Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Fresno County, Super. Ct. No. 05 CE CG 03038 Rosendo Pena, Judge.
Bruce Leichty for Plaintiff and Appellant.
Preston DuFauchard, Wayne Strumpfer, Alan Weinger, and Joan E. Kerst for Defendant and Respondent.
VARTABEDIAN, Acting P. J.
OPINION
This is an appeal from an order granting in part and denying in part appellant’s petition for writ of administrative mandate. (Code Civ. Proc., § 1094.5.) Appellant contends the trial court did not have statutory jurisdiction to grant the petition only in part. In addition, he contends the trial court employed the wrong standard of review and that respondent never properly invoked its administrative jurisdiction over him. Concluding that any error was not prejudicial, we affirm the judgment.
FACTS AND PROCEDURAL HISTORY
Appellant Bert Baro entered into contracts with nine individuals and couples (hereafter, the lenders), promising a return on investment of 25 percent per annum and a return of principal at the end of a fixed period, usually one or two years. Appellant entered into these contracts over a period extending from late 1997 to 2001 and received a total of about $400,000 from the lenders. He used the money to speculate in the commodities and stock markets, where he proceeded to lose everything by the end of 2001. Throughout this time, appellant paid himself a salary and bonuses from the invested funds, paid his business and personal expenses, and, for a while, paid interest to the lenders as it came due.
When appellant stopped making interest payments, some of the lenders filed complaints with the California Department of Corporations and the Better Business Bureau. The Department of Corporations (Department) issued a statutory desist-and-refrain order (see Corp. Code, § 25532), directing appellant to stop selling investment contracts unless and until such contracts were qualified securities under California law. Appellant timely requested an administrative hearing.
The hearing was conducted by an administrative law judge. The lenders, appellant, and a Department forensic accountant testified at the four-day hearing. Appellant represented himself; the Department was represented by a Department attorney. The administrative law judge issued an extensive (48-page) proposed decision. The proposed decision concluded the Department had properly ordered appellant to desist and refrain from violating the Corporations Code in that he had offered and sold securities that were neither qualified nor exempt from qualification under Corporations Code section 25110, misrepresented and omitted material facts in the offer and sale of the securities (Corp. Code, § 25401), and acted as an unlicensed investment adviser (Corp. Code, § 25230) and broker-dealer (Corp. Code, § 25210). The proposed decision also found that restitution and the costs of investigation properly could be assessed against appellant.
The Corporations Commissioner rejected the proposed decision and invited further briefing. At this point, counsel entered the case on behalf of appellant and filed a 42-page memorandum in opposition to the proposed order and filed a separate motion to reopen the hearing. The commissioner issued his decision on August 24, 2005, adopting the proposed order with minor changes not relevant to this appeal.
Appellant filed his writ petition on September 23, 2005. After respondent’s successful demurrer, appellant filed an amended petition, on which (along with respondent’s answer) the matter went to trial.
The amended petition focuses overwhelmingly on the propriety of respondent’s order that appellant pay restitution and costs of the administrative hearing. For example, the petition alleges: “The Department had no jurisdiction to enter any order as to Baro … beyond permanently enjoining Baro from the conduct enjoined in the [desist and refrain] order.” Since appellant prevailed on those issues, and the orders for restitution and costs were vacated by the trial court, we will omit a summary of his contentions in the interest of brevity.
The amended petition also included claims relevant to this appeal. First, it alleged the failure of the administrative law judge to “sequester” the witnesses at the hearing and prior contamination of the witnesses by respondent’s investigators “helped foster the conditions under which the witnesses felt they could testify against Baro with impunity.” As a result, “witnesses were influenced by each other to give false and misleading testimony, and … Baro, acting as his own counsel, was not in a position to expose said misleading testimony nor did he realize that he should have testified point by point in response to their testimony .…” Appellant contended this resulted in an unfair hearing. He requested respondent be ordered to set aside the decision or, in the alternative, be ordered not to give effect to the restitution and costs portion of the decision.
The trial court granted the petition to the extent respondent’s order sought to require restitution and payment of costs; the court found, however, that the desist-and-refrain order “is supported by substantial evidence[] and is not affected by the Court’s decision.” Appellant filed a timely notice of appeal from the “order granting in part petition for writ of administrative mandamus.” (Capitalization omitted.)
DISCUSSION
A. The Form of the Judgment.
Appellant’s primary argument on appeal asserts that the trial court was not permitted to affirm only the desist-and-refrain order but, instead, was required to remand that portion of the case to the administrative agency for a new exercise of discretion. He bases his argument on the language of Code of Civil Procedure section 1094.5, subdivision (f), which provides that in administrative writ proceedings the “court shall enter judgment either commanding respondent to set aside the order or decision, or denying the writ. Where the judgment commands that the order or decision be set aside, it may order the reconsideration of the case in the light of the court’s opinion and judgment and may order respondent to take such further action as is specially enjoined upon it by law, but the judgment shall not limit or control in any way the discretion legally vested in the respondent.”
According to appellant, therefore, he was entitled to a new evidentiary hearing on the desist-and-refrain order or, at the least, to a new exercise of discretion by respondent as to whether the order should issue. (Cf. Deegan v. City of Mountain View (1999) 72 Cal.App.4th 37, 46-47 [trial court may vacate but not modify agency’s determination of penalty upon finding of manifest abuse of discretion; court cannot substitute its exercise of discretion for that of agency]; Jaffee v. Psychology Examining Com. (1979) 92 Cal.App.3d 160, 167-170.)
Appellant is correct as to the form of the judgment. The better course would have been for the trial court to send the matter back to the agency for entry of a new decision and order “in light of the court’s opinion and judgment.” Such an order was implicit in the judgment that was entered, however, and after this court denied stay of the judgment pending appeal, that is exactly what the agency did: we take judicial notice of the fact that on September 7, 2006, the Department issued a new desist-and-refrain order adopting the original proposed decision of the administrative law judge, except “Subsections 2 and 3 of the order are deleted”; those subsections concerned restitution and costs.
But appellant is incorrect in asserting that the court’s order partially affirming the agency action constitutes an interference with respondent’s exercise of statutory discretion. Where an appellant has been afforded a fair hearing, the determination by the agency constitutes a final exercise of its discretion. Nothing in Code of Civil Procedure section 1094.5,requires (or even permits) a trial court to order an agency to exercise its discretion anew just because a portion of the previous exercise was beyond the jurisdiction of the agency. (See Saad v. City of Berkeley (1994) 24 Cal.App.4th 1206, 1214 [no remand required where evidence sufficient to support agency action, even though evidence insufficient to support some findings].) The inquiry in administrative writ proceedings “shall extend to the questions whether the respondent has proceeded without, or in excess of jurisdiction; whether there was a fair trial; and whether there was any prejudicial abuse of discretion.” (Code Civ. Proc., § 1094.5, subd. (b).) If the petitioner cannot establish any of those grounds to set aside the previous exercise of discretion, he or she is entitled to a new exercise of discretion only if “the court finds that there is relevant evidence that, in the exercise of reasonable diligence, could not have been produced or that was improperly excluded at the hearing before respondent.” (Id. at subd. (e); see Ashford v. Culver City Unified School Dist. (2005) 130 Cal.App.4th 344, 352-354.)
While appellant raises some of those statutory grounds for reversal, and we address them below, the point here is that mere remand does not automatically result in a new hearing or a new exercise of discretion. The judgment of the court under Code of Civil Procedure section 1094.5, subdivision (f), is permitted to direct the agency to enter a new order consistent with the agency’s prior exercise of discretion.
Because appellant is not entitled to a new hearing or exercise of agency discretion, we next consider whether the form of the judgment -- stating that the relevant portion of the decision is unaffected instead of remanding for reissuance of that same portion of the decision -- prejudiced appellant. (See Code Civ. Proc., § 475.) We conclude it did not. The net effect of the two possible forms of judgment is the same and, as noted, respondent already has acted in accordance with the implicit directive in the judgment as entered. (Cf. Kurz v. Federation of Petanque U.S.A.(2006) 146 Cal.App.4th 136, 151 [failure to show prejudice arising from form of pleadings and judgment in writ proceedings against nonprofit membership corporation].)
B. Due Process
Appellant next contends respondent lacked jurisdiction to conduct the administrative hearing because, once appellant requested the hearing, respondent was required to serve upon him an “accusation” under the Administrative Procedure Act. (Gov. Code, § 11500 et seq.; id. at § 11503.) We set forth appellant’s reasoning, as follows:
Corporations Code section 25532 provides that the Commissioner of Corporations may issue a desist-and-refrain order against certain violations of the securities laws. It provides that such an order becomes final if the person to whom the order is directed fails to request a hearing on the order within 30 days after service of the order. (Corp. Code, § 25532, subd. (d).) (At the time of the present proceedings, the time for requesting a hearing was one year; it was reduced to the current 30 days by Statutes of 2003, chapter 473, section 10.) Section 25532, subdivision (d) also provides that any such hearing “shall be held in accordance with provisions of the Administrative Procedure Act, Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, and the commissioner shall have all of the powers granted under that chapter.” Chapter 5, appellant argues, provides only two ways in which an administrative proceeding may be commenced: by accusation (Gov. Code, § 11503) (proceeding to revoke or suspend a license) or by “statement of issues” (Gov. Code, § 11504) (proceeding to determine whether a license shall be granted, issued, or renewed). Since neither option was employed by respondent in the present case, respondent never acquired jurisdiction to conduct the hearing, according to appellant.
There are two reasons why appellant’s argument fails. First, the purpose of the Administrative Procedure Act is to provide a uniform standard for review of any “decision by an agency if, under the federal or state Constitution or a federal or state statute, an evidentiary hearing for determination of facts is required for formulation and issuance of the decision.” (Gov. Code § 11410.10.) Thus the requirements for the conduct of the hearing apply regardless of whether a “right, authority, license, or privilege” under Government Code section 11503 or 11504 is involved. Here, the manner of commencing the hearing process is established by statute, namely, Corporations Code section 25532, which required appellant, not respondent, to begin the administrative hearing process by requesting a hearing. Respondent’s jurisdiction was invoked by its initial issuance of the desist-and-refrain order, and nothing more was required of it to retain jurisdiction.
Second, as to the desist-and-refrain order, appellant was provided ample notice of the specific charges against him. He did not object to the adequacy of notice of charges at the administrative hearing (see Stoumen v. Munro (1963) 219 Cal.App.2d 302, 306-307) and has shown no prejudicial absence of specificity in the notice provided to him before the hearing (see Code Civ. Proc., § 475).
Accordingly, we conclude appellant’s jurisdictional challenge fails.
C. “Absence of Meaningful Judicial Check”
Appellant contends the entire proceeding was a violation of the separation of powers provisions of the state Constitution. His theory appears to be that, by making the desist-and-refrain order immediately effective, respondent precluded meaningful judicial review of the order. Appellant relies primarily on McHugh v. Santa Monica Rent Control Bd. (1989) 49 Cal.3d 348 (McHugh).
McHugh is wholly inapposite. In that case, an administrative order permitted a tenant to withhold future rent to recoup past overcharges. The order provided that this permission would constitute a defense to any unlawful detainer action filed for nonpayment of rent. (McHugh, supra, 49 Cal.3d at p. 354.) The problem with the administrative order in McHugh was not that it was immediately enforceable, but that it was self-enforcing outside of the judicial process and purported to have legal and binding effect as a defense in judicial proceedings. (Id. at pp. 376-377.) Accordingly, the order violated the judicial powers clause of the state Constitution (see Cal. Const., art. VI, § 1). In other words, even though the relevant statute provided for judicial review, the order impermissibly purported to exercise “judicial power” (see McHugh, supra, at p. 364) through providing for immediate enforcement without any judicial intervention. (See id. at pp. 377-378 & fn. 44.)
In the present case, the desist-and-refrain order did not purport to be self-enforcing. Judicial intervention would be required to enforce the order against a nonlicensee of the Department, such as the injunctive relief sought to enforce the desist-and-refrain order in People ex rel. Garamendi v. American Autoplan, Inc. (1993) 20 Cal.App.4th 760 (desist-and-refrain order of the Insurance Commissioner; see Corp. Code, § 25530) or the civil penalties provided for violation of such an order in Corporations Code section 25535, subdivision (a). Additionally, in the present case, unlike McHugh, supra, 49 Cal.3d 348, the order (after modification by the trial court) only required appellant to obey the law, not to take any affirmative remedial action. As a result, the order did not constitute an impermissible exercise of judicial power by the commissioner, even though the order was effective immediately.
D. Standard of Review in the Trial Court
Appellant’s final argument starts with the premise that the trial court should have used the “independent judgment” standard of review and, in determining it should use the “substantial evidence” standard, the court erred. The independent judgment standard is used to review administrative decisions that involve or substantially affect a “fundamental vested right.” (JKH Enterprises, Inc. v. Dept. of Industrial Relations (2006) 142 Cal.App.4th 1046, 1056-1057.) Appellant contends that in concluding there is no vested right to operate an illegal business, the trial court erroneously accepted respondent’s administrative decision even before considering the evidence. There is, appellant contends, a fundamental right to conduct a lawful business (see Bixby v. Pierno (1971) 4 Cal.3d 130, 145, fn. 12) and the court must not prejudge the legality of appellant’s business without independently weighing the evidence.
The short answer to appellant’s contention is that the desist-and-refrain order did not prohibit him from conducting any lawful business whatsoever. Instead, it merely prohibited him from violating California securities law. As such, the order did not involve a fundamental vested right, even if appellant has a fundamental vested right to conduct a lawful business.
Even granting that there is an issue concerning the trial court’s standard of review, appellant fares no better: On appellate review of either form of trial court proceedings on a petition for administrative mandate, the appellate court employs the substantial evidence test -- in the “fundamental vested rights” context, to determine whether the trial court’s findings are supported by substantial evidence and, in the nonfundamental or nonvested context, to determine whether the agency’s findings are supported by substantial evidence. (JKH Enterprises, Inc. v. Dept. of Industrial Relations, supra, 142 Cal.App.4th at p. 1058.) The point, for present purposes, is that the trial court’s failure to employ independent judgment review does not constitute reversible error unless there is substantial evidence that would have supported the trial court’s hypothetical reversal of the agency’s findings. In the present case, there is no such evidence; accordingly, we need not resolve the question presented by appellant concerning the appropriate trial court standard of review.
Fundamental to appellant’s claim that there is evidence that would support findings different from those made by respondent is appellant’s far too narrow view of what constitutes a “security” under California law. Thus, throughout the proceedings, appellant “was adamant that the nine individuals or couples he contracted with had simply agreed to loan money to his business, which he had openly disclosed was a speculative business, in exchange for getting high returns on their loans,” as he phrases the issue in his opening brief. If, he says, he was not selling securities, the trial court could (and should) have concluded he had not violated the securities laws. Therefore it would make a difference whether the trial court believed his testimony and evidence in the administrative hearing, even if the administrative law judge and the commissioner did not believe that testimony, since that testimony shows, he says, that the contracts were not securities.
Appellant never analyzes whether his contracts with his nine lenders, even granting all the inferences favorable to him from the evidence, constitute “securities” under the law. He simply says that the contracts were loan transactions and, therefore, were not securities. Because appellant does not present any reasoned argument and authorities in support of this claim, we could well deem it waived. (E.g., Magic Kitchen LLC v. Good Things Internat., Ltd. (2007) 153 Cal.App.4th 1144, 1161.) We will discuss the claim briefly, however.
Promissory notes and fixed-return investment contracts are securities where, as here, the obligations are not collateralized, the lender is not actively involved in the business to which the loans are made, and the loans are solicited to generate capital for the operation of a business. (See People v. Figueroa (1986) 41 Cal.3d 714, 736-737; People v. Walberg (1968) 263 Cal.App.2d 286; Corp. Code, § 25019 [defining “security” to include, inter alia, “any note” or “evidence of indebtedness”].) The contracts here, by appellant’s own description, were securities as a matter of law.
As a result of the foregoing considerations, we conclude that even if the trial court had engaged in independent judgment review, on this record there is no substantial evidence from which a finder of fact could conclude the contracts here were not securities for purposes of California law. Similarly, given that the contracts were securities, there was no substantial evidence from which a finder of fact could conclude that appellant was not selling the securities (Corp. Code, § 25004) and advising buyers concerning the advisability of purchasing the contracts (Corp. Code, § 25009).
At various points in these proceedings, appellant has contended he did not perform investment adviser services “for compensation,” as required for regulation under Corporations Code section 25009. Here, the compensation was the receipt of the lenders’ money for, as appellant phrased it at the administrative hearing, his own “use and enjoyment.”
Finally, appellant argues (without any citation to evidence in the record) that there is substantial evidence these contracts were, even if securities, exempt from registration and regulation under the securities laws. He says the transactions were exempt under Corporations Code section 25102, subdivision (e), because they were not the result of a “public offering.” As relevant here, and in the language of the California Code of Regulations, title 10, section 260.102.2, there is no public offering if “sales [were] not consummated to more than 10 … persons, and … all of the offerees either have a preexisting personal or business relationship with the offeror … or by reason of their business or financial experience could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction.”
Appellant claims, with no citation to the record whatsoever, “most of the investors freely admitted they had had a previous business or personal relationship with Appellant, and of those who didn’t, Appellant showed that he took steps to ensure himself that the few investors he had not known personally had the capacity to protect their own interests.”
We, of course, have no way of knowing what appellant and his counsel meant by this claim, since there are no citations to the record, but our own review of the record demonstrates it is not substantiated in the record. Appellant’s entire testimony concerning Margaret Tafoya was: “Tafoya informed Baro that she was only making less than 3% per annum on her current investment and wanted to make the same amount as was being paid to [another lender]. Baro filled out his standard forms along with the terms and conditions of the agreement and gave a copy of the hand written documents to Tafoya so that she may do what she needs to do in determining if this is a transactions she wants to enter into.” On appellant’s “new account information” form for Tafoya, she is listed as a self-employed “care provider.” Lines for her annual income and net worth are left blank. (Tafoya testified at the hearing that she was the housekeeper and caregiver for one of the lenders who had known appellant prior to these events. She testified she did not have much investment experience.) There is no substantial evidence that Tafoya had or could be assumed to have “the capacity to protect [her] own interests in connection with the transaction.”
Similarly, there is no evidence that appellant made any affirmative effort to determine whether any of his lenders had business or financial experience to give them the capacity to protect their own interests in connection with the transaction. The other lenders with no prior relationship to appellant were a nurse, a teacher, a retired postal service worker, and a video store clerk. There is nothing in the record evidencing their particular business or financial expertise. To the contrary, the following extended quote from appellant’s opening brief is instructive on the issue of the lenders’ expertise:
“While it may seem counterintuitive to believe that anyone would loan a man (with no credentials other than the fact that he had been a local bank loan officer) money simply so that he could indulge in his own speculation for his own account, Appellant was correct in pointing out that there is nothing in the law which prohibits … someone from operating that kind of a business, or in raising capital for that business through borrowing. The fact that the Commissioner might know, and that other financial sophisticates might know, that no institutional lender would ever loan unsecured money for such a speculative (not to say naïve) enterprise should not have been allowed to color the picture so that Appellant could then be portrayed as an evader, deceiver and defrauder. If, as Appellant claimed, he told his lenders exactly what he was doing with their money, but they were blinded by the high rate of return he was promising, then at some point the principle of caveat emptor becomes the operative principle rather than a supposition -- born in hindsight out of the adverse results that Appellant ultimately got -- that there should have been additional disclosure and disclaimers.”
As we have discussed earlier in this section, raising capital in this manner does constitute the issuance of securities and is lawful only to the extent the raising of capital complies with the securities law.
But note the following quote from appellant’s letter to a lender: “Your funds are placed in a pool with other investors[’] funds. These funds are used to finance projects requiring short term Hard money loans. The funds in the money pool are rolled over three to four times per year at a rate of ten to twelve percent with a Ninety to one hundred twenty day term. Exact details of how we do it is not something I am at liberty to [discuss] due to the proprietary Nature of the information, it would be like asking coca cola to give you the secret recipe for coke.”
The foregoing seems to us to be an acknowledgement that appellant’s business was built on the assumption his lenders were not “financial sophisticates,” and there is nothing in the record to indicate the lenders, “blinded by the high rate of return [appellant] was promising,” had the capacity to protect their own interests in the transaction. We conclude there is no substantial evidence in the record from which one could conclude appellant’s securities and his actions in connection with the offering and sale of those securities are exempt from regulation under Corporations Code section 25102, subdivision (e). As a result, review pursuant to the independent judgment standard could not have produced a result more favorable to appellant.
E. Other Claims of Error
Appellant contends in general terms that respondent conspired with witnesses to produce false testimony in the administrative hearing, the process was biased against him because he proceeded without an attorney in the administrative hearing, and that the commissioner should have reopened the hearing for the receipt of (unspecified) additional evidence after an attorney appeared on appellant’s behalf.
Because we have looked at this record in the light most favorable to appellant, for purposes of determining whether independent judgment review might produce a result more favorable to him, we need not and do not consider these additional issues, which attack only the manner in which respondent built its case in the hearing.
DISPOSITION
The judgment is affirmed. Respondent is awarded costs on appeal.
WE CONCUR: CORNELL, J., DAWSON, J.