United States v. Reyes

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, 

Plaintiff-Appellee, No. 08-10047

v.  D.C. No.

CR-06-00556-1-

GREGORY L. REYES, CRB

Defendant-Appellant.



UNITED STATES OF AMERICA,  No. 08-10140

Plaintiff-Appellee, D.C. No.

v. CR-06-00556-2-

STEPHANIE JENSEN,  CRB

Defendant-Appellant. ORDER AND

AMENDED

 OPINION

Appeal from the United States District Court

for the Northern District of California

Charles R. Breyer, District Judge, Presiding

Argued and Submitted

May 12, 2009—San Francisco, California

Filed August 18, 2009

Amended November 5, 2009

14925

14926 UNITED STATES v. REYES

Before: Mary M. Schroeder and Stephen Reinhardt,

Circuit Judges, and Louis H. Pollak,* Senior District Judge.

Opinion by Judge Schroeder

*The Honorable Louis H. Pollak, Senior United States District Judge

for the Eastern District of Pennsylvania, sitting by designation.

UNITED STATES v. REYES 14929

COUNSEL

Amber Rosen, San Jose, California, for the plaintiff-appellee.

Seth P. Waxman, Washington, DC., for defendant-appellant

Gregory L. Reyes.

Steven A. Hirsch, Washington, DC., for defendant-appellant

Stephanie Jensen.

14930 UNITED STATES v. REYES

ORDER

The opinion filed on August 18, 2009, slip op. 11195 is

amended as follows: on slip Opinion page 11200, line 12,

replace the word “reprehensibility” with the word “responsi-

bility”. Also, on p. 11207, lines 27-29, replace “The govern-

ment even displayed for the jury a diagram explaining the

prosecutor’s position that the Finance Department did not

know of the backdating.” with “The government even dis-

played for the jury a diagram designating Elizabeth Moore as

among the uninformed to explain the prosecutor’s position

that the Finance Department did not know of the backdating.”

The petition for rehearing is denied.

No subsequent petition for rehearing or for rehearing en

banc may be filed in this matter.

OPINION

SCHROEDER, Circuit Judge:

I. Introduction

Gregory Reyes and Stephanie Jensen appeal from their con-

victions for falsifying corporate books and records, and

related charges, stemming from their participation in a

scheme to reward employees with grants of backdated stock

options. The options were backdated to a time when the com-

pany’s stock price was low, but the options were not recorded

on the company’s books as an expense of the corporation, so

the books showed the corporation to be more profitable than

it was. The convictions represent the first criminal convictions

for a backdating practice that was widespread in the late

1990s, particularly in the Silicon Valley, where the appel-

lants’ company was located.

UNITED STATES v. REYES 14931

We reverse Reyes’ conviction because of prosecutorial

misconduct in making a false assertion of material fact to the

jury in closing argument. We affirm Jensen’s conviction but

vacate the sentence and remand for resentencing because the

sentence improperly included an obstruction of justice

enhancement for which responsibility lay primarily with Jen-

sen’s lawyer.

II. Facts and Procedural Background

Gregory Reyes was the Chief Executive Officer (“CEO”),

and Stephanie Jensen was the Vice-President of the Human

Resources Department, of Brocade Communication Systems,

Inc. (“Brocade”), based in San Jose, California. The company

is publically traded and engaged in the high-tech business of

developing and selling network equipment and providing net-

working solutions. Because of the competitive demand for

qualified information technology personnel in the Silicon Val-

ley, the company began the practice of offering new personnel

and valued employees compensation in the nature of stock

options.

A stock option is the right to purchase a share of stock from

a company at a fixed price, referred to as the “strike price,”

on or after a specified vesting date. In a rising market, stock

options generally help companies recruit employees desiring

to share in the company’s growth and help persuade employ-

ees to stay with the company so that their increasingly valu-

able options may vest and be exercised.

In general, companies grant options with a strike price

equal to the market price on the date the options are granted.

“Backdating” stock options refers to the practice of recording

an option’s grant date and strike price retrospectively. Back-

dating is not itself illegal, provided that the benefit to the

employees is recorded on the corporate books as a non-cash

compensation expense to the corporation, in accordance with

an accounting convention promulgated in 1972 referred to as

14932 UNITED STATES v. REYES

Accounting Principles Board Opinion No. 25. It is not now

disputed that the options in this case were not recorded in the

books as having been backdated.

On August 10, 2006, the government charged Reyes and

Jensen with securities fraud, falsification of corporate books

and records, and violating related statutes and regulations.

Their cases were severed for trial and represented the first

such prosecutions to go before a jury.

A. The Reyes Trial

The jury convicted Reyes of conspiracy in violation of 18

U.S.C. § 371; securities fraud and making false filings with

the Securities and Exchange Commission (“SEC”) in viola-

tion of 15 U.S.C. §§ 78j(b) and 78ff, and 17 C.F.R.

§ 240.10b-5; falsifying corporate books and records in viola-

tion of 15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and 17 C.F.R.

§ 240.13b2-1; and making false comments to auditors in vio-

lation of 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2.

At trial, Reyes’ principal defense was that he, as CEO and

sole member of the Board of Directors’ Compensation Com-

mittee, signed off on the backdated options without any intent

to deceive. He sought to establish reasonable doubt as to his

intent by contending that Brocade’s Finance Department was

well aware of the backdated options and the fact that the

options were not properly expensed out on the books. Reyes

also argued that he relied in good faith on the accuracy of the

Finance Department’s documentation when he signed off on

false financial statements.

The government witnesses provided evidence as to how

this scheme operated and how Reyes participated in the

scheme. One of the witnesses, Elizabeth Moore, who was an

employee of the Finance Department and who administered

Brocade’s stock options, testified that she and other members

UNITED STATES v. REYES 14933

of the Finance Department did not know that the backdating

was occurring.

Other, higher-up Finance Department employees, however,

had given statements to the FBI describing their knowledge of

the backdating scheme. Both prosecution and defense counsel

were familiar with these statements. Those employees, who

were themselves subject to possible criminal prosecution and

had been targets of SEC civil suits, did not testify.

During trial, Reyes’ position was that he relied on the

Finance Department to make sure that the corporate books

were accurate, and that he was not responsible for the false

records. Reyes’ counsel, in closing argument, therefore told

the jury that the Finance Department knew about the backdat-

ing, thus supporting the defense position. The prosecutor,

however, told the jury that the employees in the Finance

Department “don’t have any idea” that the backdating was

occurring. The prosecutor thereby asserted to the jury facts

that he knew were belied by the statements to the FBI from

responsible Finance Department officers, and by SEC com-

plaints that had been filed against some of the Finance

Department employees alleging they knew about the scheme.

Reyes moved for a new trial on the basis of prosecutorial

misconduct. He also sought a new trial on the separate basis

of what he asserted to be a recantation of Elizabeth Moore’s

testimony that she did not know about the backdating. The

district court denied the motions. Earlier, the court had denied

a motion for directed verdict for insufficiency of the evidence

to establish materiality, i.e., that knowledge of the backdating

would have affected the judgment of a reasonable investor.

The district court sentenced Reyes to 21 months’ imprison-

ment, and imposed a $15 million fine. This appeal followed.

B. The Jensen Trial

In the Jensen trial, the principal issue was whether she

knew that this was a fraudulent scheme and whether she pos-

14934 UNITED STATES v. REYES

sessed a criminal intent. Jensen sought an instruction that

would have required the jury to find she knew what law she

was violating, i.e., to find that the falsification was done “with

the purpose of violating a known legal duty.” The district

court instead instructed the jury that it must find the govern-

ment proved Jensen acted “knowing the falsification to be

wrongful.” United States v. Jensen, 532 F. Supp. 2d 1187,

1195 (N.D. Cal. 2008). The jury convicted Jensen on the two

counts charged against her: (1) falsifying and aiding and abet-

ting the falsification of books, records, and accounts in viola-

tion of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff, and

17 C.F.R. § 240.13b2-1; and (2) conspiracy to falsify books

and records in violation of 18 U.S.C. § 371.

At sentencing, Jensen also argued she was within the provi-

sion of the penalty statute that exempts a defendant from

imprisonment for violating a regulation if the defendant “had

no knowledge of such rule or regulation.” 15 U.S.C. § 78ff(a).

The district court declined to hold she was within the “No

Knowledge Clause,” and sentenced her to a term of imprison-

ment of four months.

Jensen’s term included an enhancement for obstruction of

justice for her lawyer’s reliance on a declaration made by

Reyes. Her lawyer had obtained a severance of Jensen’s trial

from Reyes’ on the basis of Reyes’ false declaration stating

that Jensen was without any culpability, that Reyes had told

Jensen that there was no backdating, and that Reyes would

testify at Jensen’s trial if the trials were severed. Reyes did

not testify at Jensen’s trial.

The district court was understandably annoyed that the

court had had to preside over two trials and had been misled

by the false declaration. It imposed the obstruction of justice

enhancement because Jensen was present in the courtroom

when her attorney argued the motion to sever and did not

interfere with her lawyer’s presentation of the false declara-

tion. The district court’s order on Jensen’s sentence is pub-

UNITED STATES v. REYES 14935

lished at United States v. Jensen, 537 F. Supp. 2d 1069 (N.D.

Cal. 2008).

III. The Reyes Appeal

The Reyes trial was combative. The government had to

prove Reyes was knowingly responsible for the false corpo-

rate records, and the stakes were high. The issue that is dispo-

sitive of Reyes’ appeal concerns the government attorney’s

misconduct in falsely telling the jury that the Finance Depart-

ment did not know about the backdating, when the prosecutor

knew that their statements revealed that they did.

There is a threshold issue, however, of whether the govern-

ment satisfied its burden of proving that the false records

would have affected the judgment of a reasonable investor. If

the government failed in its burden to establish the materiality

of the falsification, then the prosecution must be dismissed,

and no new trial would be possible. Burks v. United States,

437 U.S. 1, 18 (1978). The government did not, however, fail

in its burden.

Materiality depends on the significance that a reasonable

investor would assign to the withheld or misrepresented infor-

mation. Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). To

be material, “there must be a substantial likelihood that the

disclosure of the omitted fact would have been viewed by the

reasonable investor as having altered the ‘total mix’ of infor-

mation made available.” Id. at 231-32 (quoting TSC Indus.,

Inc. v. Northway, Inc., 426 U.S. 438, 448 (1976)).

[1] The prosecution did not present any witnesses who

actually invested in Brocade’s stock. The government relied

on the expert testimony of three witnesses: (1) Steve Catricks,

a portfolio manager and equity analyst at Delaware Invest-

ments, (2) Robert McCormick, an employee who was a proxy

lawyer at Fidelity Investments, and (3) Dr. John Garvey, an

accounting expert. Although Reyes now attempts to discredit

14936 UNITED STATES v. REYES

the witnesses’ testimony because they made no personal deci-

sion to invest in Brocade’s stock, the standard of materiality

is judged from the perspective of a “reasonable investor,” and

is therefore an objective one. See TSC Indus., Inc., 426 U.S.

at 448. Reyes did not contest the expertise of these witnesses

to present the testimony.

McCormick testified that Fidelity used guidelines for the

voting of shares Fidelity owned in other companies. These

guidelines were “designed to maximize shareholder benefit,”

and they instructed Fidelity managers to vote against plans

that permitted a company to grant any backdated options.

According to McCormick, Fidelity frowned upon granting

backdated stock options because they result in share dilution,

and they have a less incentivizing effect on employees than

stock options that are not backdated. Catricks testified that

granting backdated options inflates net income and earnings

per share figures of the company, figures that Catricks stated

he, as a reasonable investor, would want to know when he

made his investment decisions.

McCormick’s and Catricks’ testimony further established

that improper accounting of backdated options presents inves-

tors with an incorrect picture of a company’s finances. Sup-

porting their testimony, Dr. Garvey testified that Brocade’s

failure to expense more than $160 million from backdated

options resulted in Brocade reporting profits in 2001 and

2002, when it should have reported large losses.

[2] We have recognized that information regarding a com-

pany’s financial condition is material to investment. SEC v.

Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (“Surely the mate-

riality of information relating to financial condition, solvency

and profitability is not subject to serious challenge.”). The

witnesses’ testimony, taken cumulatively, and in the light

most favorable to the prosecution, United States v. Gonzalez-

Torres, 309 F.3d 594, 598 (9th Cir. 2002) (citation omitted),

permitted a rational trier of fact to find beyond a reasonable

UNITED STATES v. REYES 14937

doubt that the omissions and misstatements were material to

a reasonable investor.

There is also a claim of instructional error with regard to

the jury’s finding that misstatements to accountants were

materially false. The instruction required the jury to find that

the statements were capable of influencing actions of accoun-

tants, and did not expressly reference investors. In the circum-

stances of this case, there was no reversible error on this

point. The main thrust of the government’s case was that the

false statements were capable of misleading investors. The

statements were the same as those the jury found, in other

counts, capable of influencing reasonable investors. The

remaining instructional challenges relate to the false entries

count (15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and 17 C.F.R.

§ 240.1362.1). They are without merit.

We therefore turn to whether prosecutorial misconduct

requires a new trial. The principal issue before the jury was

one of intent. There was no question that Reyes signed off on

stock option grants that were priced retrospectively, and that

the backdating allowed Brocade to understate its compensa-

tion expenses. That was indeed the way that the alleged

scheme was supposed to operate, by providing a valuable

option to employees at no apparent expense to the company.

At trial, an issue as to Reyes’ criminal state of mind was

whether Reyes knew the corporate records falsely stated the

company’s financial condition by under-reporting the compa-

ny’s expenses. Reyes’ defense was that he thought the trans-

actions were properly accounted for, in reliance on the

Finance Department’s expertise to comply with accounting

principles and SEC regulations. The government, however,

argued that the Finance Department was unaware of the back-

dating, and thus powerless to get the accounting right. A key

question therefore became whether the Finance Department

knew that the backdating scheme was taking place.

14938 UNITED STATES v. REYES

[3] Statements made to the FBI by responsible employees

in the Finance Department during the FBI’s investigation

established that Finance Department executives knew about

the backdating and that one employee had resigned as a result

of it. A lower-level Finance Department employee, however,

Elizabeth Moore, testified for the government that she did not

know about the scheme. During closing argument, the prose-

cutor did not confine his argument to the evidence before the

jury or reasonable inferences that could have been drawn

from that evidence. The prosecutor asserted as fact a proposi-

tion that he knew was contradicted by evidence not presented

to the jury. In direct contravention of the statements given to

the FBI by Finance Department executives that they did know

about the backdating, the prosecutor asserted to the jury in

closing that the entire Finance Department did not know

about the backdating, and further that the government’s the-

ory of the case was that “finance did not know anything.”

“Our theory is that those people didn’t know anything . . . .

Elizabeth Moore says finance didn’t know. Did you need

everybody in the finance department to come and tell you that

they didn’t know?” The government even displayed for the

jury a diagram designating Elizabeth Moore as among the

uninformed to explain the prosecutor’s position that the

Finance Department did not know of the backdating. The

prosecutor asked the jury to assume other employees of the

Finance Department would testify that they did not know

about Reyes’ backdating procedure when the prosecutor knew

they did.

In denying the defense’s motion for a new trial, the district

court focused not only on the prosecutor’s misstatements, but

on defense counsel’s performance as well. Defense counsel

had told the jury that the Finance Department did know, and

told the jury that the Finance Department executives would

have so testified if they had been called. In the district court’s

view, defense counsel was almost as culpable as the govern-

ment because defense counsel asserted what the Finance

Department knew about the backdating without calling

UNITED STATES v. REYES 14939

Finance Department executives as witnesses. According to the

district court, defense counsel should have sought immunity

for the witnesses, and then proved, through their testimony,

that the Finance Department did know about the scheme.

It was not, however, the defense’s burden to prove Reyes

was innocent. It was the prosecutor’s burden to prove he was

guilty. Defense counsel made no knowingly false statements.

The prosecutor did. Indeed, on appeal the government does

not seriously dispute the falsity of the prosecutor’s statements

or the duty of the prosecutor to refrain from making such

statements. Instead, it argues the misconduct was harmless.

In representing the United States, a federal prosecutor has

a special duty not to impede the truth. The United States

Department of Justice’s Mission Statement describes the gov-

ernment’s duty as one “to ensure fair and impartial adminis-

tration of justice for all Americans.” United States

Department of Justice, About DOJ, http://www.usdoj.gov/

02organizations/.

[4] There is good reason for such a high standard. A “pros-

ecutor’s opinion carries with it the imprimatur of the Govern-

ment and may induce the jury to trust the Government’s

judgment rather than its own view of the evidence.” United

States v. Young, 470 U.S. 1, 18-19 (1985) (citing Berger v.

United States, 295 U.S. 78, 88-89 (1935)). For this reason, it

is improper for the government to present to the jury state-

ments or inferences it knows to be false or has very strong

reason to doubt. United States v. Blueford, 312 F.3d 962, 968

(9th Cir. 2002) (citing United States v. Kojayan, 8 F.3d 1315,

1318-19 (9th Cir. 1993)).

The district court, in denying the motion for a new trial,

apparently did not view the prosecutor’s statements to be cul-

pably false, finding that the Finance Department witness

statements that were provided to the FBI did not “put the lie”

to the government’s arguments. We are unable to agree. The

14940 UNITED STATES v. REYES

FBI witness statements affirmatively assert that Bob Bossi,

Brocade’s controller, knew backdating was occurring regu-

larly and that Reyes was backdating stock options. The wit-

ness statements also reveal that Bossi complained about

fraudulent practices relating to at least one employee’s stock

options, and that Bossi eventually resigned his position at

Brocade. The witness statements further reveal that Tony

Canova, a Chief Financial Officer at Brocade, also knew

backdating was taking place. Bossi and Canova even dis-

cussed discovering specific instances of inconsistencies in

stock option paperwork, and attributed the errors to Reyes’

backdating practice.

Moreover, in civil suits brought by the SEC, parallel evi-

dence was produced about the knowledge of Finance Depart-

ment executives. For example, the SEC complaint charging

Michael Byrd, a Chief Financial Officer at Brocade, did not

state that Byrd was “deceived” regarding the stock option

grant given to Brocade employee Richard Geruson, as the

prosecutor had argued during closing argument during Reyes’

case. Rather, the civil complaint charged that Byrd acted with

knowledge of the backdating of Geruson’s grant. The SEC’s

complaint against Canova clearly alleges that Canova did

know that backdating was occurring. As a joint press release

emphasized, the FBI, SEC, and U.S. Attorney’s Office forged

a strong, cooperative relationship in pursuing civil and crimi-

nal punishment for misconduct relating to backdating Brocade

stock options. Press Release, U.S. Securities and Exchange

Commission, U.S. Attorney’s Office and SEC Separately

Charge Former Brocade CEO and Vice President in Stock

Option Backdating Scheme (July 20, 2006),

http://www.sec.gov/news/press/2006/2006-121.htm. The

prosecution is legally charged with responsibility for informa-

tion uncovered in its civil investigations and may be required

to disclose it in criminal cases that it prosecutes. See e.g.,

United States v. Wood, 57 F.3d 733, 737 (9th Cir. 1995). It is

charged with knowledge of the parallel SEC investigation.

UNITED STATES v. REYES 14941

[5] The record demonstrates that the prosecution argued to

the jury material facts that the prosecution knew were false,

or at the very least had strong reason to doubt. Reyes objected

below and therefore preserved the issue. Both Reyes and the

government agree in their briefs that the error is not harmless

if we conclude it is more likely than not that the misconduct

materially affected the fairness of the trial. See United States

v. McKoy, 771 F.2d 1207, 1212 (citing Young, 470 U.S. at 13

n.10).

[6] Although the government’s case was relatively strong,

the jury took seven days to deliberate, and the case was com-

plex and technical. Moreover, the prosecutor’s statements

were particularly prejudicial given that Reyes’ defense rested

on his delegating his responsibilities to others and reliance on

them. At the end there was considerable focus on the issue of

what the Finance Department knew. The prosecutor’s false

statements went directly to this issue. Moreover, the state-

ments were made during closing arguments, both orally and

visually, and closing statements from the prosecution “matter

a great deal.” Kojayan, 8 F.3d at 1323. Deliberate false state-

ments by those privileged to represent the United States harm

the trial process and the integrity of our prosecutorial system.

We do not lightly tolerate a prosecutor asserting as a fact to

the jury something known to be untrue or, at the very least,

that the prosecution had very strong reason to doubt. See

Blueford, 312 F.3d at 968. There is no reason to tolerate such

misconduct here.

[7] Reyes goes further on appeal and argues that the mis-

conduct was so flagrant that the indictment should be dis-

missed. See United States v. Chapman, 524 F.3d 1073, 1085-

87 (9th Cir. 2008) (noting that dismissal of the indictment

may be warranted where the prosecutor’s actions rise to the

level of flagrant prosecutorial misconduct, a defendant suffers

substantial prejudice, and no lesser remedial action is avail-

able for the misconduct). Although we do not agree with the

district court that the prosecutor may have been innocent of

14942 UNITED STATES v. REYES

deliberate false statements, we recognize there were aggres-

sive tactics on both sides. We do not conclude the prosecu-

tor’s conduct was so egregious as to require dismissal of the

prosecution. Reyes’ case must be remanded for a new trial.

IV. The Jensen Appeal

Jensen’s appeal first challenges a jury instruction given in

her case. She also challenges her sentence.

[8] Jensen’s instructional challenge relates to the statutory

term “willfully.” The substantive provision of the Securities

and Exchange Act of 1934 (“Act”) at issue in this case

requires issuers of registered securities to “make and keep

books, records, and accounts, which, in reasonable detail,

accurately and fairly reflect the transactions and dispositions

of the assets of the issuer.” 15 U.S.C. § 78m(b)(2)(A). This

provision was an amendment to the Act enacted by the For-

eign Corrupt Practices Act of 1977. See Foreign Corrupt Prac-

tices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494. In turn,

15 U.S.C. § 78m(b)(5) provides that “[n]o person shall know-

ingly falsify any book, record, or account described” above.

The criminal penalty provision applicable to Jensen’s case

is 15 U.S.C. § 78ff(a), which provides penalties for willful

violations and false and misleading statements:

Any person who willfully violates any provision of

this chapter . . . or any rule or regulation thereunder

the violation of which is made unlawful or the obser-

vance of which is required under the terms of this

chapter, or any person who willfully and knowingly

makes, or causes to be made, any statement in any

application, report, or document required to be filed

under this chapter or any rule or regulation thereun-

der or any undertaking contained in a registration

statement . . . which statement was false or mislead-

ing with respect to any material fact, shall upon con-

UNITED STATES v. REYES 14943

viction be fined not more than $5,000,000, or

imprisoned not more than 20 years, or both, . . . but

no person shall be subject to imprisonment under

this section for the violation of any rule or regulation

if he proves that he had no knowledge of such rule

or regulation.

Jensen proposed a jury instruction that would have required

the jury to find that the falsification was done “with the pur-

pose of violating a known legal duty,” or that the falsification

was “unlawful.” It therefore would have required the jury to

find Jensen knew she was violating a securities law. The dis-

trict court rejected her proposed instructions, and instructed

the jury that they must find that Jensen falsified or intention-

ally caused to be falsified books, records, or accounts, “know-

ing the falsification to be wrongful.” Jensen, 532 F. Supp. 2d

at 1195.

[9] The Supreme Court has recognized that the meaning of

“willfully” is often influenced by the context in which it is

used. Ratzlaf v. United States, 510 U.S. 135, 141 (1994). The

district court’s instruction in this case was in line with this

court’s interpretation of “willfully” in the securities context.

In United States v. Tarallo, 380 F.3d 1174 (9th Cir. 2004),

this court interpreted the meaning of willfully in § 78ff(a). In

upholding a conviction for securities fraud in violation of 15

U.S.C. §§ 78j(b) and 78ff(a), and 17 C.F.R. § 240.10b-5, we

held in Tarallo that willfully means “intentionally undertak-

ing an act that one knows to be wrongful; ‘willfully’ in this

context does not require that the actor know specifically that

the conduct was unlawful.” Id. at 1188 (emphasis in original).

Tarallo thus rejected the instruction Jensen seeks.

Jensen nevertheless argues that a higher scienter require-

ment is warranted because the substantive securities provision

she violated involved books, records, and accounts. Accord-

ing to Jensen, the knowing falsification of books, records, and

accounts is not “inevitably nefarious,” see Ratzlaf, 510 U.S.

14944 UNITED STATES v. REYES

at 144, and therefore a higher scienter requirement is neces-

sary to prevent ensnaring innocent persons. Jensen tries to

equate a violation of 15 U.S.C. § 78m(b)(5) to other viola-

tions in which the word “willfully” requires knowledge of the

law. She relies on criminal tax, see Cheek v. United States,

498 U.S. 192, 201 (1991), and financial structuring cases, see

Ratzlaf, 510 U.S. at 149.

[10] This argument is foreclosed by Tarallo. Tarallo

observed that our circuit and others have rejected the argu-

ment that, in the context of the securities fraud statutes, will-

fulness requires a defendant know that he or she was breaking

the law. Tarallo, 380 F.3d at 1187-88 (discussing United

States v. Charnay, 537 F.2d 341, 351-52 (9th Cir. 1976), and

United States v. Peltz, 433 F.2d 48, 54 (2d Cir. 1970)). The

“knowing” requirement protects those who accidentally

record incorrect information because, for example, they are

confused by accounting rules. The district court correctly

instructed the jury that it had to find that Jensen “was aware

of the falsification and did not falsify through ignorance, mis-

take, or accident.” There is no higher standard for a willful

violation of the securities laws.

[11] Jensen also tries to distinguish Tarallo on the ground

that she was charged with the provision that prohibits “know-

ingly” falsifying books and records, whereas the defendant in

Tarallo was charged with violating a provision that was silent

on the requisite level of intent. In both this case and Tarallo,

however, the penalty provision at issue punishes “willful”

violations of the substantive provisions. 15 U.S.C. § 78ff(a).

A “knowing” falsification does not require knowledge of the

securities laws being violated. On its face, the provision

means only that the defendant must knowingly commit the act

of falsification. On the basis of the language and structure of

the statute, there is no textual reason to hold “knowingly,” as

used in § 78m(b)(5), was intended to modify or connote a

higher scienter requirement than “willfully,” as used in

§ 78ff(a).

UNITED STATES v. REYES 14945

[12] Moreover, Congress actually explained its understand-

ing of “knowingly” in connection with the 1977 amendments

to the securities laws that added 15 U.S.C. §§ 78m(b)(2) and

(b)(3). In an early version of the legislation, the Senate Report

stated:

The amendments to section 13(b) prohibiting the

falsification of corporate books and records and the

making of misleading representations to auditors are

not intended to make unlawful conduct which is

merely negligent. To clarify the purpose of these

paragraphs, therefore, the committee inserted the

term ‘knowingly’ in appropriate places in both para-

graphs (3) and (4). As explained to the committee,

the term ‘knowingly’ connotes a ‘conscious under-

taking.’ Thus these paragraphs proscribe and make

unlawful conduct which is rooted in a conscious

undertaking to falsify records or mislead auditors

through a statement or conscious omission of mate-

rial facts.

The committee believes that the inclusion of the

‘knowingly’ standard is appropriate because of the

danger, inherent in matters relating to financial

recordkeeping, that inadvertent misstatements or

minor discrepancies arising from an unwitting error

in judgment might be deemed actionable. The com-

mittee does not, however, intend that the use of the

term ‘knowingly’ will provide a defense for those

who shield themselves from the facts. The knowledge

required is that the defendant be aware that he is

committing the act which is false—not that he know

that his conduct is illegal.

S. Rep. No. 95-114, at 9 (1977), reprinted in 1977

U.S.C.C.A.N. 4098, 4107 (emphasis added). The final report

on § 78m(b)(5) that was adopted in 1988 and that provided it

14946 UNITED STATES v. REYES

was a crime to “knowingly falsify” books or records,

explained its meaning as follows:

The Conferees intend to codify current Securities

and Exchange Commission (SEC) enforcement pol-

icy that penalties not be imposed for insignificant or

technical infractions or inadvertent conduct. The

amendment adopted by the Conferees accomplishes

this by providing that criminal penalties shall not be

imposed for failing to comply with the FCPA’s

books and records or accounting control provisions.

This provision is meant to ensure that criminal pen-

alties would be imposed where acts of commission

or omission in keeping books or records or adminis-

tering accounting controls have the purpose of falsi-

fying books, records or accounts, or of

circumventing the accounting controls set forth in

the Act. This would include the deliberate falsifica-

tion of books and records and other conduct calcu-

lated to evade the internal accounting controls

requirement.

H.R. Conf. Report. No. 100-576, 917 (1988), reprinted in

1988 U.S.C.C.A.N. 1547, 1950 (emphases added). The dis-

trict court correctly concluded that the congressional history

confirms that Congress intended “knowingly” only to require

that the jury find that Jensen “was aware of that falsification

and did not falsify through ignorance, mistake, or accident.”

Jensen, 532 F. Supp. 2d at 1195.

[13] With respect to her sentence, Jensen first challenges

the district court’s ruling that Jensen could be imprisoned for

her violation of the books, records, and accounts provision

because she had failed to prove by a preponderance of the evi-

dence that she qualified for the protection of the No Knowl-

edge Clause. See Jensen, 537 F. Supp. 2d at 1073-75. The

relevant statute provides that “no person shall be subject to

imprisonment . . . for the violation of any rule or regulation

UNITED STATES v. REYES 14947

if he proves that he had no knowledge of such rule or regula-

tion.” 15 U.S.C. § 78ff(a). This provision is an affirmative

defense to a sentence of imprisonment, and the burden to

prove the defense is on the defendant. United States v.

O’Hagan, 521 U.S. 642, 677 n.23 (1997).

[14] The district court framed the question as “whether Jen-

sen has satisfied her burden of proving by a preponderance

that she was unaware of a SEC rule or regulation prohibiting

the falsification of books and records.” Jensen, 537 F. Supp.

2d at 1075. This was the proper formulation. See O’Hagan,

521 U.S. at 652 (“[A] defendant may not be imprisoned for

violating Rule 10b-5 if he proves that he had no knowledge

of the Rule.”). Other circuits have also observed that proof of

no knowledge of the rule “can only mean proof of an igno-

rance of the substance of the rule, proof that the defendant did

not know that [his or her] conduct was contrary to law.”

United States v. Schwartz, 464 F.2d 499, 509 n.16 (2d Cir.

1972) (citing United States v. Lilley, 291 F. Supp. 989, 993

(S.D. Tex. 1968)).

[15] The evidence showed that Jensen tried to hide the

backdating scheme and was conscious of her wrongdoing.

Such evidence included Jensen’s attempt to minimize the

obviousness of the backdated options, concealing the way

options were actually dated, and directing employees to not

communicate about options over the phone or email. Based on

this evidence, and more, the district court appropriately con-

cluded that Jensen had not carried her burden of establishing

that she had no knowledge of the SEC rule prohibiting the fal-

sification of books and records. Jensen, 537 F. Supp. 2d at

1072.

Jensen’s second sentencing challenge relates to the obstruc-

tion of justice enhancement to her prison sentence. The

enhancement was for obtaining a severance of her trial from

Reyes’. Reyes and Jensen were jointly indicted, and Jensen

moved to sever their trials on the ground that Reyes was a

14948 UNITED STATES v. REYES

critical witness who could provide exculpatory evidence for

her. To support this position, Jensen’s counsel submitted an

ex parte declaration by Reyes under seal. In relevant part,

Reyes declared that if the trials were severed, he would testify

that he and Jensen did not conspire to backdate. He further

declared that only he had the authority to choose the date or

price of stock options, not Jensen, and that he told Jensen that

he was not backdating stock options.

In arguing for the severance motion, Jensen’s counsel

asserted that Reyes’ declaration was “as exculpatory as it

gets.” The court thus granted the severance on the basis of

Jensen’s counsel’s argument that Reyes would provide excul-

patory testimony. Jensen did not call Reyes to testify at her

trial.

[16] Because the district court had granted the severance on

a false premise, the court imposed an enhancement under

U.S.S.G. § 3C1.1 for obstruction of justice. That sentencing

guideline provides a two-level increase in the offense level

“[i]f (A) the defendant willfully obstructed or impeded, or

attempted to obstruct or impede, the administration of justice

with respect to the investigation, prosecution, or sentencing of

the instant offense of conviction, and (B) the obstructive con-

duct related to (i) the defendant’s offense of conviction and

any relevant conduct; or (ii) a closely related offense[.]”

U.S.S.G. § 3C1.1. Although it was Jensen’s counsel who

obtained the severance and solicited Reyes’ declaration, the

district court held that Jensen was responsible for the court’s

reliance on Reyes’ false declaration, because Jensen acted

willfully in allowing her counsel to present the declaration

and Jensen knew Reyes’ declaration was false or severely

misleading.

[17] There is no evidence that Jensen procured Reyes’ dec-

laration. Jensen’s attorney even told the district court that

counsel was responsible for obtaining the declaration and sub-

mitting it to the district court. Unlike some other obstruction

UNITED STATES v. REYES 14949

cases, where the defendant threatened or attempted to influ-

ence a witness, see e.g., United States v. Sayetsitty, 107 F.3d

1405, 1410 (9th Cir. 1997), or where the defendant personally

suborned witness perjury, see e.g., United States v. Garcia,

135 F.3d 667, 671 (9th Cir. 1988), this enhancement was

based on the conduct of defense counsel. The sentencing

guidelines do not suggest an obstruction of justice enhance-

ment can be imposed for a defense attorney’s arguments. The

guidelines provide that a defendant is accountable only for the

conduct of others that he or she helped bring about or cause.

See U.S.S.G. § 3C1.1 cmt. 9 (“Under this section, the defen-

dant is accountable for his own conduct and for conduct that

he aided or abetted, counseled, commanded, induced, pro-

cured, or willfully caused.”). Our law on obstruction of justice

is consistent with this limitation. See e.g., United States v.

Collins, 90 F.3d 1420, 1423 (9th Cir. 1996) (upholding

enhancement where defendant personally told two witnesses

to give police false statements, as evidenced by recorded calls

from jail).

[18] We affirm Jensen’s conviction but vacate her sentence

and remand for resentencing without the enhancement for

obstruction of justice.

V. Conclusion

We reverse Reyes’ conviction and remand for a new trial.

We affirm Jensen’s conviction, vacate her sentence, and

remand for resentencing.

Affirmed in part, reversed in part, and remanded.