United States v. McKye ( 2015 )

  •                                                                          FILED
                                                                 United States Court of Appeals
                                                                         Tenth Circuit
                       UNITED STATES COURT OF APPEALS
                                                                      December 16, 2015
                                    TENTH CIRCUIT                    Elisabeth A. Shumaker
                                                                         Clerk of Court
                  Plaintiff - Appellee,
     v.                                                      No. 14-6057
                                                            (W.D. Okla.)
     BRIAN WILLIAM McKYE,                           (D.C. No. 5:11-CR-00045-R-1)
                  Defendant - Appellant.
                               ORDER AND JUDGMENT *
    Before GORSUCH, MURPHY, and MORITZ, Circuit Judges.
    I.    Introduction
          Following a jury trial, Appellant Brian William McKye was convicted of
    seven counts of securities fraud, in violation of 15 U.S.C. § 78j(b), and one count
    of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h).
    In this appeal, McKye challenges both his convictions and his sentence.
            This order and judgment is not binding precedent except under the
    doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
    however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
    Cir. R. 32.1.
          During McKye’s trial, a witness testified that an Oklahoma state court had
    previously determined the investment notes at issue were securities. McKye
    argues this was inadmissible hearsay and the district court erred by permitting it
    to be admitted. At sentencing, the district court calculated McKye’s advisory
    guidelines range by applying the sophisticated means enhancement set out in
    USSG § 2B1.1(b)(10)(C). McKye argues it was clear error to apply this
          Exercising jurisdiction pursuant to 28 U.S.C. § 1291 and 18 U.S.C.
    § 3742(a), this court affirms McKye’s convictions and sentence.
    II.   Background
          In 2011, a jury found McKye guilty of securities fraud and conspiracy. His
    convictions, however, were overturned by this court. United States v. McKye, 
    734 F.3d 1104
    , 1111 (10th Cir. 2013). McKye was retried in 2014 and convicted a
    second time. Once again, a central question at trial was whether the investment
    notes McKye marketed and sold were securities. Id. at 1107 & n.4. To prove this
    element, the Government put on evidence showing the investment notes were both
    investment contracts and notes that qualify as securities. See 15 U.S.C.
    § 77b(a)(1) (defining the term “security” to include notes and investment
          McKye, who represented himself at trial, called Patricia LaBarthe as his
    first witness. LaBarthe’s testimony focused on an investigation into McKye’s
    activities conducted by the Oklahoma Department of Securities in 2006. The
    investigation was initiated when the Department of Securities received an
    anonymous complaint about Global West Funding, an entity controlled by
    McKye. 1 LaBarthe was the agency lawyer assigned to the investigation. During
    cross-examination, the Government questioned LaBarthe about the outcome of a
    state civil action filed against McKye and his companies as a result of her
    agency’s investigation. The investment notes at issue in that civil action were the
    same as the ones at issue in McKye’s federal criminal trial. LaBarthe testified
    that the state court determined the investment notes were securities. This
    testimony forms the basis for McKye’s challenge to his convictions.
          McKye was found guilty and the matter proceeded to sentencing. Adopting
    the recommendation made in the Presentence Investigation Report, the district
    court calculated McKye’s advisory guidelines range by applying the sophisticated
    means enhancement set out in USSG § 2B1.1(b)(10)(C). This enhancement
    increased McKye’s base offense level by two levels. Application of this
    enhancement forms the basis for McKye’s challenge to his sentence.
           “The charged fraud . . . implicated the following entities owned or
    operated by McKye: Global West Funding, LLC and Global West Financial, LLC
    (collectively “Global West”); Sure Lock Financial, LLC and Sure Lock Loans,
    LLC (collectively “Sure Lock”); The Wave-Goldmade, Ltd. (“TW Goldmade”);
    and Heritage Estate Services, LLC (“Heritage”).” United States v. McKye, 
    734 F.3d 1104
    , 1105 (10th Cir. 2013).
    III.   Discussion
           A.    Hearsay Testimony
           McKye argues the district court erred by admitting LaBarthe’s testimony
    regarding the Oklahoma state court’s determination that the investment notes
    marketed by McKye were securities. The Government does not contest McKye’s
    assertion that the judicial finding was inadmissible hearsay because it was an
    “out-of-court . . . statement by a judge . . . offered to prove the truth of the matter
    asserted.” Herrick v. Garvey, 
    298 F.3d 1184
    , 1191 (10th Cir. 2002). The parties
    do, however, argue over whether the issue was adequately preserved. The
    Government takes the position McKye failed to clearly object to LaBarthe’s
    testimony during trial and, thus, the issue should be reviewed by applying the
    plain-error standard. See United States v. Hinson, 
    585 F.3d 1328
    , 1338 (10th Cir.
    2009) (reviewing for plain error when the defendant failed to object to the
    admission of hearsay testimony). McKye argues the objection he lodged
    immediately after LaBarthe’s testimony was sufficient to preserve the hearsay
    issue and his convictions should be reversed unless the Government can prove
    any error in admitting the testimony was harmless. See United States v. Collins,
    575 F.3d 1069
    , 1073 (10th Cir. 2009) (applying the harmless-error standard to a
    trial court’s ruling on a hearsay objection). It is unnecessary to resolve the
    dispute over the appropriate standard of review because, even if McKye’s
    objection was adequate to preserve the issue, the admission of LaBarthe’s
    testimony was harmless.
          “A harmless error is one that does not have a substantial influence on the
    outcome of the trial; nor does it leave one in grave doubt as to whether it had
    such effect.” United States v. Jones, 
    44 F.3d 860
    , 873 (10th Cir. 1995). The
    erroneous admission of hearsay evidence is harmless when the Government
    presents strong evidence of a defendant’s guilt. United States v. Shaw, 
    758 F.3d 1187
    , 1197 (10th Cir. 2014). Because there was strong evidence that the
    investment notes were securities under both the investment contract and the note
    tests, we have no doubt LaBarthe’s testimony did not influence the outcome of
    McKye’s trial.
          Under the investment contract theory, an instrument is a security if: (1) an
    individual invests money, (2) in a common enterprise, (3) with an expectation of
    profits derived solely through the efforts of others. SEC v. W.J. Howey Co., 
    328 U.S. 293
    , 298-99 (1946). Nearly a dozen witnesses testified about their
    transactions with McKye. One testified he was told the money he gave McKye
    would be used to buy properties and he would receive a 9.5% return without
    doing anything other than transferring the funds. Another testified she invested
    more than $40,000 with McKye’s company, Global West Financial, with the
    expectation she would receive a 9.75% rate of return generated by investments in
    real estate. The testimony of ten additional witnesses was substantively identical.
    Although victims were also told their money was collateralized by liens or
    mortgages on real property, there was evidence that only eleven of 528 lien
    assignments were filed with a county clerk.
          Further, the investment note contracts referred to the victims as
    “investors”; multiple victims testified they understood they were investing money
    in McKye’s businesses, not making a loan to him; and there was no evidence any
    victim was in the business of making loans. See Zabriskie v. Lewis, 
    507 F.2d 546
    , 551-52 (10th Cir. 1974) (holding promissory notes received in “isolated
    transactions outside normal commercial circles” by individuals seeking to make
    investments are securities, not commercial loans). The victims’ testimony was
    consistent with the testimony of McKye’s co-conspirator who stated that McKye
    explained his scheme in terms of investments and instructed sales representatives
    to market the instruments as investments. McKye told the sales representatives
    he was able to offer an extremely high interest rate to investors because of a
    purported agreement he had negotiated with Bank of America.
          In sum, the Government’s evidence showed McKye pooled the money he
    received from the victims and used it to operate his businesses, including making
    loans to third parties. 2 Because the investments were not fully collateralized, if
           The evidence showed between sixty and eighty individuals transferred
    funds to one of several entities controlled by McKye. A portion of these funds
    was funneled to a “pay day loan” business operated by McKye, and loaned out to
    individuals at 100% to 200% interest.
    the third-party loans were not repaid, investors in McKye’s scheme would not
    receive the return they had been promised and they would lose their initial
    investment. 3 In this way, the security of the victims’ money was inexorably
    intertwined with the success of McKye’s business ventures. The Government’s
    evidence strongly supports the conclusion the instruments were investment
    contracts because victims of McKye’s scheme invested money in a common
    enterprise with the expectation of receiving payments based on McKye’s efforts,
    not their own.
          There was equally strong evidence the investment notes were notes that
    qualified as securities. At trial, McKye admitted the instruments were notes, but
    took the position they were a type that does not qualify as a security. But see
    Reves v. Ernst & Young, 
    494 U.S. 56
    , 65 (1990) (holding “every note” is
    presumed to be a security). The following notes, and those that bear a “strong
    resemblance” to them are not securities:
          [a] note delivered in consumer financing, [a] note secured by a
          mortgage on a home, [a] short-term note secured by a lien on a small
          business or some of its assets, [a] note evidencing a “character” loan
          to a bank customer, short-term notes secured by an assignment of
          accounts receivable, or a note which simply formalizes an
          open-account debt incurred in the ordinary course of business
          (particularly if, as in the case of the customer of a broker, it is
           It is immaterial that victims were told their investments were risk free and
    collateralized by real property. Woodward v. Terracor, 
    574 F.2d 1023
    , 1024
    (10th Cir. 1978) (“In determining whether a particular transaction is, or is not, an
    investment contract, . . . emphasis is placed on economic reality.”).
          collateralized), and notes evidencing loans by commercial banks for
          current operations.
    SEC v. Thompson, 
    732 F.3d 1151
    , 1159 (10th Cir. 2013) (quotation omitted).
    Four factors are relevant to determining whether a note resembles one of the
    excluded notes: (1) “the motivations that would prompt a reasonable seller and
    buyer to enter into [the transaction],” (2) “the plan of distribution of the
    instrument,” (3) “the reasonable expectations of the investing public,” and (4)
    “whether some factor such as the existence of another regulatory scheme
    significantly reduces the risk of the instrument.” Reves, 494 U.S. at 66-67
    (quotation omitted).
          As to the first factor, the Government presented considerable evidence, in
    the form of direct testimony, that the victims of McKye’s scheme were motivated
    to invest by the expectation of a substantial return on their investment. The
    second and third factors also weigh heavily in favor of the jury’s determination
    that the notes were securities. The Government’s evidence showed that McKye
    marketed the investment notes to the general public using television and
    newspaper advertising, mailings, and telemarketing calls. There is no indication
    in the record that any restrictions were placed on who could invest. Further,
    multiple victims testified they thought of themselves as investors, not as lenders.
    Their testimony was consistent with both the Government’s evidence showing
    McKye marketed the notes as investments and the documents themselves which
    made numerous references to the term “investor.”
          The fourth factor also strongly supports the Government’s burden of
    showing the notes were securities. The Government elicited testimony from a
    special agent with the Criminal Investigation Division of the Internal Revenue
    Service that his review of the financial records disclosed the “investor funds were
    not protected at all.” Even assuming McKye is correct that the evidence upon
    which this witness relied actually showed that 29% of the investment notes were
    collateralized, 4 that would mean that 71% of the invested funds were at full risk
    of loss. Thus, the Government’s evidence, even interpreted as McKye advocates,
    amply showed the actions allegedly taken by McKye to collateralize the
    investment notes did not meaningfully reduce the risk of loss to investors.
          Having considered all the evidence presented at trial, we conclude the
    Government presented strong evidence that the investment notes were securities
    under both the investment contract theory and the note theory. There is no
    reasonable probability LaBarthe’s testimony had any influence on the jury’s
           There are serious analytical flaws in McKye’s calculation that 29% of the
    investment notes were secured in some way from risk of loss. Most glaringly, his
    analysis is applicable only to the notes entered into after September 2007. It is
    from that point forward that McKye purported to collateralize the notes with lien
    assignments. McKye’s own argument is necessarily a concession that one
    hundred percent of the investment notes sold before 2007 (approximately
    $3,230,000 in invested funds) were not even purportedly collateralized and, thus,
    100% at risk.
    finding on that element of the Government’s case. See Kotteakos v. United
    328 U.S. 750
    , 764-65 (1946) (holding a nonconstitutional error is harmless
    if, “after pondering all that happened without stripping the erroneous action from
    whole,” the reviewing court is “sure that the error did not influence the jury, or
    had but very slight effect”). Accordingly, any error in admitting the testimony
    was harmless.
          B.     Sentence Enhancement
          McKye also challenges the sentence imposed by the district court, arguing
    the court erred by assessing a two-level increase to his offense level for use of
    sophisticated means. McKye concedes that his failure to challenge the
    application of the enhancement at sentencing means his claim is reviewed only for
    plain error. See United States v. Frost, 
    684 F.3d 963
    , 971 (10th Cir. 2012). To
    meet his burden under the plain error standard, McKye must show the district
    court erred, the error was plain, the error affected his substantial rights, and the
    error seriously affects the fairness, integrity, or public reputation of judicial
    proceedings. United States v. Craig, 
    794 F.3d 1234
    , 1238 (10th Cir. 2015).
          McKye argues the district court committed error that was plain because the
    facts found by the court 5 do not show his offense conduct was “especially
            For purposes of the challenge to his sentence, McKye does not dispute any
    of the district court’s factual findings. See United States v. Svacina, 
    137 F.3d 1179
    , 1187 (10th Cir. 1998) (“This court has held repeatedly that factual disputes
    not brought to the attention of the court do not rise to the level of plain error.”).
    complex or especially intricate,” as required for the enhancement to apply. USSG
    § 2B1.1 cmt. n.9(B). We disagree.
          McKye ran his scheme undetected from 2004 to 2009, using multiple
    entities to coordinate the fraud. He used telemarketers employed by Heritage
    Estate Services, a limited liability company in which he was not a member, to
    market the investment notes. He attempted to conceal commission payments to
    Heritage Estate Services. The investment notes were issued by Global West
    Financial or Sure Lock Financial. Interest payments, however, were made by The
    Wave-Goldmade, another entity controlled by McKye, making it appear the funds
    had actually been invested. McKye used mass marketing techniques, including
    newspaper and television ads, to attract more investors. Further, he induced
    individuals to invest in his scheme by deceiving them into believing their
    investments were collateralized by real property.
          Because the evidence shows McKye used sophisticated means to perpetrate
    and conceal his fraud, the district court did not err, let alone plainly err, in
    applying the two-level sentencing enhancement. See id. (defining “sophisticated
    means” as “especially complex or especially intricate offense conduct pertaining
    to the execution or concealment of an offense”).
    IV.   Conclusion
          The judgment of conviction and sentence is affirmed.
                                           ENTERED FOR THE COURT
                                           Michael R. Murphy
                                           Circuit Judge