IN THE UTAH COURT OF APPEALS

‐‐‐‐ ooOoo

‐‐‐‐

State of Utah,

Plaintiff and Appellee,

v.

Grace C. Kelson,

Defendant and Appellant. )

)

)

)

)

)

)

)

) OPINION

Case No. 20100299

‐ CA

F I L E D

(August 2, 2012)

2012 UT App 217

‐‐‐‐‐

Third District, Salt Lake Department, 041901548

The Honorable Judith S. Atherton

Attorneys: Stephen W. Howard, Salt Lake City, for Appellant

Mark L. Shurtleff and Karen A. Klucznik, Salt Lake City, for Appellee

‐‐‐‐‐

Before Judges McHugh, Orme, and Davis.

McHUGH, Presiding Judge:

¶1 Grace C. Kelson appeals her convictions for one count of offer or sale of

unregistered securities, a third degree felony, see Utah Code Ann. §§ 61

‐ 1

‐ 7,

‐ 21(1)

(2011); one count of sale by an unlicensed broker

‐ dealer, agent, or investment advisor, a

third degree felony, see id. §§ 61

‐ 1

‐ 3,

‐ 21(1); three counts of securities fraud, second

degree felonies, see id. §§ 61

‐ 1

‐ 1,

‐ 21(2); and one count of pattern of unlawful activity, a1 Because the relevant provisions of these statutes have not been materially

changed, unless otherwise noted, we cite the current version of the Utah Code for the

convenience of the reader.

2 A “letter of credit” is defined as

[a]n instrument under which the issuer (usu[ally] a bank), at

a customer’s request, agrees to honor a draft or other

demand for payment made by a third party (the beneficiary),

as long as the draft or demand complies with specified

conditions, and regardless of whether any underlying

agreement between the customer and the beneficiary is

satisfied.

Black’s Law Dictionary 987 (9th ed. 2009) (emphasis omitted).

20100299

‐ CA 2 second degree felony, see id. §§ 76

‐ 10

‐ 1603,

‐ 1603.5 (2008). 1 We vacate Kelson’s

conviction for pattern of unlawful activity, and reverse and remand for a new trial on

all other charges.

BACKGROUND

¶2 Kelson became acquainted with the owners (Owners) of a mortgage company,

and later sought assistance from the mortgage company in financing two development

projects: a high

‐ end resort near Heber City and another development in Brazil. After

these efforts failed to provide sufficient funding, Kelson and the Owners hoped to

purchase a letter of credit to fund the developments. 2 The letter of credit was to serve as

collateral, thereby making it easier to find lenders for the project. In this pursuit, Kelson

and the Owners sought approximately $125,000 to obtain a letter of credit worth $15

million.

¶3 Around October 11, 2001, in response to an inquiry from one of the mortgage

company’s employees (Employee), Kelson explained that she and the Owners did not

have the necessary funds to close a project. Specifically, Kelson noted that she needed

about $116,000 in “a couple of days” in order to close the deal. Kelson mentioned that

she would be willing to pay a finder’s fee to Employee if she could assist in finding20100299

‐ CA 3 someone to provide the money and indicated that the lenders could make their money

back “five times.”

¶4 After obtaining assurances from one of the Owners that it was a “legitimate deal”

and that the money would be returned in approximately two to three weeks when they

obtained the letter of credit, Employee approached her family members about investing

in the project. Within a day or two, she raised $22,400 from herself, her husband, her

daughter, and a friend, which she exchanged for a promissory note dated October 11,

2001, signed by Kelson, which indicated that Employee would receive $249,331.84 in

return for the investment by November 11, 2001. Employee’s other daughter

(Daughter) also invested $20,000 in exchange for a promissory note dated October 11,

2001, stating that she would receive $133,332 within thirty days.

¶5 Between October 10 and 12, 2001, Employee called her brother (Brother) to

inform him about “getting into an investment” and told him he could get “a pretty good

return.” Brother invested $116,000 in exchange for a promissory note signed by Kelson,

which was dated October 11, 2001, and indicated that Brother would receive $773,333.33

in return. Brother understood that he was not investing in the project itself, but that his

only involvement was in obtaining the letter of credit.

¶6 Kelson did not inform Employee, Daughter, or Brother about her financial

background, which included over thirty civil judgments against her totaling $750,000.

Nor did Kelson inform these individuals that some of the money would be spent on her

personal expenses.

¶7 All of the promissory notes indicated that S.D.C. Financial Services would make

the payments. On October 11, 2001, S.D.C. Financial was registered as a limited liability

company with the Utah Division of Corporations, and it opened a bank account on the

same day. Kelson was listed as the registered agent and as a member. After the money

secured by the promissory notes was deposited in the S.D.C. Financial account, most of

it was transferred to an account in Washington, $5,000 was used for legal fees, and

Kelson withdrew approximately $25,000 for her personal use. When the S.D.C.

Financial account was closed in January 2002, it had a negative balance of over $9,000.

The letter of credit was never purchased, and S.D.C. Financial defaulted on its

obligations under the promissory notes to Employee, Daughter, and Brother.20100299

‐ CA 4 ¶8 On March 5, 2004, the State charged Kelson with three counts of securities fraud;

one count of offer or sale of unregistered securities; one count of sales by an unlicensed

broker

‐ dealer, agent or investment advisor; and one count of pattern of unlawful

activity.

¶9 At the trial held on February 24 and 25, 2009, the State called the Director of

Enforcement (Director) for the Utah Division of Securities (the Division) as a securities

expert. Director testified that notes are presumed to be securities and that “unless that

presumption is overcome, it remains a security.” Director explained that there are

certain enumerated categories of notes that are not securities and also stated that there

are four factors used to determine whether other notes are not securities (four

‐ factor test

or Reves test). Director explained how those factors are applied and opined how they

might be weighed in this case.

¶10 At the close of evidence, Kelson moved for a directed verdict on all counts. The

trial court denied the motion. Earlier, the parties had stipulated to the jury instructions.

Instruction 25 states,

You are instructed that a “note” is presumed to be a

security. However, certain notes have been classified as

non

‐ securities; these notes are:

1. the note delivered in consumer financing,

2. the note secured by a mortgage on a home,

3. the short

‐ term note secured by a lien on a small business

or some of its assets,

4. the note evidencing a ‘character’ loan to a bank customer,

5. short

‐ term notes secured by an assignment of accounts

receivable, or

6. a note which simply formalizes an open

‐ account debt

incurred in the ordinary course of business particularly if, as

in the case of the customer of a broker, it is collateralized.

A class of notes that resembles one of these exceptions

can be added to the list of non

‐ security notes if they meet a

four factor test. That test is to:

1. examine the transaction to assess the motivations that

would prompt a reasonable seller and buyer to enter into it.20100299

‐ CA 5 If the seller’s purpose is to raise money for the general use of

a business enterprise or to finance substantial investments

and the buyer is interested primarily in the profit the note is

expected to generate, the instrument is likely to be a

“security.” On the other hand, if the note is exchanged to

facilitate the purchase and sale of a minor asset or consumer

good, to correct for the seller’s cash

‐ flow difficulties, or to

advance some other commercial or consumer purpose, the

note is less sensibly described as a “security.”

2. [e]xamine the “plan of distribution” of the instrument to

determine whether it is an instrument in which there is

common trading for speculation or investment.

3. [e]xamine the reasonable expectations of the investing

public, and

4. [e]xamine whether some factor such as the existence of

another regulatory scheme significantly reduces the risk of

the instrument, thereby rendering application of the

Securities Acts unnecessary.

¶11 The jury convicted Kelson on all counts. At sentencing, Kelson represented

herself and asked the trial court to review certain documents. The trial court refused to

receive or review the documents before imposing sentence. Kelson now appeals.

ISSUES AND STANDARDS OF REVIEW

¶12 Kelson first argues that Jury Instruction 25 violated her constitutional right to a

presumption of innocence and the constitutional requirement that the State prove every

element of the crime beyond a reasonable doubt. Kelson did not preserve this

argument in the trial court and asks us to review it under the doctrine of plain error.

See generally State v. Nelson

‐ Waggoner

, 2004 UT 29, ¶ 16, 94 P.3d 186. To establish plain

error, Kelson must show that “‘(i) [a]n error exists; (ii) the error should have been

obvious to the trial court; and (iii) the error is harmful, i.e., absent the error, there is a

reasonable likelihood of a more favorable outcome for the appellant, or phrased

differently, our confidence in the verdict is undermined.’” Id. (quoting State v. Dunn

,

850 P.2d 1201, 1208

‐ 09 (Utah 1993)).20100299

‐ CA 6 ¶13 Kelson also argues that counsel was ineffective for stipulating to this instruction.

“We consider ineffective assistance of counsel claims raised for the first time on appeal

as a matter of law.” State v. Sellers

, 2011 UT App 38, ¶ 9, 248 P.3d 70.

¶14 Next, Kelson argues that the trial court erred in denying her motion for a

directed verdict because it misapplied the Utah Pattern of Unlawful Activity Act. See

generally Utah Code Ann. §§ 76

‐ 10

‐ 1601 to

‐ 1609 (2008 & Supp. 2011). Whether the trial

court properly interpreted the statute is a question of law that we review for

correctness. See State v. Steele

, 2010 UT App 185, ¶ 12, 236 P.3d 161.

¶15 Finally, Kelson argues that the trial court violated her due process rights and rule

22(a) of the Utah Rules of Criminal Procedure when it declined to grant a continuance

to allow Kelson to present additional documents to the court. These arguments each

present a question of law, “which we review for correctness.” See State v. Wanosik

, 2001

UT App 241, ¶ 9, 31 P.3d 615, aff’d

, 2003 UT 46, 79 P.3d 937.

ANALYSIS

I. The Due Process Implications of Jury Instruction 25

¶16 Before analyzing Kelson’s claims regarding Jury Instruction 25, we discuss the

due process concerns implicated by the instruction. “The Due Process Clause of the

Fourteenth Amendment ‘protects the accused against conviction except upon proof

beyond a reasonable doubt of every fact necessary to constitute the crime with which he

is charged.’” Francis v. Franklin

, 471 U.S. 307, 313 (1985) (quoting In re Winship

, 397 U.S.

358, 364 (1970)). This principle “prohibits the State from using evidentiary

presumptions in a jury charge that have the effect of relieving the State of its burden of

persuasion beyond a reasonable doubt of every essential element of a crime.” Id. In

determining whether a jury instruction relieves the State of this burden, “‘[t]he

threshold inquiry’” requires that we “‘determine the nature of the presumption it

describes.’” Id. at 313

‐ 14 (quoting Sandstrom v. Montana

, 442 U.S. 510, 514 (1979)). “A

mandatory presumption instructs the jury that it must infer the presumed fact if the

State proves certain predicate facts.” Id. at 314. Mandatory presumptions violate due

process “if they relieve the State of the burden of persuasion on an element of an3 In Searle v. Milburn Irrigation Co.

, 2006 UT 16, 133 P.3d 382, the Utah Supreme

Court explained that “there are two evidentiary burdens: a burden of persuasion and a

burden of production.” Id. ¶ 49 n.2 (citing Koesling v. Basamakis

, 539 P.2d 1043, 1046

(Utah 1975)). While the burden of persuasion “refers to ‘[a] party’s duty to convince the

fact

‐ finder to view the facts in a way that favors that party,’” the burden of production

“refers to ‘[a] party’s duty to introduce enough evidence on an issue to have the issue

decided by the fact

‐ finder, rather than decided against the party in a peremptory

ruling.’” Id. (alterations in original) (quoting Black ʹ s Law Dictionary 190 (7th ed. 1999)).

The term “burden of proof” “encompasses both the burden of persuasion and the

burden of production.” Id.

4 This is a slightly different formulation than set forth by the United States

Supreme Court in the seminal cases of Sandstrom v. Montana

, 442 U.S. 510 (1979), and

Francis v. Franklin

, 471 U.S. 307 (1985). Several years after those decisions, the Supreme

Court in Boyde v. California

, 494 U.S. 370 (1990), clarified the standard of review for jury

instructions. See id. at 378

‐ 80 (citing Franklin, 471 U.S. at 315

‐ 16; Sandstrom

, 442 U.S. at

516

‐ 17) (“Although there may not be great differences among these various phrasings, it

is important to settle upon a single formulation for this Court and other courts to

employ in deciding this kind of federal question.”). The Court explained that the focus

on the “reasonable likelihood that the jury” applied the instruction unconstitutionally,

“better accommodates the concerns of finality and accuracy than does a standard which

makes the inquiry dependent on how a single hypothetical ‘reasonable’ juror could or

(continued...)

20100299

‐ CA 7 offense.” 3 Id. In contrast, “[a] permissive inference suggests to the jury a possible

conclusion to be drawn if the State proves predicate facts, but does not require the jury

to draw that conclusion.” Id. Permissive inferences do not violate the Due Process

Clause because the State is still required “to convince the jury that the suggested

conclusion should be inferred based on the predicate facts proved.” See id. Thus, we

must first determine whether Jury Instruction 25 created a mandatory or permissive

presumption that a note is a security.

¶17 Our analysis of which type of instruction is at issue “must focus initially on the

specific language challenged.” Id. at 315. Reviewing that language, we consider

“‘whether there is a reasonable likelihood that the jury has applied the challenged

instruction in a way’ that violates the Constitution.” 4 Estelle v. McGuire

, 502 U.S. 62, 724 (...continued)

might have interpreted the instruction.” See id. at 380.

20100299

‐ CA 8 (1991) (quoting Boyde v. California

, 494 U.S. 370, 380 (1990)). Here, the challenged

instruction states, “You are instructed that a ‘note’ is presumed to be a security.

However, certain notes have been classified as non

‐ securities.” The instruction then

lists several nonsecurities and describes a four

‐ factor test to determine whether a note

not on the list should be considered a nonsecurity. Even if the State is correct that

Instruction 25 provides an accurate statement of the law, see Reves v. Ernst & Young

, 494

U.S. 56, 66

‐ 67 (1990) (announcing the four

‐ factor Reves test in a civil context); State v.

Burkinshaw

, 2010 UT App 245, ¶ 11 n.3, 239 P.3d 1052 (reviewing the trial court’s

application of the Reves test in a criminal case, “without deciding whether Utah should

adopt that test” to determine whether a note is a security); see also Utah Code Ann. 61

‐ 1

‐ 13(1)(ee)(i)(A) (2011) (“‘Security’ means a

. . . note.”), it may not supplant the

factfinder’s role with a mandatory presumption, see State v. Chambers

, 709 P.2d 321, 325

(Utah 1985) (noting that presumptions in criminal cases may be permissible if they do

not supplant “the factfinder’s responsibility at trial, based on evidence adduced by the

State, to find the ultimate facts beyond a reasonable doubt”). In determining whether

an instruction has done so, we pay “careful attention to the words actually spoken to

the jury.” See Sandstrom

, 422 U.S. at 514.

¶18 The State contends that the presumption in Instruction 25 is permissive because

the information that certain notes are not securities and the explanation of the four

‐ part

Reves test reasonably informed the jury that it could determine that the promissory

notes were nonsecurities. However, even assuming that the additional language made

the presumption rebuttable, we are not persuaded that it was permissive, rather than

mandatory. We consider the United States Supreme Court’s decision in Francis v.

Franklin

, 471 U.S. 307 (1985), instructive on this point.

¶19 In Franklin

, the defendant challenged the following instruction:

The acts of a person of sound mind and discretion are

presumed to be the product of the person’s will, but the

presumption may be rebutted. A person of sound mind and

discretion is presumed to intend the natural and probable20100299

‐ CA 9 consequences of his acts but the presumption may be

rebutted.

Id. at 315. In holding that the instruction violated the defendant’s due process rights by

impermissibly shifting the burden of persuasion, the Supreme Court first identified the

presumption as mandatory due to the use of command, rather than permissive,

language. Id. at 316 (determining that the language “are presumed” and “is presumed”

commanded the jury to apply the presumption at issue). Next, the Franklin court

rejected the argument that the defect had been cured by the permissive rebuttal

language because

[t]he very statement that the presumption “may be rebutted”

could have indicated to a reasonable juror that the defendant

bore an affirmative burden of persuasion once the State

proved the underlying act giving rise to the presumption.

Standing alone, the challenged language undeniably created

an unconstitutional burden

‐ shifting presumption with

respect to the element of intent.

Id. at 318.

¶20 Instruction 25 is similar to the instruction held to violate the due process clause

in Franklin

. It begins with language of command, stating, “You are instructed that a

‘note’ is presumed to be a security.” The instruction does not state that the jury “may”

presume that a note is a security or tell the jurors that they have a choice in whether to

follow the presumption. Instead, the words spoken to the jury instruct that “a ‘note’ is

presumed to be a security.” Furthermore, unlike the instruction in Franklin, Instruction

25 does not expressly state that the mandatory presumption may be rebutted. Even

assuming, as the State suggests, that the jury could infer as much from the description

of the four

‐ factor test, nothing in Instruction 25 explains that the State, not Kelson, had

the burden of proving that these notes were securities. Thus, as in Franklin

, the jury

may have understood that Kelson “bore an affirmative burden of persuasion” once the

State established that she had provided notes to Employee, Daughter, and Brother,

thereby “giving rise to the presumption.” See id. at 318.20100299

‐ CA 10 ¶21 However, we may not rely only on the language of Instruction 25 in deciding

whether Kelson’s due process rights were compromised. Instead, we must consider a

reasonable jury’s understanding in the context of the jury instructions and the record as

a whole. See McGuire

, 502 U.S. at 72 (“It is well established that the instruction ‘may not

be judged in artificial isolation,’ but must be considered in the context of the

instructions as a whole and the trial record.” (quoting Cupp v. Naughten

, 414 U.S. 141,

147 (1973))).

¶22 “Other instructions [and the record] might explain the particular infirm language

to the extent that a reasonable jur[y] could not have considered the charge to have

created an unconstitutional presumption.” Franklin

, 471 U.S. at 315; see also Estelle v.

McGuire

, 502 U.S. 62, 72 (1991). In reviewing the other instructions or explanations in

the record, we must determine if they sufficiently “explained the proper allocation of

burdens

. . . [so] that any ambiguity” in the instruction did not result in a reasonable

likelihood that the jury would apply the instruction so as to “shift[] the burden of

persuasion” to Kelson. See Franklin

, 471 U.S. at 319. However, “[l]anguage that merely

contradicts and does not explain a constitutionally infirm instruction will not suffice to

absolve the infirmity. A reviewing court has no way of knowing which of the two

irreconcilable instructions the jurors applied in reaching their verdict.” Id. at 322.

¶23 The State argues that there are several clarifying instructions that rectify any

deficiencies in Instruction 25. Specifically, the State notes that the jury was repeatedly

instructed that the State had the burden of proving beyond a reasonable doubt all the

elements of the crime charged. However, the United States Supreme Court has rejected

that argument, explaining that

general instructions on the State’s burden of persuasion and

the defendant’s presumption of innocence are not

“rhetorically inconsistent with a conclusive or burden

‐ shifting presumption,” because “[t]he jury could have

interpreted the two sets of instructions as indicating that the

presumption was a means by which proof beyond a

reasonable doubt

. . . could be satisfied.”

See Francis v. Franklin

, 471 U.S. 307, 319 (1985) (alteration in original) (quoting Sandstrom

v. Montana

, 442 U.S. 510, 518 n.7 (1979)). For example, in this case, there is a reasonable5 The State also argues that the court’s preliminary jury instructions cured any

defect in Instruction 25. As discussed, the fact that the general jury instructions contain

statements that the State was required to prove each element of the crime beyond a

reasonable doubt is not enough to clarify Instruction 25. See supra ¶ 23.

20100299

‐ CA 11 likelihood that the jury could have determined that although the State needed to prove

the existence of a security beyond a reasonable doubt, the presence of a promissory note

was sufficient to satisfy the State’s burden, given its possible conclusion that Kelson did

not succeed in rebutting this presumption. See, e.g., id. at 319. Thus, these generalized

instructions do not clarify the mandatory rebuttable presumption contained in

Instruction 25.

¶24 Additionally, the State relies on Instruction 38, which states in relevant part,

Evidence has been admitted relating to Civil

Judgments previously issued against Ms. Kelson. These

Judgments are admitted for a very limited purpose.

Specifically, if your deliberations determine that the Promissory

Notes involved in this case were proven to be “securities” you

may then consider whether the existence of such Judgments

constituted a “material fact” for purposes of the disclosure

requirements referenced in other Instructions.

On the other hand, if your deliberations determine that

the Promissory Notes were not shown to be “securities,” you

must disregard the Judgments entirely.

(Emphasis added.) The State contends that this instruction “impressed upon the jury

the State’s burden to prove that the notes were securities.” However, while this

instruction may indicate that the jury must decide whether notes are securities, it does

nothing to clarify the burden of persuasion.

¶25 Additionally, the State argues that the State’s and Kelson’s closing arguments

and the testimony of the Director clarified that it was the State’s burden to prove that

the promissory notes were securities. 5 During closing, the State argued,20100299

‐ CA 12 [A]s you look at these promissory notes, you will need to

determine, not [Director], not me, you need to determine

. . . whether they were securities under the test that you’ve

heard about; but more particularly under the jury

instructions that you have in front of you. There’s a jury

instruction that goes to what we call the Reves test. You

presume that a promissory note is a security and that is

because, if you look at the definitional instruction, it says

[w]hat securities are and one of the definitions is [a] note.

And because under the law notes are listed as a

security, they are presumed to be securities. But, and you

heard the testimony from [Director], that there are certain

notes that have been carved out, that don’t need to be

regulated as securities.

. . .

The State then analyzed the facts of the case against the four

‐ factor test, concluding that

“[n]otes are presumed to be securit[ies] and this is not one of those ones that gets carved

out.”

¶26 Despite this lengthy argument about the presumption and the State’s repeated

mention that the jurors were to apply the four

‐ factor test to determine whether the

notes were a security, the State never clarified which party bore the burden of

persuasion on that issue. Thus, even with the State’s closing argument, the jury

reasonably could have interpreted the jury instruction to mean that the presumption

shifted the burden to Kelson to prove an exception.

¶27 Nor are we convinced that this confusion was eliminated by Director’s

testimony. Contrary to the State’s assertion, Director did not discuss whether the State

or Kelson had the burden of proving or disproving whether the promissory notes were

a nonsecurity. Rather, Director explained that the four

‐ factor “test basically says that

. . . you accept the presumption that a note is a security, you start with that. And unless

that presumption is overcome, it remains a security.” Rather than supporting the

State’s position, Director’s testimony reinforced the unconstitutional burden shifting in

Instruction 25 because he referred to a presumption that had to be “overcome” in order

for the note to be a nonsecurity. Because the State’s case was based on the proposition

that the promissory notes were securities, it would have no reason to try to “overcome”6 Kelson also asks this court to review this issue under the doctrine of plain error.

Because we reverse and remand on Kelson’s claim of ineffective assistance of counsel,

we need not consider this argument.

20100299

‐ CA 13 the presumption. Therefore, rather than curing the problem, Director’s testimony

exacerbated it.

¶28 Only Kelson attempted to clarify the proper burden during closing argument.

She argued that the State must prove that the promissory notes were securities beyond

a reasonable doubt. However, even Kelson did not explain that the State could not

meet its burden by relying on the mandatory presumption or on Kelson’s failure to

persuade the jury that the notes met the four

‐ factor test. Cf. Francis v. Franklin

, 471 U.S.

307, 319 (1985) (rejecting an argument that an instruction explaining that the

government had the burden to prove each element of the crime beyond a reasonable

doubt cured another instruction containing a mandatory rebuttable presumption). In its

rebuttal argument, the State did not address which party bore the burden on this issue.

Instead, it simply reiterated that the jury had the responsibility to decide whether the

promissory notes were securities, without explaining the burden of persuasion on the

issue.

¶29 Based on our review of the jury instructions and the record as a whole, we are

convinced that there is a reasonable likelihood that the jury impermissibly interpreted

Instruction 25 as shifting to Kelson the burden of rebutting the mandatory presumption

that the promissory notes were securities. See Estelle v. McGuire

, 502 U.S. 62, 72 (1991).

This was in violation of Kelson’s due process rights because the State was “not forced to

prove ‘beyond a reasonable doubt

. . . every fact necessary to constitute the crime

. . . charged.’” See Sandstrom v. Montana

, 442 U.S. 510, 523 (1979) (omissions in original)

(quoting In re Winship

, 397 U.S. 358, 364 (1970)). However, because Kelson failed to

preserve this issue below, we will now consider her claim under the doctrine of

ineffective assistance of counsel. 6

II. Ineffective Assistance of Counsel Regarding Instruction 25

¶30 Kelson argues that her counsel provided ineffective assistance by stipulating to

Instruction 25. To succeed on this claim, Kelson must establish “(1) that h[er] counsel

performed deficiently, i.e., that counsel’s performance ‘fell below an objective standard20100299

‐ CA 14 of reasonableness,’ and (2) that [s]he was prejudiced by h[er] counsel’s deficient

performance.” See State v. Kucharski

, 2012 UT App 50, ¶ 3, 272 P.3d 791 (quoting

Strickland v. Washington

, 466 U.S. 668, 687

‐ 88, 691

‐ 92 (1984)), cert. denied (Utah June 28,

2012).

A. Deficient Performance

¶31 We first determine whether counsel’s conduct was deficient. In evaluating

counsel’s conduct, we “must indulge a strong presumption that counsel’s conduct falls

within the wide range of reasonable professional assistance; that is, the defendant must

overcome the presumption that, under the circumstances, the challenged action might

be considered sound trial strategy.” Strickland

, 466 U.S. at 689 (internal quotation marks

omitted). The State argues that because Kelson’s “primary defense to her charges was

that the notes here were not securities,” Jury Instruction 25 may have aided in this

defense, and as a matter of sound trial strategy, defense counsel may have chosen not to

object. According to the State, the explanation of the four

‐ factor test and the indication

that some notes are not securities was more helpful to the defense than a recitation of

the statutory definition of security, which includes notes. See generally Utah Code Ann.

§ 61

‐ 1

‐ 13(1)(ee)(i) (2011) (indicating that “‘[s]ecurity’ means a

. . . note,” without

providing any exceptions). While providing this detail may have been advantageous to

Kelson if combined with an explanation that the State retained the burden of proving

beyond a reasonable doubt that the promissory notes did not qualify as nonsecurities,

nothing in the instruction does that. Without that explanation, we cannot agree that it is

a sound trial strategy to consent to a jury instruction that informs the jury that “notes

are presumed to be securities,” when the primary defense is that the notes are not

securities. Indeed, we can conceive of no sound tactical reason why trial counsel would

stipulate to an instruction that likely shifted the burden of persuasion to Kelson on an

essential element of the crimes charged. Accordingly, we conclude that counsel’s

performance was deficient.

B. Prejudice

¶32 Next, we must determine whether counsel’s performance prejudiced Kelson.

“‘To show prejudice in the ineffective assistance of counsel context, the defendant bears

the burden of proving that counsel’s errors actually had an adverse effect on the defense

and that there is a reasonable probability that, but for counsel’s errors, the result of the7 Because Kelson has established prejudice, we need not consider her argument

that prejudice should be presumed due to Instruction 25’s unconstitutional shifting of

the burden of persuasion.

20100299

‐ CA 15 proceeding would have been different.’” State v. Fowers

, 2011 UT App 383, ¶ 21, 265

P.3d 832 (quoting State v. Munguia

, 2011 UT 5, ¶ 30, 253 P.3d 1082). “‘A reasonable

probability is a probability sufficient to undermine confidence in the outcome.’” State v.

Lenkart

, 2011 UT 27, ¶ 38, 262 P.3d 1 (quoting Strickland

, 466 U.S. at 694). In examining

counsel’s alleged errors, we “‘consider the totality of the evidence’ to determine

whether the errors ‘alter[ed] the entire evidentiary picture,’” id. (alterations in original)

(quoting Strickland

, 466 U.S. at 695

‐ 96), and note that “a verdict or conclusion only

weakly supported by the record is more likely to have been affected by errors than one

with overwhelming record support,” Strickland

, 466 U.S. at 696.

¶33 The State contends that the evidence was overwhelming that the notes were

securities and that therefore Kelson has not been prejudiced. While there are instances

where an erroneous jury instruction is harmless, we are persuaded that this is not such

a case. 7 Cf. State v. Powell

, 2007 UT 9, ¶ 23, 154 P.3d 786 (holding that an incorrect

instruction that intent for murder could include depraved indifference was harmless

where the uncontested evidence established the intent to kill and the defendant did not

dispute intent, instead claiming that he had been misidentified as the assailant); Gardner

v. SPX Corp.

, 2012 UT App 45, ¶ 38, 272 P.3d 175 (holding that an erroneous proximate

cause instruction was harmless where the jury found that there was no negligence, thus

completing deliberations before reaching that issue). Here, we have concluded that

Instruction 25 created a reasonable likelihood that the jury understood that Kelson bore

the burden of rebutting a mandatory presumption that the notes were securities.

Because the evidence created a meaningful conflict on that issue, our confidence in the

verdict has been undermined by the improper shifting of the burden of persuasion.

¶34 In making this determination, we look to the four

‐ part Reves test outlined in

Instruction 25, which provides that if a note resembles one of the listed exceptions to the

presumption, it may be a nonsecurity if it “meet[s] a four factor test.” See generally Reves

v. Ernst & Young

, 494 U.S. 56, 66

‐ 67 (1990). In particular, we consider whether the

evidence was so overwhelming on those factors that we are confident the jury would

have found that the notes were securities, even if properly instructed on the State’s

burden. See Strickland

, 466 U.S. at 696; Lenkart

, 2011 UT 27, ¶ 38; see also State v. Arnold

,8 Instruction 25 also provides that a note “exchanged to facilitate the purchase and

sale of a minor asset or consumer good

. . . is less sensibly described as a security.”

Kelson does not argue that this circumstance is present here.

9 For instance, Daughter and Brother each expected to receive a return of nearly

six times their investment over a period of one month. Employee would receive a

return of over ten times her investment, also over a period of one month.

20100299

‐ CA 16 2011 UT App 255U, ¶ 6 (mem.) (holding that where there was overwhelming evidence

supporting the defendants’ guilt, they could not show that they were prejudiced by

their counsel’s performance).

¶35 First, Instruction 25 directed the jurors to consider the motivations of the buyer

and seller, stating that “[i]f the seller’s purpose is to raise money for the general use of a

business enterprise or to finance substantial investments and the buyer is interested

primarily in the profit the note is expected to generate, the instrument is likely to be a

‘security.’” In contrast, the instruction explained that where a “note is exchanged

. . . to

correct for the seller’s cash

‐ flow difficulties, or to advance some other commercial or

consumer purpose, the note is less sensibly described as a ‘security.’” 8 The evidence at

trial showed that the notes were to be used to purchase a letter of credit to correct cash

‐

flow difficulties that prevented Kelson and the Owners from closing the transactions.

According to Kelson, the purchasers knew the funds were to purchase the letter of

credit and, therefore, that they were not for the general use of a business enterprise or to

finance a substantial financial investment. However, the testimony of the buyers

indicates that they were primarily interested in profit, especially given the substantial

return in such a short amount of time. 9 Furthermore, Director opined that the cash flow

difficulties in this case might not fall within the Reves test and that if the buyer is

motivated primarily by profits, the promissory notes are likely securities. Thus, the jury

was tasked with determining from this evidence whether the motivations of the buyers

and the seller of the notes weighed in favor of finding that the notes were securities.

We are convinced that the evidence was conflicting on this point and accordingly

determine that the jury may have weighed this factor in favor of Kelson.20100299

‐ CA 17 ¶36 The second Reves factor outlined in Instruction 25 tells the jury to “[e]xamine the

‘plan of distribution’ of the instrument to determine whether it is an instrument in

which there is common trading for speculation or investment.” In this case, it is

undisputed that this factor weighs against classification of the promissory notes as

securities because none of the purchasers indicated that they planned to resell the

promissory notes. Accordingly, the evidence on this factor is overwhelmingly in favor

of Kelson.

¶37 The third Reves factor, as set forth in Instruction 25, focuses on “the reasonable

expectations of the investing public.” The State’s expert testified that “if someone in the

general public looks at the transaction

. . . [and] use[s] the word investment then it is

more likely a security than not.” At trial, Kelson argued that the buyers were not

making an investment because they would own no interest in the real estate project, but

were “simply lending money for a short term loan.” However, the minimum return

promised on the notes was nearly 600% over a one

‐ month period and the buyers

referred to them as investments. Accordingly, we believe the evidence on this factor

weighs strongly in favor of a finding that the promissory notes are securities.

¶38 Finally, the fourth Reves factor instructed the jury to “[e]xamine whether some

factor such as the existence of another regulatory scheme significantly reduces the risk

of the instrument, thereby rendering application of the Securities Acts unnecessary.”

We have not been directed to any evidence of a regulatory scheme here that could

support weighing this factor against a finding that the notes are securities.

¶39 Kelson presented evidence from which the jury could have concluded that at

least two of the relevant factors weighed in favor of finding that the notes were not

securities. Furthermore, the jury was free to weigh the four factors against each other

however it deemed appropriate. Thus, the evidence was not so overwhelming in the

State’s favor that we have confidence in the verdict despite the impermissible shifting of

the burden of persuasion created by Instruction 25. Accordingly, Kelson has

established that her counsel’s ineffective performance in stipulating to Instruction 25

was prejudicial, and we reverse and remand for a new trial on the securities charges.20100299

‐ CA 18 III. The Sufficiency of the Evidence to Prove a Pattern of Unlawful Activity

A. Preservation

¶40 Kelson next contends that the alleged unlawful activity in this case is not a

pattern of unlawful activity as a matter of law. The State contends that Kelson failed to

preserve this issue for appellate review. “In order to preserve an issue for appeal, a

defendant must raise the issue before the [trial] court in such a way that the court is

placed on notice of potential error and then has the opportunity to correct or avoid the

error.” State v. Diaz

‐ Arevalo

, 2008 UT App 219, ¶ 10, 189 P.3d 85. In particular, “[t]he

issue must be sufficiently raised to a level of consciousness before the trial court and

must be supported by evidence or relevant legal authority.” Id. (internal quotation

marks omitted).

¶41 At the close of evidence on February 25, 2009, Kelson moved for a directed

verdict on the pattern of unlawful activity charge. Kelson asserted that “[a]lthough

there are multiple counts in this case, I would argue

. . . that there are not multiple

episodes, which [are] required under the definition of pattern [of] unlawful activity.”

Trial counsel relied on the statutory language and the dictionary definition of episode,

because “[t]here wasn’t anything in the Utah case law with regard to pattern of

unlawful activity.” See generally Utah Code Ann. § 76

‐ 10

‐ 1602(2) (Supp. 2011) (defining

“[p]attern of unlawful activity”).

¶42 While the State acknowledges that Kelson raised the argument that “the five

securities violations here constituted only a single episode of unlawful activity,” it

argues that Kelson failed to adequately preserve the issue. In particular, the State

contends that Kelson “misinformed the trial court” that there was no Utah authority on

this point because she did not call the trial court’s attention to the Utah Supreme

Court’s decision in Hill v. Estate of Allred

, 2009 UT 28, 216 P.3d 929. While we agree that

Hill is controlling, we cannot fault trial counsel for failing to cite it. The supreme court

issued the Hill decision on May 1, 2009, approximately two months after the conclusion

of Kelson’s trial on February 25, 2009. See id.

¶43 Our review of the directed verdict record indicates that Kelson specifically

argued to the trial court that “there [were] not multiple episodes, which is required

under the definition of pattern for unlawful activity.” In support of this argument,10 The State also contends that Kelson never argued in her appellate brief that her

acts did not extend over a substantial period of time. However, Kelson specifically

outlines the test provided in Hill v. Estate of Allred

, 2009 UT 28, 216 P.3d 929, including

the substantial period of time element. See id. ¶ 41. Immediately thereafter, Kelson

distinguishes this case from Hill

, stating, “[T]he conduct alleged in counts one through

five occurred during a period of just a few days.”

20100299

‐ CA 19 Kelson stated that “in many

. . . cases, there is a pattern of unlawful activity that can

stretch on for a long long time, years, sometimes.” Kelson asserted that the acts in this

case were the result of “a single episode” and thus “did not constitute a pattern as it’s

commonly understood.” While trial counsel did not expressly argue that the predicate

acts in this case were not committed over a “substantial period of time,” the supreme

court had not yet used that language to define a pattern of unlawful activity, as it later

did in Hill

. 10 See Hill

, 2009 UT 28, ¶ 41 (“The proper test for determining whether there

was a pattern of unlawful activity is whether there was ‘a series of related predicates

extending over a substantial period of time’ or a demonstrated threat of continuing

unlawful activity and not whether there were multiple schemes.” (quoting H.J. Inc. v.

Northwestern Bell Tel. Co.

, 492 U.S. 229, 242 (1989))). Instead, Kelson relied on the

definition of “[p]attern of unlawful activity” in Utah Code section 76

‐ 10

‐ 1602 and the

dictionary to support her motion for directed verdict made immediately upon the close

of evidence. See Utah Code Ann. § 76

‐ 10

‐ 1602(2). Nor has the State pointed to any Utah

authority available at the time of the directed verdict motion that defined the term

“episode” for these purposes. Under these circumstances, we are convinced that Kelson

sufficiently preserved this issue. See Diaz

‐ Arevalo

, 2008 UT App 219, ¶ 10.

B. Merits

¶44 The Utah Pattern of Unlawful Activity Act (the Utah Act) defines a “pattern of

unlawful activity,” in relevant part, as

engaging in conduct which constitutes the commission of at

least three episodes of unlawful activity, which episodes are

not isolated, but have the same or similar purposes, results,

participants, victims, or methods of commission, or

otherwise are interrelated by distinguishing characteristics.

Taken together, the episodes shall demonstrate continuing20100299

‐ CA 20 unlawful conduct and be related either to each other or to

the enterprise.

Utah Code Ann. § 76

‐ 10

‐ 1602. Kelson argues that under this definition, her crimes can

only constitute a single criminal episode because although there were multiple acts and

multiple victims, each act sought to accomplish the same objective over a short period

of time. In contrast, the State argues that under Hill

, multiple acts which “contribute[]

to the same objective” can be considered multiple criminal episodes. See 2009 UT 28,

¶ 40. While we agree in principle with the State’s interpretation of the law, we

determine that the predicate acts in this case do not constitute multiple episodes as

defined in Hill

. See id. ¶ 41.

¶45 In Hill

, the plaintiff filed a complaint asserting a civil pattern of unlawful activity

on the ground that “each unlawful act by [d]efendants” was a separate “episode of

unlawful activity,” constituting a pattern. See id. ¶ 35. In contrast, the defendants

argued that, although not accomplished through a single act, their conduct “was only

one episode of criminal activity.” See id. The district court agreed with defendants, and

the plaintiffs appealed. See id.

¶46 In interpreting the Utah Act, the supreme court compared the federal Racketeer

Influenced and Corrupt Organizations Act (RICO), see generally 18 U.S.C. §§ 1961

‐ 68

(2006), with Utah Code section 76

‐ 10

‐ 1602(2), see generally Utah Code Ann. § 76

‐ 10

‐ 1602(2) (Supp. 2011). See Hill

, 2009 UT 28, ¶¶ 38

‐ 40. It determined that the phrases

“pattern of unlawful activity” under section 76

‐ 10

‐ 1602(2) and “pattern of racketeering

activity” under RICO “should be interpreted to mean the same thing.” Id. ¶ 38.

Accordingly, the Utah Supreme Court applied United States Supreme Court precedent

interpreting RICO to determine the meaning of “pattern of unlawful activity” under

Utah’s Act. See id. ¶¶ 38

‐ 40. Relying on Sedima, S.P.R.L. v. Imrex Co.

, 473 U.S. 479

(1985), and the legislative history of the Utah Act, our supreme court determined that a

“pattern of unlawful activity” under the Utah Act requires “‘continuity plus

relationship.’” See Hill

, 2009 UT 28, ¶ 38 (quoting Sedima

, 473 U.S. at 496 n.14) (internal

quotation marks omitted); see also Utah Code Ann. § 76

‐ 10

‐ 1602(2) (“Taken together, the

episodes shall demonstrate continuing unlawful conduct and be related either to each

other or to the enterprise.”). To define “continuity plus relationship,” the court looked

to H.J. Inc. v. Northwestern Bell Telephone Co.

, 492 U.S. 229 (1989). See Hill

, 2009 UT

28, ¶ 39. There, the United States Supreme Court held that “‘to prove a pattern of20100299

‐ CA 21 racketeering activity a plaintiff or prosecutor must show that the racketeering

predicates are related, and that they amount to or pose a threat of continued criminal

activity.’” See Hill

, 2009 UT 28, ¶ 39 (quoting H.J.

, 492 U.S. at 239). The H.J. court

further clarified that “‘[c]ontinuity is both a closed

‐ and open

‐ ended concept, referring

either to a closed period of repeated conduct, or to past conduct that by its nature

projects into the future with a threat of repetition.’” See Hill

, 2009 UT 28, ¶ 39 (quoting

H.J.

, 492 U.S. at 241). The Utah Supreme Court further reasoned that “[c]ontinuity may

be demonstrated ‘over a closed period by proving a series of related predicates

extending over a substantial period of time,’ and if a RICO action is ‘brought before

continuity can be established in this way,’ continuity can be shown if ‘the threat of

continuity is demonstrated.’” See id. (quoting H.J., 492 U.S. at 242). Although not

mentioned in Hill

, the H.J. court further explained that “[p]redicate acts extending over

a few weeks or months and threatening no future criminal conduct do not satisfy this

requirement.” See H.J., 492 U.S. at 242.

¶47 After analyzing these cases, our supreme court concluded that “[t]he proper test

for determining whether there was a pattern of unlawful activity is whether there was

‘a series of related predicates extending over a substantial period of time’ or a

demonstrated threat of continuing unlawful activity and not whether there were

multiple schemes.” See Hill v. Estate of Allred

, 2009 UT 28, ¶ 41, 216 P.3d 929 (quoting

H.J.

, 492 U.S. at 242). The Hill court then applied that test to the facts, explaining that

each of the defendants’ unlawful acts served the same purpose of stealing Hill’s money,

involved similar parties, and involved the same victim. See id. It further noted that the

unlawful acts occurred over a five

‐ year period. See id. ¶ 41. Based on those facts, the

Hill court concluded that the defendants’ acts constituted a pattern of unlawful activity.

See id.

¶48 The facts in this case are distinguishable from Hill

. Although Kelson’s actions

involved multiple alleged crimes committed for the common purpose of obtaining cash,

Kelson’s alleged crimes took place over a matter of days. Kelson first alerted Employee

about the opportunity shortly before October 11, 2001, and all checks exchanged for

promissory notes were deposited by October 15, 2001. Thus, Kelson’s alleged unlawful

activity took place over a “closed period,” and the State was required to show “‘a series11 On appeal, the State makes no allegation that Kelson’s conduct posed a

continuing threat of unlawful activity. See Hill

, 2009 UT 28, ¶ 41.

12 Rather than arguing that Kelson’s acts extended over a substantial period of

time, the State analyzes this issue under the doctrine of plain error. It concludes that

Utah law is unclear on what constitutes a substantial period of time, and thus

determines that any error was not plain. We need not determine whether it is plain that

several days does not constitute a substantial period of time because Kelson adequately

preserved this issue.

13 The State calls our attention to the Utah Supreme Court’s decision in State v.

McGrath

, 749 P.2d 631 (Utah 1988), where a defendant was convicted of racketeering

based on seventy

‐ four drug transactions occurring over a four

‐ month period. Id. at 636.

We do not consider McGrath inconsistent with our decision here. While the drug sales

occurred over only four months, the high volume of transactions “‘by its nature projects

into the future with a threat of repetition.’” See generally Hill

, 2009 UT 28, ¶ 39 (quoting

H.J. Inc. v. Northwestern Bell Tel. Co.

, 492 U.S. 229, 241 (1989)). As indicated, supra note

11, in this case the State makes no allegation that Kelson’s acts posed a continuing threat

of unlawful activity.

14 Because we reverse Kelson’s conviction on this count and reverse and remand

for a new trial on the charges of offer or sale of unregistered securities; sale by an

unlicensed broker

‐ dealer, agent, or investment advisor; and securities fraud, we need

not consider Kelson’s challenge to her sentences under rule 22(a) of the Utah Rules of

Criminal Procedure.

20100299

‐ CA 22 of related predicates extending over a substantial period of time.’” 11 See Hill

, 2009 UT

28, ¶ 41 (quoting H.J.

, 492 U.S. at 242). The State does not contend that it has done so,

nor could it have made such a showing. 12 As the Supreme Court noted in H.J.

, “[p]redicate acts extending over a few weeks or months,” which do not threaten “future

criminal conduct,” do not constitute a substantial period of time sufficient to show

continuity. See H.J.

, 492 U.S. at 242. Accordingly, Kelson’s acts over the course of only a

few days are insufficient as a matter of law to satisfy Hill ’s requirement that a pattern of

unlawful activity must occur over a substantial period of time. 13 See Hill

, 2009 UT

28, ¶ 41. Thus, the trial court erred in denying Kelson’s motion for a directed verdict

and we vacate Kelson’s conviction on the charge of pattern of unlawful activity. 1420100299

‐ CA 23 CONCLUSION

¶49 Jury Instruction 25 created a mandatory rebuttable presumption that a note is a

security, thereby unconstitutionally shifting the burden of persuasion from the State to

Kelson. In stipulating to this instruction, Kelson’s counsel performed deficiently.

Because the evidence was not overwhelming on at least two of the four factors relevant

to whether the promissory notes here were securities, this deficiency prejudiced Kelson.

Additionally, the trial court erred in denying Kelson’s motion for a directed verdict

with respect to the pattern of unlawful activity charge because her activities do not

constitute a pattern of unlawful activity as a matter of law. We vacate Kelson’s

conviction for pattern of unlawful activity and reverse and remand for a new trial on

the charges of offer or sale of unregistered securities; sale by an unlicensed broker

‐

dealer, agent, or investment advisor; and securities fraud.

¶50 Vacated in part, and reversed and remanded in part.

____________________________________ Carolyn B. McHugh,

Presiding Judge

‐‐‐‐‐

¶51 WE CONCUR:

____________________________________ Gregory K. Orme, Judge

____________________________________ James Z. Davis, Judge