PEOPLE v. FREDERICK

Filed 8/29/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

Here the crime, an endless chain, proves to be an oxymoron. (Pen. Code, § 327.)[1] The conviction of defendants ends the chain, but not the losses to countless victims.

Among other things, we conclude the elaborate chain scheme devised by defendants to bilk money from various hapless victims also involve securities fraud. We also conclude that the crime of filing a false income tax return does not involve a "taking" for the purpose of sentence enhancement.

Joan Frederick, Mercedes Navarrete, and Felix Navarrete appeal a judgment following conviction of operating an endless chain scheme; conspiracy to commit grand theft; grand theft; sale of a security without qualification (Mercedes and Felix);[2] using a false statement in the sale of a security (Felix); using a scheme to defraud in the sale of a security (Mercedes and Felix); and filing a false income tax return (Mercedes and Felix). (§§ 327, 182, subd. (a)(1), 487, subd. (a), 186.11, subd. (a)(2) [excessive taking in pattern of related felony conduct], & 12022.6, subd. (a)(4) [excessive taking]; Corp. Code, §§ 25110, 25540, subds. (a) & (b), 25401, & 25541; Rev. & Tax. Code, § 19705, subd. (a)(1).) We strike the section 12022.6 taking enhancement regarding count 28, filing a false income tax return, but otherwise affirm.

FACTS AND PROCEDURAL HISTORY

In 2000, Mercedes founded La Luz de Oro, meaning "The Light of Gold." ("LLDO.") She became chief executive officer and president of the later-formed corporation, and Felix became secretary. Mercedes's daughter, Joan Frederick, became chief financial officer and treasurer. LLDO held meetings to recruit members, who were required to pay meeting and membership fees, join various programs, and recruit additional members. Programs included purchases of telephone calling cards, credit/debit cards, cellular telephones, ownership ("co-dueno") interests in LLDO, Mitsubishi automobiles, and "dream homes." Mercedes and LLDO representatives assured members that LLDO would make the payments on the automobiles and dream homes. They also represented that members would receive investment returns on the calling cards, credit cards, and "co-dueno" interests.

On March 7, 2001, plainclothes Los Angeles police officers attended and secretly videotaped an LLDO meeting at La Hacienda Real nightclub in Los Angeles. Several hundred members attended and gave cash and checks to LLDO representatives. Armed security guards were present. The meeting resembled a revival meeting as excited members gave testimonials regarding LLDO benefits. During the meeting, Mercedes stated that LLDO would pay for the members' new automobiles and dream homes. She also stated that a prospective member could purchase an ownership interest in LLDO, entitling him to a share of its income. Felix, described as "a man of few words," sat on the stage. The prosecutor played portions of the videotape at trial.

Undercover Detective John Rodriguez spoke with Pedro Miramontes at the LLDO meeting. Miramontes identified himself as a leader of LLDO and gave Rodriguez a sales presentation that included an LLDO "co-owner membership agreement." Miramontes stated that LLDO members shared in its earnings ("a share in the profits"). He also stated that LLDO would purchase an automobile and a home for Rodriguez if he joined the LLDO programs and recruited additional members. Miramontes described LLDO as "an investment business," and stated that Rodriguez's "commitment" required a $140 monthly purchase of prepaid telephone calling cards. Miramontes explained the "co-owner" program as an "investment" program in which the investor acquires "a share in or . . . a co-partner[ship] in the company." Rodriquez secretly videotaped his conversation with Miramontes and the prosecutor played a portion of the videotape at trial.

Several weeks later, Rodriguez interviewed Mercedes. She stated that approximately 25,000 members worldwide belonged to LLDO. Mercedes described LLDO as a telecommunications company that earned income from telephone calling cards, cell phones, and internet connections.

In December 2000, Lona Luckett, a Better Business Bureau employee, investigated LLDO following many consumer complaints. On February 15, 2001, Luckett spoke with Felix. She opined that he was operating a pyramid scheme and recommended that he cease operations. Luckett also recommended that Felix consult an attorney because he was not a licensed investment advisor. Felix responded that he had been involved previously with similar programs, that "he was going to make it work," and that "[t]his time everyone would get paid."

Felix often signed the checks given as payments to LLDO leaders. Felix was also a director of LLDO, and an application for a federal employer tax identification number indicated that he was a principal officer.

"Co-Dueno" Program

The "co-dueno" or "co-owner" program provided that members would become co-owners in LLDO in exchange for certain payments and for recruiting additional members. LLDO co-owners were entitled to a share of its annual profits.

Mitsubishi Automobile Program

In 2000, Mitsubishi Motor Sales had a promotion that permitted a qualified purchaser to purchase a new automobile with no down payment and no payments for six months to one year. At the time, Mitsubishi Motor Credit, the finance subsidiary of Mitsubishi Motor Sales, had an "auto express" credit approval program conferring credit approval responsibility upon the dealerships.

Juan Alvarado was a member and a "leader" of LLDO. In 2000 and 2001, Assael Mitsubishi in Duarte employed Alvarado as an assistant sales manager. Miller Mitsubishi in Van Nuys employed Carlos Vargas, an LLDO member, as a salesman. LLDO representatives referred LLDO members to Alvarado and Vargas at their respective dealerships. Alvarado and Vargas sold Mitsubishi automobiles to "qualified" LLDO members - those who paid sums to LLDO, participated in other LLDO programs, and recruited new members. Alvarado and Vargas completed credit applications for LLDO members, falsely stating their employment and incomes. They assured prospective buyers that LLDO would make their automobile payments after they purchased an automobile. In fact, LLDO did not make any payments. (Counts 10 - 15 [grand theft].)

Mitsubishi Motor Credit repossessed 156 automobiles purchased by LLDO members. It lost nearly $2.25 million after selling the repossessed automobiles and receiving approximately $375,000 "negotiated settlement" from the two dealerships. Mitsubishi Motor Credit later contacted LLDO members who had surrendered vehicles, and offered to expunge derogatory credit reporting regarding the transactions.

On April 18, 2001, police officers executed search warrants upon LLDO offices and the Navarretes' residence in Arleta. They later seized nearly two million dollars in cash and cashier's checks. An investigative audit revealed that approximately $9 million passed through LLDO bank accounts from April 2000 through June 2001.

When police officers executed the search warrant at the Navarretes' residence, only Frederick and a housekeeper were present. From time to time, Frederick was a guest in her mother's home. Frederick requested permission to leave and take her black duffel bag that was on the bed in her sister's bedroom. When police officers looked inside the unmarked duffel bag, they discovered nearly $14,000 in currency. Police officers also found $10,000 in currency in a safe at the residence.

Later that day, Frederick obtained three cashier's checks from LLDO bank accounts, totaling nearly $2 million. One check for nearly $1.3 million was payable to her, another check for $500,000 was payable to the LLDO corporation, and a third check for $150,000 was payable to an attorney. Police officers later seized the bank accounts pursuant to warrant, however, and the checks were not paid.

Many LLDO members paid significant sums toward its programs, but did not receive cellular telephones, credit/debit cards, or the promised returns. (Counts 3 - 15 [grand theft].) Many LLDO members also were unaware that Mercedes had been convicted of theft in Michigan in 1999, involving a similar scheme. Those who had automobiles repossessed complained of damaged credit ratings. Some received investment returns, but not in the amounts or with the frequency promised. A certified public accountant examined LLDO's cancelled checks and determined that members received approximately $3.6 million overall.

Bonnie Youngdahl, a former attorney with the California Department of Corporations, testified at trial as an expert witness concerning California securities law. She explained that the Department of Corporations enforces the law regarding the raising of investment capital. Youngdahl opined that many factors were involved in determining whether a particular offering was a "security." She stated that the determination does not depend upon the name of the interest sold, but rather concerns the "economic reality" of the offering. This means looking "through the form to the substance of the transactions." Youngdahl also stated that reasonable persons could disagree whether a particular investment is a security.

A special agent of the California Franchise Tax Board reviewed the Navarretes' 2000 income tax return. The agent testified that the Navarretes owed $195,679 in income taxes for the year 2000, based upon LLDO's assumed illegal and unreported activities. (Count 28.)

The fourth amended grand jury indictment charged nine individual defendants with operating an endless chain scheme, conspiracy to commit grand theft and grand theft, and violation of California securities laws, among other counts. (§§ 327, 182, subd. (a)(1), & 487, subd. (a); Corp. Code, §§ 25110, 25540, subds. (a) & (b), 25401, & 25541.) The indictment also charged financial taking enhancements. (§§ 12022.6, subd. (a)(4) [$2,500,000], 1203.045, subd. (a) [$100,000], & 186.11, subd. (a)(2) [$500,000].)

Prior to trial, the trial court denied Frederick's motion to suppress evidence of the cash found in the duffel bag during execution of the search warrant. (§ 1538.5.) The court found that police officers could lawfully search the non-descript bag for weapons before allowing Frederick to leave. The court reasoned that the officers "would put themselves at undue risk if they don't look inside for officer safety." The court also found that Frederick was more than a casual visitor to the residence, and that the searching police officer's testimony was credible. In sum, it ruled that the plain view doctrine lawfully permitted police officers to seize the currency.

The trial court severed the trial of Mercedes, Felix, and Frederick from the remaining defendants. Defendants Juan Alvarado and Carlos Vargas were convicted after trial; other defendants entered nolo contendere pleas to particular counts. We decided the appeals of Alvarado, Vargas, and others in unpublished decisions. (People v. Vargas (Jan. 26, 2005, B164912) & People v. Miramontes (Jan. 10, 2006, B174318).)

The jury convicted Frederick and the Navarretes of operating an endless chain scheme, conspiracy to commit grand theft, and 13 counts of grand theft. (§§ 327, 182, subd. (a)(1), & 487, subd. (a).) It found that the excessive taking allegations of sections 186.11, subdivision (a)(2), 1203.045, subd. (a), and 12022.6, subdivision (a)(4), were true. The jury also convicted Mercedes and Felix of selling a security without qualification, using a scheme to defraud in the sale of a security, and filing a false income tax return. (Corp. Code, §§ 25110, 25540, subds. (a) & (b), & 25541; Rev. & Tax. Code, § 19705, subd. (a)(1).) It convicted Felix of making a false statement in the sale of a security.[3] (Corp. Code, §§ 25401 & 25540, subd. (b).)

The trial court sentenced Mercedes to 20 years' imprisonment, consisting of an upper term for count 27 [using a scheme to defraud in the sale of a security], consecutive terms for the excessive taking enhancements of sections 186.11, subdivision (a)(2), and 12022.6, subdivision (a)(4), and consecutive or concurrent sentencing for the remaining counts. It sentenced Frederick to 12 years' imprisonment, consisting of an upper term for count 1 [operating an endless chain scheme], and consecutive upper terms for the excessive taking enhancements. The trial court imposed but stayed sentence on the remaining counts pursuant to section 654. The trial court sentenced Felix to 10 years' imprisonment, consisting of a middle term for count 25 [sale of security without qualification], and consecutive terms for the excessive taking enhancements. It then suspended execution of sentence, dismissed the probation restrictions of sections 1203.044 and 1203.045, and granted Felix five years' probation with terms and conditions. The trial court later described Felix as the "least culpable of anyone."

The trial court also ordered Mercedes and Felix to pay approximately $10 million restitution, and Frederick to pay approximately $9.75 million restitution. Restitution claimants included individual LLDO members, Mitsubishi Motor Credit, and the California Franchise Tax Board (Mercedes and Felix).

Frederick, Mercedes, and Felix appeal and contend that the trial court erred by: 1) denying the suppression motion; 2) precluding expert testimony concerning endless chain schemes; 4) not reinstructing regarding the elements of an endless chain scheme prior to jury deliberations; 5) instructing that sale of an unqualified non-exempt security is a general intent crime; 6) not instructing regarding theft by trick or device, rather than theft by false pretenses; 7) not modifying CALJIC No. 17.01 to require victim unanimity; 8) not defining "related felony conduct" within the section 186.11 taking enhancement instruction; 9) not staying Mercedes's sentence for counts 3 through 15 [grand theft] pursuant to section 654; 11) imposing upper term and consecutive term sentences in violation of Blakely v. Washington (2004) 542 U.S. 296, and Apprendi v. New Jersey (2000) 530 U.S. 466; 12) applying the section 12022.6 taking enhancement to count 28, filing of a false tax return (Rev. & Tax. Code, § 19705, subd. (a)(1)); and 13) imposing and staying sentence upon Mercedes for count 26 [using a false statement in the sale of a security]. They also contend that there is insufficient evidence of: 3) a security within Corporations Code section 25019, and 10) the excessive taking enhancements.

Each appellant joins the factual summaries and legal contentions made by the others, as applicable. (Cal. Rules of Court, rule 13(a)(5); People v. Castillo (1991) 233 Cal.App.3d 36, 51.)

DISCUSSION

I.

Frederick argues that the trial court erred by denying her motion to suppress evidence of the currency seized from her duffel bag during execution of the search warrant. She points out that the search warrant neither mentioned her nor specified seizure of currency. Frederick adds that she lived in San Diego and infrequently stayed at her mother's home. She asserts that insufficient evidence supports the trial court's factual findings that the police officer searched the duffel bag to protect officer safety and discover contraband. Frederick points out that he gave several reasons for searching the duffel bag - fruits of the crime and officer safety. She adds that the officer had no evidence connecting her to illegal LLDO activities or to the Navarretes. (People v. Berry (1990) 224 Cal.App.3d 162, 169 [circumstances must suggest a relationship between the person, the place searched, and the illegal activities].) Frederick argues the error is prejudicial because the "case against [her] was thin." (Chapman v. California (1967) 386 U.S. 18, 24.)

In reviewing a trial court's ruling on a suppression motion, we defer to the trial court's factual findings that are supported by substantial evidence. (People v. Hughes (2002) 27 Cal.4th 287, 327; People v. Camacho (2000) 23 Cal.4th 824, 830.) The trial court "sits as a finder of fact with the power to judge credibility, resolve conflicts, weigh evidence, and draw inferences[.]" (People v. Needham (2000) 79 Cal.App.4th 260, 265.) Whether a search is constitutionally reasonable, however, is a legal question upon which we exercise our independent judgment. (People v. Hughes, supra, 27 Cal.4th 287, 327.)

Searching police officers may seize items not listed in the warrant provided that the items are in plain view while the officers are lawfully in the location they are searching, and the incriminating nature of the items is immediately apparent. (People v. Kraft (2000) 23 Cal.4th 978, 1043.)

Under certain circumstances, police officers may search the personal effects of a person who is more than a casual visitor, but not a resident of the premises. (People v. Berry, supra, 224 Cal.App.3d 162, 168.) "If the circumstances suggest a relationship between the person and place sufficient to connect the individual to the illegal activities giving rise to the warrant, search of the person's property on the premises is permitted." (Id., at p. 169.)

Sufficient evidence supports the trial court's finding that the officer acted reasonably in searching the duffel bag. The bag contained no identifying marks and officers were not required to believe Frederick's statement that the bag belonged to her. Frederick was more than a mere visitor to her mother's home. She ate meals and stayed there from time to time. The duffel bag was on the bed in the bedroom in which she stayed as a guest. Thus, she had "'more than just a temporary presence . . . '" in the residence. (People v. Howard (1993) 18 Cal.App.4th 1544, 1555 [defendant's purse legally searched where she was found in bed with another defendant during execution of warrant].)

Moreover, police officers could search the bag for weapons to protect their safety. Operation of LLDO involved large amounts of checks, cash, and money orders; armed security guards were present at membership meetings. A courier carrying the cash and financial instruments might carry a weapon to safeguard the items. The trial court expressly determined the credibility of the officer's reason for searching the bag. We do not redetermine questions of credibility. (People v. Needham, supra, 79 Cal.App.4th 260, 265.)

In any event, any error in admitting evidence of the currency is harmless beyond a reasonable doubt. (People v. Memro (1995) 11 Cal.4th 786, 847 [standard of review when evidence obtained from unlawful search and seizure].) After leaving her mother's home, Frederick went to the bank and obtained three cashier's checks totaling nearly $2 million. The largest check for $1.3 million was payable to her; another check for $150,000 was payable to an attorney. By comparison, evidence of the $14,000 within the duffel bag is neither significant nor prejudicial.

II.

Frederick contends that the trial court erred by precluding expert testimony regarding an endless chain scheme, a complicated subject beyond the jury's common experience. She points out that Evidence Code section 805 allows expert opinion that "embraces the ultimate issue to be decided by the trier of fact." She asserts that the trial court's ruling denied her due process of law and the assistance of counsel because the ruling restricted her right to present a defense. (People v. Reeder (1978) 82 Cal.App.3d 543, 553.)

During the examination of expert witness and lawyer Thayer Lindauer, the trial court ruled that his testimony regarding endless chain schemes was limited to the common features or hallmarks of a scheme. The court ruled that the question whether LLDO was an endless chain scheme was an "ultimate question for the jury to decide." Thus, the court permitted Lindauer to testify whether a particular aspect of an endless chain scheme was "consistent with his experience," but not whether a particular hypothetical entity was an endless chain scheme.

Evidence Code section 805 provides that "[t]estimony in the form of an opinion that is otherwise admissible is not objectionable because it embraces the ultimate issue to be decided by the trier of fact." Nevertheless, an expert opinion is inadmissible "if it invades the province of the jury to decide a case." (Piscitelli v. Friedenberg (2001) 87 Cal.App.4th 953, 972.) Such evidence is "wholly without value" to the trier of fact. (Ibid.) The determination whether an expert witness's opinion bears upon or decides an ultimate issue in the case is sometimes a difficult decision, and "a large element of judicial discretion [is] involved." (People v. Wilson (1944) 25 Cal.2d 341, 349.) The trial court did not abuse its discretion by limiting the opinions of prosecution and defense expert witnesses regarding endless chain schemes. The trial court properly permitted the expert witnesses to testify regarding the indicia or aspects of an endless chain scheme, but not whether LLDO was, in fact, an endless chain scheme. Thus, Lindauer testified that based upon his expertise and knowledge, endless chain schemes are not secret organizations, they do not sell products, and they compensate a participant for bringing in a new participant. He also stated that he had no knowledge of an endless chain scheme that received $9 million from its participants, yet returned 60 to 85 percent of the funds.

The trial court also properly restricted Lindauer and other expert witnesses from instructing upon the law of endless chain schemes. (Summers v. A. L. Gilbert Co. (1999) 69 Cal.App.4th 1155, 1178-1184.) Calling lawyers as "expert witnesses" to give opinions as to the application of law to particular facts "usurps the duty of the trial court to instruct the jury." (Id., at p. 1179.)

The trial court's evidentiary limitations did not deny Frederick her constitutional right to the assistance of counsel and to present a defense. Lindauer testified at length concerning the indicia of an endless chain scheme, and opined that a plan that returned 60 to 85 percent of its revenues to members was not an endless chain scheme. The trial court's ruling was not a "'blanket exclusion'" of evidence that stripped Frederick of her defense. (People v. Page (1991) 2 Cal.App.4th 161, 185.)

III.

Mercedes and Felix argue that there is insufficient evidence to support the convictions of counts 25, 26, and 27, violations of California securities law. (Corp. Code, §§ 25110 (count 25), 25401 (count 26 [Felix only]), & 25541 (count 27).) They contend that LLDO programs were not securities within the meaning of Corporations Code section 25019, because LLDO members actively participated in the venture. (People v. Figueroa (1986) 41 Cal.3d 714, 738-739 [Corporate Securities Law requires that an investor risk capital through his investment].) Mercedes and Felix rely upon LLDO's requirement that members must recruit seven new members to argue that members were active participants in the venture.

Corporation Code section 25019 defines a "security" expansively, and includes "participation in any profit-sharing agreement" or an "investment contract," whether or not a written document evidences the investment. (Ibid.; ["All of the foregoing are securities whether or not evidenced by a written document."].) An "investment contract" is "a contract or a transaction in which a person entrusts money or other capital to another, with the expectation of deriving a profit, income or some financial benefit from a business enterprise, the failure or success of which is dependent upon the managerial efforts of other persons." (People v. Smith (1989) 215 Cal.App.3d 230, 235.) It is a question for the trier of fact whether a particular investment is a security. (Id., at p. 236.) Here the trial court properly instructed with the definition of investment contract set forth in People v. Smith, supra, 215 Cal.App.3d 230, 235.

Sufficient evidence supports the jury's finding that the LLDO "co-dueno" program was a security. LLDO members testified that they believed that they were investors and co-owners of LLDO. Miguel Gutierrez testified that LLDO representatives told him a co-owner investment meant that he would be "a part of the company . . . like an owner." Jose Grant received a videotape from LLDO in which Mercedes stated that members "share in the company's earnings." Omar Sotowade testified that he considered LLDO an investment in which he expected a return. Julia Parkin believed LLDO was an investment company. Yolanda Rosales invested in the "co-dueno" program because LLDO "was presented to [her] as an investment company." Alison Conover invested in the "co-dueno" program to receive "a profit share . . . at the end of the year." Israel Menjivar believed that he would be a co-owner based upon Mercedes's statements. LLDO leader Pedro Miramontes gave undercover Officer Rodriguez a "co-owner agreement," and stated that LLDO members received "a share in [LLDO's] profits." This is reasonable and credible evidence from which a reasonable trier of fact could find defendants guilty of the securities counts beyond a reasonable doubt. (People v. Kipp (2001) 26 Cal.4th 1100, 1128 [standard of review of substantial evidence].)

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[1] All further statutory references are to the Penal Code unless stated otherwise.

[2] To ease the reader's task, we shall refer to the Navarretes by their first names.

[3] The jury neglected to complete a verdict form for this particular count (count 26) regarding Mercedes.