other First Meridian officers and sales personnel were charged in a 39-count indictment with various crimes arising from the sale of financial plans consisting of numismatic coin portfolios, art portfolios and condominiums located in Florida and Indiana.   Defendant Roger V. Sala (hereinafter the president) was First Meridian's president and chief operating officer, while defendants John W. Donovan and Roger C. Sala (hereinafter Sala), the president's son, worked with First Meridian in promoting the coin and art investment programs, respectively.

The indictment alleged that defendants, who served on First Meridian's “investment advisory board”, posed as objective financial planners qualified to provide each client with a personalized financial plan tailored to individual financial objectives.   The brochures distributed to potential investors advertised that First Meridian's advisory board was “composed of experts [who were] disciplined and certified in various fields of financial counseling * * * to give our clients an objective analysis of their current financial situation and the direct route to achieving their goals”, and that the advisory board's investment recommendations were “scrutinized by an independent attorney and accountant”.   Invariably, however, the advisory board recommended the identical financial plan to all clients.

In marketing these financial plans to potential investors, First Meridian and its sales personnel represented leveraged purchases of rare coins, artwork and condominiums as low-risk, high-yield investments which could be purchased by placing a down payment and permitting First Meridian to arrange for the financing of the balance.   The sales personnel consistently concealed from investors certain fees associated with the transactions, the large commissions received by First Meridian, the nonliquidity of the investments and the risks associated with the markets in rare coins, condominiums and artwork.   In marketing the artwork portfolios, First Meridian represented that it controlled the artwork market through exclusive contracts with several artists who were managed by First Meridian's subsidiary, codefendant Meridian Arts, and whose works were offered as a part of First Meridian's financial plans.   The art portfolios sold by First Meridian were portrayed as having “no risk” and a projected appreciation rate of 38% per year, a figure which, according to the People's art expert, lacked any factual basis.   Investors were advised that they could sell or donate the artwork for a profit at the end of a three to five-year period, but were not informed of the limited resale market or that 65% of the purchase price was ultimately received by First Meridian as a commission (50%) and kickback from the artist (15%).

Furthermore, with regard to the condominiums sold to investors, First Meridian failed to divulge that a 12% commission was built into the sales price, that as co-broker of the sale it received a 9% commission from the provider of the condominiums and that many investors were being placed into negative amortization schedules without their knowledge.   Moreover, First Meridian advised investors that the condominiums would appreciate in value by a specified percentage despite the market data showing decreases in the developers' and resale markets.

Similarly, the numismatic coin portfolios were marketed to investors using profit projection sheets claiming appreciation rates in excess of 25%, as well as brochures advertising the coins as “rare” and the “best high-yield low-risk [investment] vehicle”.   First Meridian further claimed that in addition to impressive returns, its rare coin investments offered such benefits as high liquidity and limited supply.   What First Meridian did not reveal, however, was that most of the coins sold to investors were readily available common date coins, that the coin market was actually depreciating and somewhat risky, that the coins were purchased at retail prices but could only be resold at wholesale prices, and that hidden mark-ups such as auction fees would further decrease any returns received on the investment.   Meanwhile, First Meridian provided coin investors with updated appraisals showing increasing retail values of their coin portfolios, giving the false impression that the appraisal represented the portfolio's resale value.   Of those investors who chose to liquidate their coin portfolios following the recommended three to five-year holding period, many were able to recoup only half of their initial investment.

Defendants moved to, inter alia, dismiss the first count of the indictment charging them with the crime of scheme to defraud in the first degree and County Court (Marks, J.) granted the motion.   Upon the People's appeal, we reversed and reinstated the charge (see, 201 A.D.2d 145, 614 N.Y.S.2d 811) and the Court of Appeals affirmed (see, 86 N.Y.2d 608, 635 N.Y.S.2d 144, 658 N.E.2d 1017).   A joint jury trial ensued and, following the presentation of the People's case, defendants each moved pursuant to CPL 290.10 for trial orders of dismissal.   Supreme Court (Sheridan, J.) initially denied the respective motions.   At the conclusion of all of the evidence, however, the court granted reargument with regard to Donovan's motion, withdrew its previous ruling and reserved decision on the motion.   Thereafter, the jury rendered a guilty verdict as to all defendants for the crime of scheme to defraud in the first degree.   As relevant to this appeal, the president and Donovan were also found guilty of 16 counts of fraud in the sale of securities (General Business Law § 352-c [6] ) and 16 counts of varying degrees of grand larceny.

After the verdict was rendered, Supreme Court granted Sala's renewed CPL 290.10 motion with respect to the scheme to defraud count and granted Donovan's and the president's renewed CPL 290.10 motions with regard to 10 of the grand larceny counts.   The People appeal from the orders setting aside the guilty verdicts and dismissing the aforementioned counts of the indictment, and the president and Donovan each appeal from their respective judgments of conviction.   The appeals were joined for this court's determination.

II

 Initially addressing the People's appeal, the People contend that Supreme Court erred in granting trial orders of dismissal with regard to the scheme to defraud count against Sala and the 10 grand larceny counts against the president and Donovan.   We agree.   A motion for a trial order of dismissal may be granted where the trial evidence, if accepted as true without considering questions as to the quality or weight of the evidence, is legally insufficient to establish every element of the offense charged (see, People v. Sabella, 35 N.Y.2d 158, 167, 359 N.Y.S.2d 100, 316 N.E.2d 569).   In determining whether the verdict is supported by legally sufficient evidence, Supreme Court must view the evidence in the light most favorable to the prosecution and determine “whether any valid line of reasoning and permissible inferences could lead a rational person to the conclusion reached by the fact finder on the basis of the evidence at trial” (People v. Williams, 84 N.Y.2d 925, 926, 620 N.Y.S.2d 811, 644 N.E.2d 1367;  see, CPL 70.10[1];  People v. Grassi, 250 A.D.2d 944, 673 N.Y.S.2d 753, affd. 92 N.Y.2d 695, 685 N.Y.S.2d 903, 708 N.E.2d 976).

A

 First addressing Sala's motion for a trial order of dismissal, in order to establish his guilt of the crime of scheme to defraud in the first degree, the People were obligated to prove that he “engage[d] in a scheme constituting a systematic ongoing course of conduct with intent to defraud * * * by false or fraudulent pretenses, representations or promises” (Penal Law § 190.65[1] [b] ).  Fraudulent intent is usually not susceptible of proof by direct evidence and must ordinarily be inferred from circumstantial evidence such as the defendant's knowledge of the misleading or deceptive nature of the particular business practices employed (see, People v. White, 101 A.D.2d 1037, 472 N.Y.S.2d 730).

 Acknowledging that considerable deference should be given to Supreme Court's assessment of the evidence (see, People v. Ford, 88 A.D.2d 859, 862, 451 N.Y.S.2d 753) and that Sala's knowledge may not have extended to every detail of First Meridian's business (see, People v. Korsen, 167 A.D.2d 180, 561 N.Y.S.2d 572, lvs denied 77 N.Y.2d 962, 570 N.Y.S.2d 496, 573 N.E.2d 584, 77 N.Y.2d 966, 570 N.Y.S.2d 500, 573 N.E.2d 588), we are nonetheless of the view that the trial evidence, although circumstantial, sufficiently demonstrated Sala's willful participation in the alleged scheme with the intent to defraud.   Sala's activities were not limited to a mere business association with First Meridian or familial relationship with its president;  to the contrary, the evidence showed that in his capacity as executive art consultant on the investment advisory board, Sala attended and actively participated in board meetings relating to art investments and in fact received a commission on the sale of every piece of art.   He assisted in formulating the art portfolio profit projection sheets distributed to potential investors and attended 90% of the weekly sales meetings where sales personnel were instructed to conceal First Meridian's interest in the transactions and the commissions that they derived therefrom.   Sala was familiar with (and shared in) First Meridian's art portfolio commission structure providing for a 50% commission on artwork sales (and a 15% kickback from the artist) yet never disclosed the commissions to investors.   Moreover, although Sala advised clients that the projected annual appreciation rate of the art portfolios was 38%, he admitted that this figure was “just a guess” and was “as good as any other number to me”.   This evidence, viewed in the light most favorable to the People, provided a sufficient basis from which a rational juror could infer that Sala knew of the scheme's fraudulent nature (see, People v. Ford, 88 A.D.2d 859, 862, 451 N.Y.S.2d 753, supra ).

B

 Turning to the respective motions by Donovan and the president (hereinafter collectively referred to as defendants), we conclude that Supreme Court erred in dismissing the 10 grand larceny counts on the ground that the factual omissions made by defendants were insufficient to prove the People's underlying theory of larceny by false pretenses.   While the court correctly recognized that larceny by false pretenses generally requires proof of affirmative misrepresentations of past or presently existing fact, rather than mere omissions (see generally, People v. Norman, 85 N.Y.2d 609, 618-619, 627 N.Y.S.2d 302, 650 N.E.2d 1303;  People v. Starks, 238 A.D.2d 621, 622, 656 N.Y.S.2d 399, lv. denied 91 N.Y.2d 836, 667 N.Y.S.2d 690, 690 N.E.2d 499), we held in our previous decision that “the failure of a seller of securities to disclose every material fact may be the basis of a larceny conviction” (see, 201 A.D.2d 145, 154, 614 N.Y.S.2d 811, supra ).  Moreover, although the People were required to allege the particular theory of larceny upon which they were relying (see, Penal Law § 155.45[1] ), a conviction for grand larceny in the third or fourth degree may ultimately be supported by “pleading and proof charging and establishing ‘larceny’ in its broadly defined form regardless of the basic common law offense underlying the particular case” (Donnino, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 39, Penal Law art. 155, at 165;  see, People v. Ponnapula, 229 A.D.2d 257, 273, 655 N.Y.S.2d 750).   Interestingly, Supreme Court appeared to have embraced this view when it instructed the jury that proof of larceny by false pretenses was not required and that a grand larceny conviction could be premised upon a representation which “conceals or omits a material fact”.

Thus, the relevant inquiry is whether the grand larceny counts dismissed by Supreme Court were supported by evidence that defendants failed to disclose a material fact with the intent to induce another to part with property (see, 201 A.D.2d 145, 154, 614 N.Y.S.2d 811, supra;  see also, Penal Law §§ 155.30, 155.35).   Initially, Donovan candidly admits in his brief that under this standard there was legally sufficient evidence to support the 10 grand larceny counts dismissed by Supreme Court.   As for the president, the testimony of several First Meridian employees established that he was responsible for creating financial plans and initially made all of the decisions regarding the products that would be recommended to investors.   The record further reveals that the financial plans prepared at the president's direction and signed by investors did not disclose commissions, resale-related fees, product mark-ups and transaction costs, or the fact that leveraging the deal could increase the risk of the investment.   First Meridian's condominium and coin portfolio sales representatives testified that the president conducted sales meetings at which the representatives were instructed as to the manner in which to present the condominium and coin portfolio investments to potential clients.   The president specifically directed the representatives to avoid the topic of commissions when presenting the financial plans and the representatives complied with this directive.   According to the testimony of the investors, they were never informed about the commissions or certain investment risks.   In our view, this evidence adequately demonstrated the president's commission of the crimes of grand larceny in the third and fourth degrees (see, Penal Law §§ 155.30, 155.35).   As such, Supreme Court improperly granted the president's motion for a trial order of dismissal.

 In any event, the record contains legally sufficient evidence to support the convictions under the larceny by false pretenses standard urged by defendants.   Defendants represented that First Meridian was a financial planner composed of experts who formulated an individualized plan for each investor;  however, the evidence demonstrated that each investor was provided with a virtually identical plan regardless of individualized need (see, 201 A.D.2d 145, 148, 614 N.Y.S.2d 811, supra ).   Moreover, defendants instructed sales representatives to advise the investors that First Meridian's fee was calculated according to the complexity of the financial plan chosen, when in fact the financial plans were of equal complexity and the sales associates were given discretion to charge whatever they “thought [they] could get away with”.   Given these affirmative misrepresentations of presently existing fact and the inferences to be drawn therefrom, the jury could rationally conclude that defendants' conduct satisfied the common-law theory of larceny by false pretenses.

III

Now addressing defendants' respective appeals, the president argues that Supreme Court erred in denying his motion for trial orders dismissing his conviction for scheme to defraud in the first degree, 16 counts of fraud in the sale of securities under General Business Law § 352-c (6) (hereinafter the Martin Act) and the remaining six counts of grand larceny in the third degree.1  Similarly, Donovan argues that his convictions of these crimes were not supported by legally sufficient evidence and were against the weight of the evidence.   We are not persuaded.

A

 We first note our agreement with the parties' contention that there is no reasonable means of distinguishing the grand larceny counts that Supreme Court dismissed from the remaining counts which survived the dismissal motion.   Therefore, having found legally sufficient evidence to support the grand larceny counts that were dismissed against the president, we reject his challenge to the sufficiency of the evidence to support the remaining grand larceny counts against him.   Because Donovan is unwilling to concede the sufficiency of the evidence adduced on the sustained grand larceny counts and contends that the evidence was insufficient to demonstrate the element of intent to defraud, we must examine the relevant trial evidence.   Testimony indicates that Donovan, in his capacity as First Meridian's general manager, trained and supervised sales representatives.   He also determined what information was included in client files, aided the president in the investment decision-making process and assisted during the sales meetings at which representatives were instructed to evade investors' questions regarding commissions.   Whether this conduct gave rise to an inference of Donovan's intent to defraud was a question for the jury to resolve (see generally, People v. Owens, 251 A.D.2d 898, 674 N.Y.S.2d 847, lv. denied 92 N.Y.2d 951, 681 N.Y.S.2d 481, 704 N.E.2d 234;  People v. Rosado, 244 A.D.2d 772, 666 N.Y.S.2d 227, lv. denied 91 N.Y.2d 977, 672 N.Y.S.2d 856, 695 N.E.2d 725) and, viewing the evidence in the light most favorable to the prosecution (see, People v. Contes, 60 N.Y.2d 620, 467 N.Y.S.2d 349, 454 N.E.2d 932), we conclude that there is a “valid line of reasoning and permissible inferences which could lead a rational person to the conclusion reached by the jury” (People v. Bleakley, 69 N.Y.2d 490, 495, 515 N.Y.S.2d 761, 508 N.E.2d 672).

B

 We similarly reject defendants' contentions that their convictions for scheme to defraud in the first degree were not supported by legally sufficient evidence because they lacked the specific intent to defraud the investors and the evidence merely demonstrated that their business advice, although negligent, was rendered in good faith.   With regard to Donovan, aside from exercising control over sales meetings and representatives in his capacity as sales manager, he was designated as the in-house expert on numismatic coin portfolios and would answer questions regarding them.   Donovan received a salary plus overrides amounting to a portion of the monthly gross sales including planning fees and condominium sales and removed damaging information from client files following the commencement of the Attorney-General's investigation.   The president omitted commission information from the financial plans and instructed the sales representatives to avoid the topic of commissions despite the financial planning ethical code requiring the disclosure of all conflicts of interest, including commissions.   Moreover, the president approved First Meridian promotional brochures that misrepresented the nature of the financial planning services provided to investors, failed to inform investors that he received a 15% management fee on art sales, and was aware of the hidden 12% condominium mark-up.   In addition, the president instructed the sales force to represent the coin portfolios as very low risk, when he knew that the coins were not increasing in value.   In view of this evidence, together with the inferences to be drawn therefrom, we conclude that there was legally sufficient evidence to support the jury's conclusion that defendants were knowing participants in the fraudulent activities of First Meridian and intended to defraud the investors.

C

 Defendants further contend that their convictions under the Martin Act were not based upon legally sufficient evidence because they lacked the requisite fraudulent intent.   Initially, we note that General Business Law § 352-c (6) requires a fraudulent intent similar to that in the crime of scheme to defraud and provides that a defendant commits the crime of fraud in the sale of securities where he “intentionally engages in fraud * * * while engaged in inducing or promoting the * * * sale * * * within or from this state of any securities * * * as defined in this article” (General Business Law § 352-c [6];  see, People v. Lurie, 249 A.D.2d 119, 673 N.Y.S.2d 60, lv. denied 92 N.Y.2d 900, 680 N.Y.S.2d 64, 702 N.E.2d 849).   Moreover, contrary to defendants' contentions, neither scienter nor an intent to defraud need be proven in order to establish liability under the Martin Act (see, State of New York v. Rachmani Corp., 71 N.Y.2d 718, 725 n. 6, 530 N.Y.S.2d 58, 525 N.E.2d 704;  People v. Lexington Sixty-First Assocs., 38 N.Y.2d 588, 595, 381 N.Y.S.2d 836, 345 N.E.2d 307).   Rather, the People need only prove that the defendant committed an intentional act constituting fraud, which under the Martin Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public” (Kaufmann, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 19, General Business Law art 23-A, at 32-33).   A finding of fraudulent practice may be based upon an omission if there is a substantial likelihood that disclosure of the omitted fact would have been significant to a potential investor (see, State of New York v. Rachmani Corp., supra, at 726, 530 N.Y.S.2d 58, 525 N.E.2d 704).   Here, the finding of defendants' guilt was based upon legally sufficient evidence of their failure to disclose commissions, fees and risks associated with the investments, as well as their misrepresentations regarding the nature of the services provided by First Meridian (see, People v. Lurie, 249 A.D.2d 119, 673 N.Y.S.2d 60, supra;  see also, People v. Landes, 84 N.Y.2d 655, 621 N.Y.S.2d 283, 645 N.E.2d 716).

 Finally, we reject Donovan's claim that his convictions for fraud in the sale of securities were not supported by legally sufficient evidence because the People failed to establish that the coin portfolios and condominiums constituted securities under the Martin Act. The Martin Act defines securities as “stocks, bonds, notes, evidences of interest or indebtedness or other securities ” (General Business Law § 352[1] [emphasis supplied] ).   Under the standard enunciated in Securities & Exch. Commn. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244, and adopted by the Court of Appeals as the test for “other securities”, securities are the functional equivalent of an investment contract, which is “a contract, transaction or scheme whereby a person [1] invests his money [2] in a common enterprise and [3] is led to expect profits solely from the efforts of the promoter or a third party” (id., at 298-299, 66 S.Ct. 1100;  see, All Seasons Resorts v. Abrams, 68 N.Y.2d 81, 92, 506 N.Y.S.2d 10, 497 N.E.2d 33).  Significantly, upon applying this tripartite test on the previous appeal in this matter, the Court of Appeals concluded that the evidence before the Grand Jury was legally sufficient to establish that First Meridian's sale of numismatic coin portfolios constituted the sale of “other securities” within the meaning of the Martin Act (see, 86 N.Y.2d 608, 618-620, 635 N.Y.S.2d 144, 658 N.E.2d 1017).

 With regard to the numismatic coin portfolios, Donovan maintains that the evidence produced at trial was legally insufficient to establish the third prong of the Howey test because the coin market was “too wide open” to respond to the efforts of a promoter or third party.   We disagree.   As construed by the Court of Appeals, this element should be applied “realistically” rather than literally and is satisfied by proof that the efforts engaged in by the promoter or third person were “ ‘ * * * essential managerial efforts, which affect the failure or success of the enterprise’ ” (86 N.Y.2d 608, 620-621, 635 N.Y.S.2d 144, 658 N.E.2d 1017, quoting Securities & Exch. Commn. v. Turner Enters., 474 F.2d 476, 482, cert. denied 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53).

Regardless of whether First Meridian sales personnel made efforts that could influence the success or failure of the coin market, Howey merely requires that investors be “led to expect profits solely from [any such] efforts” (see, Securities & Exch. Commn. v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 90 L.Ed. 1244, supra [emphasis supplied] ).   Here, the trial evidence demonstrated that Donovan was portrayed as an expert in the numismatic coin market and First Meridian's sales literature represented to investors that the profitability of coin investments was ensured by such expertise in selecting the coins, monitoring their value and aiding in resale transactions.   In our view, that evidence was sufficient to support a finding that the investors were led to believe that First Meridian's efforts would influence the value of their coin portfolios.

Moreover, upon the exercise of our factual review power and viewing the evidence in a neutral light, we are satisfied that the verdicts of guilt against all defendants were not against the weight of the evidence (see, People v. Bleakley, supra, at 495, 515 N.Y.S.2d 761, 508 N.E.2d 672;  People v. Hubert, 238 A.D.2d 745, 746, 656 N.Y.S.2d 493, lvs. denied 90 N.Y.2d 859, 860, 661 N.Y.S.2d 186, 683 N.E.2d 1060).

The parties' remaining contentions have been reviewed and found to be lacking in merit.

ORDERED that the judgment convicting defendant John W. Donovan of the crimes of scheme to defraud in the first degree, fraud in the sale of securities (16 counts) and grand larceny in the third degree (six counts) is affirmed.

ORDERED that the judgment convicting defendant Roger V. Sala of the crimes of scheme to defraud in the first degree, fraud in the sale of securities (16 counts), grand larceny in the third degree (six counts), failure to register as a commodity broker-dealer and failure to register as a commodity investment advisor is affirmed.

ORDERED that the order is modified, on the law and the facts, by reversing so much thereof as granted the motions by all defendants for trial orders of dismissal;  motions denied, verdicts reinstated and matter remitted to the Supreme Court for resentencing;  and, as so modified, affirmed.

FOOTNOTES

1.   The People contend that no appeal lies from the denial of a motion for a trial order of dismissal and that therefore the president's appeal should be dismissed.   Because the president's arguments are presented in the context of his appeal from the judgment of conviction, they are properly before this court (see generally, People v. Phillips, 256 A.D.2d 733, 682 N.Y.S.2d 685).

MERCURE, J.

CARDONA, P.J., PETERS and SPAIN, JJ., concur.

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