State v. Chapman

2014 UT App 255_________________________________________________________
THE UTAH COURT OF APPEALS
STATE OF UTAH,
Plaintiff and Appellee,
v.
JOSHUA PAUL CHAPMAN,
Defendant and Appellant.
Opinion
No. 20120137-CA
Filed October 23, 2014
Third District Court, Salt Lake Department
The Honorable Dennis M. Fuchs
No. 081906646
Lori J. Seppi and Scott A. Wilson, Attorneys
for Appellant
Sean D. Reyes and Deborah L. Bulkeley, Attorneys
for Appellee
SENIOR JUDGE PAMELA T. GREENWOOD authored this Opinion, in
which JUDGE STEPHEN L. ROTH concurred, with opinion. JUDGE
JOHN A. PEARCE concurred in part and concurred in the result,
with opinion.1
GREENWOOD, Senior Judge:
¶1 Defendant Joshua Paul Chapman appeals his conviction for
securities fraud, a second degree felony. We affirm.
1. The Honorable Pamela T. Greenwood, Senior Judge, sat by
special assignment as authorized by law. See generally Utah R. Jud.
Admin. 11-201(6).
State v. Chapman
BACKGROUND
¶2 In 2005, Sterling Madsen, who had known Chapman and his
family for many years, invested $30,000 in a “hard money loan”2
for which Chapman acted as an intermediary.3 In accordance with
the terms of the loan, Chapman promptly returned the $30,000
back to Madsen with interest. In October 2006, Chapman contacted
Madsen with another hard money investment opportunity
involving a third party, Dennis Rowley. Rowley sought a $70,000
hard money loan to finance improvements to a house that would
“almost double” its appraisal value. Rowley agreed to repay the
loan in fifty-one days at 100% interest and would obtain the funds
to do so by taking out a home equity loan against the property
upon completion of the renovation project.
¶3 Madsen wanted to think the proposal over for a week and
expressed concern to Chapman as to whether Rowley “could pull
this off” because the interest rate was “astronomical” and the terms
of the proposed written agreement indicated that the note was not
secured. Chapman reassured Madsen that he believed Rowley was
capable, which Madsen interpreted as an indication that Chapman
“had checked [Rowley] out well enough that [Chapman] had
confidence in him” and that this deal would go smoothly “just like
2. Hard money loans are most commonly used in connection with
real estate transactions and offer an alternative to conventional
loans “[w]hen financing is difficult to obtain.” Mortgages: Hard
Money, 40-Mar. Real Est. L. Rep. 6, 6 (2011). Hard money loans
“carry much higher interest rates than conventional loans” and are
generally secured by the property in which the loan is invested. Id.The lenders involved “are not commercial banks or other
traditional lenders; instead they often are private investors familiar
with their local economy.” Id. An individual involved in flipping
houses may seek out “hard money loans for short-term financing,
with the first proceeds of a sale used to pay off the loan.” Id. at 7.
3. We recite the facts in a light most favorable to the jury’s verdict.
State v. Kruger, 2000 UT 60, ¶ 2, 6 P.3d 1116.
20120137-CA 2 2014 UT App 255State v. Chapman
the last client” with the $30,000 loan. Madsen also recalled
Chapman describing having “some kind of . . . a document that
would allow [them] to go and get that property if Mr. Rowley
couldn’t perform.” Chapman did not show Madsen any such
document but assured him that Rowley’s house had “‘plenty of
equity in it’” and that they could “‘easily get [Madsen’s] principal
and interest back’” if it came to that.
¶4 Madsen ultimately agreed to the deal because of the trust he
had developed in Chapman “over years of knowing him and his
family and of . . . having at least one prior business deal with him.”
At no point in the discussions leading up to the agreement did
Chapman inform Madsen that he was expecting a $70,000
commission from the transaction, meaning that Rowley agreed to
pay 200% interest on the loan, for a total obligation of $210,000.
¶5 Two weeks later, Madsen entered into another hard money
loan with Chapman as the intermediary and Rowley as the
borrower. This time, Madsen agreed to lend Rowley $140,000 at 4%
monthly interest, which Rowley intended to use on a completely
different project. Madsen borrowed the funds needed for this
second transaction through a home equity loan on a rental
property he owned.4
¶6 The $70,000 note became due on December 15. Madsen,
having received no payments, contacted Chapman a week later.
Chapman explained that Rowley had apparently encountered
“some kind of water damage in this house that he was buying, and
that now he was going to go sue the seller” and that he would be
unable to pay the $70,000 note back until “he wrapped that up.”
Madsen followed up some time later, and Chapman informed him
that things were still “‘kind of up in the air’” and that he did not
know when Rowley would have Madsen’s money.
4. Chapman was acquitted of a second count of securities fraud
based on the $140,000 loan.
20120137-CA 3 2014 UT App 255State v. Chapman
¶7 During this conversation, Madsen inquired about utilizing
the document that Chapman had described in conjunction with the
$70,000 loan that purportedly allowed them to “go get [Rowley’s]
house if anything went wrong and Mr. Rowley couldn’t finish this
project himself.” Chapman admitted that he did not have “that
document” and later testified that the document was for a lease
option and provided no security for the note. Madsen also
reminded Chapman that Chapman had promised to pay Madsen
back himself if anything went wrong with the deal. Chapman
denied personally guaranteeing the loan, but Madsen recalled
Chapman indicating only that he could not afford to pay him back
his investment. Madsen later discovered that the property was for
sale. By then, Rowley had “disappeared.” Chapman told Madsen
that the last he knew of Rowley was that “he was living out of his
car” and that “he just emailed [Chapman] now occasionally.”
Chapman then supplied Madsen with a copy of a promissory note
between Chapman and Rowley signed on the same date the
$70,000 note was executed, in which Madsen learned that Chapman
expected to receive a $70,000 commission on the deal.
¶8 The State charged Chapman with two counts of securities
fraud based on his role as intermediary for the two hard money
loans between Madsen and Rowley.5 Before trial, the State
indicated its intent to call Michael Hines, the then-Director of
Enforcement at the Utah Division of Securities, as an expert witness
at trial. Chapman unsuccessfully moved to exclude all legal
conclusions, legal definitions, and opinions on ultimate issues from
Hines’s testimony. A jury trial was held in October 2011. At the
close of the State’s evidence, and several other times, Chapman
moved for a directed verdict. At the close of all of the evidence, he
renewed his directed verdict motion on the basis that the State did
not present sufficient evidence to establish willfulness, a necessary
element of both of the charges against him. The trial court denied
the motions, ruling that willfulness was “an issue for the trier of
fact.” The jury convicted Chapman of one count of securities fraud
5. Rowley was a co-defendant in this case and pleaded guilty.
20120137-CA 4 2014 UT App 255State v. Chapman
related to the $70,000 loan and acquitted him of the second count
of securities fraud based on the $140,000 loan. Chapman appeals.
ISSUES AND STANDARDS OF REVIEW
¶9 Chapman raises two issues on appeal. First, he argues that
the trial court erred by denying his motions for directed verdict
because the State did not introduce sufficient evidence to prove the
willfulness element of securities fraud. We reverse “a trial court’s
denial of a motion for directed verdict . . . on the basis of
insufficiency of the evidence . . . only if, viewing the evidence in the
light most favorable to the prevailing party, we conclude that the
evidence is insufficient to support the verdict.” Brewer v. Denver &
Rio Grande W. R.R., 2001 UT 77, ¶ 33, 31 P.3d 557 (citation and
internal quotation marks omitted); accord State v. Harrison, 2012 UT
App 261, ¶ 10, 286 P.3d 1272.
¶10 Second, Chapman argues that the trial court exceeded its
discretion by allowing the State to elicit legal conclusions on
ultimate issues from its expert witness.“It is within the discretion
of the trial court to determine the suitability of expert testimony in
a particular case, and we will not reverse that determination on
appeal in the absence of a clear showing of abuse.” State v. Johnson,
2009 UT App 382, ¶ 17, 224 P.3d 720 (citation and internal
quotation marks omitted).
ANALYSIS
I. Directed Verdict
¶11 Chapman argues that the trial court erred by denying his
motions for directed verdict because the State failed to provide
sufficient evidence that he acted willfully. The Utah Uniform
Securities Act states,
20120137-CA 5 2014 UT App 255State v. Chapman
It is unlawful for any person, in connection with the
offer, sale, or purchase of any security, directly or
indirectly to:
(1) employ any device, scheme, or artifice to defraud;
(2) make any untrue statement of a material fact or to
omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances under which they are made, not
misleading; or
(3) engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any person.
Utah Code Ann. § 61-1-1 (LexisNexis 2011). In addition, the Act
provides, “[A] person who willfully violates Section 61-1-1 . . . is
guilty of a second degree felony if, at the time the crime was
committed, the property, money, or thing unlawfully obtained or
sought to be obtained was worth $10,000 or more.” Id. § 61-1-
21(2)(b). In this context, to act willfully “means to act deliberately
and purposefully, as distinguished from merely accidentally or
inadvertently,” and “when applied to the intent with which an act
is done or omitted, [willful] implies a willingness to commit the
act” but “does not require an intent to violate the law or to injure
another or acquire any advantage.” State v. Larsen, 865 P.2d 1355,
1358 n.3 (Utah 1993) (interpreting the willfulness requirement in
section 61-1-21 of the securities fraud statute). The jury was
instructed that it could find that Chapman had acted willfully, i.e.,
made a willful misstatement or omission of a material fact, if it
determined that Chapman “consciously avoided the existence of a
fact or facts” but that he could not “be convicted if he was merely
negligent, careless or foolish”; “[h]e must have acted with a
conscious objective or desire to ignore a material fact or facts.” The
jury instructions defined “material fact” as “something which a
buyer of ordinary intelligence and prudence would think to be of
importance in determining whether to buy or sell a security.” The
jury was also instructed that
20120137-CA 6 2014 UT App 255State v. Chapman
for an omission to be “material” it must be a matter
which:
(a) a reasonable person would attach importance to
its existence or nonexistence in determining his or
her choice of action in the transaction in question; or
(b) the person making the omission knows or has
reason to know that the person regards or is likely to
regard the matter as important in determining his or
her choice of action, although a reasonable person
would not so regard it.
¶12 As Chapman points out, there is evidence in the record
suggesting that inexperience and bad luck are to blame for
Madsen’s losses, rather than willfulness on Chapman’s part. This
includes evidence of Chapman’s young age at the time of the loans
(mid-twenties), his limited education, and his few years of
experience in the real estate market, which occurred entirely during
a “boom” in the local housing market. Likewise, Chapman’s
testimony of his and Madsen’s pre-existing friendship and their
families’ connections could negate a finding of willfulness on his
part.
¶13 However, there is also evidence in the record supporting the
State’s contentions. The State argued that Chapman made several
willful misstatements or omissions of material fact and contends
that any one of those statements can support Chapman’s
conviction. The State asserts that Chapman’s conviction could rest
on his having vouched for Rowley’s ability to repay the $70,000
loan at 100% interest without disclosing the fact that his opinion
was not informed by any actual research into Rowley’s financial
background. Likewise, the State contends that Chapman’s failure
to disclose the $70,000 commission he was expecting from that loan
amounted to a misrepresentation of the terms of the loan to
Madsen; Chapman told Madsen that Rowley would repay the
$70,000 loan with 100% interest for a total of $140,000, when
Rowley had actually agreed to repay the loan with 200% interest
for a total of $210,000. Given Madsen’s skepticism of Rowley’s
ability to pull off the deal at 100% interest, the jury could
reasonably determine that either of these actions by Chapman
20120137-CA 7 2014 UT App 255State v. Chapman
constituted a willful material misstatement or omission of a
material fact. See generally infra ¶ 21.
¶14 The State also argues that Chapman falsely represented the
existence of collateral for the $70,000 loan. Chapman testified that
he was aware that the document Madsen believed created a
security interest in Rowley’s property was actually an assignment
of contract rights and did not create a security interest but that he
nonetheless informed Madsen that he “had a document to
hopefully back up [the] deal.” Chapman testified that he clearly
communicated the risks associated with the $70,000 loan, including
that the loan was not secured and that this lack of collateral was
why he was able to negotiate such a high interest rate. And Madsen
testified that he had read the terms of the promissory note
describing the note as unsecured and then indicated that this was
a “sticking point” for him. Nonetheless, there is sufficient evidence
in the record for the jury to determine that Chapman misstated a
material fact by representing the document as more than it was in
order to assuage Madsen’s concerns about the risk of the
investment. Accordingly, the trial court did not err in denying
Chapman’s motions for directed verdict based on insufficient
evidence of willfulness.
II. Expert Testimony
¶15 Next, Chapman argues that his conviction should be
reversed because the trial court erroneously permitted the State to
elicit legal conclusions on ultimate issues from its expert witness,
Michael Hines.6
¶16 “The trial court has wide discretion in determining the
admissibility of expert testimony, and such decisions are reviewed
under an abuse of discretion standard. Under this standard, we will
not reverse unless the decision exceeds the limits of reasonability.”
State v. Stringham, 957 P.2d 602, 607 (Utah Ct. App. 1998) (citation
6. Chapman did not object to Hines’s qualifications to testify as an
expert witness. Consequently, there is no issue of qualification in
this case.
20120137-CA 8 2014 UT App 255State v. Chapman
and internal quotation marks omitted). Appropriate expert
testimony will “help the trier of fact to understand the evidence or
to determine a fact in issue.” Utah R. Evid. 702(a). In securities
cases in particular, “expert testimony may be appropriate . . .
because the technical nature of securities is not within the
knowledge of the average layman or a subject within the common
experience and would help the jury understand the issues before
them.” State v. Larsen, 865 P.2d 1355, 1361 (Utah 1993) (citation and
internal quotation marks omitted).
¶17 An expert witness may testify in the form of an opinion and
can opine on an ultimate issue at trial “as long as that testimony is
otherwise admissible under the rules of evidence.” Id. at 1363
(construing rule 704 of the Utah Rules of Evidence); see also Utah R.
Evid. 704(a) (“An opinion is not objectionable just because it
embraces an ultimate issue.”). An expert witness exceeds the scope
of permissible testimony when “the witness’s legal conclusions blur
the separate and distinct responsibilities of the judge, jury and
witness, or there is danger that a juror may turn to the [witness’s
legal conclusion] rather than the judge for guidance on the
applicable law.” State v. Johnson, 2009 UT App 382, ¶ 37 n.14, 224
P.3d 720 (alteration in original) (citation and internal quotation
marks omitted). “No ‘bright line’ separates permissible ultimate
issue testimony under rule 704 and impermissible ‘overbroad legal
responses’ a witness may give during questioning,” State v. Davis,
2007 UT App 13, ¶ 16, 155 P.3d 909 (citation omitted), and a “trial
court has wide discretion in determining the admissibility of expert
testimony,” Larsen, 865 P.2d at 1361.
¶18 Chapman raises three specific challenges to Hines’s
testimony. He claims that Hines impermissibly testified as to the
meaning of the terms “security,” “material fact or omission,” and
“predicate statement,” which had the effect of telling “the jury
what result to reach.” We address each challenge in turn.
A. The Meaning of “Security”
¶19 First, Chapman contends that for the jury to convict him on
the first count of securities fraud, it needed to decide whether the
20120137-CA 9 2014 UT App 255State v. Chapman
unsecured promissory note for the $70,000 loan constituted a
security. Chapman argues that Hines “told the jury that the
transaction at issue would constitute a security” by testifying that
promissory notes and “notes that are issued for investment
purposes and are not collateralized” are securities.7
¶20 Hines testified that there are “two different forms” of
securities—those that are explicitly enumerated in the Utah Code
as a security, see Utah Code Ann. § 61-1-13(1)(ee) (LexisNexis 2011),
and those “that need an explanation in which elements are met to
define the transaction as a security.” In response to the State’s
question as to whether promissory notes, in general, can be
securities, Hines explained that “notes that are issued for
investment purposes and are not collateralized are” recognized in
the industry as securities while “[n]otes that are issued in which
there is collateral attached . . . [are] less likely a security.” Hines
explained in broad terms how those in the industry may
characterize a transaction that is not clearly enumerated in the
Securities Act as a security. Hines did not tell the jury that the
transaction at issue was a security, couch his opinion specifically in
terms of what is required under Utah law, or otherwise tell the jury
what conclusion to reach. Compare, e.g., Larsen, 865 P.2d at 1361 &
n.10 (holding that an expert witness’s testimony on an ultimate
issue was admissible, recognizing that the expert did not
specifically testify that the defendant was guilty or “that, as a
matter of law, the facts satisfied the [applicable] legal standard”),
with Davis, 2007 UT App 13, ¶ 17 (determining that a witness’s
testimony should have been excluded where the witness connected
his opinion testimony “to the requirements of Utah law” and
7. Chapman also argues that Hines’s testimony explaining that “a
transaction is ‘more likely a security’ if ‘the people involved use the
term investment’” was improper because “[d]uring trial, the
witnesses repeatedly called the loan an investment.” This argument
is without merit, particularly in light of the fact that the only
individuals that used the term “investment” to refer to the $70,000
loan during trial were Chapman, defense counsel, and the
prosecutor.
20120137-CA 10 2014 UT App 255State v. Chapman
answered “a specific question” on the verdict form (citations and
internal quotation marks omitted)), and Stringham, 957 P.2d at 607(holding that the trial court erred in permitting the prosecutor to
pose a hypothetical scenario to an expert witness “consisting of the
exact actions of which [the] defendant was accused” in order to ask
the expert “to give an opinion as to whether the[] actions were
illegal” (emphasis omitted)). Accordingly, the trial court did not
abuse its discretion in permitting Hines to testify as to the meaning
of “security.”
B. Meaning of “Material Information”8
8. Judge Pearce’s concurring opinion concludes that the trial court
abused its discretion in admitting Hines’s testimony regarding
materiality because that testimony was within the knowledge and
experience of an average layperson and therefore unhelpful. See
generally Utah R. Evid. 702(a) (requiring an expert’s testimony to
“help the trier of fact to understand the evidence or to determine
a fact in issue”). While we agree that the trial court failed to address
“whether the testimony would actually be helpful to the jury,” see
infra ¶ 28, the reason for the omission is obvious: counsel never
raised those specific questions. Chapman has maintained a fairly
narrow position throughout the proceedings, requesting only that
Hines be prohibited from offering legal conclusions in his
testimony, specifically, that he be prohibited from testifying as to
whether the individual promissory notes at issue in this case
amounted to securities and whether the specific acts or omissions
alleged in this case were material. Chapman has explicitly stated
that he was not seeking to exclude Hines from testifying, that Hines
should be permitted to testify as to “what the test is to determine
whether a promissory note is considered a security,” and that
Hines could “also provide the definition of materiality.” Although
Chapman also argued at times that Hines should not be permitted
to define “materiality,” he based this assertion on the lack of a
statutory definition of the term and made only a passing reference
to helpfulness. Accordingly, we do not consider the issues
addressed in Judge Pearce’s concurring opinion to be properly
before this court for our disposition. See State v. White, 2011 UT 21,
(continued...)
20120137-CA 11 2014 UT App 255State v. Chapman
¶21 For the jury to convict Chapman on the first count of
securities fraud, it also needed to decide whether Chapman
misstated or omitted a material fact in relation to the $70,000 loan.
Chapman contends that Hines impermissibly “tied his examples”
of what constitutes “material information to the State’s
allegations.”9 Chapman claims that Hines testified that a seller is
“required” to disclose
(1) the “risks associated with an investment”; (2) any
“compensation or commission”; (3) “your ability to
get your money back”; (4) “all financial information
concerning the issu[er],” including whether “the
principals . . . have civil histories, bankruptcies,
criminal histories”; (5) whether “the individuals who
8. (...continued)
¶ 34, 251 P.3d 820 (noting that Utah appellate courts will generally
refrain from addressing an argument outside the scope of the
issues presented); cf. State v. Robison, 2006 UT 65, ¶¶ 16, 22, 147
P.3d 448 (explaining that because an unargued and unbriefed legal
theory “was never subjected to the rigors of the adversarial
process,” appellate courts “should not normally search the record
for unargued and unbriefed reasons to reverse a [district] court
judgment” (alteration in original) (citation and internal quotation
marks omitted)).
9. Chapman also asserts that Hines “incorrectly asserted that the
securities fraud statute imposed an affirmative duty to investigate
and disclose certain material information.” The record contains no
such statement by Hines; indeed, Hines testified to the opposite:
“[Individuals selling securities] have to make sure that any
statement they make is truthful, and that they do not omit any
material fact if they make a predicate statement. An omission by
itself is not actionable. The fact that there is some fact available is not
actionable.” (Emphasis added.) We therefore do not reach this issue.
Cf. State v. Wallace, 2005 UT App 434, ¶¶ 14–15, 124 P.3d 259(declining to address whether the willfulness element in securities
fraud cases imposes on the seller an affirmative duty to
investigate), aff’d, 2006 UT 86, 150 P.3d 540.
20120137-CA 12 2014 UT App 255State v. Chapman
are offering and selling the securities are [] licensed”;
and (6) “the financial condition of the issuer.”
(Alterations and omission in original.) Chapman has taken these
statements out of context. Hines did not list these items as required
disclosures but as “some examples” of the information that he
believed is important “[f]or a purchaser of a security to make an
intelligent investment decision.” While these observations by Hines
“express an opinion regarding the ultimate resolution of [a]
disputed issue,” the testimony does not cross the line drawn by
rule 704 of the Utah Rules of Evidence. See State v. Larsen, 865 P.2d
1355, 1363 (Utah 1993). Hines’s testimony was relevant in
“help[ing] the trier of fact to understand the evidence or to
determine a fact in issue,” see Utah R. Evid. 702(a), by explaining
what concerns may drive an investor’s decision to purchase a
security. Compare Larsen, 865 P.2d at 1361 (determining that an
expert’s opinion testimony “that some of the material that [the
defendant] had omitted from the securities documents could have
been important or significant to an investor” was admissible), with
State v. Tenney, 913 P.2d 750, 756 (Utah Ct. App. 1996) (holding
inadmissible expert testimony that included statements “that
failure to disclose certain enumerated information would be a
material omission under Utah law,” “that the material actually
provided to investors did not meet disclosure requirements under
the Act,” and that the agreements at issue “were securities under
Utah law”). Accordingly, the trial court did not abuse its discretion
by admitting this part of Hines’s testimony.
C. Meaning of “Predicate Statements”
¶22 Last, Chapman argues that Hines explained the concept and
identified specific examples of “predicate statements” made by
Chapman in his dealings with Madsen that are prohibited by the
Securities Act.10 See State v. Schwenke, 2009 UT App 345, ¶ 14, 222
10. This argument implies that the phrase “predicate statement”
refers to an abstract legal concept. We have not found any support
for such a presumption. Utah courts and other jurisdictions
(continued...)
20120137-CA 13 2014 UT App 255State v. Chapman
P.3d 768. In particular, Chapman argues that Hines identified
Chapman’s statement vouching for Rowley as “a guy that can be
depended upon” as a predicate statement and explained that in
order to “lawfully” comply with the disclosure requirements of the
Utah Uniform Securities Act, Chapman needed to follow up with
further explanation, i.e., “a description of his investigation into
Rowley’s criminal history, courts history, databases or a disclaimer
that he had not done any verification to support his opinion.”
(Internal quotation marks omitted.)
¶23 In context, however, Hines’s testimony was far more
generalized than Chapman lets on. In response to questions based
on Chapman’s statement vouching for Rowley, Hines stated,
It is my opinion [if] that is said in connection with a
securities transaction, in connection with the offer,
sale or the purchase of a security, that is what I
referred to earlier as a predicate statement, a
statement that may or may not need more
information to be clarified. A statement of that nature
then needs to be followed up to be complete with,
10. (...continued)
employing the phrase in securities cases have not used it in
association with any specific legal definition; rather, the term is
used as shorthand to refer to a statement alleged to be false or
misleading due to the accused’s alleged material omission. See, e.g.,
State v. Johnson, 2009 UT App 382, ¶¶ 41–43, 224 P.3d 720; State v.
Schwenke, 2009 UT App 345, ¶¶ 11, 14–15, 222 P.3d 768; see also, e.g.,
Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 630 (4th Cir. 2008);
Fener v. Belo Corp., 513 F. Supp. 2d 733, 746 (N.D. Tex. 2007). In
other words, the case law utilizes the term to refer to the unwieldy
statutory language prohibiting a “person, in connection with the
offer, sale, or purchase of any security, directly or indirectly to . . .
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which
they are made, not misleading.” See Utah Code Ann. § 61-1-1(2)
(LexisNexis 2011).
20120137-CA 14 2014 UT App 255State v. Chapman
“This is how I know that he’s dependable,” or that,
“This is merely my opinion, and I haven’t done any
verification,” before the investor can understand the
importance of that statement.
Hines’s unremarkable opinion that “a statement [like] that” “may”
require clarification does not “transgress[] into the area reserved
for the jury by instructing the jury as to what legally constitutes”
a predicate statement or material omission. See Larsen, 865 P.2d at
1361; see also Utah R. Evid. 704 (permitting an expert witness to
express an opinion on an ultimate issue as long as that testimony
is otherwise admissible under the rules of evidence). Accordingly,
the trial court did not abuse its discretion by permitting that
testimony.11
CONCLUSION
¶24 The trial court correctly denied Chapman’s motions for
directed verdict. The State presented sufficient evidence to prove
that Chapman acted willfully in connection with the $70,000 loan.
The trial court did not abuse its discretion by admitting Hines’s
testimony as to the meaning of “security,” “materiality,” and
11. Chapman also argues that Hines’s testimony should have been
excluded under rules 702 and 403 of the Utah Rules of Evidence
because its probative value was outweighed by the danger of
unfair prejudice and because he was in fact prejudiced by the
testimony. In making this argument, Chapman simply repackages
the assertions addressed above to claim that any probative value
of Hines’s testimony was outweighed by the prejudice resulting
from the legal conclusions contained in the testimony because such
legal conclusions “blur[red] the separate and distinct
responsibilities of the judge, jury, and witness.” See State v. Davis,
2007 UT App 13, ¶ 15, 155 P.3d 909 (citation and internal quotation
marks omitted). We reject this argument for the same reasons we
reject Chapman’s other challenges to Hines’s testimony. See supra
¶¶ 15–22.
20120137-CA 15 2014 UT App 255State v. Chapman
“predicate statements” and Hines did not offer impermissible legal
conclusions in his testimony. We affirm the trial court’s decision.
ROTH, Judge (concurring):
¶25 I concur in Judge Greenwood’s opinion but write separately
to note that I share Judge Pearce’s concerns regarding the
admissibility of the State’s expert’s testimony with respect to the
materiality of Chapman’s statements and omissions. I agree with
Judge Greenwood, however, that this matter is not properly before
us on appeal, and, as a consequence, I believe it would be
imprudent to reach the issue. I therefore concur.
PEARCE, Judge (concurring in part and concurring in the result in
part):
¶26 I concur that the trial court did not err in denying
Chapman’s motion for a directed verdict as discussed in Part I of
the majority opinion’s analysis. I respectfully disagree with the
conclusion that the trial court operated within the bounds of its
discretion when it permitted Michael Hines, the then-Director of
Enforcement at the Utah Division of Securities, to testify concerning
the materiality of Chapman’s statements and omissions. However,
because Chapman has not shown that he was prejudiced by the
trial court’s admission of Hines’s testimony, I concur in the result
the majority opinion reaches in Part II of its analysis.
¶27 The trial court allowed Hines to testify concerning
materiality, reasoning,
I think that the Courts have made a determination
that securities fraud cases and securities are very
technical in nature. I think that the Courts have ruled
in respect that the experts can make—can testify in
regards to what securities are and what facts they
would state they consider to be material or not
material if omitted or provided.
20120137-CA 16 2014 UT App 255State v. Chapman
Although the trial court did not provide the basis for its ruling,
both parties have briefed this matter as if the court relied upon
State v. Larsen, 865 P.2d 1355 (Utah 1993), to reach its conclusion.
See id. at 1361 (“[E]xpert testimony may be appropriate in securities
fraud cases because the technical nature of securities is not within
the knowledge of the average layman or a subject of common
experience and would help the jury understand the issues before
them.” (citation and internal quotation marks omitted)).
¶28 To the extent the trial court read Larsen to require the
admission of expert testimony in every securities fraud case, it
greatly expanded Larsen’s reach. Larsen held that a trial court did
not abuse its discretion in permitting expert testimony concerning
the materiality of information that a securities fraud defendant had
omitted from documents provided to investors. However, Larsen
specifically disavowed the suggestion that “the trial court must
allow expert testimony regarding materiality, especially testimony
utilizing the term ‘material.’” Id. at 1363 n.12 (emphasis added).
Larsen did not alter the requirement that to be admissible, expert
testimony must be “helpful to the finder of fact” under rule 702 of
the Utah Rules of Evidence. See State v. Rimmasch, 775 P.2d 388, 398
n.8 (Utah 1989). Nor did Larsen exempt expert testimony in
securities fraud cases from the reach of rule 403 of the Utah Rules
of Evidence. Indeed, Larsen noted that “an integral element of a
rule 702 determination to admit expert evidence is a balancing of
the probativeness of the evidence against its potential for unfair
prejudice” and that the balancing of those two factors “mimics that
under rule 403 and is necessary to a determination of
‘helpfulness.’” 865 P.2d at 1363 n.12. Despite this instruction and
Chapman’s objection to Hines’s testimony on those grounds,
nothing in the record before this court suggests that the trial court
ever considered whether the testimony would actually be helpful
to the jury.12
12. The majority opinion suggests that Chapman failed to raise this
argument in the trial court. Chapman conceded below that Hines
could testify to “any other question that would help an average
layman understand the concept of securities” but argued that
(continued...)
20120137-CA 17 2014 UT App 255State v. Chapman
¶29 In other words, the trial court never examined whether
Hines’s testimony would help the jury “understand the evidence
or to determine a fact in issue.” Utah R. Evid. 702(a). Unlike many
securities fraud cases, where the issues are complex, the questions
presented to the jury concerning materiality in this case were
straightforward. The State alleged that Chapman had made
misrepresentations, including that there was equity in Rowley’s
property, that Chapman possessed a document that would allow
him to access that equity in case of default, and that Chapman
would personally guarantee repayment. The State also alleged that
Chapman had failed to disclose material facts, including that he
had not adequately researched Rowley’s ability to pay and that
Chapman stood to receive a $70,000 commission on the transaction.
¶30 Hines testified on direct examination that “an important fact
is the same as a material fact.” He then testified as to examples of
“important facts,” including: (1) “if the principals in the issuing
company have civil histories, bankruptcies, criminal histories”; (2)
“facts relative to your ability to get your money back”; (3) “the
actual risks associated with an investment”; and (4) “what
compensation or commission, if any, is paid to individuals.” In
addition, Hines testified that “it would be important for the
investor to actually see financial statements, preferably audited
financial statements” and that “if the individuals who are offering
and selling the securities are not licensed, that’s a fact that would
be important to the investor to know.”
12. (...continued)
Hines “should be excluded from providing an opinion as to what
a reasonable purchaser in this particular situation would want to
know.” The State’s opposition to the motion in limine specifically
argued that Hines’s testimony would be helpful under rule 702.
The State quoted State v. Larsen, 865 P.2d 1355 (Utah 1993), for the
proposition that “[i]n determining ‘helpfulness,’ the trial court
must first decide whether the subject is within the knowledge or
experience of the average individual.” The State also argued that
“[m]uch of this information is not within the knowledge of the
average layman or within the common experience.” The issue I
address was presented to the trial court.
20120137-CA 18 2014 UT App 255State v. Chapman
¶31 To determine whether Hines’s testimony would aid the jury,
the trial court first needed to “decide whether the subject [of the
expert’s testimony] is within the knowledge or experience of the
average individual.” Larsen, 865 P.2d at 1361. The definition of
materiality in the context of securities fraud is whether the
statement or omission is “likely to influence a reasonable
investor.”13 Id. at 1362. The initial question for the trial court should
have been whether an average individual would know that a
reasonable investor would be influenced by learning: (1) that
Chapman had not investigated Madsen’s ability to repay the loan;
(2) that contrary to his representation, Chapman did not have a
document that would allow him to access the equity in Madsen’s
Property; (3) that Chapman did not intend to personally guarantee
repayment; and (4) that Chapman would be paid a $70,000
commission on the $70,000 loan.
¶32 It is well within the experience of the average layperson to
know that a reasonable investor would likely be influenced by
basic information about a financial transaction, such as “facts
relative [to an investor’s] ability to get [his or her] money back.”
For example, Chapman was alleged to have misrepresented that he
had “a document that would allow [them] to go and get” the
borrower’s property in the case of default. The jury did not need an
expert’s help to understand that such information would likely
influence a reasonable investor.
¶33 Hines’s testimony reflected that lack of complexity. Hines
simply listed categories of information and told the jury that an
investor would deem them to be important. Hines made no
attempt to explain why such information would be important to an
investor. Hines may not have explained his conclusions because
13. The Utah Supreme Court has also defined a “material fact” as
“something which a buyer or seller of ordinary intelligence and
prudence would think to be of some importance in determining
whether to buy or sell.” Gohler v. Wood, 919 P.2d 561, 567 (Utah
1996) (emphasis omitted) (citation and internal quotation marks
omitted).
20120137-CA 19 2014 UT App 255State v. Chapman
they needed no explanation. An average person would already
know that a reasonable investor would be influenced by the kind
of information the State accused Chapman of misrepresenting or
omitting.
¶34 Moreover, the trial court never examined whether it would
be helpful for the jury to have the sitting Director of Enforcement
for the Division of Securities recite categories of information he
opined investors would consider important without explanation of
the information’s import. On the facts of this case and the
allegations leveled against Chapman, Hines’s materiality testimony
was not helpful.14 Cf. Sawant v. Ramsey, No. 3:07-cv-980, 2012 WL
2046812, at *2 (D. Conn. June 6, 2012) (disallowing expert testimony
concerning materiality of purported misrepresentations and
omissions, reasoning that “[a]lthough in some instances, in the
context of a much more complicated segment of the stock market,
expert testimony may be admissible as helpful to suggest ‘the
inference which should be drawn from the specialized knowledge
to the facts,’ the Court finds that the facts presented by the current
case are simple and straightforward” (citation omitted)). Because
Hines’s testimony on the question of materiality was unhelpful, the
trial court exceeded its discretion in admitting that testimony.15
14. This is not to suggest that expert testimony concerning
materiality can never be helpful to a finder of fact. As Larsen
recognized, there are cases where the “technical nature of securities
is not within the knowledge of the average layman or a subject
within the common experience.” 865 P.2d at 1361 (citation and
internal quotation marks omitted). But a trial court cannot
distinguish between those cases where expert testimony would
assist and those where it would not if the court fails to conduct the
rule 702 inquiry.
15. The trial court also failed to analyze whether Hines’s testimony
regarding promissory notes and predicate statements would be
helpful to the jury. But Chapman has not demonstrated that these
topics were within the knowledge and experience of an average
(continued...)
20120137-CA 20 2014 UT App 255State v. Chapman
¶35 Chapman also argues that Hines’s testimony should not
have been admitted, because the danger for unfair prejudice
outweighed its probative value. See Utah R. Evid. 403. Chapman
specifically contends that Hines’s testimony crossed the line into
improper legal conclusions and blurred the “separate and distinct
responsibilities of the judge, jury, and witness.” See State v. Davis,
2007 UT App 13, ¶ 15, 155 P.3d 909 (citation and internal quotation
marks omitted). This argument requires exploration of the
boundary that separates testimony concerning the ultimate issue in
the case—permitted by rule 704 of the Utah Rules of
Evidence—and testimony that amounts to an improper legal
conclusion—which our case law has held inadmissible. See State v.
Tenney, 913 P.2d 750, 756 (Utah Ct. App. 1996). This court has
previously noted that there is “no bright line between responses
that embrace an ultimate issue and those that provide an
impermissible legal conclusion.” Id.; accord Davis, 2007 UT App 13,
¶ 16 (“No ‘bright line’ separates permissible ultimate issue
testimony under rule 704 and impermissible ‘overbroad legal
responses’ a witness may give during questioning.” (citation
omitted)).
¶36 In cases concerning materiality, the question turns on
whether the experts “tie their opinions to the requirements of Utah
law.” Tenney, 913 P.2d at 756. In Tenney, we concluded that an
expert’s testimony crossed the line because he testified that certain
information constituted “a material omission under Utah law” and
that another expert’s testimony was improper because she testified
the information “was material under the Utah Uniform Securities
Act.” Id. Our reasoning in Tenney is consistent with the Utah
Supreme Court’s decision in Larsen, which permitted an expert to
testify about information that “could have been important or
significant to an investor” but stated that the expert “should have
avoided using the specific term ‘material.’” State v. Larsen, 865 P.2d
15. (...continued)
person and that, therefore, Hines’s testimony should have been
deemed unhelpful and inadmissible.
20120137-CA 21 2014 UT App 255State v. Chapman
1355, 1362 (Utah 1993).16 Larsen specifically noted that the expert
did not testify that, “as a matter of law, the facts satisfied the legal
standard of materiality.” Id. at 1361 n.10.
¶37 In an apparent effort to stay on the right side of that less-
than-bright line, Hines attempted to avoid directly opining that a
fact was “material,” preferring instead to define “material” as
“important” and then testify as to what a reasonable investor
would find important. Hines’s testimony was not quite so cleanly
on the right side of the line, however. Immediately after listing the
“important information,” Hines opined that the securities laws
“require total disclosure of all important facts to potential
purchasers.” Although not as blatantly explicit as the testimony
Tenney found improper, Hines’s testimony implicitly tied his
opinion to the requirements of Utah law. Hines also testified on
direct examination that “the financial condition of the issuer is an
important fact that needs to be disclosed,” a statement that also
implicitly ties its conclusion to a requirement of Utah law. These
portions of Hines’s testimony constituted improper legal
conclusions and should not have been admitted into evidence.
¶38 In order for Chapman to obtain relief based on a showing of
erroneously admitted testimony, he also must demonstrate
prejudice. State v. Johnson, 2009 UT App 382, ¶ 37, 224 P.3d 720.
This court “will not overturn a jury verdict for the admission of
improper evidence if the admission of the evidence did not
reasonably [a]ffect the likelihood of a different verdict.” State v.
Houskeeper, 2002 UT 118, ¶ 26, 62 P.3d 444. That Hines’s materiality
testimony simply recited common-sense conclusions that were
within the ken of the average juror makes it difficult for Chapman
to demonstrate prejudice. Because it is reasonably likely that the
16. The supreme court also noted that the defendant in Larsen had
lodged his objection to the expert’s use of the term “material”
under rule 702 of the Utah Rules of Evidence, not rule 403. See 865
P.2d at 1363 n.12. The court suggested that “[i]f Larsen had made
[an objection pursuant to rule 403], it might have merited serious
consideration by the trial court.” Id.
20120137-CA 22 2014 UT App 255State v. Chapman
jury would have reached the same conclusion—that Chapman’s
statements and omissions were material to a reasonable
investor—with or without Hines’s improper testimony, Chapman
has not established prejudice.
¶39 Moreover, we have previously held that in some
circumstances a trial court can ameliorate “any potentially
prejudicial effects” of an expert offering an improper legal
conclusion by “correctly and promptly” instructing the jury.
Johnson, 2009 UT App 382, ¶¶ 38–39. Chapman attempts to
distinguish his case from those, like Johnson, where we have held
that proper jury instructions and thorough cross-examination of
the expert have cured any potential prejudice because the expert
testimony in those cases “was not erroneous at all or so slightly
erroneous.” That attempt is unavailing because the expert
testimony in Johnson—coincidentally also offered by Hines—does
not differ significantly from that offered here. In Johnson, Hines: (1)
“defined the kind of material facts that must be disclosed under
section 61-1-1 of the Securities Act”; (2) testified that “officers of a
corporation have a specific duty to disclose material facts about
their backgrounds”; and (3) testified “to the hypothetical types of
statements or omissions that would violate section 61-1-1.” Id. ¶ 10.
Johnson did not reach the question of whether the trial court
erroneously admitted the testimony because it found any potential
prejudice had been cured by jury instruction and
cross-examination. The facts of this case are not so different as to
warrant a different outcome.
¶40 For these reasons, I concur in the majority opinion’s holding
with respect to the directed verdict but concur only in the result
with respect to the admission of Hines’s expert testimony.
20120137-CA 23 2014 UT App 255