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Matsuyoshi v. Business Registration Division

Intermediate Court of Appeals of Hawaii

February 25, 2014

LEIGH K. MATSUYOSHI and L.K. MATSUYOSHI, INC., Respondents-Appellants-Appellants,



Gary Victor Dubin Frederick J. Arensmeyer Richard T. Forrester for Respondents-Appellants- Appellants.

Ian Robertson for Petitioner-Appellee- Appellee.

Nakamura, C.J., Foley and Leonard, JJ.


Respondents-Appellants-Appellants Leigh K. Matsuyoshi (Matsuyoshi) and L.K. Matsuyoshi, Inc. (LKM Inc.) (together, Appellants) were found to have violated several provisions of the Uniform Securities Act, Hawaii Revised Statutes (HRS) Chapter 485 (Securities Act), in an action brought by Petitioner-Appellee-Appellee Business Registration Division, Securities Enforcement Branch, Office of Administrative Hearings, Department of Commerce and Consumer Affairs, State of Hawai'i[1] (Appellee). Appellants appeal from:

(1) the "Order Affirming Commissioner's Final Order" and the "Final Judgment, " (together, Circuit Court Order) both entered December 18, 2012 in the Circuit Court of the First Circuit[2] (Circuit Court);

(2) the "Commissioner's Final Order as to Respondents [Matsuyoshi] and [LKM Inc.]" (Final Order) entered February 3, 2012 in the Department of Commerce and Consumer Affairs, Hearings Office[3] (DCCA); and

(3) the "Hearings Officer's Findings of Fact, Conclusions of Law and "Recommended Order" (Recommended Order) entered October 20, 2010 in the DCCA.[4]

On appeal, Appellants contend the Circuit Court Order was wrong because:

(1) the Commissioner clearly erred by misapplying the doctrine of Piercing the Corporate Veil against Appellants to conclude the subject transactions were not exempted from the securities' registration requirement of HRS § 485-8 (Supp. 2000);

(2) the Commissioner clearly erred by misapplying the doctrine of Piercing the Corporate Veil against Appellants to conclude Matsuyoshi violated the registration regulations for investment advisors and salespersons under HRS § 485-14 (Supp. 2 0 0 0);

(3) the Commissioner clearly erred by concluding Appellants violated 485-25(a)(1), (2), and (3) (Supp. 2007) because the record lacked sufficient evidence to find either Matsyoshi or LKM Inc. committed fraud, and the conclusion was based on the erroneous finding that Appellants were not exempted from the registration regulations under the Securities Act; and

(4) the Commissioner violated Appellants' Fourteenth Amendment due process rights by "sua sponte" misapplying "a major doctrine of law in the Final Order without allowing Appellants a meaningful opportunity to respond."


Matsuyoshi was a registered representative of Paulson Investment Company (Paulson) from May 1992 to June 19, 2000. Ray Ishihara (Ishihara), Shizue Takaki (Takaki), and Miyuki Hirashima (Hirashima), former clients of Matsuyoshi while she was at Paulson (collectively, Investors), invested in LKM Inc. Matsuyoshi incorporated LKM Inc. on June 7, 2000, to invest in stocks. Matsuyoshi was the sole director, president, vice-president, treasurer, registered agent, manager and only employee of LKM Inc. and had full control of the company from 2000 through 2004.

LKM Inc. issued "Stock Purchase Agreements" (SP Agreements) to each of the Investors. The SP Agreements purported to sell Class A Common Stock in LKM Inc. to the Investors in exchange for a collective capital contribution of almost one million dollars. Matsuyoshi testified LKM Inc. never issued stock certificates. The SP Agreements provided that Matsuyoshi was entitled to a salary of 7% of LKM Inc.'s total equity per month. This salary would equal 84% of LKM Inc.'s assets at the beginning of the year, if the asset level had remained constant. Matsuyoshi deposited the Investors' total contribution into LKM Inc.'s business brokerage account held at Charles Schwab (Schwab Account). Matsuyoshi testified that the total value of the Schwab Account was equal to the total equity of LKM Inc. From June 2000 to November 2004, Matsuyoshi issued around $486, 000 to herself and her creditors directly from LKM Inc.'s Schwab Account.

Matsuyoshi testified she alone made the investment decisions concerning LKM Inc.'s Schwab Account. LKM Inc.'s Schwab Account decreased in value as early as October of 2000. Around that time, Matsuyoshi returned Takaki's money following Takaki's repeated requests. Takaki received about $15, 000 less than she initially invested. In 2002, Matsuyoshi returned Ishihara's money at his request. Ishihara received about $320, 000 less than he originally invested. By 2004, Matsuyoshi returned Hirashima's investment, which was about $287, 000 less than Hirashima originally invested.

On August 14, 2009, the Commissioner issued a "Preliminary Order to Cease and Desist" against Appellants alleging Appellants engaged in unregistered and fraudulent securities sales and solicitations through the offer and sale of the SP Agreements. The DCCA heard the matter on October 22, 2009 and March 16, 2010, and Hearings Officer Uyehara issued the Recommended Order on October 20, 2010. The Recommended Order recommended the Commissioner "conclude that the preponderance of the evidence established that [Appellants] violated HRS §§ 485-8, 485-14, 485-25 (a) (1), (2), and (3)[.]"

On February 3, 2012, the Commissioner issued the Final Order. The Final Order affirmed the part of the Recommended Order that found a preponderance of evidence established: (i) Appellants violated § 485-8 by not registering the securities involved in the SP Agreement; (ii) Matsuyoshi violated § 485-14 by acting as an unregistered salesperson and investment advisor; and (iii) Appellants violated § 485-25(a)(1), (2), and (3), by engaging in fraudulent and other prohibited activities. The Final Order reversed the part of the Recommended Order that found LKM Inc. violated § 485-14 and affirmed the recommended $500, 000 penalty. On December 18, 2012, the Circuit Court affirmed the Final Order.


"Review of a decision made by the circuit court upon its review of an agency's decision is a secondary appeal." Paul's Electrical Service, Inc. v. Befitel, 104 Hawai'i 412, 416, 91 P.3d 494, 498 (2004). We review such a decision to determine whether the circuit court was right or wrong in its decision, applying the standards set forth in HRS § 91-14(g) to the agency's decision. See id. HRS § 91-14 (g) (2012 Repl.) provides:

Upon review of the record the court may affirm the decision of the agency or remand the case with instructions for further proceedings; or it may reverse or modify the decision and order if the substantial rights of the petitioners may have been prejudiced because the administrative findings, conclusions, decisions, or orders are:
(1) In violation of constitutional or statutory provisions; or
(2) In excess of the statutory authority or jurisdiction of the agency; or
(3) Made upon unlawful procedure; or
(4) Affected by other error of law; or
(5) Clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record; or
(6) Arbitrary, or capricious, or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

Findings of fact are reviewed under § 91-14(g)(5). See id. Conclusions of law are reviewed under §§ 91-14(g)(1), (2), and (4). See id. An agency's exercise of discretion is reviewed under § 91-14(g)(6). See id.


A. Appellants' violated HRS § 485-8.

The finding that the SP Agreements constitute securities under the Securities Act is undisputed on appeal. Under HRS § 485-8, securities are required to be registered with the office of the commissioner unless an exception applies. Appellants contend the subject transactions were exempted under HRS § 485-6(9) (Supp. 2001) (limited offering exemption[5]), which provides:

§ 485-6(9) Exempt Transactions. The following transactions shall be exempt from sections 485-4.5, 485-8, and 485-25 (a) (7):
(9) Any transaction pursuant to an offer to sell securities of an issuer, if the transaction is part of an issue which:
(A) There are no more than twenty-five offerees, wherever located (other than those designated in paragraph (8)) during any twelve consecutive months;
(B) The issuer reasonably believes that all purchasers, wherever located, (other than those designated in paragraph (8)), ...

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