People v. Chapman

1

THE PEOPLE, Plaintiff and Respondent, v. GREGORY T. CHAPMAN, Defendant and Appellant.

B303437

California Court of Appeals, Second District, Seventh Division

March 22, 2024

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. BA425361 Curtis B. Rappe, Judge. Affirmed in part sentence is reversed, vacated and remanded with instructions.

Valerie G. Wass for Defendant and Appellant.

Rob Bonta, Attorney General, Lance E. Winters, Chief Assistant Attorney General, Susan Sullivan Pithey, Senior Assistant Attorney General, Michael C. Keller and Charles S. Lee Deputy Attorneys General, for Plaintiff and Respondent.

MARTINEZ, J.

INTRODUCTION

From 2003 to 2011 Gregory Chapman and his associates offered securities in their company, Authotecq. Authotecq held itself out as having a successful credit card technology, and Chapman personally authored materials selling investments in the company that predicted hundreds of millions of dollars in expected revenue. Authotecq attracted $11 million in investments from individual investors. But investors did not know Authotecq sold securities in violation of state law, actually earned no revenue, never fully developed its technology, and misappropriated almost all investor funds.

For his role in Authotecq, Chapman was convicted by a jury of 69 counts of securities fraud (Corp. Code, § 25401, subd. (b)), 68 counts of grand theft (Pen. Code, § 487, subd. (a)), and one count of participating in a fraudulent securities scheme (Corp. Code, § 25541).^[1] He was sentenced to a total of 30 years.

Chapman raises 10 errors on appeal. While we reject Chapman's challenges to his conviction, we remand for resentencing. Chapman is entitled to the benefit of newly amended sections 654 and 1170, subdivision (b), as well as a stay of his sentence on the fraudulent securities scheme count under section 654. We also direct the trial court to modify the sentencing minute orders and the abstract of judgment to correct certain errors. Accordingly, the judgment of conviction is affirmed, but the sentence is reversed, vacated, and remanded to the trial court.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Information

On November 22, 2016 Chapman was charged by information with 74 counts of grand theft (§ 487, subd. (a)), 74 counts of securities fraud (Corp. Code, § 25401, subd. (b)), and one count of participating in a fraudulent securities scheme (Corp. Code, § 25541). The information charged codefendants Rogel Patawaran and James Litzinger with the same counts. The information included three special allegations as to all counts: (1) the defendants committed two or more related felonies with the material element of fraud, involving a pattern of related felony conduct and the taking of more than $500,000 (§ 186.11, subd. (a)(2)); (2) the defendants intentionally took funds exceeding $100,000 (§ 1203.045, subd. (a)); and (3) the defendants, in the commission of a felony, intentionally took property in an amount exceeding $1,300,000 (§ 12022.6, subds. (a)(3), (b)).

Litzinger pleaded guilty to two counts and the first special allegation, receiving an eight-year prison sentence. Chapman and Patawaran pleaded not guilty and were tried together.

B. The People's Evidence at Trial

1. Chapman, Patawaran, and Litzinger Formed Authotecq

In the 1990s Chapman, Patawaran, and Litzinger met and founded a data security company, RGTecq. They hired salesman Wallace Thomas to raise investments for RGTecq on a 30 to 35 percent commission. Chapman was in charge of preparing RGTecq's "private placement memoranda," or "PPMs":

documents soliciting funds from investors by explaining how investments will be used and projecting the company's future revenue. RGTecq eventually shut down after being unable to pay its rent and its employees. Dozens of investors in RGTecq received no return on their investment.

In 2001 or 2002 Chapman and Patawaran decided to launch a new company, Authotecq, focused on credit card processing technology. Litzinger served as Authotecq's president. Thomas joined Authotecq as a salesperson in charge of raising investment funds, marketing the technology, and keeping in contact with investors. Thomas hired another salesman, Michael Diaz, to help recruit investors.

2. Authotecq Sold "Stock" to Investors, Then Diverted Investor Funds

Thomas and Diaz cold-called potential investors to offer stock in Authotecq, although Authotecq was not qualified to sell securities and neither Thomas nor Diaz were licensed to sell securities in California. Thomas falsely told would-be investors that merchants were already processing credit card transactions through Authotecq and Authotecq was earning revenue from these merchants. Thomas also falsely told potential investors their funds were invested directly into the company. In reality, Thomas and Diaz kept 45 percent of the funds raised as their commission.

Once Thomas and Diaz identified potential investors, Litzinger mailed them an investment package, including a PPM, and Thomas or Diaz would follow up to execute the deal. Each investor received an Authotecq stock certificate. No investors received any return on their investment.

The information filed against Chapman focused on fraudulent sales of stock to nine named victims, many retired. The victims testified to repeated contact from Thomas and Diaz providing updates on Authotecq's purported finances and progress to solicit continued investments.

Duane Anderson, a retired financial analyst, bought stock in Authotecq on 13 occasions between 2005 and 2010 for approximately $90,000.

Chuck Mills, also retired, invested six times in Authotecq in 2010 and 2011. Mills invested $92,500.

Richard Joyce, an optometrist, bought stock in Authotecq 12 times from 2003 to 2011. All told, Joyce invested $85,000.

Guyla Etter first invested in Authotecq in 2004. Through 2010, Etter made five more investments for a sum of $55,000.

Mary Jane Ludwig invested $100,000 from her retirement account in 2007.

Gary Ruchaber invested 11 times from 2007 to 2011. Ruchaber's investments totaled $430,000.

Kenneth Hoagland, a retired sales manager, invested $940,000 between 2008 and 2011 in 15 separate investments.

John Orlando, a retired teacher, invested twice in 2010 for a total of $15,000.

Joe Baker, a retired dentist, also invested a total of $15,000 over two occasions in 2010.

Authotecq received $11,461,117.50 in investor funds and generated zero revenue from its product. The investor funds were diverted into various shell companies owned by Chapman, Chapman's son, Patawaran, Litzinger, and others. Chapman and his son personally received over $1.4 million in Authotecq investor funds through Chapman's company IQSecure and over $2 million in investor funds through Chapman's company Shadoworks. Chapman spent more than $1.8 million of investor funds on personal expenses for "automobiles, household repairs, medical visits, residential leases, and restaurant and entertainment expenses."

3. Authotecq Misrepresented Its Product

Unbeknownst to investors, Authotecq's credit card processing technology was not viable. In 2008 Authotecq purchased a preexisting credit card gateway company, Valetpay, and renamed it Paysentinel.^[2] Only seven merchants used Paysentinel, and even then, only occasionally. The gateway could not process debit cards, merchants could not sign up to use the gateway online, and the gateway could not bill merchants for transactions. When Paysentinel sought security certification in 2009, the security assessor observed the gateway had only ever processed 20 to 25 credit card transactions, and there was no current traffic on the gateway-as compared to the typical gateway traffic of 300,000 to 400,000 credit card transactions per month.

Authotecq did not use its investor funds to address these deficiencies or to improve its product. After Authotecq purchased Paysentinel, the sole software developer working on the product was not paid regularly. After discussing the nonpayment with Chapman, the software developer worked only 15 hours a week and received payment up front. Paysentinel's CEO, who Chapman hired to develop the gateway for the market, was also paid irregularly and lacked the budget to effectively market the product.

4. Chapman's Role in Authotecq

Litzinger testified that early into the Authotecq venture Chapman prepared a written list of Chapman's duties. In the document, Chapman claimed ownership of the business side of Authotecq: interviewing and hiring employees, researching information to include in Authotecq PPMs, preparing financial charts and graphs for the PPMs, dealing with shareholders, raising money, and naming new products, subsidiaries, and services. As summarized by Chapman: "Basically no one moves or really does anything unless I do it first." Chapman was identified as "Chairman of the Board of Directors" in some of Authotecq's corporate filings with the Delaware Secretary of State.

Thomas testified Chapman prepared all offering materials for Authotecq, including the PPMs, the initial investor subscription package, and subsequent investor updates and talking points. PPMs were issued in May 2003, May 2005, May 2007, August 2009, January 2010, August 2010, November 2011 and February 2012. Although the PPMs generally explained Authotecq's "Use of Proceeds" from investments, they did not disclose any sales commissions paid to Thomas and Diaz until the company's final PPM in 2012, which disclosed a 5 percent sales commission. Each PPM stated large fundraising goals, ranging from $2.5 million to $5 million, and reflected that almost all investor funds would be reinvested into Authotecq. The PPMs also reported "projected gross revenue." For...