Appeal from a judgment of the Superior Court of Los Angeles County, Joseph Kalin and Aurelio N. Munoz, Judges. Judgment is affirmed in part and remanded for further proceedings. (Los Angeles County Super. Ct. No. BC360749).
The opinion of the court was delivered by: Croskey, Acting P. J.
CERTIFIED FOR PARTIAL PUBLICATION*fn1
Those who violate the Corporate Securities Law of 1968 may be exposed to criminal sanctions, civil suits, and administrative enforcement actions brought by the Commissioner of Corporations (Commissioner). In this case, the Commissioner brought an administrative action against defendant Anthony O'Neal for: (1) the offer and sale of unqualified, non-exempt securities; and (2) fraud in the offer and sale of securities. Defendant and Otha Cole*fn2 had created a business in which they convinced several individuals to invest by means of poorly drafted Principal Investment Agreements (PIAs), which were signed by the individuals and Cole, but not defendant. Defendant and Cole misused investors' funds and the business failed.
After a bench trial, the trial court concluded defendant had violated both pleaded provisions of the securities law, enjoined defendant from further violations, and ordered him to pay restitution and civil penalties. In the published portion of this opinion, we consider, and reject, defendant's argument that he cannot be held liable in an administrative enforcement action and required to pay restitution to his victims unless he was in contractual privity with them - a requirement imposed in civil actions for the identical securities law violations. In the unpublished portion of the opinion, we address defendant's other, factually-dependent, contentions. We affirm in part and remand for further findings.
FACTUAL AND PROCEDURAL BACKGROUND
1. The LadyCare Device and Business
LadyCare is an alternative medical device, designed to reduce menstrual cramps and discomfort. Less charitably described, it is a magnet intended to be worn inside the underwear.
LadyCare is also the name of a business operated by Cole and defendant, which had the stated goal of distributing the LadyCare magnetic device in the United States and Canada. LadyCare, as a business, never existed as a legal entity. Instead, Cole and defendant conducted the LadyCare business, in part, through two corporations: Innerplanetary Enterprise, Inc. (Innerplanetary), and ICJ Health, Inc. (ICJ Health).
It is undisputed that Cole first introduced the LadyCare product and the idea of the LadyCare business to defendant. Defendant asserted, at trial, that he was merely an investor in LadyCare, who lost money just as the other investors did. The trial court concluded, however, that defendant was deeply involved in the business and the sales of securities to investors. As we discuss at length in the unpublished portion of the opinion, substantial evidence supports the conclusions of the trial court.
2. LadyCare Prior to Defendant's Involvement
Cole initially learned of the LadyCare device from an alternative medicine practitioner from London. Cole then obtained 100 LadyCare devices, which he distributed for free as a test.*fn3 Claiming to have received unanimous positive feedback from the women who tried the device, Cole planned to start selling it. He intended to test market LadyCare in Canada to "get a snapshot of what we could do," and then market the product in the United States. Cole's intent was to purchase the product for $4, and sell it for $39. He believed LadyCare could generate $10 million profit in the United States.
On October 31, 2002, Cole incorporated Innerplanetary in Nevada. Innerplanetary would ultimately engage counsel to prepare a private placement memorandum to attract investors in a United States LadyCare corporation. It does not appear that the private placement memorandum was ever finalized.
3. Defendant's Initial Involvement in LadyCare
Defendant met Cole through their common membership in From the Heart Church Ministries. They met in June of 2003, and by July, defendant was involved in the LadyCare operation. A July 9, 2003 "LadyCare Lifetime, Inc."*fn4 meeting agenda indicates that Cole was to provide an overview while defendant was responsible for the discussion of "Warehousing."*fn5
4. The Principal Investment Agreements
Cole, without the assistance of counsel, drafted a PIA to be executed by individuals investing in the LadyCare business. The document is largely unintelligible, but purports to be an agreement between Cole (as principal) and the investor.*fn6 The "Scope of Services" paragraph indicates that Cole "shall work with investments of Investor . . . by way of introducing to the USA LadyCare LifeTime and operational for the sole purpose of providing product to the public for a fee; finish all area of advertising and commercializing of said product on local and national Cable Television." While this language is, in several ways, incomprehensible, it appears to indicate that Cole promised to use the investors' funds to advertise the LadyCare product in the United States.
Under the PIA, the investor was to receive the entire amount of the investment back and a 100% profit, although the time period in which this was promised is somewhat unclear.*fn7 The PIA also indicates that "[a]ll of the needs and preparation for the sale and marketing of the LadyCare Lifetime product is [sic] completely in place." An attached exhibit identifies "Completed Items to Date," including, "All printed literature (brochures, flyers, letterhead, business cards)," "All products up to 350 plus thousand product," "Fulfillment Center/Warehousing," "Installation of 100 phone lines," and "Full campaign, radio, TV, and print commercial in place."
Defendant was the first to execute a PIA, signing his agreement on August 27, 2003. Shortly thereafter, he shared the LadyCare business opportunity with his close friends and family. His mother, mother-in- law, and sister-in-law each signed PIAs shortly after defendant did. Two of his friends, each of whom he had known for approximately 20 years, also signed PIAs. None of defendant's relatives and close friends testified at the trial, and the trial court's findings were not based on their investments. *fn8
5. The Reed, Belisle and Cofield Investments
LadyCare obtained three more investors in the last quarter of 2003: Lula Reed, the Belisles, and the Cofields.
On October 9, 2003, Lula Reed signed a PIA investing in the LadyCare business. Reed had known defendant "for quite some time." She had lost touch with him for a period, then saw him again and realized that he was the same person she had known from years before. They had "just kind of remained friends." Reed's adult daughter had been thinking about investing in LadyCare. Reed then spoke to defendant about it. Defendant told Reed "a little bit about the business." A meeting was arranged with Cole, defendant and Reed at a restaurant. Defendant was present while Cole went over the PIA with Reed, and told her she would have "some funds" in six months. Reed had no investment experience; she was not informed of the risks of the investment. She invested $2,500 in the LadyCare business.
On October 14, 2003, Arthur and Yolanda Belisle signed a PIA investing $15,000 in the LadyCare business. Yolanda Belisle had met defendant at church in early 2003; Yolanda Belisle was a greeter, so she spoke with everyone who came to the church. Defendant "seemed like a nice man." In mid-September 2003, defendant approached Yolanda Belisle at church, told her that he knew of a good investment opportunity, and asked if she was interested. The Belisles agreed to talk further about it. Defendant arranged a meeting in which he and Cole went to the Belisles' home to discuss LadyCare. At the meeting, defendant did most of the talking. Defendant told the Belisles that they would "definitely get [their] money back." The Belisles withdrew $15,000 from Arthur Belisle's retirement account and invested it in LadyCare. They agreed to invest because defendant told them it was a good product.*fn9
On December 19, 2003, Leroy and Leah Cofield signed a PIA investing $10,000 in the LadyCare business. Leroy Cofield had known defendant as a fellow congregant at church. Defendant, who had no real financial experience,*fn10 had given a financial seminar at the church. The Cofields wanted to improve their credit rating and get out of debt, so they asked defendant for advice after the seminar. Defendant suggested that the Cofields refinance their house; he recommended Cole to do the refinance. The Cofields met with Cole, who refinanced their mortgage through his realty company. The Cofields received $60,000 from the refinance; they used some of the money to pay off debt and put the rest in the bank. Some time later, defendant told the Cofields about LadyCare, and that it was a good investment, but defendant told them that it was "closed" to new investors. Less than two weeks later, defendant called the Cofields and told them that LadyCare was taking investors; Leroy Cofield said that he was interested. Cole then called Leroy Cofield and asked how much the Cofields could invest. Within 48 hours, defendant, but not Cole, met the Cofields and gave them the PIA, which the Cofields signed. The Cofields made their check out to "Otha Cole; Lady Care Lifetime Investment." Cole met them near the bank to pick up the check. Leroy Cofield was led to believe that LadyCare was a corporation. Defendant had told Leroy Cofield that he was "kind of . . . Cole's financial officer." Defendant had told Leroy Cofield that they had already test marketed the LadyCare device and that it was expected to be very successful. Cole confirmed that the Cofields would get 100% of their investment back within six months, as they were just about to launch the product. Leroy Cofield was an investment novice; he trusted defendant's assurances as well as Cole's business acumen.
6. Last Quarter 2003 LadyCare Operations
While defendant and Cole were obtaining $27,500 from Reed, the Belisles, and the Cofields, they had not, in fact, already successfully test marketed LadyCare. Despite the representations in the PIA, everything necessary to sell and market the LadyCare product was not "completely in place." In fact, none of it was.
On October 30, 2003, defendant became the treasurer of Innerplanetary.*fn11 On November 5, 2003, defendant opened a corporate bank account for Innerplanetary; defendant and Cole were the two authorized signatories. Thereafter, defendant began writing checks on the Innerplanetary account.*fn12 Indeed, Cole would later tell an examiner from the Department of Corporations that defendant handled all financial matters regarding LadyCare.
The plan to test market the LadyCare device in Canada began in Vancouver. Cole would later testify that although they advertised LadyCare in Vancouver, they were unable to sell products there. But by the end of 2003, when defendant was representing that the device had been successfully test marketed, the LadyCare business had not only not had a successful test marketing, it had not even begun to test market the device. In fact, the record indicates that nobody involved with the LadyCare business even went to Canada prior to 2004.*fn13
While the record does not indicate the precise disposition of the 2003 investors' funds, it appears that LadyCare was using them for non- business-related expenses. In addition to defendant and Cole, two other individuals were also engaged in the LadyCare business, Andrea Tezino and Shawn Grant. A document prepared by defendant entitled "Company Expenses," indicates that, in December 2003, the "Company" paid for Grant to attend a church retreat in Maryland.
7. LadyCare Operations Prior to the Next Investor
The next relevant LadyCare investment did not occur until March 18, 2004.*fn14 In the meantime, defendant and Cole began LadyCare operations in Canada. On January 5, 2004, defendant, Cole and Green made a one-day trip to Vancouver. Trips to Vancouver would continue through September 2004.
On January 21, 2004, ICJ Health was incorporated in British Columbia. It had three shareholders - Cole, defendant, and Tezino - each of whom had 100,000 shares of common stock. The same three individuals were identified as the first directors of the corporation.*fn15 At some point, defendant applied for a Visa Platinum card.*fn16 On his application, he identified himself as the Chief Financial Officer of ICJ Health.*fn17 Defendant would sign all ICJ Health checks concerning the LadyCare business. Defendant was considered the controller for the business, and admitted preparing all of the LadyCare financial documents in evidence.
A document entitled "[Defendant]'s Expense Report" runs from November 2003 to February 3, 2004. A note after the last entry*fn18 refers to an unknown "Najera loan," and reads, in part, "$875 will be applied to the filing cabinets. So out of the Najera loan I only received $875 towards bills. WE ARE GETTING FAR BEHIND." A later version of defendant's expense report indicates that on February 12, 2004, a check for $6050 "bounced causing major problems." Defendant adds that Cole "only gave me $5450 to cover the check making matters worst [sic]."
On March 18, 2004, Samuel and Jacqueline Cann signed a PIA investing $10,000 in the LadyCare business. Samuel Cann had attended the same church as O'Neal and Cole in California, but moved to the Washington D.C. area in June 2003. He had no relationship with defendant beyond being members of the same church. He knew Cole a bit better, and had stayed at Cole's house two or three times. He knew nothing of Cole's business character, or his "track record" in business. At some point in 2004, the Canns refinanced the mortgage on their Virginia home; Cole handled the refinance for them (by wire). The Canns received cash back from their refinance. At that point, Cole told Samuel Cann about the LadyCare business opportunity. Cole promised 100% return on their investment within six months. Cole told the Canns that the business was doing very well in Canada, and suggested that the Canns could be the distributors of the LadyCare product in the Washington D.C. area. The Canns agreed to invest. Cole told Samuel Cann to give his investment money to defendant; Cole also told him that if Cole was unavailable, he could always speak with defendant. The Canns' money was transferred directly into defendant's account.
Defendant prepared a financial statement detailing the partial distribution of the Canns' investment. $1,889 of the Canns' investment was used to pay Tezino's rent. The Canns had not authorized ...