People v. Miller

Opinion

WORK, Acting P. J.

Marvin Miller appeals a judgment convicting him of nine counts of selling unregistered securities (Corp. Code, 2 § 25110) and eight counts of selling securities by false representations (§ 25401), each count involving losses greater than $100,000 (Pen. Code, § 12022.6, subd. (b)). He claims the prosecution is time-barred and, in any event, his real estate transactions were not subject to regulation by California’s security laws.

I

On May 18, 1984, a superior court judge issued an arrest warrant on a complaint charging Miller with 19 counts of securities violations and 19 counts of grand theft involving the same loan transactions. Eight additional counts of felony tax violations were included. Four counts of grand theft allegedly occurred before May 18, 1984 (counts 1-4), but were found not to have been “discovered” for the purpose of triggering the statute of limitations 3 until after August 24 and September 3, 1981. Counts 5 through 38 involved theft and security crimes purportedly committed between May 22, 1981, and May 17, 1982, inclusive.

Miller waited until May 21, 1985 before moving to dismiss all grand theft and securities counts on the ground the three-year statute of limitations had then expired. His argument was based on the fact that Penal Code section 800, as it read at all applicable times, required either an indictment or issuance of an arrest warrant by a municipal or justice court judge to stop the limitations statute from running. 4 Because the May 18, 1984, arrest *1508 warrant was issued by a superior court judge, Miller argues it did not fulfill the statutory requirement. This contention was rejected first by a magistrate, then by the superior court, and finally this court when we denied Miller’s petition for extraordinary writ. A petition for review of our decision was denied.

In an innovative plea bargain, Miller agreed to waive a jury trial on the securities counts and submit them to a court trial and to plead guilty to each grand theft count on condition he be allowed to withdraw those pleas if he prevails on the securities violations. 5

II

The charges evolved from a general scheme developed by longtime confidence operator, Miller. 6 Initially, he apparently convinced a real estate broker in the Palm Springs area he intended to purchase 20 homes, each in the million dollar range, to “fixup” and resell. 7 He then contacted an appraiser to prepare estimates on the homes he intended to buy, misrepresenting the value of the homes by falsifying the intended purchase prices. This appraiser’s official estimates were grossly inflated, a fact attributed to his never before appraising luxury homes and the speed with which the estimates were required. For obvious reasons, Miller never told the appraiser his estimates were based on false information or were grossly excessive.

Miller presented the erroneous estimates along with falsified financial disclosure statements to Lochmiller Mortgage to secure separate loans for each home. 8 The homes were originally purchased by Bargain Books, Miller’s own corporation. Some homes apparently were later refinanced. 9 Miller employed a series of double escrows to obfuscate his chicanery.

Lochmiller Mortgage never detected the documents Miller was presenting were fraudulent, until several transactions “soured,” causing it to be *1509 come insolvent and its investors to lose millions of dollars. Meanwhile, Stephen Lochmiller was involved in funding his mortgage company through which he made “equity” loans to Miller and others, 10 generating capital from passive investors whose interests were secured by fractional shares of real property trust deeds. Lochmiller solicited these investors and placed their funds in an investment pool until he approved a borrower. Lochmiller then determined the proportional interest each investor would have in each security and “serviced” the investors’ accounts. Miller’s wife, on behalf of Bargain Books, signed promissory notes and loan documents on which the names of the payees (and trust deed beneficiaries) were left blank, to be filled in later by Lochmiller. This was done by reference to lists of persons attached as exhibits setting forth multiple names and proportional interests. Thus, unlike some transactions discussed in Leyva v. Superior Court (1985) 164 Cal.App.3d 462 [210 Cal.Rptr. 545], Miller’s notes were made payable directly to the publicly solicited investors. 11

When Miller defaulted on the Lochmiller Mortgage loans, the properties were foreclosed by senior hen holders.

Ill *

IV

Miller argues that even if his fractionalized promissory notes and trust deeds were securities subject to registration laws, he is not the person responsible for compliance. Instead, he contends the only person liable is Lochmiller whose public solicitation garnered the many investors to create his own investment pool. Miller claims it was Lochmiller on whom these lenders relied to place their money in profitable, secure loans and to service their accounts. Although substantial evidence shows Miller was aware he was not borrowing from Lochmiller Mortgage but that Lochmiller was merely brokering loans between Miller and available lenders, he claims it is only the person who directly solicits the public investors who is subject to the security laws. To support this proposition, Miller suggests the only reported similar cases relate to actions against the mortgage broker not the *1510 borrower. (See People v. Schock (1984) 152 Cal.App.3d 379 [199 Cal.Rptr. 327]; Leyva v. Superior Court, supra, 164 Cal.App.3d at p. 462.) Even if this were accurate, 12 this circumstance is irrelevant under the facts we now address.

A security is statutorily defined as “any note; ... evidence of indebtedness; ... collateral trust certificate; ... investment contract; ... or, in general, any interest or instrument commonly known as a ‘security’....” (§ 25019.) Courts, however, consistently narrow the literal interpretation of this and equivalent statutes (see Leyva v. Superior Court, supra, 164 Cal.App.3d at p. 471; People v. Schock, supra, 152 Cal.App.3d at p. 385), instead defining what constitutes a security on an ad hoc basis depending on the relevant facts and circumstances in light of the regulatory purposes of the Corporate Securities Law (Leyva v. Superior Court, supra, 164 Cal.App.3d at p. 470). The primary purpose of which is “to afford those who risk their capital at least a fair chance of realizing their objectives.” (People v. Schock, supra, 152 Cal.App.3d at p. 385, citing Dahlquist, Regulation and Civil Liability Under the California Securities Act (1945) 33 Cal. L.Rev. 343, 360.) Thus, in analyzing issuer transactions, California has established a “risk capital” test. This concept is derived from language in Silver Hills Country Club v. Sobieski (1961) 55 Cal.2d 811, 814 [13 Cal.Rptr. 186, 361 P.2d 906, 87 A.L.R.2d 1135], which states: “Section 25008 defines a security broadly to protect the public against spurious schemes, however ingeniously devised, to attract risk capital....” Particular documents meet the “risk capital” test when the money is raised for a business venture through indiscriminate offerings to members of the general public who have no control over the success of the venture and whose money is substantially undersecured. (People v. Figueroa (1986) 41 Cal.3d 714, 736 [224 Cal.Rptr. 719, 715 P.2d 680]; People v. Schock, supra, 152 Cal.App.3d at p. 385; People v. Coster (1984) 151 Cal.App.3d 1188, 1194 [199 Cal.Rptr. 253]; Hamilton Jewelers v. Department of Corporations (1974) 37 Cal.App.3d 330, 336 [112 Cal.Rptr. 387].)

Here, Miller was borrowing these monies for investment purposes. Although he was purchasing residences, they were but the bait for his grandiose illegal lottery scam. Because Miller had no means to pay these loans as they came due when his lottery was barred by the authorities, the only repayment possibility lay in his ability to resell these assets. However, the loans obtained by Miller were so far in excess of the value of the secured interests that no resale or foreclosure could recoup more than a few cents on the dollar to the individual lenders. Moreover, these investors were solicited *1511 from the general public and had no control over the success of the venture in which their money was placed. Clearly, Miller’s notes and trust deeds are securities. (See People v. Schock, supra, 152 Cal.App.3d at pp. 385-387.)

Miller argues that it is only the success of Lochmiller’s mortgage investment caper to which the investors looked and it is Lochmiller’s control and managerial responsibilities that require him to comply with the Corporate Securities Law. However, the fact Lochmiller independently may be liable because he brokered these transactions and obtained commissions from the borrower, Miller, while charging fees for his managerial services to the investors, does not insulate Miller from liability for issuing his own unregistered securities. Section 25110 makes it unlawful to offer or sell nonexempt securities in an “issuer” transaction unless they have been legally qualified. An issuer is “any person who issues or proposes to issue any security.” (§ 25010.) A security includes a promissory note secured by fractionalized interests in real property. (People v. Schock, supra, 152 Cal.App.3d at p. 390.) Here, Miller generated and circulated these notes to multiple investors in each transaction; that he brokered them through Lochmiller does not relieve him from the requirements of registration.

V

Miller claims he cannot be responsible for any security violation because he was never in privity with his lenders. He relies on federal decisions which have incorporated a privity requirement to permit a purchaser of nonexempt unregistered securities to bring a civil action against the issuer. These cases follow the mandate of 15 United States Code section 771. 13 Thus, where an issuer sells the securities to an underwriter for resale, or distribution to the public for a price differentiation, in federal court, the purchaser is limited to a civil action against the immediate seller, underwriter. Miller cites no analogous California authority or cogent reason why the rationale of civil cases based on federal legislation should prevent California *1512 from enforcing its regulatory statutes against those whose activities expose the public to the very type of scam involved here. In any event, Miller knew Lochmiller was soliciting funds from the general public and that multiple investors would receive fractional interests in the notes he issued. That’s why he left the payee line blank as each note was executed. That Lochmiller acted as Miller’s agent in securing these investors does not create any lack of privity here.

Disposition

Judgment affirmed.

Butler, J., and Todd, J., concurred.

A petition for a rehearing was denied July 24, 1987.