IN THE SUPREME COURT OF CALIFORNIA
THE PEOPLE,
Plaintiff and Respondent,
S126773
v.
Ct.App. 2/2 B159750
JAVIER O. SALAS et al.,
Los Angeles County
Defendants and Appellants.
Super. Ct. No. BA204220
Corporations Code section 25110 prohibits the sale of unregistered
securities.1 Violation of this prohibition is a crime, punishable by incarceration
for up to three years and a fine up to $1 million. (§ 25540, subd. (a).) But not all
securities must be registered. There are many grounds of exemption from the
registration requirement, and sale of an unregistered but exempt security is not a
crime.
Here, defendants Javier O. Salas and Stephen Patrick, charged with selling
unregistered securities, claimed they believed in good faith that the securities they
sold were exempt from registration. The trial court instructed the jury that this
good faith belief was irrelevant to their criminal culpability, and defendants were
convicted. The Court of Appeal, however, held that guilty knowledge—meaning
either knowledge of the security’s nonexempt status or criminal negligence in
1
All statutory citations are to the Corporations Code unless otherwise
indicated.
1
failing to determine its status—is an element of the crime of selling an
unregistered security.2 It concluded that the trial court erred in failing to so
instruct the jury, and that the error was harmless as to defendant Salas but
prejudicial as to defendant Patrick.
Like the Court of Appeal, we hold that a seller who believes reasonably and
in good faith that a security is exempt is not guilty of the crime of unlawful sale of
an unregistered security. As in other similar cases, the severity of the penalties
attached to this crime persuade us that the Legislature did not mean to impose
criminal liability on defendants who lacked guilty knowledge of facts essential to
make the conduct criminal.
Unlike the Court of Appeal, however, we hold that in this context guilty
knowledge is not an element of the crime. Rather, a defendant’s reasonable good
faith belief that a security is exempt from registration is an affirmative defense on
which the defense bears the initial burden of proof. This is consistent with the
Legislature’s treatment of the status of the securities as exempt or nonexempt. In
a prosecution for unlawful sale of an unregistered security, the prosecutor is not
required to prove, as an element of the offense, that the security was not exempt
2
The mental aspect of a violation of section 25110 could refer to whether a
defendant knew the thing sold was a security, whether he knew it was
unregistered, or whether he knew it was not exempt from registration. Only the
third aspect is at issue here. Thus, we use the term “guilty knowledge,” with
reference to section 25110, to refer to a defendant’s knowledge of facts showing
that the security is not exempt, or his criminal negligence in failing to know of
such facts.
Criminal negligence refers to “ ‘a higher degree of negligence than is
required to establish negligent default on a mere civil issue. The negligence must
be aggravated, culpable, gross, or reckless.’ ” (People v. Penny (1955) 44 Cal.2d
861, 879; see People v. Valdez (2002) 27 Cal.4th 778, 783; People v. Peabody
(1975) 46 Cal.App.3d 43, 47; CALJIC No. 3.36.)
2
from registration. Rather, exemption from registration is an affirmative defense
on which the defense bears the initial burden of proof. (§ 25163.) It is reasonable
to infer that the Legislature intended for the defendant’s knowledge of the
security’s exemption status to be treated in the same manner, as an affirmative
defense rather than an element of the crime.
Because good faith belief in a security’s exempt status is an affirmative
defense, the trial court must instruct the jury about it only when the defense has
presented evidence sufficient to raise a reasonable doubt that the defendant knew,
or was criminally negligent in failing to know, that the security was not exempt.
Here, defendant Salas presented such evidence, and therefore the trial court erred
in not instructing the jury on the affirmative defense of good faith as to Salas. But
because there was also overwhelming evidence of his guilty knowledge, we
conclude that the error was nonprejudicial. As to defendant Patrick, it is unclear
whether he presented sufficient evidence of good faith to entitle him to a jury
instruction on the affirmative defense. Because the Court of Appeal failed to
consider whether Patrick’s showing was sufficient to entitle him to an instruction
on the affirmative defense, and because the parties did not address that issue here,
we remand the matter to it for further proceedings.
I. FACTS AND PROCEEDINGS
In 1990, defendant Salas formed American Joint Ownership Interests, Inc.
(AJOI) to acquire properties for development. He was its president, secretary,
treasurer, and sole stockholder. Acting on behalf of AJOI, Salas created a number
of partnerships to purchase the properties. Defendant Rick Berry (who did not
appeal his conviction), and defendant Patrick assisted Salas in procuring investors
for partnership interests.
Salas, Berry, and Patrick telephoned numerous persons to urge them to
invest in partnership interests in 201 Boylston Street Associates, an entity formed
3
to acquire the property at that address. In almost all instances, they had no
acquaintance with the person called. They knew little or nothing of the investor’s
economic circumstances, but may have taken some of the names from a list of
persons furnished by a promoter of another real estate venture. In 1995, however,
defendant Berry resigned as sales manager and sent investors a letter advising
them of improprieties and fraudulent activities in connection with AJOI
investments. AJOI went into receivership in 1997. Salas, Berry, and Patrick were
charged with selling unregistered securities in violation of section 25110 and
selling securities by misrepresentation or omission of a material fact in violation of
section 25401.
At the onset of trial, the parties stipulated that the AJOI partnership
interests were securities under section 25110 that had not been registered with the
Department of Corporations. Defendants claimed, however, that the securities
were exempt from registration under section 25102, which provides that
registration is not required if the sales “are not made to more than 35 persons” (id.,
subd. (f)(1)) and all purchasers either had a preexisting business relationship with
the issuer or “could be reasonably assumed to have the capacity to protect their
own interests in connection with the transaction” (id., subd. (f)(2)).3
3
Section 25102, subdivision (f), exempts from registration:
“Any offer or sale of any security in a transaction (other than an offer or
sale to a pension or profit-sharing trust of the issuer) that meets each of the
following criteria:
“(1) Sales of the security are not made to more than 35 persons, including
persons not in this state.
“(2) All purchasers either have a preexisting personal or business
relationship with the offeror or any of its partners, officers, directors or controlling
persons, or managers . . . , or by reason of their business or financial experience or
the business or financial experience of their professional advisers who are
unaffiliated with and who are not compensated by the issuer . . . could be
(Footnote continued on next page)
4
At trial, Department of Corporations Examiner Michelle Tse testified that
the bank records of 201 Boylston Street Associates showed that 48 people had
invested in that partnership. Defendant Salas testified that he was aware that he
had to limit the number of investors to 35 in order to avoid the registration
requirement, and claimed that he did so. Tse’s figures, he said, were incorrect,
and included people who had invested in other partnerships or rescinded their
investments and received refunds.
Salas also claimed that he or other corporate officers had preexisting
relationships with all investors, because John Torosian and others supplied lists of
persons who were interested in investing in real estate ventures, and AJOI used
those lists in contacting potential investors. Torosian, however, was not an officer
or otherwise associated with AJOI.
Although Patrick had the title of vice-president, he and Salas both testified
that Patrick was a salesman with no managerial authority. When asked if he knew
the investments were securities, Patrick replied: “I had no idea it was a security. I
thought these were totally exempt.” (Italics added.) There is no other evidence
whether Patrick believed in good faith that the securities were exempt from
registration.
The trial court instructed the jury that a security is exempt from registration
if sold to no more than 35 persons, all of whom either have a preexisting personal
or business relationship with the offeror or “are sophisticated investors by virtue
of their business and financial experience or the business and financial experience
(Footnote continued from previous page)
reasonably assumed to have the capacity to protect their own interests in
connection with the transaction.”
5
of their financial advisors.” It further instructed that “evidence that a defendant
. . . acted in good faith is not a defense.” It did not instruct that to commit the
crime of selling an unregistered security, a defendant must know, or be criminally
negligent in not knowing, that the security should have been registered.
The jury found all defendants guilty of selling an unregistered security in
violation of section 25110. Defendant Berry was also convicted of selling
securities by means of misrepresentation or omission of a material fact in violation
of section 25401. The jury did not reach a verdict as to whether Salas or Patrick
violated section 25401 by selling securities by misrepresentation or omission.
The trial court sentenced defendant Salas to a prison term of three years, to
be served in the Department of Corrections’ Los Angeles restitution center.4 It
sentenced defendant Patrick to 16 months in state prison, suspending execution of
sentence and placing him on probation on condition that he serve one year in
county jail. Defendants Salas and Patrick appealed.
On appeal, defendants argued that the trial court erred in not instructing the
jury that they could be found guilty of violating section 25110 only if they knew
that the security should have been registered or were negligent in failing to know
it. The Court of Appeal agreed, reasoning that section 25110 describes a general
intent crime in which scienter (knowledge or criminal negligence) is an element of
the crime. It held the trial court’s failure to instruct on scienter was harmless as to
defendant Salas, who managed the investment scheme and should have verified
that the number of investors did not exceed 35, as required by statute. As to
4
A restitution center is a penal institution in which prisoners are permitted to
leave the facility during working hours so they can earn money to pay restitution.
(Pen. Code, § 6220 et seq.) The Department of Corrections is now known as the
Department of Corrections and Rehabilitation. (See Pen. Code, § 5000 et seq.)
6
defendant Patrick, however, the Court of Appeal held the error to be prejudicial
because Patrick was a salesman who had no management authority and did not
know how many investors were involved.
The Court of Appeal’s holding that a violation of section 25110 requires
scienter conflicts with an earlier decision of the same district in People v. Corey
(1995) 35 Cal.App.4th 717 (Corey). We granted the Attorney General’s petition
for review to resolve the conflict.
II. GUILTY KNOWLEDGE UNDER SECTION 25110
Section 25110 states simply: “It is unlawful for any person to offer or sell
in this state any security in an issuer transaction . . . unless such sale has been
qualified [i.e., registered] . . . or unless such security or transaction is exempted or
not subject to qualification . . . .” Section 25540, subdivision (a) provides: “[A]ny
person who willfully violates any provision of this division [including section
25110] . . . shall upon conviction be fined not more than one million dollars
($1,000,000), or imprisoned in the state prison, or in a county jail . . . or be
punished by both that fine and imprisonment.”5 (Italics added.)
In the Court of Appeal, the Attorney General argued that section 25110
describes a strict liability offense. In this court, however, all parties agree that a
violation of section 25110 is a general intent crime. The classification of section
25110 as a general intent crime, however, does not answer the question whether,
as the Court of Appeal held, a violation of section 25110 requires that a defendant
5
Section 25540, subdivision (a), also provides that “no person may be
imprisoned for the violation of any rule or order if he or she proves that he or she
had no knowledge of the rule or order.” That provision, however, is inapplicable
here because defendants were convicted of violating a statute, not a rule or order.
7
either know that a security is not exempt from registration or be criminally
negligent in not knowing.
Depending upon the crime, a requirement of guilty knowledge may mean
that defendants are innocent unless they know the facts making their conduct
criminal. (See, e.g., People v. Garcia (2001) 25 Cal.4th 744, 752.) In other cases,
it is sufficient that the defendants either know those facts or were criminally
negligent in failing to know them. (See Pen. Code, § 20 [“In every crime or public
offense there must exist a union, or joint operation of act and intent, or criminal
negligence”]; People v. Valdez, supra, 27 Cal.4th 778; People v. Linwood (2003)
105 Cal.App.4th 59, 71-72.) Defendants here do not argue that a violation of
section 25110 requires that the seller actually knew that the security he sold should
have been registered; however, they contend that criminal liability requires that a
seller of securities either knew the security was not exempt from registration or
was criminally negligent in failing to know. The Attorney General, on the other
hand, argues that a seller is guilty if he “willfully” — that is, intentionally — sells
an unregistered security, without regard to whether the seller knew or should have
known that the security should have been registered.
We addressed a similar issue in 1995 in People v. Simon (1995) 9 Cal.4th
493 (Simon). The defendant there was convicted of violating section 25401,
which prohibits the purchase or sale of securities “by means of any written or oral
communication which includes an untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements made . . . not
misleading.” Simon held that “knowledge of the falsity or misleading nature of a
statement or of the materiality of an omission, or criminal negligence in failing to
investigate and discover them, are elements of the criminal offense described in
section 25401.” (Simon, supra, 9 Cal.4th at p. 522.)
8
Simon set out several reasons for that conclusion. First, it reasoned that
because section 25540, which states the penalty for a violation of section 25401,
requires a “willful” violation, section 25401 is a general intent crime, not one of
strict liability. (Simon, supra, 9 Cal.4th at p. 507.) Simon noted that general intent
crimes ordinarily require mens rea or guilty knowledge. (Id. at p. 519; see Pen.
Code, § 20 [“In every crime or public offense there must exist a union, or joint
operation of act and intent, or criminal negligence”].) After observing that
criminal liability may be imposed despite a lack of guilty knowledge “where the
purpose is to protect public health and safety and the penalties are relatively light”
(Simon, supra, 9 Cal.4th at p. 521, citing People v. Vogel (1956) 46 Cal.2d 798,
801, fn. 2), Simon pointed out that section 25401 does “not involve conduct which
threatens the public health or safety” (9 Cal.4th at p. 521), and that the punishment
for a violation of that statute is not a light one (ibid).6
Next, Simon asserted that section 25401 was based on section 12(2) of the
federal Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), which contains
an express requirement of guilty knowledge, and that section 25540 was modeled
after section 32(a) of that act, which some, but not all, federal courts have
construed as requiring guilty knowledge. (Simon, supra, 9 Cal.4th at pp. 509-
512.) Simon noted also that section 10(b)(5) of the federal Securities Exchange
Act of 1934, which prohibits a “manipulative or deceptive device” in connection
with a sale, was construed by the United States Supreme Court as requiring guilty
knowledge. (Simon, supra, 9 Cal.4th at p. 512, citing Ernst & Ernst v. Hochfelder
6
The offenses at issue in Simon, supra, 9 Cal.4th 493, were committed
between 1980 and 1985. At that time, the maximum punishment for a violation of
section 25401 was a fine of $10,000 and a prison term of two, three, or five years.
(Simon, at p. 507.) The maximum fine is now $10 million. (§ 25540, subd. (b).)
9
(1976) 425 U.S. 185.) And Simon observed that former California Corporations
Commissioner Robert Volk and Professor Harold Marsh, described by Simon as
having “major responsibility” for drafting the state Corporate Securities Law of
1968, had asserted: “[S]ection 25540 was intended to impose criminal liability
only for an intentional misstatement.” (Simon, supra, 9 Cal.4th at p. 513,
discussing 1 Marsh & Volk, Practice Under the Cal. Securities Laws (rev. ed.
1994) § 1413[1], p. 14-79.)
Simon further observed that section 25501, which provides a civil remedy
against a defendant who violates section 25401, states that there is no liability if
“the defendant exercised reasonable care and did not know (or if he had exercised
reasonable care would not have known) of the untruth or omission.” Simon
concluded that it would be incongruous, and possibly unconstitutional, to impose
criminal punishment – presumably a more serious sanction than civil liability –
without guilty knowledge when civil liability required guilty knowledge. (Simon,
supra, 9 Cal.4th at pp. 516-518, 522.)
Finally, Simon invoked the rule of lenity: “ ‘The defendant is entitled to the
benefit of every reasonable doubt, whether it arise out of a question of fact, or as
to the true interpretation of words or the construction of language used in a
statute.’ ” (Simon, supra, 9 Cal.4th at pp. 517-518, quoting In re Tartar (1959) 52
Cal.2d 250, 257.)
The Court of Appeal in Corey, supra, 35 Cal.App.4th 717, asserted that
some of the reasons we put forward in Simon, supra, 9 Cal.4th 493, to support a
requirement for guilty knowledge in section 25401 (fraudulent sale of securities)
do not apply to the sale of unregistered securities in violation of section 25110.
The Attorney General advances the same arguments here.
First, the Attorney General points out that in Simon, supra, 9 Cal.4th at
pages 516-518, this court relied on the express requirement of guilty knowledge in
10
section 25501, which permits a civil cause of action against a seller who makes
misleading statements in the sale of a security, as one ground for requiring guilty
knowledge for criminal liability. In an attempt to distinguish Simon, the Court of
Appeal in Corey noted that the Corporate Securities Law of 1968 does not
expressly require guilty knowledge in a civil action against a seller of unregistered
securities. (Corey, supra, 35 Cal.App.4th at pp. 728-729.)
Second, Corey, supra, 35 Cal.App.4th at page 729, observed that in Simon
we stated that Marsh and Volk, who were involved in drafting the Corporate
Securities Law of 1968 (see ante, at p. 10), said that only intentional
misstatements in the sale of securities incur criminal liability. (See Simon, supra,
9 Cal.4th at pp. 513-514.) In contrast, Corey notes, Marsh and Volk assert that the
sale of an unregistered security “ ‘is considered a strict liability offense.’ ”
(Corey, supra, 35 Cal.App.4th at p. 729; quoting 1 Marsh & Volk, Practice Under
the Cal. Securities Laws, supra, § 14.13[1], p. 14-101.)
The Court of Appeal in Corey asserted a third ground for distinguishing
Simon, supra, 9 Cal.4th 493, but that ground is not valid. It asserted that the
magnitude of potential criminal penalties for selling an unregistered security in
violation of section 25110, which Corey described as carrying a fine of $1 million
and a one-year prison term, was much less than the maximum five years’
imprisonment for making misleading statements in the sale of a security. (Corey,
supra, 35 Cal.App.4th at p. 729.) But Corey was wrong in its description of the
maximum penalty for sale of an unregistered security; it is three years’
imprisonment, not one year. (See Pen. Code, § 18.) Moreover, even a one-year
felony penalty, let alone a $1 million fine, would argue strongly for a guilty
knowledge requirement. (See People v. Coria (1999) 21 Cal.4th 868, 877.)
In short, two of the five reasons we gave in Simon, supra, 9 Cal.4th 493, for
requiring guilty knowledge for a violation of section 25501 (sale by
11
misrepresentation or omission) are unique to that section and cannot be invoked to
require guilty knowledge for the sale of an unregistered security in violation of
section 25110. But the core reason for Simon’s conclusion to require guilty
knowledge is the principle that mens rea generally attaches to criminal offenses
except for those that involve public health or safety and impose relatively light
penalties. That principle applies here because defendants were charged with
crimes that do not relate to public health and safety and impose relatively severe
punishment. (See Staples v. United States (1994) 511 U.S. 600, 618-619; In re
Jorge M. (2000) 23 Cal.4th 866, 872; People v. Vogel, supra, 46 Cal.2d at p. 801.)
We therefore reject the Attorney General’s contention that our decision in Simon
should be distinguished from this case; the same principles should apply whether a
defendant is charged with selling an unregistered security, as occurred here, or
with making misleading statements or omissions in selling a security, as in Simon.
The Attorney General also challenges Simon’s analysis of the legislative
history of the statutes it construed. He claims Simon was mistaken when it said
that section 25540, which prescribes the punishment for violations of the
Corporate Securities Law of 1968, was modeled on section 32a of the federal
Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.). The wording of
section 25540, he asserts, more closely resembles section 409, subdivision (a), of
the American Law Institute’s proposed Uniform Securities Act, and the
commentary to that section states that, by requiring a “willful” violation, the
statute requires only that the person act intentionally, in the sense that he was
aware of what he was doing.
The Attorney General also points out that former section 26104, the
predecessor to current section 25110, prohibited “knowingly” selling an
unauthorized security. (Stats. 1917, ch. 532, § 14.) The Legislature’s omission of
the term “knowingly” in section 25540, he argues, suggests that it did not intend to
12
require actual knowledge for a violation. Simon, supra, 9 Cal.4th 493, itself noted
that the word “knowingly” does not appear in section 25540, but said that the
absence of that word was not in itself sufficient to compel a conclusion that a
criminal statute does not require guilty knowledge even though that statute
imposes severe penalties. (Simon, at pp. 521-522.) In Simon, we specifically
disapproved People v. Johnson (1989) 213 Cal.App.3d 1369, in which the Court
of Appeal had incorrectly asserted that “[t]he omission of ‘knowingly’ from a
penal statute indicates that guilty knowledge (scienter) is not an element of the
offense.” (Simon, supra, 9 Cal.4th at p. 522, fn. 18.)
The Attorney General’s arguments finding fault with this court’s discussion
of the legislative history of the Corporate Securities Law of 1968 in Simon, supra,
9 Cal.4th 493, do not offer grounds for distinguishing that case here; instead, they
suggest that Simon’s analysis was wrong and that we should overrule that case.
We are not persuaded. In Simon, we invited the Legislature to clarify which
criminal violations of section 25540, enacted as part of the Corporate Securities
Law of 1968 – which includes both sales by misrepresentation or omission (the
issue in Simon) and sales of an unregistered security (the issue here) – “are strict
liability offenses and what mental states are elements of those which require
scienter.” (Simon, supra, 9 Cal.4th at p. 510, fn. 13.) But although the Legislature
has frequently amended the Corporate Securities Law of 1968 in the 10 years
since we decided Simon, it has not abrogated Simon or clarified the mens rea of
crimes punishable under section 25540. We infer legislative acquiescence in
Simon’s conclusion that a conviction for unlawful sale of securities that entails a
relatively severe punishment requires guilty knowledge. (See Colmenares v.
Braemer Country Club (2003) 29 Cal.4th 1019, 1030; Fukuda v. City of Angels
(1999) 20 Cal.4th 805, 819; People v. Bouzas (1991) 53 Cal.3d 467, 475.)
13
Moreover, during this 10-year period we have frequently relied on Simon to
require guilty knowledge for violation of a number of criminal statutes even
though the statutes did not expressly require that the defendant act “knowingly.”
For instance, in People v. Hagen (1998) 19 Cal.4th 652, we construed the
term “willfully” in Revenue and Taxation Code former section 19405, subdivision
(a)(1), which made it a felony to “willfully make and subscribe a [tax] return . . .
that he or she does not believe to be true and correct as to every material matter.”
(Rev. & Tax. Code, former § 19405, as amended by Stats. 1993, ch. 826, § 6,
pp. 4462-4463, repealed by Stats. 1994, ch. 1243, § 58.) We held that a violation
of this statute required more than “volitional action”; it required “ ‘bad faith or evil
intent.’ ” (People v. Hagen, supra, at pp. 663, 665.)
In People v. Coria, supra, 21 Cal.4th 868, we held that a conviction for
manufacturing methamphetamine (Health & Saf. Code, § 11379.6, subd. (a))
required proof that the defendant knew the substance being manufactured was
methamphetamine. (People v. Coria, supra, 21 Cal.4th at p. 874.) Our decision
relied on our holding in Simon, supra, 9 Cal.4th at page 519, that mens rea is the
rule rather than the exception, particularly for crimes with severe penalties.
(People v. Coria, supra, 21 Cal.4th at pp. 876-878.)
People v. Rubalcava (2000) 23 Cal.4th 322, said that because the crime of
carrying a concealed dirk or dagger (Pen. Code, § 12020, subd. (a)) “criminalizes
‘ “traditionally lawful conduct,” ’ we construe the statute to contain a ‘knowledge’
element. [Citation.] Thus, to commit the offense, a defendant must still have the
requisite guilty mind: that is, the defendant must knowingly and intentionally
carry concealed upon his or her person an instrument ‘that is capable of ready use
as a stabbing weapon.’ [Citation.] A defendant who does not know that he is
carrying the weapon or that the concealed instrument may be used as a stabbing
14
weapon is therefore not guilty of violating section 12020.” (People v. Rubalcava,
supra, 23 Cal.4th at pp. 331-332.)
In re Jorge M., supra, 23 Cal.4th 866, held that in a prosecution for
possession of an assault weapon in violation of Penal Code section 12280,
subdivision (b), “the People bear the burden of proving the defendant knew or
reasonably should have known the firearm possessed the characteristics bringing it
within the [Assault Weapons Control Act].” (In re Jorge M., supra, 23 Cal.4th at
p. 887.)
People v. Garcia, supra, 25 Cal.4th 744, held that because the crime of
willful failure to register as a sex offender under Penal Code section 290 involved
a failure to act, a defendant could not be found guilty unless the defendant actually
knew of his duty to register. (Garcia, at p. 752.) People v. Barker (2004) 34
Cal.4th 345 confirmed that a violation of Penal Code section 290 required guilty
knowledge, but held that the defendant, aware of his duty to register, could not
defend on the ground that he forgot the critical date of registration.
In view of the repeated judicial affirmation of Simon, supra, 9 Cal.4th 493,
in this line of precedent, we reject the Attorney General’s suggestion that we
overrule Simon, and instead, following the reasoning in that decision, hold that a
defendant is not guilty of the crime of selling an unregistered security in violation
of section 25110 if there is a reasonable doubt whether the defendant knew the
security was not exempt from regulation or was criminally negligent in failing to
know that the security was not exempt.7
7
Language contrary to this opinion in People v. Corey, supra, 35
Cal.App.4th 717, is disapproved.
15
III. LACK OF GUILTY KNOWLEDGE AS AN AFFIRMATIVE DEFENSE
According to the Attorney General, including a guilty knowledge
requirement in section 25110’s prohibition on the sale of unregistered securities
will seriously hamper enforcement of that provision. He points out that there are
many grounds for exempting a security from registration. (See §§ 25102 [listing
17 grounds for exemption], 25103 [listing five grounds], 25104 [eight grounds],
25105 [authorizing commissioner by rule to establish additional grounds for
exemption].) The Attorney General contends that it would be virtually impossible
for the prosecution to prove as part of its case-in-chief that a defendant did not
believe the security exempt under any of these grounds.
The Legislature anticipated the problems caused by the multiplicity of
exemptions. Section 25163 provides: “In any proceeding under this law, the
burden of proving an exemption or an exception from a definition is upon the
person claiming it.” As this court noted in Simon, however, “Because an
exemption defense is not collateral to the defendant’s guilt of a charge of selling
unqualified securities, . . . a defendant’s burden is only to raise a reasonable doubt
that the defendant sold nonexempt securities.” (Simon, supra, 9 Cal.4th 493, 501;
see People v. Mower (2002) 28 Cal.4th 457, 483.) The Legislature having
determined that a defendant who asserts a security is actually exempt raises an
affirmative defense and has the burden of presenting evidence raising a reasonable
doubt, it is reasonable that a defendant asserting a good faith belief that a security
is exempt should bear the same burden.
Under the so-called rule of convenience and necessity, “ ‘the burden of
proving an exonerating fact may be imposed on a defendant if its existence is
“peculiarly” within his personal knowledge and proof of its nonexistence by the
prosecution would be relatively difficult or inconvenient.’ ” (People v. Mower,
supra, 28 Cal.4th at p. 477, quoting In re Andre R. (1984) 158 Cal.App.3d 336,
16
342.) Applying this principle, we held in Mower that the defendant had the
burden of producing evidence to show that marijuana was grown for personal
medicinal purposes (see Health & Saf. Code, § 11362.5, subd. (d)), because that
defense involved facts peculiarly within the defendant’s personal knowledge.
(People v. Mower, supra, 28 Cal.4th at p. 477.)
This analysis applies here. A defendant’s knowledge or lack of knowledge
of the exempt status of the securities is a fact peculiarly within the defendant’s
personal knowledge. What steps, if any, the defendant took to determine whether
the security is exempt often will also be a fact peculiarly within the defendant’s
knowledge. There is no unfairness or hardship in requiring the defendant to
assume the burden of presenting evidence of the facts on which he or she relies.
Thus, we depart from the analysis in Simon, supra, 9 Cal.4th 493, in one
respect. Simon held that knowledge of the falsity of a statement or the materiality
of an omission (or criminal negligence) was an element of the crime of fraudulent
sale of a security (§ 25401), and, consequently, that the trial court must so instruct.
(See Simon, supra, 9 Cal.4th at p. 522.) We hold that lack of knowledge that a
security is not exempt (or criminal negligence) is an affirmative defense, on which
the trial court must instruct only if the defendant presents enough evidence to raise
a reasonable doubt. Consequently, the prosecution will not have to prove that a
defendant lacked a good faith belief in every one of the numerous grounds for
exemption; it need only address the evidence the defense presented to raise a
reasonable doubt as to the defendant’s good faith.
IV. DEFENDANTS’ RIGHT TO AN INSTRUCTION ON GUILTY KNOWLEDGE
It is well settled that a defendant has a right to have the trial court, on its
own initiative, give a jury instruction on any affirmative defense for which the
record contains substantial evidence (People v. Michaels (2002) 28 Cal.4th 486,
529) – evidence sufficient for a reasonable jury to find in favor of the defendant
17
(Matthews v. United States (1988) 485 U.S. 58, 63) – unless the defense is
inconsistent with the defendant’s theory of the case (People v. Breverman (1988)
19 Cal.4th 142, 157). In determining whether the evidence is sufficient to warrant
a jury instruction, the trial court does not determine the credibility of the defense
evidence, but only whether “there was evidence which, if believed by the jury,
was sufficient to raise a reasonable doubt.” (People v. Jones (2003) 112
Cal.App.4th 341, 351; see People v. Ramirez (1990) 50 Cal.3d 1158, 1180; People
v. Jeter (1964) 60 Cal.2d 671, 674; People v. Simmons (1989) 213 Cal.App.3d
573, 579, and cases there cited.) Thus, whether the trial court erred in not
instructing that a defendant is not guilty of the crime of selling an unregistered
security (§ 25110) unless the defendant knew the security was not exempt, or was
criminally negligent, turns on whether the defendant offered substantial evidence
that, if believed, by the jury, would raise a reasonable doubt as to the defendant’s
knowledge or criminal negligence.
A. Salas
Defendant Salas claimed that AJOI complied with the exemption
requirements of section 25102, subdivision (f). He testified that AJOI had no
more than 35 investors, and insisted that the contrary prosecution testimony was in
error. He maintained that all investors had preexisting relationships with AJOI,
and all could reasonably be assumed to have the capacity to protect their own
interests.
Although Salas presented this evidence to support his claim that the
securities were actually exempt from registration, that evidence, if believed by the
jury, would also show that Salas believed in good faith that the securities were
18
exempt. We conclude that Salas presented sufficient evidence to be entitled to a
jury instruction on the affirmative defense of absence of guilty knowledge.8
We next examine whether the instructional error was prejudicial as to Salas.
He testified that he attempted to comply with the exemption requirements. In light
of the prosecution’s evidence, however, no reasonable jury would believe Salas’s
testimony. AJOI was essentially a one-man operation, and Salas was the man. As
the president and secretary of the corporation, he had a duty to know the
registration requirements and to know whether the security sales complied with
those requirements. As the Court of Appeal concluded: “Given his self-
proclaimed awareness of the exemption requirements, his total control over AJOI,
his admitted personal supervision of records related to investors, and his
involvement in conversations with investors, the evidence that Salas was
criminally negligent in not knowing that there were more than 35 investors was
overwhelming.”
Moreover, in selling the securities, Salas made virtually no effort to
determine whether the buyers had a preexisting relationship with AJOI officers or
were capable of protecting their own interests. At trial he offered evidence that
the investors were selected from a list of persons who had invested in other real
8
The trial court also committed two other instructional errors. First, it
instructed that good faith is not a defense to the charge of selling an unregistered
security, an instruction that is inconsistent with our analysis that absence of guilty
knowledge is a defense. Second, it instructed that the exemption in section 25102,
subdivision (f), applies only if the investors had “the business and financial
experience” to make them “sophisticated investors.” The statutory language refers
to persons who, themselves or through financial advisors, have “the business and
financial experience . . . to have the capacity to protect their own interests.”
(§ 25102, subd. (f)(2).) The term “sophisticated investor” may connote a higher
level of experience and expertise than would be required for an investor to protect
his own interests.
19
estate projects, but that evidence did not establish any preexisting relationship
between the investors and AJOI officers, nor did it show that the Salas could
reasonably assume the investors had the capacity to protect their own interests.
Only one or two of the investors who testified had a preexisting relationship with
an AJOI officer; most did not. Some investors may have had the capacity to
protect themselves – Salas points out that one had a degree in business
administration and two others had investment advisors – but Salas made no such
showing as to other investors. Section 25102, subdivision (f), requires that all
purchasers either have a preexisting relationship with the seller or the capacity to
protect themselves. It is clear beyond a reasonable doubt that Salas knew, or was
criminally negligent in not knowing, that many AJOI investors did not meet the
requirements of section 25102, subdivision (f), for exempting a security from
registration.
We have not yet determined what test of prejudice applies to the failure to
instruct on an affirmative defense. (See Simon, supra, 9 Cal.4th at p. 507, fn. 11.)
But even assuming the more rigorous Chapman test applies (see Chapman v.
California (1967) 386 U.S. 18, 24 [state must prove error harmless beyond a
reasonable doubt]), we conclude that the trial court’s failure to instruct on guilty
knowledge was harmless as to Salas.9
B. Patrick
Defendant Patrick was a salesman without managerial authority. He
testified that he thought the securities were exempt, but he did not explain why he
thought so. He did not refer to any specific exemption nor point to any facts that
might support a claimed exemption. Under these circumstances, it is not clear
9
This reasoning and conclusion also apply to the other instructional errors
noted in footnote 8, ante.
20
whether Patrick presented sufficient evidence to entitle him to a jury instruction on
the affirmative defense of lack of guilty knowledge. We decline to decide,
however, whether this record would have entitled Patrick to an instruction on his
affirmative defense because that issue was not briefed or decided in the Court of
Appeal, and has not been briefed or argued here. Therefore, as to Patrick, we
remand the matter to the Court of Appeal to determine whether the trial court erred
in failing to instruct on the absence of guilty knowledge as an affirmative defense,
and whether that error, alone or in combination with other instructional errors (see
fn. 8, ante) was prejudicial.
V. DISPOSITION
The judgment of the Court of Appeal is affirmed as to defendant Salas, but
reversed as to defendant Patrick. The case is remanded to the Court of Appeal for
further proceedings consistent with this opinion.
KENNARD,
J.
WE CONCUR:
GEORGE, C. J.
BAXTER, J.
WERDEGAR, J.
CHIN, J.
MORENO, J.
BUTZ, J.*
*
Associate Justice of the Court of Appeal, Third Appellate District, assigned
by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
21
See next page for addresses and telephone numbers for counsel who argued in Supreme Court. Name of Opinion People v. Salas
__________________________________________________________________________________
Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 119 Cal.App.4th 805
Rehearing Granted
__________________________________________________________________________________
Opinion No.
S126773Date Filed: February 6, 2006
__________________________________________________________________________________
Court:
SuperiorCounty: Los Angeles
Judge: William F. Fahey
__________________________________________________________________________________
Attorneys for Appellant:
Douglas G. Benedon, under appointment by the Supreme Court; Benedon & Serlin and Gerald Serlin forDefendant and Appellant Javier O. Salas.
Neil Rosenbaum, under appointment by the Supreme Court, for Defendant and Appellant Stephen C.
Patrick.
__________________________________________________________________________________
Attorneys for Respondent:
Bill Lockyer, Attorney General, Robert R. Anderson, Chief Assistant Attorney General, Pamela C.Hamanaka, Assistant Attorney General, Susan Sullivan Pithey, Thien Huong Tran, Victoria B. Wilson,
Donald E. De Nicola and Lance E. Winters, Deputy Attorneys General, for Plaintiff and Respondent.
Steve Cooley, District Attorney (Los Angeles), Curt Livesay, Chief Deputy District Attorney, Peter
Bozanich, Assistant District Attorney, William Woods and Richard A. Lowenstein, Deputy District
Attorneys, as Amicus Curiae on behalf of Plaintiff and Respondent.
22
Counsel who argued in Supreme Court (not intended for publication with opinion):
Gerald SerlinBenedon & Serlin
21700 Oxnard Street, Suite 1290
Woodland Hills, CA 91367
(818) 340-1950
Neil Rosenbaum
247 Hartford Street
San Francisco, CA 94114
(415) 626-4111
Lance E. Winters
Deputy Attorney General
300 South Spring Street
Los Angeles, CA 90013
(213) 576-1347
23
| Date: | Citation: | Docket Number: |
| Mon, 02/06/2006 | 37 Cal. 4th 967, 127 P.3d 40, 38 Cal. Rptr. 3d 624 | S126773 |
| 1 | The People (Plaintiff and Respondent) Represented by Lance E. Winters Ofc Attorney General 300 S. Spring Street, Room 1700 Los Angeles, CA |
| 2 | Salas, Javier O. (Defendant and Appellant) Represented by Douglas G. Benedon Benedon & Serlin 21700 Oxnard Street, Suite 1290 Woodland Hills, CA |
| 3 | Patrick, Stephen C. (Defendant and Appellant) Represented by Neil J. Rosenbaum Rosenbaum & Associates 247 Hartford Street San Francisco, CA |
| 4 | Patrick, Stephen C. (Defendant and Appellant) Represented by California Appellate Project - La 520 South Grand Avenue, Suite 400 520 South Grand Avenue, Suite 400 Los Angeles, CA |
| 5 | Los Angeles District Attorney (Amicus curiae) Represented by Richard A. Lowenstein Ofc Of District Attorney - Appellate Division 320 West Temple Street, Suite 540 Los Angeles, CA |
| Opinion Authors | |
| Opinion | Justice Joyce L. Kennard |
| Disposition | |
| Feb 6 2006 | Opinion: Affirmed in part/reversed in part |
| Dockets | |
| Jul 30 2004 | Petition for review filed respondent People |
| Aug 2 2004 | Record requested |
| Aug 4 2004 | Received Court of Appeal record |
| Sep 14 2004 | Record requested remainder of c/a rec. overnite |
| Sep 14 2004 | Received Court of Appeal record 2 doghouses |
| Sep 17 2004 | Time extended to grant or deny review to and including 10-28-2004 |
| Sep 29 2004 | Petition for review granted (criminal case) George, C.J., was absent and did not participate. Votes: Kennard, Baxter, Werdegar, Chin, and Moreno, JJ. |
| Oct 13 2004 | Counsel appointment order filed Douglas Benedon for Appellant ( Javier O. Salas). Appellant's brief on the merits must be served and filed on or before 30 days from the date respondent's opening brief on the merits is filed. |
| Oct 13 2004 | Counsel appointment order filed Neil Rosenbaum for appellant ( Stephen C. Patrick). Appellant's brief on the merits must be served and filed on or before 30 days from teh date respondent's opening brief on the merits is filed. |
| Oct 29 2004 | Opening brief on the merits filed respondent, The People. |
| Nov 22 2004 | Request for extension of time filed Appellant ( Salas ) to file the answer brief on the merits. asking to Dec. 13, 2004. |
| Nov 29 2004 | Request for extension of time filed counsel for aplt. (Patrick) requests extension of time to January 28, 2005, to file the answer brief on the merits. |
| Dec 1 2004 | Extension of time granted to Dec. 13, 2004 for appellant ( Salas) to file the answer brief on the merits. |
| Dec 3 2004 | Extension of time granted to Jan. 28, 2005 for aplt. Patrick to file the answer brief on the merits. |
| Dec 9 2004 | Answer brief on the merits filed Appellant ( Salas). |
| Jan 27 2005 | Request for extension of time filed to 2-18-2005 to file appellant Stephen Patrick's answer brief on the merits |
| Jan 28 2005 | Extension of time granted appellant Stephen C. Patrick to and including 2-18-2005 to file answer brief on the merits. |
| Feb 17 2005 | Request for extension of time filed by Respondent Stephen Patrick for a seven (7) days extension to 2-25-2005, to file and answer brief on the merits. |
| Feb 24 2005 | Extension of time granted On application of appellantt STEPHEN C. PATRICK and good cause appearing, it is ordered that the time to serve and file answer brief on the merits is extended to and including 2-25-05. |
| Feb 24 2005 | Answer brief on the merits filed by Respondent Stephen C. Patrick |
| Mar 11 2005 | Request for extension of time filed to file respondent's reply brief (to 04-15-05] Dep. A.G. L. Winters for The People. |
| Mar 14 2005 | Received: Faxed copy of e.o.t. from L.A. Office by the AG |
| Mar 21 2005 | Extension of time granted On application of respondent and good cause appearing, it is ordered that the time to serve and file respondent's reply brief on the merits is extended to and including April 15, 2005. |
| Apr 15 2005 | Application to file over-length brief filed respondent's {The People} |
| Apr 15 2005 | Received: concurrent with application to file oversize respondent's Reply Brief {The People} |
| Apr 18 2005 | Received: From the L.A. Office -- Respondent's oversized reply brief on the merits, containing 7308 words, or 3,108 words over the word limit of 4200 (CRC 29.1(c) |
| Apr 19 2005 | Order filed The application of Respondent People for permission to file oversized (7,308 words), reply brief on the merits containing 3,108 words over the 4,200 word limit is hereby granted. (See Cal. Rules of Court 29.1(c).) |
| Apr 19 2005 | Reply brief filed (case fully briefed) Respondent People's |
| May 19 2005 | Received application to file Amicus Curiae Brief by counsel for a/c Los Angeles County District Attorney supporting respondent (people) |
| May 25 2005 | Permission to file amicus curiae brief granted The application of Los Angeles District Attorney for permission to file an amicus curiae brief in support of respondent is hereby granted. An answer thereto may be served and filed by any party within twenty days of the filing of the brief. |
| May 25 2005 | Amicus curiae brief filed Los Angeles District Attorney in support of respondent. |
| Jun 15 2005 | Response to amicus curiae brief filed Appellant (Patrick) to the AC brief of the LA County DA |
| Oct 12 2005 | Case ordered on calendar 11-09-05, 9:00 a.m., in Sacramento |
| Oct 17 2005 | Filed: Letter from Lance E. Winters, Supervising Deputy Attorney General, stipulating that Justice Kennard may rule on the above case despite her absence at oral argument, set for November 9, 2005. |
| Oct 17 2005 | Filed: Letter from Douglas G. Benedon, counsel for Javier Salas, stipulating to Justice Kennard's participation in the case even though she will not be present at oral argument. |
| Oct 19 2005 | Filed: Letter from Neil Rosenbaum, counsel for Stephen C. Patrick, stipulating to Justice Kennard's participation in the case. |
| Oct 24 2005 | Filed: Request by counsel for appellants to oral argument divide time between Neil Rosenbaum (on behalf of Stephen Patrick) and Gerald Serlin (on behalf of Javier Salas. |
| Oct 26 2005 | Order filed The request of counsel for appellants to allow 2 counsel to argue on behalf of appellants at oral argument is granted. |
| Oct 26 2005 | Order filed The request of appellants to allocate to Neil Rosenbaum 20 min. and Gerald Serlin 10 min. of appellants' 30-min. allotted time for oral argument is granted. |
| Nov 7 2005 | Received: Letter (faxed) from counsel Serlin requesting reallocation of appellants' time from 20 minutes for Mr. Rosenbaum/10 minutes for Mr. Serlin, to 25 minutes for Mr. Rosenbaum/5 minutes for Mr. Serlin. |
| Nov 9 2005 | Cause argued and submitted |
| Feb 6 2006 | Opinion filed: Affirmed in part, reversed in part The judgment of the Court of Appeal is affirmed as to defendant Salas, but reversed as to defendant Patrick. The case is remanded to the Court of Appeal for further proceedings. Opinion by Kennard,J -- Joined by George, C. J., Baxter, Werdegar, Chin, Moreno, and Butz, JPT.* *M. Kathleen Butz, Associate Justice, Third Appellate District, assigned by the Chief Justice. |
| Mar 24 2006 | Remittitur issued (criminal case) |
| Apr 5 2006 | Received: Telephone call from Jim Guzman, Second Appellate District, requesting for the record to be returned to his attention. |
| Apr 5 2006 | Returned record B159750 [S126773] To Second District/ Attention: Jim Guzman Recond consists of four (4) doghouses. |
| Apr 7 2006 | Received: Receipt for remittitur from Second District, Division Six, signed for by Jim Guzman, Deputy. |
| Apr 26 2006 | Compensation awarded counsel Atty Benedon |
| Apr 26 2006 | Compensation awarded counsel Atty Rosenbaum |
| Briefs | |
| Oct 29 2004 | Opening brief on the merits filed |
| Dec 9 2004 | Answer brief on the merits filed |
| Feb 24 2005 | Answer brief on the merits filed |
| Apr 19 2005 | Reply brief filed (case fully briefed) |
| May 25 2005 | Amicus curiae brief filed |
| Jun 15 2005 | Response to amicus curiae brief filed |
| May 23, 2011 Annotated by robert woodward | FACTS In 1990, Salas incorporated American Join Ownership Interest (AJOI), a real estate development business. On AJOI’s behalf, Salas created investment partnerships to purchase real estate. Patrick served as a vice president but the scope of his duties and knowledge were those of a salesperson rather than of a manager. Defendants Patrick and Salas solicited investors for partnerships over the phone. They had had no prior personal contact with nearly all of those contacted. Rather, AJOI received the list of potential investors from different sources that were not otherwise affiliated with the defendants or the company. 48 investors bought into partnerships. In 1997, AJOI went into receivership and the sales manager, Berry, sent letters to investors advising them of fraud in connection with AJOI investments. PROCEDURAL HISTORY On review, the Appellate Court found that section 25110 describes a general intent crime in which scienter, defined as knowledge or criminal negligence, is an element of the crime. The court held the trial court’s failure to instruct on scienter was harmless to Salas, but prejudicial to Patrick. ISSUE ANALYSIS Since the penalty for violating Corporations code section 25540 is relatively severe, and the crime is not closely related to public health and safety, scienter is an affirmative defense to indictments for violations of section 25540. Moreover, the defendant has a right to have the trial court, on its own initiative, give a jury instruction for every affirmative defense that is substantially evidenced in the record. Sufficient evidence is evidence strong enough that a reasonably jury could find in favor of the defendant. In this case, Salas had proclaimed himself to have been aware of the exemption requirements for registration of securities, had total control of records related to investors, and personally contacted investors. In contrast, the record indicates that Patrick was a salesman who merely contacted investors and thus might have reasonably believed that those sales were exempt from registration requirements. Therefore, there is no issue of fact as to whether Salas had scienter, but there is an issue of fact as to whether Patrick had scienter. KEY RELATED CASES TAGS Annotation by R.M. Woodward |
