Utah Blue Sky Laws and Fraud Lawyer

Salt Lake City Securities Fraud Defense Attorney

Utah’s (and the nation’s) securities laws can be real head-scratchers for some, and downright maddening for others. This is because for them, the laws seem to run against common sense.

Consider this simple example, which is written in plain English, instead of Legalese:

George, who lives in Utah, sees an old Ford Mustang at a local junk yard, and the price tag on it is only $300. He feels it will only take him $5,700 to restore it, and he could easily sell it for $20,000 (for a $14,000 profit). However, George is broke. So, he asks his roommate, and brother, Eddie, if Eddie will give him the $6,000.

For this, George will do all the work, and Eddie will not only get his $6,000 back, but $7,000 on top of that (half the $14,000 profit). Eddie trusts his brother, so he writes him a check. They sign a simple agreement on a napkin that lays out what they are both agreeing to. True to his word, George fixes up the car – and does so on budget – then sells it for $20,000. He honorably pays Eddie back the $6,000, and gives him $7,000 on top of that. Eddie is thrilled.

The second to the last thing that George wants to see is language like this from the State of Utah:

It appears to the Director of the Utah Division of Securities (Director) that YOU, GEORGE, have engaged in acts and practices that violate the Utah Uniform Securities Act, Utah Code Annotated Section 61-1-1, et seq. (the Act). Those acts are more fully described herein. Based upon information discovered in the course of the Utah Division of Securities’ (Division) investigation of this matter, the Director issues this Order to Show Cause in accordance with the provisions of § 61-1-20(1) of the Act. Specifically, the State of Utah asserts that George violated § 61-1-1 (securities fraud) of the Act while engaged in the offer and sale of securities in or from Utah.

And the last thing that George wants is for that problem to go from an "administrative mater" to a "criminal one". George is deeply bewildered and frightened. He has never been in trouble with the law before, and certainly does not view himself as a criminal.

If you, or your loved one, is like George, please call us immediately. George still has rights and privileges that need to be protected.

George has just been introduced to the "Blue Sky" laws. And sadly, many criminal defense attorneys do not even know what these are. George thinks, "I wasn’t selling stock to my brother!"

George feels that he is a victim of government run amuck. After all, George was certainly not selling stock in a big company, and besides that, he even made Eddie $14,000 bucks, and Eddie is NOT even upset. In fact, Eddie thinks George is a hero. Now, this is an extreme fact pattern, but it goes to show that the law can be violated even when the investor is not financially hurt.

So why do we call these laws "Utah Blue Sky" laws? It may come from Justice McKenna, who was on the United States Supreme Court back 1917, who used that term in the cases of Hall v. Geiger-Jones Co., 242 U.S. 539 (1917).

Whenever a case is ruled on, one Judge will speak for the Court. In other words, because here are nine Judges on the United States’ Supreme Court, it just does not make sense for them all to issue a ruling. Normally, one of them writes the statement that the "majority" of the Judges agree on, and those who disagree with the majority’s statement are free to write their own opinions, which are called "dissents".

Justice McKenna, wrote that Ohio’s laws regulating (and even criminalizing) the type of conduct that George was involved in was indeed constitutional. The Defendants in that case were essentially saying, "Are you kidding us! Allowing the State of Ohio to prosecute us for selling something to somebody who wants to buy it is insane! Hey, unless there is some sort of fraud, the government should just butt out! Ohio’s police power should not be allowed to mess with the affairs of consenting adults."

Justice McKenna essentially said that the purpose of the laws was to make sure that investors could check out the reputation of sellers, and have authoritative information, before he or she decided to invest. And that information needed to be on file with the State, and the sellers had to be licensed.

The Supreme Court said that states have VERY broad powers when it comes to what they want to police. They even went so far as to say when it comes to the power of policing what goes on within its borders, that power is the "least limitable of the exercises of government." Therefore, the Judge wrote that Ohio could force people to get a license before they offer an investment opportunity, and that license could be revoked by Ohio if the seller got out of line. The judge agreed that the Ohio investments commissioner could revoke the license upon discovering that the seller/licensee was of "bad repute", or had engaged in, or was about to engage in an "illegitimate business or fraudulent transaction".

The Judge also said, "It will be observed, therefore, that the law is a regulation of business, constrains conduct only to that end, the purpose being to protect the public against the imposition of unsubstantial schemes and the securities based upon them. Whatever prohibition there is, is a means to the same purpose, made necessary, it may be supposed, by the persistence of evil and its insidious forms and the experience of the inadequacy of penalties or other repressive measures. The name that is given to the law indicates the evil at which it is aimed; that is, to use the language of a cited case, ’speculative schemes which have no more basis than so many feet of ’blue sky;" or, as stated by counsel in another case, ’to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations.’ Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government, and that the appreciation of the consequences of it is not open for our review."

In the Complaint against GEORGE, he would typically see statements something like these:

• 1. "The investment opportunities offered and sold by GEORGE are securities under § 61-1-13 of the Act.
• 2. The securities were offered and sold in this state.
• 3. The securities were not registered under the Act, and Respondents did not file any claim of exemption relating to the securities.
• 4. Based on the above information, GEORGE violated § 61-1-7 of the Act.

ORDER

The Director, pursuant to § 61-1-20 of the Act, hereby orders GEORGE to appear at a formal hearing to be conducted in accordance with Utah Code Arm. §§ 63-46b-4 and 63-46b-6 through -10, and held before the Utah Division of Securities. The purpose of the hearing is to establish a scheduling order and address any preliminary matters. If GEORGE fails to file an answer and appear at the hearing, the Division of Securities may hold GEORGE in default, and a fine may be imposed in accordance with Utah Code Arm. § 63-46b-11. In lieu of default, the Division may decide to proceed with the hearing under § 63-46b-1O. At the hearing, GEORGE may show cause, if any he has why: a) GEORGE should not be found to have engaged in the violations alleged by the Division in this Order to Show Cause; b) why GEORGE should not be ordered to cease and desist from engaging in any further conduct in violation of Utah Code Arm. § 61-1-1, or any other section of the Act; c) why GEORGE should not pay fines and restitution.

If you, or your loved one, is like George, please call us immediately at 801-364-6454. George still has rights and privileges that need to be protected.

Remember that under Utah law "an investment in a common enterprise with the expectation of profit to be derived through the essential managerial efforts of someone other than the investor; or

• (ii) an investment by which:
• (A) an offeree furnishes initial value to an offerer;
• (B) a portion of the initial value is subjected to the risks of the enterprise;
• (C) the furnishing of the initial value is induced by the offerer’s promises or representations that give rise to a reasonable understanding that a valuable benefit of some kind over and above the initial value will accrue to the offeree as a result of the operation of the enterprise; and
• (D) the offeree does not receive the right to exercise practical or actual control over the managerial decisions of the enterprise."

In other words, George may have a serious legal problem on his hands. See Utah Code Section § 61-1-13.

If you, or your loved one, is like George, please call us immediately. George still has rights and privileges that need to be protected.