Opinion
Docket No. 25421.
Filed: December 5, 2000.
Appeal from the District Court of the Fourth Judicial District, State of Idaho, Ada County. Hon. George D. Carey, District Judge.
Judgment of conviction for multiple counts of racketeering, securities fraud, selling securities when not licensed, selling unregistered securities and money laundering, reversed.
Nevin, Herzfeld Benjamin, Boise, for appellant. Dennis A. Benjamin argued.
Hon. Alan G. Lance, Attorney General; Alison A. Stieglitz, Deputy Attorney General, Boise, for respondent. Alison A. Stieglitz argued.
Following a jury trial, Marilyn Gertsch was found guilty of racketeering, securities fraud, selling securities when not licensed, selling unregistered securities and money laundering. Gertsch appeals from the judgment of conviction. She asserts several errors in the conduct of her trial and also contends that the verdicts should be set aside because the State's evidence was insufficient to prove the elements of the charged offenses. The State has conceded on appeal that the racketeering conviction must be reversed for lack of proof. We conclude that Gertsch's conviction on the remaining charges also must be reversed because the evidence was insufficient to demonstrate that Gertsch engaged in the sale of securities.
FACTS AND PROCEDURAL HISTORY
This case presents a rather bizarre tale of conduct by Gertsch that was as irrational as it was destructive. It began in the form of facially altruistic (though intemperate and unsensible) generosity that could not be sustained, and ultimately turned into a deception that caused a cumulative loss of more than $100,000 to Gertsch's victims.
Gertsch was employed as an assistant to a school district administrative officer. In the early or mid-1990s Gertsch offered a free vacation package, which she personally paid for, as a prize in a raffle contest conducted as a fundraiser for an organization. The winner of the raffle contest received, as promised, a vacation paid for by Gertsch. Although Gertsch was not affluent, and supported her disabled husband, she thereafter continued to offer similar travel giveaways. The beneficiaries would travel at their own expense to locations such as Hawaii or the Caribbean, and upon their return would present their travel expense receipts to Gertsch. Gertsch would then reimburse the traveler for all of the expenses. In order to cover the costs of these giveaways as well as personal expenses, Gertsch began soliciting money from acquaintances and co-workers for an "investment." She promised these individuals that they would be paid a twenty-five percent interest rate on the money they gave to her. Most victims were told that this was a quarterly rate, i.e., the equivalent of 100 percent per annum. The other details of this "investment" opportunity, as described by Gertsch, varied from victim to victim and were always extremely vague. However, a common thread in the representations to most of the victims was that Gertsch had special privileged access to some form of account to which the victims' money would be applied and from which the twenty-five percent return would be drawn. Some were told that Gertsch operated a travel business, and others were told that she was affiliated with a company "back east." In reality, there was no special account, no travel business and no company back east. Much of the money that Gertsch acquired was actually used to pay for the travel packages that Gertsch gave away, but some of the funds were used by Gertsch for her own benefit.
This prosecution is based upon Gertsch's transactions with seven individuals, each of whom gave thousands of dollars to Gertsch in reliance upon her promises. Some of these people did receive some interest payments or travel benefits. However, Gertsch eventually became unable to sustain her system of acquiring money from new "investors" in order to pay the travel benefits or interest promised to others, and most of the victims lost all the money they had relinquished to Gertsch for her sham investment program.
The prosecution elected to charge Gertsch with racketeering, Idaho Code § 18-7803, et seq., securities fraud, I.C. § 30-1403, selling securities when not licensed, I.C. § 30-1406, selling unregistered securities, I.C. § 30-1416, and money laundering, I.C. § 18-8201(2). After a jury trial, Gertsch was found guilty of all counts and all alleged predicate acts. On February 19, 1999, the district court imposed concurrent sentences for the various offenses, with the longest sentence being a unified twelve-year term with a three-year minimum period of incarceration. On appeal, Gertsch contends that the district court committed a number of errors during her trial and that the trial evidence is insufficient to sustain the verdicts because the State did not prove that the transactions in this case involved securities nor prove that there existed the requisite "enterprise" for a racketeering offense. She also argues that her sentences are excessive. Because we find the sufficiency of the evidence issues dispositive, the other issues raised by Gertsch will not be addressed.
ANALYSIS
A. Racketeering
Gertsch contends, and the State concedes, that her conviction on the racketeering counts must be reversed because the State did not prove an element of the offense. The racketeering charge is based upon I.C. § 18-7804(c), which provides that it is "unlawful for any person employed by or associated with any enterprise to conduct or participate, directly or indirectly, in the conduct of the affairs of such enterprise by engaging in a pattern of racketeering activity." (Emphasis added.) In the indictment against Gertsch, the "enterprise" was described as "a sole proprietership [sic] operated solely by Marilyn K. Gertsch, . . . engaged in soliciting investments from various individuals." At the close of the State's case, Gertsch moved for a judgment of acquittal on this charge, asserting that the State had failed to demonstrate the existence of an enterprise. The motion was opposed by the prosecutor and denied by the district court.
However, on appeal the State concedes that a sole proprietorship made up of only a single person is not an enterprise with which that same person may be "associated" for purposes of I.C. § 18-7804(c). See generally McCullough v. Suter, 757 F.2d 142, 143-44 (7th Cir. 1985); United States v. Benny, 786 F.2d 1410, 1416 (9th Cir. 1986); State v. Hutchings, 950 P.2d 425, 437 (Utah App. 1997). In view of this concession, Gertsch's conviction for the violation of I.C. § 18-7804(c) will be reversed.
B. Securities Law Violations — The Howey-Forman Test
The charges against Gertsch for securities fraud, selling securities without a license, and selling unregistered securities, are all based upon alleged violations of the Idaho Securities Act, I.C. § 30-1401, et seq. Gertsch challenges the sufficiency of the evidence to support the jury's verdict on these charges. Gertsch's specific contention is that her sham transactions, even as they were described by Gertsch to the victims, do not involve the sale of a "security" as that term is used in the Act.
Our standard of review for this issue was expressed by the Idaho Supreme Court in State Department of Finance v. Resource Service Co., Inc., 130 Idaho 877, 950 P.2d 249 (1997):
The question of whether a transaction constitutes a "security" has been interpreted both as a question of fact and a question of law. This Court agrees with those jurisdictions holding that, although characterization of a transaction raises questions of both law and fact, the ultimate issue of whether a particular set of facts constitutes an investment contract is a question of law. This Court reviews questions of law de novo.
Id. at 880, 950 P.2d at 252 (citations omitted).
The term "security" as used in the Idaho Securities Act is defined in I.C. § 30-1402(12). That definition includes an "investment contract." It was the State's theory that Gertsch's transactions with the victims constituted the sale of "investment contracts," and the jury was instructed that for purposes of this case, a "security" meant an investment contract. Gertsch argues that the transactions, as described by the victims in their testimony, do not meet the criteria for an "investment contract."
Section 30-1402(12) states: "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, voting-trust certificate, certificate of deposit for a security, certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease, or, in general, any interest or instrument commonly known as a "security" or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. "Security" does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay money, either in a lump sum, or periodically for life or some other specified period. (Emphasis added.)
A jury instruction provided a definition of "investment contract" based upon the Howey- Forman test, which we discuss infra.
"Investment contract" is not a defined term in the Idaho Securities Act. However, I.C. § 30-1457 gives direction for judicial interpretation of the Act. It specifies that "[t]his Act shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact similar statutes and to coordinate the interpretation and administration of this Act with the related federal regulations." This statutory directive requires that Idaho courts examine the decisions construing like language in the federal securities statutes. See Resource Serv. Co., 130 Idaho at 881, 950 P.2d at 253. Accordingly, this Court will examine the corresponding federal securities statutes and interpretive case law to determine whether the transactions in this case involved investment contracts.
Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 in the wake of the 1929 stock market crash, in order to restore investors' confidence in the financial markets. United Housing Foundation, Inc v. Forman, 421 U.S. 837 (1975). The United States Supreme Court, examining the intent of Congress, has explained:
The primary purpose of the Acts of 1933 and 1934 was to eliminate serious abuses in a largely unregulated securities market. The focus of the Acts is on the capital market of the enterprise system: the sale of securities to raise capital for profit-making purposes, the exchanges on which securities are traded, and the need for regulation to prevent fraud and to protect the interests of investors.
Id. at 849. The definitions of "security" in the 1933 and 1934 Acts, although differing slightly, have been held to be virtually identical in practical application. Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 n. 1 (1985); Tcherepnin v. Knight, 389 U.S. 332, 335-36 (1967); Great Western Bank Trust v. Kotz, 532 F.2d 1252, 1255 (9th Cir. 1976). According to the Supreme Court, the Congressional definition of a security was purposefully made broad and ambiguous so that courts may employ a flexible approach "to meet the countless and variable schemes devised by those who seek the use of money of others on the promise of profits." S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946). See also Forman at 847; Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 756 F.2d 230, 238 (2nd Cir. 1985). As the Tenth Circuit Court of Appeals has expressed, "The federal securities laws are designed `to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.'" Holloway v. Peat, Marwick, Mitchell Co., 879 F.2d 772, 776 (10th Cir. 1989) (quoting S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963)). The label placed on a transaction is not controlling; rather, the courts must examine the substance of the transaction. "[I]n searching for the meaning and scope of the word `security' in the Act, form should be disregarded for substance and the emphasis should be on the economic reality." Tcherepnin, 389 U.S. at 336.
To effectuate the flexible approach intended by Congress, and focusing on the economic realities, the United States Supreme Court in Howey adopted a definition of an "investment contract" as "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." Howey, 328 U.S. at 298-99. This was later refined in Forman into a three-part standard (commonly referred to as the "Howey-Forman" test) requiring that there be: (1) an investment of money; (2) in a common enterprise; and (3) a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Forman, 421 U.S. at 852. Each of these three components has been interpreted by courts in a variety of complex factual circumstances.
We will offer a brief description of each as it has been developed and explained by federal courts and the Idaho Supreme Court.
1. Investment of money
The first Howey-Forman element, an investment of money, "typically involves parting with money for the purpose and in the reasonable expectation of making a profit." Resource Service Co., 130 Idaho at 882, 950 P.2d at 254 (quoting S.E.C. v. Energy Group of Am., Inc., 459 F. Supp. 1234, 1239 (S.D.N Y 1978)). In assessing whether a person's expectation was reasonable, the standard to be applied is that of a "reasonable person," not the subjective understanding of the specific individual. Id. The investment of money element is satisfied if an individual "chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security." International Bhd. of Teamsters, Etc. v. Daniel, 439 U.S. 551, 559 (1979)). As the Seventh Circuit has noted, it is not always easy to discern whether a transfer of money is an investment or is more appropriately characterized as a loan:
In one sense every lender of money is an investor since he places his money at risk in anticipation of a profit in the form of interest. Also in a broad sense every investor lends his money to a borrower who uses it for a price and is expected to return it one day.
On the other hand, the polarized extremes are conceptually identifiable: buying shares of the common stock of a publicly-held corporation, where the impetus for the transaction comes from the person with the money, is an investment; borrowing money from a bank to finance the purchase of an automobile, where the impetus for the transaction comes from the person who needs the money, is a loan. In between is a gray area which, in the absence of further congressional indication of intent or Supreme Court construction, has been and must be in the future subjected to case-by-case treatment.
C.N.S. Enter., Inc. v. G. G. Enter., Inc., 508 F.2d 1354, 1359 (7th Cir. 1975).
2. Common enterprise
The second element of the Howey-Forman analysis is a common venture or enterprise. Federal courts have developed standards calling for either horizontal commonality or vertical commonality to demonstrate the existence of a common enterprise. Horizontal commonality occurs when there is a "tying of each individual investor's fortunes to the fortunes of the other investors by the pooling of assets, usually combined with the pro-rata distribution of profits . . . . In a common enterprise marked by horizontal commonality, the fortunes of each investor depends upon the profitability of the enterprise as a whole." Revak v. S.E.C. Realty Corp., 18 F.3d 81, 87 (2nd Cir. 1994).
Vertical commonality focuses on the relationship between the promoter and the investors. Vertical commonality exists when, "the fortunes of the investor are interwoven with and dependent on the efforts and success of those seeking the investment or of third parties." S.E.C. v. Unique Fin. Concepts, Inc., 193 F.3d 1195, 1199 (11th Cir. 1999) (quoting S.E.C. v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 n. 7 (9th Cir. 1973)). This is distinct from the horizontal commonality test because in vertical commonality, "the fact that an investor's return is independent of that of other investors in the scheme is not decisive. Rather, the requisite commonality is evidenced by the fact that the fortunes of all investors are inextricably tied to the efficacy of the [promoter] . . . ." S.E.C. v. Koscot Interplanetary, Inc., 497 F.2d 473, 479 (5th Cir. 1974). Although some federal courts apparently require horizontal commonality, Curran v. Merrill Lynch, Pierce, Fenner and Smith, 622 F.2d 216, 222 (6th Cir. 1980); Salcer v. Merrill Lynch, Pierce, Fenner and Smith, 682 F.2d 459, 460 (3rd Cir. 1982); others have held that vertical commonality is sufficient to satisfy the common enterprise requirement. S.E.C. v. Goldfield Deep Mines Co., 758 F.2d 459 (9th Cir. 1985); Unique Fin. Concepts, Inc., supra.
3. Reasonable expectation of profits from the efforts of others
The third Howey-Forman element requires that the investment be premised upon a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. The Forman court recognized profits of two different types: "By profits, the Court has meant either capital appreciation resulting from the development of the initial investment, as in [S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120 (1943)] . . . or a participation in earnings resulting from the use of investors' funds, as in Tcherepnin v. Knight, [ 389 U.S. 332, 88 S.Ct. 548 (1967)]." Forman, 421 U.S. at 852. At least one circuit court has suggested that these two categories of profits discussed in Forman are exclusive. See Hunssinger v. Rockford Bus. Credits, Inc., 745 F.2d 484, 490 (7th Cir. 1984). Profits may be said to be derived from the efforts of others if "the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." S.E.C. v. Glenn W. Turner Enter., Inc., 474 F.2d 476 (9th Cir. 1973).
4. Limited scope of securities acts
Courts have cautioned that the Securities Acts were not intended to remedy every type of fraud. The Supreme Court noted in Marine Bank v. Weaver, 455 U.S. 551 (1982), "[W]e are satisfied that Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud." Id. at 556. See also Kotz, supra; Bellah v. First Nat'l Bank, 495 F.2d 1109, 1114 (5th Cir. 1974). In a similar vein, the Sixth Circuit has observed, "The securities laws are not a panacea for commercial loans gone awry. Relief from the consequences of commercial transactions unwisely contracted must be found in another haven." Union Planters Nat'l Bank v. Commercial Credit Bus. Loans, Inc., 651 F.2d 1174, 1185 (6th Cir. 1981). These sentiments have been echoed by the Idaho Supreme Court:
Despite the fact that transactions should be construed flexibly to effectuate the purposes of the Securities Act, the Court declines to stretch the potential applicability of the Act to transactions not contemplated by the legislature. Howey, 328 U.S. at 299, 66 S.Ct. at 1103 (whether statutes are to apply to a transaction is tested not by the desirability of the regulation but by whether such application will fulfill the statutory purpose of "compelling full and fair disclosure relative to the issuance of `many types of instruments that in our commercial [world] fall within the ordinary concept of a security'"). Our law has other remedies that do not warp the definition of a security that can be utilized if promotions are misleading, such as an action for common law fraud or proceedings under the Consumer Protection Act. I.C. §§ 48-601 to 617.
Resource Service Co., 130 Idaho at 884, 950 P.2d at 256. Indeed, in Resource Service Co., our Supreme Court held that the transactions at issue did not violate the Idaho Securities Act. In that case, the defendant had charged a $40 fee to enter customers' names into a Bureau of Land Management lottery for oil and gas leases. The district court held that the transactions violated the Idaho Securities Act, but the Idaho Supreme Court reversed. Applying the Howey-Forman criteria, the Supreme Court held that the transactions were not sales of "investment contracts" because the customers merely paid for the defendant's services.
Another transaction that was held not to be an investment contract is described in Marine Bank. In that case, the Weavers acquired $50,000 worth of certificates of deposit from Marine Bank, and later pledged these certificates to guarantee a loan being made to a third-party slaughterhouse company. In consideration for the pledge of the certificates, the third party agreed to pay the Weavers $100 per month plus fifty percent of the slaughterhouse's net profits. Additionally, the Weavers were granted, as consideration for the pledged certificates, a right to use the third party's pasture and barn and the right to veto any future borrowing by the slaughterhouse company. Later, the slaughterhouse company went bankrupt and Marine Bank gave the Weavers notice of its intent to claim the pledged certificates of deposit. The Weavers filed a complaint alleging that Marine Bank had been aware of the slaughterhouse's precarious financial situation and had violated both state and federal securities laws by inducing the Weavers to pledge the certificates. The United States Supreme Court held that, because the certificates of deposit were insured by the Federal Deposit Insurance Corporation, there was no need for the additional protection afforded by the securities laws. Marine Bank, 455 U.S. at 556-59. More pertinent to our analysis here, the Supreme Court also determined that the separate agreement between the Weavers and the third party was not an investment contract or other form of security. The Court noted that the transaction was not the type "that comes to mind when the term `security' is used and does not fall within `the ordinary concept of a security'" Id. at 559. In reaching this conclusion, the Court considered prior cases where unusual instruments had been found to be securities, but observed that the "prior cases involved offers to a number of potential investors" as opposed to private transactions. Id. The Court also deemed it significant that the instruments in these prior cases were subject to "common trading," and "had equivalent values to most persons and could have been traded publicly." Id. at 560. See also S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. 344 (1943). The Court further noted that the absence of a prospectus, and the fact that the transaction was negotiated in a one-on-one fashion and was never designed for public trading, weighed against the finding of a security. Marine Bank, 455 U.S. at 560.
5. Application of Howey-Forman test to Gertsch's transactions
Having the foregoing authorities in mind, and applying the Howey-Forman test, we conclude that the transactions described in the trial testimony of Gertsch's victims cannot, as a matter of law, be characterized as the sale of "investment contracts," and hence, that the State did not prove that Gertsch violated the Idaho Securities Act. Close examination of the victims' testimony shows that Gertsch's representations about what would be done with their money and about the source of the promised twenty-five percent return were always vague, often evasive, and sometimes illogical. Each victim was given a slightly different version of Gertsch's "investment" scheme, but Gertsch did not describe to any of the victims a use of the funds that would amount to an investment in a common enterprise for the purpose of generating profits through the entrepreneurial or managerial efforts of others.
The mere fact that financial schemes that Gertsch described to her victims were fictitious would not preclude a finding that the Idaho Securities Act was violated. A person making untrue statements in order to induce another to invest in a nonexistent enterprise will be held to those representations as if they were true. See Unique Fin. Concepts, Inc., 196 F.3d at 1200; S.E.C. v. Lauer, 52 F.3d 667, 670 (7th Cir. 1995); First Nat'l Bank v. Estate of Russell, 657 F.2d 668, 673 n. 16 (5th Cir. 1981). As the court stated in Lauer, "[I]t would be a considerable paradox if the worse the securities fraud, the less applicable the securities law." Lauer, 52 F.3d at 670.
One victim, J.A.S., initially became involved because she won a drawing for one of the free vacation trips offered by Gertsch. When J.A.S. contacted Gertsch to arrange for the travel, Gertsch told her about an "investment opportunity." Gertsch said that if J.A.S. invested several thousand dollars, she would receive a twenty-five percent quarterly interest rate. When asked how she could offer such a rate of return, Gertsch explained that she had previously worked for a travel agency and when the people she worked for died, they left Gertsch many thousands of dollars that she could not touch without having to pay extreme taxes. Gertsch told J.A.S. that this money was sitting in an account gaining interest and, "out of the goodness of her heart she wanted to share it with people less fortunate." J.A.S. initially resisted, but Gertsch continued to pressure J.A.S. for money. Gertsch said she needed $23,000 to pay for one of the giveaway trips because a man had bounced a $30,000 check to Gertsch, and Gertsch therefore could not fulfill her obligations. This time, Gertsch promised a twenty-five percent return in one month. Gertsch said that as soon as J.A.S.'s check cleared, her repayment would be on its way because "your money is sitting back east waiting for you." J.A.S. eventually was induced to give Gertsch thousands of dollars. Although J.A.S. at one point testified that she believed she was investing in a travel business for Gertsch, she also testified that the check she gave Gertsch was payable to Gertsch personally, not to a company, and Gertsch indicated that the money was going into the account containing the thousands of dollars that Gertsch had inherited from her former employers. On cross-examination, J.A.S. testified that the money was given to Gertsch to cover Gertsch's debt for a trip that someone else was taking. J.A.S. also testified that she believed this was like getting a CD at a bank.
In this testimony, J.A.S. expressed several inconsistent perceptions of the transaction. However, it is readily apparent that Gertsch's representation of the transaction does not meet the Howey-Forman test. Although it might be argued that the first prong of Howey-Forman, an investment of money, is satisfied because J.A.S. delivered money to Gertsch, representations satisfying the other two prongs are entirely absent. Gertsch did not describe any common enterprise that would use J.A.S.'s money, nor did Gertsch's representations indicate that the twenty-five percent rate of return would be derived from the entrepreneurial efforts of others. Rather, J.A.S. was told the money was going into an account with funds that Gertsch had reportedly inherited, and that Gertsch was paying twenty-five percent interest as a matter of personal generosity. The transaction that J.A.S. described was in the nature of a loan to Gertsch because Gertsch needed the money to pay for trips that other people were taking at her expense. J.A.S. did not testify that she believed she was acquiring an interest in a business or would be sharing in its profits or losses or that her rate of return would be tied to the success or failure of a business enterprise.
Throughout the trial, the victims were allowed to testify, without objection from the defense, about their understanding or perception of the transactions, as distinguished from what Gertsch represented to them. Because this testimony was admitted, we include it in our summaries of the victims' testimony, but we do not thereby imply that this testimony would have been admissible over a relevance objection. Gertsch could be convicted only on the basis of what she did or said.
Another victim, P.M., was also told that Gertsch was the beneficiary of the largesse of others and wanted to share it. P.M. understood that the money she gave Gertsch would be forwarded to a firm in New York which Gertsch would not identify, and the New York firm "took care of" the money. However, Gertsch would pay the twenty-five percent interest out of her own funds. The role of the business in New York was never explained. Gertsch talked P.M. into putting money into this "savings plan" which Gertsch represented was secure and risk-free. This transaction fails the Howey-Forman test for many of the same reasons discussed above with respect to J.A.S.'s infusion of funds. There was no representation of a common enterprise and no expectation that the twenty-five percent interest would be a "profit" derived from managerial or entrepreneurial efforts of others.
For two of the victims, D.W. and K.J., Gertsch represented that the twenty-five percent return on their money would be somehow related to her practice of giving away free travel packages. D.W. testified that Gertsch told him his money would be deposited into "some kind of investment vehicle that she had previously from an employer, into an account, that she would then get the receipts from the people who she sent on a trip, file those with this company account, and when those came back, she would reimburse me plus give me twenty-five percent . . . ." Gertsch represented to D.W. that it was "kind of like a settlement kind of thing, something that she was entitled to that she could take advantage of, and she could also make it available to other people." Gertsch mentioned that the company that operated the account was a solid company.
K.J. likewise understood that when people returned from trips given by Gertsch and turned over their expense receipts, Gertsch "would then give them to an account or a person or some other relationship that she was working with, that then she would get the money and give it back to me." When asked to relate Gertsch's explanation for how she was able to get the money from the third-party account, K.J. said that Gertsch was vague but represented "that she had previously been involved with them and still had this account open and was able to do that," and "it had to do with travel." She was told that the investment was very safe and no risk.
Neither D.W. nor K.J. testified to any representation from Gertsch that the money would be invested in any company, business, enterprise or venture. Neither reported that Gertsch gave any explanation of what would be done with their money while she held it, but both understood that they would receive a twenty-five percent return paid from some kind of account related to the free trips that Gertsch was giving away. As the conversations were described in their testimony, Gertsch did not suggest that there was any business venture or enterprise that they would be investing in nor represent that their return would be paid from the profits of such an enterprise.
Two more victims, P.O. and J.L.S. understood that their money would be placed in an account that Gertsch administered or managed. According to P.O., Gertsch "described a corporate account that she was the administrator of." Gertsch represented to J.L.S. that Gertsch would be investing the money in an account "of a private benefactor whom she could not disclose." Gertsch said that this was a travel account that Gertsch had gained from a past association. J.L.S. "interpreted the situation to be that [Gertsch] was acting as an investment person and was handling the money that I invested and gave her to invest, that I was going to get a twenty-five percent return on that money. . . . She was acting as an agent, in my frame of reference, to handle those dollars that I had given her to manage." J.L.S. thought that Gertsch was some organization's representative, but he acknowledged that he was not given the name of any organization. Like nearly all of Gertsch's victims, P.O. and J.L.S. were told that their twenty-five percent return was guaranteed and that the transaction was risk free.
The scheme reported by P.O. and J.L.S. was that Gertsch would be a financial manager, investing their money, but with no explanation of what kind of investment vehicles would be used. Neither of these victims reported any representation that Gertsch would invest their money in stocks, bonds, mutual funds or any corporation, partnership or business. How the twenty-five percent return would be generated was not expressed. Thus, there is once again no satisfaction of the second component of the Howey-Forman test, a common enterprise. The money was simply to be given to Gertsch, and what she would do with it was undefined. Further, the promised return was a fixed rate of interest, represented to be guaranteed and risk-free; it was not portrayed to be dependent upon the amount of capital appreciation or earnings that Gertsch could generate from the use of the victims' funds.
The final victim, T.H., was told that Gertsch had a travel company and that if T.H. would invest in it, she would double her money in two years. Although T.H. referred to this as an investment in Gertsch's company, she also testified that she thought the money was going into a third-party account. Like several other victims, T.H. was told that due to a gratuity that Gertsch had received from other people, Gertsch was able to give away free vacation trips. Gertsch told T.H. that her money "was going straight into that account." When asked what specifically was done with the money, Gertsch was vague, but T.H. understood that the travel people, "were kind of like a bank, and the money would actually be kind of circulated." T.H. understood that the money would be used like a bank uses the money from deposits, and that her money was "guaranteed and insured." In her testimony, T.H. sometimes referred to the sums that she gave Gertsch as loans, but she also testified that these were investments, not loans.
T.H. did initially identify an enterprise, a travel company operated by Gertsch, that she was asked to invest in. However, T.H.'s subsequent testimony demonstrates that she was not told that the transaction was to be an acquisition of an interest in a business enterprise or venture from which she could expect to derive profits in common with the promoter or with other investors. To the contrary, she was told that her money was going into some kind of account connected in some obscure way to Gertsch's program of giving away travel. Her investment return did not depend upon the entrepreneurial skill or success of others but, instead, was guaranteed. T.H. viewed the transaction as akin to a deposit into a bank account bearing an extraordinary rate of interest. Once again, the amorphous description of the "investment" system given by Gertsch does not depict an investment contract under the Howey-Forman test.
It would require a great distortion of the Howey-Forman standard to hold that the transactions, as represented by Gertsch to her victims, constituted sales of investment contracts. Reinforcement of that conclusion emerges if we examine these transactions more broadly for characteristics typical of a "security," as the United States Supreme Court examined the transaction in Marine Bank. Not one of Gertsch's victims testified to a representation or a belief that he or she was purchasing stocks, bonds, an equity position in a business, or any type of instrument conventionally thought of as a security. None was given a prospectus or any purported literature relating to the use of their funds. None of the victims reported a representation or belief that he or she was purchasing an asset or instrument possessing the common characteristics of a security, such as being subject to market volatility, public trading, and capital appreciation. For most of the victims, there was an express representation or an implication that Gertsch was the recipient of some kind of largesse from third parties which she was generously sharing.
The evidence shows, without dispute, that Gertsch engaged in fraudulent and deceitful methods to extract money from her victims, but the wrongfulness of her conduct does not convert the events into sales of securities. As our Supreme Court aptly stated, "Our law has other remedies that do not warp the definition of a security that can be utilized if promotions are misleading . . . ." Resource Service Co., Inc., 130 Idaho at 884, 950 P.2d at 256. These other remedies include, at a minimum, a civil action for fraud. Alternative remedies may also include prosecution under other criminal statutes, such as those prohibiting theft by deception and theft by obtaining money under false pretenses. See I.C. §§ 18-2403(2)(a), (b); 18-2402(2), (3)(b).
When the State elected to prosecute Gertsch for violations of the Idaho Securities Act, it assumed the burden to prove every essential element of such offenses. Jackson v. Virginia, 443 U.S. 307 (1979); In re Winship, 397 U.S. 358 (1970); State v. McDougall, 113 Idaho 900, 902, 749 P.2d 1025, 1027 (Ct.App. 1988). It did not meet that burden here. For the reasons explained, we are constrained to hold that the evidence presented at Gertsch's trial does not demonstrate the sale of an "investment contract," the only form of "security" that Gertsch was alleged to have sold. Even when construed liberally in favor of the State, the evidence is insufficient to support the verdict finding Gertsch guilty of violations of the Idaho Securities Act.
C. Money Laundering
The indictment against Gertsch also charged her with money laundering in violation of I.C. § 18-8201(2). It alleged that she "did, knowingly and intentionally supervise and facilitate the transfer of proceeds . . . which were known by the defendant to be derived from a pattern of racketeering activity as defined in Idaho Code section 18-7803(d)." The referenced definition of "racketeering activity" in § 18-7803(d) includes acts chargeable under the Idaho Securities Act. I.C. § 18-7803(a)(13). Gertsch's conviction for money laundering is contingent upon her conviction for the Securities Act violations. Therefore, because we have held that Gertsch's conduct was not a violation of the Idaho Securities Act, her conviction for money laundering must also be reversed.
CONCLUSION
As the State has conceded, Gertsch's conviction for racketeering must be set aside for lack of evidence of an enterprise. We also reverse her convictions for Securities Act violations, and the associated conviction for money laundering, because the transactions between Gertsch and her victims, as a matter of law, do not constitute sales of investment contracts.
The judgment of conviction is reversed.
Chief Judge PERRY and Judge SCHWARTZMAN CONCUR.