Simmons v. Acc

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
GEORGE T. SIMMONS, et al.,
Plaintiffs/Appellants,
v.
ARIZONA CORPORATION COMMISSION,
Defendant/Appellee.
No. 1 CA-CV 19-0047
No. 1 CA-CV 19-0048
FILED 12-05-2019
AMENDED PER ORDER FILED 12-06-2019
Appeal from the Superior Court in Maricopa County
No. LC2018-000077-001
The Honorable Sigmund Popko, Judge Pro Tempore
AFFIRMED
COUNSEL
Clark Hill, PLC, Scottsdale
By Christopher Thomas Curran, Charles R. Berry
Counsel for Plaintiffs/Appellants George T. Simmons and Janet B. Simmons
Bruce L. Orr and Susan Orr, Long Beach, CA
Plaintiffs/Appellants
Arizona Corporation Commission, Phoenix
By Paul Kitchin
Counsel for Defendant/Appellee
SIMMONS, et al. v. ACC
Decision of the Court
MEMORANDUM DECISION
Judge David D. Weinzweig delivered the decision of the Court, in which
Presiding Judge Randall M. Howe and Judge Maurice Portley1 joined.
W E I N Z W E I G, Judge:
¶1 Appellants George Simmons (“Simmons”), Janet Simmons,
Bruce Orr (“Orr”) and Susan Orr appeal the superior court’s order
affirming the Arizona Corporation Commission’s (“Commission”) decision
that Simmons and Orr were “control persons” of USA Barcelona Realty
Advisors, LLC (“Barcelona”) under A.R.S. § 44-1999(B) and thus
secondarily liable under the Arizona Securities Act.2 Because the
Appellants have shown no reversible error, the decision is affirmed.
FACTS AND PROCEDURAL BACKGROUND
¶2 Richard Harkins formed Barcelona in November 2010 to
develop and acquire hotels and apartments. As relevant here, Barcelona
offered and sold investments to the public, including “promissory notes
and investment contracts.” It used private offering memoranda to describe
the opportunities to potential investors. Barcelona raised over $1.4 million
from ten investors between October 2012 and July 2014.
¶3 Barcelona was governed by two primary operating
documents from 2012 and 2013. The operating agreements vested day-to-
day management in Harkins, but stated that “Executive Members” have
“overall management and control of [Barcelona’s] business and affairs,”
and instructed that “Major Decisions” must be approved by a majority of
Executive Members, who were authorized to call meetings for this purpose.
The offering memoranda echoed this point, telling potential investors that
1 The Honorable Maurice Portley, Retired Judge of the Court of
Appeals, Division One, has been authorized to sit in this matter pursuant
to Article 6, Section 3, of the Arizona Constitution.
2 Janet Simmons and Susan Orr are the spouses of George and Bruce,
and were named in the enforcement action only to determine the marital
communities’ liability.
2
SIMMONS, et al. v. ACC
Decision of the Court
“Executive Members have control of the company through their exclusive
power to approve all ‘Major Decisions.’”
¶4 Both operating agreements named Simmons and Orr as
Executive Members. Simmons testified that “his view of the role of
Executive Members was to protect the interests of nonvoting members in
major decisions that would have affected their interests in the company,”
and recognized that Executive Members “would have a material impact on
the success or future of the company.” Orr similarly believed that Executive
Members “would decide major decisions” and “driv[e] the company.”
Beyond that, Simmons and Orr were named as two of the company’s four
“Managers” in Barcelona’s amended April 2013 articles of organization,
and Barcelona provided their biographies to potential investors in the
offering memoranda.
¶5 The administrative record also shows that Simmons and Orr
signed letters from Barcelona to investors as Executive Members. They
signed one letter informing investors about Barcelona’s latest investment
opportunity, and signed another when funds had run out to inform
investors that interest payments would be delayed. And as an Executive
Member, Orr collected a guaranteed salary under the operating agreement
from November 2012 until June 2013.
¶6 Simmons and Orr also helped craft important documents.
Simmons made extensive handwritten edits to parts of the second
operating agreement, which named him an Executive Member. Simmons
and Orr also had “[m]ajor input” in the offering memoranda according to
Harkins, the self-described “chief draftsman.” For instance, Orr assisted
with the financial projections of the various investment opportunities
described within the memoranda.
¶7 Simmons served as the Executive Vice President and Chief
Operating Officer of Barcelona. The amended articles in April 2013
identified Simmons as owning at least 20 percent of Barcelona, although
Simmons testified his interest never exceeded 10 percent. The record also
included evidence and testimony that Simmons entered contracts on
Barcelona’s behalf, approved expense reports, signed one investor’s
subscription agreement, and offered two jobs at Barcelona. One of
Barcelona’s independent contractors testified that Harkins and Simmons
“would conduct rehearsal sessions with him and another person who was
brought in to market the product,” and Harkins and Simmons “would
pretend to be the investor and would critique the presentations of the
product.”
3
SIMMONS, et al. v. ACC
Decision of the Court
Enforcement Action
¶8 A “former officer” of Barcelona complained to the
Commission in 2015 that Barcelona was misleading investors. The
Commission later brought an enforcement action against Barcelona for
violating the Arizona Securities Act’s anti-fraud rules. A.R.S. § 44-1991.
The Commission claimed that Simmons, Orr and other officers were
vicariously liable for the alleged fraud as “control persons” of Barcelona.
¶9 An administrative law judge (“ALJ”) heard the claims over
seven days in May 2016. Thirteen witnesses testified, including five
investors, Harkins, Simmons and Orr. Simmons, represented by counsel,
and Orr, representing himself, each cross-examined the witnesses.
¶10 After post-hearing briefing, the ALJ issued his recommended
opinion and order, which the Commission accepted on January 3, 2018. The
Commission’s unanimous 171-page decision found that Barcelona violated
several provisions of the Act and committed eight counts of fraud involving
false statements and misleading omissions made to investors.
¶11 The Commission also found that Simmons and Orr were
“control persons” in Barcelona by February 1, 2013, and thus secondarily
liable for the primary fraud, along with their marital communities. The
Commission ordered that Simmons and Orr were jointly and severally
liable to pay $1,215,353 in restitution to defrauded investors. The
Commission also imposed administrative fines of $40,000 and $30,000,
respectively. The ALJ found Simmons’ testimony to be “the least credible”
of those charged.
¶12 After rehearing applications were denied, Simmons and Orr
sought judicial review and the superior court affirmed the Commission’s
decision. This timely appeal followed. We have jurisdiction pursuant to
A.R.S. § 12-2101(A)(1).
DISCUSSION
¶13 We will affirm the Commission’s decision on review unless it
is “contrary to law, is not supported by substantial evidence, is arbitrary
and capricious or is an abuse of discretion.” A.R.S. § 12-910(E). We defer to
the Commission’s factual findings if supported by substantial evidence,
even if other evidence before the Commission would support a different
conclusion. Waltz Healing Ctr., Inc v. Ariz. Dep’t of Health Servs., 245 Ariz.
610, 613, ¶ 9 (App. 2018). We consider the evidence in the light most
favorable to sustaining the Commission’s decision, Special Fund Div. v.
4
SIMMONS, et al. v. ACC
Decision of the Court
Indus. Comm’n, 182 Ariz. 341, 346 (App. 1994), but are not bound by the
Commission’s legal conclusions, Sanders v. Novick, 151 Ariz. 606, 608 (App.
1986).
¶14 Simmons and Orr do not contest the Commission’s findings
of fraud under A.R.S. § 44-1991. Nor do they assert the good-faith defense
provided to control persons under A.R.S. § 44-1999(B). Instead, Simmons
and Orr contend the Commission had no evidence to determine they were
control persons, insisting they had no meaningful authority at Barcelona
and never signed the operating agreements. We must therefore decide
whether the record includes substantial evidence to support the
Commission’s decision that Simmons and Orr were “control persons” at
Barcelona under A.R.S. § 44-1999(B).
¶15 The Arizona Securities Act provides that “control persons”
are jointly and severally liable to the same extent as persons who commit a
primary violation of A.R.S. §§ 44-1991 or -1992. See A.R.S. §§ 44-1999. The
Act imposes “presumptive control liability on those persons who have the
power to directly or indirectly control the activities of those persons or
entities liable as primary violators” of the Act’s anti-fraud provision. E.
Vanguard Forex, Ltd. v. Ariz. Corp. Comm’n, 206 Ariz. 399, 412, ¶ 42 (App.
2003) (emphasis in original). A finding of “control” only requires evidence
that a person has the legal power to control—it does not require that the
person exercise that power or actively participate in the unlawful conduct.
Id. at ¶¶ 41-42. Active participation is not required because the Act seeks
to discourage control persons from passively allowing misconduct to occur
under their watch. See id. at ¶¶ 41, 50.
¶16 The record contains sufficient evidence to support the
Commission’s finding. Barcelona’s governing documents imbued
Simmons and Orr with substantial power as Executive Members to decide
important issues, and that power was also recognized in the amended
articles of organization. See A.R.S. § 29-681 (management powers and
structures are governed by operating agreements). Simmons and Orr
testified about the critical role of Executive Members. Both confirmed their
leadership roles in written communications to investors and helped craft
important governing and sales documents. Barcelona touted their
affiliation in its marketing materials. Simmons held additional leadership
positions (Executive Vice President and Chief Financial Officer), entered
contracts and hired people for Barcelona. And Orr received a guaranteed
salary as an Executive Member.
5
SIMMONS, et al. v. ACC
Decision of the Court
¶17 Simmons and Orr argue that they did not know about or
exercise their powers, did not sign the operating agreement, and had no
actual powers. But the record provides a reasonable basis to find they had
power and knew it. Apart from that, the definition of control persons under
the Act does not turn on whether they exercised their legal powers. E.
Vanguard Forex, Ltd., 206 Ariz. at 412, ¶¶ 41-42. And more generally,
Simmons and Orr cannot overcome the existence of substantial evidence by
pointing to conflicting evidence that favors their position. Id. at 409, ¶ 35.
¶18 Last, Simmons and Orr contest the Commission’s finding that
they became “control persons” in February 2013. They point to the future
tense of a sentence in the February 2013 offering memorandum that says
Simmons and Orr “will serve as a member on the Executive Committee.”
But the same memorandum identified them as current Executive Members,
as did the operating agreements.
¶19 On this record, the Commission reasonably concluded that
Simmons and Orr possessed legal power and control at Barcelona since
February 2013, and thus meet the definition of control persons under A.R.S.
§ 44-1999(B).
CONCLUSION
¶20 We affirm.
AMY M. WOOD • Clerk of the Court
FILED: JT
6