Case Title: Trivectra v. Ushijima

Citation: 

Docket Number: 

State: hawaii

Court: Hawaii Supreme Court

Date: 2006-09-11T00:00:00Z

Document:
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and PACIFIC REPORTER ***

 

IN THE SUPREME COURT OF THE STATE OF HAWAT'T

 

GAY 11 es saga
:

 

200

 

IN THE MATTER OF
TTRIVECTRA, aka TRIVECTRA, INC.; CURTIS N. GUSHT; DONOVAN D. ODA
Respondent's-Appellants-Appellants,

RYAN S. USHIJIMA, COMMISSIONER OF SECURITIES, DEPARTMENT OF

COMMERCE AND CONSUMER AFFAIRS, STATE OF HAWAI'I; STATE OF HARAI'I,

DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS
Appellees-Appellees.

 

No. 25312

APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(Civ. No. 02-1-796-03; SEU-2000-003)

SEPTEMBER 11, 2006

 

MOON, C.J., LEVINSON, NAKAYAMA, AND DUFFY, JJ.; AND
ACOBA, J., CONCURRING SEPARATELY AND DISSENTING

AMENDED OPINION OF THE COURT BY LEVINSON,

‘The appellants-appellants TriVectra, Inc., Curtis N.
Gushi, and Donovan D. Oda (hereinafter, collectively, “the
Appellants”]* appeal from the August 27, 2002 judgment of the
circuit court of the first cixeuit, the Honorable Eden Elizabeth
Nifo presiding, affirming the February 14, 2002 final order of
Ryan S. Ushijima, Commissioner of Securities of the State of

Hawai'i Department of Commerce and Consumer Affairs (DCCA)

(hereinafter, “the commissioner”]. The commissioner concluded
+ According to the record, Gushi and Oda “are the owners and sole
‘reivectra

 

general partners”
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that the Appellants had violated several provisions of Hawai'i
Revised Statutes (HRS) ch. 485, the Uniform Securities Act, and
ordered them: (1) to cease and desist transacting in securities
until they came into compliance with HRS ch. 485; (2) to provide
their customers with the option to rescind the customers’
contracts with the Appellants: and (3) to pay a fine of
$100, 000.00.

on appeal, the Appellants allege: (1) that the

conmissioner’s determination that the Appellants’ activities

 

constituted the creation of investment contracts was clearly
erroneous and an error of law; (2) that the commissioner erred in
concluding that the Appellants had violated HRS ch. 485; (3) that

the commissione:

 

issuance of the final order without providing
the Appellants an opportunity to respond to the findings of fact
(FOFs) and conclusions of law (COLs) contained therein violated
the Appellants’ statutory rights under HRS § 91-11 (1993);?

(4) that the issuance of the final order sixteen months after the
issuance of the original cease and desist order (CDO) and eleven

months after the issuance of the hearings officer's recommended

 

+ HRS § 91-12 provide

 

Whenever in a contested case the officials of the agency who are
to render the final decision have not heard and examined a1] of the
evidence, the decision, if adverse to a party to the proceeding other
fhan the agency steel, shall not be made until a proposal for decision
Containing e statement of reasons and including determination of

issue of fact or law necessary to the proposes decision has been served
‘pon the parties, and an opportunity has been afforded to each party
auversely affected to file exceptions and present argument to the
Citiciols who sre to render the decision, she shell personally consider
the whele record of such portions thereof as may be cited by the
parties.

 

 

 

 
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order violated the Appellants rights to @ final decision within a
reasonable time, pursuant to HRS §§ 91-12 (1993)? and 485-18.7
and (5) that the imposition of a $100,000.00 fine on the

 

(2993)
Appellants was arbitrary, capricious, and an abuse of discretion.

 

For the reasons discussed more fully infra in part III, the
Appellants’ arguments are without merit. Accordingly, this court

affirms the circuit court’s August 27, 2002 judgment.

1. BACKGROUND
nt appeal arises out of activities of the

 

The pr
Appellants in running an internet-based business. Beginning in
late 1999, the Appellants sold online “shopping malls”
(hereinafter “OSMs”} that allowed private individuals,
(hereinafter “menbers”], to host a customized website containing

 

3 RS § 91-12 provides in relevant part:

‘The agency shall notify the parties to the proceeding by
Geiivering oF mailing a certified copy of the decision and order and
Sccompenying findings ena conclusions within @ reasonable time to each
party or to the party's attorney of record.

 

«RS § 485-16.7 provides in relevant part:

() Upon the issuance of a[ cease and desist! order by the
commissioner under subsection (a), the commissioner shall promptly
notify the respondent that an order has been issued and the reesons
Therefor snd that open the receipt of @ written request nade within
thirty days the metter will be set for a hearing to commence within
Hifteen business cays after receipt of the request unless extended by
the ceamissioner for good cause. During the pendency of any hearing
requested under this subsection, the cease and desist order shall remain
Ineffect unlese vacated or modified by the commissioner) provided that
any penalty shail not take effect until the final order is iseued.

(e) After the hearing, the commissioner shall issue 2 final order
that shall affirm, vacate, or nodity the order in effect during the
pendency of the hearing. s+ «

 

 

 

    
 

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Links to brand name retailers such as Disney and Warner Bros.
Members paid $79.00 for three months of service, which included
maintenance, server hosting, and assistance with web design.

TriVectra obtained the bulk of its links te brand-name
retailers through the services of Linkshare Corporation, which
allowed individuals to register as affiliates and download and
run links to retailers free of charge. Oda registered as an
affiliate in December 1999, but the commissioner found that,
under the terms of the Linkshare agreement, Oda was not
authorized to sublicense, transfer, or assign those links to
other individuals.

‘The terms of the agreement under which the mali owners
operated allowed them to make money either (1) through
commissions earned from online merchants whenever a purchase was
made by @ third party using @ link from the member's website or
(2) by recruiting other people to purchase OSMs. The Appellants
sold the OSM program through training meetings and TriVectra’s
website. In this way, the Appellants testified that they sold
between 300 and 400 Oss by early 2000. Participants later
testified that the focus of the meetings was on recruitment of
new OSM members rather than on the means by which to generate

© from OSM websites. During

 

sales commissions through purchai

 

+ Linkshare offered 4 Signature Program wherein affiliates could
designate their commissions co charities and ether thire parties, with
USnkshare approval. Though disputed by the Appellants, the commissioner found
that Oda had not registered uncer this program and that Trivectra, By.
Sublessing cde’: account to ite nenbere, was therefore in violation of ite
agreement with Lintshare. A review of the evicence does not dencnstrate thi
the'Soenissioner clearly erred in this finding, see infra section 111-B.4.b.

 

   

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the period leading up to February 23, 2000, @ total of $154.43 in
purchases was made through all OSMs combined, resulting in total
commissions of $6.25.

As for the second method of earning income,
selling OSMs to new customers, menbers were compensated for

recruiting additional mall owners through a multitiered program

 

 

of “Vectoring,” “Power Up,” and “Power Up Matching,” wherein the
successful recruiters were paid commissions depending on the
number of new OSM buyers they secured for TriVectra.

TriVectra’s marketing materials emphasized large potential
returns for members through the OSM sales program, denonstrating
how commissions totaling $2,097,144 were possible, presupposing
the recruitment of 393,216 new investors. The Appellants later
informed DCCA investigator Mary Donahue that, of the seventy-

nine-dollar fee, Trivectra applied approximately thirty dollars

 

to technical support costs and fifty dollars to paying
conmissions to individuals who sold additional OSMs to new
members.

Following DCCA’s investigation, on October 11, 2000,
the commissioner issued a Preliminary CDO against the Appellants.
Pursuant to an October 18, 2000 request for a hearing filed by
the Appellants, DCCA Hearings Officer Richard Marshall conducted
a hearing on Decenber 18 and 19, 2000.

One OSM menber who testified at the hearing was Lori-
Ann Wavares, who attend a TriVectra training meeting in late
1999. According to Navares, at the meeting Gushi emphasized
earning conmissions through the sales of OSMs to cthers rather

: .
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than how to earn commissions through operating an OSM. At the
meeting, Navares bought ten OsMs for a discounted total of
$600.00. She testified that Gushi told her that “if we owned ten
stores, I think [we] were part of a certain program where (4e]
would get a certain commission off of what the company made.”
Navares also testified that, at a subsequent meeting in early
2000, she paid Gushi an additional $3500.00 for at least forty

new OsMs, in reliance on a promise from him to locate buyers for

 

those OsMs
o ny did you pay $3500?

(Mavares): Because that was another special they had: that if -~
there wat only 3 certain amount of people, and if you
Signed up and you paid 62800 -~ ¥ think «O-something
Stores, that they would find store owners for you.

 

 

@: Who told you this?

[mavares): Mr. Gushi.

 

9 Did Mr. Gushi oF Hr. Oda oF anyone el
other store omers for you?

(Wavares]: I think they found » couple:

° But not 40?

(tavares): Nop not that I know of

Navares testified during cross-examination by the Appellants’
counsel that Gushi did not represent that he already had the new
buyers lined up, but rather that he would endeavor to locate
some, and that no specific tine frane for providing them was
established. It was shortly after Navares paid the $3500.00 that
DCCA issued its Coo.

‘The Appellants maintained that TriVectrs did not
require an individual to purchase an OSM in order to earn

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commissions on the sale of OSMs to others. However, Navares
testified regarding the issue, in response to inguiries from

Marshall, as follows:

(Marshall): So St yas your understanding thet you
Could bring people to meetings, lets say,
fo'promcte dey and if they joined ~~ sf
Gnotgh cf them Joined, you wouls get money
for having brought them in, and their
faving become members, even if you never
Bought inte the mall web site yourself?

 

(tavares}: No, you couldn’
(marshall): You could not?
INavares): ight:

Iwarsnel1}: So you had to buy into the mall web site
saree?

(ievares}: Yes.

At the hearing, as part of DCCA’s argument that the
Appellants engaged in fraudulent activity in violetion of HRS ch.
495, the Appellees asserted that TriVectra received the osM
marketing Links free of charge from Linkshare, that Oda’s
practice of assigning those links to members as subaffiliates was
in violation of Oda’s agreement with Linkshare, and that
Trivectra never revealed to potential members that the OSM links
could be obtained directly from Linkshare free of charge.

‘The Appellants admitted that the OSM service provided
to Trivectra’s customers was available from Linkshare free of
charge and that they never so informed the mebers. Oda
asserted, hovever, that, while Linkshare’s software was free,
additional technical expertise, provided by TriVectre, was

necessary to create and maintain a viable, attractive website.
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The Appellants also contested the DCCA’s assertion that TriVectra
assigned subaffiliate links to members in violation of Oda’s
agreenent with Linkshare.

Early in the hearing, DCCA called as a witness
Linkshare’s General Counsel, Miriam Gadden, who testified by
telephone from the mainland that Linkshare had no record of any
agreenent with Oda to allow him more than one affiliate
membership and that hosting 300 to 400 menbers under his account
would be in violation of his agreement with Linkshare. She
admitted on cross-examination that Linkshare alloved affiliates
in its Signature Program to secure numerous subaffiliates; she
further testified, however, that as far as she knew, Linkshare
had no written agreement with Oda approving his participation in
that program.

On the other hand, the Appellants adduced evidence that
Oda contacted Jean-Louis Richiardone at Linkshare on January 24,
2000 and submitted an application for the Signature Program,
receiving indications from Richiardone that approval would be
forthcoming within twenty-four hours. In addition, the
Appellants cited to Linkshare internal correspondence from the
company’s chief information officer stating that Trivectra’s
account was operating in the Linkshare software system under the
Signature Progran. Finally, the Appellants raised with Gadde
the contents of Exhibit B, printouts from Linkshare’s monthly
affiliate report compiled for Trivectra, containing more than one
hundred epparent menber identification numbers under the

‘Trivectra umbrella.
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Gadden refused, however, to concede that TriVectra was
duly registered under the Signature Program, asserting that the
chief information officer's statement did not necessarily
establish that a legal agreenent existed between Oda and
Linkshare, and, inasmuch as she did not have a copy of Exhibit B
in front of her, she refused to draw any conclusions based on
anything contained in the exhibit as to Oda’s membership in the
Program. Trivectra’s counsel did not respond to Gadden’s
repeated invitations to fax Exhibit 8 to her. Finally, the

following exchange took place:

ae Let me eek you ~~ the question T have is
Feslly 2 general one, ond that is: if
this report shows ID numbers on the
report ==

 

But menber ID nay be just affiliate
{deneitication numbers, It doesn’t

tobe a
Gubaffiiiate, So, for instance, Trivectra
Donovan Oda, they'have a menber 2D No. SID
Dose). That's their weaber TD number.

   

   

° Wiel, Jet me read off sone Member 1D
hunbere here. it says, for example, O001~
000, and theze’s ancther menber £0 No
‘002-0003,

 

 

But there's # prefix to then. Does it say
SID or MID[2] ‘what's the prefix before
the punber [7]

 

Let me ack you this: Assuming that you
have a senber ID for an affiliate, there
Mould be only one menber ID; correct?

 

(Gedden}: Right, But with respect to what you are
aeking ne to identity, it's probably
preceded by either af MID or an SID, 60 7
fan know what it is

Let me just ask you a general question.
If an affiliate Linkshare was dealing
with, just one affiliate without any
Subsfeilistes, there would cnly be ene

 

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mmenber ID number; is that correct?

IGedden): There's only one mesber ID number for an
afsilisce.
°: If an affiliate has sub-affiliates, there would

bbe funmerous of multiple member 10 numbers; would
that be correct?

adden}: There would be another Ul identification,
So it would either eay, "Subaffillate
Identification,” or "Sub 1D Number,” or
something that will indicate thet it is @
Subaftiiiate, That’s why 1 am asking if
you would teil ne what the prefix Je) then
T'can better help you.

 

 

° You have answered my question so let me
move on to something else here:

With regard to Gadden’s comments, it should be noted that there
are no prefixes to the member 1D numbers listed in Exhibit B.

To support the DCCA’s contention that the Appellants
violated the specified provisions of HRS ch. 485, the Appellees
entered an affidavit into evidence from Henry Tanji, a securities
compliance specialist with DCCA, averring that a diligent search
of DCCA records reflected neither that Gushi or Oda were
registered as securities dealers with the commissioner nor that
TriVectra’s OSM marketing program was registered with DCCA as a

curity, nor that Trivectra’s advertising materials were

 

similarly registered,
On January 10, 2001, Marshall issued FOFs, COLs, and a
recommenced order proposing that the comissioner dissolve the
October 11, 2000 CDO and dismiss the matter. Marshall's
recommended order, applying the long-standing test for what

constitutes a “security” articulated in State ex rel, Comm'r of
Sec. v. Hawaii Mkt, Ctra, Inc, $2 Haw. 642, 485 P.2d 108 (1971),

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see infra section III.A, concluded that the Appellees had failed
to establish by @ preponderance of the evidence that the
Appellants had offered or sold “investment contracts” or
wsecurities” so as te bring their activities within the purview
of HRS ch. 485. Marshall found that the subscription fee of
379.00 for three months was for the purchase of a product and not
initial value paid as an investment and, hence, that the first
prong of the Hawaii Mkt, Ctr. test was not fulfilled.

DCCA filed exceptions to the reconmended order on
January 26, 2001, and TriVectra filed a statement of support on
February 12, 2001, requesting oral argument. On April 27, 2001,
both parties presented oral arguments before the commissioner,
pursuant to Hawai" Administrative Rules (HAR) § 16-201-46
(1990).* on February 14, 2002, the commissioner, “after
carefully considering the [r]econmended [o]rder, exceptions,
statement in support, oral arguments, and evidence presented at
the hearing, and listening to the tape of the hearing,” issued 2
final order. The final order set forth modified FOFs and COLs
and concluded that the Appellants’ program did constitute the

© wan § 16-203

 

6 provides:

Whenever written exceptions have been tinely filed and e party has
requestes the oppertunity to present oral argument, ail parties to the
reauesGings shell be offorded the opportunity to present, cral argument
Perec a Gthorsty concerning the recommended decision. The authority
Mall’personaily consider the whole record or portions of the record ss
sna ave been cited by the parties either sn support of or in opposition
BY pave emendes decision . +. Within @ reasonable tine efter
BephRtat hes seen heard, the authority shall issue a written final
ZEEQENGR Ba craecs either acopting, noditying, or reversing, in whole
Sei ares the hearings officer's recommended decisicn:

 

 

 

 

 

Ayailable at http://hawsis..gov/dece/areas/oah/mein/har /hax_cah_201.p0f-

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sale of securities, pursuant to the four-pronged Hawaii Mkt, Ctr
test, see infra section III.A. In reaching his conclusion, the
commissioner determined that $49.00 of the $79.00 three-month fee

was in excess of the value of the web-based shopping mall

 

business and hence was “initial value” paid by purchasers as an
investment in the venture, pursuant to the first prong of the
test.

Based on the determination that the Appellants were
selling securities, the commissioner concluded that they had
violated several sections of HRS ch. 485: (1) HRS § 485-8 (Supp.
1998); (2) HRS § 485-14 (Supp. 1996);" and (3) HRS
§5 485-25(a) (1), (2), (3), and (7) (1993). The commissioner’ s

 

7 urs § 4as-s

 

provides in relevant part

 

Tt shall be unlawful for any person to sell or offer to sell in
the state, any security except of a class exempt under [HRS 8) 405-4 or
onless sold cr offered in any transaction exempt under [HRS §] 485-6 oF
unless it isa federal covered security, unless the security has been
Fegistered by notification or by qualification ae hereinafter provided.

 

 

+ ans § 485-14 (a) provides in relevant part that “(iJt is unlawful

for any person te transact business in this state as @ cealer. . . (or)

lesperson. . . unless registered under this chapter.” Eftective Hay 20,
100, July 2, 200%, Joly 1, 2002, and June 15, 2004, the legislature amended
ins 5 485-14" tn respects immaterial to the present matter. See 2006 Haw.
Sess. L. het 121, s§ 57 ane €2 st 90°94; 2002 Haw, Sess. L. Act 32, $63 end
5 at 102-03; 2001 Haw. sees. L. Act 16, $63 and 16 at 31-37, 38, ACE 128,
$$ 104 and 108 at 334-38; 2000 saw. Sess. L. Act 145, $6 5 and € at 295-300,
302

 

    

     

 

 

 

 

   

5 RS § 485-25(a) provides in relevant pe

(a) It is unlawful for any person, in connection with the offer,
sale, of purchase... of any security, . inthe State, directly or
neizectly)

(2) Te employ any device, scheme, oF

12) jake any untrue statement of a material fact or omst te

 

3 material fact necessary in orser to make the
statenents made, in the light of the circumstences under
Teont inves

 

 

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final order required the Appellants: (1) to cease and desist
from making any offers to sell or purchase securities until they
came into compliance with HRS ch. 485; (2) to rescind at the
option of Hawai'i residents all contracts regarding the purchase
and (3) jointly and

 

and sale of the securities in question;
severally to pay a fine of $100,000.00.

on March 26, 2002, the Appellants filed 2 notice of
appeal in the first circuit court. On August 27, 2002, the
circuit court entered judgment, affirming the commissioner’ s
final order. On September 10, 2002, the Appellents filed a

timely notice of appeal to this court.

TT. STANDARD OF REVIEW

Review of @ decision made by the circuit court
Upon ies review of an agency’ s decision 1s 0
Cconéary appeal. . = (7]nie court must
Sccermine whether the circuit court was Fight oF
Wing in its secision, applying the standards
bet forth in HAS § 91-14(6) [(1993)] to the
agency's decision.

 

 

Dee faval't 217, 229, 983 Pad 1915, 1327
Tiss ans § 1-14, entitled “Judicial review of
* provides in relevant pari
G) Upon review of the record the
court say affirm the decision of the

       

+4. scontinved)
Which they are made, not misleading:
ear Sayact, practice, oF course of business which

 

(3) Te ene
Tperates cr would operate ae e fraud or deceit upon any
persons

(7) Fe dssue, circulate, or publish any advertising matter

Unless a’ copy thereof has been previcusly filed with the
Ridice Oe the commissioner, oF unless the conmissioner hes
Ep tule or order exempted the filing of any advertising
material

 

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‘agency or renand the case with
instructions for further proceedings: or
fe or modify the decision and
‘Substantial rights of the
een prejudiced
Saninistrative findings,
conclusions, decisions, or orders ai
(2) in wieletion of conststutiona
oF statutory provisions; or

   

 

 

(2) In excess of the statutory
authority or jurisdiction of
fhe agency; of

(3) Made’ upon ‘uniawfut procedure:

(4) Rétected by other error of

law) or
(8) Clearly erroneous in view of

the relisble, probative, and

Substantial ‘evidence on’ the

whole record? oF
(6) Arbitrary, oF capricious, oF

erized by abuse of
‘ion oF clearly
tnwarranted exercise of
Giscreticn.

“(Winder HRS § 91-14(9), (COL) are reviewable under
subsections (1), (2), and (4)? questions regarding
Procedural defects under subsection (3); [FOFs) under
Subsection (5); and an agency's exercise of discretion
Under subsection (€)." ip ze iavatian elec, Cou 82
Nawai's 438, 465, 918 F.2d SEL, S67 (1586)

 

 

 

 

jonda_v of tr: rt et. si

Hawai", 108 Hawai'i 212, 230, 116 P.3d 1158, 1173 (2005) (some

 

internal citations omitted) (some brackets in original).

Furthermore,

[ap FOF or 2 mixed determination of law and
fact is clearly erroneous when (1) the record Lacks
Substantial evidence to support the finding er
determination, oF (2) despite substantial evidence te
support the finging or ceterninstion, the appellete
court is left with the definite and firm conviction
that a mistake has been made. We have defined
“substantiel evidence” ae credible evidence shich is
of sufficient quality and probative valve to enable &
person of reasonable caution to support s conclusion.

Freites v. Aduin. Dir. of Courts, 108 Hawai'i 31, 36-37, 116 P.36

673, 678-79 (2005) (internal citations omitted) (quoting in re

 

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Wai‘ola 0 Moloks', Inc., 103 Hawai'i 401, 421, @3 P.3d 664, 684
(2004) (quoting In ze Water Use Permit Applications, 94 Hewai't

97, 118-19, 9 P.34 409, 430-31 (2000))).
ITI. pIScuSSION

£0) he A were enga he sa

securities.
In Hawaii Mkt, Ctr,, $2 Haw. 642, 485 P.2d 105 (1971),

this court articulated a four-pronged test to determine when a
schene or transaction involved securities or investment contracts
within the purview of the Uniform Securities Act, HRS ch. 485,

holding that, for purposes of the act, an investment contract is

created whenever:
(2) an offeree furnishes initial value to an
efterer, and
(2) S portion of the initial value is eubject to the
Estke of the enterprise, and
(3) the furnishing of the initial value is induced
by the offeror’s promises or representations
which give rise te s reasonable understanding
that a valuable benefit of sone kind, over and
above the initsal value, will
Offeree ae a result of the opt
anc
does not receive the right to
\ctical and actual contrel over the
jecisions of the enterprise.

 

 

 

 

 

     

enagerial
52 Haw. at 648-49, 485 P.2d at 109 (footnote omitted). In
Getermining the existence and anount of “initial value” paid in
by an investor who makes a preliminary purchase to participate in
the program, we focused on the disparity between the amount paid
for the product and the wholesale cost of that product. 52 Haw,

at 649, 485 P.2d at 109-10.

as
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‘The Appellants contend that the commissioner erred in
concluding that TriVectra’s business product was an investment
contract and hence subject to HRS ch. 485, In particular, they

argue that the commissioner: (1) clearly erred in finding that

 

49.00 of the $79.00 fee was used to pay commissions on the sale
of additional OsMs; and (2) erred in concluding that the $49.00
was “initial value” under the first prong of the Hawaii Mkt, Ctr.

test.

 

1. Furnishing initial value

a. SBrofit” wv “initial val

The Appellants argue that the $79.00 fee was a fair
market price for the OSM website supplied by Trivectra. They
further contend that, assuming arguende that the $79.00 fee
exceeded the website’s operating cost, it should nonetheless be
deemed economic “profit” and not “initial value” paid in by the
member as part of an “investment contract.”

What determines whether income paid to an enterprise is
“profit” -- and hence disposable by the business as it sees fit -
- or “initial value” -~ and hence, if all other criteria are met,
@ security governed by HRS ch. 485 -- is, according to Hawaii
Mkt, Ctr., the purchaser’s expectation that money paid to the
company is “given in consideration for the right to receive

 

 

HRS § 485-133) (1993) defines a security in relevant pert as “any

investment contract.” Effective Joly 20, 1998, Hey 30, 2000, July 7,
2063, and July 1, 2004, the legislature anended HRS § 488-1. in respecte,
Snmeterial to the present matter. Seg 2004 Haw. Sess. L. Act 121, $8 54 and
62 at 464-65, 496712003 How. Sese. L. Act 17, 66 1 end 3 at 25-26; 2000 Haw.
Sees. L. Act’ 149, $6 2 and € at 291-92, 302; 1996 Haw. Sees. L. Act 258, $9 2,
3, and 18 at 680-82, B93.

 

 

 

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future income from the corporation.” 52 Haw. at 650, 485 P.2d at
110. .

‘The Appellants maintain that TriVectra did not require
the purchase of an OSM in order to earn commissions selling oss
to others. Therefore, they contend, any sum in excess of
operating costs contained within the $79.00 fee constituted
profit to TriVectra that could be applied as TriVectra management
saw fit, including paying commissions to individuals who sold
additional OSMs through a standard sales representative
arrangement. It was therefore wrong, they maintain, for the
commissioner to conclude that any part of the $79.00 fee
constituted payment as part of an investment contract.

‘There is substantial evidence in the record, however,
that menbers were required to purchase an OSM in order to receive
commissions for selling additional OsMs to third parties.
Trivectra’s marketing information explains that commissions on
new OSM sales are a “(mJallowner [bJenefit[].” The marketing
materiale state that “TriVectra Mall Owners earn income in 2
major ways: (1) Direct Commissions on products and services sold
at their Malls(; and) (2) Leverage and Residual incomes selling
TriVectra [0SMs},” and that “Mall Owners may also leverage their
incomes by selling or sponsoring other persons to open their own
TriVectra (OSMs].” Nelson Hirata, the DCCA investigator assigned
to the case, testified that, at the TriVectra marketing meeting
he attended, the Appellante spoke of how menbers could earn
further conmissions by selling OSs to others. Nothing in the

record reflects that at that meeting the Appellants ever

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disavowed the proposition that OSM ownership was a prerequisite
to earning commissions. Most importantly, Navares testified that
the purchase of an OSM was a prerequisite for earning OSM sales
commissions. Therefore, despite Gushi’s and Oda’s testimony to
the contrary, the commissioner was not wrong in concluding that
any excess profit was in fact initial value “given in
consideration for the right to receive future income from the
corporation,” see 52 Haw. at 650, 485 P.2d at 110.
b.

hat 849.00 of the $7 3

value.

‘The Appellants maintain that $79.00 was a fair market
price for the OSM product in 2000 and, hence, that there was no
excess “initial value.” Nevertheless, the commissioner concluded
that, of the $79.00 fee, $49.00 was initial value investment,
based on the Appellants’ admissions that the actual operating
cost of the website was approximately $30.00 per member and that
the Appellants employed the remainder to pay commissions to
members selling additional Osis.

Under the Hawaii Mkt, Ctr, test, in determining
“initial value” in the context of purchases required to obtain
menbership in a venture, the court does not compare the fair
market price of the product a new member is required to purchase
to the amount the new member is actually required to pay for that
product; rather, the court compares the wholesale price of the
product to the price paid by the participant. 52 Haw. at 649,
485 P.2d at 109-10, ‘The Appellants admitted that the OSM service

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provided to their customers was available from Linkshare free of
charge, although Oda asserted that significant expertise was
required to transform the Linkshare software into a viable,
attractive website. Given that the wholesale cost of the
Linkshare software employed by TriVectra was zero, even allowing
for Trivectra’s technical input, the commissioner was not wrong
in concluding that at least $49.00 was “given in consideration
for the right to receive future income from the corporation,” $2
Haw. at 650, 485 P.2d at 110, particularly in light of the
Appellants’ admission that approximately that amount was applied
toward OSM commissions. Accordingly, the commissioner was not
wrong in concluding that $49.00 of the $79.00 paid in by members
was initial value pursuant to the first prong of the Hawaii Mkt.
cer. test.

2. Subject to the risks of the enterprise

Pursuant to the second prong of the Hawaii Mkt. Ctr.
test, an investment contract is formed when “a portion of the
initial value is subject to the risks of the enterprise.” $2
Haw. at 648-49, 485 P.2d at 109. The Appellants contend that the
second prong addresses the start-up phase of a business, when
there is a risk that the enterprise will fail to raise sufficient
capital to become operational, and that, therefore, because
reivectra was @ fully capitalized business, any monies paid in by
menbers did not fulfill the second prong as being “subject to the
risks of the enterprise.”

It is true that the retail establishment at issve in

Hawaii Mkt. Ctr. launched operations with only $1000.00 in
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financing and sought venture capital through the participation of
5000 “founder-nenbers” drawn from the public. $2 Haw. at 644,
485 P.2d at 107. Hawaii Mkt, Ctr, made it clear, however, that 2
product’s status as a “security” did not hinge upon whether the
business seeking the investment was fully capitalized. Rather,
the focus is properly “on the economic realities of security
transactions: that is, ‘[t]he placing of capital or laying out
of money in a way intended to secure income or profit from its

employment’ in an enterprise.” 52 Haw. at 647-48, 485 P.2d at

109 (quoting Minnesota v. Gopher Tire & Rubber Co., 177 N.W. 937,
938 (Minn. 1920)). “This subjection of the investor's money to

the risks of an enterprise over which he exercises no managerial
control is the basic economic reality of a security transaction.”
52 Haw. at 648, 405 P.2d at 109 (citations omitted). Although
the solicitation of investment capital is perhaps more pronounced
when it involves initial venture capital, a fully funded business
operation can issue investment contracts or securities in order
to raise capital just as readily as @ foundling, underfunded
venture can. As this court said in Hawaii Mkt. Ctr., “any
formula which purports to guide courts in determining whether @
ecurity exists should recognize the essential reality and be
broad enough to fulfill the remedial purposes of the Securities
Act.” Id. Under the second prong of the Hawaii Mkt, Ctr. test,
therefore, an investment contract is formed if the capital paid
into the business by investors, in order to derive income from
the use of that capital in the business, is put at risk in the

event the business venture fails.

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In the present matter, under TriVectra’s program, the
payment of initial value was required for an individual to
participate in the OSM commission program, see supra section
qII.A.1.a. While, in order to earn commissions, it was necessary
that a member make actual sales, by requiring the initial
investment payment, TriVectza transformed garden variety sales
representatives into equity holders in the enterprise. As such,
the menbers could only realize a return if Trivectra remained
viable and sufficiently capitalized to honor its OSM commission
commitments. Accordingly, the commissioner was not wrong in
concluding that the menbers’ initial value investments were
subject to the risks of the enterprise.

3. ef court rea! he e oe

Ss" _product ituted s “security” under

The Appellants do not contest the conmissioner’s
conclusions pertaining to the final two prongs of the Hawaii Mkt.
Gtr. test, dues, that members’ participation was induced by
promises of large future returns and that the members exerted no
control over TriVectra’s operations or management. Inasmuch as
the first two prongs of the Hawaii Mkt. Ctr. test have been
fulfilled pursuant to the preceding analysis, the circuit court
was therefore correct in affirming the commissioner's COL that
nrivectra’s program constituted an investment contract and hence

‘a “security” under HRS § 485-1(13), see supra note 10.

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8. The circuit court was correct in affirming the

‘commissioner's conc}uat anes
the suecified provisions of HS ch. 485.

1. BRS_S 495-8

HRS § 485-8, see supra note 7, makes it unlawful to
sell an unregistered security. The Appellants admit that they
sold between 300 and 400 OSMs and that the OSM product was not
registered as a security with DCCA. They do not contend that the
OSM product falls within any enumerated statutory exemption.
DCCA confirmed that it had no record of any registration.
Therefore, pursuant to the conmissioner’s conclusion that
TriVectra’s product was indeed @ security, it was not wrong for
the circuit court to affirm the commissioner's conclusion that
TriVectra had violated HRS § 485-8.

2. HRS § 485-14

HRS § 495-14, see supra note €, makes “(Jt . .
unlawful for any person to transact business in this state as a
dealer . . . (or) salesperson . . . unless registered under this
chapter.” The Appellants admit that they were not duly
registered securities traders, and the Appellees adduced

 

sont Commistioner noted that HRS § 495-1(2)_ (1993) defines
yperson” te "mean{] any individual other than

rior issuer in effecting or attempting to effect
securities,” and that HRS § 495-1(2) (Supp. 1998) defined “dealer” to “mean(]
any person engaged in the Business of effecting transactions in

securities . fer the person's ow account.” The commissioner correctiy
Goncluded that because the Appellants were selling s security, *{ujnder either
Gefinition, [the Appellants) can be construed to have acted © a “desler’ or
spersen'” sufficient to support finding a violation of HAS § 485-14. The
Appellants die not challenge the conclusion cn appeal. Effective May 30, 2000
fand April 16, 2003, the legisiature amended HRS 485-1(3) in ways inmaterial
fo the present matter. See 2003 Hew. Sees. L. Ret 27, $62 end 9 at 25-26;
2000 Haw. Sess. L. Act 149, §§ 2 and € st 291-92, 302,

22

            

 

 

     
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uncontested evidence to that effect. The Appellants do not deny
that they were engaged in marketing Trivectra’s product, which
the commissioner concluded constituted @ security under the

Hawaii Mkt. Ctr. test, see supra section III.A. Therefore, the
circuit court was correct in affirming the commissioner's

 

conclusion that the Appellants violated § 485-14 as dealers in

unregistered securities.
3. -
while enfor: FEES
Lal) does nots

The commissioner, in finding the Appellants in
violation of HRS § 485-25(a) (1), see supra note 9; see also infra
section III.B.4, stated that scienter was required to establish
liability under that paragraph and that a finding of recklessness
was sufficient. In issuing his FOFs and COLs regarding HRS
$§ 485-25 (a) (2) and 485-25 (a) (3), see infra sections III.8.5 and
III.B.6, however, the commissioner failed to enter any findings
with regard to scienter.

We find no Hawai'i case law addressing the level, if
any, of scienter that is required to establish violations of HRS
§§ 495-25(a) (1), (2) (2), or (a) (3). Nevertheless, HRS
§§ 495-25(a) (1), (2) (2), and (a) (3) contain language virtually
identical to both 17 C.F.R. § 240.10b-5 (1999) (concerning
securities fraud), often referred to as Rule 10b-5,* and section

17 CAPR, § 240.10b°8 proviges:
It shall be unlawfui for any person, directly or indirectly, by

the use of any means cr instvunentality of interstete comerce, of of
‘eontanves...)

 
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17(a) of the federal Securities Act of 1933, codified at

15 U.S.C. § 774 (2000) [hereinafter, “the 1933 Act”). “(I)n
instances where Hawai'i case law and statutes are silent, this
court can look to parallel federal law for guidance.” Price v
Qbavashi, 81 Hawai'i 171, 181, 914 P.2d 1364, 1374 (1996), quoted
in Gap vy, Puna Geothermal Venture, 106 Hawai'i 325, 333, 104 P.3d
912, 920 (2004); LeMay v. Leander, 92 Hawai'i 614, 620, 994 P.2d
846, $52 (2000); Gold v, Harrison, 68 Hawai'i 94, 104, 962 P.2d
383, 363 (1998); State v. Ontai, 84 Hawai'i 56, 61, 929 P.2d 69,
74 (1996).

 

¥(.. -continved)
the sails or of any facility of any national securities exchange
(a) “To employ any device, scheme, oF artifice to defraud,
(b) To make any" untrue statenent of a material fact or to omit
fo state a material fact necessary in order to make the
statenents made, in the Light of the circumstances under
which they were made, not misleading, oF

 

 

 

(c) Te engage in any act, practice, or course of business which
cperates or would operate ass fraud or deceit upon any
Perscn,

in connection with the purct

 

or sale of any security,

The text of 17 C.F-R. § 240-10b-§ is materially identicel to HRS
$6 485-25 (0) (1), (a) (2), and (0) (3)- See gupta note 9.

» 15 0.8.c. § 77q provides in pertinent part:

It shall be unlewfsi for any person in the sale of any
securities . . . by the use of any means or instruments of
transportation or communiestion sn interstate commerce oF by use
of the nelle, directly or indirectly
(a) te'enploy any device, schene, or artifice to defraud, or
(2) te obtain money or property by means of any untrue
statencnt of a material fact or any omission to state a material
fact necessary in order to make the statements made, in the Light
Of the cireunatances under unich they were nade, not misleading,

 

 

 

(3) te engage in any transaction, practice, or course of
business which operstes or would operate ee # fraud ox cecelt Upon
the purchaser.

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Rule 10b-5 was promulgated by the Securities and
Exchange Commission (SEC) to give effect to the language of
section 10(b) of the Federal Securities Exchange Act of 1934
(hereinafter, “the 1934 Act], codified at 15 U.S.c. § 78)

(2000). Ernst & Exnst v. Hochfelder, 425 U.S. 185, 212 n.32
(1976). In drafting Rule 10b-5, however, the SEC drew heavily

 

from the language of section 17(a) of the 1933 Act, see supra
note 13. Ide
‘The United States Suprene Court has concluded that the

language contained in section 10(b) of the 1934 Act -- “any
manipulative or deceptive device or contrivance,” see supra note
14 -- imbues section 10(b) and Rule 10b-5, which draws its
authority from section 10(b), with a scienter element, Lies,
“knowing or intentional misconduct,” that a complaining party
must prove to establish a violation of either section 10(b) or
Rule 10b-5, regardless of the identify of the plaintiff or the

nature of the relief sought. Hochfelder, 425 U.S. at 197-201;

 

M15 ,8.c. § 783 provides in relevant part

Bt shall be unlawful for any person, directly or indirectly,
by the use of any peans or instrumentality of interstate commerce
of of the nails, or ef any facility of any national securities
exchange ~~

iwi Fo’ vse or employ, in connection with the purchase
or sale of any security registered cn a national securities
Suchange or any security fet so registered,

panioulatiy vice oF co in
Contravention of such roles end Teouiaticne © the
[Securities and Exchange] Commission ay prescribe as
necessary cr appropriate in the public interest or for the
Protection of investors.

 

 

(Emphasis added.)

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SEC v. Baron, 446 U.S. 680, 690-91, 696 (1980); see also SEC.
Rana Research, Inc., 8 F.3d 1358, 1364 (9th Cir. 1992)
(concluding scienter is required for an SEC agency action to
enforce section 10(b) and Rule 10b-$). Conversely, the Court has
held that, while scienter must be proved for section 17(a) (1) of
the 1933 Act (noting the language of that paragraph “plainly
evinces an intent on the part of Congress to proscribe only
knowing or intentional misconduct”), scienter need not be
proved to establish violations of sections 17(a) (2) or (a) (3)
(noting, respectively, that the language of (a) (2) “is devoid of
any suggestion whatsoever of a scienter requirement” and that the
language of (a) (3) “quite plainly focuses upon the effect of
particular conduct . . . rather than upon the culpability of the

Aaron, 446 U.S, at 695-97 (emphasis in

   

person responsible
original). In sum, analyzing the language of either the 1933 Act

or the 1934 Act, the Court has required scienter for securities

 

As to the level of scienter necessary to establish # violation of
section 17(a) (2), the nited States Court of Appeals for the Ninth Circuit has
Concluded that a! finding of "knowing or reckless conduct” is sufficient
Vexnazza-v. SEC, 327 F.3d 651, 860 (9th. Cir. 2003) (citing SeC-2. Dain
Rauscher, inc., 25¢ F.3a 682, "086 (Sen Cir. 2001)}. Other federal courts have
concurred. See eacou , 119 F.3a 1219, 1226 (Sth Cér. 1997)) SECw..
Garribe Air. Inc, ¢e1 F-2a-i3ie, 1324 (1ith Cir. 1902); SBC 'v. Kenton
Gepitel Lidl, €2'F. supc. 2a 1,'10 (D.0.C. 1996); Baker v. Eagle Aircraft,
Sou G42 F. Supp. 1005, 1008 (0. Or. 1986)} SEC x, Youmans, S43 F.Supp. 1992,
3288 (E:p. “tenn. 1982), rev'd ce Qther grounds, GECv. Younens, 129 Feed 413,
(€th Cir, 1964). This conclusicn also comports with the federal courte’
analysis of scienter uncer Rule 105-5, similarly based on language connoting
fraudulent intent, concluding that recklesenese is sufficient ecienter to
establish viciation.. See Magne Jay es One Theva Two
Hungkeg, ‘991 F.2a 38, 39 (ith Cir. 1981); Hackbart . Holmes, 675 F.2d 1114,
Ty (leh cir. 1982) 7 7 , E86 F-28945, 959

S.A. Thososcn 4 Co, ¥ Fareriage,
1981); Manshach o frescott, Bell ¢ Turben, $9 P.26 1027, 10:

 

 

 

 

 

 

len

  

75); Nelson v Serucig, S7¢ F.2a 1332, 1337 (9th Cir. 1978); Bole o.
Eluih, Essien illo s Coe, a 36, 44" (26 Chr. 1978); Suncstrand Core.

 

3048 {7th cir. 1997).

 

EeSun chen Comm, $82 Fa
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violations based on language identical to that found in HRS
§ 485-25(e) (1), see supra notes 9, 12, and 13, but, in analyzing
the language mirrored in HRS $§ 485-25(a) (2) and (a) (3), the
court has concluded that virtually identical language either does
not require scienter, if rooted in section 17(a), or does require
scienter, if rooted in section 10(b) and Rule 10b-5, due to the
underlying “manipulative or deceptive” language of section 10(b)
and its effect on the substantive elements of Rule 10b-5.

In 1956, the National Conference of Commissioners on
uniform State Laws (NCCUSL) approved for adoption by all states
the Uniform Securities Act (hereinafter, “USA 1956"). Sen.
Stand. Comm. Rep. No. 231, in 1957 Senate Journal, at 520.
Effective June 7, 1957, the Hawai'i legislature adopted USA 1956.
1957 Haw. Sess. L. Act 314, $§ 1 and 2 at 392, 420. Section 102
of USA 1956 was codified as HRS $§ 485-25(a) (1), (a) (2), and

)(3).© The comments to section 101 indicate that “this

 

section is substantially [Rule 10b-5], which in turn was modeled
upon [section] 17(a) of the Securities Act of 1933, . . . except

that the rule was expanded to cover the purchase es well as the

 

section 101 reads as follows:

3 ia unlawful for any person, in connection with the offer,
of purchase of any security, directiy or indirectly
Ti) "to employ any device, schene, or artifice to defraud,
(2) te make any untrue statenent of material fact cr to omit
te state a material fact necessary in order to make the statenents
ede, in the Light of circunstences unser which they are nede, not
nisleading, oF

(3) ote engage in any act, practice, or course of business which
operates cf would operate ae a fraud or deceit upen eny person.

      

 

 

 

Unit. Sec. Act § 102 (2956), TC U.L.A. 110 (2000 & Supp. 2006)

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sale of any security.” This language is ambiguous, in that it
does not clearly establish whether HRS $§ 485-25(a) (1), (a) (2),
‘and (a) (3) are grounded in the Securities Act of 1933 or in
section 10(b) of the Securities Exchange Act of 1934 through Rule
10b-5.
In construing an ambiguous statute,
the courts may resort to extrinsic aids in
Geternining the legisiatsve intent. One

nue is the use of legislative history
fan interpretive tools

 

Grav iy, Admin, Dic, of the Court], 84 Hawai'i (238,)
ite, gai Pezd {906,1 590 (1199711. This court may,
also consider “(t)te reason and spirit of the lawy and
the cause which Indiced the legislature to enact it
«ss to discover its true meaning.” ARS §-1-15(2)
(2393).° Saws in pari sateria, of upon the sane
Subject matter, shell be construed with reference to
each ether. What is clear in one statute nay be
celled upon in aig to explain wnat is deubeful in
ancther." ARS § 1-16 (1993)

Stete v. cullen, 86 Hawai'i 1, 9, 946 P.2d 955, 963 (1997) (some

brackets in original and some internal citations omitted).

 

In enacting USA 1986, the Senate Judiciary Committee
stated that “(tJhe 8111 expands the anti-fraud provisions of the
Present statutes by adopting those of the Uniform Act which in
turn are based upon the provisions of the federal Securities Act
2£.1833 as interpreted by the courts{] and the Securities and
Exchange Commission.” Sen. Stand. Comm. Rep. No. 231, in 1957
Senate Journal, at S21. (Emphasis added.) The House Judiciary
Committee expressed virtually identical views. See Hee. Stand.
Conn. Rep. No. 931, in 1957 House Journal, at 900.

A review of the jurisprudence of other states that have

enacted USA 1956 reveals an almost unanimous interpretation of

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section 101, as enacted in the respective states, as: (1) being
rooted in section 17(a) of the Securities Act of 1933, not
section 10(b) of the Securities Exchange Act of 1934; and (2) in
concluding that no proof of scienter is required to establish a
civil violation of the state equivalent of section 17(a) (2) or
(a) (3) = Hawaii's HRS $§ 485-25(a) (2) or (a) (3). See Arizona vs
Gunnison, 618 P.24 604, 607 (Ariz. 1980) (noting that the Arizona
equivalent of HRS § 485-25(a) (2) is a counterpart to section
17(a) (2) and holding scienter is not required in civil cases,
based on plain language analysis and Aaron); Idaho v. Shama Res.
td. P'shin, 899 P.24 977, 982 (Idaho 1995) (noting that the
Idaho equivalent of HRS $§ 485-25(a) (2) and (a) (3) are “virtually

identical” to sections 17(a) (2) and (a) (3) and holding that @

 

showing of scienter is not required for agency enforcement, based
on plain language analysis and Aaron); Manns v. Skolnik, 666
N.E.2d 1236, 1248 (Ind. 1996) (in an agency enforcement action,
concluding that violations of the Indiana equivalent of HRS

'§ 485-25 (2) (2) need not establish intent, based solely on plain
language analysis); K y. Kershner, 801 P.2d 68, 69-71 (Kan.
Ct. App. 1990) (noting that the Kansas Securities Act (KSA) is
patterned on the Uniform Securities Act and the federal
Securities Act of 1933 and concluding no specific intent is
required to prove a violation of the KSA, beyond wilfulness for a
criminal violation); Sprangers v, Interactive Techs., Inc., 394
N.W.2d 498, $03 (Minn. Ct. App. 1986) (concluding Minnesota
equivalent of HRS § 485-25(a) (2) was rooted in section 17(a) (2)

of the 1933 Securities Act and therefore does not require

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scienter in civil actions for recovery): Sec'y of State v,
Tnetiak, 22 P.3d 1134, 1141 (Nev. 2001) (concluding the
equivalents of HRS §§ 485-25(a) (2) and (a) (3) do not require
scienter in an agency enforcement action, based on plain language
analysis and in keeping with other state courts and Aaron);
‘Tneider v. Doherty & Co., 527 P.2d 498, 499 (NLM. 1974)
(concluding that the intent of the actor in a violation of the
equivalent of HRS § 485-25(a)(2) is irrelevant); Utah v. Larsen,
865 P.20 1355, 1360 (Utah 1993) (noting the Utah equivalents of
BRS §§ 485-25(a) (2) and (a) (3) are not limited by the underlying
Jenguage of section 10(b) of the Securities Exchange Act of 1934,
but are analogous to sections 17(a) (2) and (a) (3) of the
Securities Act of 1933 and, in keeping with Aaron, concluding
that the Utah equivalent of HRS § 485-25(a) (2) does not require
scienter); Fibro Trust, Inc, v, Brahman Fin., Inc., 974 P.24 288,
294 (Utah 1999) (concluding that the Utah equivalent of HRS

§ 485-25 (a) (1) requires scienter, while the equivalent of HRS

§ 485-25 (a) (3) does not, based on other states’ interpretations
ond Aaron); Tanner v. State Corp. Comm'n, 574 S.£.2d 525, 530
(Va. 2003) (applying the holding of Aaron pertaining to section
17(a) (2) to hold scienter is not required te prove a violation of
the Virginia equivalent of HRS § 485-25(a) (2) in a civil agency
action); Kittilson v, Ford, 608 P.2d 264, 265-66 (Wash. 1980)
(concluding scienter is not required to prove a violation of the
Washington equivalent of HRS §§ 485-25(a) (1) te (3)); Wisconsin
Usatemby, 322 N.W.2d 522, 528-29 (Wis. 1982) (noting that the

Wisconsin equivelents of HRS §§ 485-25(z) (1) to (3) were “almost

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identical” to section 17(a) and concluding that intent to defraud
was not an elenent of a criminal violation of paragraph (2) (2),
based on plain language analysis and Aaron). But see Manns, 666
N.E.2d at 1248 (reasoning that the plain language of the Indiana
equivalent of HRS § 485-25 (a) (3) requires scienter be
established).

We therefore hold that, in a civil enforcement action
brought by an agency, a state of mind of at least recklessness
must be established to prove a violation of HRS § 485-25(a) (1),
but need not be pled or proven in order to establish a violation
of HRS § 485-25(a) (2) or (a) (3). This holding is consistent
with the legislative history of HRS ch. 485 as rooted in the
Securities Act of 1933 and is in keeping with legislative intent
to harmonize Hawaii's securities law with other states’
interpretations of the Uniform Securities Act and with state and
federal interpretation of federal securities law underlying USA
1986." In the instant matter, the commissioner's findings with

regards to the Appellants’ scienter are in accord with our

 

In so helding, this court does net reach the question whether
acienter is required in a private claim for relief brought under HRS § 485-20
{ies3) salecing 2 violation of ARS €§ 485-25(a) (2), (a) (2) oF (8) (5) andy
hence, offers ne opinion.on the decision issued by’ the United states District
Court’ for the District of Mewai's in AM. Sav, Bank v. UES Fainenebber, Inca,
380° F. Sopp. 20 125¢ (D. Haw. 2003) (analyzing BAS § 485-25(a) (2) and
Bhcludine’ that, inva privere action for damages, scienter and reliance must
Be ectabl shed by the plaintiff, based on the conclusion thet BRS
Siasir2s(e) (2) if @ fraud statute rooted in Rule 10-5).

   

% This holding ie alee consistent with the structure of USA 2002
recently enscred by the Legislature. Section S01 of USA 200z is the successor
Eersection 101 ef USA 1986. 7C U-L.A. 99 (Supp. 2006). The commentary to
Section £61 states that “in civil and seministrative enforcenent actions

he culpability is required to be pled or proven.” 1d, ext. €

 

 

   

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holding.
4. HRS § 485-25 (2
HRS § 485-25(2) (1), see supra note 9, makes it

“unlawful for any person, in connection with the offer, sale, or

purchase . . . of any security . . . in the State, directly or
indirectly . . . [t]o employ any device, scheme, or artifice to
defraud.”

The commissioner concluded that the Appellants violated
HRS § 485-25(a) (1): (1) by inducing Navares to pay Gushi for
assistance in finding new OSM buyers; and (2) by failing to
disclose to potential buyers that TriVectra was using free
Linkshare software and authorizing buyers to use it in violation
of Trivectra’s agreement with Linkshare.
-  Navares’s payment of $3500.00

‘The commissioner concluded that Gushi’s representation

 

to Navares that he would assist her in finding buyers for the
more than forty OSMs she purchased at the meeting in early 2000
for $3500.00 “was at{] a minimum[] recklessly made in disregard
of the truth.” In so concluding, the commissioner expressly
relied upon inferences derived from circumstantial evidence. It
is well settled that, “(given the difficulty of proving the
requisite state of mind by direct evidence... , proof by
circumstantial evidence and reasonable inferences arising from
circumstances surrounding the defendant’s conduct is sufficient.”
State v. Eastman, €1 Hawai'i 131, 142, 913 P.2d 57, 67 (1996)
(quoting State v. Batson, 73 Haw. 236, 254, 831 P.2d 924, 934
(1992)).
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‘The evidentiary record of the exchange between Navares
and Gushi is limited. See Navares’s testimony set forth supra in
section I. Nevertheless, in deference to the trier of fact, we
cannot say that it was error for the circuit court to affirm the
commissioner’ s conclusion that Gushi acted recklessly with
respect to the truth of his representation to Navares that, in
return for $3500.00, he would recruit at least forty new osM
buyers on her behalf. Therefore, inasmuch as a security was
involved in this transaction and the commissioner concluded that
a misrepresentation was recklessly made in connection with its
sale, the circuit court was correct in affirming the
commissioner's conclusion that the Appellants had violated HRS

§ 485-25 (a) (2).

b. et

‘The commissioner also concluded that Trivectra had
violated HRS 485-25(1) by “failling] to disclose that the
software they were using was provided free of charge by Linkshare
‘and without Linkshare’s consent {] and that prospective purchasers
could have obtained the sane type of software and service for
free by going to Linkshare directly,” and, in doing so, that
Trivectra demonstrated a reckless disregard for the truth.

‘The Appellants dispute the conmissioner’s conclusion
that TriVectra’s activities were fraudulent and contend that is
not unlawful for a private venture to keep its profitable

business plans confidential
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‘There is circumstantial evidence in the record that
supports the Appellants’ contention that Trivectra had
Linkshare’s approval to run TriVectra members’ OSs through Oda’s
account as subaffiliates. In particular, Oda proffered
uncontested correspondence with Richiardone reflecting
TriVectra’s imminent approval under its Signature Program.
Linkshare’s chief information officer indicated in correspondence
with Gadden that Linkshare was running Oda’s account under the
Signature Program. Oda produced printed web pages from the
internet summarizing the TriVectra account's monthly activity and
containing more than one hundred alleged menber identification
numbers within the TriVectra account.

Nevertheless, Oda could not produce any written
evidence of an agreement produced by Linkshare expressly granting
TriVectra menbership in the Signature Program, nor could the
Appellants’ counsel conclusively establish that the member
identification numbers that appeared in Exhibit B were in fact
subaffiliate menber nunbers. Linkshare’s general counsel,
Gadden, insisted that she could locate no written agreement with
‘TriVectra or Oda pertaining to the Signature Program. Therefore,
while the evidence raises some concerns that TriVectra may indeed
have had Linkshare’s authorization for its subaffiliate program,
this court is not left with the definite and firm conviction that

a mistake has been made.

 

As for the cost-free nature of Linkshare’s software and

its effect on Trivectra’s profitability, there is some evidence

 

that TriVectra added value to Linkshare’s free service by

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providing web design and technical support. Nevertheless, the
core of TriVectra’s product, the OSM itself, was wholly dependent
on Linkshare’s free services. The Appellants did not choose to
disclose to customers the free alternative and then attempt to

justify the value-added nature of their services. Nor does it

 

appear that the Appellants provided this service with Linkshare’s
authorization. Given the product’s status under HRS ch. 495 as a
security, we cannot say that the commissioner was wrong in
concluding that the Appellants employed a scheme to defraud
investors with a reckless disregard for the truth.

For both of the foregoing reasons, we do not believe
the circuit court was wrong in affirming the commissioner's
conclusion that the Appellants violated HRS § 485-25 (a) (1).

S. HRS § 485-25 (a) (2.

HRS § 485-25(a) (2), see supra note 9, makes it
“unlawful for any person, in connection with the offer, sale, or
purchase . . . of any security. . . in the State, directly or
indirectly . . . [to make any untrue statement of a material
fact or omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under
which they are made, not misleading.” The commissioner concluded
that Trivectra’s failure to inform its customers that TriVectra
was sourcing its OSM software from Linkshare free of charge and
in violation of the agreement between Trivectra and Linkshare was
an omission of a material fact, in that there was “‘a substantial
Likelihood that its disclosure would have been considered
reasonable investor.'" (Quoting Basic vs.

 

significant by [.

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Levinson, 485 U.S. 224, 231 (1988).)

Inasmuch as (1) Trivectra was marketing a security
subject to HRS ch. 485, (2) Gushi and Oda failed to inform
customers that TriVectra was sourcing its software support and
core business operations from Linkshare, services that were
available free of charge to any member of the public, and (3)
TriVectra was doing so in violation of ite agreement with
Linkshare, we cannot say that the commissioner was wrong in
concluding that the Appellants violated HRS § 485-25 (a) (2) by
omitting a material fact of interest to a reasonable investor.
Nor do we believe that the circuit court was wrong in affirming
that conclusion.

6. 25-21

HRS § 485-28(a) (3), see supra note 9, makes it unlawful
“for any person, in connection with the offer, sale, or purchase
+ + of any security . . . in the State, directly or indirectly

+ [to engage in any act, practice, or course of business

which operates or would operate as a fraud or deceit upon any
Person." The conmissioner based his conclusion that the
Appellants violated this subsection on the same acts and
omissions as discussed supra in sections III.B.4.b and II.B.5,
namely, that withholding the cost-free nature of Linkshare’s
software, in combination with the limited affiliate nature of
TriVectra’s relationship with Linkshere, was a practice that
operated to deceive Trivectra’s customers. For the reasons

discussed above, we perceive no error either in the
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commissioner's conclusion or in the circuit court's affirmation
of it.

7. HRS § 485-25 (a) 17

HRS § 485-25(a) (7), see supra note 9, makes it unlawful

 

for any person, in connection with the offer, sale, oF
purchases. of any security. . in the State,
Sirectly or shdirectiy:

1 itte teeve, circulate, or publish
Any dovertising matter unless. Copy
thereof hee been previcusly filed with the
Office of the comnissioner, or unless the
Ccanissioner has by role of order exempted
the filing of any advertising material

 

 

The commissioner concluded that the Appellants had
published marketing materials over the internet to promote
Trivectra’s OSH program. The Appellants do not contend that they
filed any of these materials with the commissioner or that any
rule or order exempted them from filing. We therefore cannot say
that the commissioner erred in concluding that the Appellants
violated HRS § 485-25(a) (7) and hence believe that the circuit
court correctly affirmed that conclusion.

C. The commissioner did not exceed his authority in
issuinga final order, without further hearings, that
fodified Harshall’s recomended order:

The Appellants contend that the connissioner exceeded
hie statutory authority under HRS § 91-11, see supra note 2, by
amending Marshall's reconmended order without affording the
Appellants an opportunity to contest the commissioner’ s modified
Fors and cols.

‘The commissioners final order expressly stated that,

“[alfter carefully considering the (r]ecommended [0] rder,

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exceptions, statement in support, oral arguments, and evidence
Presented at the hearing, and listening co the tape of the
hearing, the (clommissioner hereby modifies the (h]earing
(o]f£icer’s (FOFs] and (COLs) and issues @ (f]inal [o]rder as
follows.” It is apparent from this statement that the
commissioner “personally consider(ed] the whole record.” HAR

§ 16-201-46, see supra note 6.

The plain language of HRS § 91-11 requires an
additional evidentiary hearing “(w)henever in a contested case
the officials . . . who are to render the final decision have not
heard and examined all of the evidence.” The record in the
present matter reflects that the conmissioner did in fact hear
‘and examine all the evidence, and the Appellants point to no new
evidence that the commissioner overlooked. Therefore, in
modifying or reversing the recommended order, powers granted him
under HAR § 16-201-46, see supra note 6, the commissioner did not
violate HRS § 91-11 by failing to provide the Appellants yet
another opportunity to repeat their previous argunents.

Dd. Th sioner abuse hi ior

The Appellants contend that, based on the record, the
$100,000.00 fine levied against them under HRS $ 485-20.5
(1993)"* was arbitrary and capricious and constituted an abuse

" nRS § 485-

  

g an action te recover @ civil
Person who vielates this chapter oF who hes
eo a\ rule cr erder of the comsisticne® moce

‘continued, ..)

Penaity againet
Knowingly viel

 

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of discretion, “An abuse of discretion occurs when the
decisionnaker ‘exceeds the bounds of reason or disregards rules
or principles of law or practice to the substantial detriment of
a party.'" Ince Water Use Permit Applications, 94 Hawai'i at
183, 9 P.3d at 495 (quoting Bank of Hawai'i v, Kunimoto, 91
hawai'i 372, 387, 984 P.2d 1298, 1223 (1999)), quoted in State ve
Wilmer, 97 Hewai'i 236, 243, 35 P.34 755, 760 (2001); State v
Vilet, 95 Hawai'i 94, 108, 19 P.3d 42, 56 (2001)

As the Appellants correctly note, the conmissioner did

 

not find that they acted with malicious or willful intent.
There is evidence in the record that the Appellents were
cooperative with DCCA investigators, and the commissioner
conceded that Trivectra was a fully-funded company from the
outset.

However, the Appellants did make statements in their
marketing materials that possible earnings from selling OSHs to
others could exceed two million dollars, when, in order to earn
such fees, members would have to recruit 393,216 new menbers in =
three-month period. According to the testimony of Hirata and
Navares, the overriding focus of the marketing meetings was the
recruitment of others into the OSM program, not the earning of
commissions from sales on the OSM websites. The Appellants

3500.00 in return for unfulfilled

 

induced Navares to part with

promises to locate forty additional OSM buyers for her, During

Sent co this chapter. A civil penalty of not nore than
$i00,000 ney be assessed for each violation.

 

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the same period, only $6.25 in commissions was paid on $154.43
worth of purchases through the websites. In light of the
foregoing, we cannot say that the commissioner “exceed{ed) the
bounds of reason or disregard(ed) rules or principles of law” in

levying a fine of $100,000 against the Appellants.
E, The commissioner's tinal order was issued within a
xeasonable time,” pursuant to HRS $$ 91-17 and
Following the December 18 and 19, 2000 hearings,
Marshall issued his recommended order on January 10, 2001. at
the request of the parties, the conmissioner heard oral arguments
on April 27, 2001 regarding the recommended order but did’ not
issue his final order until February 14, 2002, more than nine
months later. The Appellants argue that this delay was
unreasonably long and in violation of the spirit of HRS §§ 91-12,
see supra note 3, and 485-18.7, see supra note 4: They contend
that the fifteen-day time period, imposed on the commissioner by
HRS § 485-18.7(b), within which to respond to a request for a
hearing on a CDO reflects a legislative intent that CDO disputes
be resolved promptly and that, pursuant to HRS § 91-12,
disposition “within a reasonable time” does not contemplate a
delay of nine months before the issuance of a final order.
‘They assert that because the CDO remains in effect until the
issuance of a final order, the effect of delay is to unreasonably
and irreparably harm businesses that, in the end, may be adjudged

innocent of any violations.

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‘The Appellants’ cited authority does not assist them.
Wihile HRS § 485-18.7(b) requires the commissioner to schedule an
initial hearing within fifteen days of a request by @ party
affected by 8 CDO, HRS § 485-18.7(c), governing the issuance of
the final order itself, merely states that “the commissioner
shall issue a final order,” making no mention of reasonable time
frames. Furthermore, HRS § 91-12 governs the manner in which the
commissioner must notify parties once a decision and order have
been issued. In other words, once the commissioner has issued @
final order, he or she must notify the parties of that order
within a reasonable time; the statute is silent with respect to
when the commissioner must issue @ final order.

Nevertheless, when a statute is silent as to an express
time frame, this court has imported a “reasonable time” standard.
See Paul's Elec, Serv., Inc, v. Hefitel, 104 Hawai'i 412, 420, 91
P.3d 494, 502 (2004) (citing State v. Sherman, 70 Haw. 334,
340-41, 770 P.2d 789, 793 (1989)). Furthermore, under HAR

 

 

§ 16

“[w)ithin a reasonable time after argument has been heard, (to]

01-46, see supra note 6, the commissioner is required,

Assue a written final decision and order.” It is therefore in
that context that we must analyze the alleged delay in this
matter.

in Baul's Elec, Serv,, the Department of Labor and
Industrial Relations (DLIR) delayed issuance of a third notice of
violation (NOV) against the company for two-and-a-half years

because the DLIR wanted to determine the outcome of its

au
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investigation of the second NOV against the respondent." this
court ruled that the delay was unreasonable, because DLIR had
offered no justification for delaying the initiation of its
investigation; rather, DLIR had urged merely that an assessment

of the appropriate sanction w
second NOV, 104 Hawai"i at 420-21, 91 P.3d at 502-03. We held

 

dependent on the outcome of the

that because there was no impediment to DLIR launching its
investigation into the third alleged NOV two-and-a-half years
earlier, the delay was unjustified and unreasonable.

In the present matter, it is undisputed that the
commissioner followed all relevant administrative requirements in
issuing the CD, holding hearings, responding to exceptions, and
scheduling oral arguments. While nine months between oral
argument regarding the recommended order and the issuance of the
final order is a substantial time for an aggrieved party to wait,
there is no indication here, in contrast to Paul’ 5
that the delay was caused by an unjustified agency decision to
postpone resolution of the matter or was so outside the bounds of
the workings of a large and complex bureaucracy as to be dened
unreasonable per se. In sum, the conmissioner’s action in
issuing the final order nine months after oral argument was not
“characterized by an abuse of discretion or a clearly unwarranted
exercise of discretion” or “made upon unlawful procedure” and,

accordingly, the circuit court was correct in affirming the

 

Pursuant to HRS $ 104-2¢ (Supp. 1995), the punishment of confirmed
violations depended on the number of pricy offenses committee by a ccapeny
within tne yesre:

 

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commissioner's final order.

IV. CONCLUSI
Based on the foregoing analysis, we affirm the circuit

court’s August 27, 2002 judgment.

on the briefs:
Neal K. Aoki of Gp ~

Koshiba Agena & Kubota

for respondents-appellants~ ae

appellants Trivectra, Inc.,

Girtis N. Gushi and
Donovan . Oda Pie Coe Ore
Richard A. Young,
Securities Enforcement Branch, Ceara t, Dads b>

Department of Commerce and
Consumer Affairs, State of
Hawai'i for appellees-appellees
Ryan S. Ushijima, Commissioner
of Securities, Department

of Commerce and Consumer Affairs:
State of Hawai'i, Department

of Commerce and Consumer Affairs

4a