NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
PATRICK LEONARD SHUDAK, Plaintiff/Appellant,
v.
ARIZONA CORPORATION COMMISSION, Defendant/Appellee.
No. 1 CA-CV 15-0544
FILED 12-13-2016
Appeal from the Superior Court in Maricopa County
No. LC2014-000492-001
The Honorable Crane McClennen, Judge (Retired)
AFFIRMED
COUNSEL
Greenberg Traurig, LLP, Phoenix
By Brian J. Schulman, Nedda R. Gales
Counsel for Plaintiff/Appellant
Arizona Corporation Commission, Phoenix
By Ryan J. Millecam
Counsel for Defendant/Appellee
SHUDAK v. AZCC
Decision of the Court
MEMORANDUM DECISION
Judge Samuel A. Thumma delivered the decision of the Court, in which
Presiding Judge Patricia K. Norris and Judge Margaret H. Downie joined.
T H U M M A, Judge:
¶1 Patrick Shudak appeals from the superior court’s decision
affirming the Arizona Corporation Commission’s (ACC) decision that
Shudak violated the Arizona Securities Act and ordering him to pay
restitution and administrative penalties. Because Shudak has shown no
reversible error, the decision is affirmed.
FACTS1 AND PROCEDRAL HISTORY
¶2 From January 2008 until July 2009, Shudak offered, sold and
transferred membership units in Parker Skylar & Associates, LLC (PSA) to
various offerees in Arizona and elsewhere. Neither Shudak nor PSA were
registered securities salespersons or dealers, see Arizona Revised Statute
(A.R.S.) section 44-1941 (2016),2 and the membership units transferred were
unregistered, see A.R.S. §§ 44-1871, -1891. Promotional materials Shudak
provided stated the funds invested would be used to purchase and develop
real property. Shudak’s representations, and documents he provided, to
investors indicated funds invested in PSA would be used solely for that
purpose. Notwithstanding these representations, Shudak transferred
money invested in PSA to his personal account, to personal accounts
belonging to others (including his girlfriend) and to accounts of various
other businesses owned by or associated with Shudak.
¶3 Apart from these affirmative representations, Shudak did not
disclose to investors that multiple creditors were suing him in various cases
and that judgments had been entered against him. Shudak also failed to
1This court views the facts in the light most favorable to sustaining the
ACC’s decision. Shorey v. Ariz. Corp. Comm’n, 238 Ariz. 253, 255 ¶1 n.2 (App.
2015) (citing cases); Hirsch v. Ariz. Corp. Comm’n, 237 Ariz. 456, 458 ¶ 1 n.2
(App. 2015) (citing cases).
2Absent material revisions after the relevant dates, statutes and rules cited
refer to the current version unless otherwise indicated.
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SHUDAK v. AZCC
Decision of the Court
disclose to investors that he had added his girlfriend (who was a co-
defendant in some of the creditor lawsuits) as a co-signatory on PSA’s
accounts, despite the fact that PSA’s operating agreement authorized the
PSA manager (Shudak, at all times relevant here) as the sole signatory.
¶4 In mid-2008, Shudak secured a loan for PSA and, in return,
granted the lender a security interest in all of PSA’s assets and transferred a
20 percent interest in PSA to the lender. Almost immediately, the lender
perfected its security interest. At the time of the loan, only three investors
had invested. Shudak, however, did not inform those three investors, or
any of the subsequent investors, about the loan, transfer or security interest.
¶5 By July 2009, Shudak had assigned 132.5 percent of the PSA
membership units to various individuals or entities. Shudak did not,
however, inform the investors of this oversubscription. And
notwithstanding this oversubscription, Shudak then induced another
individual to make an investment in exchange for a security interest in 50
percent of PSA.
¶6 By December 2009, investors had become concerned when
Shudak stopped returning phone calls and failed to respond to requests for
information. Given concerns Shudak had taken perhaps as much as
$1,000,000 in investor funds, at the request of investors, on December 15,
2009, Shudak resigned as PSA manager and relinquished his PSA
membership units. In April 2010, Shudak filed for bankruptcy.
¶7 After Shudak ended his affiliation with PSA, investors tried
to salvage the project. However, in April 2013, the lender who received the
security interest in all of PSA’s assets in mid-2008 sued PSA, investors and
others. In May 2013, a balloon payment came due on the seller’s note for
the real property. When the investors were unable to sell the real property
to satisfy the balloon payment, it became subject to foreclosure. The record
provided does not describe the ultimate disposition of the property.
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SHUDAK v. AZCC
Decision of the Court
¶8 In September 2012, the ACC Securities Division (Division)
filed a 14-page notice of opportunity for hearing (Notice) against Shudak
and PSA,3 alleging violations of the Arizona Securities Act (ASA), A.R.S. §§
44-1801 to -2126. PSA did not appear or respond, a default was taken
against it and PSA is not a party to this appeal. Shudak, however, filed a
request for hearing.
¶9 After motion practice and other proceedings, a three-day
evidentiary hearing was held in June 2013 before administrative law judge
(ALJ) Marc E. Stern. ALJ Stern received exhibits and testimony from three
PSA investors, Division Certified Public Accountant Andrea McDermitt-
Fields and Division investigator Dulance Morin. Shudak was represented
by counsel, but elected not to attend the hearing, did not testify and called
no witnesses to testify on his behalf, although he had the opportunity to do
so. The parties then were allowed to file post-hearing briefs.
¶10 Approximately a year later, noting a backlog of cases, the
ACC’s Chief ALJ appointed ALJ Belinda A. Martin to preside over the case.
ALJ Martin wrote a 50-page recommended opinion and order (ROO). ALJ
Martin reviewed the record from the evidentiary hearing, “consulted with
ALJ Stern during her review of the record, [and] consulted with him if she
had any questions” during that review and the writing of the ROO.
¶11 After setting forth detailed factual findings, the ROO
concludes the PSA membership units were securities under A.R.S. § 44-
1801(26); Shudak “acted as a dealer and/or a salesman of securities” in
connection with the PSA offerings under A.R.S. § 44-1801(22); Shudak failed
to show that the securities were exempt from regulation under A.R.S. § 44-
2003; the securities, which were not registered or exempt, were offered and
sold in violation of A.R.S. § 44-1841; Shudak offered and sold unregistered
securities within and from Arizona in violation of A.R.S. § 44-1842; Shudak
(along with PSA) committed fraud in the offer and sale of unregistered
securities, including making untrue statements and omitting material facts,
in violation of A.R.S. § 44-1991; and Shudak controlled PSA within the
meaning of A.R.S. § 44-1999 and was jointly and severally liable with PSA
for violations of A.R.S. § 44-1991. The ROO recommended that the ACC
3 The notice also named as an additional respondent Promise Land
Properties, LLC (PLP), another Shudak entity. The ACC concluded PLP
violated the ASA, representing grounds for a cease and desist order, and
imposed restitution and an administrative penalty against PLP. PLP,
however, is not a party to this appeal.
4
SHUDAK v. AZCC
Decision of the Court
order Shudak to cease and desist from any future violations of the ASA,
that his actions constituted multiple violations of the ASA and were
grounds for restitution and administrative penalties and recommended
that the ACC order Shudak to pay $1,996,500 in restitution (subject to any
offset Shudak could show) and pay an administrative penalty of $150,000.
¶12 Shudak filed timely exceptions to the ROO. After an open
meeting before the ACC, the ACC rejected Shudak’s exceptions and
unanimously adopted the ROO as written. After the ACC issued the
opinion and order (Decision) in September 2014, Shudak unsuccessfully
sought rehearing.
¶13 Shudak then timely challenged the Decision in superior court.
[Id.] After full briefing and oral argument, the superior court affirmed the
Decision. This court has jurisdiction over Shudak’s timely appeal of the
superior court’s decision pursuant to A.R.S. §§ 12-913,4 -2101(A)(1) and -
120.21(A)(1).
DISCUSSION
I. Standard Of Review.
¶14 In substance, Shudak presses three arguments: (1) no
substantial evidence supports the Decision; (2) the restitution and
administrative penalty imposed were “arbitrary and capricious, and
contrary to law” and (3) the ACC violated Shudak’s due process rights by
adopting recommendations from an ALJ “who did not preside over” the
evidentiary hearing, “and, therefore, did not observe witness testimony”
and making findings “based on new fraud charges never litigated by the
parties or disclosed before the hearing.”
¶15 This court reviews the superior court’s decision to “determine
whether the underlying administrative decision of the Commission was
illegal, arbitrary, capricious, or involved an abuse of discretion.” Shorey v.
Arizona Corp. Comm’n, 238 Ariz. 253, 257 ¶ 11 (App. 2015) (citations and
internal quotations omitted). For factual challenges, this court’s review is
limited to whether there is substantial evidence in the record to support the
finding. Arizona Corp. Comm’n v. Pac. Motor Trucking, 116 Ariz. 465, 467
4Notwithstanding its reference to “the supreme court,” A.R.S. § 12-913 “has
been construed as also allowing an appeal to the court of appeals, which
was created after § 12-913 was enacted.” Svendsen v. Arizona Dept. of Transp.,
Motor Vehicle Div., 234 Ariz. 528, 533 ¶ 13 (App. 2014).
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SHUDAK v. AZCC
Decision of the Court
(App. 1977). This court independently reviews constitutional and legal
arguments. Webb v. State ex rel. Arizona Bd. of Med. Examiners, 202 Ariz. 555,
557 ¶ 7 (App. 2002). With these standards in mind, the court addresses
Shudak’s arguments in turn.
II. Substantial Evidence Supports The Decision.
A. The Decision Properly Found The Offering Was Not
Exempt From Registration.
¶16 Shudak argues the investments were part of a private offering
and, accordingly, exempt from registration under A.R.S. § 44-1844(A)(1).
Shudak argues the offering was exempt based on four factors: (1) the
number of offerees; (2) the sophistication of offerees; (3) the size and
manner of the offering and (4) the relationship of the offerees to the issuer.
Shudak had the burden of proof to show the offering was exempt. See A.R.S.
§ 44-2033; see also State v. Baumann, 125 Ariz. 404, 411 (1980) (“there must be
strict compliance with all the requirements of the exemption statute”). As
noted above, however, Shudak did not testify and did not offer any
affirmative testimony on his behalf. On this record, Shudak has not shown
the ACC erred in determining that Shudak “had the burden of proving the
applicability of an exemption, which he did not do.” Nor has Shudak shown
any legal error by the ACC in applying the factors he cites in determining
the offering was not exempt from registration.
B. The Decision Properly Found Shudak Liable As A Control
Person Of PSA.
¶17 Shudak argues the Decision improperly found him liable as a
control person of PSA because PSA could not have been primarily liable for
violating A.R.S. § 44-1991. The Decision found PSA “committed fraud in the
offer and sale of unregistered securities, engaging in transactions, practices,
or a course of business which involved untrue statements and omissions of
material facts in violation of A.R.S. § 44-1991.” PSA did not appeal from or
challenge that finding, which is now final. Given that finding, Shudak
cannot now argue that PSA could not be primarily liable for violating A.R.S.
§ 44-1991, meaning his control person argument fails.
C. The Decision Properly Found Shudak Violated The ASA.
¶18 Shudak argues the Decision improperly applied the ASA in
various ways and erroneously found him in violation of the ASA. This court
gives “great deference to the agency’s interpretation and application of the
statute[s]” it administers. E. Vanguard Forex, Ltd. v. Arizona Corp. Comm’n,
6
SHUDAK v. AZCC
Decision of the Court
206 Ariz. 399, 410 ¶ 35 (App. 2003); see also Baca v. Arizona Dept. of Economic
Security, 191 Ariz. 43, 46 (App. 1998) (noting an agency’s interpretation of a
statute or regulation it implements ordinarily is given great weight).
“However, the agency’s interpretation is not infallible, and courts must
remain the final authority on critical questions of statutory construction.”
U.S. Parking Systems v. City of Phoenix, 160 Ariz. 210, 211 (App. 1989); cf.
Marco Crane & Rigging v. Arizona Corp. Comm’n, 155 Ariz. 292, 294 (App.
1987) (judicial deference to ACC interpretation of rate schedules
appropriate “where the decision is based upon reasonable interpretation”);
Arizona Water Co. v. Arizona Dept. of Water Res., 208 Ariz. 147, 154 ¶ 30 (2004)
(“‘[A] court may not substitute its own construction of a statutory provision
for a reasonable interpretation made by the administrator of an agency.’”)
(citing Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 838
(1984)).
¶19 The parties refer to “four frauds” claimed by the Division: (1)
oversubscribing the offering; (2) mishandling and mismanaging investor
funds; (3) failing to advise investors of the existence of a perfected security
interest in PSA’s assets; and (4) failing to advise investors of lawsuits and
default judgments against Shudak and his other businesses. Shudak argues
the Decision erroneously found that these four frauds were adequately
supported by the evidence of record. The court addresses Shudak’s
arguments in turn.
¶20 Shudak argues “the evidence does not support the allegation
that Shudak sold more than 100% of [PSA’s] membership” units because he
“only sold 88 membership units” in PSA in exchange for receipt of
consideration. The record, however, shows that individuals “were being
handed [PSA] membership units for bringing somebody in,” even where
they had not paid for those membership units. Although these recipients
did not pay for these membership units, they were similar to the
membership units provided to investors who had paid for their
membership units. And “money is not always required as consideration.”
Keg Restaurants Arizona, Inc. v. Jones, 240 Ariz. 64 ¶ 43 (App. 2016). Finally,
Shudak has not shown he could not be found to have committed fraud by
distributing more than 100 percent of the membership units in PSA even if
he received no consideration in return.
¶21 Shudak also argues that “the total number of units sold
should be reduced even further” because one investor “received money
back on several occasions.” However, the record is clear that investors,
including the one who received payments, were assigned an interest in the
company that would be maintained “through the duration of land sales of
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SHUDAK v. AZCC
Decision of the Court
the entire 1,900-acre parcel.” That one investor received some money back
is immaterial to the amount of membership interests that were assigned to
him.
¶22 Turning to mishandling and mismanaging investor funds,
Shudak argues the Division was required to produce “substantial evidence
of fraud with respect to each investor.” The Decision clearly found that
Shudak violated A.R.S. § 44-1991(A) in numerous ways and committed at
least one act of fraud with each investor. The Decision does not find, and
the Division does not argue on appeal, that there were four fraud violations
for every investor. Moreover, Shudak has not shown that the loss causation
concept his argument implicates applies in this enforcement action. See
Hirsch v. Arizona Corp. Comm’n, 237 Ariz. 456, 462 ¶ 19 (App. 2015) (rejecting
argument that “[b]ecause the Commission did not present proof of loss
causation as to each of the 900 participants, . . . the Commission’s conclusion
that they violated the ASA and the corresponding imposition of
administrative penalties were unsupported by evidence and therefore,
legally erroneous”). Finally, to the extent this argument echoes his
argument that the Decision was not supported by sufficient evidence, as
discussed herein, there was ample evidence to support the fraud findings
in the Decision.
¶23 Shudak argues there was no evidence he mismanaged funds.
However, the Decision specifically found that Shudak commingled funds
and added an unauthorized co-signatory contrary to PSA’s Operating
Agreement, which constituted fraud regardless of how the funds were used
after they were commingled. Factually, the record amply supports this
finding. Legally, this court gives great weight to the ACC’s application of
the ASA. E. Vanguard Forex, Ltd. 206 Ariz. at 410 ¶ 35. As set forth in the
Decision, the ACC’s interpretation of A.R.S. § 44-1991 as including
commingling of funds and adding an unauthorized co-signatory is
certainly reasonable. Cf. Arizona Water Co., 208 Ariz. at 154 ¶ 30 (deferring
to agency’s reasonable interpretation of statute); Arnold Const. Co., Inc. v.
Arizona Bd. of Regents, 109 Ariz. 495, 499 (1973) (refusing to accept agency’s
interpretation of a statute where it would result “in an absurdity which is
not necessary under the purpose of the act nor required by a reasonable and
fair construction of the wording of the statute”). Finally, given that the
fraud finding did not turn on how the funds were used after they were
commingled, Shudak’s argument that the Division’s “forensic accountant
did not do any analysis on how the money was used” misses the mark.
¶24 Shudak argues there was no evidence that he failed to disclose
that the private lender had perfected its security interest in all of PSA’s
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SHUDAK v. AZCC
Decision of the Court
assets and that the lender deemed PSA in default of its loan obligations. It
is true that three investors purchased their membership units before this
loan was made. It is equally true, however, that written representations
provided to investors, signed by Shudak, stated investors received the
membership units “free and clear of any liens and encumbrances of any
kind, character or nature and the Grantor, and its successors and assigns
will forever warrant and defend the same against all lawful claims and
demands whatsoever.”
¶25 As to the investors who purchased their membership units
after this loan, Shudak does not argue the evidence demonstrates he
disclosed the existence of the loan, which had the very real possibility of
eliminating the value of their investments in PSA. Shudak argues offering
documents indicated he could borrow money on behalf of PSA, and
investors represented “they had access to whatever information they
deemed necessary and that they conducted their own due diligence.”
Shudak has not, however, shown any authority for the proposition that
such representations mean, as a matter of law, that he could not have acted
fraudulently for purposes of an enforcement action by failing to disclose to
investors that he had encumbered PSA and that the lender had a perfected
security interest in all of PSA’s assets. Again, Shudak has failed to show the
ACC improperly applied the ASA. See E. Vanguard Forex, Ltd., 206 Ariz. at
410 ¶ 35. Moreover, Shudak’s duties owed to investors “not only remove[]
the burden of investigation from an investor, but places a heavy burden
upon [Shudak] not to mislead potential investors in any way.” Trimble v.
Am. Sav. Life Ins. Co., 152 Ariz. 548, 553 (App. 1986).
¶26 Shudak next argues “[t]here is no evidence” that he
“represented to investors that he was qualified and had expertise and
experience to raise capital sufficient” to fund the project or “that he failed
to disclose to several investors that several of Shudak’s creditors had sued
him.” To the extent this argument is premised on a requirement of proving
lack of disclosure to all PSA investors (as opposed to all but three PSA
investors), it fails for the same reasons set forth above. See supra ¶ 22. The
record also supports the finding that Shudak represented to some investors
“that he was capable of soliciting the capital needed to meet these
obligations.” The record includes a Statement of Financial Affairs in
Shudak’s bankruptcy, indicating 11 lawsuits were filed against him in 2008
and 2009. This evidence supports a finding that he knew about at least some
of this litigation yet failed to disclose it to investors. On this record, Shudak
has not shown the Decision was factually unsupported in this regard.
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SHUDAK v. AZCC
Decision of the Court
¶27 Finally, Shudak argues there is no evidence that he induced
an Arizona couple to purchase a note in exchange for a 50 percent interest
in PSA. Again, the record reveals otherwise. The record includes testimony
about the note and documents addressing the note were received at the
hearing. Shudak presented no controverting evidence. On this record,
Shudak has not shown the Decision was unsupported by substantial
evidence in this regard.
D. Shudak’s Other Factual Challenges To The Decision Fail.
¶28 Shudak argues the ROO, which was prepared by ALJ Martin,
“cannot be reconciled with ALJ Stern’s comments at the hearing, let alone
the evidence.” Before the ACC issued the Decision, ALJ Stern responded to
a similar argument by stating “things [Shudak claimed] are taken out of
context or misread and misinterpreted.” By issuing the Decision, the ACC
accepted that explanation and, on this record, Shudak has not shown it was
improper for the ACC to do so.
¶29 Noting Shudak “presented no defense,” ALJ Stern stated that
“the evidence wasn’t terrible. The evidence was somewhat out of order.”
At that same time, ALJ Stern stated that the Division had the burden of
proof by a preponderance of the evidence, that the Division met its burden
of proof and that Shudak made a choice to “present[] no defense. So that’s
the way we awarded this.” By preparing the ROO as it was later entered in
the Decision, ALJ Martin clearly found the Division had met its burden and
that Shudak had not successfully presented any defense. In short, Shudak
has presented no statements by the ALJs that would show a lack of
evidentiary support for the ROO or the Decision.
¶30 Shudak repeatedly, and relatedly, argues that the record is
“devoid of evidence” to support various findings in the Decision, pointing
out he did not testify and was not present at the hearing. As noted above,
Shudak was given an opportunity to attend the hearing and could have
testified. Instead, he elected to stay in Hawaii, where he was living at the
time. The Decision outlines and addresses each of Shudak’s arguments
regarding the sufficiency of the evidence and finds that there was evidence
supporting the allegations that the Decision sustained. Given the record,
there is no meaningful benefit in restating here the factually supported and
adequate findings in the 50-page Decision. Moreover, many of Shudak’s
arguments turn on reweighing the evidence, something this court will not
do. Nutek Info. Sys., Inc. v. Arizona Corp. Comm’n, 194 Ariz. 104, 107 ¶ 15
(App. 1998) (noting this court does “not reweigh the evidence” and “will
not substitute its judgment for that of the agency on factual questions or
10
SHUDAK v. AZCC
Decision of the Court
matters of agency expertise”). This court has reviewed the record and found
that it adequately supports the factual findings in the Decision. See Gaveck
v. Arizona State Bd. of Podiatry Examiners, 222 Ariz. 433, 436 ¶ 11 (App. 2009).
Nothing more is required.
III. The Restitution And Administrative Penalty Imposed Were
Proper.
¶31 The Decision ordered Shudak to pay $1,996,500 in restitution,
(subject to any offset Shudak could demonstrate) and pay an administrative
penalty of $150,000. Shudak argues the restitution award was improper
because: (1) no violations were proven; (2) his due process rights were
violated and (3) the restitution amount was not supported by the evidence.
As discussed above, Shudak’s violations of the ASA were proven, and as
discussed below, Shudak’s due process rights were not violated. Similarly,
Shudak has not shown the restitution amount was unsupported.
¶32 Restitution “shall include” cash equal to the fair market value
of the consideration paid at the date such payment was originally made,
plus interest less the amount of distributions received on the security from
the purchase date to the date of repayment. See Ariz. Admin. Code R14-4-
308(C)(1). The $1,996,500 in restitution imposed is supported by record
evidence, including Shudak’s bankruptcy filing, bank records and other
documentation. Accordingly, Shudak’s lack of evidence argument fails.
Moreover, the restitution imposed is a net amount, starting with a gross
amount of $2,142,000 and, after accounting for a lack of supporting
evidence for certain investments, yielding $1,996,500 plus interest. Finally,
the Decision expressly provides that Shudak’s restitution obligation is
subject to any offset he could show, avoiding the potential windfall Shudak
suggests. On this record, Shudak has not shown the restitution ordered was
error.
¶33 Shudak argues the administrative penalty of $150,000 was
excessive because there is no evidence that he “committed 30 different
violations.” The ACC may impose administrative penalties “in an amount
not to exceed” $5,000 “for each violation” of the ASA. See A.R.S. § 44-
2036(A). The Decision found Shudak and PSA committed fraud with each
offer and each sale, which the Division claims totals 90 fraud violations. In
fact, given the “four frauds” discussed above, and the number of investors
properly implicated by each of those frauds, the maximum penalty
authorized under A.R.S. § 44-2036 far exceeded $150,000. Accordingly,
Shudak has shown no error in the administrative penalty imposed by the
Decision.
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Decision of the Court
III. Shudak’s Due Process Rights Were Not Violated.
¶34 Shudak argues his due process rights were violated because:
(1) the ALJ who did not preside over the hearing wrote the ROO and (2) the
ROO and Decision found fraud based on charges for which he did not have
advance notice. The court addresses these arguments in turn.
A. Because Credibility Was Not A Basis For The Decision,
Shudak’s Due Process Rights Were Not Violated By The
Involvement Of Two ALJs.
¶35 Shudak argues allowing an ALJ who did not preside over the
hearing to write the ROO, that was ultimately adopted by the ACC as the
Decision, violated his due process rights. Shudak argues the procedure
followed did not comply with applicable administrative rules, particularly
where credibility is at issue. Again, this court owes deference to the ACC
when it construes the administrative rules applicable here. See Grand
Canyon Trust v. Arizona Corp. Comm’n, 210 Ariz. 30, 36 ¶ 20 (App. 2005)
(stating this court will defer to ACC’s interpretation of own rules unless
“that interpretation is clearly erroneous”).
¶36 By rule, the ACC has significant flexibility in determining
how hearings and recommended decisions should proceed. Among other
alternatives, a hearing may be held “before . . . one or more” ALJs. A.A.C.
R14-3-109(A). Again by rule, “[i]n a proceeding heard by a Hearing Officer
[ALJ], the Hearing Officer [ALJ] shall prepare his recommendation which
may be in the form of an opinion and order, unless otherwise directed by
the Commissioners.” A.A.C. R14-3-110(B). And all such rules “shall be
liberally construed to secure just and speedy determination of all matters
presented to the Commission,” and may be waived “[i]f good cause
appears” when they do “not affect the substantial interests of the parties.”
A.A.C R14-3-101 (B). Here, as noted by the ACC’s Chief ALJ during the
open meeting, the change in ALJs “was purely a case-management
decision” given “a backlog of securities cases that didn’t have a ROO
written.”
¶37 Even if Shudak could show the ACC violated its own rules,
Shudak would have to show that such a violation prejudiced him and
violated his due process rights. See Brown v. Arizona Dept. of Real Estate, 181
Ariz. 320, 324 (App. 1995) (noting agency’s violation of its rules was “hardly
a model of efficient decision-making,” but that appellant was required to
show that such a violation caused him to lose a significant legal right rising
to the level of a due process violation). Thus, notwithstanding Shudak’s
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Decision of the Court
argument that the ACC violated applicable rules, given the discretion
vested in the ACC to administer those rules, Shudak’s argument turns on
whether he was deprived his due process rights.
¶38 Contrary to Shudak’s argument, the ROO and Decision did
not turn on credibility and Shudak’s “substantial interests” were not
affected by the involvement of two ALJs. ALJ Stern, who presided over the
evidentiary hearing, expressly stated during the open meeting that there
“was nothing in that hearing that would give us cause to question the
credibility of the witnesses.” ALJ Stern added that no competing witnesses
were offered to challenge credibility. Nor is there any suggestion from the
ROO that credibility formed the basis for ALJ Martin’s recommendation. In
oral argument before this court, Shudak asserted that credibility was
brought into issue at the hearing in the form of cross-examination and
because there was “conflicting testimony.” It is true that the testimony of
the investor witnesses differed. However, Shudak is conflating “different”
with “conflicting.” Shudak has not shown that because investors had
factually different stories about their own circumstances, these immaterial
differences directly, or even indirectly, contradicted each investor’s
testimony that Shudak offered and sold them securities.
¶39 Shudak’s counsel cross-examined an investor about why he
was in the hospital when he met Shudak because “the reasons why he was
in outpatient goes to the credibility of the witness.” However, ALJ Martin
allowed the questioning and decided the questioning did not put the
investor’s credibility at issue. Moreover, the Decision did not turn on one
investor’s memory of how he met Shudak.
¶40 Finally, notwithstanding Shudak’s arguments, ACC
Commissioners typically do not preside over evidentiary hearings, even
when credibility is at issue, but are always the final decision-makers. See
A.R.S. § 41-1092.08(B); cf. Ritland v. Arizona State Bd. Of Med. Examiners, 213
Ariz. 187, 191 ¶ 12 (App. 2006) (holding “because the Board, and not the
ALJ, issues the final administrative decision, the Board is not bound by the
ALJ’s findings of fact, including those related to credibility”). Thus, the
record does not support Shudak’s assertion that “[w]itness credibility and
demeanor were critical parts of the Division’s case.”
¶41 In oral argument before this court, Shudak urged a definition
of credibility from Ohlmaier v. Indus. Comm’n of Arizona, “in the larger
sense,” as including “anything which throws light on the accuracy,
truthfulness, and sincerity of the witness.” 161 Ariz. 113, 118 (1989). Even
accepting this definition, Shudak has not shown that credibility, in either a
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Decision of the Court
more typical sense or in this “larger sense,” was at issue in the hearing.
Ohlmaier does state that a single finder of fact “shall hear all conflicting
evidence which may form the basis of a contested industrial award.” 161
Ariz. at 115. However, unlike Ohlmaier, in this case, there was no conflicting
evidence implicating credibility. Indeed, Ohlmaier was careful to state that
it was not implying that “all testimony must be heard ‘live.’ In some cases
necessity dictates a different approach.” Id. at 118.
¶42 In asserting a denial of due process, Shudak relies almost
exclusively on Adams v. Indus. Comm’n of Arizona, 147 Ariz. 418 (App. 1985).
In that case, a substituted ALJ, who did not observe testimony, reversed a
workers’ compensation award, noting medical evidence of the claimed
injury was “so weakened by lack of a credible factual background as to be
insufficient to support a compensable award.” Id. at 419. Adams held that
such a decision was error because, unlike this case, the ALJ’s decision
turned on credibility and “the credibility of the claimant was central to the
determination.” Id. at 422. Further, Adams qualified that holding by
recognizing “that where final administrative decisions are made by agency
boards or commissions, the commissioners themselves need not personally
observe the witnesses.” Id. at 421 n.1.
¶43 Adams is distinguishable. Over a three-day hearing, the
Division called five witnesses, two of whom were Division employees. The
testimony of each witness was corroborated by documentary evidence.
Shudak did not call any witnesses nor did he present any evidence
addressing credibility determinations. Further, ALJ Stern made plain that
nothing received at the evidentiary hearing gave any “cause to question the
credibility of the witnesses.” See also Carbo v. United States, 314 F.2d 718 (9th
Cir. 1963) (holding there was no due process violation where successor
judge studied the record and concluded “that the corroboration [the
witnesses] received from other convincing evidence placed the
government’s case safely beyond demeanor impeachment and that [the
original judge] himself had not been disturbed by questions of credibility”).
In addition, the ACC (not the ALJ) entered the Decision. See Adams, 147
Ariz. at 421 n.1. Because the evidentiary record resulting in the ROO, that
the ACC then adopted in the Decision, did not turn on credibility, Adams
does not show Shudak’s due process rights were violated.
¶44 The ACC relies on Pine-Strawberry Imp. Ass’n v. Arizona Corp.
Comm’n, 152 Ariz. 339 (App. 1986), for the proposition that an
administrative agency may substitute ALJs without violating due process.
In Pine-Strawberry, the ACC increased water rates and, after a hearing, a
different hearing officer wrote a proposed order. Id. at 340. On appeal, the
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SHUDAK v. AZCC
Decision of the Court
court held that, because the second ALJ “had the benefit of the recorded
testimony,” that process “was sufficient to comply with due process
requirements.” Id. Although Shudak correctly notes Pine-Strawberry was
not an enforcement case, he has not shown how that distinction means this
analysis does not apply here. As in Pine-Strawberry, the ACC directed an
ALJ to prepare an order and credibility was not at issue. Accordingly, Pine-
Strawberry demonstrates Shudak’s due process rights were not violated.
¶45 The ACC was not bound to accept the ROO and could have
accepted it (as it did here) or accepted it in part or rejected it. As noted in
Ohlmaier, “members of the commission who do not hear the testimony at
the evidentiary hearing, but review the transcribed testimony thereof, may
vote nonetheless and no right has been violated.” 161 Ariz. at 118. Shudak
expressed his concerns to the ACC at the open hearing, and the ACC could
have refused to adopt the ROO. Instead, the ACC rejected Shudak’s
argument and entered the Decision. Accordingly, Shudak has not shown
that his due process rights were violated based on the involvement of two
different ALJs.
B. Because Shudak Had Proper, Timely Notice Of All Charges
Against Him, His Due Process Rights Were Not Violated.
¶46 Shudak argues his due process rights were violated because
the ACC issued “a Decision that adopted new fraud charges . . . that were
neither identified in the Notice nor argued by the parties during the
hearing.” More specifically, Shudak argues his adding a co-signatory to
PSA’s bank account and commingling funds did not constitute mishandling
and mismanaging investor funds. This, Shudak argues, violated his due
process rights.
¶47 One of the “four frauds” alleged was mishandling and
mismanaging investor funds. Based on the record, the Decision concluded
“that commingling investor funds with non-investor funds, and allowing a
person to have access to investor funds who was not a PSA officer and who
had a dubious financial background, constitutes misuse and mishandling
of investor funds” and that such conduct also “constitutes an omission of a
material fact in violation of the anti-fraud provisions” of the ASA. Clearly,
Shudak had notice of the allegations that he had mishandled investor funds
and that he had omitted material facts. Thus, the finding that he
commingled funds and improperly added a co-signatory to PSA’s accounts
constituted one of the “four frauds” alleged by the Division long before the
hearing.
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Decision of the Court
¶48 The evidence received at the hearing, which was disclosed to
Shudak before the hearing, supports the finding that Shudak misused
investor funds and added his girlfriend as a co-signatory to the account.
Shudak argues that “[n]one of the witnesses were asked about signatories
on the account or the alleged commingling of funds, because that was not a
basis for the Division’s securities fraud claim.” The record, however, is to
the contrary. The Division’s forensic accountant testified about the
commingling of funds and supporting bank documents that were admitted
into evidence. In addition, Shudak did not object to bank signature cards,
which contained his girlfriend’s name as a signatory. Shudak cannot now
assert that the allegations leading to the findings in the Decision were a
surprise.
¶49 Shudak had proper notice of the allegations against him and
an opportunity to be heard. On this record, Shudak has not shown that his
due process rights were violated. See Mathews v. Eldridge, 424 U.S. 319, 349
(1976) (defining due process as notice and an opportunity to be heard;
noting due process has been provided where agency’s “procedures not only
provide the claimant with an effective process for asserting his claim prior
to any administrative action, but also assure a right to an evidentiary
hearing, as well as to subsequent judicial review”).
CONCLUSION
¶50 Shudak has not shown the Decision was “illegal, arbitrary,
capricious, or involved an abuse of discretion.” Shorey, 238 Ariz. at 257 ¶ 11.
Accordingly, the Decision is affirmed. In addition, because Shudak is not
the prevailing party, his request for attorneys’ fees on appeal pursuant to
A.R.S. §§ 12-348(A)(2) and 41-1007, as well as his costs on appeal, is denied.
AMY M. WOOD • Clerk of the Court
FILED: AA
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