The state’s high court finds that neither an offer to sell nor a sale of securities occurred in Kansas, thereby reversing an appellate court decision holding the defendants criminally liable for securities fraud.
The Kansas Supreme Court reversed the criminal convictions of the principals of a Kansas limited liability corporation for selling or offering to sell unregistered securities and committing fraud in selling or offering to sell securities. The prosecution had alleged that jurisdiction applied even though the defendants used intermediaries residing in California who made sales presentations in California and sold the securities from California to individuals who did not reside in Kansas (State v. Lundberg, July 19, 2019, per curiam).
Court’s holding. In the appeal, the court determined that the Kansas Uniform Securities Act (KUSA) did not allow Kansas courts to exercise jurisdiction over the criminal charges against the defendants. Specifically, the court found that the state was unable to demonstrate that the offer to sell securities or the sale was made in Kansas or the offer to purchase securities or the purchase was made and accepted in Kansas.
Underlying facts. The defendants in the case, David Lundberg and Michael Elzufon, were members or sponsors of four Kansas limited liability companies that owned real property and had "substantial operations" in Kansas. The LLCs prepared and issued promissory notes that were signed by the defendants and were offered and sold to individuals both inside and outside of Kansas. The offers outside of Kansas were facilitated by California-based selling agents, and all investors wired their investments to bank accounts in Minnesota. The trial court concluded that Kansas lacked territorial jurisdiction to prosecute the defendants for violations involving the out-of-state offers because the offers did not "originate from within" Kansas within the meaning of the Kansas Uniform Securities Act.
Reverse on appeal. A panel of the Court of Appeals reversed the trial court. The panel analyzed the jurisdictional question, applying language from Lintz v. Carey Manor Ltd. and Newsome v. Diamond Oil Producers, Inc. The panel noted that in Newsome, an Oklahoma state court held "that a sale or offer to sell a security originates from a state if 'any portion of the selling process' has occurred within the state." The panel also relied on a statement from Lintz that "'so long as there is some territorial nexus to a particular transaction, the [security] laws of two or more states may simultaneously apply." Accordingly, the panel held that the sales originated in Kansas, and thus Kansas had territorial jurisdiction.
Kansas Supreme Court sees it differently. The Kansas Supreme Court reversed the appellate court’s decision based upon its finding that: (1) the sales were not made in Kansas; and (2) the offers to sell did not originate in Kansas. The high court also rejected the appellate court's nexus analysis.
In reviewing whether any steps in the sales process occurred in Kansas, the Court found:
- All investment decisions, as reflected by the acceptances of the offered securities, occurred outside Kansas.
- The Kansas LLCs' acceptances were executed outside Kansas.
- Purchases were made by sending funds to Minnesota bank accounts.
- Paperwork evidencing the sale was signed in Minnesota and sent to investors from somewhere outside Kansas.
As no step in the sales process occurred in Kansas, the court concluded no jurisdiction could exist based on a sale occurring in Kansas.
No offer to sell. Moreover, the court determined "that an offer to sell was not made from Kansas—in other words, it did not originate from Kansas—under any of these formulations of the definition." Rather, the court found that Lundberg and Elzufon retained agents in another state and those agents made an offer on behalf of the company. The offers originated with the California intermediaries. No act comprising the sales offer process that underlies the charges against Lundberg and Elzufon occurred in Kansas.
Sufficient nexus not demonstrated. While the court recognized that the prosecution, the appellate court, and amici all relied on Lintz and Newsome to conclude that Kansas has a sufficient "nexus" to the alleged crimes to invoke Kansas jurisdiction, it rejected that analysis. "We are not persuaded by these cases because jurisdiction arises under the KUSA only if an offer or sale occurred in the state—not just because the transaction has some sort of "nexus" to the state" noted the court.
The consolidated cases are Nos. 114,897 and 114,898.
Attorneys: Kristafer R. Ailslieger, Office of the Attorney General for Kansas. David L. Miller (Ney, Adams & Miller) for David G. Lundberg. Kurt P. Kerns (Ariagno, Kerns, Mank & White, LLC) for Michael L. Elzufon.
MainStory: TopStory Enforcement FraudManipulation NewsFeed KansasNews
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