Of course the lawyerly answer is: “maybe.”
Ronald Duane Dunham challenged his criminal conviction for securities fraud, arguing that the Cherokee Village lots he sold did not qualify as securities under the California Corporation Code.
Mr. Dunham got in this position by persuading a number of elderly victims to invest over a million dollars with him, ostensibly to purchase undeveloped “lots” of land in Cherokee Village, Arkansas, and/or support Dunham’s real estate development efforts there between 2004 and 2007. The lots were sold to the victims at an inflated price and marketed at times in conjunction with Ed McMahon.
The crash of 2008 happened and the victims sued to get their money back. The victims lawyer after reviewing documents from discovery thought Dunham’s actions were bad enough to warrant a criminal investigation and the District Attorney agreed. Dunham was eventually convicted.
Keith Paul Bishop highlighted this case last week: Court Rules Lot Sales Were Sales Of Securities.
” U.S. District Court Judge Gonzalo P. Curiel denied Dunham’s petition. Citing SEC v. Schooler, 905 F.3d 1107 (9th Circ. 2018), Judge Curiel reasoned that a reasonable jury could have concluded that lots sold by Dunham were not independent real estate transactions but the sale of securities “
Mere “lots” as securities? Usually, these cases involve some form of management company, investment fund or partnership. The Denial of Habeus Corpus even cites the Schooler case where a general partnership in real estate was considered a security.
Dunham’s trial court jury had found that lots represented the victims’ “shares in [the] enterprise.”
None of the California victims had any ability to develop homes in Arkansas, and they expected “Dunham and company” to sell their lots for them. The victims were relying on Dunham to bring professional management, homebuilding, and financing experience to the project. They had no desire to live in Arkansas themselves, except possibly Marilyne who would consider it after first realizing a profit. The victims sought a return on their investment, and a profitable retirement community required a certain volume of lots to succeed. On a whole, and considering the purpose of our securities laws to protect the public from fraudulent investment schemes, the Cherokee Village lot transactions qualified as investment contracts.
Page 56 of the Writ of Habeus Corpus
The federal court agreed. There didn’t seem to be any formal agreement for the Dunham to manage the investments. But, all of the victims testified they
were told they were purchasing lots in order to be part of and profit from a future retirement development in the area. Dunham held events where he presented plans for the development and marketing campaigns after the development of the area. There was some evidence that Dunham himself thought there was a common enterprise.
This is a big extension of the Howey test to real estate. The sale of dirt in a remote area, coupled with a seller’s promises are enough to bring the transaction into the definition of “investment contract.”
Sources:
- People v. Dunham, Court of Appeals of California, Fourth District, Division One. Filed February 7, 2018.
- Ronald Duane Dunham v. Stan Shiff, et al., Order Denying Petition for Writ of Habeus Corpus, 18cv0863 GPC Filed June 5, 2019
- Court Rules Lot Sales Were Sales Of Securities by Keith Paul Bishop