P. v. JAVIER O. SALAS

Filed 2/6/06




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 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 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 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 â€