Anthony Weber and Jerrold Rothous v. Iowa Insurance Division ( 2022 )

IN THE COURT OF APPEALS OF IOWA
No. 21-1022
Filed July 20, 2022
ANTHONY WEBER and JERROLD ROTHOUSE,
Petitioners-Appellants,
vs.
IOWA INSURANCE DIVISION,
Respondent-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Jeanie Vaudt, Judge.
Anthony Weber and Jerrold Rothouse appeal the judicial review ruling
affirming the decision of the Iowa Insurance Division. AFFIRMED.
Alexander E. Wonio of Hansen, McClintock & Riley, Des Moines, for
appellants.
Thomas J. Miller, Attorney General, and Jordan G. Esbrook, Assistant
Attorney General, for appellee.
Heard by Bower, C.J., and Schumacher and Ahlers, JJ.
2
AHLERS, Judge.
“Blue-sky laws” are statutes designed to protect citizens from fraudulent
investment schemes.1 Typically, they seek to achieve this goal by requiring things
like licensing of brokers, registration of securities, and approval of investment
offerings by appropriate governmental agencies.2 Iowa’s version of a blue-sky law
is Iowa Code chapter 502, the Iowa Uniform Securities Act.3 The statute makes
the Iowa Insurance Division (Division) responsible for enforcing it.4
The Division became aware that a Texas company named Carson Energy,
Inc., (Carson) had solicited Iowans to invest in Carson’s oil and gas wells in Texas
and elsewhere. The Division investigated and ended up filing charges against
Carson; Carson’s sole director and president, Earl Carter Bills II; and two of
Carson’s salesmen, Anthony Weber and Jerrold Rothouse. After Carson went out
of business and Bills died, only Weber and Rothouse remained as parties to
answer the Division’s charges. Specifically, the Division alleged Weber and
Rothouse placed cold calls to Iowans offering to sell “joint venture shares” in
Carson’s wells. As part of the investment process, Iowans persuaded to invest
had to contribute money and sign an Application Agreement, Joint Venture
Agreement, and Power of Attorney (collectively “agreement”). The Division alleged
the sale of the investments violated Iowa’s blue-sky law in two ways. In one count,
1 Blue-sky law, Black’s Law Dictionary (11th ed. 2019).
2 Blue-sky law, Black’s Law Dictionary (11th ed. 2019).
3 Iowa Code § 502.101 (2015).
4 See Iowa Code §§ 502.601, .602 (spelling out the Division’s responsibilities for
administering the Iowa Uniform Securities Act).
3
the Division alleged Weber and Rothouse engaged in the sale of unregistered
securities. In a second count, it alleged they committed securities fraud.
As the charges progressed, the Division filed a motion for partial summary
judgment on the unregistered-securities count, seeking a declaration that the
investments Weber and Rothouse sold qualified as “securities” under Iowa law.
Weber and Rothouse did not resist the Division’s motion, but they filed a competing
motion for summary judgment, contending the investments they sold were not
“securities” and asserting other defenses. An administrative law judge (ALJ)
determined that, as a matter of law, the investments Weber and Rothouse sold
were “securities” and Weber and Rothouse’s other asserted defenses did not
protect them from liability. Based on these determinations, the ALJ granted the
Division’s motion and denied Weber and Rothouse’s.
The Division then filed a second motion for summary judgment on the
unregistered-securities count. Building off the prior determination that the
investments were securities, the Division sought a final ruling rejecting Weber and
Rothouse’s other defenses. The ALJ granted the Division’s motion, ultimately
concluding that Weber and Rothouse engaged in the sale of unregistered
securities. Thus, the only remaining issue as to the unregistered-securities count
was to determine the appropriate penalties.
The case proceeded to an evidentiary hearing on the fraud count and the
issue of penalties. The hearing included testimony from Weber, Rothouse, and
three Iowans who signed agreements and invested in Carson’s wells. After the
hearing, the ALJ issued a proposed decision in which the ALJ declined to
reconsider the earlier grants of summary judgment on the unregistered-securities
4
count, found the Division failed to prove Weber and Rothouse engaged in
securities fraud, and imposed various penalties against Weber and Rothouse,
including fines of $6000 against Weber and $9000 against Rothouse for the sale
of unregistered securities. The insurance commissioner adopted the ALJ’s
decision as final agency action. Weber and Rothouse sought judicial review, and
the district court affirmed the agency. Weber and Rothouse appeal.
I. Standard of Review
Iowa Code section 17A.19(10) [(2020)] governs judicial
review of agency decision making. We will apply the standards of
section 17A.19(10) to determine whether we reach the same results
as the district court. The district court may grant relief if the agency
action has prejudiced the substantial rights of the petitioner, and the
agency action meets one of the enumerated criteria contained in
section 17A.19(10)(a) through (n).[5]
While the ALJ issued a proposed decision after an evidentiary hearing and
performed some fact finding, the parties agree the issue on judicial review was
decided by summary judgment. Additionally, neither party asserts the agency’s
decision is entitled to deference, and both parties agree the same standards
applicable to a summary judgment decision of the district court apply to the
agency’s decision here.6
“We review orders granting summary judgment for correction of errors at
law.”7 “Summary judgment is appropriate ‘if the pleadings, depositions, answers
5 Evercom Sys., Inc. v. Iowa Utils. Bd., 805 N.W.2d 758, 762 (Iowa 2011) (internal
citations and quotation marks omitted).
6 See Iowa Admin. Code r. 191-3.15(5) (stating a motion for summary judgment in
a Division proceeding “shall comply with the requirements of Iowa Rule of Civil
Procedure 1.981 and shall be subject to disposition according to the requirements
of that rule”).
7 Banwart v. 50th St. Sports, L.L.C., 910 N.W.2d 540, 544 (Iowa 2018).
5
to interrogatories, and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.’”8 “A genuine issue of fact exists if
reasonable minds can differ on how an issue should be resolved.”9 “A fact is
material when it might affect the outcome of a lawsuit.”10 “Even if the facts are
undisputed, summary judgment is not proper if reasonable minds could draw
different inferences from them and thereby reach different conclusions.”11
II. Analysis
The fighting issue on appeal is whether the agency properly determined as
a matter of law that the joint-venture shares that Weber and Rothouse sold to
Iowans were securities that were required to be registered. The Division argues
the investments are securities. Weber and Rothouse argue they are not.
A. Error Preservation
The Division begins by asserting that Weber and Rothouse failed to
preserve error on the issue they raise on appeal because they did not raise the
issue to the agency.12 The Division points out that Weber and Rothouse never
filed a resistance to the Division’s first motion for partial summary judgment. While
that is true, Weber and Rothouse did file their own motion for summary judgment
8 Banwart, 910 N.W.2d at 544 (quoting Iowa R. Civ. P. 1.981(3)).
9 Banwart, 910 N.W.2d at 544 (quoting Est. of Gottschalk v. Pomeroy Dev., Inc.,
893 N.W.2d 579, 584 (Iowa 2017)).
10 Banwart, 910 N.W.2d at 544.
11 Banwart, 910 N.W.2d at 544–45 (quoting Clinkscales v. Nelson Sec., Inc., 697
N.W.2d 836, 841 (Iowa 2005)).
12 See Renewable Fuels, Inc. v. Iowa Ins. Comm’r, 752 N.W.2d 441, 446 (Iowa Ct.
App. 2008) (“In cases involving judicial review of final action of an administrative
agency, an issue must generally be presented to the agency to satisfy error
preservation requirements.”).
6
shortly after the Division filed its motion. In their motion, Weber and Rothouse
asserted their defenses to the unregistered-securities charge. In their
memorandum of authorities supporting their motion, the duo clearly argued the
agreements “are not securities.” Their arguments quoted the language of the
agreements, and the ALJ’s first summary judgment decision considered this
language. We find their arguments preserved for our review.
B. Securities Under Iowa Law
With certain exceptions not alleged to be applicable here, Iowa Code
section 502.301(3) (2015) prohibits a person from selling a security in Iowa unless
the security is registered in Iowa.13 There is no dispute the agreements were not
registered in Iowa. Thus, the issue is whether the agreements qualify as
“securities” under Iowa law.
“The term ‘security’ is broadly defined by statute to include investment
contracts.”14 While a joint-venture interest is ordinarily not an investment contract,
“economic reality prevails over form.”15 Relying on federal law, our supreme court
adopted a three-part test to identify an investment contract:
1. An investment of money;
2. In a common enterprise; and
3. On an expectation of profits to be derived solely from the efforts of
individuals other than the investor.[16]
13 See Iowa Code § 502.301(1)–(2) (providing exceptions to the registration
requirement).
14 State v. Kraklio, 560 N.W.2d 16, 18 (Iowa 1997); accord Iowa
Code § 502.102(28) (defining “security”).
15 Corp. E. Assocs. v. Meester, 442 N.W.2d 105, 107 (Iowa 1989).
16 Meester, 442 N.W.2d at 107 (quoting Sec. & Exch. Comm’n v. W.J. Howey Co.,
328 U.S. 293, 298–99 (1946)); see also Kraklio, 560 N.W.2d at 18 (applying the
same factors).
7
This test “is flexible, rather than static, ‘to meet the countless and variable schemes
devised by those who seek the use of the money of others on the promise of
profits.’”17 The supreme court returned to relying on federal law for additional
guidance on the third prong:
All of this indicates that an investor who claims his general
partnership or joint venture interest is an investment contract has a
difficult burden to overcome. On the face of a partnership
agreement, the investor retains substantial control over his
investment and an ability to protect himself from the managing
partner or hired manager. Such an investor must demonstrate that,
in spite of the partnership form which the investment took, he was so
dependent on the promoter or on a third party that he was in fact
unable to exercise meaningful partnership powers. A general
partnership or joint venture interest can be designated a security if
the investor can establish, for example, that (1) an agreement among
the parties leaves so little power in the hands of the partner or
venturer that the arrangement in fact distributes power as would a
limited partnership; or (2) the partner or venturer is so inexperienced
and unknowledgeable in business affairs that he is incapable of
intelligently exercising his partnership or venture powers; or (3) the
partner or venturer is so dependent on some unique entrepreneurial
or managerial ability of the promoter or manager that he cannot
replace the manager of the enterprise or otherwise exercise
meaningful partnership or venture powers.[18]
Before turning to the merits of the parties’ arguments, we first want to clarify
the record we are considering. As noted, the administrative proceeding included
an evidentiary hearing after the ALJ granted summary judgment finding that the
agreements were securities. Weber and Rothouse do not ask us to consider any
testimony or exhibits produced during the hearing. Therefore, we limit our analysis
to the evidence in the record at the time of the first partial summary judgment
decision, when the ALJ found the agreements were securities.
17Kraklio, 560 N.W.2d at 18 (quoting Howey, 328 U.S. at 299).
18 Meester, 442 N.W.2d at 107 (quoting Williamson v. Tucker, 645 F.2d 404, 424
(5th Cir. 1981)).
8
We now turn to the merits. In support of their claim that the investments
they sold were not investment contracts, Weber and Rothouse point to language
in the agreements requiring active participation by and representing investment
expertise of the investors. Specifically, the Application Agreement contains
several statements whereby the signors represent they will actively participate in
the well projects and they have investing expertise:
Participants in this Joint Venture are provided extensive and
significant management powers. Participants are and will be
expected to exercise such powers and are prohibited from relying on
the Managing Venturer[19] for the success or profitability of the Joint
Venture.
....
. . . . Applicant understands the information set forth below is
merely a summary and, therefore, may not include all of the
information that Applicant might deem material to his (her) decision
to participate in the joint Venture. Applicant is encouraged to review
additional information . . . . Applicant agrees that Applicant will rely
solely on his (her) own inquiry in formulating his (her) ultimate
decision as to whether or not to participate in the Joint Venture.
....
As a condition to being admitted to the Joint Venture,
Venturers must be prepared to actively participate in, the
management of the Joint Venture and must possess extensive
experience and knowledge in business affairs such that they are
capable of intelligently exercising their management powers as a
Joint Venturer. . . . Additionally, as a condition to participation in the
Joint Venture, Venturers must rely on their own business judgment
and not on any unique entrepreneurial or managerial ability of
Carson for the success of the Joint Venture due to their ability to (i)
exercise their meaningful Joint Venture powers; and (ii) replace the
Managing Venturer . . . .
....
Applicant warrants and represents, prior to making a decision
whether to participate in the Joint Venture, he (she) will conduct a
personal investigation and will research and consider all factors that
bear on the advisability of participating in the Venture, and his (her)
decision will not be based solely upon the representations of the
Managing Venturer or its affiliates or representative.
19The Application Agreement designates Carson as the proposed Managing
Venturer.
9
....
Applicant is experienced in business matters and has
sufficient business acumen to analyze and evaluate the merits and
risks of participating in the Joint Venture. The undersigned
acknowledges and understands participation in the Joint Venture is
not intended nor considered by the Managing Venturer to be
“securities” as that term is used in state and federal securities
regulation . . . . Accordingly, the Applicant warrants and represents
that he (she) possesses extensive experience and knowledge in
business affairs such that he (she) is capable of intelligently
exercising his (her) management powers as a Joint Venturer. In
addition, the undersigned warrants and represents he (she) is not
relying on the unique entrepreneurial or managerial ability of Carson
for the success of the Joint Venture, and his (her) experience and
knowledge in business affairs enable him (her) to replace Carson as
Managing Venturer and otherwise exercise meaningful joint venture
powers.
Despite the application’s broad language about investors exercising
partnership powers, the Joint Venture Agreement limits the powers available to the
investors. The Joint Venture Agreement places day-to-day control with the
Managing Venturer. The investors’ primary power appears to be removal of the
Managing Venturer, though they also had other voting powers.
Regardless of the powers described in the agreements, the key
consideration is whether the investors were so reliant on Carson that they were “in
fact unable to exercise meaningful partnership powers.”20 Here, there is no
evidence any investor exercised any partnership powers. The Division submitted
affidavits from fourteen Iowans who signed the agreements and sent money to
Carson. While the affidavits are terse and similarly worded, all fourteen Iowans
20Meester, 442 N.W.2d at 107 (quoting Williamson, 645 F.2d at 424); accord Sec.
& Exch. Comm’n v. Arcturus Corp., 928 F.3d 400, 413 (5th Cir. 2019) (“[F]ormal
powers are not dispositive—courts must determine whether investors can and do
exercise those powers.”).
10
stated their sole involvement with Carson’s well projects was to send money to
Carson.
Weber and Rothouse submitted their own affidavits. However, these
affidavits focus on defenses the duo asserted before the agency that differ from
the defense they raise on appeal. The affidavits focused on defenses that the duo
had no authority to register the investments and they did not know the investments
needed to be registered. The duo has not raised an issue related to those
defenses on appeal; rather, they limit their defense to arguing that the investments
were not securities. However, the affidavits they submitted as part of the dueling
summary judgment process do not address this defense, as the affidavits do not
touch on the investors’ participation in Carson’s well projects or their investment
expertise. Instead, they emphasize that the duo’s involvement was limited to
making cold calls for Carson and they had no knowledge of any need to register
the agreements as securities or authority to do so.
Weber and Rothouse compare their claims to those in Securities &
Exchange Commission v. Arcturus Corp., 928 F.3d 400 (5th Cir. 2019), wherein
the Fifth Circuit found genuine issues of material fact precluding summary
judgment as to whether “joint ventures” for oil and gas wells were actually
securities.21 We find Arcturus unpersuasive because several factors present in
that case are absent here. Again, there is no evidence the investors here
exercised their formal partnership powers.22 There is no indication the investors
21 Arcturus, 928 F.3d at 424.
22 Cf. Arcturus, 928 F.3d at 413 (noting “the record suggests that the investors
utilized their powers”).
11
had any source of information other than Carson.23 There is no indication the
investors knew each other or ever communicated with each other. 24 Carson
attracted the Iowa investors by placing cold calls,25 and thirteen of the fourteen
Iowa investors stated they had no experience or expertise in the oil and gas
industry26 with no indication any third-party assisted the Iowans with the Carson
projects.27 Given these differences in the cases, we come to a different conclusion
than that reached in Arcturus.
During oral argument, Weber and Rothouse’s counsel used a tennis
analogy. Counsel argued that the Division, as the party moving for summary
judgment, had the obligation to get the serve in by showing there is no genuine
issue of material fact before the duo had the obligation to return the serve by
presenting evidence that generates a fact question.
In support of its claim that the Division did not get the serve in, Weber and
Rothouse point to the principle that the factfinder is not required to accept the
investors’ affidavits as true.28 They argue that, in light of the representations of
investor savvy and involvement contained in the agreements, all the Division did
23 Cf. Arcturus, 928 F.3d at 415 (“The record suggests that investors had numerous
sources of information.”).
24 Cf. Arcturus, 928 F.3d at 416–17 (“The record shows that the investors did in
fact communicate with each other. . . . The record also shows documents in which
the Managers identified the other investors.”).
25 See Arcturus, 928 F.3d at 418 (“The cold-calling campaign is probative of the
investors’ experience.”).
26 Cf. Arcturus, 928 F.3d at 419 (“[M]any investors did, in fact, have experience in
oil and gas drilling.”).
27 Cf. Arcturus, 928 F.3d at 419 (“The record also shows that various investors had
advisors helping them make decisions . . . .”).
28 See Banwart, 910 N.W.2d at 551 (in denying summary judgment, noting the
factfinder “is free to disbelieve” the witness).
12
by presenting the investors’ affidavits was to generate a fact question. Therefore,
according to the duo, the Division did not get the serve in and the duo had no
obligation to return it by pointing to conflicting evidence.
We disagree with the duo’s claim. Even though the agreements make
representations about the investors’ business savvy and outline some powers
available to the investors, the key question is whether the investors actually had
that savvy and were effectively able to wield those powers.29 The Division’s
affidavits show that the investors had little to no experience with oil and gas wells
and were not able to use the powers stated in the agreements. In other words, the
factual assertions in the Division’s motion, supported by affidavits, were that the
reality of the investment differed from the representations in the agreements.
Faced with the factual assertions alleging that the reality of the investment
was different from that claimed in the agreement, the duo’s mere reliance on the
terms of the agreements was not enough. A party resisting a motion for summary
judgment cannot “rest upon the mere allegations or denials in the pleadings,”30 but
must point to competing facts by use of pleadings, depositions, answers to
interrogatories, admissions on file, or affidavits.31 Weber and Rothouse introduced
29 See Meester, 442 N.W.2d at 107.
30 Iowa R. Civ. P. 1.981(5).
31 See Iowa R. Civ. P. 1.981(5) (“When a motion for summary judgment is made
and supported as provided in this rule, an adverse party may not rest upon the
mere allegations or denials in the pleadings, but the response, by affidavits or as
otherwise provided in this rule, must set forth specific facts showing that there is a
genuine issue for trial.”); see also Iowa R. Civ. P. 1.981(3) (“The judgment sought
shall be rendered forthwith if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law.”).
13
no evidence contradicting the Division’s claims about the realities of this
investment. Instead, they made legal arguments that the agreements were not
securities, focusing their factual arguments on other defenses. Even on appeal,
Weber and Rothouse merely dispute the credibility of the affidavits without pointing
to any evidence that contradicts the affidavits.
Based on the record here, we agree there is no genuine issue of material
fact that the agreements are securities. To put it in terms of the duo’s analogy, the
Division got its serve in by asserting facts that established that the reality of the
investments differed from the representations in the agreements in that the
investors were not experienced with oil and gas wells and had no effective ability
to actively participate in the investment. Weber and Rothouse failed to return the
serve by presenting conflicting evidence to generate a fact question. So, the point
goes to the Division. In this case, it happens to be match point.
III. Conclusion
We find no genuine issue of material fact that the agreements Weber and
Rothouse offered to Iowan investors were securities and they were not registered
as required by Iowa law. Therefore, we affirm the district court’s ruling affirming
the Division’s decision.
AFFIRMED.