Opinion ID: 1984482
Heading Depth: 2
Heading Rank: 1

Heading: Diacide I.

Text: We briefly summarize the facts giving rise to the State's securities fraud case that was involved in Diacide I. See id. at 370-71. In 1988 Kathleen Starnes and her brother, Joseph Grady, incorporated Diacide Distributors, Inc. to promote, sell, and distribute certain products, including an environmentally-friendly insecticide. Starnes was president of Diacide and Grady was vice-president. The insecticide was manufactured and packaged by White Mountain of America, a corporation based in Grinnell, Iowa. Defendant Sam McHose became involved in the venture when he provided the initial financing to assist Diacide in purchasing the insecticide from White Mountain and to market the product. In November 1989, McHose, through his family-held corporation, E.S.P. & S., Inc. (ESP), entered into a written agreement with White Mountain to purchase 4000 cans of the insecticide at $4 per can. White Mountain and Starnes agreed to re-purchase the insecticide from ESP at a price of $5.50 per can. Herman Tripp, an owner of White Mountain, conceived the terms of the agreement and Starnes executed it as director of marketing for White Mountain. In the latter part of 1990 and early part of 1991, ESP, McHose's family-held corporation, loaned money to Diacide for inventory, marketing expenses, and operating expenses. Diacide agreed to repay the loans within sixty to 120 days at 16.66% interest. As of December 1991, Diacide allegedly owed ESP and McHose $102,283 on these loans. In early 1992, Starnes began looking for additional capital, allegedly to keep Diacide going. To this end she recruited three licensed insurance agents, Richard Johnson, Bruce Nelson, and Larry Kellogg, to sell ninety-day-marketing-inventory receipts and ninety-day-contract notes (Diacide notes). Certain promises and guarantees concerning the return on the investment were made to customers who purchased the notes. From the early part of 1992 through 1994, Starnes and her sales crew sold Diacide notes to more than seventy investors, mostly elderly people. As was later discovered, the note program was a fraud or Ponzi scheme. See id. at 378 (defining Ponzi scheme). Diacide used funds collected from new investors to pay off those whose notes had come due and to pay those involved in the scheme, their relatives or associates. As a result of the scheme, sixty-five of those investors lost more than $1.4 million. The State of Iowa, through Craig A. Goettsch, Iowa superintendent of securities, filed an equity action against Diacide, White Mountain, Tripp, Starnes, Grady, Kellogg, Nelson, Johnson and McHose in Iowa district court on March 3, 1994. [1] The petition alleged that the defendants violated various provisions of the Iowa Uniform Securities Act, see Iowa Code chapter 502, and sought numerous items of relief against the defendants. Among other things, the State sought, on behalf of the investors, restitution and disgorgement of profits against all defendants. See Iowa Code § 502.604(2) (authorizing various forms of relief, including restitution and disgorgement of profits). [2] Specifically, as to McHose, the State contended that, among other things, he aided and abetted securities fraud. [3] Pursuant to the State's request, the district court ordered the defendants to place certain funds in escrow pending the outcome of the proceedings and also ordered that the funds held in ESP's (McHose's family-owned corporation) bank account be frozen based on the State's contention that investor funds had been deposited into the account. The district court also ordered prejudgment attachment of McHose's personal and real property, including a non-homestead residence in Nevada, Iowa. The Nevada residence was sold while the case was pending in district court and all of the sale proceeds were placed in the escrow account pursuant to the district court's order. After a trial was held against Diacide, Starnes, Grady and McHose, the district court concluded that Diacide, Starnes and Grady had committed numerous securities violations, including securities fraud. [4] The court therefore entered judgment for restitution in favor of the State against Diacide, Starnes and Grady in the amount of $1,457,135. This amount represents all damages sustained by Diacide investors from the very beginning of the fraudulent Diacide note program. The court dismissed the claims against McHose, however, finding there was insufficient evidence to support them. The district court ordered that all funds in ESP's corporate bank account, which had been frozen, and the proceeds from the sale of the Nevada property be released to McHose. The State appealed and McHose cross-appealed. None of the other defendants appealed. On appeal, we concluded, among other things, that (1) Iowa Code section 502.503(1) may be utilized by the State to impose secondary liability on persons who aid and abet securities fraud; (2) that the remedies established in section 502.604(2) (order of rescission, restitution, or disgorgement) may be utilized by the State against aiders and abettors as well as primary violators; and (3) that McHose aided and abetted the violation of Iowa Code section 502.401 antifraud provisions. Diacide I, 561 N.W.2d at 384. We ordered that the case be remanded for further proceedings to allow the district court to grant appropriate relief consistent with our opinion. Id.