An Ohio Investment Fraud Attorney's Look into the Ohio Securities Act
Ohio State Representative Peter Beck was recently indicted on 16 felony state securities fraud charges for allegedly fleecing investors out of $200,000 in Christopher Technologies ("CTech"), a start-up software company. Beck, who is a certified public accountant, was CTech's Chief Financial Officer.
Beck is charged with violating the Ohio Securities Act, which was enacted back in 1913 to guard investors against fraudulent enterprises by regulating the sale and purchase of securities in Ohio. The specific provisions in the indictment against Beck include:
- Misrepresentations in the sale of a security, Ohio Revised Code 1707.44(B)(4);
- Fraud in the sale of a security, Ohio Revised Code 1707.44(G);
- Selling securities of an insolvent company without full disclosure, Ohio Revised Code 1707.44(D);
- Making a false statement about the company's financial condition, Ohio Revised Code 1707.44(J);
- Unlicensed sale of securities, Ohio Revised Code 1707.44(A)(1);
- Sale of unregistered securities, Ohio Revised Code 1707.44(C)(1); and
- Theft by deception, Ohio Revised Code 2913.02(A)(2) and 2913.02(A)(3)
According to a civil suit filed against Beck earlier this year, much of the investors' money was invested with TML Consulting. CTech was one of the companies in TML's portfolio. Beck allegedly sold ownership interests in CTech and solicited loans for this company. It has been reported that Beck and others used investors' money for personal advantage, including donations to Beck's political campaign and contributions to a church.
It is a crime in the state of Ohio to knowingly sell (or offer to sell) securities by way of any fraudulent act. The Ohio securities laws cover both affirmative misrepresentations and omissions of important facts.
To get a conviction for fraudulent misrepresentation under the Ohio Securities Act, Hamilton County Prosecutor Joe Deters and Ohio Attorney General Mike DeWine, who are jointly prosecuting the criminal case, will have to prove that in the course of offering to sell securities, Beck knowingly made or caused to be made a false statement, orally or in writing, concerning a fact about the investment that would have been important to a prospective investor.
For example, Beck allegedly misrepresented to investors that the financial condition of CTech was sound, when he was aware, or should have been aware, that the financial condition of CTech was very poor. He allegedly made these misrepresentations through financial statements that he prepared and distributed to prospective investors. According to reports, at the time the investments were made, investors were told by Beck that the money would be used to fund the business operations of TML and CTech, and it allegedly went to other purposes, such as donations to Beck's political campaign. It has also been alleged that Beck lied to investors about receiving compensation from CTech.
A person acts "knowingly" under the Ohio criminal securities statute when he represents facts to be different than he knows them to be or should have known them to be if he had exercised reasonable diligence to learn the facts. What this means is that "knowingly" is defined in terms of "negligently" for purposes of this law. Ohio courts have ruled that ignorance, inexperience, or poor business judgment is not a defense to a prosecution for securities violations. Indeed, motive is only one of several surrounding facts and circumstances which the jury can consider in determining innocence or guilt.
The false representation must concern an important and relevant fact and not something immaterial or trivial. A fact is material when there is substantial likelihood that the information would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Finally, the statement must have been made for the purpose of selling a security.
For the "omissions" charge, which is effectively fraudulent concealment, the prosecutors will have to prove that Beck knowingly withheld material facts for the purpose of obtaining money by false pretense, representation, or promise. Beck is accused of knowing that CTech was insolvent and yet not disclosing this to investors for the purpose of getting them to invest, and also for using investor funds for other purposes that were not disclosed to them.
Beck also faces charges for selling securities without a license, as well as selling unregistered securities. It is a crime to sell securities in Ohio without first registering them with the Division of Securities, unless the securities are properly exempt from registration. Additionally, people who sell securities in Ohio must be licensed by the state or properly exempted from such licensure. While there is a "knowledge" requirement on the charge that Beck sold unregistered securities, some Ohio courts have construed the statute to create a presumption of knowledge by the seller that the securities are unregistered. On the charge that Beck was not licensed to sell securities, there is no knowledge requirement and all the prosecutors will have to prove is that Beck sold a security without being properly licensed.
Since Beck faces a maximum of 102 years in prison if convicted on all the counts with which he is charged, it is likely that the criminal charges will get the most of his attention and resources. What many people do not know, though, is that the Ohio Securities Act also provides a civil recovery for aggrieved investors who were sold securities in violation of the Act. If timely filed, every person who is sold a security in violation of the Ohio Securities Act is entitled to a full recovery of the amount investment.
Beck may be liable to the individual investors even if he is not convicted of the criminal charges he faces because the provisions of the Ohio Securities Act relating to civil liability are construed liberally, especially where fraud is alleged. Civil liability under the Ohio Securities Act attached to every person who participated in or aided the seller of the securities in any way in the unlawful conduct. This broad language extends the potential for civil liability to those who are not subject to the criminal provisions of the Ohio Securities Act, since liability extends to any person who participates or aids the seller "in any way."
Given the language of the civil remedy statutes, Ohio courts have extended liability to officers and directors of the selling company because they can be deemed to have knowledge of misrepresentations or fraud where in the exercise of reasonable diligence, they should have secured such knowledge. Beck, as the Chief Financial Officer of CTech, could be deemed to have knowledge of fraudulent misrepresentations or omissions, even if he was not the one to make them.
Ohio Republican leaders have urged Beck to resign from office, but he is refusing to do so at this point. Beck has waived his right to an arraignment and essentially pleaded not guilty to all charges. He is currently out on an unsecured appearance bond, and the civil suit against him remains pending in the Hamilton County Court of Common Pleas but was "stayed" earlier this year. Joe Deters and Mike DeWine said in a press conference last week that more criminal charges are possible. The five-year statute of limitations was running so they proceeded with these counts, but DeWine said the investigation is not over.