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ZUPAN v. CALIFORNIA DEPARTMENT OF CORPORATIONS – Leagle.com May 24, 2011

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ZUPAN v. CALIFORNIA DEPARTMENT OF CORPORATIONSSUZIE ZUPAN et al., Plaintiffs and Appellants, v. CALIFORNIA DEPARTMENT OF CORPORATIONS, Defendant and Respondent.No. A128948.Court of Appeals of California, First District, Division Three.Filed May 23, 2011. NOT TO BE PUBLISHED IN OFFICIAL REPORTSThis is an appeal from a judgment following the trial court’s denial of a petition for writ of administrative mandamus (petition) filed by appellants Suzie and Paul Zupan. The underlying administrative proceedings resulted in decisions by respondent Department of Corporations (department) to revoke seven of appellants’ finance-related business licenses, permits and applications, and to bar them from holding certain positions of employment, management or control in the State of California. For reasons discussed below, we affirm the judgment.FACTUAL AND PROCEDURAL BACKGROUNDIn 2003, appellants, husband and wife, formed Latitude Capital Management, Inc. (LCM), a real estate loan brokerage firm of which Suzie Zupan was president and sole shareholder. In 2005, LCM and Suzie Zupan filed applications for investment advisor representative certificates, which were issued simultaneously by the department on June 8, 2005. In LCM’s application, Suzie Zupan was identified as LCM’s president and sole shareholder, but no mention was made of Paul Zupan or his role in the company.Subsequently, appellants formed the LCM High Income Fund, LLC (High Income Fund), followed by the Strategic Income Fund LLC (Strategic Income Fund), two mortgage pool investment funds managed by LCM.1 Both Funds eventually applied to the department for permits to offer and sell securities and lender/broker licenses pursuant to the California Finance Lenders Law, Financial Code section 22000, et seq. These applications, signed by Suzie Zupan under penalty of perjury, identified Suzie Zupan as president and person in charge of LCM, the Funds’ manager, without mentioning Paul Zupan or his corporate role. The High Income Fund was issued a lender/broker license on or about November 16, 2004, and a permit to offer and sell securities on or about March 2, 2005. The Strategic Income Fund was issued a lender/broker license on or about February 23, 2007, and a permit to offer and sell securities on or about July 5, 2007.Around this time, on July 18, 2006, Paul Zupan filed an application with the department for an investment advisor representative certificate. In response to specific questions on the application form, Paul Zupan disclosed that he had pled guilty to two felony counts of grand theft, for which he served prison time; his license to practice law had been suspended; he had resigned from the California State Bar with disciplinary proceedings pending for a crime of moral turpitude; and he had declared bankruptcy at least once. Also in this application, Paul Zupan identified his role in LCM as “clerk.” Based upon this representation that his corporate role was limited to that of clerk, the department issued Paul Zupan an investment advisor representative certificate on August 23, 2006.
1. We collectively refer to LCM, the High Income Fund, and the Strategic Income Fund as the “investment companies,” and collectively refer to the High Income Fund and Strategic Income Fund as the “Funds.”2. Appellants and a number of investors in the Funds later became involved in a separate civil lawsuit filed by appellants in California court.3. Paul Zupan was, among other things, a licensed real estate salesperson.4. Code of Regulations, title 10, section 1422 mandates, among other things, disclosure of the following information in an application for a lender/broker license: “ITEM NUMBER 6 OF APPLICATION (Corporations and Other Business Entities): . . . [¶¶] 6.b. Officers and Directors: [¶] List the full name of each of the officers, directors, managers, and trustees.[¶] 6.c. Person(s) Who Will Be In Charge of the Place of Business: [¶] Provide the full name, address, telephone number, and e-mail address of all managers as `person(s) who will be in charge of the place of business.’ `Managers’ are persons with authority to manage the operations of the organization in California. [¶] 6.d. and 6.e. Other Persons: [¶] List the full name of any other person with direct responsibility for the applicant’s proposed activities under the CFLL license in 6.d. and any other person that owns or controls, directly or indirectly, 10% or more of the applicant in Item 6.e.” (Emphasis added.)

In addition, the applicant must sign an execution page that includes, among other things, the following declaration:

“In the matter of the Application for a License under the California Finance Lenders Law, I, the undersigned, authorized to act on behalf of the applicant, declare that the following statements are true and correct: [¶] . . . [¶]

“4. That in the event of any change of its officers, directors, or any other persons named in this application, the applicant will file an amendment to the application containing the same information in relation to the new person(s) as is required in the application, within thirty days from the date of the change, with the California Corporations Commissioner.” (Cal. Code Regs., tit. 10, § 1422.)

5. LCM’s application for a lender/broker license, filed with the department on or about August 17, 2004 and signed by Suzie Zupan, identified one person — Suzie Zupan — as the person “in charge of the place of business.” Because Paul Zupan was not identified as a person in charge of the business in this application, there was no SIQ prepared on his behalf or any disclosures relating to his disciplinary history.6. The Form ADV is filed online with the Investment Advisor Registration Depository, which then forwards applications from California applicants to the department.7. On LCM’s Form ADV, filed on March 2, 2005 and signed electronically by Suzie Zupan, as LCM’s president, Suzie Zupan is the sole person listed in Schedule A. On August 16, 2007, an amended Form ADV was filed and signed electronically by Suzie Zupan on behalf of LCM. This amended form added James Wall as a direct owner and executive officer of LCM and designated both Suzie Zupan and Dois Brock as control persons. Subsequently, another amended Form ADV was filed and signed electronically by Suzie Zupan on behalf of LCM in early 2008. This amended form deleted James Wall as a direct owner and executive officer of LCM while continuing to designate Suzie Zupan and Dois Brock as control persons.8. Under Item 10 on LCM’s original Form ADV, as well as both amended forms, Dois Brock is the only person listed. Further, there is no disciplinary history provided for any advisory affiliate under Item 11 and the answer to Question F on all forms is “No.”9. On LCM’s original Form ADV, Suzie Zupan was the only reviewer identified. However, the amended form filed in 2007 added the following information: “[LCM] manages the LCM High Income Fund, LLC, which amounts to reviewing one account. Suzie Zupan and Paul Zupan are assigned to review this account. Review consists of managing the daily review of investments, maintaining sufficient liquidity and supervising receivables (loan servicing is contracted out.)” In addition, this amended form listed both Suzie Zupan and Paul Zupan in Schedule F, Item 6, when asked to identify “each principal executive of applicant or each person with similar status or performing similar functions.” Paul Zupan is also identified as the Operations Manager of Latitude Capital and Latitude Financial.10. LCM’s Schedule K for the High Income Fund listed only Suzie Zupan and Dois Brock.11. Appellants acknowledge they intended that Paul Zupan would eventually become an officer, director and shareholder of LCM, but only when appropriate for him to do so.12. For example, the ALJ permitted appellants to elicit testimony that one of the investors referred to Paul Zupan as a “scumbag” in an email to other members of the Fund, but then sustained an objection when appellants further asked the investor how he came “to believe that we were criminals and scumbags and committing a ponzi scheme.” In doing so, the AJL reasoned such evidence was irrelevant to whether appellants had a duty to disclose certain information to the department, and then added: “We could be here all day listening.”13. The requirements of these regulations, as well as the evidence relating to Paul Zupan’s corporate role and appellants’ submissions to the department, are set forth above. (See pp. 10-18.) We see no reason to repeat them here.14. Financial Code section 22169, subdivision (a) provides in relevant part: “The commissioner may, after appropriate notice and opportunity for hearing, by order, censure or suspend for a period not exceeding 12 months, or bar from any position of employment, management, or control any finance lender, broker, mortgage loan originator, or any other person, if the commissioner finds either of the following: [¶] (1) That the censure, suspension, or bar is in the public interest and that the person has committed or caused a violation of this division or rule or order of the commissioner, which violation was either known or should have been known by the person committing or causing it or has caused material damage to the finance lender, broker, or mortgage loan originator, or to the public. [¶] (2) That the person has been convicted of or pleaded nolo contendere to any crime, or has been held liable in any civil action by final judgment, or any administrative judgment by any public agency, if that crime or civil or administrative judgment involved any offense involving dishonesty, fraud, or deceit, or any other offense reasonably related to the qualifications, functions, or duties of a person engaged in the business in accordance with the provisions of this division.”15. Corporations Code section 25401 makes it “unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”16. Specifically, in finding Paul Zupan not credible, the ALJ relied on the fact that he failed to advise Fields that dividends had been suspended in a “Monthly Update” emailed to her on September 18, 2007, the day before he allegedly gave her this information by telephone. Nor did Paul Zupan cross-examine Bright at the hearing regarding whether Fields told him that she had learned distributions were suspended. According to the ALJ, “if Paul Zupan had made such an unexpected disclosure [about the Fund's nonpayment of distributions], it would have been reasonable to document the disclosure and the investor’s acknowledgement of it in going forward with the investment.” Finally, the ALJ relied on the fact, reflected in the documentary evidence, that Paul Zupan in fact considered returning Bright’s investment in the High Income Fund and excluding him from the Fund’s subsequent write-down. According to the ALJ, it was unlikely Paul Zupan would have considered taking these actions had he disclosed to Bright and Fields prior to their investment that the Fund was not paying dividends.

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