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The People v. Jeffrey Gordon Butler

December 21, 2012


Appeal from a judgment of the Superior Court of Orange County, James A. Stotler, Judge. (Super. Ct. No. 06NF0425)

The opinion of the court was delivered by: Ikola, J.




A jury was asked to decide whether defendant Jeffrey Gordon Butler was guilty of securities fraud and related offenses or, conversely, if he was merely a failed businessman who did nothing meriting criminal punishment. Believing the former to be true beyond a reasonable doubt as to the majority of counts alleged, the jury convicted defendant of 288 counts of fraud in the offer or sale of a security (Corp. Code, § 25401),*fn1 240 counts of offering an unqualified security (§ 25110), four counts of engaging in fraudulent securities schemes (§ 25541), 147 counts of theft from an elder (Pen. Code, § 368, subd. (d)), three counts of filing a false tax return (Rev. & Tax. Code, § 19705, subd. (a)(1)), and one count of aiding in the preparation of a false tax return (Rev. & Tax. Code, § 19705, subd. (a)). Among other enhancement findings, the jury found true allegations that defendant intentionally took property valued in excess of $2.5 million. (Pen. Code, § 12022.6, subd. (a).) The court sentenced defendant to 90 years and eight months in prison. Defendant raises numerous issues on appeal, but we affirm the judgment in all respects.


Defendant's Background

Defendant graduated from high school in Clovis, New Mexico and attended one year of college at Manhattan Christian College in Manhattan, Kansas. After leaving college, he owned and operated a car detail business in Colorado for one year and a half.

Defendant obtained real estate licenses in Colorado and New Mexico, and unsuccessfully worked in the real estate business in the early 1980s. Defendant then obtained employment at Sandia Savings and Loan for "a couple years," where he "basically handled mortgages and . . . new deposits. I would visit people . . . that had high deposits with the savings and loan and basically customer service them."

Defendant next worked for "over two years" as a deputy treasurer for San Juan County, New Mexico. His duties entailed assisting the treasurer in the collection and investment of property taxes. At the same time, defendant partnered with others to buy rental properties as investments. After moving to Amarillo, Texas, defendant purchased a hair salon, which he expanded to three more locations. Defendant formed a company called "The Butler Group" and expanded into other businesses, including a laundry facility.

In the mid-1980s, defendant's banker introduced defendant to a man who owned four Arby's restaurants in Texas but was facing $300,000 in tax payments to the Internal Revenue Service (IRS). The IRS accepted defendant's offer of $80,000 to take over the restaurants. Defendant needed cash to pay off disgruntled suppliers and other bills, so he solicited investments from family members and "ran an ad in the newspaper offering . . . 12-percent interest on notes. And we had people respond to that."

One of these people was Oliver Ottensmeyer. After responding to Butler's newspaper ad, Butler promised Ottensmeyer a high rate of interest (10 or 12 percent) paid monthly. Ottensmeyer invested about $70,000 in an unspecified business venture. He received one or two interest payments. Ottensmeyer invested an additional $131,000 when told about the Arby's restaurant opportunity. Ottensmeyer did not receive any payments from the Arby's investment. Ottensmeyer unsuccessfully tried to contact Butler, but the next communication he received from Butler was a notice of bankruptcy proceedings. Despite filing proofs of claim, Ottensmeyer received nothing from the bankruptcy, which concluded in January 1989. Similarly, Sanford Evans invested $10,000 with defendant in exchange for a 12 percent note. Evans received interest payments for about a year and a half, but did not receive any of his principal back. All in all, defendant brought in approximately $400,000 in investor money using 12 percent promissory notes. Defendant did not "give [the investors] anything but the promissory note." The debts were discharged in bankruptcy.

Defendant moved back to New Mexico and worked in sales for a water filtration system company. Defendant was a top salesman; he would meet with customers in their homes and demonstrate the system. At the same time, defendant obtained an insurance license in New Mexico and started selling a variety of insurance policies.

Defendant subsequently accepted a job with Globe Life in Riverside, California in 1992. Defendant obtained a license to sell insurance in California at that time. When this job failed to provide adequate income, defendant pursued a new business in which he sold (as an independent contractor) "gap filler" insurance policies to cover in-home care for seniors. In 1995, the Department of Insurance closed down the insurance firm that was issuing the policies and put defendant on probation, revoking his license and issuing a restricted license. Defendant had offered and sold home health care services to senior citizens without the required regulatory approval of these products, and had collected large fees in doing so. Defendant paid a fine of $23,000.

Formation and Operation of Senior-Oriented Financial Services Firms

Undaunted by his bankruptcy, the suspension of his insurance license, and his apparent lack of any particular education or expertise in the complex fields of finance and investment, defendant set his sights on marketing living trusts, wills, annuities, and reverse mortgages to senior citizens.

At some point in the 1990s, defendant formed Senior Information Services (SIS), through which defendant marketed and sold living trusts and wills to senior citizens. SIS used telemarketers and print advertisements to develop leads. Defendant and his sales representatives would then use their knowledge of clients' assets to offer annuity investments.

Defendant also formed a company known as Patriot, which sold reverse mortgages -- often to the same SIS clients that defendant solicited to buy annuities (i.e., clients could use the proceeds of the reverse mortgage to buy annuities). Defendant's insurance license was permanently revoked in 2001 based on defendant's sale of reverse mortgages to senior citizens in 1996 and 1997. The Department of Insurance's revocation order stated that eight of defendant's customers were "not informed of the dollar amount of the service fee charged by [defendant] until the loan was complete and payment of the service fee was demanded. Said service fees ranged from $3,400 to $7,705. Each of said eight individuals would not have purchased the reverse mortgages if they had been informed of the dollar amount of the service fee charged by [defendant]. By failing to disclose the amount of the service fee, [defendant] misrepresented a material item or material term of the broker's agreement mentioned here and above."

Transfer of Investor Funds to Medical Factoring Company Investments

During the same time period, defendant (and his agents) began working on commission as an independent "finder" for a medical bill factoring company, Medical Capital Corporation (MCC). Defendant also worked as a "finder" for Dawson Group, Inc. (DGI), a firm similarly engaged in medical bill factoring. The factoring firms' business plan was to pay health care providers discounted cash payments for receivables. Both firms (MCC and DGI) offered promissory notes to investors paying 12 percent interest. Both firms rewarded "finders" (like defendant) with 10 percent commissions on the money invested, plus an additional 10 percent commission each year the promissory note was renewed.

Defendant steered his SIS clients into the MCC and DGI investments, sometimes just months after convincing his clients to invest in annuities. By 1998, defendant had approximately 23 clients who collectively invested more than $1 million in DGI. At the peak of "finding" investors for MCC, defendant's investors loaned $8 to $9 million to MCC. Defendant was not charged with crimes as a result of selling MCC and DGI investments.

In 1998, DGI was insolvent. DGI's assets included $332,000 in cash and $1.3 million in uncollected receivables; DGI's liabilities included $2.7 million owed to note investors. DGI's owner told defendant he was going to notify the investors of the firm's impending bankruptcy. Rather than allowing DGI to declare bankruptcy, defendant agreed to take over DGI, transferring its assets and liabilities to a new business entity. The investors would have received only 10 to 15 percent of their notes' principal values if the remaining money was returned to them. Only $225,000 of the receivables were ultimately collected. In the interim, however, investors continued to receive 12 percent interest payments. Defendant was using money from Patriot and his own compensation to make interest payments to investors.

Defendant was charged with crimes in connection with his transfer of DGI investors into new investments. The first new entity, Medifund, issued new one-year notes to the DGI investors. Defendant changed the name of Medifund to Genessee Capital, Inc. (Genessee) in 2000 and issued new Genessee notes in January 2001. Defendant did not tell DGI investors transferred to Medifund notes about the financial situation of DGI, the intention of DGI's owner to declare bankruptcy, the viable business plan (or lack thereof) of Medifund to recover losses, or defendant's history of failed business ventures. When issuing Genessee notes, defendant made no disclosures about the financial situation of Medifund/Genessee or the business plan (or lack thereof) of Genessee. Defendant also brought new investors into Medifund/Genessee without any of these disclosures.

At some point during this process, Butler consulted an attorney with regard to the issuance of Genessee notes. According to the attorney's testimony, he told Butler the "issuance of promissory notes in California . . . would be deemed an issuance of securities, that the issuance would have to either be qualified or exempt from qualification under either the Commissioner's rules or some provision of California law." Another attorney, who actually prepared the Genessee notes, testified that defendant did not provide her with most of the pertinent information about the investors and the history of the DGI/Medifund investments. The final interest payments to Genessee noteholders occurred in December 2002. Defendant finally told remaining investors that Medifund/Genessee was defunct and their investments were lost. But at the same time, defendant told these investors their money could be recovered from his new venture, Global Network Providers (GNP).

Investments in Grenada Telecommunications

Starting in 2000, defendant became involved in yet another line of business, a telecommunications startup company known as GNP, which was located in, of all places, Grenada. GNP had one asset: a license to compete with the existing telecommunications monopoly in Grenada. But GNP did not have any capital or equipment. In need of capital, GNP's promoters, Antonio Bailey and Keith Friday, offered defendant the following terms: (1) his usual 10 percent commission on all promissory notes sold; (2) a 25 percent ownership share of GNP; (3) a position with GNP of Chief Financial Officer; and (4) a salary of $3,000 per month. Defendant was charged with numerous crimes arising out of investments he sold in GNP.

Defendant talked to an attorney about GNP; the attorney advised defendant that the proposed notes were governed by federal and state securities laws. The attorney noted in an e-mail that defendant had an obligation "to disclose all material facts regarding the investment" to his investors. The attorney prepared a summary offering memorandum, which included an explanation of the reasons investment in GNP would be highly risky (e.g., lack of capital, lack of operations, unsecured nature of notes, location in a foreign country, speculative possibility of note repayment). Defendant told this attorney that defendant was familiar with securities law. But defendant never took steps to satisfy securities law requirements such as qualification of the notes or making detailed disclosures.

In response to Bailey suggesting a $6,000 slush fund be set up to make payments to people in Grenada, the GNP attorney told defendant this would violate the Foreign Corrupt Practices Act and that money used for bribes would have to be reported as income because bribes cannot be deducted as a business expense. Nonetheless, defendant wrote a note to his wife which stated: "'Peggy deduct ...

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