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COLORADO COURT OF APPEALS_____________________________________________________________________________

Cou rt of App eals No. 11CA10 80Colorado Division of Securities

Case No. XY-11-CD-11_____________________________________________________________________________

Fred J . J oseph, Colorado Secur i t ies Comm iss ioner ,

Petitioner-Appellee,

a n d

Colorad o Division of Secu rities,

Appellee,

v.

Mieka Corporat ion, Daro Blan kens hip, an d Steph en Romo,

Respondents-Appel lants ._____________________________________________________________________________

ORDER AFFIRMED

Division IOpin ion b y J UDGE TAUBMAN

Fox an d Rothen berg*, J J . , concu r

Ann oun ced May 10, 2012_____________________________________________________________________________

J ohn W. Su th ers, Attorn ey Gen eral , Ru ss ell B. Klein , First Ass ista n t Attorn eyGenera l, Alexan der C. Rein h ar dt , Ass ista n t S olicitor Gen eral , Denver, Colorado,for Petitione r-App ellee

Davis Gra h a m & Stu bb s LLP, David A. Ziss er, Mich elle M. Meyer, Den ver,Colorado, for Resp ond en ts-App ellan ts

Andrew I. Friedman, Denver, Colorado, for Amicus Curiae North AmericanSecu rit ies Adm in istra tors Ass ociat ion, Inc.

Sh oema ker Gh iselli & Sch wartz LLC, Pau l H. Sch wartz, An drew R. Shoem ak er,Boulder, Colorado, for Am icu s Cu riae HEI Resou rces, Inc.

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*Sit t in g by ass ignm ent of th e Chief J u st ice un der p rovisions of Colo. Con st . a r t .VI, 5(3), and 24-51-1105, C.R.S. 2011.

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1

In th is ju dicial review of a fin al cease a n d d esist order iss u ed

by petit ioner, Fred J . J oseph , Colorad o Secu rit ies Comm iss ioner

(Comm iss ioner), respon den ts , Mieka Corp oration , Daro

Blan ken sh ip, an d Steph en Romo (collectively resp ond en ts), app eal

th e order p roh ibitin g them from comm itting an y violat ion of th e

Colora do Secu rities Act (CSA), sect ions 11 -51 -10 1 to -90 8, C.R.S.

20 11 , in conn ection with th e offer an d s ale of an y secu rity in or

from t h e Stat e of Colora do. We affirm .

I. Background

Th is ca se a rises out of an order iss u ed by the Colorado

Divis ion of Secu rities (Divis ion) directing th e res pon den ts to sh ow

cau se why a fin al order s h ould not be entered a gains t th em in

conju n ction with th e alleged sa le of secu rities in viola tion of th e

CSA. More specifically, th e ord er alleged th at th e respon den ts h ad

viola ted pr ovision s of th e CSA by offering for s a le int eres ts in a join t

vent u re to develop an oil an d gas leas e in Penn sylvan ia (th e J oin t

Venture).

At the administrative hearing, division employee David

Swafford t est ified th a t h e h ad received ca lls from Rom o soliciting

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h is pa rt icipat ion in th e J oin t Ventu re, an d th at h e had n o previous

relat ions h ip with th e res pon den ts . Swafford testified th at Rom o

explained th at h e would ha ve to con tribu te $158,40 0 to pu rcha se a

u n it in th e J oin t Vent u re. After expres sing in terest in pa rticipa tin g,

Swafford received a p ack age from t h e resp ond en ts inclu ding a

Confiden tial In form at ion Memora n du m (CIM), which includ ed th e

propos ed J oin t Ven tu re Agreem en t. Th e CIM explained th at th e

total offerin g price was $3 ,960 ,000 , a n d th at if all twenty-five u n its

sold, th e J oin t Vent u re wou ld a cqu ire a forty-fou r percen t working

in teres t in t wo oil a n d gas wells. Accordin g to th e CIM, th e

res pon den ts developed th e J oin t Ven tu res well drillin g proposa l as

a gen eral par tn ersh ip u n der Texas law.

Alth ough Swafford did not u lt im at ely pu rch as e an in teres t in

th e J oin t Ven tu re, th e Division iden tified a n other in vestor in

Colorad o who h ad allegedly don e s o.

Followin g th e hea ring, th e Division, th rou gh a h earing pa n el

(Pan el), iss u ed a d etailed opin ion conclu ding, am ong other th in gs,

th at th e evidence presen ted establ ish ed tha t the in terests in th e

J oin t Ventu re were secu r it ies u nd er the CSA an d th at th ere had

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been a n offer an d a s ale of su ch s ecu rity in terest s. Reviewin g th e

su bs ta n tive econom ic realit ies of th e tran sa ction, th e Pan el

determined th a t th e J o in t Ventu re agreement const itu ted an

in vestm ent contra ct an d th erefore, in terests in th e J oin t Ventu re

con st i tuted secu rit ies un der the CSA. Becau se those secu rit ies ha d

n ot been registered with th e Division , th e Pan el recom m end ed th at

the Commiss ioner issu e a ceas e an d des is t order a gains t th e

res pon den ts to enjoin th em from violat in g the CSA.

In April 20 11 , th e Comm iss ioner affirm ed th e decision of th e

Pan el a fter a dop ting its fin dings of eviden tiary fa ct. Th e

Comm is sioner a ls o affirm ed th e Pa n els con clu sion s of la w, with two

exception s: (1) th e Com m iss ioner conclu ded th at th e stron g

presu mp t ion th a t genera l par tn ersh ips are n ot secu r it ies as foun d

in th e Williamson case [W illiam s on v. Tucke r, 645 F.2d 404 (5th Cir .

19 81 )] is n ot th e law u n der th e Colorad o Secu rit ies Act; an d (2)

a lthou gh the Panel ha d conclu ded tha t Romo ha d ac ted as an

u n licens ed s ales r epres en ta tive in violat ion of th e CSA, th e

Comm iss ioner conclu ded tha t he h ad a c ted as an u nl icens ed

broker -dealer or sa les r epres en ta tive in violat ion of section 11 -51-

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40 1(2), C.R.S. 20 11 . Th e va lidity of th ese two legal conclu s ions is

the pr imary issu e ra ised by the responden ts on appeal.

II. App lica ble St a n da rd of Review

App ellat e cour ts review a Comm iss ioners fin al order u n der t h e

st an da rd set forth in section 24-4-1 06(7), C.R.S. 20 11 . 11 -51-

60 7(1), 24-4 -10 6(11 ), C.R.S. 201 1. Accordin gly, we a ffirm th e order

u n less we fin d th at th e agen cy act ion was a rbi t rary and capr icious ,

an ab u se of discretion, or ba sed on fin dings of fact th at a re clearly

erroneous on the whole record , u n su pported by su bstan t ia l

eviden ce, or oth erwis e cont ra ry to la w. 24 -4-1 06 (7); see Law ley v .

Dept of High er Ed uc. , 36 P.3d 12 39 , 124 7 (Colo. 2001 ).

Fin din gs of u ltima te fa ct involve a conclu s ion of la w, or a

m ixed qu estion of law a n d fact, a n d s ett le th e righ ts an d liab ilit ies

of th e pa rties. S tate Bd . of Med . Exam ine rs v. McCrosk ey , 880 P.2d

11 88 , 1193 (Colo. 19 94). We u ph old th e Com m iss ioners fin dings of

u lt im ate fact th at h ave a reas ona ble basis in law an d ar e su pported

by su bs ta n tial eviden ce in th e record viewed a s a whole. Black

Dia m on d Fu nd , LLLP v. Jos eph , 21 1 P.3d 72 7, 7 30 (Colo. App .

2009); Wes tma rk As se t Mgm t. Corp. v. Jos eph , 37 P.3d 51 6, 520

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(Colo. App . 200 1). Su bs ta n tial eviden ce is s u fficien t prob a tive

eviden ce to adequa tely su pport a con clu sion , with out regar d to th e

existence of conflicting evidence. Black Dia m on d Fu nd, 211 P.3d a t

730 ; Wes tmark Ass et Mgmt., 37 P .3d a t 520.

Fin dings of eviden tiary fact, th e deta iled factu al or h ist orical

fin dings u pon which a legal determ in at ion r ests , will n ot be set

as ide u n less th ey ar e con tra ry to th e weight of th e eviden ce. S ee

McCros k ey , 880 P .2d a t 1193.

In contr as t , a lth ou gh we afford deferen ce to an agencys

reas ona ble in terpretat ion of its ena blin g statu te an d r egu lat ion s, we

are n ot boun d b y its con clu sion s of law. See Black Diam ond Fund,

211 P .3d a t 730

III. Exist en ce of Secu rities

Th e Pan el an d th e Comm iss ioner foun d th e responden ts s old

u n regist ered s ecu rit ies in violat ion of section 11 -51-30 1, C.R.S.

201 1, bas ed on th eir con clu sion th at th e J oin t Ventu re in terests

were in terests in an investm ent con tra ct . Th e respon den ts con tend

th at th is conclu sion was b as ed on a n erroneous view of th e law, or

al tern at ively, u n su pported by su bsta n t ial eviden ce in th e record.

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We do not ad dress th e first con tent ion an d disagree with th e

second.

A. Legal Fra m ework

It is u n la wfu l to offer or s ell a s ecu rity in Colora do u n less it is

registered or exemp t u n der th e CSA. 11-51-30 1.

Alth ough a n in terest in a general par tn ersh ip or a join t

ventu re is n ot defin ed as a secu rity un der s ect ion 1 1-51-201 (17),

C.R.S. 2011 , a secu rity in clu des a n in vestm en t con tra ct. 11 -

51-201(17); Feigin v . Digital In teractive A s s ociate s , Inc., 987 P.2d

87 6, 881 (Colo. App . 19 99 ). Wh eth er a par ticu lar tr an sa ction

in volves a secu rity depen ds on th e su bs ta n tive econ omic rea lit ies

u n derlyin g th e t ran sa ct ion, not on th e na m e or th e form of th e

ins t rument . Jos eph v . Via tica Mgm t., LLC, 55 P.3d 2 64 , 26 6 (Colo.

App . 200 2). App lyin g an econ omic realit ies a n alysis to th e J oin t

Ventu re, the Pan el foun d, an d th e Com m iss ioner ad opted its

fin din g, that th e J oin t Ventu re was an in vestm ent contra ct an d

th erefore a secu rity.

[A]n in vest m en t con tra ct . . . [is] [(1)] a con tra ct, tr a n s act ion

or sch eme wh ereby a p erson in vests h is m oney [(2)] in a com m on

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en terp rise a n d [(3)] is led to expect pr ofits s olely from th e efforts of

th e promoter or a th ird pa rty. S .E.C. v. W.J. How ey Co., 328 U.S.

293 , 298 -99 (194 6). In determ in in g wheth er an in vestm ent

con tract exists , Colorado courts ap ply this th ree-pa rt How ey test .

Low ery v . Ford Hill In v. Co., 192 Colo. 125 , 130-31, 55 6 P.2d 120 1,

12 05 (19 76 ).

Th e pa rties agree with th e Com m iss ioners fin ding tha t th e

pu rchas e of a u n it in the J o in t Ventu re was an investm ent

tra n sa ction in a com m on enterp rise. However, th ey disa gree with

h is fin ding th at an y profits were expected to com e from th e

en trepr en eu rial or ma n agerial efforts of a th ird p ar ty. S ee

Toothm an v. Free born & Peters , 80 P.3d 8 04 , 81 1 (Colo. App . 20 02 ).

Th e responden ts conten d th at th e Comm iss ioner erred in fin din g

th is th ird elem en t sa tisfied. According to th e res pon den ts, (1) th e

Com m iss ioner erred in n ot app lyin g the Williamson presumpt ion

an d (2) h is conclu sion was u n su pported by su bst an t ial eviden ce.

We address each content ion in tu rn .

B. Williamson Presumption

Th e CIM an d t h e J oin t Ventu re Agreemen t conta in ed th erein

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iden t ify th e J oin t Ventu re as a general partn ersh ip organ ized u n der

Texas law an d the in vestors as gen eral pa rtn ers. Th e Pan el an d the

Com m iss ioner an alyzed the J oin t Ventu re as a general partn ersh ip

on its face, an d th e part ies do not con test th at conclu sion on

appeal .1

Th e part ies contest wheth er this genera l par tn ersh ip was

illu sory an d wh eth er th e in vestors expected profits prima rily from

th e efforts of oth ers . In Williamson , 645 F.2d 40 4, th e Fifth Circu it

an alyzed this very qu estion . Firs t , it affirm ed tha t cou rts s h ou ld

analyze the third How ey factor in a general par tn ersh ip with an

u n ders ta n ding tha t th e econ omic reality is to govern over form a n d

th at t h e defin it ions of th e var iou s types of secu rit ies s h ould n ot

h in ge on exact an d litera l test s. Id . a t 418 ; see Feigin , 987 P.2d a t

88 1 (ad optin g focus on econ omic form over su bs ta n ce). Th e cou rt

then d iscu ssed s cen ar ios th a t m ight render a genera l par tn ersh ip

illu sory an d form u lat ed a flexible thr ee-pronged a n alysis to

1 We note, h owever, th at n ot all agree with th e resp ond ent s cu rs orysta temen t th at a join t ventu re h as th e sa m e legal ident i ty as ageneral partnership. S ee generally George E. Reeves , PartnershipS tatus of Joint Ven tures in Colorad o, 24 Colo. Law. 2553-56 (Nov.19 95 ) (discu s s in g th e divers ity of opinion in Colora do th a t a join tventu re is a p artn ersh ip).

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determ ine whether a genera l par tnersh ip was an investm ent

contract . The Williamson cou rt s ta ted :

A genera l pa rtn ersh ip or join t ventu re in terest can bedes igna ted a secu rity if th e in vestor ca n esta blish , forexam ple, th at (1) an agreem ent am ong the p art ies leavesso lit t le power in th e ha n ds of th e par tn er or ventu rerth at th e arra n gemen t in fact dist r ibu tes power as would alim ited pa rtn ersh ip; or (2) th e par tn er or ventu rer is soin experienced a n d u n kn owledgeable in bu siness affairsth at h e is in cap a ble of in telligent ly exercisin g hispa rtn ersh ip or ventu re powers; or (3) th e par tn er orventu rer is s o depend ent on s ome un ique ent repreneu ria l

or m an agerial abi lity of th e promoter or m an ager tha t h ecan n ot replace th e ma n ager of the en terprise or otherwiseexercise m ean in gfu l partn ersh ip or ven tu re powers.

645 F .2d a t 424; accordFeigin , 98 7 P.2d a t 882 . Th e Fifth Circu it

n oted th at a n investor claimin g th at a genera l pa rtn ersh ip is

actu al ly an in vestm ent con tract h as a difficu lt bu rden to

overcom e. 645 F.2d at 424 . Even thou gh the Williamson cou rt d id

n ot us e the term presu m ption, th is p roposit ion h as com e to be

known a s the Williamson presumpt ion . Se e Toothm an , 80 P.3d at

811 .

No Colorad o app ellat e cou rt h as express ly ad opted or rejected

th e Williamson presumpt ion . S ee Feigin , 987 P.2d a t 882 (ap plyin g

Williamsons econ omic reality test with out ad dres sing th e

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presumption); s ee also People v. Robb , 215 P.3d 12 53 , 126 2 (Colo.

App . 20 09 ) (retr oact ive a pp lica tion ofFeigin s h olding th at wheth er

a general par tn ersh ip is a s ecuri ty is to be m ad e on th e bas is of

s u bs ta n ce, or econom ic rea lity, not form did n ot viola te

defenda n ts du e process r igh t ; n ot ad dress in g th e presu m ption th at

a gen eral part n ers h ip is a s ecu rity). However, in Toothman , 80 P.3d

at 81 1, in determining tha t th e Williamson presu mp t ion does n ot

apply to limited liability partnerships, a division of this court

remark ed tha t an in teres t in a genera l par tn ersh ip is p resu med n ot

to be an investm en t contr act. Neverth eless , th e Toothman division

did n ot express ly ru le on th e a pp licab ility of th e Williamson

p resumpt ion .

Here, the Pan el conclu ded th at t h e factors cited in Williamson

a n d Feigin guided its econom ic realit ies a n alysis of th e J oin t

Ven tu re. With ou t app lyin g th e so-called Williamson presumption, i t

con clu ded th at interests in th e J oin t Ventu re con st i tuted s ecuri t ies .

Th e Pan el fu rth er s ta ted: Ou r con clu sion . . . wou ld n ot differ if th e

presu m ption out l in ed in Williamson were app lied to th e in terest s in

th e J oin t Ventu re an d th e facts of th is ca se.

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As n oted, th e Williamson cou rt a rt iculated th ree relevan t

factors in an y econ omic realit ies a n alysis of a genera l pa rtn ers h ip:

(1) whether a par tn ersh ip agreement d ist r ibu tes power am ong

pa rtn ers similar to a lim ited p ar tn ers h ip; (2) th e level of experien ce

an d kn owledge of th e par tn ers in th e par tn ersh ips b u siness affairs;

an d (3) th e dependen ce of th e partn ers on th e u n iqu e

entrepreneurial or managerial abilit[ies] of the promoter or

m an ager. 645 F.2d at 424. In con clu din g th e cha llenged genera l

par tn ersh ip in Feigin was a n investm ent cont rac t, the division relied

on th e followin g fa ctors : (1) th e soph is tication an d vu ln era bility of

th e solicited invest ors; (2) th at th e in vestors wou ld b e str an gers to

th e promoter a n d (3) s t r an gers to each other; (4) th at th e in vestors

wou ld b e geogra ph ically scat tered; (5) th at th e in vestors wou ld b e

solicited regardless of th e exist en ce of an y expert ise or pr ior interes t

in t h e par tn ersh ips bu sin ess ; (6) th at th ere wou ld be a very lar ge

nu mb er of par tn ers ; and (7) tha t th e ma na gement of the

pa rtn ersh ip wou ld be vested in a m an agement comm ittee with

expert ise. 987 P.2d at 883. Su ch factors are helpfu l in determ in in g

wheth er a par t icu lar t ran sa ct ion involves a secu rity . . . n ot on th e

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na me or th e form of the ins t ru men t . S ee Viatica Mgmt., 55 P.3d a t

266 .

Th e Comm iss ion er a dop ted a ll of th e Pan els fin din gs of fa ct

an d conclu sion s of law to th e extent th ey were con sistent with th e

ceas e an d desist order. Unlike th e Pan el, h owever, th e

Com m iss ioner express ly con clu ded th at th e Williamson

presu m ption does not apply in Colorado. Th e respon den ts con tend

th at th e Com m iss ioners r ejection of th e Williamson presumpt ion

was erroneous .

We need n ot address th is conten t ion becau se, con trar y to the

res pon den ts conten tion, we conclu de th e Com m iss ioners r efu sa l to

ap ply th e Williamson presu m ption was n ot disposi t ive.

Ou r d u ty on review is to decide a ctu a l cont rovers ies b y a

ju dgm en t wh ich ca n be ca rr ied in to effect , n ot to decla re pr in cip les

or ru les of law which ca n n ot affect th e m att er a t issu e before [u s.]

W ell Au gm en tation S ub d is trict v. City of Aurora, 221 P.3d 39 9, 416

(Colo. 20 09 ) (qu otin g B arn es v . Dis t. Cou rt, 199 Colo. 310, 312 , 607

P.2d 10 08 , 100 9 (19 80 )).

We m a y also a ffirm th e Comm iss ion ers lega l con clu s ion on

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an y groun ds s u pported by the record . Se e Rus h Creek Solutions,

Inc. v . Ute Moun ta in Ute Tribe , 10 7 P.3d 40 2, 4 06 (Colo. App . 20 04 ).

Here, th e Com m iss ion ers r ejection of th e Williamson

presu mp t ion was u nn ecessary to resolve whether th e J o in t Ventu re

in terests were s ecuri t ies b ecau se h e ad opted th e Pan els con clu sion

th at th e J oin t Ventu re in terests were secu rit ies , an d th e Pan el

explained th at its con clu sion wou ld h ave been th e sa m e if th e

presu m ption ha d appl ied. Th u s, the applicat ion of th e Williamson

presumption was not dispositive of the administrative proceeding

an d th e Com m iss ioners s ta tem ent of law concern in g it is n ot ripe

for ju dicia l res olu tion .2 S ee, e.g., Maryland Cas . Co. v. Mes s ina , 874

P.2d 1 05 8, 1 061 -62 (Colo. 199 4) (in a worker s compen sa tion

proceedin g, a d etermin at ion u n n ecess ary to the r esolu t ion of th e

cas e ha d th e ch ar acteristics of dicta, was n ot a pr oper su bject for

ap peal , an d th erefore was n ot preclu ded u n der collatera l estoppel

(qu otin g Resta tem ent (Second) of J u dgmen ts 27 cm t. h (19 82))).

C. Su bs tan t ial Eviden ce

2 Th e Division an d b oth a m ici cur iae concede th at we need n otad dres s th e Com m iss ioners r ejection ofWilliamson , desp ite u rgin gu s to do so.

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We next determ in e wh eth er th e Com m iss ioners d ecision was

su pported by su bsta n t ial eviden ce in th e record. See W estmark , 37

P.3d at 5 20 . In so doin g, we are m in dfu l of th e econ omic rea lit ies

factors ar ticu lat ed in Williamson a n d Feigin , d iscu ss ed ab ove.

After h ear in g the t estimon y of five witn ess es a n d exam in in g

nu merous exhib it s in t rodu ced a t th e hear in g, the Panel ma de

extens ive fin dings concern in g th e econom ic rea lit ies of th e J oin t

Venture. Se e Low ery , 192 Colo. at 1 30, 556 P.2d a t 120 5

(m an da tin g close atten tion to th e facts of each cas e an d a

substantive appraisal of the commercial realities of the offering).

Th e Pan el foun d th e J oin t Ventu re Agreemen t lacked th e

h allm ar ks of a tr ad itiona l bon a fide gen eral par tn ers h ip in th e

following ways:

Th e in vestors lack ed th e righ t or a bility to vote on t h ead m iss ion or exclu sion of n ew in vestors .

In vestors could n ot bin d th e J oin t Ventu re. No votes or other a ct ions h ad been ta ken by in vestors

con cernin g m an agement decision s even th ough th e J oin t

Ventu re was u n der way.

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Contra ry to the respondents conten t ion th a t the m an agemen tpowers a fforded t o in vestors in th e J oin t Vent u re Agreem en t

ar e typical of a genera l partn ersh ip, th ose powers are also

typically conta in ed in lim ited pa rtn ersh ip a greemen ts an d a re

similar to those gran ted to corpora te sh areh olders.

Th e Panel also foun d th at , a lth ough th e J oin t Ventu re Agreemen t

a llows for rem ova l of th e opera tor, Mieka LLC, th e per cen ta ge of

votes required precludes the investors themselves from executing

removal.

Th e Pan el also foun d th at th e responden ts d id n ot in qu ire in to

or a ss ess in vestors sp ecific kn owledge or s oph ist ication concern in g

th e J oin t Ven tu re activity or oil an d gas developm en t an d th erefore

cou ld n ot ass ess h ow an in vestor m igh t exercise m an agement

righ ts or p owers . . . in a n y in telligent or m ea n in gfu l way. Th e

Panel a l so determ ined th a t th e respon dents m arketed the

in vestm ent s a s pa ss ive an d delegat ed th e day-to-da y operat ions

an d m an agemen t to noninvestors .

Add itiona lly, th e Pan el fou n d th at , u n like in m ost tra ditiona l

bona fide pa rtn ersh ips, th e respond ents solicited a large nu mb er of

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in vestors with whom th ey h ad n o prior relat ion sh ip.

Th e Pan el also con sidered, bu t rejected as contr ollin g, tha t th e

J oin t Ven tu re Agreem en t p rovided for join t liab ility of a ll in ves tors ,

a trad ition al ch ar acter ist ic of gen eral pa rtn ersh ips . It conclu ded

th at th is factor d id n ot outweigh th e other econ omic realit ies of th e

Joint Venture.

Th e Pan el th en conclu ded th at th e J oin t Ventu re in terests

were in vestm ent contra cts , an d th e Comm iss ioner agreed.

The resp ond ents never theless contend tha t th e

Com m iss ioners u lt im ate conclu sion is u n su pported by an y

eviden ce tha t th e powers p rovided to th e ven tu rers were illu sory.

Th e respon dents argu e th at th e Division fai led to demon str ate

h ow th e J oin t Ventu re actu al ly worked beyond th e four corn ers of

th e CIM an d J oin t Ventu re Agreemen t . However, becau se th e J oin t

Ven tu re is in i ts ear ly st ages, as ses sm ent of th e econ omic rea lit ies

required review of th e docu men ts, an d th e respond ents th ems elves

emph as ized the im portan ce of th ese docu m ents as a s ta rt in g poin t .

Ind eed, the responden ts re lied on th ese docu men ts to rebu t th e

Com m iss ioners conten t ion th at th e J oin t Ventu re is an illu sory

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general partnership.

We th erefore con clu de th at th e docum ents con tained s u fficient

eviden ce to su pp ort th e Pan els a n d th e Com m iss ioners conclu sion.

Nor are we pers u ad ed th at t h e pre-forma tion a ctivit ies did not

su pp ort th e Pan els a n d th e Com m iss ioners a pp lication of th e

econ omic real it ies tes t to determ in e wheth er th e J oin t Ventu re was

an investm ent con tract . Th e respon dent s ha ve n ot cited, an d we

h ave not foun d, an y pu blish ed ap pellate d ecision h oldin g tha t pr e-

formation activities do not factor into the economic realities

analysis .

To the con tra ry, the res pon den ts extens ive pre-form at ion

activit ies s u pp orted th e Pan els a n d th e Com m iss ioners

con clu sion s th at join t ventu rers were depend ent on th e

res pon den ts en trepr en eu rial or m an agerial ab ility. To th e extent

th at th e respon dents argu e that th eir pre-forma tion disclosu res

ena bled join t ventu rers to ma ke in formed investm ent decision s, th e

Pan el was en t it led to reach con trar y in ferences ba sed on th is

evidence. See Law ley , 36 P .3d a t 1252.

Alth ough th e respon dent s also u rge us to review oth er factors

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n egat ing that th e J oin t Ventu re was an illu sory genera l pa rtn ersh ip,

ou r r eview is lim ited t o determ in in g wh eth er en ou gh eviden ce exists

to su pp ort th e agencys con clu sion with ou t regard t o the existen ce

of con flictin g evide n ce. Westmark , 37 P.3d a t 520 . Accordin gly, we

con clu de th at su bs tan t ial eviden ce exists in th e record a s a whole

to su pport th e Com m iss ioners d ecision s th at th e J oin t Ventu re was

an illu sory genera l pa rtn ersh ip a n d th erefore in terests in it were

investment contracts .

IV. Im proper Rulema king

Th e respond ents n ext con tend th at th e Com m iss ioners

rejection of th e Williamson presum pt ion was t an tamoun t to

ru lema kin g an d violated ru lema kin g procedu res m an da ted by th e

Colora do Adm inis tr a tive Proced u re Act (APA). We disa gree.

Noncomplian ce with th e s tatu tory requ iremen ts for

ru lem a kin g is fat al to [an ] a gencys r u le-m ak in g a ction s . Hom e

Bu ild ers As s n v . Pub. Utilitie s Com m 'n , 720 P.2d 55 2, 56 2 (Colo.

198 6). In determ in in g wheth er an agency h as regularly pu rsu ed its

sta tu tory au th ority, we are not boun d by the label at ta ched to

agency actions. Id . at 56 0-61 . Rath er, we review de novo th e

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su bstan ce of what th e agency ha s d one an d determine whether i t

com plied with th e sta tu te. Se e id.

Un der th e APA, a ru le con n otes th e whole or a n y pa rt of

every agency s ta tem en t of gen era l app licab ility an d fu tu re effect

im plemen tin g, interp reting, or d eclar in g law or policy or sett in g

forth th e pr ocedu re or pra ctice requ irem en ts of an y agency. 24 -

4-1 02 (15 ), C.R.S. 20 11 . An a gency is gener a lly requ ired to provide

n otice and gran t pa rt ies an opportun ity to part icipa te in th e

prom u lgation of an y ru le. 24 -4-103 , C.R.S. 20 11. An a gen cy is

exemp t from n otice an d h earing requ iremen ts, h owever, when it

promulgates an interpretative, rather than legislative, rule or

gener a l s ta tem en t of policy. 24 -4-1 03 (1), C.R.S. 20 11 .

An in terpr etive ru le serves a n a dvisory fu n ction. It explains

th e mean in g of a term in a sta tu te or other ru le, an d describes th e

type of factors which a n agency will cons ider in fu tu re

ad m in ist ra tive proceedin gs with out , however, bin ding th e agency to

a pa rt icu lar resu lt . Regu lar Rou te Com m on Carrie r Con ference v .

Pub. Utilities Com m n , 761 P.2d 73 7, 74 8-49 (Colo. 1988 ).

Even i f we as su m e tha t the Comm iss ioners pr onou n cement

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regarding Williamson am oun ted to a ru le as the respond ents

conten d, it wou ld be a n int erpr etative rath er th an a legislative ru le

an d th erefore exem pt from th e not ice and h earing rulem aking

requiremen ts. Th e abs ence of th e Williamson presu mp t ion d id not

bin d th e Pan el or the Comm iss ioner to a pa rt icu lar res u lt here. Nor

wou ld it so bind fu tu re decision m ak ers . In st ead , it serves to guide

a h earing pan els an alysis of wheth er in terests in a pa rt icular

genera l pa rtn ersh ip const itu te securi t ies . Cf. Ham m ond v. Pub.

Em ploy ees Re t. As s n, 21 9 P.3d 42 6, 4 28 (Colo. App . 20 09 ) (ru le

which requ ire[d] a pa rticular action (an d t h u s ach ieve[d] a

pa rticu la r r esu lt) was legislat ive ru le).

Accord in g, we reject th e resp ond ent s conten tion th at t h e

Comm iss ioner en gaged in impr oper ru lema king in violat ion of

sect ion 24 -4-103.

V. Brok er-D ea ler Violation s

The respondents next main ta in th a t , becau se neither th e

Pan el n or th e Com m iss ioner express ly foun d th at Mieka or

Blan ken sh ip was a broker-dealer or iss u er, the Comm iss ioners

finding that they violated section 11-51-401(2) was unsupported by

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th e eviden ce. We per ceive n o err or.

Und er s ection 1 1-51 -401 (2): Neith er a broker -dealer n or an

iss u er sh all em ploy or otherwise en gage an in dividu al to act a s a

sa les rep resen ta tive in [Colorad o] u n less th e sa les rep resen ta tive is

licen s ed or exem pt from licen s in g . . . .

Th e Pan el foun d th at Mieka a n d Blan ken sh ip engaged . . .

Rom o as an u n licens ed s ales rep res ent at ive in violat ion of th is

section.3 Th e Comm iss ioner a dopted th at fin din g.

Th e responden ts contend th at th is fin din g was erroneous

becau se th e Pan el an d th e Com mission er did n ot express ly fin d,

an d th e record does n ot es tab l ish , tha t Mieka a n d Blan kens hip

were iss u ers or broker-dealers. We disa gree.

An agencys fin dings n eed n ot be in a n y par ticu lar form , bu t

m ay be imp lied from other facts . Colorad o Office of Con s um er

Counsel v. Pub. Utilities Commn , 786 P.2d 10 86 , 109 1 (Colo. 1990 ).

Th e Pan els a n d th e Com m iss ioners conclus ion th at Mieka a n d

3 Th e Com m iss ioner foun d th at Mieka an d Blank ens h ip employedor oth erwise en gaged u n licensed sa les a gents to acts a s s alesrepresentatives in Colorado in violation of section 11-51-401(2),C.R.S.

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Blan ken sh ip violated sect ion 11-51-40 1(2) is ba sed on th e prem ise

th at th ey are iss u ers or broker-dealers .

However, even i f we ass u m e th at Mieka a n d Blan kens h ip a re

n ot iss u ers, we need only determine wheth er su bsta n t ial eviden ce

exist s to su pp ort the fin ding th at th ey ar e br oker-dealers. Th is

term conn otes in relevan t pa rt a p erson, n ot in clu ding a sa les

repr esen ta tive or iss u er, en gaged in th e bu sines s of effectin g

pu rch as es or sa les of secu rit ies for th e accou n ts of others . 11-

51 -201 (2), C.R.S. 2 01 1.

Th e Pan el foun d th at Rom o at tem pted to effectua te pu rch as es

an d s ales of th e in terests in th e J oin t Ventu re an d th erefore was a

sa les repres ent at ive. Th is fin ding of u lt im at e fact was b as ed on ,

am ong oth er eviden ce, Rom os tes timony th at h e con ta cted

poten tial in vestors to solicit th eir in vestm en t in th e J oin t Ven tu re

an d to qu al ify th em as ventu rers .

Th e Pan el fu rth er foun d th at Mieka a n d Blan ken sh ip engaged

an d a u th orized Rom o to act a s a sa les repres enta t ive on beh alf of

th e J oin t Vent u re. Th is fin ding was su pport ed by Rom os testimon y

th at h e was em ployed an d given a call lis t by Mieka an d m an aged

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exclusively by Blankenship in qualifying investors.

In m aking its fin din gs, th e Panel conclu ded th at a broker-

dealer m ay be con stru ed as engagin g in th e bu siness of bu yin g or

sellin g secu rit ies b y au th orizin g an d em ployin g a s ales

represen tat ive on h is or her beha lf. We conclu de tha t su ch an

in terpretat ion is reas ona ble. Se e Black Diam ond Fund, 211 P.3d a t

73 0 (affording deferen ce to a rea son ab le in terp reta tion).

Accordin gly, we con clu de th e Pan els fin din g, a dop ted b y th e

Com m iss ioner, th at Mieka a n d Blan kens h ip violated sect ion 1 1-51-

401 (2), was su pported by su bsta nt ial eviden ce and h ad a

reas ona ble bas is in th e law.

VI. Bread th of Ceas e an d Desist Order

Th e responden ts contend t h at th e Comm iss ioner exceeded h is

a u th ority un der s ection 11 -51 -60 6(1.5 )(d)(IV)(A) in ord ering th em to

ceas e an d d esist from an y violat ions or fu tu re violat ions of section

11-51-50 1, C.R.S. 2011 , an d oth er provision s of th e CSA becau se

s u ch viola tion s were n ot specifica lly alleged or fou n d. We are n ot

persuaded .

If th e Comm iss ioner reas ona bly fin ds th at a n y person a gains t

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whom he h as en tered an order to show cau se h as engaged, or is

ab ou t to engage, in acts or pra ctices cons titu tin g violat ions of

sec t ions 11-51-301, 11-51-401, or 11 -51-501, h e or s he m ay issu e

a fin al ceas e an d d esist order im posin g san ct ions , in clu din g

[d]irectin g su ch p erson to ceas e an d des ist from fu rth er u n lawfu l

a ct s or p ra ct ices . 11-5 1-6 06(1.5 )(d )(IV)(A).

Th e Com m iss ioner ordered th e respon dent s to im m ediately

cease an d desist from:

(a) In conn ection with th e offer an d s ale of an y secu rityin or from the State of Colorado, committing orcau sing an y violat ions an d a n y fu tu re violat ions of[section s] 11-5 1-30 1, -401 , an d -50 1, C.R.S., or

(b) Oth erwise engagin g in con du ct in viola tion of a n yprovision of the [CSA], [sections] 11-51-101, et seq.,

C.R.S.

In Black Dia m on d Fu nd, a division of this court analyzed

sa n ct ions in a ceas e an d desist order of th e Com m iss ioner

pra ctically iden tical to th ose ordered here. 21 1 P.3d at 73 8. Th ere,

th e Comm iss ioner ordered the respon dent s to ceas e an d desist from

cau sing an y violat ion s of sect ions 11-51-30 1, -401, a n d -501 , an d

en gagin g in con du ct in viola tion of th e CSA. Th e divis ion s ta ted

th at th e Comm iss ioner [e]ss en tially . . . ordered res pon den ts to

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comp ly with Colora do law. Id . We fin d per s u as ive th e divis ion s

ra tiona le. Sim ilar ly, h ere, th e Comm iss ioner did n ot order th e

respon den ts to cease a n d des ist from s pecific con du ct not

ad dress ed; rath er, h e ordered th em to cease an d desist from al l

viola tion s of th e la w. Accordin gly, we discer n n o a bu s e of

discretion. Se e id. (We also fin d n oth in g arb itr ar y or ca pr iciou s in

the terms of a cease an d des is t order tha t m an dates complian ce

with [the CSA].).

VII. Proced u ra l Violation s

Fin al ly, the r espond ents con tend th at th e Com m iss ioners

order is p remised on two procedur al defects tha t am oun ted to an

a bu se of discr etion . Sp ecifically, th ey a rgu e th a t (1) Swaffords

con du ct con st i tuted entr apm ent an d (2) th e Division deprived th em

of pr oper n otice con cern in g Swafford . Again, we disa gree.

A. Ent rapment

After th e Pan els h earing, th e res pon den ts filed a m otion t o

dism iss th e proceedin g again st th em on th e groun d th at Swafford

an d th e Division h ad cond u cted an u n dercover operat ion indu cin g

th em to offer to sell an in terest in th e J oin t Ventu re th at th ey wou ld

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n ot other wise ha ve offered. Th e resp ond en ts cha ra cterize th is

argu m ent a s a claim of entra pm ent . We declin e to ad dress th is

defense because i t is unavailable in administrative proceedings as a

m at ter of law. Se e Black Diam ond Fund, 211 P .3d a t 730

(a pp lica tion of legal sta n da rd s reviewed de n ovo); Jon es v . Civil

S ervice Comm n , 176 Colo. 25 , 30, 48 9 P.2d 32 0, 32 2 (19 71 ); s ee

als o Bou rie v. Dept of Highe r Edu c., 92 9 P.2d 18 , 21 (Colo. App .

19 96 ) (ad m in istr at ive pr oceedings r esu ltin g in corrective a ctions

again st complaina n t were ad ministrat ive in n atu re an d not

an alogous to crim in al prosecu t ion; therefore com plainan t was n ot

afforded criminal procedural protections under Jon es ); cf. Patty v.

Bd . of Med . Exam iners , 508 P.2d 11 21 , 112 9 (Cal. 1973 ) (defens e of

en tra pm ent availab le in Californ ia a dm in istr at ive proceedin gs to

revoke or su sp en d p rofess iona l licens es).

Th e respond ents were cha rged, an d sa n ct ioned, on ly with th e

violation of CSA rules and not with any criminal offenses.

Th erefore, th e defens e of en tra pm en t was n ot availab le to th em .

Jon es , 176 Colo. at 3 0, 489 P.2d at 322 .

B. Notice

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Th e resp ond en ts a lso conten d th at th e Division s

ch ar acterizat ion of Swafford a s a Colorad o in vestor kn own as DS

on th e pet it ion a n d witn ess lis t , ra th er th an an employee of th e

Division, violat ed t h eir s ta tu tory right to n otice of th e factu al a n d

legal ba s is for the petition . We disa gree.

Wh en an agency acts in a qu as i-ju dicial capacity, procedu ral

du e process r equ ires th at t h e agency give notice an d a fford a

h ear in g to a ffected ind ividu als. Bou rie , 92 9 P.2d at 22. However,

th e notice required in a n a dm in ist ra tive proceeding does not

requ ire th e sa m e form ality, specificity, an d d etail th at is requ ired in

a crim in al proceedin g. Id . Notice m u s t com ply with th e agen cys

own r u les a n d be s u fficien t to notify a comp laina n t of th e pu rp ose

of an d m at ters to be addressed a t a hear ing. Id .

Th e Division s en acting sta tu tes a n d ru les pr ovide th at , to

com m ence a cease a n d d esist order, it m u st file a pet it ion to sh ow

cau se, clearly an d concisely stat ing the facts which are th e grou n ds

for th e u n lawfu l act or pr actice in qu estion, th e relief sou ght, a n d

an y other ad dit iona l su pport in g in forma tion or docum ents .

Comm iss ion Ru le 51-6.3 .E.2, 3 Code Colo. Regs. 70 4-1. A pa n el of

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th e Division m u st h ear th e ma tter with in t en to th irty-five days

followin g s ervice of th e petition . Comm is sion Ru le 51-6 .3.E.4 .

Part ies m u st also file s ta temen ts ident ifyin g witn esses an d t h e

su bst an ce of expected test imony no later th an th ree days before the

h earing. Com m iss ion Ru le 51-6.3.E.8.

In February 2011, the Division filed a petition for order to

sh ow cau se a llegin g, in relevan t pa rt , th at Romo conta cted a

Colora do in vestor (h ere a fter iden tified a s DS) in s olicita tion of th e

J oin t Ven tu re an d on beh alf of Mieka . In March , three da ys before

th e hearing proceeded, the par t ies excha n ged witn ess lis ts . Th e

Division iden tified Swa fford b y his fu ll na m e, bu t n ot as an

em ployee of th e Division. Th e ad dres s l isted , however, was th at of

th e Division office an d iden tical to th at of an other witn ess who was

disclosed a s a Division at torn ey.

Th e res pon den ts ar gu e th at th e Division ins u fficien tly notified

th em of Swaffords iden tity an d em ploymen t in th e petit ion a n d

witn ess lis t an d t h at th e in su fficient n ot ice redu ced th eir t ime to

prepa re im peach m ent of th e witn ess from th irty days to three days.

However, th e ru les on ly provide for th ree da ys n otice of a witn ess s

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iden tity, an d th e resp ond en ts r eceived Swaffords full n am e an d h is

employment ad dress th ree days before th e hearing. A reas onab le,

diligen t in qu iry by th e respon den ts wou ld h ave disclosed th at

Swafford was a Divis ion em ployee. See Burman v. Richm ond Hom es

Ltd ., 82 1 P.2d 91 3, 9 19 (Colo. App . 19 91 ) (th e receipt of in qu iry

n otice cha rges a p ar ty with n otice of all facts th at a reas ona bly

diligen t inqu iry wou ld h a ve dis clos ed ). Accord ingly, th e

res pon den ts h ad in qu iry n otice of Swaffords fu ll iden tity with in th e

time a fforded by th e Divisions ru les .

Even if th e n otice was in su fficien t b ecau se t h e Division d id n ot

disclose Swaffords fu ll iden tity, the resp ond ent s h ave n ot s h own

prejudice. See Bar MK Ranches v. Yuetter, 994 F.2d 73 5, 740 (10th

Cir. 1 99 3) (Th e h a rm less err or ru le ap plies t o ju dicia l review of

ad m in istra t ive proceedin gs, an d errors in s u ch a dm in istra t ive

proceedings will not require reversal unless [p]laintiffs can show

th ey were p reju diced.); accordS he ep Mounta in Allian ce v. Bd . of

County Commrs, 27 1 P.3d 5 97 , 60 6 (Colo. App . 20 11 ).

Th e respond ents cross-exam in ed Swafford at th e hear in g

ab out why he was contacted a s a Colorado in vestor, wh ether h e ha d

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lied to Rom o abou t h is employm ent , a n d th e in forma tion h e

received from th e respon den ts. Th e respon dents h ave n ot

ar ticu lat ed wha t th ey wou ld h ave done differen tly if th ey h ad h ad

ad ditiona l t im e to prepa re Swaffords imp each m en t.

Nor did th e resp onden ts requ est a cont in u an ce after bein g pu t

on inqu iry n otice of Swaffords em ploymen t s ta tu s b y the witn ess

list.

Accordingly, becau se th e respon dent s h ave n ot sh own h ow

th ey were p reju diced by th e alleged n otice defect, we perceive n o

ab u se of discretion b y the Division or th e Com m iss ioner.

The order is affirmed.

J UDGE FOX an d J UDGE ROTHENBERG concu r.