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People v. Martinez

California Court of Appeals, Fourth District, First Division

March 9, 2017

THE PEOPLE, Plaintiff and Respondent,
v.
FRANCISCO JOSE MARTINEZ et al., Defendants and Appellants. THE PEOPLE, Plaintiff and Respondent,
v.
MARCELLUS LOPES LEE, Defendant and Appellant.

          Pub. & mod. order 4/6/17

         CONSOLIDATED APPEALS from judgments of the Superior Court of San Diego County No. SCD219673Peter C. Deddeh, Judge. Remanded with directions; affirmed as modified.

          Charles R. Khoury, under appointment by the Court of Appeal, for Defendant and Appellant, Francisco Jose Martinez.

          Cynthia M. Jones, under appointment by the Court of Appeal, for Defendant and Appellant, Daniel P. Romero.

          Barbara A. Smith, under appointment by the Court of Appeal, for Defendant and Appellant, Marcellus Lopes Lee.

          Kamala D. Harris, Attorney General, Kathleen Alice Kenealy, Chief Deputy and Acting Attorney General, Gerald A. Engler and Julie L. Garland, Assistant Attorneys General, Sharon Rhodes and Ryan H. Peeck, Deputy Attorneys General, for Plaintiff and Respondent.

          O'ROURKE, J.

         A jury found Marcellus Lopes Lee, Daniel Paul Romero and Francisco Jose Martinez, Jr. (together, appellants or the defendants) guilty of fraud in the offer or sale of commodities. (Corp. Code, § 29536.)[1] Lee and Romero were also convicted of conspiracy and grand theft of personal property. (Pen. Code, §§ 182, subd. (a)(4), 487, subd. (a).) The jury found that the takings exceeded certain dollar amounts and that the victims' losses were in excess of $150, 000. (Pen. Code, §§ 186.11, subds. (a)(2) & (a)(3), 12022.6, subd. (a)(2) (collectively, aggravated white collar criminal enhancements).) The trial court subsequently granted the defendants' motions for a new trial on some of the counts and dismissed other counts for insufficiency of the evidence. The People appealed. (People v. Lee (Mar. 7, 2014, No. D061235) [nonpub. opn.] (Lee).)

         In Lee, we concluded that the trial court abused its discretion in reversing the jury's verdicts. We reversed the trial court's orders and remanded the case with instructions to reinstate the verdicts rendered by the jury and sentence the defendants accordingly. In the interests of justice, we ordered the proceedings on remand to be heard before a trial judge other than the judge whose orders were reviewed on appeal.[2] (Lee, supra, No. D061235, Disposition.)

         On remand, at the People's request, the sentencing court dismissed the counts on which the defendants were subject to retrial. The court sentenced Romero to a total of seven years in prison. Martinez received a one-year jail sentence and a five-year probation term. Lee was sentenced to a total of five years in prison.

         In the instant appeal, Appellants assert there is not sufficient evidence to support their convictions for commodities fraud because they entered into money management contracts with their clients, not contracts for the sale or purchase of commodities. Martinez also argues there is not sufficient evidence to sustain his convictions even if money management contracts qualify as commodities contracts within the meaning of section 29536. Appellants claim the trial court prejudicially erred by failing to instruct the jury that scienter is an element of the offense of commodities fraud. They also contend reversal is required because the sentencing court refused to consider a motion for a new trial on grounds not decided by the trial court.[3]

         Romero argues the trial court did not properly instruct the jury about the statute of limitations requirement for conspiracy. He contends the sentencing court erroneously ordered him to pay restitution to several alleged victims for crimes for which he was not convicted, and duplicating the amount of restitution owed to one of the victims. Romero and Martinez maintain there is insufficient evidence to support an aggravated white collar crime enhancement under Penal Code section 186.11, subdivision (a)(2), which requires a taking to be greater than $500, 000. Finally, Romero contends the sentencing court erred by reinstating count six, which the court later dismissed at the People's request, and by reinstating his conviction on count seven, and sentencing him for that offense.[4]

         The People concede the sentencing court erroneously reinstated counts six and seven, and we accept their concession. The People also concede the trial court erred when it did not instruct the jury that scienter is an element of the offense of commodities fraud, but contend the error was harmless. The People ask this court to review the possibility the sentencing court may not have imposed a mandatory fine under Penal Code section 186.11, subdivision (c).

         We conclude that the restitution award to Ricky Lutz was incorrectly determined. We vacate Romero's conviction on count seven and remand for resentencing. Otherwise, we find no error and affirm.

         FACTUAL AND PROCEDURAL BACKGROUND

         We detailed the factual and procedural background of this case in our earlier decision, Lee, supra, No. D061235. We need not repeat those details here. Instead, we summarize the background of the case where relevant to the issues raised in these appeals.[5]

         In early 2004, Romero and Martinez became interested in international currency trading. They had no background in trading or foreign currency. Romero and Martinez contacted Lee, a former stockbroker who had started trading in off-exchange foreign currency (forex). Lee's company was New England Capital Traders (NECT).

         In August 2004, Romero opened an account with a futures commodity merchant (FCM). He acknowledged receiving a risk disclosure statement from the FCM, which stated stop-loss or stop-limit orders intended to limit losses to certain high returns and minimal risk through stop-loss discipline may not be effective because market conditions may make it impossible to execute such orders. Notwithstanding this advisement, Martinez developed a web site for his and Romero's company, Kingdom Advisors, which stated: "Investors may lower their exposure to risk by employing risk-reducing strategies such as 'stop-loss' or 'limit' orders."

         Romero and Martinez solicited and received more than $600, 000 in loans from two individuals to start trading. Using Lee as a trader, they had highly favorable returns for three to five months and were able to recruit other investors. After the initial period, Lee began to incur large trading losses. Despite the losses, Lee personally profited from every trade. Based solely on Lee's short-lived success, Lee, Romero and Martinez solicited several million dollars from other persons for the purpose of trading forex contracts. Lee and Romero told potential investors they had significant success trading foreign currency. They promised high rates of return and said they mitigated risk by implementing stop-loss procedures.

         Unhappy that Lee was taking commissions, Romero and Martinez opened a trading account with another FCM, and received commissions or rebates on every trade regardless of performance. Romero and Martinez contracted with another trader, who was inexperienced and incurred large losses. Their clients lost most or all of their money. According to Romero's estimates, during a period of 16 to 18 months, Kingdom Advisors received from 10 to 30 percent of several million dollars in commissions from trading forex contracts.

         In approximately late 2005, Romero and Martinez, together with Lee, decided to stop trading in the forex market and start an FCM, which they named TradeCo. They told existing clients the only way to recoup their losses was to invest in TradeCo. They solicited other persons to finance their new enterprise by promising high rates of return and the possibility of equity positions. After operating for two to three months, the NFA increased TradeCo's capitalization requirements and TradeCo ceased functioning.

         On March 25, 2009, the People charged Lee, Romero and Martinez with conspiracy to defraud, commodities fraud and grand theft. The People alleged defendants falsely claimed substantial expertise and success trading foreign currency, promised returns of 10 to 15 percent per month on investment funds and guaranteed investors they would not lose more than 20 percent of the initial value of their portfolio through the use of stop-loss mechanisms. The People also alleged as a result of their misrepresentations, defendants took more than 2.4 million dollars from individual victims, who lost most or all of their investments.

         Trial began on February 28, 2011, and concluded on April 6, 2011. In the interests of brevity, we discuss only those counts for which the defendants were convicted and sentenced. Additional facts are set out in Discussion where relevant to the issues raised on appeal.

         Count One (Conspiracy)

         The People charged Lee, Martinez and Romero with conspiracy to defraud and alleged they committed 19 overt acts in furtherance of their conspiracy, including obtaining $100, 000 from Robert Smith on or about November 3, 2004; $260, 000 from Ricky Lutz between August to September 2005; $45, 000 from Curtis Brown and $100, 000 from Michael Mauch on or about November 28, 2005; $10, 000 from Greg Hughes on or about March 30, 2006; $110, 000 from Greg Sabal between May 10 and July 5, 2006; and $150, 000 from Paul Cannon between September 25 and 28, 2006. The complaint alleged the defendants failed to return all but a small fraction of the money to their victims, despite demands by the victims for its return.

         Counts Eight and Nine (Robert Smith)

         The People charged the defendants with grand theft of personal property and fraud in the offer or sale of a commodity to Robert Smith. After several meetings with Romero and Martinez, and with Lee, Romero and Martinez, Brian Smith, a financial advisor, advised his client, Robert Smith, to invest with the defendants. Brian Smith was aware that forex trading was high risk. Romero told Brian Smith they could provide a monthly return of six percent and had clients who were earning that rate. Brian Smith discussed foreign currency markets, liquidity leverage, technology and stop-loss as risk mitigation in technical terms with Lee. Brian Smith said the strategies Lee described for managing risk included stop-loss discipline and were "very reassuring."

         In November 2004, Robert Smith invested $100, 000 with Kingdom Advisors. He received a six percent return each month for three or four months. Kingdom Advisors did not provide any account or trade summaries. When Kingdom Advisors stopped sending checks, Brian Smith kept communicating with Romero, who assured him that Robert Smith's principal was intact and profits would resume. Robert Smith received one or two additional payments in the third quarter of 2005. Brian Smith never learned what happened to Robert Smith's principal.

         Forensic accounting showed that Robert Smith's funds were commingled in a Kingdom Advisors trading account where Lee's company, NECT, had trading authority. The total initial balance was $478, 385. Of that amount, there were trading losses of $149, 630.50 and withdrawals of $328, 754.50. The withdrawals included payments of $78, 638 to Kingdom Advisors, $15, 000 to Martinez, $11, 000 to Martinez's organization, Luz de Vida, and transfers totaling $53, 000 to Romero's personal bank account. In April 2005, Kingdom Advisors made a $5, 000 payment to Robert Smith from another investor's account.

         Counts Ten and Eleven (Brian Smith et al.)

         The People charged the defendants with grand theft and commodities fraud from Brian Smith. At various times, six investors gave a total of $460, 000 to Brian Smith, which he invested with the defendants through his company, Olympia Capital Management (Olympia). A few weeks later, the account suffered losses of approximately 70 percent. Brian Smith contacted Romero, who blamed the trading loss on a young trader. Brian Smith had met the trader but had not expected him to have any direct role in trading his accounts. When the trader suffered initial trading losses, he abandoned stop-loss discipline in hopes of recovering the funds, compounding the losses.

         Brian Smith met with Romero and Martinez, who said Smith could recover his assets by investing in TradeCo. Martinez told Smith they could provide seven percent interest a month while maintaining safety on the principal. Smith invested the funds remaining in his trading account in TradeCo. He never learned what happened to those funds.

         According to a forensic accountant, Jeremy Connelly deposited $10, 000 in a Kingdom Advisors bank account in June 2005. That $10, 000, along with other deposits, was withdrawn in various transactions that month. Kingdom Advisors received $4, 300 of Connelly's money, of which $2, 500 went to Romero's personal account. Between February and June 2006, Connelly received approximately $3, 000 in payments from Olympia.

         In November 2005, Michael Mauk deposited $100, 000 with Olympia, which was wired to a trading account where Kingdom Advisors had trading authority. The trading account had losses of $69, 514 in two months, including commissions. From November 28, 2005 to January 26, 2006, Kingdom Advisors received approximately $63, 500 in payments from the trading account. Romero personally received $9, 500. Four thousand dollars was transferred to another one of Romero's business accounts.

         Curtis Brown deposited $45, 000 with Olympia in November 2005. A month later, Brown's funds were deposited in a trading account. There were transfers from the trading account to Olympia in February, May and June 2006 totaling $34, 076.76. Those funds became part of Olympia's $75, 000 deposit with Kingdom Advisors for TradeCo in July 2006. Of those funds, $69, 000 was deposited in a TradeCo bank account. The remaining $6, 000 was used to pay part of a settlement in a civil lawsuit that Romero owed to a third party.

         Greg Hughes deposited $10, 000 with Olympia in March 2006. Those funds, together with Greg Sabal's $100, 000 deposit, were distributed as follows: In May, $30, 000 was placed in a trading account; $35, 000 was transferred to a Kingdom Advisors bank account; and the remaining funds were part of Olympia's $75, 000 transfer to Kingdom Advisors for TradeCo. Romero used the funds that were transferred to Kingdom Advisors for his personal expenses, included a $24, 500 payment to Hoehn Motors, and other payments to Disney Resort, Romero's credit cards, airlines, hotels and restaurants, and to replenish another client's trust account.

         In September 2006, Cannon deposited a total of $152, 600 with Olympia. His funds comprised a large portion of a $140, 000 transfer to Kingdom Advisors. Of that transfer, a $10, 000 check made out to Daniel Romero's wife was deposited in Romero's personal account. Cannon's money was never deposited in any trading account.

         Counts Twelve and Thirteen (Lutz)

         Romero and Lee were charged with grand theft and fraud in the offer or sale of commodities to Ricky Lutz. In early 2005, Lutz contacted Romero for information about forex. Romero sent him a brochure stating Kingdom Advisors had returns of 10 to 14 percent a month. The brochure stated "the investment manager has established a stop-loss policy with authorized traders such that they are to cease trading should any account suffer a 20 percent loss below the series' most recent highest asset valuation."

         Lutz spoke to Lee on numerous occasions about stop-loss. Lee told him if the investment funds dropped below 80 percent of their original amount, trading would stop and the investor would be notified. Lee showed Lutz returns showing that investors had doubled their money in eight months. Lutz knew that a forex investor could make a lot of money and could lose a lot of money. That was why he was "such a stickler" about the stop-loss provision. Lutz believed that a loss of 20 percent of his investment was the worst case scenario.

         Relying "100 percent" on Lee and Romero's representations, Lutz recruited four other investors. Together, they deposited $260, 000 in Lee's trading company in August and September 2005. In early September, Lee sent Lutz an e-mail stating the investment was up 67 percent. Approximately three weeks later, Lutz learned that one of his accounts had lost more than 50 percent of its initial value and another account was down approximately 40 percent. Lutz told Lee he was in violation of their agreement and demanded that Lee restore the accounts to 80 percent of their original value. Lee said the lack of notice to Lutz at the 20 percent mark was an oversight. He had some safer, small trades that would bring the account balances back to their original amounts. Lutz authorized Lee to continue trading.

         On October 12, 2005, Lutz told Lee to close his accounts and return the balance of $105, 000 to him. On November 6, Lee notified Lutz he had closed the trading account and was ending his forex trading career. Lee said Lutz's account was down approximately 90 percent but he had a solution that would help them both succeed. He asked Lutz to invest his investors' remaining funds, and additional funds, in TradeCo. Lee promised Lutz he would return the expected profits on his original investment to him. After declining Lee's offer, Lutz received a payment of $24, 162, which he returned to one of his investors.

         The Defense Case

         Martinez testified he was not responsible for the way trades were conducted. He said he did not have access to trading accounts or records, or authority over the disbursement of funds from Kingdom Advisors. Martinez said he did not misrepresent Kingdom Advisors' success to any prospective clients or guarantee that a client would not lose his or her investment. Martinez testified he confronted Romero about his use of Kingdom Advisors funds. Romero had built a pool at his home, and purchased a Porsche and a BMW, all-terrain vehicles, a trailer and jewelry. Martinez acknowledged he was vice president of Kingdom Advisors, a partner in TradeCo, but said he did not have an ownership interest in the company. Martinez acknowledged he had signatory authority for Kingdom Advisors' bank accounts and signed documents as the vice president of Kingdom Advisors, and he had trading authority over its accounts.

         Romero testified when he spoke to potential clients, he simply relayed his experience in the market during the early months of trading. He promised "best efforts" but never guaranteed a specific rate of return. Romero was not responsible for Kingdom Advisors' Web site, which stated that stop-loss discipline would be used to limit losses. Martinez developed the Web site with content from an FCM.

         Lee did not testify on his own behalf.

         Jury Verdicts

         The jury convicted Romero of conspiracy (count one), commodities fraud (counts seven, nine, eleven and thirteen) and grand theft (counts eight, ten and twelve). The jury found Martinez guilty of commodities fraud (counts nine and eleven). As to Lee, the jury returned guilty verdicts on the counts of conspiracy, commodities fraud (counts nine, eleven and thirteen) and grand theft (count twelve). As to all of the defendants, the jury made true findings on three white collar penalty enhancements under Penal Code sections 186.11 and 12022.6.[6]

         Post-Trial Proceedings

         The defendants filed new trial motions under section 1181, subdivision (6) on the ground there was insufficient evidence to support the verdicts. The trial court granted new trials on counts nine, eleven and thirteen, and dismissed counts two, three, four, five, eight, nine, twelve and thirteen. The trial court also dismissed count one as to Martinez, and count ten as to Martinez and Lee. (Lee, supra, No. D061235, at pp. 16-17.)

         The People appealed. Our court determined the trial court erred in granting the motions for new trial on grounds of instructional error. In addition, the trial court applied an incorrect legal standard in dismissing the defendants' convictions for legal insufficiency of the evidence. (Lee, supra, No. D061235, at p. 3.) We reversed the trial court's orders and remanded the matter to the superior court with instructions to reinstate the jury verdicts and sentence the defendants accordingly. The People had the discretion to seek a retrial on the counts that ended in mistrial. (Lee, at p. 60.)

         Remand

         After the matter was remanded to the sentencing court, Martinez filed an opposed motion for new trial on his convictions for commodities fraud. He argued the trial court did not rule on his new trial motion and he was entitled to a decision on the merits. The sentencing court denied the motion for a new trial, stating it had an obligation to follow the order on remand to reinstate the verdicts and sentence the defendants.

         At the sentencing hearings, [7] the court sentenced Martinez to one year in the county jail and five years of probation for his convictions on two counts of commodities fraud. The court did not impose a sentence on the white collar criminal enhancements. Martinez was ordered to pay various fines and fees, and provide restitution to his victims in an amount to be determined.

         The sentencing court denied Romero's request for probation and sentenced him to a total of seven years in prison, as follows: two years on count seven, which the court designated as the principal count; two years, stayed, for conspiracy; count nine, one year, consecutive; count ten, two years, stayed; count eleven, one year, consecutive; count twelve, two years, stayed; and count thirteen, one year, consecutive. In addition, the sentencing court imposed a two-year consecutive sentence on aggravated white collar criminal enhancements. In addition to fines and fees, the court ordered Romero to pay restitution in the amount of $81, 500 to McClelland, $110, 000 to Capell, $395, 282 to Lutz, $40, 000 to Shemtov, and an amount to be determined to Brian Smith.

         As to Lee, the sentencing court imposed a total of five years' imprisonment. The court set the principal term of three years on count nine, and sentenced him to three years each on counts eleven and thirteen, to run concurrently. The court imposed, and stayed, a one-year sentence for conspiracy and two years for grand theft (count twelve). Lee received an additional two-year term on the white collar criminal enhancement. Lee was ordered to pay fines, fees, and restitution in an amount to be determined to Brian Smith and John Shea Buenas, [8] and restitution in the amount of $81, 500 to McClelland; $110, 000 to Capell; $395, 282 to Lutz; and $40, 000 to Shemtov.

         DISCUSSION

         I

         COMMODITIES FRAUD

         A

         The Parties' Arguments

         The People charged Romero, Lee and Martinez with violations of section 29536, subdivision (b) (the statute), which states, "It is unlawful for any person, directly or indirectly, in connection with the purchase or sale of, the offer to sell, the offer to purchase, the offer to enter into, or the entry into, a commodity, commodity contract, or commodity option to... willfully make any false report, enter any false record, make any untrue statement of a material fact, or 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."

         Appellants contend there is not sufficient evidence to support their convictions on charges of commodities fraud. They state section 29536 is limited to misrepresentations connected to actual contracts to purchase commodities, and does not include misrepresentations that may have been made in non-commodities contracts between investors and money managers. Appellants contend the relationship between the defendants and the investors did not involve currency trading because their clients opened money management accounts, and did not enter into commodities contracts.

         Romero argues merely informing potential clients they could trade in commodities contacts was not an offer to buy or sell commodities, and any alleged misrepresentations underlying the commodity fraud charges were therefore not made in connection with the purchase or sale of a commodity.

         Martinez claims the contracts that were discussed in his presence were money management contracts, not commodities contracts. He argues a discretionary trading account is not an investment governed by section 29536. Martinez further argues there is insufficient evidence to support his convictions on commodities fraud. He asserts he was a clerk and office manager, and had nothing to do with the sale or offer of commodities.

         Lee asserts that as a trader, he never acted as a buyer or seller of commodities or commodities options. He argues the contracts he signed with retail customers were several steps removed from being contracts for commodities sales or purchases. Lee joins in Romero's and Martinez's argument.

         The People contend Appellants' interpretation of section 29536 is overly narrow. They argue section 29536 prohibits the use of fraud and other specified conduct by any person in connection with the offer or sale of foreign currency, regardless of how the parties characterize and structure their agreement. The People assert there is substantial evidence to support Martinez's convictions for commodities fraud.

         B

         The Legislature Did Not Intend to Limit the Meaning of "Commodity" and "Commodity Contract" to Any Particular Type of Account, Agreement or Contract

         The parties' arguments raise an issue of statutory interpretation we must address before considering the sufficiency of the evidence in this case. (Burden v. Snowden (1992) 2 Cal.4th 556.) Statutory interpretation is de novo. (Ibid.) "The rules governing statutory construction are well settled. We begin with the fundamental premise that the objective of statutory interpretation is to ascertain and effectuate legislative intent. [Citations.] 'In determining intent, we look first to the language of the statute, giving effect to its "plain meaning." ' [Citations.] Although we may properly rely on extrinsic aids, we should first turn to the words of the statute to determine the intent of the Legislature." (Id. at p. 562.)

         In arguing their conduct did not come with section 29536, Appellants rely on CFTC v. White Pine Trust Corporation (2009 9th Cir.) 574 F.3d 1219 (White Pine Trust), which held that discretionary trading accounts are not contracts to purchase commodities under the federal Commodity Exchange Act, 7 ...


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