Shorey v. Arizona Corp. Commission , 238 Ariz. 253 ( 2015 )


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  •                                IN THE
    ARIZONA COURT OF APPEALS
    DIVISION ONE
    DAVID SHOREY and MARY JANE SHOREY, husband and wife;
    WESTCAP ENERGY, INC., an Arizona corporation dba Westcap Solar,
    Plaintiffs/Appellants,
    v.
    ARIZONA CORPORATION COMMISSION, Defendant/Appellee.
    No. 1 CA-CV 14-0471
    FILED 9-17-2015
    Appeal from the Superior Court in Maricopa County
    No. LC2013-000191-001
    The Honorable Crane McClennen, Judge
    AFFIRMED
    COUNSEL
    The Law Firm of Heurlin Sherlock, Tucson
    By Bruce R. Heurlin, Catherine N. Hounfodji
    Counsel for Plaintiffs/Appellants
    Arizona Corporation Commission, Phoenix
    By Phong Huynh
    Counsel for Defendant/Appellee
    OPINION
    Judge Kenton D. Jones delivered the Opinion of the Court, in which
    Presiding Judge Margaret H. Downie and Judge Jon W. Thompson joined.
    SHOREY et al. v. AZCC
    Opinion of the Court
    J O N E S, Judge:
    ¶1             Appellants challenge the superior court’s order affirming a
    decision of the Arizona Corporation Commission (Commission) finding
    David Shorey and Westcap Energy, Inc. (Westcap) violated Arizona
    Revised Statutes (A.R.S.) sections 44-1841,1 -1842, and -1991. We affirm
    the Commission’s determination and hold the enforcement of those
    statutes to be both constitutional and not preempted by federal law.
    FACTS2 AND PROCEDURAL HISTORY
    ¶2            Westcap was incorporated in Arizona in 2008 for the
    primary purpose of installing solar panels. In 2009, Shorey, as Westcap’s
    CEO, agreed with Litchfield Enterprises, Inc. (Litchfield), a Colorado
    corporation, to have Litchfield “consult” with Westcap to raise $1,000,000
    through an offering of dividend-paying convertible preferred stock.
    Among the terms of the agreement, Litchfield agreed to identify potential
    investors and assist in preparing documents to present to them. In
    exchange, Litchfield would receive 10 percent of all monies received from
    the sale of securities as a “consulting fee.” Neither Shorey nor Litchfield
    were registered to sell securities within or from Arizona.
    ¶3            Litchfield and Westcap then engaged Intuition Capital
    (Intuition), a company from Spain also not registered to sell securities
    within or from Arizona, to solicit foreign investors for the Westcap
    offering. In exchange, Intuition would receive 65 percent of all investment
    monies received. With Intuition on board, Litchfield lowered its own
    commission rate to 7.5 percent. Thus, 72.5 percent of all Westcap security
    investments were contractually committed to the payment of
    commissions, leaving only 27.5 percent available to Westcap to obtain a
    return for the investors.
    1     Absent material changes from the relevant date, we cite a statute’s
    current version.
    2      We view the facts in the light most favorable to upholding the
    Commission’s decision. See Hirsch v. Ariz. Corp. Comm’n, 
    237 Ariz. 456
    ,
    458 n.2, ¶ 1 (App. 2015) (citing Eaton v. Ariz. Health Care Cost Containment
    Sys., 
    206 Ariz. 430
    , 431, ¶ 2 (App. 2003), and State v. Barber, 
    133 Ariz. 572
    ,
    578 (App. 1982)).
    2
    SHOREY et al. v. AZCC
    Opinion of the Court
    ¶4            Pursuant to their agreement, Litchfield and Westcap created
    a subscription agreement and private placement memorandum to present
    to potential investors. The private placement memorandum reserved the
    right to pay commissions and finders’ fees as needed, specifically stating:
    The Company . . . reserves the right to pay commissions to
    registered brokers or dealers registered with the National
    Association of Securities Dealers (“NASD”) in connection
    with the sale of the Shares in which case the proceeds to the
    Company will be reduced. The Company may also pay
    finders’ fees for introduction to persons or entities that
    purchase Preferred Stock in this Offering. The amount of
    any commissions or finders’ fees will be within the range of
    amounts normally paid in similar situations, in which case,
    the proceeds to the Company will be reduced.
    The documents did not specify the amount or percentage of the
    investment that would actually be paid in commissions or finders’ fees.
    And according to Shorey, the stock offering was never available to U.S.
    investors, but instead exclusively targeted foreign investors pursuant to
    Regulation S of the Securities Act of 1933, 15 U.S.C. § 77.3
    ¶5             In March 2010, Intuition began soliciting investors in
    Europe. When Intuition found an interested investor, it notified Shorey.
    Shorey then sent documents detailing the proposed transaction to the
    potential investor by regular mail, email, or Federal Express. The
    documents instructed the investor to sign and return all documents to
    Shorey by email or facsimile and to send money via wire transfer to a
    bank account in Tucson, Arizona under the name “Westcap Energy, Inc.,
    David Shorey, CEO.” When an investor completed the transaction,
    Shorey immediately transferred 72.5 percent of the funds to Litchfield and
    Intuition in accordance with their prior agreements.
    ¶6            By August 2010, twenty-four investors had contributed a
    total of $388,570, of which $281,714 was immediately paid to Litchfield
    and Intuition. On August 31, 2010, the securities sold were converted into
    shares of a Nevada corporation, and the offering resumed in Nevada.
    3      Regulation S provides a safe harbor from the federal registration
    requirements for offers and sales of securities occurring outside the
    United States. See 17 C.F.R. §§ 230.901-905 (2014); see, e.g., Zacharias v.
    SEC, 
    569 F.3d 458
    , 465 (D.C. Cir. 2009).
    3
    SHOREY et al. v. AZCC
    Opinion of the Court
    ¶7             In March 2011, the Commission’s Securities Division
    initiated administrative proceedings against Appellants alleging
    violations of A.R.S. §§ 44-1841 (prohibiting the sale of unregistered
    securities), -1842 (prohibiting the sale of securities by unregistered dealers
    and salesmen), and -1991 (prohibiting fraud in the sale of securities).
    ¶8            In March 2013, following an evidentiary hearing, the
    Commission found Westcap and Shorey offered and sold unregistered
    securities within or from Arizona in violation of A.R.S. § 44-1841, offered
    and sold securities from Arizona without being registered as dealers or
    salesmen in violation of A.R.S. § 44-1842, and made untrue statements and
    omitted material facts during securities transactions in violation of A.R.S.
    § 44-1991. The Commission ordered Appellants to offer to rescind the
    $388,570 of stock sold to the twenty-four investors and held Appellants
    jointly and severally liable for all monies owed.4 The Commission also
    ordered Appellants to pay $10,000 in administrative penalties to the State
    of Arizona. Westcap and Shorey were ordered to cease and desist from
    future violations of A.R.S. §§ 44-1841, -1842, and -1991.
    ¶9            Appellants timely appealed the Commission’s decision to
    the superior court, and the court affirmed. A notice of appeal to this
    Court was timely filed. We have jurisdiction pursuant to A.R.S. §§ 12-
    120.21(A)(1), -913, and -2101(A)(1).
    DISCUSSION
    ¶10           Appellants do not contest the Commission’s conclusion that
    Westcap and Shorey offered and sold unregistered securities, nor do they
    claim either Westcap or Shorey was registered to offer or sell securities
    within or from Arizona. Instead, Appellants argue: (1) A.R.S. §§ 44-1841,
    -1842, and -1991 do not apply to the Westcap securities offering because,
    they contend, neither Westcap nor Shorey actually sold the securities, the
    sales did not occur within or from Arizona, and the sales were not
    fraudulent; (2) even if the conduct of Westcap and Shorey is proscribed by
    4      Pursuant to Arizona Administrative Code (A.A.C.) R14-4-308, the
    Commission may order parties liable for violations of the Arizona
    Securities Act to make a rescission offer to investors. The offer affords
    investors the opportunity to sell back their securities for “cash equal to the
    fair market value of the consideration paid . . . with . . . [i]nterest at a rate
    pursuant to A.R.S. § 44-1201.” A.A.C. R14-4-308.
    4
    SHOREY et al. v. AZCC
    Opinion of the Court
    these statutes, the applicable provisions are preempted by federal law
    regulating securities sales outside the United States; and (3) application of
    these statutes to the Westcap offering imposes an unconstitutional burden
    on interstate commerce.
    ¶11              On appeal from the judgment of the superior court, we
    determine whether the underlying administrative decision of the
    Commission “was illegal, arbitrary, capricious, or involved an abuse of
    discretion.” 
    Eaton, 206 Ariz. at 432
    , ¶ 7 (citing Samaritan Health Servs. v.
    Ariz. Health Care Cost Containment Sys., 
    178 Ariz. 534
    , 537 (App. 1994)).
    Each of Appellants’ arguments presents a question of law, which we
    review de novo. Paczosa v. Cartwright Elementary Sch. Dist. No. 83, 
    222 Ariz. 73
    , 77, ¶ 14 (App. 2009) (“On appeal, we review de novo the court’s
    application of law to th[e] facts.”); Hutto v. Francisco, 
    210 Ariz. 88
    , 90, ¶ 7
    (App. 2005) (“We review federal preemption issues de novo.”); Webb v.
    State ex rel. Ariz. Bd. of Med. Exam’rs, 
    202 Ariz. 555
    , 557, ¶ 7 (App. 2002)
    (“We apply our independent judgment . . . to questions of law, including
    . . . constitutional claims.”).
    I.     Application of A.R.S. §§ 44-1841, -1842, and -1991
    ¶12           The Arizona Securities Act (ASA), A.R.S. §§ 44-1801 through
    -2055, constitutes Arizona’s “blue-sky laws.” Jennings v. Woods, 
    194 Ariz. 314
    , 323, ¶ 40 (1999). Blue-sky laws “are designed to protect the public
    from fraud and deceit arising in [securities] transactions.”5 State v.
    Baumann, 
    125 Ariz. 404
    , 411 (1980). Appellants first argue Westcap and
    Shorey did not engage in prohibited conduct under the ASA because they
    5      Although it is clear that blue-sky laws are aimed at ridding the
    market of overly speculative and fraudulent securities transactions, there
    is some disagreement about the origin of the term. In SEC v. Edwards, the
    U.S. Supreme Court asserted blue-sky laws were so named because “they
    were ‘aimed at promoters who would sell building lots in the blue sky in
    fee simple.’” 
    540 U.S. 389
    , 394 (2004) (quoting 1 L. Loss & J. Seligman,
    Securities Regulation, at 36 (3d ed. 1998)). Much older Supreme Court
    authority, however, asserts the name derived from “the evil at which [the
    law] is aimed; . . . speculative schemes which have no more basis than so
    many feet of blue sky; or . . . to stop the sale of stock in fly-by-night
    concerns, visionary oil wells, distant gold mines, and other like fraudulent
    exploitations.” Hall v. Geiger-Jones Co., 
    242 U.S. 539
    , 550 (1917) (internal
    quotations omitted).
    5
    SHOREY et al. v. AZCC
    Opinion of the Court
    did not sell the securities, the sales did not occur within or from Arizona,
    and the sales were not fraudulent. We disagree.
    A.     Westcap and Shorey Were Unregistered Salespersons Who
    Sold Unregistered Securities Within or From Arizona.
    ¶13           Under the ASA, “[i]t is unlawful to sell or offer for sale
    within or from this state any securities unless the securities have been
    registered . . . or are federally covered securities.”6 A.R.S. § 44-1841.
    Appellants do not assert Westcap securities were “federal covered
    securities” but argue instead that because the offering was made to
    investors through Intuition, it was not made within or from Arizona. This
    contention is unpersuasive for two reasons.
    ¶14           First, viewing the evidence in the light most favorable to
    upholding the Commission’s decision, 
    Hirsch, 237 Ariz. at 458
    n.2, ¶ 1
    (citation omitted), we find the offering was not made by Intuition; rather,
    the offering was created, offered, and sold by Westcap. Although
    Intuition sought out potential investors for Westcap, consistent with the
    offering, only Westcap had the authority to close the transaction. Intuition
    was therefore nothing more than a “go-between,” or intermediary,
    facilitating sales that ultimately occurred between Westcap and its
    investors.
    ¶15          Second, the sale of securities to persons outside of Arizona
    does not require a finding that the sale, itself, was not made within or
    from Arizona. See Ariz. Corp. Comm’n v. Media Prods., Inc., 
    158 Ariz. 463
    ,
    465-67 (App. 1988). In Media Products, the Commission brought an action
    against a Delaware corporation to enjoin the sale of unregistered
    6       “‘Federal covered security’ means any security described as a
    covered security in § 18 of the securities act of 1933.” A.R.S. § 44-1801(12).
    Although Appellants assert Westcap securities were sold under
    Regulation S of federal law, Regulation S securities are not included in the
    Security Act’s definition of “covered securities.” See 15 U.S.C. § 77r(b)(4);
    see also 17 C.F.R. § 230.901, Preliminary Note 4 (“Nothing in these rules
    obviates the need to comply with any applicable state law relating to the
    offer and sale of securities.”). Appellants argue Westcap securities were
    exempt from federal and state regulation requirements under Regulation
    S, but because Regulation S securities are not “covered securities,” the
    Westcap securities offering is subject to the ASA’s registration
    requirements.
    6
    SHOREY et al. v. AZCC
    Opinion of the Court
    securities, alleging the sale would be made within or from Arizona in
    violation of A.R.S. § 44-1841. 
    Id. at 464.
    The corporation asserted that,
    because it was incorporated in Delaware and did not offer the securities in
    Arizona or to Arizona residents, the sales were not made within or from
    the State of Arizona. 
    Id. Therefore, it
    contended, the registration
    requirement of A.R.S. § 44-1841 was inapplicable to its offering. 
    Id. at 464-
    65. This Court found, however, the corporation’s principal place of
    business and base of operations were in Arizona, its officers and directors
    operated from and resided in Arizona, the stock certificates were prepared
    and issued by an agent in Arizona, the board meetings were held in
    Arizona, the escrow agreement designated an Arizona bank as the escrow
    agent, and the sale documents identified an Arizona address as the place
    for notices to be provided. 
    Id. at 465-66.
    Noting the corporation’s Arizona
    activities were “more than ministerial,” this Court concluded the
    securities were sold within or from Arizona under A.R.S. § 44-1841. 
    Id. at 466-67.7
    ¶16          The Arizona Attorney General addressed this issue more
    than sixty years ago, concluding “the words ‘within or from this state’ in
    A.R.S. § 44-1841 encompass the sale or offer for sale of unregistered
    securities within this state, and also the offering and selling of
    unregistered securities to purchasers without the state through a base of
    operations within this state.” Op. Ariz. Att’y Gen. 56-140, at 2-3 (1956).
    The Attorney General added that the words “within or from” do not
    “require the registration of an issue of stock by a corporation organized
    under the laws of Arizona merely because it is an Arizona corporation.”
    
    Id. at 3.
    However, if the corporation’s activities within Arizona are more
    than ministerial, the corporation is subject to the ASA’s registration
    requirements, even if the corporation is only selling securities to non-
    Arizonans. Media 
    Prods., 158 Ariz. at 466-67
    ; Chrysler Capital Corp. v.
    Century Power Corp., 
    800 F. Supp. 1189
    , 1193 (S.D.N.Y. 1992) (applying
    Arizona law).
    7       This Court ultimately held the application of A.R.S. § 44-1841 to the
    corporation was unconstitutional because it would have created a direct
    burden on interstate commerce. 
    Id. at 469.
    Because the corporation sold
    securities registered in other states and with the Securities Exchange
    Commission (SEC) to non-Arizonans, we identified no Arizona interest
    justifying further regulation of the sale. 
    Id. This aspect
    of Media Products
    is discussed further in Part III.
    7
    SHOREY et al. v. AZCC
    Opinion of the Court
    ¶17           Westcap’s actions in Arizona were “more than ministerial.”
    As in Media Products, Westcap’s principal place of business and base of
    operations were established in Arizona, its officers and directors resided
    in and operated from Arizona, the board meetings were held in Arizona,
    and payments were wire transferred to an Arizona bank. In addition,
    Westcap was incorporated in Arizona; the various sale documents,
    including the subscription agreement and private placement
    memorandum, were distributed to potential investors from Shorey in
    Arizona; and the subscription agreement specified Arizona law would
    govern the transaction designating Tucson, Arizona as the appropriate
    forum for any future disagreement. Under these circumstances, the
    transactions are overwhelmingly connected to Arizona, and we find no
    error in the conclusion that Westcap and Shorey sold unregistered
    securities within or from Arizona under A.R.S. § 44-1841.
    ¶18          Similar language in A.R.S. § 44-1842 encompasses Westcap’s
    conduct. “It is unlawful for any dealer to sell or purchase or offer to sell
    or buy any securities, or for any salesman to sell or offer for sale any
    securities within or from this state unless the dealer or salesman is
    registered as such pursuant to the [ASA].” A.R.S. § 44-1842. Again,
    Westcap and Shorey acknowledge they were unregistered salesmen of the
    securities. Having already concluded the sales took place within or from
    Arizona, we find no error in the determination Westcap and Shorey
    violated A.R.S. § 44-1842.
    B.     Westcap and Shorey Made Misrepresentations to Investors
    and Omitted Material Facts in Connection with the Sale of
    Westcap Securities.
    ¶19          The ASA’s anti-fraud statute states, in relevant part:
    It is a fraudulent practice and unlawful for a person, in
    connection with a transaction or transactions within or from
    this state involving an offer to sell or buy securities, or a sale
    or purchase of securities . . . directly or indirectly to do any
    of the following:
    ...
    Make any untrue statement of material fact, or omit to state
    any material fact necessary in order to make the statements
    made, in the light of the circumstances under which they
    were made, not misleading.
    8
    SHOREY et al. v. AZCC
    Opinion of the Court
    A.R.S. § 44-1991(A)(2). Appellants contend they did not violate A.R.S.
    § 44-1991(A)(2) because information regarding the specific amount of
    commissions paid to Intuition and Litchfield was not material. We
    disagree.
    ¶20            “The requirement of materiality is satisfied by ‘a showing of
    substantial likelihood that, under all the circumstances, the misstated or
    omitted fact would have assumed actual significance in the deliberations
    of a reasonable buyer.’” 
    Hirsch, 237 Ariz. at 922
    , ¶ 27 (citing Trimble v. Am.
    Sav. Life Ins. Co., 
    152 Ariz. 548
    , 553 (App. 1986)) (internal quotations
    omitted). Although specific disclosures regarding commissions and
    finders’ fees are not per se required, omitted information that would have
    significance in a reasonable buyer’s deliberations is misleading and thus
    violates A.R.S. § 44-1991(A)(2).
    ¶21            Here, the Commission found Westcap’s payment of 72.5
    percent of invested funds to commissions and finders’ fees would have
    been a substantial factor in a reasonable buyer’s decision to invest. At
    least one other court has acknowledged that a 30 percent commission
    figure is, “as a matter of law, one that most reasonable investors would
    deem material in determining whether to invest,” and “failure to disclose
    this sum misrepresents the investor’s potential profit.” SEC v. Levine, 
    671 F. Supp. 2d 14
    , 30 (D.D.C. 2009) (internal quotation and citation omitted).
    We therefore agree with the Commission’s conclusion that a 72.5 percent
    commission figure is material and should have been disclosed to potential
    Westcap investors. To be reasonably informed, the investor would need
    to know that nearly three-quarters of the total investment amount is
    unavailable to realize any return.
    ¶22           The private placement memorandum presented to investors
    also contains overt misrepresentations and misleading statements. For
    example, the “Use of Proceeds” section of the memorandum breaks down
    how Westcap would use the invested funds, specifically indicating that, of
    the $1,000,000 offering, only $100,000, or 10 percent, would be set aside for
    “offering expenses” — the expense category that investors could
    reasonably believe includes commissions.8 In actuality, the percentage of
    8       The “Use of Proceeds” indicates the rest of the funds would be
    used as follows: $225,000 for local advertising and branding of name;
    $36,000 for staff development and training expenses; $15,000 for
    warehouse and office equipment; $90,000 for acquisition of service and
    installation equipment and vehicles; $357,000 for funding growth in
    9
    SHOREY et al. v. AZCC
    Opinion of the Court
    investment money siphoned off to “offering expenses” was substantially
    higher. This misrepresentation is material. Any reasonable potential
    buyer presented with the truth would carefully consider the likelihood of
    Westcap’s ability to obtain the projected return where 72.5 percent of the
    total invested funds were spent on commissions and finders’ fees.
    ¶23           Appellants lastly argue the Commission did not present any
    evidence of actual harm to investors or what a normal commission and
    finders’ fee would be for an overseas securities transaction. However, the
    Commission had no duty to do so; the Commission need only show
    Westcap’s statements and omissions were objectively material and
    misleading — a feat which it has clearly accomplished. 
    Trimble, 152 Ariz. at 553
    (“[D]efendants have an affirmative duty not to mislead potential
    investors. This requirement not only removes the burden of investigation
    from an investor, but places a heavy burden upon the offeror not to
    mislead potential investors in any way.”) (citation omitted).
    ¶24           Appellants have not “show[n] by clear and satisfactory
    evidence that [the Commission’s decision] is unreasonable or unlawful.”
    Reliable 
    Transp., 86 Ariz. at 370-71
    (quoting A.R.S. § 40-254(E)). We
    therefore find no error in the conclusion that Westcap violated A.R.S. § 44-
    1991(A)(2).9
    II.     Federal Preemption of A.R.S. §§ 44-1841, -1842, or -1991
    ¶25           Appellants argue Arizona’s regulation of securities sold
    exclusively to foreign investors is preempted by SEC Regulation S. Under
    the Supremacy Clause, U.S. Const. art. VI, cl. 2, federal law may preempt
    state law through express preemption, field preemption, or conflict
    preemption. Ting v. AT&T, 
    319 F.3d 1126
    , 1135 (9th Cir. 2003) (citing Int’l
    Paper Co. v. Ouellette, 
    479 U.S. 481
    , 491 (1987), and Pac. Gas & Elec. Co. v.
    accounts receivable and working capital; $125,000 for funding growth in
    inventories; $40,000 for patents and engineering expenses; and $12,000 for
    security deposits.
    9      Although we hold a 72.5 percent commission payment was a
    material fact that should have been disclosed in this case, we need not
    determine what might constitute a reasonable commission for purposes of
    A.R.S. § 44-1991. “This Court’s review is limited to whether there is
    substantial evidence in the record to support the finding of the superior
    court.” Pac. Motor 
    Trucking, 116 Ariz. at 467
    .
    10
    SHOREY et al. v. AZCC
    Opinion of the Court
    Energy Res. Conservation & Dev. Comm’n, 
    461 U.S. 190
    , 204 (1983)). We
    address each type of preemption in turn and, finding that none apply,
    conclude A.R.S. §§ 44-1841, -1842, and -1991 are not preempted by federal
    law.
    A.     Express Preemption
    ¶26            Express preemption exists if Congress has “explicitly stated
    in [a federal] statute’s language” that a state law is preempted. See Morales
    v. Trans World Airlines, Inc., 
    504 U.S. 374
    , 383 (1992) (quoting FMC Corp. v.
    Holliday, 
    498 U.S. 52
    , 56-57 (1990)). Appellants, however, do not identify
    any congressional command within any provision of federal securities law
    which explicitly prohibits Arizona from regulating the sale of securities,
    and our search reveals none.
    ¶27            To the contrary, Congress recognized the validity of blue-
    sky laws governing intrastate transactions by enacting 15 U.S.C. § 78bb(a),
    “a provision ‘designed to save state blue-sky laws from pre-emption.’”
    Edgar v. MITE Corp., 
    457 U.S. 624
    , 641 (1982) (quoting Leroy v. Great W.
    United Corp., 
    443 U.S. 173
    , 182 n.13 (1979)). Thus, the ASA is expressly
    permitted by congressional decree so long as its application is limited to
    securities transactions occurring within or from Arizona. See id.; 15 U.S.C.
    § 78bb(a) (“Except as otherwise specifically provided in this chapter,
    nothing in [Title 15, Chapter 2B of the United States Code] shall affect the
    jurisdiction of the securities commission (or any agency or officer
    performing like functions) of any State over any security or any person
    insofar as it does not conflict with the provisions of this chapter or the
    rules and regulations under this chapter.”). Clearly, federal securities
    laws are intended to co-exist with state securities laws, and for these
    reasons, we find Appellants have not shown the ASA is expressly
    preempted.
    B.     Field Preemption
    ¶28           For the same reasons, Appellants have not shown field
    preemption of the ASA. Field preemption exists “where the scheme of
    federal regulation is sufficiently comprehensive to make reasonable the
    inference that Congress ‘left no room’ for supplementary state
    regulation.” 
    Ting, 319 F.3d at 1136
    (citing In re Cybernetic Servs., Inc., 
    252 F.3d 1039
    , 1045-46 (9th Cir. 2001)) (internal quotation omitted). Although
    federal securities law is quite comprehensive, Appellants do not provide
    any indication that Congress left no room for supplementary state
    11
    SHOREY et al. v. AZCC
    Opinion of the Court
    regulation. Indeed, as addressed above, federal law expressly permits
    states to enact and enforce their own securities laws. See supra ¶ 27.
    C.     Conflict Preemption
    ¶29            Finally, conflict preemption may exist when application of
    state law conflicts with federal law, but only (1) “where compliance with
    both federal and state regulations is a physical impossibility,” or (2) where
    the state law “stands as an obstacle to the accomplishment and execution
    of the full purposes and objectives of Congress.” CTS Corp. v. Dynamics
    Corp. of Am., 
    481 U.S. 69
    , 78-79 (1987) (quoting Ray v. Atl. Richfield Co., 
    435 U.S. 151
    , 158 (1978)) (internal quotations omitted).
    ¶30          Appellants have not identified any impossibility in
    complying with the requirements of both the ASA and federal securities
    laws, and we likewise find no impossibility exists. See N. Star Int’l v. Ariz.
    Corp. Comm’n, 
    720 F.2d 578
    , 583 (9th Cir. 1983) (finding no conflict
    preemption where, although “state standards are more stringent than the
    federal standards, it is possible to comply with both”).
    ¶31           Appellants do argue the ASA is an obstacle to the
    accomplishment and execution of Regulation S, which they contend
    unequivocally exempts its overseas activity from registration and
    disclosure laws. This, however, does not demonstrate how the ASA
    stands as an obstacle to a congressional objective or purpose; even if
    Westcap’s offering were a valid Regulation S security offering — a
    determination we need not make for purposes of this appeal — the
    regulation only exempts security sales from federal registration and
    disclosure laws, not state registration and disclosure laws. See 17 C.F.R.
    § 230.901 (exempting the sale of securities outside the United States from
    the federal registration requirements of 15 U.S.C. § 77e).
    ¶32           Westcap’s argument is further undercut by Preliminary Note
    4 of the rules governing Regulation S security offerings, which states:
    “Nothing in these rules obviates the need to comply with any applicable
    state law relating to the offer and sale of securities.” 17 C.F.R. § 230.901,
    Preliminary Note 4.10 Moreover, the Ninth Circuit Court of Appeals
    10     Despite comprehensive revisions to Regulation S in 1997 and 1998,
    Congress did not change the text of Preliminary Note 4. See Offshore
    Offers and Sales, 63 Fed. Reg. 9632-01, 9642 (Feb. 25, 1998); Offshore Press
    Conferences, Meetings with Company Representatives Conducted
    12
    SHOREY et al. v. AZCC
    Opinion of the Court
    rejected a similar argument that state regulatory efforts aimed at
    reviewing the merits of a securities offering “stand as obstacles to effective
    implementation of the federal regulatory scheme.” N. Star 
    Int’l, 720 F.2d at 582-83
    .
    ¶33           It is clear Congress did not intend Regulation S to exempt
    the sale of securities from applicable state securities laws. We therefore
    find A.R.S. §§ 44-1841, -1842, and -1991 do not conflict with federal
    securities laws and are thus not preempted. Having concluded these ASA
    provisions are applicable, we next address the constitutionality of
    applying these provisions to the Westcap securities offering.
    III.   Constitutionality of A.R.S. §§ 44-1841, -1842, and -1991 as Applied
    ¶34           Appellants argue that applying the ASA under the
    circumstances presented violates the Commerce Clause of the U.S.
    Constitution. That the Commerce Clause limits a state’s power to regulate
    interstate commerce is a truism. U.S. Const. art. I, § 8, cl. 3 (reserving to
    Congress the right “[t]o regulate Commerce . . . among the several
    States”); 
    Edgar, 457 U.S. at 640
    . However, not every state act that impacts
    interstate commerce is invalid. 
    Edgar, 457 U.S. at 641
    . A state statute must
    be upheld unless it directly burdens interstate commerce or imposes an
    incidental burden on interstate commerce that outweighs the state’s
    legitimate local interest. Pike v. Bruce Church, Inc., 
    397 U.S. 137
    , 142 (1970).
    The Supreme Court has repeatedly upheld the constitutionality of blue-
    sky laws against Commerce Clause challenges, finding the state’s purpose
    in enacting such legislation legitimate and the burden incidental. 
    Edgar, 457 U.S. at 641
    .
    ¶35           Appellants nonetheless argue A.R.S. §§ 44-1841, -1842, and
    -1991 directly burden interstate commerce. In the alternative, Appellants
    contend Arizona has no legitimate interest in applying these ASA
    provisions to securities sold to foreign investors, and therefore, even an
    incidental burden is excessive. We disagree.
    Offshore and Press-Related Materials Released Offshore, 62 Fed. Reg.
    53948-03, 53954 (Oct. 17, 1997).
    13
    SHOREY et al. v. AZCC
    Opinion of the Court
    A.     The ASA’s Anti-Fraud Provisions Do Not, as a Matter of
    Law, Impose an Impermissible Burden on Interstate
    Commerce.
    ¶36            Appellants do not present a colorable argument that A.R.S.
    § 44-1991, designed to prevent fraud in the offer and sale of securities,
    imposes a direct burden on interstate commerce. The statute imposes no
    additional requirements on the sale of securities and does not impede
    interstate transactions. See 
    Chrysler, 800 F. Supp. at 1195
    . To the contrary,
    we agree with the U.S. District Court for the Southern District of New
    York, which, in reviewing the constitutionality of A.R.S. § 44-1991, held,
    “such legislation facilitates commerce far more than it can even be argued
    to ‘burden’ in any sense . . . because it provides a measure of assurance
    that commerce will be honestly transacted.” 
    Id. ¶37 Furthermore,
    Congress expressly preserved state authority
    to regulate against fraud. See 15 U.S.C. 77r(c)(1) (stating “the securities
    commission (or any agency or office performing like functions) of any
    State shall retain jurisdiction under the laws of such State to investigate
    and bring enforcement actions, in connection with securities or securities
    transactions . . . with respect to (i) fraud or deceit”). Under this federal
    directive, the ASA’s provisions forbidding fraudulent activity within or
    from Arizona are expressly allowed and cannot be found burdensome
    under a Commerce Clause analysis. Therefore, we hold, as a matter of
    law, that A.R.S. § 44-1991 imposes no impermissible burden on interstate
    commerce and does not violate the Commerce Clause.
    B.     The Registration Requirements of A.R.S. §§ 44-1841 and
    -1842, as Applied, Do Not Directly Burden Interstate
    Commerce, and Any Incidental Burden is Outweighed by
    Arizona’s Legitimate Interest in Protecting its Business
    Reputation.
    ¶38            Appellants rely on Media Products in advancing their
    argument that the registration requirements of A.R.S. §§ 44-1841 and -1842
    improperly burden interstate commerce. In Media Products, this Court
    considered a Delaware corporation’s sale of securities registered with
    other states and the SEC to 
    non-Arizonans. 158 Ariz. at 464-65
    . Under
    those facts, this Court held Arizona did not have a legitimate interest in
    protecting nonresident shareholders whose home states had already
    determined the offerings met their state standards, and that, although
    Arizona’s business reputation is a legitimate local public interest, the
    corporation’s security sales did not place Arizona’s business reputation at
    14
    SHOREY et al. v. AZCC
    Opinion of the Court
    stake. 
    Id. at 468-69
    (citing CTS 
    Corp., 481 U.S. at 1651-52
    , and 
    Edgar, 457 U.S. at 644
    ).       Additionally, because A.R.S. § 44-1841 was not
    “effectuat[ing] a legitimate local public interest,” we held it constituted a
    direct and unconstitutional burden on interstate commerce. Id. (quoting
    
    Edgar, 457 U.S. at 640
    ).
    ¶39            We find important distinctions between Media Products and
    the present case. Although the corporation in Media Products was selling
    securities within or from Arizona, it was not an Arizona corporation, and
    its securities were registered in other states and with the SEC. 
    Id. at 469.
    The out-of-state purchasers’ interests were adequately addressed by the
    appropriate agencies in their home states and the SEC. See 
    id. Moreover, the
    corporation advised purchasers it was based in Delaware and that the
    offerings were not approved by the Commission, effectively eliminating
    any legitimate concern that, “if the sale was unfair, blame could be placed
    on Arizona, tarnishing its reputation.” 
    Id. at 470.
    ¶40            This case, however, presents an entirely different scenario.
    Although Arizona may not have a legitimate interest in protecting
    nonresident shareholders, it does have “an important interest in keeping
    itself free of enterprises which offer questionable investment
    opportunities.” 
    Id. at 469
    (“A state has an interest in seeing that its
    territory is not used as a base of operations to conduct illegal sales in other
    states. Thus, the host state has an interest in protecting its reputation as
    not being a center for illegal or questionable securities activity.”)
    (quotation and citation omitted); see also State ex rel. Corbin v. Goodrich, 
    151 Ariz. 118
    , 122 (App. 1986) (“Arizona has a legitimate interest in regulating
    the conduct of Arizona residents engaged in the offer and sale of securities
    even though those ultimately victimized may not be Arizona residents.”)
    (citing State ex rel. Corbin v. Pickrell, 
    136 Ariz. 589
    , 597 (1983), and Ariz.
    State Real Estate Dep’t v. Am. Standard Gas & Oil Leasing Serv., Inc., 
    119 Ariz. 183
    , 186-87 (App. 1978)). Unlike in Media Products, Arizona’s interest in its
    business reputation is at stake here, where Westcap was incorporated in
    Arizona, actively operated from the state, and sold securities not
    registered anywhere. See 
    Goodrich, 151 Ariz. at 122
    (approving state
    exercise of police power “to regulate the conduct of persons residing in
    Arizona and using this state as a base for securities operations”).
    ¶41          Furthermore, there is no evidence these provisions of the
    ASA apply more or less stringently to, or unfairly target, interstate
    commerce. See 
    Pike, 397 U.S. at 142
    (noting statute affecting interstate
    commerce must be applied “even-handedly”).          Rather, the ASA
    consistently addresses unlawful conduct occurring within or from
    15
    SHOREY et al. v. AZCC
    Opinion of the Court
    Arizona by an Arizona corporation, something it is clearly entitled to do.
    
    Goodrich, 151 Ariz. at 122
    ; see also 
    Edgar, 457 U.S. at 641
    (noting blue-sky
    laws that regulate transactions occurring within the regulating state have
    traditionally been upheld against Commerce Clause challenges). On these
    principles, we find no direct burden on interstate commerce by applying
    A.R.S. §§ 44-1841 and -1842 in this case.
    ¶42           Although A.R.S. §§ 44-1841 and -1842 impose an incidental
    burden on the offer or sale of securities by requiring registration,
    Appellants do not illustrate how applying these ASA provisions in this
    case excessively burdens interstate commerce in relation to Arizona’s
    legitimate interest in protecting its business reputation. See 
    Pike, 397 U.S. at 142
    (establishing a balancing test to determine whether a state statute
    excessively burdens interstate commerce in relation to the local benefits)
    (citing Huron Portland Cement Co. v. City of Detroit, 
    362 U.S. 440
    , 443
    (1960)).
    ¶43            Westcap’s security offering clearly implicates Arizona’s
    business reputation, and the registration requirements of A.R.S. §§ 44-1841
    and -1842 are no more burdensome on interstate securities transactions
    than on a securities transaction with Arizona residents. To hold that
    Arizona must apply different standards when an Arizona corporation
    sells securities to an Arizona resident than when it sells to a nonresident
    would be absurd. Arizona’s interest in regulating the conduct of Arizona
    corporations selling unregistered, speculative, or misleading securities
    within or from Arizona — regardless of the purchaser’s place of residence
    — far exceeds any incidental burden imposed by the registration
    requirements.
    ¶44           Appellants also suggest that, because this application of the
    ASA burdens foreign commerce, as opposed to interstate commerce, it
    warrants greater scrutiny under S.-Cent. Timber Dev., Inc. v. Wunnicke, 
    467 U.S. 82
    , 96 (1984) (noting “‘Commerce Clause scrutiny may well be more
    rigorous when a restraint on foreign commerce is alleged’”) (quoting
    Reeves, Inc. v. Stake, 
    447 U.S. 429
    , 438 n.9 (1980)). Westcap has not,
    however, identified any foreign policy issues or federal directives
    implicated by applying these ASA provisions to an Arizona corporation
    that would run afoul of the Commerce Clause. See Container Corp. of Am.
    v. Franchise Tax Bd., 
    463 U.S. 159
    , 194 (1983); Piazza’s Seafood World, L.L.C.
    v. Odom, 
    448 F.3d 744
    , 750 (5th Cir. 2006) (noting the Commerce Clause
    prohibits even nondiscriminatory state regulations if they “(1) create a
    substantial risk of conflicts with foreign governments; or (2) undermine
    the ability of the federal government to ‘speak with one voice’ in
    16
    SHOREY et al. v. AZCC
    Opinion of the Court
    regulating commercial affairs with foreign states”) (quoting New Orleans
    S.S. Ass’n v. Plaquemines Port, Harbor & Terminal Dist., 
    874 F.2d 1018
    , 1022
    (5th Cir. 1989)). We therefore hold the application of A.R.S. §§ 44-1841
    and -1842 to the offer or sale of securities made within or from Arizona to
    foreign investors does not improperly interfere with interstate or foreign
    commerce.
    CONCLUSION
    ¶45            The superior court’s order upholding the Commission’s
    decision is affirmed.
    :ama
    17
    

Document Info

Docket Number: 1 CA-CV 14-0471

Citation Numbers: 238 Ariz. 253, 359 P.3d 997, 721 Ariz. Adv. Rep. 27, 2015 Ariz. App. LEXIS 198

Judges: Jones, Downie, Thompson

Filed Date: 9/17/2015

Precedential Status: Precedential

Modified Date: 11/2/2024

Authorities (26)

Leroy v. Great Western United Corp. , 99 S. Ct. 2710 ( 1979 )

FMC Corp. v. Holliday , 111 S. Ct. 403 ( 1990 )

Huron Portland Cement Co. v. City of Detroit , 80 S. Ct. 813 ( 1960 )

Ray v. Atlantic Richfield Co. , 98 S. Ct. 988 ( 1978 )

International Paper Co. v. Ouellette , 107 S. Ct. 805 ( 1987 )

Morales v. Trans World Airlines, Inc. , 112 S. Ct. 2031 ( 1992 )

State v. Barber , 133 Ariz. 572 ( 1982 )

State Ex Rel. Corbin v. Pickrell , 136 Ariz. 589 ( 1983 )

State v. Baumann , 125 Ariz. 404 ( 1980 )

NORTH STAR INTERNATIONAL, a Nevada Corporation, Plaintiff-... , 720 F.2d 578 ( 1983 )

New Orleans Steamship Association v. Plaquemines Port, ... , 874 F.2d 1018 ( 1989 )

Trimble v. American Savings Life Insurance , 152 Ariz. 548 ( 1986 )

Samaritan Health Services v. Arizona Health Care Cost ... , 178 Ariz. 534 ( 1994 )

Securities & Exchange Commission v. Edwards , 124 S. Ct. 892 ( 2004 )

darcy-ting-individually-and-on-behalf-of-all-others-similarly-situated , 319 F.3d 1126 ( 2003 )

State Ex Rel. Corbin v. Goodrich , 151 Ariz. 118 ( 1986 )

Hutto v. Francisco , 210 Ariz. 88 ( 2005 )

Hall v. Geiger-Jones Co. , 37 S. Ct. 217 ( 1917 )

U.S. Securities & Exchange Commission v. Levine , 671 F. Supp. 2d 14 ( 2009 )

Chrysler Capital Corp. v. Century Power Corp. , 800 F. Supp. 1189 ( 1992 )

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