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IN THE SUPREME COURT OF THE STATE OF IDAHO
Docket No. 33191
IN THE MATTER OF:  VONDEAN RENEE
KAREL, A REGISTERED BROKER-DEALER
AGENT UNDER THE UNIFORM SECURITIES
ACT (2004).
)
VONDEAN RENEE KAREL,                                                                               )
)
Petitioner-Appellant,                                                                              )   2007 Opinion No. 93
                                                                                                   )
v.                                                                                                 )   Boise, May 2007 Term
                                                                                                   )
STATE OF IDAHO, DEPARTMENT OF                                                                      )   Filed: June 27, 2007
FINANCE,                                                                                           )
                                                                                                   )   Stephen W. Kenyon, Clerk
Respondent.                                                                                        )
)
)
Appeal from the District Court of the Fourth Judicial District of the State of Idaho, Ada
County.  Hon. D. Duff McKee, District Judge.
Decision and order of the district court on judicial review of a Department of Finance
decision suspending a securities agent’s license is:    reversed and remanded.
Givens Pursley, LLP, Boise, for Appellant.  David R. Lombardi argued.
Hon. Lawrence G. Wasden, Attorney General, Boise, for Respondent.  Joseph B. Jones
argued.
TROUT, Justice
Vondean Renee Karel appeals from a district court decision affirming a final order by
the Department of Finance (Department), which resulted in the suspension of Karel’s license as a
securities agent.  The Department suspended her license for a six-month period based on its
finding that Karel violated Idaho Code section 30-14-411(d) by refusing to provide records
requested during a 2005 audit and investigation.
I.
FACTUAL AND PROCEDURAL BACKGROUND
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Karel has been licensed by the Department as a securities agent since 1998.  She worked
at Morgan Stanley Dean Witter until February 2002, when she and her father, Milt Erhart, joined
Wachovia Securities Financial Network.  Both were licensed to sell securities and they
conducted business under the name of “Milt Erhart & Associates.”  She and her father had
combined accounts and shared their clients until March of 2005, when Milt Erhart’s registration
as a securities dealer was terminated.  Thereafter, Karel became affiliated, as an agent, with
Summit Brokerage Services, Inc. (Summit), but continued to work out of her father’s office and
to conduct business under the Milt Erhart & Associates name.  Karel’s father remained in the
office, where he conducted a real estate business.
On June 7, 2005, based upon a suspicion that Milt Erhart was conducting securities
business with Karel’s clients despite being an unregistered agent, the Department investigators
made an unannounced visit to Karel’s office.  The investigators requested that Karel produce the
following documents: a list of clients with their addresses and telephone numbers; financial
records for Milt Erhart and Associates; and Karel’s personal bank account records into which she
deposited her commission checks from Summit.  Although Karel had these documents, she
refused to give them to the investigators, based on her belief that the Department did not have the
authority to request to inspect that information.  As a result of her refusal to turn over the
documents, the Department suspended her securities license for six months.
Karel filed an appeal, contending the Department did not have the authority to audit or
inspect the records they had requested, and therefore, her license should not have been
suspended.  The matter was assigned to a hearing officer who took testimony and made detailed
findings about the business being operated by Karel in conjunction with her father.  The hearing
officer concluded that the Department’s request for the documents was reasonable pursuant to
I.C. § 30-14-411(d), as the documents were directly related to the Department’s suspicions that
Karel was improperly engaged in the securities business with an unlicensed individual.
Therefore, the hearing officer recommended that the suspension of Karel’s license by the
Department be upheld.  Karel then sought judicial review in the district court.  The district judge
concluded the hearing officer’s findings and conclusions were correct, and therefore, he affirmed
the Department.  Karel now appeals the district court’s decision.
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II.
STANDARD OF REVIEW
“In an appeal from the district court’s decision, where it was acting in its appellate
capacity in a review under the APA [Administrative Procedure Act], this Court reviews the
agency record independently of the district court’s decision.”  Haw v. Idaho State Bd. of Med.,
140 Idaho 152, 157, 90 P.3d 902, 907 (2004).  Pursuant to I.C. § 67-5279, this Court does not
substitute its judgment for that of the administrative agency as to the weight of evidence, but
defers to the agency’s findings of fact unless clearly erroneous.    The agency’s order may be
overturned only where it: a) violates statutory or constitutional provisions; b) exceeds the
agency’s statutory authority; c) was made upon unlawful procedure; d) is not supported by
substantial evidence in the record as a whole; or e) is arbitrary, capricious, or an abuse of
discretion.
III.
DISCUSSION
A.                                                                                                  Department’s authority to request the documents
Karel argues the Department had no authority to request the records it did because the
pertinent statutes did not list those items as records Karel was required to maintain and provide
for inspection.  While Karel acknowledges the Department does have the statutory authority to
conduct an audit or inspection, she argues that the inspection must be reasonable.  She asserts a
reasonable inspection must be limited to those records which the broker-dealer (in this case,
Summit) is required by statute to maintain.  If the investigation is not so limited, then Karel
argues the statutes are unconstitutionally vague and violate her right to adequate notice of her
recordkeeping responsibilities.
We begin our analysis with I. C. § 30-14-411(d) which states in pertinent part:
The records of … every broker-dealer, agent … are subject to such
reasonable periodic, special or other audits or inspections … as the
administrator  considers  necessary  or  appropriate  in  the  public
interest and for the protection of investors.   An audit or inspection
may  be  made  at  any  time  and  without  prior  notice.     The
administrator may copy, and may remove for audit or inspection
copies  of,  all  records  the  administrator  reasonably  considers
necessary or appropriate to conduct the audit or inspection.
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In support of her contention that any inspection must be limited in scope and specific in
its reach, Karel cites to New York v. Burger, 482 U.S. 691, 107 S.Ct. 2636 (1987).  In Burger,
the appellant, Burger, contested the legality of an inspection of his business that occurred
pursuant to New York Vehicle & Traffic Law § 415-a5, which allows the inspection of records
during regular business hours “which are subject to the record keeping requirements of this
section and which are on the premises.”  Burger argued that the evidence obtained should be
suppressed because the inspection was not limited in scope.    The United States Supreme Court
disagreed and ruled that § 415-a5 satisfied the three criteria of a “reasonable” warrantless
inspection under the Fourth Amendment.    The Supreme Court noted that an owner or operator
of commercial premises in a closely regulated industry has a reduced expectation of privacy,
and therefore, may be subject to a warrantless inspection of such premises.  Burger, 482 U.S. at
702, 107 S. Ct. at 2643.  This warrantless inspection will be deemed reasonable if three criteria
are met.  Id. at 702, 107 S. Ct. 2644.
First, there must be a “substantial” government interest that informs the regulatory
scheme pursuant to which the inspection is made.  Id.  Second, the inspection must be necessary
to further the regulatory scheme; and last, the regulatory statute must perform the two basic
functions of a warrant: it must advise the owner of the commercial premises that the search is
being made pursuant to the law and has a properly defined scope, and it must limit the
discretion of the inspecting officer.  Id.       In reference to the third criterion, the Supreme Court
found that the statute provided a constitutionally adequate substitute for a warrant because it
informed the business operators that inspections would be made on a regular basis, and thus, the
operator would know that inspections would not constitute discretionary acts, but would be
conducted pursuant to the statute.  Burger, 482 U.S. at 711, 107 S. Ct. at 2648.  Further, the
Court held, the statute placed adequate limits upon the inspecting officers by limiting the hours
of inspection and what could be inspected, and therefore, the search was constitutional.  Burger,
482 U.S. at 711-12, 107 S. Ct. at 2648.
Karel acknowledges that the first and second criteria are satisfied by I.C. § 30-14-411(d)
and that the Department was authorized by the statute to conduct a “reasonable … audit or
inspection” of her office.  Karel argues, however, that the inspection was not reasonable because
it did not limit the discretion of the investigating officers.  As discussed above, in order to be
constitutional, the statute in question must provide an adequate substitute for a warrant in terms
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of the certainty and regularity of its application by first, advising the owner of the commercial
premises that the search is being made pursuant to the law and has a properly defined scope, and
second, the statute must limit the discretion of the inspecting officers.      Specifically, Karel
contends the Department, in conducting an inspection pursuant to I.C. § 30-14-411(d), must
limit its inspection to records that are required to be made or maintained pursuant to I.C. § 30-
14-411(c); otherwise, the statute is unconstitutional because it does not limit the Department’s
discretion as required by Burger.
A party challenging a statute on constitutional grounds bears the burden of proving the
statute is unconstitutional and must overcome a strong presumption of validity.  State v. Korsen,
138 Idaho 706, 711, 69 P.3d 126, 131 (2003).    A statute must give adequate notice to people of
the conduct it proscribes.  Korsen, 138 Idaho at 712, 69 P.3d at 132.    In interpreting a statute,
an appellate court is obligated to seek an interpretation that upholds its constitutionality.    State
v. Cobb, 132 Idaho 195, 197, 969 P.2d 244, 246 (1998).  A statute should not be held void for
uncertainty if any practical interpretation can be given it.  Id.
As noted above, I.C. § 30-14-411(d) simply permits the Department to conduct a
reasonable audit and inspection of “all records the administrator reasonably considers necessary
or appropriate to conduct the audit or inspection.”  Looking solely at this language, it is difficult
to see how this in any way limits the discretion of the inspecting officials.  No guidance is given
about what records may be demanded other than the circuitous statement that it must be those
records necessary to the conduct of the inspection; i.e. the official may demand to inspect those
records he deems necessary to his inspection.  Immediately preceding this section is I.C § 30-
14-411(c) entitled “Recordkeeping.”  That subsection sets forth recordkeeping requirements for
broker-dealers and investment advisers, which include accounts, correspondence, books and
other records required by rules adopted by the Department.  During oral argument, the
Department’s attorney candidly acknowledged that the records demanded of Karel are not
among those required to be kept pursuant to subsection (c).  While the recordkeeping obligation
of subsection (c) is placed on broker-dealers, not agents like Karel, subsection (d) includes
securities agents within its description of persons who are subject to the Department’s audit and
inspection requirements.  The logical interpretation of these two subsections is that, while
broker-dealers are the ones on whom the recordkeeping obligation is placed, securities agents
like Karel have an obligation to make those records available upon reasonable request by the
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Department.  It makes no sense to have detailed recordkeeping responsibilities on broker-
dealers, but to allow the Department to demand virtually unlimited records (those “necessary…
to conduct the audit”), from a securities agent.  Thus, we agree with Karel that the records to be
made available for audit and inspection are those required to be maintained in subsection (c).
With that interpretation, I.C. § 30-14-411(d) is a constitutionally adequate substitute for a
warrant as required by Burger.  First, the statute informs the securities business broker-dealer or
agent that he or she is “subject to such reasonable periodic, special or other audits or inspections
… within or without this state, as the administrator considers necessary or appropriate in the
public interest and time and without prior notice.”  Thus, similar to § 415-a5 in Burger, the
statute informs the dealers and agents that inspections to which they are subject do not
constitute discretionary acts by a government official, but are conducted pursuant to the statute.
Further, we agree with Karel that the statute limits any inspections pursuant to subsection (d) to
documents that are subject to the recordkeeping requirements in subsection (c).    In other words,
a search is only “reasonable” pursuant to I.C. § 30-14-411(d) if it is limited to documents that
the law requires broker-dealers or registered investment advisors to make or maintain pursuant
to I.C. § 30-14-411(c).  Thus, even though Karel was not personally required to make or
maintain the records outlined in subsection (c), she was required to surrender those documents
for inspection pursuant to I.C. § 30-14-411(d).
In this case, the Department’s inspection was prompted by information it had received
that suggested Karel was allowing her father to conduct a securities business with her clients,
despite being an unregistered agent.  While there appear to be other statutes which would permit
the Department to obtain the information it sought, it cannot do so under the guise of a normal
audit without limiting the request as indicated above.  Therefore, the Department did not have
the authority to request those documents pursuant to I.C. § 30-14-411(d).
In this case, the district court did not interpret a “reasonable” audit or inspection to be
limited in scope, and therefore, it was in error.  As a result, Karel’s securities license should not
have been suspended.  Given our interpretation of these statutes, we need not address Karel’s
other argument that the statute is unconstitutionally vague.
B.                                                                                                      Attorney’s fees on appeal
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Karel seeks attorney’s fees on appeal pursuant to I.C. § 12-117, arguing that the
Department had no reasonable basis in fact or law for its interpretation of I.C. § 30-14-411.  The
Department requests attorney’s fees and costs pursuant to I.A.R. 41 and I.C. §§ 12-121 and 12-
117, arguing that Karel has brought this appeal frivolously, unreasonably and without
foundation.  Given that this appeal presents a matter of first impression for this Court, we find
that the appeal was neither pursued nor defended frivolously, and thus, both parties are denied
attorney’s fees on appeal.
IV.
CONCLUSION
We hold that the Department of Finance did not have the authority to request the
documents it did from Karel pursuant to I.C. § 30-14-411(d), as the documents were not subject
to the recordkeeping requirements of I.C. § 30-14-411(c).    Karel’s securities license should not
have  been  suspended  as  a  result  of  her  refusal  to  produce  the  records  requested  by  the
Department for inspection, and we remand this matter to the Department for further action in
accordance with this opinion.  We award costs on appeal to Karel.
Chief Justice SCHROEDER, and Justices EISMANN and  BURDICK CONCUR.
JONES, J., concurring in part and dissenting in part.
I  concur  in  the  Court’s  opinion  in  all  respects  except  for  the  conclusion  that  the
Department did not have the authority under I.C. § 30-14-411(d) to request Karel’s client list.
The Department determined that when the investigators requested the client list, Karel either had
a client list or could have produced one through her computerized records. The client records
were required to be maintained under I.C. § 30-14-411(c) and Karel was obligated to surrender
them upon the Department’s request.   While it is true the Department conceded these records
were  not  required  to  be  maintained,  a  review  of  the  applicable  provisions  indicates  the
Department conceded too much.
The Court correctly holds that securities agents are obligated to make available to the
Department upon its reasonable request those records within their possession which their broker-
dealer is required by law to maintain.   Broker-dealers are required to maintain a wide array of
records, mostly dealing with client (customer) contracts, accounts, and trade transactions.   I.C. §
30-14-411(c)(1) requires that broker-dealers (which does not include agents) make and maintain
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such records as are required pursuant to rules adopted by the Department. The Department’s
Rule                                                                                                88  (IDAPA  12.01.08.088.01)  requires  broker-dealers  to  make  and  maintain  records
compliant with SEC rules found at 17 C.F.R. §§ 240.17a-3, 17a-4, 15g-9 and 15c2-11.   Those
SEC rules require maintenance of records primarily related to customers, including customer
contracts, their personal information and their security transactions.   For example, 17 C.F.R. §
240.17a-3(a)(17)(i)(A)  requires  maintenance  of  account  records  including  the  names  of
customers who are natural persons, together with each customer’s tax identification number,
address, telephone number, date of birth, employment status, annual income, net worth and
investment objectives.   A current record of this and other information required by the SEC rules
must be maintained and kept current for each office of the broker-dealer and is subject to
examination by the SEC at any time during business hours.   17 C.F.R. 240.17a-3(b).
Based on the SEC rules, brokers-dealers have a strong incentive to carefully maintain
customer records.   Additionally, those records are the lifeblood of the broker-dealer’s business
and contractual relationships with agents generally reflect that the customer records are the
property of the broker-dealer, rather than the agent.   The agreement between Summit and Karel
specifies, “It is understood and agreed that all books and records pertaining to Summit customers
are the property of Summit.”  Karel further agreed that Summit had the sole discretion to conduct
unannounced examinations and audits of these and other records related to her business.
One of the items that the Department sought to obtain from Karel when its agents made
the unannounced visit to Karel’s office on June 7, 2005, was a list of clients to include their
addresses and telephone numbers.   Karel was required to surrender such information to the
Department.   The parties dispute what customer information was available and what should have
been turned over.   The Department contends Karel acknowledged she had a list of customers but
refused to turn it over.    Karel contends that she turned over information pertaining to her
customers  but that she was not obligated to furnish a list of the customers.
We need not try to reconcile the conflict in the evidence because the hearing officer
addressed the matter in her findings, which the Department adopted in its order.   The hearing
officer found that Karel acknowledged she had the documents requested by the Department,
including the client list, but declined to turn them over.  The hearing officer went on to find:
With respect to production of the client list, Ms. Karel testified she understood the
Department wanted a list of anyone currently doing investment business with
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Summit.   She testified that, in June, 2005, she did not have a separate client list
and indicated she did not know how to generate a client list from the ILX system.
Her  hearing  testimony  conflicts  with  her  admissions  to  the  Department
investigators in which she admitted she had a client list, but refused to provide it.
Further, Exhibits 10 and 11, produced by Ms. Karel on June 7, 2005, and June 15,
2005,  indicate  through  her  computerized  records  she  had  the  capability  of
producing lists of clients. She testified that, in order to provide a current client
list, she would need to update her records and eliminate old clients.   However,
Ms. Karel never explained that to the investigators.    Instead, she refused to
provide a list.
Thus, the hearing officer found that Karel either had a client list at the time it was requested or
that she had the capability of producing one at that time.  This finding, which was adopted by the
Department, is supported by substantial, albeit conflicting, evidence and should be sustained.
Karel’s refusal to provide the customer list was a violation of her obligations under I.C. § 30-14-
411(d).
At oral argument, Karel’s counsel acknowledged that Karel had a list that she declined to
provide the investigators but contended it was not information required to be maintained under
I.C. § 30-14-411(c).  According to counsel, the client list was not updated and not complete.  The
list included the names of clients from her former broker-dealer, Wachovia, and was being used
by Karel as a “working list”.   This contention provides no relief to Karel, however.   Wachovia
was a broker-dealer and the same record maintenance and production requirements pertained to
Wachovia, as applied to Summit.   The pertinent SEC rule requires customer information to be
maintained for at least six years.                                                                    17 C.F.R.  240.17a-4.   Whether the customer information
requested by the Department pertained to Karel’s customers under either broker-dealer, she was
obligated to furnish the information to the Department under I.C. § 30-14-411(d).
The  same  does  not  apply  to  the  bank  account  records,  as  the  Court  holds.    The
requirement in I.C. § 30-14-411(c) to maintain records applies to broker-dealers, which does not
include agents.   While a broker-dealer is required to maintain its check books, bank statements,
canceled checks and cash reconciliations in its records, pursuant to 17 C.F.R. § 240.17a-4(b)(2),
these are not the banking records that the Department sought.   If the Department wished to
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obtain Karel’s personal checking account records or the records of a checking apparently owned
by her father (and upon which she was able to draw checks), the Department should have sought
those records pursuant to its subpoena power.   I.C. § 30-14-602.   Therefore, I concur in the
Court’s determination regarding the banking records but dissent with regard to the determination
pertaining to customer information.
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