Opinion
No. H025445
November 10, 2004 CERTIFIED FOR PARTIAL PUBLICATION. REVIEW GRANTED February 23, 2005
Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of parts I, III, IV and V.
Appeal from the Superior Court of Santa Clara County, No. 210662, Joyce Allegro, Judge.
Thomas M. Singman, Jill M. Bojarski, under appointment by the Court of Appeal, for Defendant and Appellant.
Bill Lockyer, Attorney General, Robert R. Anderson, Chief Assistant Attorney General, Gerald A. Engler, Assistant Attorney General, Eric D. Share and Dorian Jung, Deputy Attorneys General, for Plaintiff and Respondent.
After being indicted for various securities and tax violations, defendant Steven Allan Ristau was found guilty by a jury and sentenced to state prison. On appeal he contends, among other things, that the trial court committed instructional error by failing to tell the jury that scienter is an element of the offense of selling unregistered securities, by refusing to instruct on mistake of fact as a defense to securities fraud and tax evasion, and by imposing an aggravated term on the basis of facts not found by the jury. We find error in the latter respect only, and remand for limited purposes affecting only sentencing. In all other respects we find the judgment free of reversible error, and affirm.
FACTUAL AND PROCEDURAL BACKGROUND
It is undisputed that defendant founded PacketSwitch.com (PacketSwitch), a California corporation, in or around February 1999. At that time defendant was the chief executive officer, chief financial officer, and sole director of PacketSwitch. For most of its corporate life, PacketSwitch operated without a board of directors; defendant alone ran the company and, for most of this time, had sole authority over its bank accounts. Investors supplied the company's only revenue.
PacketSwitch stock was not sold publicly and was not registered with federal or state securities regulators. Shares were sold privately to some 700 to 900 purchasers. Each purchaser signed a form attesting that he or she was an "accredited investor." Had these recitals been accurate, they would have helped to establish an exemption from registration requirements. However, the five purchasers named as victims in counts 2 through 6 of the indictment testified that they did not in fact meet the statutory criteria for "accredited investor" status and did not know when they signed the forms what that term signified. The forms contained no definition of "accredited investor" and few purchasers asked what it meant. Defendant testified that he accurately defined the term for those who asked.
Defendant told investors that PacketSwitch was going to render the internet obsolete by establishing a global multimedia network using new technology including wireless transmission, fiber optics, a "brand new operating system based on pictures not zeroes and ones," a new central processing system, a new database technology, a new optical switch, and new encryption technology. Defendant described this technology to investors as already being in existence. In fact it did not exist. In one videotaped demonstration, defendant showed investors a "set top player" in San Jose that he said reflected "technology that we developed a long time ago." He displayed movies which he said were being transmitted by "completely wireless" means from a Qwest location in Sunnyvale, 12 miles away. In fact the signal was carried by wire from Sunnyvale to a San Jose building, from which it was transmitted by a commercially available wireless device to the rooftop of the building where the demonstration took place, then by wire to a commercially available wireless "access point" in the ceiling of the room where the demonstration took place, which transmitted the signal wirelessly to the set-top device about eight feet away.
Defendant said that the new technology would first be introduced in countries with little or no data infrastructure, on the theory that it would be less expensive to build there. He told investors that he had connections in various countries including South Korea, Vietnam, Nigeria, and the Philippines. He also stated that he had a "strategic alliance" with Global Crossing, an established company, when in fact he had no firm relationship with that entity. He admitted that some of his statements were misleading, but denied that he intended to defraud anyone by them.
Defendant also failed to inform investors of various facts that the jury could find to have been material to an evaluation of PacketSwitch's prospects. He did not tell them that, as of the date of the videotaped demonstration, the federal Securities and Exchange Commission (SEC) was investigating PacketSwitch for possible securities violations. Nor did he tell them that the stock they were buying had not been registered with or approved by state or federal securities regulators. He did not disclose that some of the patent applications he had filed were clouded by ownership being asserted claims by his previous company, Internet Telephone Company. Nor did he tell investors that his three previous companies had all gone out of business, that he had filed for personal bankruptcy in the early 1980's, or that he was asked to resign as chief executive of Internet Telephone Company due to alleged mismanagement and financial improprieties. He testified that the latter allegations were false, and were the product of a "business war" between himself and a major investor in that company.
The prosecution introduced evidence of questionable financial transactions by which defendant secured various payments to himself, usually in the name of his wife, and used corporate funds to pay personal expenses, including a luxurious family vacation.
Defendant testified that he had believed the stock was sold in a manner complying in all essential respects with applicable law. However he admitted being told by an attorney that he was operating in violation of federal securities regulations. He testified that the attorney did not specify the rules he was breaking, and that he did not investigate further because he thought the attorney was just upset over having been fired.
Defendant's 1998 tax return failed to report all income he had earned that year. A prosecution witness testified that whereas defendant reported $5,147 in taxable income, the correct figure was $157,426, leaving an unpaid tax liability of $10,036. The PacketSwitch corporate return for 1999, which defendant signed, failed to report compensation paid to him. He admitted not filing a personal return for 1999. He attributed these events to the theft of certain records and to his reliance on accountants.
The SEC commenced an investigation of PacketSwitch in June 2000. Three months later PacketSwitch essentially ceased operations. Shortly thereafter defendant agreed to stop selling PacketSwitch stock. PacketSwitch eventually declared bankruptcy.
Defendant was indicted for one count of fraud in the offer or sale of securities (see Corp. Code, § 25541, subd. (a)), five counts of offering or selling unregistered securities (see Corp. Code, §§ 25110, 25540, subd. (a)), two counts of filing false tax returns (see Rev. Tax Code, § 19705, subd. (a)(1)), and one count of failing to file a tax return, with intent to evade taxes (see Rev. Tax Code, § 19706). The jury found him guilty on all charges and also found, in connection with the first count, that he intentionally took property with a value in excess of $2,500,000. (See Pen. Code, § 12022.6, subd. (a)(4).) The trial court imposed a sentence of 11 years in prison, consisting of the upper term of five years on count 1 (fraud), a four-year enhancement under Penal Code section 12022.6, subdivision (a)(4), and consecutive eight-month sentences on each of the three tax counts. Five three-year sentences were imposed for sales of unqualified securities (counts 2-6), but stayed pursuant to Penal Code section 654. The court also imposed fines and restitution orders totaling over $5 million.
Defendant filed this timely appeal.
DISCUSSION
See footnote, ante, page 1436.
Defendant contends that the trial court erred by failing to instruct the jury that some degree of scienter had to be found in order to convict him, in counts 2 through 6, of selling unqualified securities in violation of Corporations Code sections 25110 and 25540, subdivision (a).
The court instructed that the offense consists of the intentional offer or sale of a security at a time when it has not been qualified by the Commissioner of Corporations. The court further told the jury that defendant was not guilty of these charges if the security was exempt from the qualification requirement, which would be the case if it was sold to no more than 35 investors each of whom possessed certain affiliations with defendant. The court added that the 35-investor limit excludes any "'accredited investor,'" which it defined as a person who, at the time of the sale, had a net worth in excess of $1 million, or who had individual income of $200,000 or joint income of $300,000 in each of the preceding two years, and has a "reasonable expectation" of maintaining that level of income. In other words, the sale was exempt from the registration requirement if all purchasers were either affiliated with defendant or had the requisite levels of net worth or income.
With respect to the mens rea, or culpable mental state, required to convict of such a charge, the court stated that "a general criminal intent need only be shown. Proof that the defendant had an evil motive or an intent to violate the law is not required. Moreover, evidence that the defendant relied on the advice of counsel or that he acted in good faith is not a defense." Shortly thereafter, the court instructed that for purposes of these counts, "the doing of the act is a crime. The intent with which the act is committed is immaterial to guilt."
Defendant asserts that these instructions were deficient for failure to require a finding that defendant knew the security was not exempt from registration, or was criminally negligent in failing to acquire such knowledge. Defendant acknowledges that the governing statutes contain no such requirement, but contends that it must be implied under the authority of People v. Simon (1995) 9 Cal.4th 493 [ 37 Cal.Rptr.2d 278, 886 P.2d 1271] ( Simon). In that case the Supreme Court 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 [Corporations Code] section 25401," i.e., making false statements or material omissions in the sale of a security. ( Id. at p. 522; see id. at p. 497 ["the trial court erred prejudicially in instructing that [Corporations Code] sections 25401 and 25540 create an offense that does not require either (1) knowledge of the false or misleading nature of a representation or of the materiality of an omission, or (2) criminal negligence in failing to acquire such knowledge"].)
The question before us is whether the reasoning in Simon leads to a similar conclusion for violations of Corporations Code section 25110. One published decision has already held it does not. ( People v. Corey (1995) 35 Cal.App.4th 717 [ 41 Cal.Rptr.2d 540] ( Corey).) We concur in that conclusion, though not entirely in the reasoning by which it was reached.
The California Supreme Court has granted review in a recent decision that declined to follow Corey. (See People v. Salas, review granted Sept. 29, 2004, S126773.)
We must begin by isolating the rationale in Simon in order to determine its applicability here. In reaching its conclusion that the statutes there had to be read to incorporate a scienter requirement, the court alluded to a number of factors. Prominent among these was the fact that under the statute providing civil remedies for material falsehoods or omissions in the sale of securities, a defendant could avoid liability for damages by showing that he or she "'exercised reasonable care and did not know (or if he had exercised reasonable care would not have known) of the untruth or omission.' [Citation.]" ( Simon, supra, 9 Cal.4th at p. 509, fn. 12, quoting Corp. Code, § 25501.) The constructional preference against interpretations yielding "unreasonable or arbitrary results" suggests that for conduct to warrant criminal penalties, it should ordinarily be "more, not less, culpable" than conduct sufficient to trigger civil liability. ( Simon, supra, 9 Cal.4th at p. 517.) Thus it would be "an unreasonable application of the statutory scheme" for the law to make lack of scienter a defense against civil liability while imposing criminal punishment without regard to fault. ( Id. at p. 522.)
In addition to the considerations we discuss below, the court suggested that its holding was supported by legislative history and federal authorities. ( Simon, supra, 9 Cal.4th at p. 509.) Later, however, it seemed to find those sources equivocal at best. ( Id. at pp. 511-513.) The court also alluded to the rule of lenity, under which a criminal statute yielding two otherwise sound interpretations will ordinarily be given the meaning more favorable to the accused. ( Id. at p. 517.)
The court also found tension between the imposition of punishment without proof of scienter and the harshness of the penalties authorized by the statute. "We generally presume that the Legislature would not attach a substantial penalty to a strict liability offense. 'Harsh penalties' are a '"significant consideration in determining whether the statute should be construed as dispensing with mens rea."' [Citations.]" ( Simon, supra, 9 Cal.4th at pp. 509-510, fn. 13.) The court recognized that this factor could apply to most or all of the criminal penalties imposed by the securities act, but declined to "assume that the Legislature intended that scienter be an element of every regulatory aspect of the Corporate Securities Law of 1968." ( Id. at p. 509, fn. omitted.) At the same time, it declared this reluctance "tempered somewhat by recognition" that the Legislature had since amended the governing statute to "attach extremely heavy penalties to criminal violations of some provisions" of the act. ( Id. at pp. 509-510, fn. 13.) As affecting the conduct at issue there, the amendments increased the maximum punishment to a prison term of five years and fine of $10 million. ( Id. at pp. 509-510, fn. 13.) Although these amendments occurred after the defendant engaged in the conduct there at issue (see id. at p. 497), they were relevant as "strongly impl[ying] a current legislative understanding that neither [Corporations Code] section 25401 nor those other regulatory provisions of the Corporate Securities Law of 1968 create a strict liability offense." ( Id. at pp. 509-510, fn. 13.)
The court urged the Legislature "to clarify which of the criminal violations of the Corporate Securities Law of 1968 that are punishable under either subdivision (a) or (b) of [Corporations Code] section 25540 are strict liability offenses and what mental states are elements of those which require scienter." ( Simon, supra, 9 Cal.4th at pp. 509-510, fn. 13.) Although the Legislature has since amended the act several times, the court's plea has thus far gone unheeded.
More generally, the court noted that numerous cases expressed reservations about the imposition of criminal punishment without proof of mens rea. The United States Supreme Court had declared the requirement of mens rea to be "'the rule of, rather than the exception to, the principles of Anglo-American criminal jurisprudence'" ( Simon, supra, 9 Cal.4th at p. 519, quoting Dennis v. United States (1951) 341 U.S. 494, 500 [ 95 L.Ed. 1137, 71 S.Ct. 857]), and had described punishment without mens rea as having a "'generally disfavored status'" ( Simon, supra, at p. 520, quoting United States v. United States Gypsum Co. (1978) 438 U.S. 422, 437-438 [ 57 L.Ed.2d 854, 98 S.Ct. 2864]). The Simon court read the high court's decisions as tending to uphold criminal punishment without fault only with respect to "regulatory or 'public welfare' offenses," and "on the assumption that the conduct poses a threat to public health or safety, the penalty for those offenses is usually small, and the conviction does not do 'grave damage to an offender's reputation.' [Citation.]" ( Simon, supra, 9 Cal.4th at p. 519, fn. omitted.)
The court in Simon also discerned in its own decisions recognition of "a 'prevailing trend "away from the imposition of criminal sanctions in the absence of culpability where the governing statute, by implication or otherwise, expresses no legislative intent or policy to be served by imposing strict liability." [Citation.]'" ( Simon, supra, 9 Cal.4th at p. 521.) These decisions too assumed the constitutionality of criminal punishment without fault for "regulatory or malum prohibitum crimes" where "the purpose is to protect public health and safety and the penalties are relatively light." ( Id. at p. 521.)
"Malum prohibitum" refers to offenses which are blameworthy only in that they are prohibited, as distinct from "malum in se" offenses, in which the proscribed conduct is considered intrinsically wrongful. (Black's Law Dict. (8th ed. 2004) pp. 978-979.) Examples of the former would include ordinary traffic offenses or violations of purely economic regulations, while examples of the latter would be traditional felonies like robbery or murder. The distinction may not bear a great deal of weight if leaned upon too heavily, but serves a useful purpose in some contexts. (See R.M. Sherman Co. v. W.R. Thomason, Inc. (1987) 191 Cal.App.3d 559, 566, fn. 7 [ 236 Cal.Rptr. 577], quoting 6A Corbin on Contracts (1962) § 1378, pp. 24-25. [As bearing on the doctrine of illegal contracts, "[t]he Latin terms malum in se and malum prohibitum are attacked by Corbin for concealing the 'falsity' of the purported distinction."]; Black's Law Dict., supra, at p. 978 [quoting a treatise for the proposition that the distinction has been criticized since at least the Nineteenth Century].)
The court acknowledged that United States v. Freed (1971) 401 U.S. 601, 613 [ 28 L.Ed.2d 356, 91 S.Ct. 1112], upheld a relatively severe punishment (up to 10 years' imprisonment) without proof of scienter for the possession of unregistered hand grenades. However the court noted the comment in Freed that such punishment could have been justified by Congress on the premise that "'one would hardly be surprised to learn that possession of hand grenades is not an innocent act.' [Citation.]" ( Simon, supra, 9 Cal.4th at pp. 519-520, fn. 17, quoting United States v. Freed, supra, 401 U.S. at p. 609.) The apparent significance of this observation was that the obviously hazardous nature of the conduct there put the offender on notice of the potential for severe punishment. In contrast, the Simon court observed, "public safety is not involved" in securities charges, and the defendant's conduct there did not intrinsically put him on notice that it might be criminally punishable: "[I]t cannot be assumed that an individual would realize that making a statement he believed to be true or failing to reveal information about acts that were not contemplated at the time a security was sold, and thus did not seem material, was criminal." ( Simon, supra, 9 Cal.4th at pp. 519-520, fn. 17.)
This statement is far from self-evident as it applies to affirmative representations. Most if not all sellers of securities know that such transactions are heavily regulated. In the interest of ensuring the integrity of the securities markets, the Legislature might well conclude that anyone participating in such a transaction must ensure the accuracy of his her statements either by confirming facts to a degree of certainty that makes the speaker willing to gamble on an unqualified assertion, or by fully disclosing the extent of any uncertainty which makes such a gamble unattractive. The Legislature might well conclude that such a person would hardly be surprised to learn that he could be criminally punished for failing to choose either option, and instead unqualifiedly asserting a fact that proves to be materially false. Such a regime does not require infallibility, but it does require caution in asserting without qualification matters not reliably known to be true.
A different situation is presented by a rule that punishes the seller of securities for an innocent failure to disclose material facts which were not known or reasonably knowable at the time of the transaction. The Supreme Court seemed most concerned with this possibility, i.e., criminal punishment for "failing to reveal information about acts that were not contemplated at the time a security was sold." ( Simon, supra, 9 Cal.4th at pp. 519-520, fn. 17.) However the court made no distinction between omissions and affirmative misstatements, and its holding must be viewed as applying equally to both.
Ultimately the court did not decide in Simon whether the federal and state constitutions would permit five years' imprisonment or a $10 million fine for false statements or omissions made without scienter. However, it reasoned that "the due process implications of imposing a criminal penalty of that magnitude for such conduct are sufficient to raise a substantial question as to the validity of [Corporations Code] section 25401 if it is construed as creating a strict liability criminal offense." ( Simon, supra, 9 Cal.4th at p. 522.) Because the court "presume[d] the Legislature did not intend to enact a statute of doubtful validity," the statute would be construed to include, as an element of the criminal offense, "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." ( Ibid.)
The holding in Simon thus appears to rest on a number of somewhat interrelated considerations: (1) The preference for construing statutes to avoid unreasonable results favored implication of a scienter requirement, because it would be unreasonable to impose criminal punishment without regard to the defendant's mental state when the lack of scienter is a defense to civil liability. (2) The harshness of the criminal penalties supports an inference, in and of itself, that the Legislature did not intend to impose criminal culpability without proof of fault. (3) Requiring mens rea is consistent with the general disfavor in which Anglo-American jurisprudence has traditionally held strict liability offenses. (4) The statute differs from those in which the imposition of criminal punishment without mens rea has been held constitutionally permissible, in that the penalties are harsh and the prohibited conduct does not directly bear on public health or safety. (5) In view of these considerations, aconstruction dispensing with proof of mens rea would cast a sufficient cloud over the constitutional validity of the statute to trigger the presumption against constitutionally doubtful readings of statutes.
In Corey, supra, 35 Cal.App.4th 717, the court held that the reasoning in Simon did not extend to the offense at issue here, i.e., sale of unqualified securities in violation of Corporations Code section 25110. This holding rested on three subsidiary conclusions. First, the court reasoned that in contrast to the statute in Simon, the statute imposing civil liability for sales of unqualified securities "does not contain a scienter element." ( Corey, supra, 35 Cal.App.4th at pp. 728-729, citing Corp. Code, §§ 25503, 25501.) Second, the court concluded that the maximum criminal penalties to which the defendant there was exposed were "much less" than those at issue in Simon, i.e., "up to $1 million in fines and up to one year imprisonment." ( Corey, supra, 35 Cal.App.4th at p. 729, fn. omitted.) Finally, the court noted that two commentators, who were viewed as chiefly responsible for the original drafting of the act, and who were quoted in Simon for their criticism of a case imposing strict liability for violations of Corporations Code section 25401, had offered no similar objection to other decisions treating the violation of Corporations Code section 25110 as "'a strict liability offense.'" ( Corey, supra, 35 Cal.App.4th at p. 729, quoting 1 Marsh Volk, Practice under the Cal. Securities Laws (rev. ed. 1994) § 1413[1], p. 14-80 and fn. 10; see Simon, supra, 9 Cal.4th at pp. 513-514).
At least two cases decided before Simon had rejected contentions that some form of scienter or specific intent was an element of the offense of selling unqualified securities. In People v. Clem (1974) 39 Cal.App.3d 539 [ 114 Cal.Rptr. 359], the court rejected a contention that the reference to "'willful'" violations in Corporations Code section 25540, subdivision (a), required some evidence of moral culpability. The willfulness contemplated by the statute, the court wrote, was "'simply a purpose or willingness to commit the act.'" ( People v. Clem, supra, 39 Cal.App.3d at p. 542.) "[E]xcept as provided by [Corporations Code] section 25700 [concerning acts done in conformity with regulatory directions,] advice of counsel or other evidence of good faith is not a defense to charge of dealing in unqualified securities." ( Id. at pp. 542-543, fn. omitted; see People v. Feno (1984) 154 Cal.App.3d 719, 725 [ 201 Cal.Rptr. 513] ["Criminal violations of [Corporations Code] section 25110 are strict liability offenses"].)
The first and second points lose some of their force under close examination. It is not entirely accurate to describe the statute in Simon as requiring "a scienter element" in the parallel civil cause of action. Instead the statute there allowed an affirmative defense to civil liability, i.e., the defendant was liable "unless [he or she] prove[d] that the plaintiff knew the facts concerning the untruth or omission or that 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. . . ." (Corp. Code, § 25501; see Simon, supra, 9 Cal.4th at p. 516.) Therefore the Simon court did not simply import the elements of the civil cause of action into the criminal offense; it required the prosecutor to affirmatively prove a fact no civil plaintiff was required to prove, i.e., the defendant's "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." ( Simon, supra, 9 Cal.4th at p. 522.)
Defendant contends that the reasoning in Corey was also unsound for failing to consider the effect of administrative regulations bearing on Corporations Code section 25510, which he reads as incorporating a scienter defense. In fact the key regulation is ambiguous. It defines "accredited investor" as a buyer who " comes within one of the categories of an 'accredited investor' in Rule 501(a) of Regulation D adopted by the Securities and Exchange Commission. . . ." (Cal. Code Regs., tit. 10, § 260.102.13, subd. (g).) The cross-referenced federal regulation in turn sets forth a number of categories under a paragraph stating that an accredited investor is "any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person." ( 17 C.F.R. § 230.501(a), italics added.) Defendant's argument assumes that by incorporating the federal categories, this regulation also incorporates the introductory reference to reasonable belief. This is not the literal meaning of the regulation, however. The meaning urged by defendant could have been achieved more clearly and succinctly by simply incorporating the entire federal definition rather than the "categories" listed there.
In any event the regulatory definition of "accredited investor" has only a debatable bearing on the question before us. The parallel reasoning in Simon was apparently that the Legislature would not readily be supposed to have provided sellers with a scienter defense against civil claims while subjecting them to criminal punishment regardless of innocent intent. (See Simon, supra, 9 Cal.4th at pp. 516-518.) We question whether any such inference can be drawn where the putative discrepancy arises not within the legislative scheme but between a statute and an administrative regulation. The divergence in authorship attenuates and weakens, if it does not destroy, any interpretative inference arising from such a discrepancy.
We also note, however, that the Corey court was somewhat mistaken in its assessment of the penalties at issue. It distinguished Simon on the ground, among others, that the "magnitude of potential criminal penalties for violation of [Corporations Code] section 25110 is much less than violation of [Corporations Code] section 25401; up to $1 million in fines and up to one year imprisonment." ( Corey, supra, 35 Cal.App.4th at p. 729, fn. omitted, italics added.) In fact the maximum prison term for violating Corporations Code section 25110 is three years. Thus, while the penalties are indeed less onerous than the five years and $10 million found so "harsh" in Simon, supra, 9 Cal.4th at page 509, footnote 13, the difference is not as great as the Corey court believed.
The penalties for a violation of Corporations Code section 25110 are prescribed by Corporations Code section 25540, subdivision (a), which provides, as pertinent here, that violators "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 for not more than one year, or be punished by both that fine and imprisonment." (Italics added.) The italicized language invokes the provisions of Penal Code section 18, which as pertinent here provides that "every offense declared to . . . be punishable by imprisonment in a state prison, is punishable by imprisonment in any of the state prisons for 16 months, or two or three years." The maximum penalties thus imposed for a violation of Corporations Code section 25110 are three years in state prison and a $1 million dollar fine.
Nonetheless we believe the result in Corey to be correct. The court's rationales, if somewhat weaker than they appear at first glance, retain significant force. Moreover, we find the reasoning in Simon inapposite here for two reasons not recognized in Corey: the conduct here is more intrinsically culpable than that in Simon, and a scienter defense would impair the legislative purposes served by criminalizing that conduct more than was the case in Simon.
The conduct at issue in Simon, and penalized by Corporations Code sections 25401 and 25540, subdivision (b), consists of uttering words that prove to be untrue or materially incomplete. Part of the court's reluctance to penalize such conduct without proof of fault was that one who utters words while reasonably believing them to be true may have no reason to suspect that his or her conduct may lead to penal sanctions. As noted above, the court distinguished United States v. Freed, supra, 401 U.S. 601, on the ground that the rationale there imputed to Congress — "one would hardly be surprised to learn that possession of hand grenades is not an innocent act" ( id. at p. 609, fn. omitted) — did not apply to the innocent utterance of false or materially incomplete statements. As the court in Simon observed, "it cannot be assumed that an individual would realize that making a statement he believed to be true or failing to reveal information about acts that were not contemplated at the time a security was sold, and thus did not seem material, was criminal." ( Simon, supra, 9 Cal.4th at pp. 519-520, fn. 17.)
Here, in contrast, the conduct penalized by Corporations Code sections 25110 and 25540, subdivision (a), could readily have been viewed by the Legislature as resembling the conduct in Freed in that it carried an obvious and intrinsic risk of serious legal consequences. These statutes do not attach criminal penalties to the commonplace conduct of speaking or failing to speak, but to the far more formal and specific conduct of engaging in a securities transaction. Such conduct cannot be undertaken inadvertently, casually, or incidentally. An investor who wants to avoid the penalties imposed by these statutes can do so by registering the securities prior to the transaction, or by making certain that the transaction is in fact exempt. (See Corp. Code, §§ 25111-25113; Cal. Code Regs., tit. 10, § 260.110 et seq.) The Legislature could wish to create such a regime in order to deny any other safe harbor and thereby to deter sellers from relying on exemptions in any but the clearest cases. In other words, the Legislature could intend to compel the seller, under pain of criminal sanction, to guarantee that any sale of unregistered securities is in fact exempt. A defendant's claimed belief that the transaction was exempt, when in fact it was not, could well be viewed as no more availing than an amateur grenadier's claim that he thought his conduct conformed to law. That is, the Legislature could rationally believe that one who sells unregistered securities should "hardly be surprised to learn that [his conduct] is not an innocent act." ( United States v. Freed, supra, 401 U.S. at p. 609, fn. omitted.)
Such a supposition gains weight when evaluated in light of the centrality of the registration requirement to the securities laws, which serve the crucial social objective of ensuring the integrity of securities markets and facilitating the flow of investment capital, to the ultimate benefit of all citizens. To permit a scienter defense to the sale of unqualified securities would significantly impair the efficacy of the registration requirement by permitting an unscrupulous seller to raise a colorable defense in every case merely by asserting that he thought his victims were accredited investors. The groundwork for such a defense could be laid during the sale itself by requiring each purchaser to execute a boilerplate form containing a recital that he or she is an accredited investor. Indeed this is exactly what defendant did here, and it forms essentially the entire basis of his claim that the jury might have entertained a reasonable doubt about the existence of a culpable mental state. To allow such a defense would substantially alter the risks confronting a seller when he or she is put to the choice between registering the security and gambling on an exemption. The hazards of the latter choice would be significantly reduced, and the integrity of the markets would to that extent be impaired, by such an escape clause.
The Legislature could also rationally conclude that criminal sanctions require this kind of "teeth" because civil and administrative remedies will not suffice to deter the kind of misconduct targeted by these statutes. Offending sales will ordinarily involve securities not in a going concern but in a new venture. Such an investment is riskier both in a business sense and in terms of the reduced likelihood of obtaining redress if securities violations are discovered after the venture fails. The issuer of such securities may hope to make himself effectively immune from adverse civil consequences by dissipating or secreting the proceeds of his misconduct. Without the threat of criminal penalties, such a person may feel beyond any coercive power of law.
The Legislature could thus conclude that one who sells unqualified securities must either establish that the transaction was exempt in fact or suffer the penal consequences. The offense is not "strict liability" in the purest sense; it requires a general intent to do the proscribed act, i.e., to sell the securities. But the Legislature could well intend, and we believe did intend, that no more than this is necessary for the imposition of criminal punishment if the seller of new securities fails to bring himself within the objective safe harbors of registration or exemption. Like the possessor of grenades, and unlike the utterer of words, one who sells securities that are not registered can reasonably be deemed on notice that his conduct may carry serious penal consequences. His conduct is inherently hazardous to the public good, and he must exercise the utmost punctiliousness to conform it to law, or suffer criminal punishment.
The trial court thus directed the jury confusingly, if not erroneously, when it instructed that "the doing of the act is a crime. The intent with which the act is committed is immaterial to guilt." This is true in the narrow sense that an innocent purpose is immaterial. However, the crime does require an intent to sell the security in question. Indeed the court elsewhere instructed the jury correctly that "a general criminal intent need only be shown." Any resulting confusion was harmless by any standard, since there was no basis whatever for the jury to entertain a reasonable doubt as to defendant's intent to sell the securities in question.
This case amply illustrates the necessity for such a rule. Defendant's claim that he lacked scienter depends on the fact that purchasers of PacketSwitch stock signed "investor registration forms" containing the recital that the signer was an "accredited investor." If true this would tend to support a conclusion that the sale was exempt from the registration requirement. (See Corp. Code, § 25102, subd. (f); Cal. Code Regs., tit. 10, § 260.102.13, subd. (g).) To qualify as an "accredited investor," however, the signer had to possess a prescribed net worth or annual income. Nothing in the forms, or otherwise in evidence, justified a belief by defendant that the purchasers actually met these qualifications. The forms did not specify the criteria establishing the status of "accredited investor" and did not indicate the significance of such status. In fact none of the purchaser-victims identified in the criminal counts here at issue did meet those qualifications; each testified that he or she did not understand what the reference to "accredited investor" meant and did not in fact meet the statutory criteria. Had buyers been asked to certify that they possessed the specific characteristics establishing an accredited status, i.e., a net worth of $1 million or annual income of $200,000 ($300,000 for a married couple), many of them would undoubtedly have balked. Instead they were asked to sign forms containing language the meaning of which was neither known nor communicated to them. It is impossible to see how their signatures on these forms could have supported a good faith belief by defendant that they in fact met the requisite criteria.
An offering memorandum prepared by an independent firm in connection with defendant's prior venture, Internet Telephone Company, included a definition of "accredited investor." Defendant's executive assistant testified that she did not know why the PacketSwitch forms lacked a similar statement of the relevant criteria; she "just assumed that [defendant] told them." Defendant acknowledged, however, that he did not "explain orally or [in] any other way to investors what the definition of an accredited investor was." He explained the difference between the two forms by describing the investor's form here as "a business plan" rather than a private placement, asserting, "There's a big difference between the two."
We also note that the Legislature has often provided explicit mens rea requirements where it wishes to condition liability in that manner. (See, e.g., Corp. Code, §§ 25400, subd. (a) [unlawful to engage in certain conduct "[f]or the purpose of creating a false or misleading appearance of active trading in any security or a false or misleading appearance with respect to the market for any security"], (b) [same, "for the purpose of inducing the purchase or sale of such security by others"], 25402 [insider trading while possessing information which actor "knows is not intended to be" available to public, "unless he has reason to believe that the person selling to or buying from him is also in possession of the information"], 25403, subd. (a) [liability for "with knowledge directly or indirectly control[ling] and induc[ing] any person to violate any provision of this division"], (b) [same, "knowingly provid[ing] substantial assistance to another person in violation of any provision of this division . . ."], 25404 [unlawful to "knowingly alter . . . any record . . . with the intent to impede, obstruct, or influence the administration or enforcement of this division"], 25504.1 [joint and several liability for persons assisting in certain conduct "with intent to deceive or defraud"].) The Legislature obviously knows how to incorporate a culpable mental state into the definition of a violation of the securities laws when it chooses to do so.
We conclude that there was no error in failing to instruct the jury that defendant was only guilty of selling unqualified securities if he knew the purchasers were not accredited investors or acted with criminal negligence in failing to ascertain that fact.
See footnote, ante, page 1436.
Premo, J., and Elia, J., concurred.