State v. Kelson , 284 P.3d 695 ( 2012 )

IN THE UTAH COURT OF APPEALS
‐‐‐‐ooOoo‐‐‐‐
State of Utah, ) OPINION
)
Plaintiff and Appellee, ) Case No. 20100299‐CA
)
v. ) FILED
) (August 2, 2012)
Grace C. Kelson, )
) 2012 UT App 217Defendant and Appellant. )
‐‐‐‐‐
Third District, Salt Lake Department, 041901548
The Honorable Judith S. Atherton
Attorneys: Stephen W. Howard, Salt Lake City, for Appellant
Mark L. Shurtleff and Karen A. Klucznik, Salt Lake City, for Appellee
‐‐‐‐‐
Before Judges McHugh, Orme, and Davis.
McHUGH, Presiding Judge:
¶1 Grace C. Kelson appeals her convictions for one count of offer or sale of
unregistered securities, a third degree felony, see Utah Code Ann. §§ 61‐1‐7, ‐21(1)
(2011); one count of sale by an unlicensed broker‐dealer, agent, or investment advisor, a
third degree felony, see id. §§ 61‐1‐3, ‐21(1); three counts of securities fraud, second
degree felonies, see id. §§ 61‐1‐1, ‐21(2); and one count of pattern of unlawful activity, a
second degree felony, see id. §§ 76‐10‐1603, ‐1603.5 (2008).1 We vacate Kelson’s
conviction for pattern of unlawful activity, and reverse and remand for a new trial on
all other charges.
BACKGROUND
¶2 Kelson became acquainted with the owners (Owners) of a mortgage company,
and later sought assistance from the mortgage company in financing two development
projects: a high‐end resort near Heber City and another development in Brazil. After
these efforts failed to provide sufficient funding, Kelson and the Owners hoped to
purchase a letter of credit to fund the developments.2 The letter of credit was to serve as
collateral, thereby making it easier to find lenders for the project. In this pursuit, Kelson
and the Owners sought approximately $125,000 to obtain a letter of credit worth $15
million.
¶3 Around October 11, 2001, in response to an inquiry from one of the mortgage
company’s employees (Employee), Kelson explained that she and the Owners did not
have the necessary funds to close a project. Specifically, Kelson noted that she needed
about $116,000 in “a couple of days” in order to close the deal. Kelson mentioned that
she would be willing to pay a finder’s fee to Employee if she could assist in finding
1
Because the relevant provisions of these statutes have not been materially
changed, unless otherwise noted, we cite the current version of the Utah Code for the
convenience of the reader.
2
A “letter of credit” is defined as
[a]n instrument under which the issuer (usu[ally] a bank), at
a customer’s request, agrees to honor a draft or other
demand for payment made by a third party (the beneficiary),
as long as the draft or demand complies with specified
conditions, and regardless of whether any underlying
agreement between the customer and the beneficiary is
satisfied.
Black’s Law Dictionary 987 (9th ed. 2009) (emphasis omitted).
20100299‐CA 2
someone to provide the money and indicated that the lenders could make their money
back “five times.”
¶4 After obtaining assurances from one of the Owners that it was a “legitimate deal”
and that the money would be returned in approximately two to three weeks when they
obtained the letter of credit, Employee approached her family members about investing
in the project. Within a day or two, she raised $22,400 from herself, her husband, her
daughter, and a friend, which she exchanged for a promissory note dated October 11,
2001, signed by Kelson, which indicated that Employee would receive $249,331.84 in
return for the investment by November 11, 2001. Employee’s other daughter
(Daughter) also invested $20,000 in exchange for a promissory note dated October 11,
2001, stating that she would receive $133,332 within thirty days.
¶5 Between October 10 and 12, 2001, Employee called her brother (Brother) to
inform him about “getting into an investment” and told him he could get “a pretty good
return.” Brother invested $116,000 in exchange for a promissory note signed by Kelson,
which was dated October 11, 2001, and indicated that Brother would receive $773,333.33
in return. Brother understood that he was not investing in the project itself, but that his
only involvement was in obtaining the letter of credit.
¶6 Kelson did not inform Employee, Daughter, or Brother about her financial
background, which included over thirty civil judgments against her totaling $750,000.
Nor did Kelson inform these individuals that some of the money would be spent on her
personal expenses.
¶7 All of the promissory notes indicated that S.D.C. Financial Services would make
the payments. On October 11, 2001, S.D.C. Financial was registered as a limited liability
company with the Utah Division of Corporations, and it opened a bank account on the
same day. Kelson was listed as the registered agent and as a member. After the money
secured by the promissory notes was deposited in the S.D.C. Financial account, most of
it was transferred to an account in Washington, $5,000 was used for legal fees, and
Kelson withdrew approximately $25,000 for her personal use. When the S.D.C.
Financial account was closed in January 2002, it had a negative balance of over $9,000.
The letter of credit was never purchased, and S.D.C. Financial defaulted on its
obligations under the promissory notes to Employee, Daughter, and Brother.
20100299‐CA 3
¶8 On March 5, 2004, the State charged Kelson with three counts of securities fraud;
one count of offer or sale of unregistered securities; one count of sales by an unlicensed
broker‐dealer, agent or investment advisor; and one count of pattern of unlawful
activity.
¶9 At the trial held on February 24 and 25, 2009, the State called the Director of
Enforcement (Director) for the Utah Division of Securities (the Division) as a securities
expert. Director testified that notes are presumed to be securities and that “unless that
presumption is overcome, it remains a security.” Director explained that there are
certain enumerated categories of notes that are not securities and also stated that there
are four factors used to determine whether other notes are not securities (four‐factor test
or Reves test). Director explained how those factors are applied and opined how they
might be weighed in this case.
¶10 At the close of evidence, Kelson moved for a directed verdict on all counts. The
trial court denied the motion. Earlier, the parties had stipulated to the jury instructions.
Instruction 25 states,
You are instructed that a “note” is presumed to be a
security. However, certain notes have been classified as
non‐securities; these notes are:
1. the note delivered in consumer financing,
2. the note secured by a mortgage on a home,
3. the short‐term note secured by a lien on a small business
or some of its assets,
4. the note evidencing a ‘character’ loan to a bank customer,
5. short‐term notes secured by an assignment of accounts
receivable, or
6. 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 collateralized.
A class of notes that resembles one of these exceptions
can be added to the list of non‐security notes if they meet a
four factor test. That test is to:
1. examine the transaction to assess the motivations that
would prompt a reasonable seller and buyer to enter into it.
20100299‐CA 4
If the seller’s purpose is to raise money for the general use of
a business enterprise or to finance substantial investments
and the buyer is interested primarily in the profit the note is
expected to generate, the instrument is likely to be a
“security.” On the other hand, if the note is exchanged to
facilitate the purchase and sale of a minor asset or consumer
good, to correct for the seller’s cash‐flow difficulties, or to
advance some other commercial or consumer purpose, the
note is less sensibly described as a “security.”
2. [e]xamine the “plan of distribution” of the instrument to
determine whether it is an instrument in which there is
common trading for speculation or investment.
3. [e]xamine the reasonable expectations of the investing
public, and
4. [e]xamine whether some factor such as the existence of
another regulatory scheme significantly reduces the risk of
the instrument, thereby rendering application of the
Securities Acts unnecessary.
¶11 The jury convicted Kelson on all counts. At sentencing, Kelson represented
herself and asked the trial court to review certain documents. The trial court refused to
receive or review the documents before imposing sentence. Kelson now appeals.
ISSUES AND STANDARDS OF REVIEW
¶12 Kelson first argues that Jury Instruction 25 violated her constitutional right to a
presumption of innocence and the constitutional requirement that the State prove every
element of the crime beyond a reasonable doubt. Kelson did not preserve this
argument in the trial court and asks us to review it under the doctrine of plain error.
See generally State v. Nelson‐Waggoner, 2004 UT 29, ¶ 16, 94 P.3d 186. To establish plain
error, Kelson must show that “‘(i) [a]n error exists; (ii) the error should have been
obvious to the trial court; and (iii) the error is harmful, i.e., absent the error, there is a
reasonable likelihood of a more favorable outcome for the appellant, or phrased
differently, our confidence in the verdict is undermined.’” Id. (quoting State v. Dunn,
850 P.2d 1201, 1208‐09 (Utah 1993)).
20100299‐CA 5
¶13 Kelson also argues that counsel was ineffective for stipulating to this instruction.
“We consider ineffective assistance of counsel claims raised for the first time on appeal
as a matter of law.” State v. Sellers, 2011 UT App 38, ¶ 9, 248 P.3d 70.
¶14 Next, Kelson argues that the trial court erred in denying her motion for a
directed verdict because it misapplied the Utah Pattern of Unlawful Activity Act. See
generally Utah Code Ann. §§ 76‐10‐1601 to ‐1609 (2008 & Supp. 2011). Whether the trial
court properly interpreted the statute is a question of law that we review for
correctness. See State v. Steele, 2010 UT App 185, ¶ 12, 236 P.3d 161.
¶15 Finally, Kelson argues that the trial court violated her due process rights and rule
22(a) of the Utah Rules of Criminal Procedure when it declined to grant a continuance
to allow Kelson to present additional documents to the court. These arguments each
present a question of law, “which we review for correctness.” See State v. Wanosik, 2001
UT App 241, ¶ 9, 31 P.3d 615, aff’d, 2003 UT 46, 79 P.3d 937.
ANALYSIS
I. The Due Process Implications of Jury Instruction 25
¶16 Before analyzing Kelson’s claims regarding Jury Instruction 25, we discuss the
due process concerns implicated by the instruction. “The Due Process Clause of the
Fourteenth Amendment ‘protects the accused against conviction except upon proof
beyond a reasonable doubt of every fact necessary to constitute the crime with which he
is charged.’” Francis v. Franklin, 471 U.S. 307, 313 (1985) (quoting In re Winship, 397 U.S.
358, 364 (1970)). This principle “prohibits the State from using evidentiary
presumptions in a jury charge that have the effect of relieving the State of its burden of
persuasion beyond a reasonable doubt of every essential element of a crime.” Id. In
determining whether a jury instruction relieves the State of this burden, “‘[t]he
threshold inquiry’” requires that we “‘determine the nature of the presumption it
describes.’” Id. at 313‐14 (quoting Sandstrom v. Montana, 442 U.S. 510, 514 (1979)). “A
mandatory presumption instructs the jury that it must infer the presumed fact if the
State proves certain predicate facts.” Id. at 314. Mandatory presumptions violate due
process “if they relieve the State of the burden of persuasion on an element of an
20100299‐CA 6
offense.”3 Id. In contrast, “[a] permissive inference suggests to the jury a possible
conclusion to be drawn if the State proves predicate facts, but does not require the jury
to draw that conclusion.” Id. Permissive inferences do not violate the Due Process
Clause because the State is still required “to convince the jury that the suggested
conclusion should be inferred based on the predicate facts proved.” See id. Thus, we
must first determine whether Jury Instruction 25 created a mandatory or permissive
presumption that a note is a security.
¶17 Our analysis of which type of instruction is at issue “must focus initially on the
specific language challenged.” Id. at 315. Reviewing that language, we consider
“‘whether there is a reasonable likelihood that the jury has applied the challenged
instruction in a way’ that violates the Constitution.”4 Estelle v. McGuire, 502 U.S. 62, 72
3
In Searle v. Milburn Irrigation Co., 2006 UT 16, 133 P.3d 382, the Utah Supreme
Court explained that “there are two evidentiary burdens: a burden of persuasion and a
burden of production.” Id. ¶ 49 n.2 (citing Koesling v. Basamakis, 539 P.2d 1043, 1046
(Utah 1975)). While the burden of persuasion “refers to ‘[a] party’s duty to convince the
fact‐finder to view the facts in a way that favors that party,’” the burden of production
“refers to ‘[a] party’s duty to introduce enough evidence on an issue to have the issue
decided by the fact‐finder, rather than decided against the party in a peremptory
ruling.’” Id. (alterations in original) (quoting Blackʹs Law Dictionary 190 (7th ed. 1999)).
The term “burden of proof” “encompasses both the burden of persuasion and the
burden of production.” Id.
4This is a slightly different formulation than set forth by the United States
Supreme Court in the seminal cases of Sandstrom v. Montana, 442 U.S. 510 (1979), and
Francis v. Franklin, 471 U.S. 307 (1985). Several years after those decisions, the Supreme
Court in Boyde v. California, 494 U.S. 370 (1990), clarified the standard of review for jury
instructions. See id. at 378‐80 (citing Franklin, 471 U.S. at 315‐16; Sandstrom, 442 U.S. at
516‐17) (“Although there may not be great differences among these various phrasings, it
is important to settle upon a single formulation for this Court and other courts to
employ in deciding this kind of federal question.”). The Court explained that the focus
on the “reasonable likelihood that the jury” applied the instruction unconstitutionally,
“better accommodates the concerns of finality and accuracy than does a standard which
makes the inquiry dependent on how a single hypothetical ‘reasonable’ juror could or
(continued...)
20100299‐CA 7
(1991) (quoting Boyde v. California, 494 U.S. 370, 380 (1990)). Here, the challenged
instruction states, “You are instructed that a ‘note’ is presumed to be a security.
However, certain notes have been classified as non‐securities.” The instruction then
lists several nonsecurities and describes a four‐factor test to determine whether a note
not on the list should be considered a nonsecurity. Even if the State is correct that
Instruction 25 provides an accurate statement of the law, see Reves v. Ernst & Young, 494
U.S. 56, 66‐67 (1990) (announcing the four‐factor Reves test in a civil context); State v.
Burkinshaw, 2010 UT App 245, ¶ 11 n.3, 239 P.3d 1052 (reviewing the trial court’s
application of the Reves test in a criminal case, “without deciding whether Utah should
adopt that test” to determine whether a note is a security); see also Utah Code Ann. 61‐1‐
13(1)(ee)(i)(A) (2011) (“‘Security’ means a . . . note.”), it may not supplant the
factfinder’s role with a mandatory presumption, see State v. Chambers, 709 P.2d 321, 325
(Utah 1985) (noting that presumptions in criminal cases may be permissible if they do
not supplant “the factfinder’s responsibility at trial, based on evidence adduced by the
State, to find the ultimate facts beyond a reasonable doubt”). In determining whether
an instruction has done so, we pay “careful attention to the words actually spoken to
the jury.” See Sandstrom, 422 U.S. at 514.
¶18 The State contends that the presumption in Instruction 25 is permissive because
the information that certain notes are not securities and the explanation of the four‐part
Reves test reasonably informed the jury that it could determine that the promissory
notes were nonsecurities. However, even assuming that the additional language made
the presumption rebuttable, we are not persuaded that it was permissive, rather than
mandatory. We consider the United States Supreme Court’s decision in Francis v.
Franklin, 471 U.S. 307 (1985), instructive on this point.
¶19 In Franklin, the defendant challenged the following instruction:
The acts of a person of sound mind and discretion are
presumed to be the product of the person’s will, but the
presumption may be rebutted. A person of sound mind and
discretion is presumed to intend the natural and probable
4
(...continued)
might have interpreted the instruction.” See id. at 380.
20100299‐CA 8
consequences of his acts but the presumption may be
rebutted.
Id. at 315. In holding that the instruction violated the defendant’s due process rights by
impermissibly shifting the burden of persuasion, the Supreme Court first identified the
presumption as mandatory due to the use of command, rather than permissive,
language. Id. at 316 (determining that the language “are presumed” and “is presumed”
commanded the jury to apply the presumption at issue). Next, the Franklin court
rejected the argument that the defect had been cured by the permissive rebuttal
language because
[t]he very statement that the presumption “may be rebutted”
could have indicated to a reasonable juror that the defendant
bore an affirmative burden of persuasion once the State
proved the underlying act giving rise to the presumption.
Standing alone, the challenged language undeniably created
an unconstitutional burden‐shifting presumption with
respect to the element of intent.
Id. at 318.
¶20 Instruction 25 is similar to the instruction held to violate the due process clause
in Franklin. It begins with language of command, stating, “You are instructed that a
‘note’ is presumed to be a security.” The instruction does not state that the jury “may”
presume that a note is a security or tell the jurors that they have a choice in whether to
follow the presumption. Instead, the words spoken to the jury instruct that “a ‘note’ is
presumed to be a security.” Furthermore, unlike the instruction in Franklin, Instruction
25 does not expressly state that the mandatory presumption may be rebutted. Even
assuming, as the State suggests, that the jury could infer as much from the description
of the four‐factor test, nothing in Instruction 25 explains that the State, not Kelson, had
the burden of proving that these notes were securities. Thus, as in Franklin, the jury
may have understood that Kelson “bore an affirmative burden of persuasion” once the
State established that she had provided notes to Employee, Daughter, and Brother,
thereby “giving rise to the presumption.” See id. at 318.
20100299‐CA 9
¶21 However, we may not rely only on the language of Instruction 25 in deciding
whether Kelson’s due process rights were compromised. Instead, we must consider a
reasonable jury’s understanding in the context of the jury instructions and the record as
a whole. See McGuire, 502 U.S. at 72 (“It is well established that the instruction ‘may not
be judged in artificial isolation,’ but must be considered in the context of the
instructions as a whole and the trial record.” (quoting Cupp v. Naughten, 414 U.S. 141,
147 (1973))).
¶22 “Other instructions [and the record] might explain the particular infirm language
to the extent that a reasonable jur[y] could not have considered the charge to have
created an unconstitutional presumption.” Franklin, 471 U.S. at 315; see also Estelle v.
McGuire, 502 U.S. 62, 72 (1991). In reviewing the other instructions or explanations in
the record, we must determine if they sufficiently “explained the proper allocation of
burdens . . . [so] that any ambiguity” in the instruction did not result in a reasonable
likelihood that the jury would apply the instruction so as to “shift[] the burden of
persuasion” to Kelson. See Franklin, 471 U.S. at 319. However, “[l]anguage that merely
contradicts and does not explain a constitutionally infirm instruction will not suffice to
absolve the infirmity. A reviewing court has no way of knowing which of the two
irreconcilable instructions the jurors applied in reaching their verdict.” Id. at 322.
¶23 The State argues that there are several clarifying instructions that rectify any
deficiencies in Instruction 25. Specifically, the State notes that the jury was repeatedly
instructed that the State had the burden of proving beyond a reasonable doubt all the
elements of the crime charged. However, the United States Supreme Court has rejected
that argument, explaining that
general instructions on the State’s burden of persuasion and
the defendant’s presumption of innocence are not
“rhetorically inconsistent with a conclusive or burden‐
shifting presumption,” because “[t]he jury could have
interpreted the two sets of instructions as indicating that the
presumption was a means by which proof beyond a
reasonable doubt . . . could be satisfied.”
See Francis v. Franklin, 471 U.S. 307, 319 (1985) (alteration in original) (quoting Sandstrom
v. Montana, 442 U.S. 510, 518 n.7 (1979)). For example, in this case, there is a reasonable
20100299‐CA 10
likelihood that the jury could have determined that although the State needed to prove
the existence of a security beyond a reasonable doubt, the presence of a promissory note
was sufficient to satisfy the State’s burden, given its possible conclusion that Kelson did
not succeed in rebutting this presumption. See, e.g., id. at 319. Thus, these generalized
instructions do not clarify the mandatory rebuttable presumption contained in
Instruction 25.
¶24 Additionally, the State relies on Instruction 38, which states in relevant part,
Evidence has been admitted relating to Civil
Judgments previously issued against Ms. Kelson. These
Judgments are admitted for a very limited purpose.
Specifically, if your deliberations determine that the Promissory
Notes involved in this case were proven to be “securities” you
may then consider whether the existence of such Judgments
constituted a “material fact” for purposes of the disclosure
requirements referenced in other Instructions.
On the other hand, if your deliberations determine that
the Promissory Notes were not shown to be “securities,” you
must disregard the Judgments entirely.
(Emphasis added.) The State contends that this instruction “impressed upon the jury
the State’s burden to prove that the notes were securities.” However, while this
instruction may indicate that the jury must decide whether notes are securities, it does
nothing to clarify the burden of persuasion.
¶25 Additionally, the State argues that the State’s and Kelson’s closing arguments
and the testimony of the Director clarified that it was the State’s burden to prove that
the promissory notes were securities.5 During closing, the State argued,
5
The State also argues that the court’s preliminary jury instructions cured any
defect in Instruction 25. As discussed, the fact that the general jury instructions contain
statements that the State was required to prove each element of the crime beyond a
reasonable doubt is not enough to clarify Instruction 25. See supra ¶ 23.
20100299‐CA 11
[A]s you look at these promissory notes, you will need to
determine, not [Director], not me, you need to determine . . .
whether they were securities under the test that you’ve
heard about; but more particularly under the jury
instructions that you have in front of you. There’s a jury
instruction that goes to what we call the Reves test. You
presume that a promissory note is a security and that is
because, if you look at the definitional instruction, it says
[w]hat securities are and one of the definitions is [a] note.
And because under the law notes are listed as a
security, they are presumed to be securities. But, and you
heard the testimony from [Director], that there are certain
notes that have been carved out, that don’t need to be
regulated as securities. . . .
The State then analyzed the facts of the case against the four‐factor test, concluding that
“[n]otes are presumed to be securit[ies] and this is not one of those ones that gets carved
out.”
¶26 Despite this lengthy argument about the presumption and the State’s repeated
mention that the jurors were to apply the four‐factor test to determine whether the
notes were a security, the State never clarified which party bore the burden of
persuasion on that issue. Thus, even with the State’s closing argument, the jury
reasonably could have interpreted the jury instruction to mean that the presumption
shifted the burden to Kelson to prove an exception.
¶27 Nor are we convinced that this confusion was eliminated by Director’s
testimony. Contrary to the State’s assertion, Director did not discuss whether the State
or Kelson had the burden of proving or disproving whether the promissory notes were
a nonsecurity. Rather, Director explained that the four‐factor “test basically says that
. . . you accept the presumption that a note is a security, you start with that. And unless
that presumption is overcome, it remains a security.” Rather than supporting the
State’s position, Director’s testimony reinforced the unconstitutional burden shifting in
Instruction 25 because he referred to a presumption that had to be “overcome” in order
for the note to be a nonsecurity. Because the State’s case was based on the proposition
that the promissory notes were securities, it would have no reason to try to “overcome”
20100299‐CA 12
the presumption. Therefore, rather than curing the problem, Director’s testimony
exacerbated it.
¶28 Only Kelson attempted to clarify the proper burden during closing argument.
She argued that the State must prove that the promissory notes were securities beyond
a reasonable doubt. However, even Kelson did not explain that the State could not
meet its burden by relying on the mandatory presumption or on Kelson’s failure to
persuade the jury that the notes met the four‐factor test. Cf. Francis v. Franklin, 471 U.S.
307, 319 (1985) (rejecting an argument that an instruction explaining that the
government had the burden to prove each element of the crime beyond a reasonable
doubt cured another instruction containing a mandatory rebuttable presumption). In its
rebuttal argument, the State did not address which party bore the burden on this issue.
Instead, it simply reiterated that the jury had the responsibility to decide whether the
promissory notes were securities, without explaining the burden of persuasion on the
issue.
¶29 Based on our review of the jury instructions and the record as a whole, we are
convinced that there is a reasonable likelihood that the jury impermissibly interpreted
Instruction 25 as shifting to Kelson the burden of rebutting the mandatory presumption
that the promissory notes were securities. See Estelle v. McGuire, 502 U.S. 62, 72 (1991).
This was in violation of Kelson’s due process rights because the State was “not forced to
prove ‘beyond a reasonable doubt . . . every fact necessary to constitute the crime . . .
charged.’” See Sandstrom v. Montana, 442 U.S. 510, 523 (1979) (omissions in original)
(quoting In re Winship, 397 U.S. 358, 364 (1970)). However, because Kelson failed to
preserve this issue below, we will now consider her claim under the doctrine of
ineffective assistance of counsel.6
II. Ineffective Assistance of Counsel Regarding Instruction 25
¶30 Kelson argues that her counsel provided ineffective assistance by stipulating to
Instruction 25. To succeed on this claim, Kelson must establish “(1) that h[er] counsel
performed deficiently, i.e., that counsel’s performance ‘fell below an objective standard
6
Kelson also asks this court to review this issue under the doctrine of plain error.
Because we reverse and remand on Kelson’s claim of ineffective assistance of counsel,
we need not consider this argument.
20100299‐CA 13
of reasonableness,’ and (2) that [s]he was prejudiced by h[er] counsel’s deficient
performance.” See State v. Kucharski, 2012 UT App 50, ¶ 3, 272 P.3d 791 (quoting
Strickland v. Washington, 466 U.S. 668, 687‐88, 691‐92 (1984)), cert. denied (Utah June 28,
2012).
A. Deficient Performance
¶31 We first determine whether counsel’s conduct was deficient. In evaluating
counsel’s conduct, we “must indulge a strong presumption that counsel’s conduct falls
within the wide range of reasonable professional assistance; that is, the defendant must
overcome the presumption that, under the circumstances, the challenged action might
be considered sound trial strategy.” Strickland, 466 U.S. at 689 (internal quotation marks
omitted). The State argues that because Kelson’s “primary defense to her charges was
that the notes here were not securities,” Jury Instruction 25 may have aided in this
defense, and as a matter of sound trial strategy, defense counsel may have chosen not to
object. According to the State, the explanation of the four‐factor test and the indication
that some notes are not securities was more helpful to the defense than a recitation of
the statutory definition of security, which includes notes. See generally Utah Code Ann.
§ 61‐1‐13(1)(ee)(i) (2011) (indicating that “‘[s]ecurity’ means a . . . note,” without
providing any exceptions). While providing this detail may have been advantageous to
Kelson if combined with an explanation that the State retained the burden of proving
beyond a reasonable doubt that the promissory notes did not qualify as nonsecurities,
nothing in the instruction does that. Without that explanation, we cannot agree that it is
a sound trial strategy to consent to a jury instruction that informs the jury that “notes
are presumed to be securities,” when the primary defense is that the notes are not
securities. Indeed, we can conceive of no sound tactical reason why trial counsel would
stipulate to an instruction that likely shifted the burden of persuasion to Kelson on an
essential element of the crimes charged. Accordingly, we conclude that counsel’s
performance was deficient.
B. Prejudice
¶32 Next, we must determine whether counsel’s performance prejudiced Kelson.
“‘To show prejudice in the ineffective assistance of counsel context, the defendant bears
the burden of proving that counsel’s errors actually had an adverse effect on the defense
and that there is a reasonable probability that, but for counsel’s errors, the result of the
20100299‐CA 14
proceeding would have been different.’” State v. Fowers, 2011 UT App 383, ¶ 21, 265
P.3d 832 (quoting State v. Munguia, 2011 UT 5, ¶ 30, 253 P.3d 1082). “‘A reasonable
probability is a probability sufficient to undermine confidence in the outcome.’” State v.
Lenkart, 2011 UT 27, ¶ 38, 262 P.3d 1 (quoting Strickland, 466 U.S. at 694). In examining
counsel’s alleged errors, we “‘consider the totality of the evidence’ to determine
whether the errors ‘alter[ed] the entire evidentiary picture,’” id. (alterations in original)
(quoting Strickland, 466 U.S. at 695‐96), and note that “a verdict or conclusion only
weakly supported by the record is more likely to have been affected by errors than one
with overwhelming record support,” Strickland, 466 U.S. at 696.
¶33 The State contends that the evidence was overwhelming that the notes were
securities and that therefore Kelson has not been prejudiced. While there are instances
where an erroneous jury instruction is harmless, we are persuaded that this is not such
a case.7 Cf. State v. Powell, 2007 UT 9, ¶ 23, 154 P.3d 786 (holding that an incorrect
instruction that intent for murder could include depraved indifference was harmless
where the uncontested evidence established the intent to kill and the defendant did not
dispute intent, instead claiming that he had been misidentified as the assailant); Gardner
v. SPX Corp., 2012 UT App 45, ¶ 38, 272 P.3d 175 (holding that an erroneous proximate
cause instruction was harmless where the jury found that there was no negligence, thus
completing deliberations before reaching that issue). Here, we have concluded that
Instruction 25 created a reasonable likelihood that the jury understood that Kelson bore
the burden of rebutting a mandatory presumption that the notes were securities.
Because the evidence created a meaningful conflict on that issue, our confidence in the
verdict has been undermined by the improper shifting of the burden of persuasion.
¶34 In making this determination, we look to the four‐part Reves test outlined in
Instruction 25, which provides that if a note resembles one of the listed exceptions to the
presumption, it may be a nonsecurity if it “meet[s] a four factor test.” See generally Reves
v. Ernst & Young, 494 U.S. 56, 66‐67 (1990). In particular, we consider whether the
evidence was so overwhelming on those factors that we are confident the jury would
have found that the notes were securities, even if properly instructed on the State’s
burden. See Strickland, 466 U.S. at 696; Lenkart, 2011 UT 27, ¶ 38; see also State v. Arnold,
7
Because Kelson has established prejudice, we need not consider her argument
that prejudice should be presumed due to Instruction 25’s unconstitutional shifting of
the burden of persuasion.
20100299‐CA 15
2011 UT App 255U, ¶ 6 (mem.) (holding that where there was overwhelming evidence
supporting the defendants’ guilt, they could not show that they were prejudiced by
their counsel’s performance).
¶35 First, Instruction 25 directed the jurors to consider the motivations of the buyer
and seller, stating that “[i]f the seller’s purpose is to raise money for the general use of a
business enterprise or to finance substantial investments and the buyer is interested
primarily in the profit the note is expected to generate, the instrument is likely to be a
‘security.’” In contrast, the instruction explained that where a “note is exchanged . . . to
correct for the seller’s cash‐flow difficulties, or to advance some other commercial or
consumer purpose, the note is less sensibly described as a ‘security.’”8 The evidence at
trial showed that the notes were to be used to purchase a letter of credit to correct cash‐
flow difficulties that prevented Kelson and the Owners from closing the transactions.
According to Kelson, the purchasers knew the funds were to purchase the letter of
credit and, therefore, that they were not for the general use of a business enterprise or to
finance a substantial financial investment. However, the testimony of the buyers
indicates that they were primarily interested in profit, especially given the substantial
return in such a short amount of time.9 Furthermore, Director opined that the cash flow
difficulties in this case might not fall within the Reves test and that if the buyer is
motivated primarily by profits, the promissory notes are likely securities. Thus, the jury
was tasked with determining from this evidence whether the motivations of the buyers
and the seller of the notes weighed in favor of finding that the notes were securities.
We are convinced that the evidence was conflicting on this point and accordingly
determine that the jury may have weighed this factor in favor of Kelson.
8
Instruction 25 also provides that a note “exchanged to facilitate the purchase and
sale of a minor asset or consumer good . . . is less sensibly described as a security.”
Kelson does not argue that this circumstance is present here.
9
For instance, Daughter and Brother each expected to receive a return of nearly
six times their investment over a period of one month. Employee would receive a
return of over ten times her investment, also over a period of one month.
20100299‐CA 16
¶36 The second Reves factor outlined in Instruction 25 tells the jury to “[e]xamine the
‘plan of distribution’ of the instrument to determine whether it is an instrument in
which there is common trading for speculation or investment.” In this case, it is
undisputed that this factor weighs against classification of the promissory notes as
securities because none of the purchasers indicated that they planned to resell the
promissory notes. Accordingly, the evidence on this factor is overwhelmingly in favor
of Kelson.
¶37 The third Reves factor, as set forth in Instruction 25, focuses on “the reasonable
expectations of the investing public.” The State’s expert testified that “if someone in the
general public looks at the transaction . . . [and] use[s] the word investment then it is
more likely a security than not.” At trial, Kelson argued that the buyers were not
making an investment because they would own no interest in the real estate project, but
were “simply lending money for a short term loan.” However, the minimum return
promised on the notes was nearly 600% over a one‐month period and the buyers
referred to them as investments. Accordingly, we believe the evidence on this factor
weighs strongly in favor of a finding that the promissory notes are securities.
¶38 Finally, the fourth Reves factor instructed the jury to “[e]xamine whether some
factor such as the existence of another regulatory scheme significantly reduces the risk
of the instrument, thereby rendering application of the Securities Acts unnecessary.”
We have not been directed to any evidence of a regulatory scheme here that could
support weighing this factor against a finding that the notes are securities.
¶39 Kelson presented evidence from which the jury could have concluded that at
least two of the relevant factors weighed in favor of finding that the notes were not
securities. Furthermore, the jury was free to weigh the four factors against each other
however it deemed appropriate. Thus, the evidence was not so overwhelming in the
State’s favor that we have confidence in the verdict despite the impermissible shifting of
the burden of persuasion created by Instruction 25. Accordingly, Kelson has
established that her counsel’s ineffective performance in stipulating to Instruction 25
was prejudicial, and we reverse and remand for a new trial on the securities charges.
20100299‐CA 17
III. The Sufficiency of the Evidence to Prove a Pattern of Unlawful Activity
A. Preservation
¶40 Kelson next contends that the alleged unlawful activity in this case is not a
pattern of unlawful activity as a matter of law. The State contends that Kelson failed to
preserve this issue for appellate review. “In order to preserve an issue for appeal, a
defendant must raise the issue before the [trial] court in such a way that the court is
placed on notice of potential error and then has the opportunity to correct or avoid the
error.” State v. Diaz‐Arevalo, 2008 UT App 219, ¶ 10, 189 P.3d 85. In particular, “[t]he
issue must be sufficiently raised to a level of consciousness before the trial court and
must be supported by evidence or relevant legal authority.” Id. (internal quotation
marks omitted).
¶41 At the close of evidence on February 25, 2009, Kelson moved for a directed
verdict on the pattern of unlawful activity charge. Kelson asserted that “[a]lthough
there are multiple counts in this case, I would argue . . . that there are not multiple
episodes, which [are] required under the definition of pattern [of] unlawful activity.”
Trial counsel relied on the statutory language and the dictionary definition of episode,
because “[t]here wasn’t anything in the Utah case law with regard to pattern of
unlawful activity.” See generally Utah Code Ann. § 76‐10‐1602(2) (Supp. 2011) (defining
“[p]attern of unlawful activity”).
¶42 While the State acknowledges that Kelson raised the argument that “the five
securities violations here constituted only a single episode of unlawful activity,” it
argues that Kelson failed to adequately preserve the issue. In particular, the State
contends that Kelson “misinformed the trial court” that there was no Utah authority on
this point because she did not call the trial court’s attention to the Utah Supreme
Court’s decision in Hill v. Estate of Allred, 2009 UT 28, 216 P.3d 929. While we agree that
Hill is controlling, we cannot fault trial counsel for failing to cite it. The supreme court
issued the Hill decision on May 1, 2009, approximately two months after the conclusion
of Kelson’s trial on February 25, 2009. See id.
¶43 Our review of the directed verdict record indicates that Kelson specifically
argued to the trial court that “there [were] not multiple episodes, which is required
under the definition of pattern for unlawful activity.” In support of this argument,
20100299‐CA 18
Kelson stated that “in many . . . cases, there is a pattern of unlawful activity that can
stretch on for a long long time, years, sometimes.” Kelson asserted that the acts in this
case were the result of “a single episode” and thus “did not constitute a pattern as it’s
commonly understood.” While trial counsel did not expressly argue that the predicate
acts in this case were not committed over a “substantial period of time,” the supreme
court had not yet used that language to define a pattern of unlawful activity, as it later
did in Hill.10 See Hill, 2009 UT 28, ¶ 41 (“The proper test for determining whether there
was a pattern of unlawful activity is whether there was ‘a series of related predicates
extending over a substantial period of time’ or a demonstrated threat of continuing
unlawful activity and not whether there were multiple schemes.” (quoting H.J. Inc. v.
Northwestern Bell Tel. Co., 492 U.S. 229, 242 (1989))). Instead, Kelson relied on the
definition of “[p]attern of unlawful activity” in Utah Code section 76‐10‐1602 and the
dictionary to support her motion for directed verdict made immediately upon the close
of evidence. See Utah Code Ann. § 76‐10‐1602(2). Nor has the State pointed to any Utah
authority available at the time of the directed verdict motion that defined the term
“episode” for these purposes. Under these circumstances, we are convinced that Kelson
sufficiently preserved this issue. See Diaz‐Arevalo, 2008 UT App 219, ¶ 10.
B. Merits
¶44 The Utah Pattern of Unlawful Activity Act (the Utah Act) defines a “pattern of
unlawful activity,” in relevant part, as
engaging in conduct which constitutes the commission of at
least three episodes of unlawful activity, which episodes are
not isolated, but have the same or similar purposes, results,
participants, victims, or methods of commission, or
otherwise are interrelated by distinguishing characteristics.
Taken together, the episodes shall demonstrate continuing
10
The State also contends that Kelson never argued in her appellate brief that her
acts did not extend over a substantial period of time. However, Kelson specifically
outlines the test provided in Hill v. Estate of Allred, 2009 UT 28, 216 P.3d 929, including
the substantial period of time element. See id. ¶ 41. Immediately thereafter, Kelson
distinguishes this case from Hill, stating, “[T]he conduct alleged in counts one through
five occurred during a period of just a few days.”
20100299‐CA 19
unlawful conduct and be related either to each other or to
the enterprise.
Utah Code Ann. § 76‐10‐1602. Kelson argues that under this definition, her crimes can
only constitute a single criminal episode because although there were multiple acts and
multiple victims, each act sought to accomplish the same objective over a short period
of time. In contrast, the State argues that under Hill, multiple acts which “contribute[]
to the same objective” can be considered multiple criminal episodes. See 2009 UT 28,
¶ 40. While we agree in principle with the State’s interpretation of the law, we
determine that the predicate acts in this case do not constitute multiple episodes as
defined in Hill. See id. ¶ 41.
¶45 In Hill, the plaintiff filed a complaint asserting a civil pattern of unlawful activity
on the ground that “each unlawful act by [d]efendants” was a separate “episode of
unlawful activity,” constituting a pattern. See id. ¶ 35. In contrast, the defendants
argued that, although not accomplished through a single act, their conduct “was only
one episode of criminal activity.” See id. The district court agreed with defendants, and
the plaintiffs appealed. See id.
¶46 In interpreting the Utah Act, the supreme court compared the federal Racketeer
Influenced and Corrupt Organizations Act (RICO), see generally 18 U.S.C. §§ 1961‐68
(2006), with Utah Code section 76‐10‐1602(2), see generally Utah Code Ann. § 76‐10‐
1602(2) (Supp. 2011). See Hill, 2009 UT 28, ¶¶ 38‐40. It determined that the phrases
“pattern of unlawful activity” under section 76‐10‐1602(2) and “pattern of racketeering
activity” under RICO “should be interpreted to mean the same thing.” Id. ¶ 38.
Accordingly, the Utah Supreme Court applied United States Supreme Court precedent
interpreting RICO to determine the meaning of “pattern of unlawful activity” under
Utah’s Act. See id. ¶¶ 38‐40. Relying on Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479(1985), and the legislative history of the Utah Act, our supreme court determined that a
“pattern of unlawful activity” under the Utah Act requires “‘continuity plus
relationship.’” See Hill, 2009 UT 28, ¶ 38 (quoting Sedima, 473 U.S. at 496 n.14) (internal
quotation marks omitted); see also Utah Code Ann. § 76‐10‐1602(2) (“Taken together, the
episodes shall demonstrate continuing unlawful conduct and be related either to each
other or to the enterprise.”). To define “continuity plus relationship,” the court looked
to H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (1989). See Hill, 2009 UT
28, ¶ 39. There, the United States Supreme Court held that “‘to prove a pattern of
20100299‐CA 20
racketeering activity a plaintiff or prosecutor must show that the racketeering
predicates are related, and that they amount to or pose a threat of continued criminal
activity.’” See Hill, 2009 UT 28, ¶ 39 (quoting H.J., 492 U.S. at 239). The H.J. court
further clarified that “‘[c]ontinuity is both a closed‐ and open‐ended concept, referring
either to a closed period of repeated conduct, or to past conduct that by its nature
projects into the future with a threat of repetition.’” See Hill, 2009 UT 28, ¶ 39 (quoting
H.J., 492 U.S. at 241). The Utah Supreme Court further reasoned that “[c]ontinuity may
be demonstrated ‘over a closed period by proving a series of related predicates
extending over a substantial period of time,’ and if a RICO action is ‘brought before
continuity can be established in this way,’ continuity can be shown if ‘the threat of
continuity is demonstrated.’” See id. (quoting H.J., 492 U.S. at 242). Although not
mentioned in Hill, the H.J. court further explained that “[p]redicate acts extending over
a few weeks or months and threatening no future criminal conduct do not satisfy this
requirement.” See H.J., 492 U.S. at 242.
¶47 After analyzing these cases, our supreme court concluded that “[t]he proper test
for determining whether there was a pattern of unlawful activity is whether there was
‘a series of related predicates extending over a substantial period of time’ or a
demonstrated threat of continuing unlawful activity and not whether there were
multiple schemes.” See Hill v. Estate of Allred, 2009 UT 28, ¶ 41, 216 P.3d 929 (quoting
H.J., 492 U.S. at 242). The Hill court then applied that test to the facts, explaining that
each of the defendants’ unlawful acts served the same purpose of stealing Hill’s money,
involved similar parties, and involved the same victim. See id. It further noted that the
unlawful acts occurred over a five‐year period. See id. ¶ 41. Based on those facts, the
Hill court concluded that the defendants’ acts constituted a pattern of unlawful activity.
See id.
¶48 The facts in this case are distinguishable from Hill. Although Kelson’s actions
involved multiple alleged crimes committed for the common purpose of obtaining cash,
Kelson’s alleged crimes took place over a matter of days. Kelson first alerted Employee
about the opportunity shortly before October 11, 2001, and all checks exchanged for
promissory notes were deposited by October 15, 2001. Thus, Kelson’s alleged unlawful
activity took place over a “closed period,” and the State was required to show “‘a series
20100299‐CA 21
of related predicates extending over a substantial period of time.’”11 See Hill, 2009 UT
28, ¶ 41 (quoting H.J., 492 U.S. at 242). The State does not contend that it has done so,
nor could it have made such a showing.12 As the Supreme Court noted in H.J.,
“[p]redicate acts extending over a few weeks or months,” which do not threaten “future
criminal conduct,” do not constitute a substantial period of time sufficient to show
continuity. See H.J., 492 U.S. at 242. Accordingly, Kelson’s acts over the course of only a
few days are insufficient as a matter of law to satisfy Hill’s requirement that a pattern of
unlawful activity must occur over a substantial period of time.13 See Hill, 2009 UT
28, ¶ 41. Thus, the trial court erred in denying Kelson’s motion for a directed verdict
and we vacate Kelson’s conviction on the charge of pattern of unlawful activity.14
11
On appeal, the State makes no allegation that Kelson’s conduct posed a
continuing threat of unlawful activity. See Hill, 2009 UT 28, ¶ 41.
12
Rather than arguing that Kelson’s acts extended over a substantial period of
time, the State analyzes this issue under the doctrine of plain error. It concludes that
Utah law is unclear on what constitutes a substantial period of time, and thus
determines that any error was not plain. We need not determine whether it is plain that
several days does not constitute a substantial period of time because Kelson adequately
preserved this issue.
13
The State calls our attention to the Utah Supreme Court’s decision in State v.
McGrath, 749 P.2d 631 (Utah 1988), where a defendant was convicted of racketeering
based on seventy‐four drug transactions occurring over a four‐month period. Id. at 636.
We do not consider McGrath inconsistent with our decision here. While the drug sales
occurred over only four months, the high volume of transactions “‘by its nature projects
into the future with a threat of repetition.’” See generally Hill, 2009 UT 28, ¶ 39 (quoting
H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 241 (1989)). As indicated, supra note
11, in this case the State makes no allegation that Kelson’s acts posed a continuing threat
of unlawful activity.
14
Because we reverse Kelson’s conviction on this count and reverse and remand
for a new trial on the charges of offer or sale of unregistered securities; sale by an
unlicensed broker‐dealer, agent, or investment advisor; and securities fraud, we need
not consider Kelson’s challenge to her sentences under rule 22(a) of the Utah Rules of
Criminal Procedure.
20100299‐CA 22
CONCLUSION
¶49 Jury Instruction 25 created a mandatory rebuttable presumption that a note is a
security, thereby unconstitutionally shifting the burden of persuasion from the State to
Kelson. In stipulating to this instruction, Kelson’s counsel performed deficiently.
Because the evidence was not overwhelming on at least two of the four factors relevant
to whether the promissory notes here were securities, this deficiency prejudiced Kelson.
Additionally, the trial court erred in denying Kelson’s motion for a directed verdict
with respect to the pattern of unlawful activity charge because her activities do not
constitute a pattern of unlawful activity as a matter of law. We vacate Kelson’s
conviction for pattern of unlawful activity and reverse and remand for a new trial on
the charges of offer or sale of unregistered securities; sale by an unlicensed broker‐
dealer, agent, or investment advisor; and securities fraud.
¶50 Vacated in part, and reversed and remanded in part.
____________________________________
Carolyn B. McHugh,
Presiding Judge
‐‐‐‐‐
¶51 WE CONCUR:
____________________________________
Gregory K. Orme, Judge
____________________________________
James Z. Davis, Judge
20100299‐CA 23