Court Opinion

ID: 3163172
Source: CourtListenerOpinion
Date Created: 2015-12-16 17:01:01.813992+00
Date Added: 2024-06-11T11:58:50.408970
License: Public Domain

FILED
                                                             United States Court of Appeals
                                                                     Tenth Circuit
                   UNITED STATES COURT OF APPEALS
                                                                  December 16, 2015
                                TENTH CIRCUIT                    Elisabeth A. Shumaker
                                                                     Clerk of Court

 UNITED STATES OF AMERICA,

              Plaintiff - Appellee,

 v.                                                      No. 14-6057
                                                        (W.D. Okla.)
 BRIAN WILLIAM McKYE,                           (D.C. No. 5:11-CR-00045-R-1)

              Defendant - Appellant.

                           ORDER AND JUDGMENT *

Before GORSUCH, MURPHY, and MORITZ, Circuit Judges.

I.    Introduction

      Following a jury trial, Appellant Brian William McKye was convicted of

seven counts of securities fraud, in violation of 15 U.S.C. § 78j(b), and one count

of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h).

In this appeal, McKye challenges both his convictions and his sentence.

      *
        This order and judgment is not binding precedent except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
      During McKye’s trial, a witness testified that an Oklahoma state court had

previously determined the investment notes at issue were securities. McKye

argues this was inadmissible hearsay and the district court erred by permitting it

to be admitted. At sentencing, the district court calculated McKye’s advisory

guidelines range by applying the sophisticated means enhancement set out in

USSG § 2B1.1(b)(10)(C). McKye argues it was clear error to apply this

enhancement.

      Exercising jurisdiction pursuant to 28 U.S.C. § 1291 and 18 U.S.C.

§ 3742(a), this court affirms McKye’s convictions and sentence.

II.   Background

      In 2011, a jury found McKye guilty of securities fraud and conspiracy. His

convictions, however, were overturned by this court. United States v. McKye, 734

F.3d 1104, 1111 (10th Cir. 2013). McKye was retried in 2014 and convicted a

second time. Once again, a central question at trial was whether the investment

notes McKye marketed and sold were securities. Id. at 1107 & n.4. To prove this

element, the Government put on evidence showing the investment notes were both

investment contracts and notes that qualify as securities. See 15 U.S.C.

§ 77b(a)(1) (defining the term “security” to include notes and investment

contracts).

      McKye, who represented himself at trial, called Patricia LaBarthe as his

first witness. LaBarthe’s testimony focused on an investigation into McKye’s

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activities conducted by the Oklahoma Department of Securities in 2006. The

investigation was initiated when the Department of Securities received an

anonymous complaint about Global West Funding, an entity controlled by

McKye. 1 LaBarthe was the agency lawyer assigned to the investigation. During

cross-examination, the Government questioned LaBarthe about the outcome of a

state civil action filed against McKye and his companies as a result of her

agency’s investigation. The investment notes at issue in that civil action were the

same as the ones at issue in McKye’s federal criminal trial. LaBarthe testified

that the state court determined the investment notes were securities. This

testimony forms the basis for McKye’s challenge to his convictions.

      McKye was found guilty and the matter proceeded to sentencing. Adopting

the recommendation made in the Presentence Investigation Report, the district

court calculated McKye’s advisory guidelines range by applying the sophisticated

means enhancement set out in USSG § 2B1.1(b)(10)(C). This enhancement

increased McKye’s base offense level by two levels. Application of this

enhancement forms the basis for McKye’s challenge to his sentence.

      1
       “The charged fraud . . . implicated the following entities owned or
operated by McKye: Global West Funding, LLC and Global West Financial, LLC
(collectively “Global West”); Sure Lock Financial, LLC and Sure Lock Loans,
LLC (collectively “Sure Lock”); The Wave-Goldmade, Ltd. (“TW Goldmade”);
and Heritage Estate Services, LLC (“Heritage”).” United States v. McKye, 734
F.3d 1104, 1105 (10th Cir. 2013).

                                        -3-
III.   Discussion

       A.    Hearsay Testimony

       McKye argues the district court erred by admitting LaBarthe’s testimony

regarding the Oklahoma state court’s determination that the investment notes

marketed by McKye were securities. The Government does not contest McKye’s

assertion that the judicial finding was inadmissible hearsay because it was an

“out-of-court . . . statement by a judge . . . offered to prove the truth of the matter

asserted.” Herrick v. Garvey, 298 F.3d 1184, 1191 (10th Cir. 2002). The parties

do, however, argue over whether the issue was adequately preserved. The

Government takes the position McKye failed to clearly object to LaBarthe’s

testimony during trial and, thus, the issue should be reviewed by applying the

plain-error standard. See United States v. Hinson, 585 F.3d 1328, 1338 (10th Cir.

2009) (reviewing for plain error when the defendant failed to object to the

admission of hearsay testimony). McKye argues the objection he lodged

immediately after LaBarthe’s testimony was sufficient to preserve the hearsay

issue and his convictions should be reversed unless the Government can prove

any error in admitting the testimony was harmless. See United States v. Collins,

575 F.3d 1069, 1073 (10th Cir. 2009) (applying the harmless-error standard to a

trial court’s ruling on a hearsay objection). It is unnecessary to resolve the

dispute over the appropriate standard of review because, even if McKye’s

                                          -4-
objection was adequate to preserve the issue, the admission of LaBarthe’s

testimony was harmless.

      “A harmless error is one that does not have a substantial influence on the

outcome of the trial; nor does it leave one in grave doubt as to whether it had

such effect.” United States v. Jones, 44 F.3d 860, 873 (10th Cir. 1995). The

erroneous admission of hearsay evidence is harmless when the Government

presents strong evidence of a defendant’s guilt. United States v. Shaw, 758 F.3d

1187, 1197 (10th Cir. 2014). Because there was strong evidence that the

investment notes were securities under both the investment contract and the note

tests, we have no doubt LaBarthe’s testimony did not influence the outcome of

McKye’s trial.

      Under the investment contract theory, an instrument is a security if: (1) an

individual invests money, (2) in a common enterprise, (3) with an expectation of

profits derived solely through the efforts of others. SEC v. W.J. Howey Co., 328

U.S. 293, 298-99 (1946). Nearly a dozen witnesses testified about their

transactions with McKye. One testified he was told the money he gave McKye

would be used to buy properties and he would receive a 9.5% return without

doing anything other than transferring the funds. Another testified she invested

more than $40,000 with McKye’s company, Global West Financial, with the

expectation she would receive a 9.75% rate of return generated by investments in

real estate. The testimony of ten additional witnesses was substantively identical.

                                         -5-
Although victims were also told their money was collateralized by liens or

mortgages on real property, there was evidence that only eleven of 528 lien

assignments were filed with a county clerk.

      Further, the investment note contracts referred to the victims as

“investors”; multiple victims testified they understood they were investing money

in McKye’s businesses, not making a loan to him; and there was no evidence any

victim was in the business of making loans. See Zabriskie v. Lewis, 507 F.2d

546, 551-52 (10th Cir. 1974) (holding promissory notes received in “isolated

transactions outside normal commercial circles” by individuals seeking to make

investments are securities, not commercial loans). The victims’ testimony was

consistent with the testimony of McKye’s co-conspirator who stated that McKye

explained his scheme in terms of investments and instructed sales representatives

to market the instruments as investments. McKye told the sales representatives

he was able to offer an extremely high interest rate to investors because of a

purported agreement he had negotiated with Bank of America.

      In sum, the Government’s evidence showed McKye pooled the money he

received from the victims and used it to operate his businesses, including making

loans to third parties. 2 Because the investments were not fully collateralized, if

      2
       The evidence showed between sixty and eighty individuals transferred
funds to one of several entities controlled by McKye. A portion of these funds
was funneled to a “pay day loan” business operated by McKye, and loaned out to
individuals at 100% to 200% interest.

                                         -6-
the third-party loans were not repaid, investors in McKye’s scheme would not

receive the return they had been promised and they would lose their initial

investment. 3 In this way, the security of the victims’ money was inexorably

intertwined with the success of McKye’s business ventures. The Government’s

evidence strongly supports the conclusion the instruments were investment

contracts because victims of McKye’s scheme invested money in a common

enterprise with the expectation of receiving payments based on McKye’s efforts,

not their own.

      There was equally strong evidence the investment notes were notes that

qualified as securities. At trial, McKye admitted the instruments were notes, but

took the position they were a type that does not qualify as a security. But see

Reves v. Ernst & Young, 494 U.S. 56, 65 (1990) (holding “every note” is

presumed to be a security). The following notes, and those that bear a “strong

resemblance” to them are not securities:

      [a] note delivered in consumer financing, [a] note secured by a
      mortgage on a home, [a] short-term note secured by a lien on a small
      business or some of its assets, [a] note evidencing a “character” loan
      to a bank customer, short-term notes secured by an assignment of
      accounts receivable, or 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

      3
       It is immaterial that victims were told their investments were risk free and
collateralized by real property. Woodward v. Terracor, 574 F.2d 1023, 1024
(10th Cir. 1978) (“In determining whether a particular transaction is, or is not, an
investment contract, . . . emphasis is placed on economic reality.”).

                                         -7-
      collateralized), and notes evidencing loans by commercial banks for
      current operations.

SEC v. Thompson, 732 F.3d 1151, 1159 (10th Cir. 2013) (quotation omitted).

Four factors are relevant to determining whether a note resembles one of the

excluded notes: (1) “the motivations that would prompt a reasonable seller and

buyer to enter into [the transaction],” (2) “the plan of distribution of the

instrument,” (3) “the reasonable expectations of the investing public,” and (4)

“whether some factor such as the existence of another regulatory scheme

significantly reduces the risk of the instrument.” Reves, 494 U.S. at 66-67

(quotation omitted).

      As to the first factor, the Government presented considerable evidence, in

the form of direct testimony, that the victims of McKye’s scheme were motivated

to invest by the expectation of a substantial return on their investment. The

second and third factors also weigh heavily in favor of the jury’s determination

that the notes were securities. The Government’s evidence showed that McKye

marketed the investment notes to the general public using television and

newspaper advertising, mailings, and telemarketing calls. There is no indication

in the record that any restrictions were placed on who could invest. Further,

multiple victims testified they thought of themselves as investors, not as lenders.

Their testimony was consistent with both the Government’s evidence showing

                                          -8-
McKye marketed the notes as investments and the documents themselves which

made numerous references to the term “investor.”

      The fourth factor also strongly supports the Government’s burden of

showing the notes were securities. The Government elicited testimony from a

special agent with the Criminal Investigation Division of the Internal Revenue

Service that his review of the financial records disclosed the “investor funds were

not protected at all.” Even assuming McKye is correct that the evidence upon

which this witness relied actually showed that 29% of the investment notes were

collateralized, 4 that would mean that 71% of the invested funds were at full risk

of loss. Thus, the Government’s evidence, even interpreted as McKye advocates,

amply showed the actions allegedly taken by McKye to collateralize the

investment notes did not meaningfully reduce the risk of loss to investors.

      Having considered all the evidence presented at trial, we conclude the

Government presented strong evidence that the investment notes were securities

under both the investment contract theory and the note theory. There is no

reasonable probability LaBarthe’s testimony had any influence on the jury’s

      4
       There are serious analytical flaws in McKye’s calculation that 29% of the
investment notes were secured in some way from risk of loss. Most glaringly, his
analysis is applicable only to the notes entered into after September 2007. It is
from that point forward that McKye purported to collateralize the notes with lien
assignments. McKye’s own argument is necessarily a concession that one
hundred percent of the investment notes sold before 2007 (approximately
$3,230,000 in invested funds) were not even purportedly collateralized and, thus,
100% at risk.

                                         -9-
finding on that element of the Government’s case. See Kotteakos v. United

States, 328 U.S. 750, 764-65 (1946) (holding a nonconstitutional error is harmless

if, “after pondering all that happened without stripping the erroneous action from

whole,” the reviewing court is “sure that the error did not influence the jury, or

had but very slight effect”). Accordingly, any error in admitting the testimony

was harmless.

      B.     Sentence Enhancement

      McKye also challenges the sentence imposed by the district court, arguing

the court erred by assessing a two-level increase to his offense level for use of

sophisticated means. McKye concedes that his failure to challenge the

application of the enhancement at sentencing means his claim is reviewed only for

plain error. See United States v. Frost, 684 F.3d 963, 971 (10th Cir. 2012). To

meet his burden under the plain error standard, McKye must show the district

court erred, the error was plain, the error affected his substantial rights, and the

error seriously affects the fairness, integrity, or public reputation of judicial

proceedings. United States v. Craig, 794 F.3d 1234, 1238 (10th Cir. 2015).

      McKye argues the district court committed error that was plain because the

facts found by the court 5 do not show his offense conduct was “especially

      5
        For purposes of the challenge to his sentence, McKye does not dispute any
of the district court’s factual findings. See United States v. Svacina, 137 F.3d
1179, 1187 (10th Cir. 1998) (“This court has held repeatedly that factual disputes
not brought to the attention of the court do not rise to the level of plain error.”).

                                          -10-
complex or especially intricate,” as required for the enhancement to apply. USSG

§ 2B1.1 cmt. n.9(B). We disagree.

      McKye ran his scheme undetected from 2004 to 2009, using multiple

entities to coordinate the fraud. He used telemarketers employed by Heritage

Estate Services, a limited liability company in which he was not a member, to

market the investment notes. He attempted to conceal commission payments to

Heritage Estate Services. The investment notes were issued by Global West

Financial or Sure Lock Financial. Interest payments, however, were made by The

Wave-Goldmade, another entity controlled by McKye, making it appear the funds

had actually been invested. McKye used mass marketing techniques, including

newspaper and television ads, to attract more investors. Further, he induced

individuals to invest in his scheme by deceiving them into believing their

investments were collateralized by real property.

      Because the evidence shows McKye used sophisticated means to perpetrate

and conceal his fraud, the district court did not err, let alone plainly err, in

applying the two-level sentencing enhancement. See id. (defining “sophisticated

means” as “especially complex or especially intricate offense conduct pertaining

to the execution or concealment of an offense”).

                                          -11-
IV.   Conclusion

      The judgment of conviction and sentence is affirmed.

                                       ENTERED FOR THE COURT

                                       Michael R. Murphy
                                       Circuit Judge

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