Superior Court County: King. Superior Court Cause No: 93-1-00102-5. Date filed in Superior Court: September 8, 1993. Superior Court Judge Signing: Hon. Brian Gain.
Written by: Judge Kennedy, Concurred by: Judge Grosse, Judge Agid
KENNEDY, A.C.J. -- William A. Argo appeals his conviction of six counts of first degree theft and eleven counts of securities fraud. Argo contends that the trial court erred in concluding that the transactions in which he and his victims engaged involved securities within the meaning of the Securities Act of Washington, RCW 21.20. Argo also contends that the trial court erred in concluding that transactions that occurred more than five years before the filing of the information were not barred by the statute of limitations. Finally, Argo contends that the trial court
erred in calculating his offender score and in imposing an exceptional sentence of ten years. Finding no reversible error, we affirm.
Argo was a certified public accountant whose license to practice public accounting was suspended in 1988. After that date, Argo continued working as a tax planner and financial advisor until his arrest in 1993.
Beginning in the 1970's, Argo raised money from investors for various business ventures. Two of these ventures were partnerships, purported or real, in which Argo sold interests or options to purchase interests for varying sums of money. Argo also collected money from investors for the "William Argo Trust." The William Argo Trust was not a formal trust arrangement, but rather a name Argo placed on a collection of bank accounts that he maintained at various banks and into which he deposited investors' moneys. In general, Argo's investors would place money in the William Argo Trust Account with the expectation of receiving a set, guaranteed rate of interest in return. Most often, Argo did not inform the investors specifically how their money would be invested. On several occasions, Argo informed investors that their money would be used to finance loans to others. Some of these investors received promissory notes in exchange for their investments in the William Argo Trust.
In November of 1990, the Securities Division of the Washington Department of Financial Institutions began investigating Argo's investment practices after receiving an inquiry from the adult children of one of Argo's elderly investors. A Securities Division examiner discovered that Argo had recently been the subject of an involuntary bankruptcy petition, and that he owed at least 40 investors, collectively, several million dollars. When the Securities Division subpoenaed Argo to testify and produce his investment records, Argo refused, and was held in
contempt of court. Argo eventually produced his records, but given their state of disarray, the Securities Division decided to track Argo's activities through his bank records, instead. Examination of Argo's bank records led the Securities Division to most of Argo's investors. Interviews with these investors uncovered others. The investigation revealed that Argo had been operating a Ponzi scheme by which he had collected well over a million dollars. Argo's investors recovered little or none of their money.
Argo was eventually charged with six counts of first degree theft in violation of RCW 9A.56.030(1)(a) and 9A.56.029(1)(a) and (b), and 11 counts of securities fraud in violation of RCW 21.20.010 and 21.20.400.*fn1 At trial, Argo stipulated to facts sufficient to prove beyond a reasonable doubt every element of the charged offenses,*fn2 but denied that the transactions in which he and the victims engaged involved securities. In addition, Argo disputed that all of the charged offenses occurred within the statute of limitations. Following a bench trial, the trial court found Argo guilty as charged. The court concluded that the transactions at issue involved securities, and that none of the charged offenses was barred by the statute of limitations.
Calculating an offender score of sixteen, the court imposed an exceptional sentence of ten years. This appeal followed.
I. Investments in the William Argo Trust
Argo contends that his conviction of securities fraud must be reversed because the investments in the William Argo Trust at issue in Counts III - VII, IX, and X did not constitute securities within the meaning of the Securities Act of Washington. The term "security" is defined in RCW 21.20.005, which states in pertinent part:
"Security" means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral-trust certificate; preorganization certificate or subscription; transferable share; investment contract; investment of money or other consideration in the risk capital of a venture with the expectation of some valuable benefit to the investor where the investor does not receive the right to exercise practical and actual control over the managerial decisions of the venture; ...
RCW 21.20.005(12). This definition mirrors the definitions in the Federal Securities Act of 1933, 15 U.S.C. § 77b (1988) and the Securities Exchange Act of 1934, 15 U.S.C. § 78c (1988). Cellular Engineering, Ltd. v. O'Neill, 118 Wash. 2d 16, 24, 820 P.2d 941 (1991) (citing State v. Philips, 108 Wash. 2d 627, 630, 741 P.2d 24 (1987)). Thus, Washington courts look to federal law to determine the meaning of the term "security" under the Washington Act. Id.; see also RCW 21.20.900 (the policy of the Securities Act of Washington is to make uniform the law and to coordinate its interpretation and administration with related federal regulation).
The United States Supreme Court has stated that the definition of a security "embodies a flexible rather than a static principle, one that is capable of adaptation
to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." S.E.C. v. W.J. Howey Co., 328 U.S. 293, 299, 90 L. Ed. 1244, 66 S. Ct. 1100, 163 A.L.R. 1043 (1946). In determining whether an investment constitutes a security, "form should be disregarded for substance and the emphasis should be on economic reality." Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S. Ct. 548, 19 L. Ed. 2d 564 (1967). Because the securities acts are remedial in nature and are designed to protect investors from speculative or fraudulent schemes of promoters, both Washington and federal courts apply a broad definition to the term "security." S.E.C. v. Glenn W. Turner Enters., 474 F.2d 476, 480-81 (9th Cir.), cert. denied, 414 U.S. 821, 38 L. Ed. 2d 53, 94 S. Ct. 117 (1973); Cellular Engineering, 118 Wash. 2d at 23; Philips, 108 Wash. 2d at 631.
The definition of security in RCW 21.20.005(12) includes investment contracts and notes. Here, the trial court found that the investments at issue in Counts III-VII, IX, and X constituted investment contracts and were thus securities under the Securities Act. The State argues that Counts V and VI may be affirmed on the alternative basis that they involved notes within the meaning of the Securities Act. Argo contends that the investments in the William Argo Trust involved neither investment contracts nor notes under the Securities Act, and thus that his conviction for securities fraud must be reversed.
A. Investment Contract as a Security
The United States Supreme Court first defined the term "investment contract" in S.E.C. v. W.J. Howey Co., supra. In Howey, owners of large tracts of citrus groves offered to sell smaller tracts to investors; together with optional service contracts for harvesting and marketing the fruit. The Court held that the owners' scheme was an investment contract and thus a security under the Securities Act of 1933. 328 U.S. at 299. Noting the absence of a definition in the statute, the Court explained that an investment contract is "a contract, transaction or scheme whereby a
person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party". 328 U.S. at 298-99.
The Washington Supreme Court has adopted the Howey test, setting forth the elements of an investment contract as: (1) an investment of money; (2) a common enterprise; and (3) an expectation of profits deriving primarily from the efforts of the promoter or a third party. Cellular Engineering, 118 Wash. 2d at 26; Philips, 108 Wash. 2d at 632; Sauve v. K.C., Inc., 91 Wash. 2d 698, 702, 591 P.2d 1207 (1979); McClellan v. Sundholm, 89 Wash. 2d 527, 531, 574 P.2d 371 (1978). Argo does not appear to challenge the existence of the first and third elements of the Howey test in this case, nor does the record indicate a basis for such a challenge. Rather, Argo contends that, here, there was no common enterprise and that the absence of this element defeats the existence of an investment contract.
In Washington, a "'common enterprise need not be a common fund. The term denotes rather an interdependence of fortunes, a dependence by one party for his profit on the success of some other party in performing his part of the venture.'" Philips, 108 Wash. 2d at 632 (quoting McClellan, 89 Wash. 2d at 532); see also Sauve, 91 Wash. 2d at 702. In Sauve, the plaintiff loaned $15,120 to the defendant, a corporation which leased household appliances to consumers. 91 Wash. 2d at 699. In exchange for the loan, the plaintiff received security interests in the appliances purchased with her funds. In addition, the defendant promised make monthly interest payments to the plaintiff at a rate of 12% per annum. Id. When the defendant defaulted on the loan, the plaintiff brought an action alleging violations of the Securities Act of Washington. Analyzing the plaintiffs investment under the Howey test, the court held that the common enterprise element was met because both the plaintiffs and the defendant's fortunes depended on the efforts of the defendant to find lessees for the appliances the plaintiffs funds had purchased. 91 Wash. 2d at 702. See also Philips, 108 Wash. 2d at 632-34 (holding that common
enterprise existed when investors' profits were inextricably woven with loan broker's screening services and ability to locate sound business borrowers).
Here, as in Sauve and Philips, both the victims' and Argo's fortunes depended on Argo's efforts to manage the "trust" and find appropriate borrowers for the victims' funds. Because there was an interdependence of fortunes, we conclude that the common enterprise element of the Howey test was met in this case.
Citing Heine v. Colton, Hartnick, Yamin & Sheresky, 786 F. Supp. 360 (S.D.N.Y. 1992), Argo contends that given the fixed interest rate applied to all of the William Argo Trust investments, the victims' fortunes would not rise and fall with Argo's, and thus there was no interdependence of fortunes. Under Washington law, however, a fixed interest rate does not preclude a finding of interdependence of fortunes. In Sauve, the plaintiff contracted to receive a fixed interest rate of 12%. Quoting the Ninth Circuit, the court held that profits need not vary when an investor's risk of loss depends on the efforts of a third party:
It is true that unlike the situation in Howey, the financial gain for [the plaintiff] did not vary from year to year depending on the skill with which [the defendant] managed her collateral. Rather, only the risk of loss varied with [the defendant's] management skills. But this distinction between [the defendant's] plan and the Howey plan is without significance when determining whether the plan is a security. The distinction is precisely that between a common stock and a corporate bond, yet a corporate bond is not for that reason excluded from the definition of a security. Therefore, the fact that [the plaintiff's] "profit" was constant while her risk of loss depended on [the defendant's] management skills does not remove the plan from the definition of a security.
Sauve, 91 Wash. 2d at 703 (quoting El Khadem v. Equity Sec. Corp., 494 F.2d 1224 (9th Cir.), cert. denied, 419 U.S. 900 (1974)). In this case, as in Sauve and El Khadem, the investors' risk of loss depended on Argo's management of the
"trust." Although their profits did not vary with Argo's, the investors risked the loss of their entire investment in the event that Argo's management skills failed to keep the "trust" profitable. Under these circumstances, we conclude that there was an interdependence of fortunes, and hence a common enterprise.
Argo also seeks to distinguish this case from those in which a common enterprise has been found by arguing that the differences among the individual investments preclude a finding of a common enterprise. Although the investments contained some variations, all of the investors believed that they were investing in the William Argo Trust. All of the investments were a part of Argo's overarching Ponzi scheme. Our Supreme Court has emphasized that in analyzing whether an investment contract exists, the court will focus on the entire investment scheme, as opposed to individual parts of the scheme. See Cellular Engineering, 118 Wash. 2d at 25. Thus, individual variations in Argo's investment scheme do not preclude a finding that a common enterprise existed.
With respect to Counts V and VI, the State argues that Argo's conviction may be affirmed on the alternative basis that the transactions encompassed within those counts involved notes within the ...