Securities Fraud, Money Laundering Convictions Overturned Because of Erroneous Jury Instruction

US v. McKye, 2013 WL 4419330, No. 12-6108 (10th Cir. 8/20/13) (published): Court reverses defendant's convictions for securities fraud and conspiracy to launder money derived from the fraud. The charges involved 8 transactions and implicated numerous entities owned or operated by defendant. One of those businesses was Heritage Estate Services, which would prepare revocable trusts for clients. If clients could not afford the full cost of the service, they could finance it for 36 months by signing a promissory note in favor of Heritage. Some of the loans included documentation of a claimed lien on the client's home. The loans were sold were another entity owned or operated by defendant, Global West.
Heritage also offered to its clients investment notes issued by Global West, that allegedly paid high rates of return, The notes were "backed" by the trust loans and represented as being backed by real estate notes and mortgages. More than $5 million worth of these notes were sold and transferred to several entities owned or controlled by defendant. An IRS agent testified this was a Ponzi scheme.
Defendant sought a jury instruction requiring the jury to determine whether the investment notes at issue were securities for purposes of the charged crimes.The trial court refused, accepting the government's argument that the notes were presumed to be securities and defendant had not presented evidence to overcome the presumption. The Tenth reverses the convictions. The question of whether a note is a security has factual and legal components. The legal standard in Reves v. Ernst and Young, 494 US 56 (1990), must be applied to determine whether a particular note is a security. The trial court erred in instructing the jury that all notes are securities. Finally, the error was not harmless.