Wales 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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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
TIMOTHY JOHN WALES, et al., Plaintiffs/Appellants,
v.
ARIZONA CORPORATION COMMISSION, Defendant/Appellee.
No. 1 CA-CV 19-0345
FILED 2-25-2020
Appeal from the Superior Court in Maricopa County
No. LC2018-000249-001
The Honorable Patricia A. Starr, Judge
AFFIRMED
COUNSEL
Sherman & Howard L.L.C., Scottsdale
By Brian M. Mueller
Counsel for Plaintiffs/Appellants
Arizona Corporation Commission, Phoenix
By Paul Kitchin
Counsel for Defendant/Appellee
WALES, et al. v. ACC
Decision of the Court
MEMORANDUM DECISION
Judge David B. Gass delivered the decision of the Court, in which Presiding
Judge Lawrence F. Winthrop and Judge Maria Elena Cruz joined.
G A S S, Judge:
¶1 Timothy and Stacey Wales (collectively, the Wales) appeal the
superior court’s order reviewing an Arizona Corporation Commission (the
Commission) decision. After an administrative hearing, the Commission
entered a cease and desist order and further ordered the Wales to pay
restitution of $526,500, plus interest and administrative penalties. The
superior court denied the Wales’ request for a trial de novo and affirmed the
Commission’s orders. For the following reasons, this court affirms.
FACTUAL AND PROCEDURAL HISTORY
¶2 In 2007, the Wales established Visionary Business Works, Inc.
(Visionary), an Arizona company specializing in cloud-based fleet
management systems. Mrs. Wales served as Visionary’s president and Mr.
Wales as its vice president.
¶3 In 2011, the Wales approached J.W. and Tammi Wight
(collectively, the Wights) about investing in Visionary. The Wights owned
an insurance company providing medical, dental, and vision insurance to
Visionary. During an initial meeting, the Wales showed Mr. Wight a
spreadsheet summarizing projections of Visionary’s growth. Additionally,
the Wights listened in on in a few phone calls between Mr. Wales and
potential clients. The Wights subsequently invested $300,000 in Visionary.
Mrs. Wight later executed a related subscription agreement and shares
buyback agreement.
¶4 Contemporaneously with the Wight transaction, the Wales
offered Javier Cano (Cano) and Jorge de las Casas (de las Casas)
subscription agreements. Before the Wales offered the subscription
agreements, Cano and de las Casas had been Visionary customers. In 2009,
Cano and de las Casas each paid Visionary for the right to sell Visionary’s
software internationally. Beginning in 2010, Cano and de las Casas also
served as Visionary officers and directors. Under the subscription
agreements, Cano and de las Casas received stock. Their subscription
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agreements provided “[t]he shares are being offered in consideration of
cash in the aggregate amount of One Hundred Thirteen Thousand Two
Hundred Fifty and No/100 Dollars ($113,250.00).” Each subscription
agreement confirmed the $113,250 “has been paid by Shareholder to the
Company as of the date of the execution of this Agreement.” Cano and de
las Casas both executed their subscription agreements.
¶5 The Wales did not register the securities they sold to the
Wights, Cano, or de las Casas.
¶6 On June 29, 2016, the Commission’s Securities Division (the
Division) filed a temporary order to Cease and Desist and a Notice of
Opportunity for Hearing against Visionary. The Division alleged the Wales
offered and sold Cano and de las Casas each 10% shares in Visionary in
consideration for their individual contributions of $113,250 for a total of
$226,500. The Division also alleged the Wales offered and sold 25% shares
in Visionary to the Wights in consideration of their contribution of $300,000.
The total amount the Wales collected in exchange for shares in Visionary
was $526,500.
¶7 The Division alleged the Wales violated A.R.S. §§ 44-1841 and
44-1842 by offering and selling these unregistered securities in Arizona. In
answering the allegations, the Wales admitted “they sold securities in the
form of corporate stock” to the Wights, Cano, and de las Casas but later
affirmatively alleged these sales were exempt transactions.
¶8 The Division held an evidentiary hearing, which was
recorded. In the hearing, the Wales put forth two arguments: (1) the
transactions with Cano and de las Casas were a gift; and (2) Visionary’s
stock was exempt from registration with the Commission under the non-
public offering exemption. After the evidentiary hearing, the parties
submitted post-hearing briefs, and the Division made recommendations
(the Recommended Opinion and Order) to the Commission rejecting both
of the Wales’ arguments. The Recommended Opinion and Order concluded
the Wales failed to meet their burden of proving the Visionary stock was
exempt from registration under A.R.S. § 44-1844(A)(1). The administrative
law judge (ALJ) who prepared the Recommended Opinion and Order was
a substitute ALJ who did not preside over the evidentiary proceedings.
Before preparing the proposed decision, the substitute ALJ did review the
entire record, including the recording of the evidentiary hearing. In that
regard, the Recommended Opinion and Order was supported by extensive
citation to the hearing transcript. Finally, the ALJ who presided over the
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evidentiary hearing appeared at the Commission’s hearing and answered
its questions.
¶9 The Wales filed written objections to the Recommended
Opinion and Order. The Commission conducted an open hearing, which
also was recorded. Through counsel, the Wales presented oral arguments
as to why the Recommended Opinion and Order was in error. The
Commission questioned counsel for the Wales and for the Hearing Division
concerning the Wales’ objections. After the hearing, the Commission issued
its final administrative Opinion and Order. The Commission concluded the
Wales violated A.R.S. §§ 44-1841 and 44-1842. The Commission specifically
found the Wales failed to prove the non-public offer exemption applied. See
A.R.S. § 44-2033. The Commission ordered the Wales to cease and desist
offering unregistered securities and ordered them to pay $526,500 in
restitution, plus interest and administrative penalties.
¶10 The Wales timely appealed the Commission’s Opinion and
Order to the superior court and requested a trial de novo before a jury. The
Wales argued the Commission denied them due process when it permitted
a substitute ALJ who did not preside over the Division’s hearing to draft
the Recommended Opinion and Order. The superior court denied the
Wales’ motion for a trial de novo, finding the Commission complied with its
statutory obligations and had afforded the Wales due process.
¶11 After briefing and oral argument, the superior court affirmed
the Commission’s Opinion and Order, concluding substantial evidence
supported it. The superior court found the Wales waived the argument that
the three transactions were limited public offerings. The superior court
further found the Commission did not abuse its discretion when the
Commission: (1) ruled Cano’s and de las Casas’ transactions were sales of
securities; (2) ruled the three transactions were not exempt non-public
offerings; and (3) set the amount of the restitution owed to the Wights,
Cano, and de las Casas.
¶12 The Wales timely appealed to this court. This court has
jurisdiction under A.R.S. §§ 12-120.21(A)(1)-(3).
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ANALYSIS
I. Because the Commission’s hearing process complied with Arizona
law and did not violate the Wales’ due process rights, the Wales are
not entitled to a trial de novo.
¶13 This court reviews de novo constitutional and statutory
interpretation claims. Webb v. State ex rel. Ariz. Bd. of Med. Exam’rs, 202 Ariz.
555, 557, ¶ 7 (App. 2002).
¶14 The Wales argue the Commission’s administrative hearing
process was legally insufficient. The Commission argues Arizona law
permits it to record its hearings stenographically. Section 12-910 provides:
For review of final administrative decisions of agencies . . . the
trial shall be de novo . . . if a hearing was not held by the
agency or the proceedings before the agency were not
stenographically reported or mechanically recorded so that a
transcript might be made.
A.R.S. § 12-910(C). By stenographically recording the Division’s hearing,
the Commission’s process complied with section 12-910(C).
¶15 The Wales also argue the Commission violated their due
process rights by having an ALJ who did not preside over the evidentiary
hearing draft the Commission’s Recommended Opinion and Order. In
support of this argument before the superior court, the Wales relied on
cases in which the substituted hearing officer makes final decisions as
opposed to recommendations. See, e.g., Adams v. Indus. Comm’n, 147 Ariz.
418 (App. 1985). On appeal, the Wales rely on the same cases. The superior
court rejected this argument, finding these cases to be inapposite. We agree.
¶16 Unlike Adams, the ALJ here presented a recommendation to
the Commission. The Commission conducted an open hearing on the
record, considered the Wales’ written objections and oral argument, asked
appropriate questions, and independently ruled on the matter. Adams said,
“[w]e recognize that where final administrative decisions are made by
agency boards or commissions, the commissioners themselves need not
personally observe the witnesses.” 147 Ariz. at 421 n.1; see also Pine-
Strawberry Improvement Ass’n v. Ariz. Corp. Comm’n, 152 Ariz. 339, 340 (App.
1986).
¶17 When faced with this distinction, this court has said a hearing
officer tasked with preparing a proposed order for a commission does not
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have to personally attend the evidentiary hearing on which the
recommendation is based. See Pine-Strawberry, 152 Ariz. at 340. Relying on
recorded testimony is sufficient to comply with due process requirements.
Id. “[B]ecause the [Commission], and not the ALJ, issues the final
administrative decision, the Board is not bound by the ALJ’s findings of
fact, including those related to credibility.” Ritland v. Ariz. State Bd. of Med.
Exam’rs, 213 Ariz. 187, 191, ¶ 12 (App. 2006). Here, the substitute ALJ
reviewed the record in full before issuing the Recommended Opinion and
Order. However, the Commission made its final decision after conducting
a hearing on the record and considering the Wales’ written objections and
oral argument regarding the ALJ’s Recommended Opinion and Order.
¶18 The Commission’s process complied with Arizona law. The
Wales were afforded due process.
II. The superior court did not abuse its discretion in upholding the
Commission’s decision.
¶19 When considering a challenge to the Commission’s decision
enforcing securities laws, this court independently reviews the
administrative record to determine whether the Commission’s action was
unlawful, arbitrary, capricious, or an abuse of discretion. See A.R.S. § 12-
910(E); Parsons v. Ariz. Dep’t of Health Servs., 242 Ariz. 320, 322, ¶ 10 (App.
2017); Shorey v. Ariz. Corp. Comm’n, 238 Ariz. 253, 257, ¶ 11 (App. 2015);
Nutek Info. Sys., Inc. v. Ariz. Corp. Comm’n, 194 Ariz. 107-08, ¶ 15 (App. 1998).
This court considers the evidence in the light most favorable to sustaining
the Commission’s decision. Hirsch v. Ariz. Corp. Comm’n, 237 Ariz. 456, 458,
¶ 2 (App. 2015).
¶20 This court does not reweigh the evidence but instead assesses
whether substantial evidence supports the decision. E. Vanguard Forex, Ltd.
v. Ariz. Corp. Comm’n, 206 Ariz. 399, 409, ¶ 35 (App. 2003). Substantial
evidence exists if the evidentiary record supports the decision, even if the
record would also support a different conclusion. Id.; see also Webster v. State
Bd. of Regents, 123 Ariz. 363, 365 (App. 1979). This court reviews the
Commission’s legal determinations de novo. McGovern v. Ariz. Health Care
Cost Containment Sys. Admin., 241 Ariz. 115, 118, ¶ 8 (App. 2016).
A. The Wales sold unregistered securities to Cano and de las
Casas.
¶21 The Wales challenge the Commission’s finding they sold
unregistered securities to Cano and de las Casas. They argue the Cano and
de las Casas transactions were bona fide gifts, not sales.
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¶22 Substantial evidence supports the Commission’s finding
these transactions were sales. In their answer, the Wales admitted to selling
securities—corporate stock—to Cano and de las Casas. The Wales concede
this point, saying “[a]s to the Wales’ answer, it says what it says.” The Wales
acknowledge Visionary was cash poor at that point and did not have money
to give Cano and de las Casas, so they offered the unregistered securities
instead. The subscription agreements say the Wales are offering the stocks
in “consideration of cash” from Cano and de las Casas. Over time, Cano
and de las Casas did contribute funds to Visionary. Cano and de las Casas
in fact received stock.
¶23 Substantial evidence, therefore, supports the Commission’s
conclusion.
B. The offers and sales to the Wights, Cano, and de las Casas
were not exempt from registration.
¶24 Unless subject to a statutory exemption, “any note” is a
security for registration purposes under Arizona law. A.R.S. § 44-
1801(27)(a); see also State v. Tober, 173 Ariz. 211, 212–14 (1992). Generally,
sale of an unregistered security is prohibited. See A.R.S. § 44-1841. Certain
limited classes of securities are exempt from the registration requirement,
as are certain transactions. See A.R.S. §§ 44-1843 (exempt securities), 44-1844
(exempt transactions). Qualifying for exemption requires strict compliance
with all aspects of the relevant exemption provision. See State v. Baumann,
125 Ariz. 404, 411 (1980). The party urging exemption as a defense has the
burden to prove the existence of the exemption. A.R.S. § 44-2033.
¶25 The Wales argue the securities offers and sales are exempt
from registration, relying on both the limited offering exemption and the
non-public offering exemption.
¶26 The Wales waived their limited public offering argument by
not arguing it to the Commission. See Marquette Venture Partners II, L.P. v.
Leonesio, 227 Ariz. 179, 184, ¶ 21 (App. 2011). Waiver notwithstanding, this
exemption only applies to “accredited investors.” The Wales do not argue
Mrs Wight was in fact an accredited investor, but instead argue they
reasonably believed Mrs. Wight was an accredited investor, making her
$300,000 transaction exempt from registration under A.R.S. §§ 44-1841 and
44-1842. See A.A.C. R14-4-126(B)(1)(e)-(f). Their reasonable belief would be
insufficient under the statute. At times, the Wales have taken a different
tack, arguing Mrs. Wight misled them about her status as an accredited
investor. The Commission concluded the evidence, including Mrs. Wight’s
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testimony, established Mrs. Wight did not know what it meant to be an
accredited investor. Therefore Mrs. Wight could not have misled the Wales
as they contend.
¶27 The Wales next argue the sales are exempt from registration
under the non-public offering exemption. Substantial evidence supports
the Commission’s finding that this exemption does not apply. The Wales
bore the burden of proving they were exempt from registration under this
statute. See A.R.S. § 44-2033. To establish the exemption, the Wales had to
show strict compliance with all requirements of the statute. Baumann, 125
Ariz. at 411. The Wales did not.
¶28 Section 44-1844(A)(1) defines the non-public offering
exemption as “[t]ransactions by an issuer not involving any public
offering.” No controlling Arizona authority has interpreted the meaning of
A.R.S. § 44-1844(A)(1). That section, however, is identical to 15 U.S.C.
§ 77d(a)(2). In the absence of controlling Arizona authority, and following
the legislative purpose of Arizona statutes governing sales of securities, this
court follows settled federal securities law to interpret this statute. See 1996
Ariz. Sess. Laws, ch. 197, § 11(C) (42d Leg., 2d Reg. Sess.); (statement of
intent) Sell v. Gama, 231 Ariz. 323, 327, ¶ 18 (2013).
¶29 To establish the non-public offering exemption, the Wales had
to show all the offerees had enough information to be able to fend for
themselves individually. See SEC v. Murphy, 626 F.2d 633, 647 (9th Cir.
1980). Each offeree must have access to, or disclosure of, the type of
information proper registration would have revealed. See SEC v. Ralston
Purina Co., 346 U.S. 119, 126-27 (1953). The exemption involves the
knowledge of the offerees, not the intent of the issuers. Id. The “financial
information about the investment, similar to what would be found in a
registration statement, is crucial.” Sorrel v. SEC, 679 F.2d 1323, 1326 (9th Cir.
1982). The Wales said they had a “reasonable belief” the offerees had this
knowledge. The Wales’ unilateral and unsupported belief, however, is not
substantial evidence Cano, de las Casas, and the Wights had the requisite
knowledge.
¶30 The record shows none of the offerees had such knowledge.
The Commission found none of the offerees were given a written opinion
of counsel regarding the offering. No offerees were given certified balance
sheets or information on company officer pay. Mr. Wight said he was
shown a spreadsheet listing “projections of growth” for Visionary, but he
did not recall receiving a copy of the spreadsheet. Further, the Wales did
not prepare a written summary of risk disclosures for the offerees. They
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only included a statement in the subscription agreement saying the stock
purchase involved “substantial risks.” The Wales did not disclose or make
available sufficient information to their offerees so the offerees could fend
for themselves individually.
¶31 The Wales, therefore, did not meet their burden.
C. The Commission did not abuse its discretion when it ordered
the Wales to pay restitution of $526,500, plus interest and
administrative penalties.
¶32 The Wales raise no challenges regarding the Commission’s
interest and administrative penalty calculations. Their argument on appeal
goes to the amount of restitution itself, $526,500.
¶33 The Commission has the authority to order restitution. A.R.S.
§ 44-2032(1). The goal is to restore the purchasers to their original position.
See Hirsh, 237 Ariz. at 466, ¶ 40. The Commission’s rules establish how it
calculates restitution. A.A.C. R14-4-308(C)(1). The Commission looks to the
“[c]ash equal to the fair market value of the consideration paid, determined
as of the date such payment was originally paid by the buyer” plus interest,
and minus “any principal, interest, or other distributions received on the
security” from the day of purchase to the day of repayment. See id.
¶34 The Wales drafted the subscription agreements. Those
subscription agreements document Cano and de las Casas each paid
Visionary $113,250. The Wales raise the same argument here as they did
before, i.e., this amount does not reflect Cano and de la Casas’ true
investment. Essentially, the Wales ask this court to reweigh the evidence,
which we will not do. Substantial evidence supports the Commission’s
award.
¶35 The Wights’ restitution order is also in line with the
Commission’s rules on restitution and supported by substantial evidence.
The Wales agree the Wights invested $300,000 in Visionary, but argue the
Wights made a knowing misrepresentation regarding their status as
“accredited investors” during the sale process. The Commission did not
agree. The record supports the Commission’s findings, establishing the
Wights did not know what it meant to be an “accredited investor.”
¶36 The superior court did not abuse its discretion when it
affirmed the Commission’s restitution order. The Commission followed its
own rules when calculating the restitution owed.
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ATTORNEY FEES ON APPEAL
¶37 The Wales request attorney fees incurred in this appeal under
A.R.S. § 12-348(A). Because they are not the prevailing party, this court
denies their request.
CONCLUSION
¶38 For the foregoing reasons, the superior court’s judgment is
affirmed.
AMY M. WOOD • Clerk of the Court
FILED: AA
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