Petition — Natelli v. United States
Supreme Court brief1976
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IN THE
Supreme Court of the Anited
OCTOBER TERM, 1975
No. %5-808
ANTHONY M. NATELLI,
Petitioner,
UNITED STATES OF AMERICA,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
PHILIP A. LACOVARA
Hughes Hubbard & Reed
1660 L Street, N.W.
Washington, D.C. 20036
JOHN S. MARTIN, JR.
Martin, Obermaier & Morvillo
1290 Avenue of the Americas
New York, New York 10019
Attorneys for Petitioner
Washington, D.C. © CLB PUBLISHERS e LAW PRINTING CO. e (202) 393-0625
(i)
TABLE OF CONTENTS
Page
pS ee ee ae ii
he a Ue eS awe Cae d ee cece. l
eae aan ib bbe 6:6.66.000.6% 6 2
CONSTITUTIONAL AND STATUTORY PRO-
es be ek oil we Oa ba’ hee 2
ee ak as b's S be 6d 08'S 0-06 2
to oe es yaaa es eee 6h 50066066 whee 3
re Se es ca ds Ad ede we e's ees Suwa
B. The Audit of NSMC for Fiscal Year 1968 ........ 5
C. Petitioner’s Post-Audit Communications with
EE DEG ca PCS ake Ee eO TCL eehhen ve beee ces 8
D. Preparation of the September 1969 Proxy
Statement and the Statements Alleged To Be
ee a hte wee hand O56 oN 9048 10
1. The Footnote to the Audited Statement
ns in kwee aes k eee e558 ae o.s 11
2. The Unaudited Statement of Earnings ....... 15
E. The Trial and the Instructions to the Jury ....... 19
REASONS FOR GRANTING THE WRIT ............. 21
ee oes cae eneees 0% 21
I. The Decision Below Obliterates the Widely
Accepted Professional Distinction Between
Audited and Unaudited Financial Statements ..... . 25
II. The Court of Appeals Has Weakened the
Requirement of Scienter Associated With the
Proscription of “Knowing” and “Willful”
Se ee Peres Tee eee 30
lil. This Case Presents an Important Issue of
Sound Judicial Administration to Assure
I I eae ik wae ore me
(ii)
Page
IV. By Expressly Confining ““To The Facts’ This
Court’s Decision In Travis v. United States,
364 U.S. 631 (1964), And In Sustaining
Venue The Court Of Appeals Overstepped
Its Bounds And Created An Inter-Circuit
Conflict On The Proper Interpretation of |
OE ee erro oy ee eee Te eT ee 35
V. Petitioner Was Deprived of a Fair Trial When
the Government Withheld Crucial Facts and
Made Affirmative Misrepresentations to the
Duo hk a dec aie ese eee Ov 08s ORR EK ee Ns 39
Pa a eae ee ere 46
APPENDICES
Appendix A (Opinion Below Affirming Peti-
Cg ee a a ae la
Appendix B (Judgment Below Affirming
og | eee ee lb
Appendix C (Opinion Reinstating Conviction of
Senay a GED ng 5 wc ce es eotecces’ Ic
Appendix D (Order Denying Petitioner's Petition
ne a a ye eee rere ld
Appendix E (Constitutional and Statutory
i ee ee ree cece seus le
TABLE OF AUTHORITIES
Cases:
Aicorte vw. Tenas, 355 UB. FE CISST) nw wc cc ccc cces 45
Andres v. United States, 333 U.S. 740 (1948) .......... 34
Berger v. United States, 295 U.S. 78 (1935) ........... 44
Brady v. Maryland, 373 U.S. 83 (1963) .............. 45
Ernst & Ernst v. Hochfelder, 503 F.2d 1100 (7th
Cir. 1974), cert. granted 421 U.S. 909 (1975) ....... 24
Fischer v. Kletz, 266 F. Supp. 180 (S.D.N.Y. 1967)... ... 28
RP er Re ee
(iii)
Page
Feola v. United States, _.. U.S. —___ (No.
CE CE De Uae ye oes od bs es 24
Forster v. United States, 237 F.2d 617 (9th Cir.
SD 0 ts-aen we biee Chit nae enw Ow oe ued es 6 0 es 5 32
Giglio v. United States, 405 U.S. 150 (1972) .......... 43
Gold v. DCL Inc., 1973 CCH Fed. Sec. L. Rep.
CEE wee ewtab Sale ses veces 28
Griego v. United States 298 F.2d 845 (10th Cir.
eR ines ea ee a a 31
Investors Funding Corp. v. Jones, 495 F.2d 1000
te Os a a a oe we Wee's 38
Johnson v. Louisiana, 406 U.S. 356 (1972) ........... 34
Mooney v. Holohan, 294 U.S. 103 (1935) ............ 45
Morisette v. United States, 342 U.S. 246 (1952) ........ 31
Napue v. Illinois, 360 U.S. 264 (1959) ............... 45
Ring v. United States, US. —— (No.
eek eee eeenene hues 45
Sansone v. United States, 380 U.S. 343 (1965) ......... 24
SEC v. National Student Marketing Corp., CCH
Fed. Sec. L. Rep. 995,331 (D.D.C. October 21,
Pn Ceskseeen cand bb CCE a he eis 4 hae 6008s 21,
Travis v. United States, 364 U.S. 631 (1961)- ........ passim
United States v. Balint, 258 U.S. 250 (1922) .......... 24
United States v. Bishop, 412 U.S. 346 (1973) .......... 24
United States v. Brawer, 482 F.2d 117 (2d Cir.)
cert. denied 419 U.S. 1051 (1973) ............... 31
United States v. Bright, 517 F.2d 584 (2d Cir.
i Seed ele ee cod eel aia Pie bok Sa ntny0-0 32
United States v. Clearfield, 358 F. Supp. 564 (E.D.
Pi Geter cele e er rou bat eoreeaehehaces 31
(iv)
Page
United States v. General Motors Corp., 226 F.2d 745
(36 Cin. OGGGD « ccccsedcduteave ssn 30
United States v. International Minerals & Chemical
Cosp., GR UB. SRS GRRVED 0 cv ckectaeeencsuues 24
United States v. Jacobs, 475 F.2d 270 (2d Cir.),
cert. denied 414 U.S. 821 (1973) ............205- 31
United States v. Jewell, F.2d _____ (9th Cir.
Ne. 76-2833 Feb. 36, GOVGe ‘00 cues bene cues uae 30
United States v. Joly, 493 F.2d 672 (2d Cir. 1974) ...... 31
United States v. Lombardo 241 U.S. 73 (1916) ......... 38
United States v. Murdock, 290 U.S. 389 (1933) ........ 24
United States v. Olivares-Vega, 495 F.2d 827 (2d
Cle. FOP ccc scedeedsttenss eee 31
United States v. Ottley, 509 F.2d 667 (2d Cir.
i SP eParer merge err 31
United States v. Park, ____ US. (No. 74-215,
June D, COVER oo viv cvecnct canneee 24, 31
United States v. Sarantos, 455 F.2d 877 (2nd Cir.
TFUED cabecveveeusetenseen eee 31
United States v. Squires, 440 F.2d 859 (2d Cir.
31 | rar esr 31
United States v. Thomas, 484 F.2d 909 (6th Cir.),
cert. Gattied 415 UZ. SRO CIGIH) vc ccvcustavecasucus 31
United States v. Zapata, 497 F.2d 95 (Sth Cir.
fe rrr er 31
Verdugo v. United States, 40° F.2d 599 (9th Cir.
1968), cert. denied 402 U.S. 961 (1971) ............ 31
Walters v. United States, 256 F.2d 840 (9th Cir.),
cert. denied 358 U.S. 833 (1958) ................. 32
Constitutional Provisions:
U.S. Constitution, Sixth Amendment ............ 2, 34, 35
Statutes:
Securities Act of 1933
S87. 03 UBL. O7Re 2. cece eceeee eee 38
626, (35 UBL. OFPe og isn dhe 32
(v)
Page
Securities Exchange Act of 1934
DUCTED bnccococccecccccececves 38
EEE 37, 38
MPD? a ccccccectpecceccces 38
PU (C ccscecceccecoces 2, 35, 36, 38
COC. (UD ccccccccsceccccces passim
Internal Revenue Code of 1939, § 145(b), 53 Stat.
NN POPP TTETETELL ETT 32
Labor Management Reporting and Disclosve Act
CME ccccccccesecocccccees 33
National Labor Relations Act, §9(h), 61 Stat. 146,
EES Ee 37
ESE LST OTT TTT TEE EE 31
TT e et ccc eeceecbscececees 31, 36
EEE coc cscesocecesvecesess 32
Es Doce e ccc ed eedevcececes 31
EE EE ee 31
EE ELE ET 2
SEC Regulations and Release:
SEC Reg. 210.2-02(e), as amended, 4 CCH Fed.
Sec. L. Rep. 969,128A (1975) .......2-- eee ee. 27
SEC Reg 240. 14 a-6, 17 C.F.R. §240.14a-6 (1975) ..... 37
Securities Act Release No: 177, 5 CCH Fed. Sec. L.
Rep. 472,199 (Sept. 10,1975) ..........220005. 29
Other:
American Institute of Certified Public Accountants
Professional Standards, (CCH ed.)
DUIPEC CECE GebOGdeeescesesccccecoccces 26
DMC EPEC ESGbessecsenccoscccccccccs 26
DUUECEEMGbeG Gb eeeeceescccccccccccces 26
DPCP EE Ee Ge Scesceeeceesccceccecs 26-27
DEORE ccc ccovccssrtesssuneeeetdeceebews
|}, rrr eye tT This dt Ge
American Institute of Certified Public Accountants,
Reports Following a Pooling of Interests,
(Statement of Auditing Procedure No. 40, 1968) ...
Federal Rules of Criminal Procedure,
Po Pre rrr re ere ren
Me EP cctcsecceddevantees becuse cues
FF EF ore ee ry at
IN THE
Supreme Court of the Anited States
OCTOBER TERM, 1975
No.
ANTHONY M. NATELLI,
Petitioner,
UNITED STATES OF AMERICA,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
Petitioner Anthony M. Natelli respectfully petitions
for a writ of certiorari to review the judgment of the
United States Court of Appeals for the Second Circuit
affirming his conviction for violation of Section 32(a)
of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78ff.
OPINIONS BELOW
The opinions of the court of appeals affirming
petitioner’s conviction and, on rehearing, reinstating the
2
conviction of codefendant Joseph Scansaroli have not
yet been reported and appear in Appendices A and C,
respectively, of this petition.
JURISDICTION
The judgment of the court of appeals affirming
petitioner’s conviction was entered on July 28, 1975. A
timely petition for rehearing was denied on November
5, 1975. The jurisdiction of this Court is invoked
pursuant to 28 U.S.C. §1254(1).
CONSTITUTIONAL AND STATUTORY
PROVISIONS INVOLVED
The pertinent portions of the Sixth Amendment and
of Sections 27 and 32(a) of the Securities Exchange
Act of 1934 are set forth in Appendix E, infra.
QUESTIONS PRESENTED
1. Whether, in a prosecution under Section 32(a) of
the Securities Exchange Act alleging that an independ-
ent professional accountant ‘“‘willfully” and “know-
ingly” submitted a false financial statement containing
unaudited figures, the accountant is entitled to instruc-
tions explaining that the professional obligations
regarding unaudited financial data are different from
those involving figures he has audited.
2. Whether the conviction of an independent profes-
sional accountant for “willfully” and “knowingly”
making a materially false statement in violation of
Section 32(a) of the Securities Exchange Act can be
3
based merely upon a finding that, though ignorant of
the alleged falsity, he acted with a “‘reckless disregard”
of the true facts but without a conscious purpose to
avoid learning the truth.
3. Whether, in a prosecution involving multiple
specifications of unlawful conduct contained in a single
count, a general admonition that the “‘verdict” must be
unanimous is sufficient to implement the Constitutional
requirement that the jury must be unanimous on at least
one particular specification before it can convict.
4. Whether the court of appeals erred in confining “‘to
the facts” this Court’s decision in Travis v. United States,
364 U.S. 631 (1964), and in permitting a prosecution for
making a false statement in a document “required to be
filed” with the SEC to be brought in a district other than
the one in which the document was required to be and
was in fact filed.
5. Whether petitioner was denied a fair trial when the
government withheld crucial facts from and made
affirmative misrepresentations to the jury.
STATEMENT
A. Introduction
This case presents important and recurring questions
regarding the obligations of independent professional
accountants under the Federal securities laws as they are
enforced by criminal sanctions—in particular, whether an
accountant is obliged to question unaudited figures in the
same manner as audited presentations are scrutinized, and
whether his failure to do so can support a conviction
under a statute declaring it a felony to make a false
4
statement “knowingly” and “willfully.” By the
Government’s own concession, this prosecution is the
focal point of an attempt to fashion new standards of
civil and criminal liability for accountants and lawyers.!
Petitioner Anthony M. Natelli, together with
co-defendant Joseph Scansaroli, both certified public
accountants, were convicted of “knowingly” and
“willfully” making false or misleading statements with
respect to material facts in a proxy statement issued by
the National Student Marketing Corp. (NSMC) and filed
with the SEC in September 1969. At all relevant times,
petitioner was the partner in the accounting firm of
Peat, Marwick, Mitchell & Co. (PMM) in charge of the
firm’s engagement to serve as independent accountants
for NSMC. Co-defendant Scansaroli was the supervisor
on that engagement, working under petitioner’s general
direction. The multi-count indictment that named
petitioner and Scansaroli also charged five officers of
NSMC with various violations of the securities laws and
lOn the fifth day of trial, October 29, 1974, The Wall Street
Journal described this prosecution as a “test case in the
government’s effort to enforce the securities laws against auditors
and lawyers.” Subsequently the Government submitted to the
trial court a memorandum by the Chief Accountant of the SEC,
acknowledging that he had been the source for the newspaper
story as a result of an interview with the reporter involved.
The article, which also attributed to the source the statement
that “if we can’t get a conviction here we never will,” was the
subject of a defense motion for a mistrial on the ground of
deliberate government misconduct in generating prejudicial
publicity. The trial court, while not condoning the conduct of
the SEC’s Chief Accountant, denied the motion on the ground
that the article had not “infected” the jury. (Tr. 2434).
Petitioner argued on appeal that a defendant should not have the
usual burden of showing prejudice where he seeks a sanction
against prejudicial publicity that high government officials have
deliberately planted in the press.
5
the conspiracy and mail fraud statutes. Four of those
officers pleaded guilty to various counts prior to trial,
and the trial of the fifth was severed. Scansaroli’s
conviction was first reversed by the court below and
then reinstated on the government’s petition for
rehearing.” °
We are constrained to express our belief at the outset
that the court below, apparently relying on the
government’s brief, rested on unwarranted inferences
from the evidence, even when that evidence is viewed in
the light most favorable to the government. According-
ly, we note the relevant instances where the court
below, in our view, diverged from what the jury fairly
could have found.
B. The Audit of NSMC for Fiscal Year 1968
PMM was engaged to serve as independent account-
ants for NSMC in August 1968, two years after the
company’s formation. A different firm had previously
performed accounting services for NSMC, including
those incident to its first public offering of stock in
April 1968. PMM’s first task was to perform an audit of
the company’s financial statements for the fiscal year
ended August 31, 1968. In the course of this audit, a
question arose as to whether the income accrual used
by NSMC for that fiscal year conformed to accepted
accounting principles.
*Scansaroli’s petition for rehearing of the decision reinstating
his conviction is now before the Court of Appeals.
6
NSMC had been formed in 1966 to. provide
promotional and marketing services to companies desiring
to sell their products to college students. Through a
system of student representatives, NSMC offered its
clients the opportunity to distribute promotional
materials on campuses and to solicit business from
students. Initially, NSMC’s programs vvere designed to
elicit a direct response from students to the client—such
as the return of a coupon or order form in response to
a mailing or poster-and NSMC was paid an agreed
amount for each response. In 1968, however, NSMC
began concentrating on securing fixed-fee contracts,
proposing a promotional program tailored to a client’s
products at a fixed price. (Tr. 330-331, 335-338,
1826-1831).
Because the bulk of NSMC’s work was completed by
the time a proposal was prepared for a client, NSMC
accrued as revenue a substantial part of the price of any
proposal a client had agreed to accept. This procedure
permitted the revenue a client would ultimately pay
NSMC to be matched against the expenses the company
incurred to develop the proposal. An independent CPA
who advised NSMC prior to PMM’s engagement had
accepted the company’s accrual of revenue upon
representations by account executives that client
representatives had orally promised to buy fixed-fee
programs, and revenue so accrued was reflected in an
unaudited nine-month earnings statement issued by the
company for the period ended May 31, 1968. (Tr.
303-307, 469-482, 1494-1498, 1831-1832).
Petitioner initially was faced with the decision
whether to object to this accrual of revenue. After
7
considering alternative accounting methods, including a
suggestion by NSMC’s president that the total fee on
any commitment should be accrued, petitioner con-
cluded that continued accrual of a portion of
committed fees would not be improper, provided that
company records allowed calculation of the accrued
proportion. Under this “percentage of completion”
accounting method, the accrued proportion was the
percentage of the total estimated time to be expended
on a contract that had been invested by NSMC during
the fiscal year in question. (Tr. 1494-1498, 1830-1838)
Before accepting this accounting treatment,
petitioner directed Scansaroli to verify directly with
NSMC’s clients the commitments recorded by NSMC
and to obtain documentation from NSMC that would
permit calculation of the appropriate completion
percentages. Scansaroli met with NSMC account execu-
tives, reviewed their files, and made telephone calls to
randomly-selected NSMC clients. A schedule from
NSMC’s comptroller and forms signed by account
executives showed the gross amount of each client’s
commitment, the estimated cost to be incurred by
NSMC for printing and distributing promotional
materials for that client, and the account executive’s
estimate of the completion percentage. (Tr. 1921-1939
196, 1501-1505, 1838-1843: Gx3)
Income accrued in this manner appeared in the
audited financial statement as “‘Unbilled receivables and
estimated earnings on contracts in progress,” and the
percentage-of-completion method of accrual was fully
explained in a footnote. (Gx. 5, pp. 19-20.)°
The court below suggested that the accounting method used
for the 1968 audited statement was “contrary to sound
accounting practice” and furnished petitioner with a motive to
falsify subsequent records in order to escape “severe criticism
and possible liability.” App. 13a. There was no evidence at trial,
liowever, that percentage-of-completion accrual violated accepted
accounting principles, and the CPA advising NSMC at the time of
the unaudited nine-month statement published in June 1968 had
IEEE OOOO EE EEE EO eEOo7O
' 8
C. Petitioner’s Post-Audit Communications with
NSMC
Soon after completing the audit in early December
1968, petitioner advised NSMC’s officers to improve the
company’s record-keeping procedures. At a meeting
attended by NSMC’s president, comptroller, and general
counsel, petitioner stated that in the future the company
should record income on a fixed-fee proposal only when
a client made a written commitment. A few days
thereafter, NSMC’s counsel prepared a letter contract to
be used for future commitments for fixed-fee programs,
and petitioner was advised of counsel’s judgment that
such a_ letter would constitute an _ enforceable
commitment. (Tr. 206-211, 490-492, 530-532, 673,
1845-1850; Natelli Ex. G)
In April or May 1969, petitioner learned from NSMC’s
general counsel that Robert Michaels, formerly the
Director of Marketing for NSMC, had been fired for
taking bribes from certain suppliers and that a
subsequent investigation had revealed that sales commit-
ments reported by Michaels and recorded by NSMC as
accrued revenue. for fiscal 1968 in fact never had
existed. After confirming this report with NSMC’s
permitted the company to use the method. Petitioner concluded
that his insistence upon non-recognition of income until all services
were performed would have produced a distortion of the com-
pany’s financial record, because the change in accounting methods
would have presented NSMC as a failing company, even though
substantial resources invested by the company had in fact
produced favorable oral commitments. (Tr. 1505. 1837; Gx3, pp.
1913-1914)
9
president, petitioner concluded that the appropriate
accounting treatment was a retroactive write-off of the
amounts involved since revenues and expenses attribu-
table to these “‘commitments” never would have been
accrued had the truth been known. The fraudulent
Michaels contracts represented $748,762 in accrued
revenues for fiscal 1968 and $539,012 in accrued
expenses—costs NSMC never would incur on _ these
accounts—so that the net effect of the write-off on
1968 profits was to reduce the sum originally reported
by $209,750 (Tr. 370-373, 661-664, 1853-1857.)
At about this same time, petitioner received advice
from Mrs. Carol Raimondo, an accountant in PMM’s tax
department, that NSMC’s 1968 income statement
contained an unnecessary expense item of $190,000
charged to a deferred tax account.* While preparing
NSMC’s federal income tax return for the 1968 fiscal
year, Mrs. Raimondo concluded that a tax loss carry
forward, which apparently had not been foreseen at the
time of the audit, would result in a tax saving for NSMC,
making unnecessary the $190,000 charge on NSMC’s
books. (Tr. 1381-1390, Natelli Ex. O&P.) After
conferring with Mrs. Raimondo’s superior, who agreed
with her conclusions, petitioner concluded that the
deferred tax entry should be removed from NSMC’s
books. (Tr. 1858-1862.)
4a deferred tax account is ordinarily included in a
corporation’s financial statement when, because of differences in
tax and financial statement accounting methods, income reported
in the financial statement exceeds that reportable for tax
purposes. A charge to this account represents tax liability
ultimately to be paid on income accrued for financial accounting
purposes but not currently reported for tax purposes.
10
When NSMC _ sought assistance in making the
necessary adjustments in the 1968 accounts, petitioner
delegated to Scansaroli the preparation of appropriate
entries. The entries Scansaroli prepared combined the
write-off of the Michaels commitments with the write-off
of the erroneous $190,000 charge to the deferred tax
account, since these two components were nearly
identical in amount and virtually cancelled one another
in their effect upon NSMC’s fiscal 1968 earnings.
Scansaroli’s initial entry, however, had not included one
of the smaller Michaels commitments involving profits
of $21,000, an omission that made the contract figure
match almost exactly the amount of the tax item.
When informed of this omission, petitioner insisted that
this contract also be written off retroactively, and an
appropriate entry to this effect was later made in NSMC’s
books.* (Tr. 1863-1867.)
D.Preparation of the September 1969 Proxy
Statement And the Statements Alleged To Be
False and Misleading
During the period from November 1968 to May 1969,
NSMC had been engaged in an active program of
acquiring other companies whose products had special
appeal in the youth market. During the spring of 1969,
‘The court of appeals stated that in making the entry
Scansaroli had used “the device of rounding off the tax item to
make it conform exactly to the write-off.” App.9a. This
characterization simply ignores petitioner’s insistence upon
correction of Scansaroli’s entries as soon as he learned of the
$21,000 omission.
I]
NSMC’s officers decided to call a stockholder’s meeting
in order to authorize the issuance of additional shares
needed for completion of NSMC’s acquisitions. The
lengthy proxy statement for this meeting was to include
NSMC’s financial statement for the 1968 fiscal year
ending August 31, 1968—the latest audited period—and
an unaudited summary of earnings for the nine-month
period from September |, 1968 through May 31, 1969.
The two distinct statements alleged by the indictment
to be false and misleading were contained in those two
portions of the proxy statement.
1. The Footnote to the Audited Statement of Earnings.
The audited statement of earnings printed in the proxy
statement consisted of republished income statements for
the preceding fiscal years 1966, 1967, and 1968. NSMC
had acquired several companies subsequent to the close
of the last period, however, and therefore the statements
could not be republished in original form. Statement on
Auditing Procedure No. 40 issued by the American
Institute of Certified Public Accountants (AICPA) in
October 1968 required that any republication of financial
statements for pre-acquisition periods reflect the
combined operations of NSMC and the acquired
companies, as if they had been operating as an integral
unit during those periods.® The retroactive “pooling” of
°The purpose of such a presentation is to make figures for
pre- and post-acquisition periods properly comparable, by
eliminating the sudden distortion that an acquisition would
otherwise introduce into a financial statement. See AICPA,
Reports Following a Pooling of Interests 41 (Statement on
Auditing Procedure No. 40, 1968).
12
NSMC’s earnings during pre-acquisition periods with
those of its newly-acquired companies resulted in a
substantial augmentation of the figures originally
reported for those periods. For example, NSMC was
reporting in the proxy statement sales and earnings for
fiscal year 1968 of $11,541,895 and $773,152,
respectively, whereas in its audited statement originally
prepared for that year it had reported only $4,989,446
and $338,081, respectively. (Compare Gx. 5 and Gx. 25.)
The republished statement for fiscal year 1968 reflected
the write-off of the Michaels contracts and the
elimination of the deferred tax provision, which was
shown separately as an extraordinary credit.
Opinion No. 10 of the Accounting Principles Board
of AICPA, then in effect, suggested that in order to
show effects of pooling upon earnings trends, the
acquiring company “may wish to provide reconciliations
of amounts of revenues and earnings previously
reported with those currently presented.” Petitioner
determined early in the course of preparing the
financial statement that such a reconciliation, suggested
but not required by then authoritative AICPA prin-
ciples, should be included. A footnote to the audited
statement of earnings contained, for both sales and
earnings in each pre-acquisition period, a line labelled
“originally reported” to show the figure attributable to
NSMC as it existed before acquisitions, and a separate
line labelled “pooled companies reflected retroactively”
to show the addition of data for acquired companies.
The sum of entires on the two separate lines equalled
the corresponding entry in the financial statement
presented in the main text. (Gx.5, p. 23)
13
As originally drafted by petitioner, the footnote
contained an additional line labelled “retroactive
adjustment for contract losses,” in which petitioner
planned to show the write-off of commitments
fraudulently reported by Michaels. After reviewing the
first printed draft of the proxy statement, which
contained this line entry, petitioner determined that
such an entry would have to be amplified by narrative
discussion. As he attempted to draft an explanation of
Michaels’ misconduct, petitioner became concerned
about the propriety of printing such allegations in a
public document and began to question whether
separate disclosure of retroactive adjustments to 1968
figures—the write-off of Michaels contracts and of the
deferred tax expense—was really necessary at all, since
their net effect was a reduction of only $21,000 from
originally reported earnings of $388,000 (Tr. 1905-
1908.)
Petitioner decided to discuss the matter with Leon
Otkiss, a PMM partner who because of his technical
proficiency was designated as an “SEC reviewing
partner.” In his discussion with Otkiss, petitioner
questioned the need for separate treatment and
narrative discussion of these two adjustments because of
the small net effect these items had upon earnings.
Petitioner mentioned the improvements in the
company’s record-keeping practices since the date of
the original financial statement and noted that
insistence on written commitments should eliminate
problems such as the write-off of oral commitments
that Michaels had reported. Otkiss agreed with
petitioner that in these circumstances the post-period
14
adjustments had no material impact upon net income
and that footnote discussion of the contract write-offs
was therefore not necessary.’ As a_ result the
‘adjustment for contract losses” line in the footnote
petitioner had drafted was eliminated, and the adjust-
ments for the contract write-offs and the deferred tax
provision were simply reflected in the footnote in the
figures entered in the line labelled “pooled companies
reflected retroactively.” (Tr. 1741-1752, 1908-1910.)
The indictment charged that the inclusion of these
adjustments in the “pooled companies’ line without
seperate disclosure constituted a materially false state-
ment in violation of Section 32(a) of the Act, 15 U.S.C.
§ 78ff(a).
"The court of appeals, without citing any support in the
record, stated that petitioner had sought Otkiss’ advice “without
full disclosure to Otkiss of all relevant factors.” (App. 17a.) This
characterization is inconsistent with testimony by Otkiss that he
asked all questions he thought relevant and that petitioner
answered them openly. (Tr. 1771.) On cross-examination Otkiss
testified that he “had no recollection” of petitioner’s telling him
about matters relating to the unaudited statement concerning a
later period, discussed infra pp. 15-19. (Tr. 1767-1770.) These
matters had nothing to do with the footnote to the audited
statement on which petitioner sought Otkiss’ advice. This
testimony, therefore, fails to support the insinuation that
petitioner had concealed from his partner any information
necessary to make a judgment on the necessity of footnote
disclosure or on the propriety of percentage-of-completion
accounting, the two matters on which petitioner sought Otkiss’
assistance.
15
2. The Unaudited Statement of Earnings.
The other specification of material falsity related to
the inclusion of income from a promotion contract in
figures appearing in an unaudited financial statement for
the nine-month period ending May 31, 1969. PMM had
not performed an audit with respect to the nine-month
figures and these were clearly labelled “unaudited” in the
proxy statement. Because those figures would appear in
proxy material also containing figures PMM had audited,
however, petitioner had a professional obligation to
object to any known departures from accepted
accounting principles. |
Among the items included in the nine-month
statement as initially drafted by NSMC’s management
was a commitment from Pontiac Division of General
Motors Corporation involving gross revenue of $1.2
million. The Pontiac commitment originally had been
included by NSMC in an unaudited statement of earnings
for the first six months of fiscal 1969, published by
NSMC in May 1969. Although petitioner was in no way
associated with this statement, when he became aware
of the entry he advised NSMC’s management that the
accrual of revenue on this commitment would not be
accepted at the time of the fiscal 1969 audit because
the supporting letter from Pontiac Division was not in
the legally-binding form prescribed by NSMC’s general
counsel after the December 1968 meeting.®
During the course of work on the proxy statement,
petitioner went from his office in the District of
Columbia to New York City to spend the evening of
®See p. 8, supra.
16
August 14 reviewing the proxy statement at the offices
of NSMC’s printer. At that time he insisted upon
changes in the figures already set in type to reflect
deletion of the Pontiac commitment. NSMC’s president
Cortes Randell, who was present at the printer’s plant,
insisted that the Pontiac commitment was firm and
offered to fly petitioner to Detroit to meet the Pontiac
official involved. Petitioner declined this offer and
maintained his prior position that while there was no
reason to question the genuineness of the letter, the
commitment should not be included in the figures
because it was not in the legally binding form
prescribed by the company’s counsel: (Tr. 515-519,
§30-532, 651-653, 672-673, 1913-1919; Gx. 12; Natelli
Ex. G.)
At some point during this session, which stretched into
the early morning hours of August 15, Randell reminded
petitioner of an oral commitment Eastern Airlines had
given in May, for which written confirmation had
recently been received. Randell suggested that since the
two contracts were approximately equal and Eastern’s
had not been reflected in the figures contained in the
printed draft, the Eastern commitment, now confirmed
in writing, should be “substituted” for the Pontiac
commitment, averting the need to change any of the
figures set in type. Despite the unusual hour, Randell
arranged for an NSMC account executive to telephone
the gross sales and costs anticipated on the Eastern
contract. Those figures indicated, however, that NSMC’s
expected earnings on the Eastern contract were about
$200,000 less than those anticipated on the Pontiac
commitment. Petitioner concluded that in no event could
the figures currently in the draft proxy statement
remain unchanged. His decision meant that the entire
nine-month statement had to be reprinted.
17
Before his departure from the printer, petitioner was
asked to consider whether, when the statement was
revised, the company could include the Eastern contract,
since the Eastern letter, in the agreed-upon form,
confirmed an oral commitment made in May, during the
period covered by the unaudited statement. During the
day of August 15, Dennis Kelly, an NSMC vice-president,
brought petitioner a copy of the letter signed by the
Eastern Airlines Manager of Special Markets, which read
in pertinent part:
This is to confirm our verbal commitment given
to you on May 14, 1969.
We will accept and utilize during the fiscal year
1970, an amount of not less than $820,000 for
National Student Marketing Corporation’s services
as Offered to us in your proposal originally
submitted on May 7, 1969. (Gx 18.)
Kelly also produced a copy of the proposal referred to in
the Eastern letter and reviewed with petitioner the costs
allocable to the Eastern program. Petitioner left New
York on August 15 without having decided whether
inclusion of the Eastern contract would be proper. (Tr.
539-544, 677-679, 1919-1928.)
During the following week, petitioner reviewed the
time sheets of Robert Bushnell, the NSMC account
executive having primary responsibility for the Eastern
Airlines account; the records showed that he had spent
more than 110 hours on the Eastern program prior to the
end of May. Petitioner concluded that accrual of some
revenue on the Eastern contract in the unaudited
statement would be consistent with percentage-
of-completion accounting treatment and accordingly
advised NSMC that he would not object to the
proposed inclusion. When the unaudited statement was
18
reprinted to delete revenue attributable to the Pontiac
commitment and include that attributable to the
Eastern account, the nine-month sales and earnings were
$400,000 and $200,000 lower, respectively, than the
figures that had appeared in the earlier printed draft, to
which petitioner had objected.’ (Tr. 541-544, 680-682,
769-770, 1925-1930; Natelli Ex. J; Gx. 13, p. 2666.)
The indictment alleged that the unaudited nine-month
statement had falsely overstated NSMC’s*sales and
earnings. The principal component of the overstatement
was said to be the Eastern contract. This was described
by government counsel at trial as a “complete phony,”
°The key passage in the opinion of the court below on
petitioner’s alleged mishandling of the Eastern commitment
(App. 15a) contains several mistakes about the record. First, the
court’s view that the Eastern commitment was “substituted” for
the Pontiac contract is erroneous because the initial figures that
reflected the Pontiac contract were not allowed to stand. While
that was the treatment proposed by NSMC’s president Randell,
the suggestion was rejected by petitioner, and the proxy
statement was reprinted with new computations. It was Randell’s
suggestion to disregard the differences in the figures that
petitioner described as “weird,” not the Eastern commitment
itself as suggested by the court. Notwithstanding the court’s
characterization of the two commitments as “strangely close in
amount,” the Eastern contract on its face showed $227,000 less
in earnings for NSMC than had the Pontiac commitment, a
difference that necessitated reprinting of the proxy statement to
show those lower earnings.
Next, the court’s observation that NSMC had “only time logs”
but no expenditures and no billing on the program is without
significance, since the essence of percentage-of-completion
accounting is the accrual of revenue and costs on unbilled sales.
Finally, the court’s remark that petitioner had seen “not one
scrap of paper” from Eastern other than the commitment letter
simply ignores the character of the letter itself, which on its face
was a binding document in the form approved by counsel.
19
which appeared “‘[b]y magic [at] 3 o’clock in the
morning.” (Tr. 2295.) Significantly, the government
never offered any evidence that the Eastern letter
examined by petitioner was anything other than what it
purported to be—a binding commitment by Eastern to
purchase at least $820,000 of NSMC’s services—and,
indeed, testimony by the principal government witness
in a subsequent, related prosecution showed that the
prosecutor had substantially (and apparently knowingly)
misrepresented the facts in his presentations to the jury
trying petitioner.'®
E. The Trial and the Instructions to the Jury
The key issues for the jury were whether petitioner
had made any false material statements to the SEC, and,
if so, whether he had done so “willfully” and
“knowingly.” With respect to the omission of footnote
discussion of the retroactive write-off of the Michaels
contracts, petitioner’s position was that (1) the contract
write-off and the correction of the deferred tax charge
'°The subsequent testimony and its significance are examined
infra, pp. 39-45. What is important here is that the government
failed to show that the Eastern contract was a fraud—an essential
element to sustain this specification. The court below never
acknowledged this omission in the government’s proof but
confined itself to stating that the Eastern contract “was a matter
for deep suspicion.” (App. 15a.) While we believe this
characterization erroneous for the reasons stated in n.9, supra, the
court’s remark shows, at most, that petitioner should
have questioned the Eastern contract, not that it was not genuine
or that its inclusion rendered the unaudited financial statement
false and misleading.
20
had only a small net effect upon NSMC’s 1968 earnings
when combined, (2) the retroactive write-off itself
seemed traceable to dishonesty of an employee who
already had been discharged, and (3) new procedures for
obtaining written commitments in binding form seemed
likely to prevent recurrence of the situation. Petitioner
and Otkiss testified that in these circumstances they
believed in good faith that omission of further
explanation of the adjustments in the pooled financial
statement for fiscal year 1968 was not material. With
regard to the Eastern contract that the government
described as a “phony,” petitioner’s position was that
whether or not the contract was actually bogus —a point
on which the government offered no evidence—he had
believed the Eastern contract to be genuine and had no
reason to seek verification from the Eastern official
who signed the letter, since the financial statement in
question was not the subject of an audit, and the letter
was in the legally binding form that he would require at
the time of the next audit.
The trial judge instructed the jury that a conviction
could be returned without a finding that petitioner knew
of any material inaccuracy in the figures. The court
stated that, although “‘ordinary or simple negligence or
mistake alone would be insufficient to support a finding
of guilty knowledge or willfulness or intent,” the jury
could convict if it found “reckless deliberate indifference
to or disregard for truth or falsity.” (Tr. 2365.) Defense
counsel objected to the “recklessness” element of the
charge (Tr. 2139-2140, 2427-2429), as well as to the
court’s failure to explain an independent accountant’s
duty with respect to an unaudited statement. Notwith-
standing the fact that an unaudited statement formed
the basis of the second specification, and that the court
instructed the jury on the outside accountant’s duties
when conducting an audit, the court refused to
distinguish that duty from an accountant’s professional
Ee - 1 areyop
ee
21
obligations with respect to unaudited financial state-
ments. (Tr. 2365-2369, 2384.) The Court’s instructions
on “‘willful’’ and “knowing” conduct, and specifically the
“recklessness” concept, were discernibly the basis for
the jury’s verdict."
REASONS FOR GRANTING THE WRIT
Introduction and Summary
This case is part of extensive litigation that has been
described by one court as a “turning point” in the
exposure of accountants and lawyers to liability under
the securities laws.'? In this “test” prosecution, the
government urged that petitioner could be convicted of
"After an initial period of deliberation, the jury requested
further instruction on the element of “knowing” and “willful”
conduct. In his supplementary instructions, the judge told the
jury that a conviction was permissible only if petitioner “knew
that a portion of the financial statement . . . was false or mis-
leading” and if he had the “intention to include false or
misleading information of a material nature....” (Tr. 2400.)
This time, however, the court omitted any reference to
recklessness as a basis for conviction, despite objection from the
government. (Tr. 2401.) After another period of deliberations,
the jury reported itself deadlocked. (Tr. 2420.)
When the judge instructed the jury to continue deliberations,
the foreman asked him to define “knowingly” again. On this
occasion the supplementary charge reintroduced “‘recklessness”’ as
an adequate basis for conviction, without actual knowledge of
material falsity. (Tr. 2426-2428.) After receiving these instruc-
tions, the jury brought in a verdict of guilty.
'2See SEC v. National Student Marketing Corp., CCH Fed.
Sec. L. Rep. 995,331, n.32 (D. D.C. Oct. 21, 1975), the civil
action brought by the. SEC against officers and directors of
NSMC, NSMC’s independent accountants, outside attorneys
retained by NSMC, and attorneys serving certain parties with
which NSMC transacted business.
22
“knowingly” and “willfully” filing false financial
statements because his purported failure to satisfy what
the government contended were his professional obliga-
tions constituted “reckless disregard” of the truth. The
court below, in affirming the conviction, concluded that
petitioner had “willfully” and “‘knowingly”’ filed a
materially false statement with the SEC by failing to
perform ‘“‘a specific duty to discover the true facts.”
(App. 22a.) Yet the specific duty the court discerned is
not found in any pronouncement of the accounting
profession, and the court disregarded a distinction the
profession has long recognized as_ significant—the
difference between an independent accountant’s audit-
ing function and his simple association with unaudited
financial presentations. Although the court based its
affirmance of the conviction upon petitioner’s failure to
investigate an unaudited financial statement, it approved
the jury instructions that dealt exclusively with the
auditing function. The court concluded that an
accountant’s conduct should be measured by jurors’
“common understanding” of proper conduct. (App.
24a.)
The decision below also constitutes a novel expansion
of the statutory requirement of culpable knowledge—an
expansion expressly tied to petitioner’s status as a
member of one of the “ancient professions [law and
accounting]."” (App. 21a.) The court concluded that
because petitioner had failed to satisfy the obligation of
affirmative inquiry created by the court, he could be held
to have “willfully” and “knowingly” filed a materially
false statement without regard to his actual knowledge or
belief. It was sufficient, the court held, if petitioner
had acted with “reckless disregard” for the true facts; this
was equated with foreknowledge of falsity even without
RES etre eens ee ee ee
23
the accompanying finding, until now universally required
in the case of a prohibition of “knowing” and “willful”
conduct, that the defendant has acted with at least a
conscious purpose to remain ignorant. Thus, by coupling
its erroneous determination of an accountant’s
professional responsibilities with its elimination of the
requirement of scienter, the court below upheld a
conviction despite the district judge’s appraisal that
petitioner did not have the requisite intent. The judge
stated at sentencing:
... I think you are absolutely sincere when you say
that you do not believe that you did anything wrong
in this audit or audits for National Student
Marketing. After thinking about the matter for a
long time I think you honestly mean that. But the
tragedy is that the jury found that this was an audit
or audits done with reckless disregard for what was
really involved. We know that because of the record
showing what it did in the jury deliberation. (S. Tr.
12) (Emphasis added.) 13
The decision to hold accountants, under threat of
criminal prosecution, to virtually the same duty of
verification in connection with unaudited financial
statements that heretofore has been applied only when
accountants certify financial data, is one that obviously
‘34 sentence of one year in prison plus a $10,000 fine was
imposed, with all but sixty days of the prison sentence
suspended. Despite the fact that the trial judged acknowledged
that in 13 years as a trial judge he had not dealt with any person
“more generally reputable, and deservedly so,” than petitioner
(S. Tr. 12), the judge stated he was imposing a prison sentence
“because I think the profession of accountancy has failed just as
badly as some aspects of the legal profession have failed in
understanding their professional responsibility.” (/d.)
24
will have broad impact upon the accounting profession.
The abandonment of authoritative professional pro-
nouncements in favor of the “common understanding”
of lay jurors as the standard for measuring an
accountant’s conduct is a matter that warrants
considered review by this Court. The decision below
takes on added significance because the vehicle for
enhanced discipline of professionals is a_ criminal
statute, and the discipline has been imposed by a weaken-
ing of the requirement of a culpable state of mind. The
determination of the degree of mens rea necessary to
support criminal conviction under regulatory statutes has
long been regarded as a judgment for this Court to
make.'* This case is one of special significance because
the court below has carved from a statute of general
applicability a special exception to the mens rea
requirement applicable only to professionals.
A grant of certiorari is particularly appropriate because
the Court has before it Ernst & Ernst v. Hochfelder,
No. 75-1042, in which the Court is asked to consider
whether an accountant’s negligence in preparing
financial statements is sufficient to bring civil liability
under the securities laws. However that question may
be resolved, the Court should grant review in this case
to reaffirm that only “knowing” falsehood warrants the
imposition of criminal sanctions and that where
statements are made in ignorance of true facts only a
'4See e.g., United States v. Murdock, 290 U.S. 389 (1933),
United States v. Balint, 258 U.S. 250 (1922); Sansone v. United
States, 380 US. 343 (1965); United States v. International
Minerals & Chemical Corp., 402 U.S. 558 (1971); United States v.
Bishop, 412 U.S. 346 (1973); Feola v. United States US.
____ (No. 73-1123, Mar. 19, 1975); United States v. Park, —
U.S. ____ (No. 74-215, June 9, 1975).
25
conscious purpose to avoid learning the truth can
possibly justify treating the statements as the predicate
for a criminal conviction.
This case also presents other issues of importance for
the integrity of federal criminal justice. These involve the
appellate court’s approval of inadequate jury instructions
on the constitutional requirement of unanimity, and the
sustaining of venue in a district other than the one in
which the allegedly false statement was required to be,
and was, filed. Finally, events since the affirmance of this
conviction by the court below strongly indicate that the
government procured the conviction by misconduct;
these developments are serious enough to warrant
summary action by this Court.
THE DECISION BELOW OBLITERATES
THE WIDELY ACCEPTED PROFESSIONAL
DISTINCTION BETWEEN AUDITED AND
UNAUDITED FINANCIAL STATEMENTS.
The affirmance of petitioner’s conviction is premised
upon the court’s conclusion that he “recklessly”
defaulted on his alleged professional obligations by a
failure to confirm the Eastern contract through com-
munication with Eastern officials. (App. 22a-23a) This
decision draws into question what has been the long held
and widely accepted principle in the accounting profes-
sion that an accountant’s responsibilities in dealing with
unaudited figures are not as extensive as those relating to
an audit. The Eastern contract appeared in what was
clearly labelled as an unaudited presentation. The signifi-
cance of this fact largely eluded the trial court, which
26
instructed the jury on auditing but refused petitioner’s
requested instruction on the scope of an accountant’s
professional obligations when working with unaudited
statements. The court of appeals affirmed the conviction
notwithstanding the absence of amy jury instruction
distinguishing audited from unaudited statements; and
in an opinion which confused the two kinds in
explaining the professional standards established by
AICPA, the court adopted a theory of professional
obligation—the breach of which it held may carry
criminal liability—that compels accountants to ignore
the distinction.
When conducting an audit, the accountant is expected
to go beyond company records, as, for example, by
observing inventories or by communicating directly with
customers of the audited company. See | CCH AICPA
Professional Standards § 331. With respect to unaudited
statements, however, the profession has recognized that
the accountant’s duty is more limited. The AICPA
Standards, which govern the professional conduct of
certified public accountants, flatly state that:
The certified public accountant has no responsibility
to apply any auditing procedures to unaudited
financial statements. | CCH §516.02.
When an accountant becomes “associated” with an
unaudited financial presentation,'S AICPA Standards
prescribe his obligations as follows:
[I]f the certified public accountant concludes on
the basis of facts known to him that unaudited
‘San accountant becomes “associated” with unaudited
presentations if he assists in their preparation, or if he permits
his name to be used elsewhere in a document containing them. 1
CCH § §516.03, 516.11, & 516.12.
27
financial statements with which he may become
associated are not in conformity to generally
accepted principles, which include adequate
disclosure, he should insist ...upon appropriate
revision. . . . §516.06 [emphasis added].
The SEC Accounting Rules themselves distinguish
audited and unaudited statements and provide that with
respect to unaudited data an accountant must follow
“appropriate professional standards.” SEC _ Reg.
210.2-02(e) as amended, 4 CCH Fed. Sec. L. Rep.
969,128A (1975). In the case of NSMC’s unaudited
nine-month statement petitioner assured himself that
the company’s records supported accrual of the income
included, consistent with percentage-of-completion
accounting principles. He refused to permit recognition
of income on the Pontiac commitment because the
letter supporting that commitment was not in legally
binding form. But the Eastern contract was acceptable
because the supporting letter evidencing that commit-
ment was in the legally binding form prescribed by
NSMC’s counsel.
In affirming this conviction, the court below
concluded, citing the AICPA Standards, that petitioner
had failed to satisfy professional obligations by his failure
to take the additional step of communicating with
Eastern. (App. 16a-17a.) But, as demonstrated, nothing in
the “generally accepted principles” applicable to
unaudited statements required petitioner to verify the
genuineness of company records that were in the proper
form.'®
"®Since the court of appeals relied heavily upon that
specification regarding the Eastern contract, we reiterate that the
Government introduced no evidence to show that the Eastern
contract was not genuine. Furthermore, if petitioner had done
what the court found he had crucially failed to do—communicate
with Eastern about the commitment—he would not have dis-
covered any defect in the apparently binding contract. See pp.
39-45 infra.
28
The court below not only misinterpreted existing
pronouncements of the profession, but abandoned them
entirely by approving jury instructions that focused
exclusively on auditing and failed to differentiate the
accountant’s more limited responsibility in connection
with unaudited presentations.'? Ultimately, the court
concluded, petitioner’s conduct was to be judged
according to the “common understanding” of the jury
about what constitutes legitimate behavior for a
professional accountant.
Quite apart from the unfairness of convicting an
accountant found to have violated this “common
understanding” by actions that conformed to
authoritative professional standards at the time he acted,
the prospective impact of this decision upon accounting
practice will be substantial and adverse. Faced with the
court’s vague standard of conduct enforced by criminal
sanction, a professional accountant must observe auciting
procedures even when dealing with unaudited statements.
The result, however, will be a loss of the benefits
unaudited statements provide for the financial
community.
Companies publishing audited financial statements
often include unaudited “interim statements” summa-
‘The court of appeals concluded that the instruction
requested by petitioner was not proper. (App. 24a.) Any
deficiency in the proffered instruction, however, did not justify
the trial court’s refusal, after instructing the jury on an auditor's
responsibility, to add amy remarks distinguishing unaudited
statements. This omission was specifically noted by defense
counsel in compliance with Fed.R.Cr.P.30. (Tr. 2384.)
The distinction between audited and unaudited presentations
has been applied in civil suits against accountants in the district
courts, see, e.g., Fischer v. Kletz, 266 F.Supp. 180 (S.D.N.Y.
1967); Gold v. DCL Inc., 1973 CCH Fed. Sec. L. Rep. €94,036
(S.D.N.Y. 1973), but the decision below dealing with criminal
liability casts doubt upon whether the distinction will continue
to receive judicial recognition.
29
rizing the company’s earnings record from the close of the
audited period to the date of publication. Because
adherence to auditing procedures often means that the
audited statements must follow by several months the
close of the audited period, these unaudited interim
statements are viewed as helpful to investors, even
without an auditor’s certification, since they make more
current the picture of the firm’s financial status. Indeed,
the SEC has moved to expand the inclusion of interim
financial data in annual financial statements filed with it.
See Accounting Series Release No. 177, 5 CCH Fed.
Sec. L. Rep. 972,199 (September 10, 1975). Interim
statements cannot, however, serve the function of
making audited statements more current if accountants
must follow full audit procedures or suffer criminal
liability for what later may be found to have been a
“reckless” failure to seek additional information
concerning an unaudited presentation.
If Section 32(a) of the Securities Exchange Act
compels accountants, despite general professional
practice, to treat all associations with financial
presentations as demanding the same degree of
involvement and scrutiny—or to risk conviction of a
federal felony—such a departure from accepted
accounting practice that is as old as the statute itself
should be mandated uniformly and authoritatively by
this Court.
30
Il.
THE COURT OF APPEALS HAS WEAK-
ENED THE REQUIREMENT OF SCIENTER
ASSOCIATED WITH THF PROSCRIPTION
OF “KNOWING” AND “WILLFUL” CON-
DUCT.
The court below concluded that because petitioner had
failed to perform a duty to inquire further into the
Eastern contract, he had acted with “reckless
indifference” to the true facts, and that this amounted to
“knowing” and “willful” false statement of material
facts. Even if the court’s initial premise that petitioner
had an obligation to inquire further is accepted—a
position untenable unless one rejects the
generally accepted professional standards prevailing prior
to the decision below—it is plain that the court’s
conclusion involves a novel departure from the usual
concepts of criminal culpability.
In Section 32(a) of the Securities Exchange Act,
Congress has sought to criminalize only “knowing” and
“willful” falsehood; the making of an _ erroneous
statement in ignorance of the facts can be held criminal
only if the defendant has consciously closed his eyes to
the truth. As the Third Circuit has noted, “[o]nly a
finding of a conscious purpose to avoid enlightenment
will justify charging the defendant with knowledge.”
United States v. General Motors Corp., 226 F.2d 745,
749 (3d Cir. 1955). A conscious, purposeful refusal to
recognize the truth may lay the foundation for a finding
that the accused really did know, see United States y.
Jewell, F.2d (9th Cir. No. 74-2832, Feb. 26,
1975), or it may permit the conclusion that he “de-
31
liberately chose not to learn for the very purpose of being
able to assert his ignorance if discovered,” United States
v. Olivares-Vega, 495 F.2d 827, 830 n.10 (2d Cir. 1974).
In either case, the finding of a conscious purpose to avoid
learning the truth is necessary to establish that the
defendant acted with the consciousness of wrongdoing
which the elements “knowingly” and “willfully” require.'*
Morisette v. United States 342 U.S. 246, 264-65 (1952);
compare United States v. Park, U.S. (No.
74-215, June 9, 1975). Only recently, indeed, a dif-
ferent panel of the same court that affirmed petitioner’s
conviction reversed the conviction of a defendant charged
'SOther federal statutes proscribing “knowing” and “willful”
conduct have been so construed by the courts of appeals. F.g., 21
U.S.C. §960(a), knowingly violating narcotics control laws, see
United States v. Zapata, 497 F.2d 95, 97 n.5 (Sth Cir. 1974);
United States v. Joly, 493 F.2d 672, 674-675 (2d Cir. 1974);
Verdugo v. United States, 402 F.2d 599, 604 (9th Cir. 1968) cert.
denied 402 U.S. 961 (1971); Griego v. United States, 298 F.2d
845, 849 (10th Cir. 1956).
18 U.S.C. §922(aX6), knowingly making false statements in
connection with acquisition of a firearm, see United States v.
Thomas, 484 F.2d 909 (6th Cir. 1973), cert. denied 415 U.S.924
(1973); United States v. Squires, 440 F.2d 859, 864 n.12 (2d
Cir. 1971).
18 U.S.C. §1001, knowingly making false statements in a
matter before a federal department or agency, see United States
v. Sarantos, 455 F.2d 877 (2d Cir. 1972); United States v.
Clearfield, 358 F. Supp. 564 (E.D. Pa. 1973).
18 U.S.C. §2314, knowing transportation of stolen
property, see United States v. Brawer, 482 F.2d 117, 128 n.14
(2d Cir. 1973); United States v. Jacobs, 472 F.2d 270. 287 &
n.37 (2d Cir.), cert. denied 414 U.S. 821 (1973).
See also United States v. Ottley, 509 F.2d 667, 672-673 (2d
Cir. 1975) (willful violation of fiduciary duty imposed by
32
with knowing possession of stolen mail matter, 18 U.S.C.
§ 1708, because of the trial judge’s failure to include the
requirement of a “conscious purpose” when instructing
that a “reckless disregard’’ for the truth would suffice to
convict. United States v. Bright, 517 F.2d 584 (2d Cir.
1975).
In this case, however, according to the decision below,
petitioner's status as a professional accountant caused the
requirement of conscious purpose to vanish. This con-
struction of Section 32(a), which the court made no
pretense of supporting by the language or legislative
history of the statute, introduces a serious distortion in
federal prosecutions of “knowing” and “willful”
conduct. While a citizen who obtains goods under
circumstances indicating a high probability that they are
stolen but remains ignorant of their true character may
be convicted only upon a finding that he acted with a
conscious purpose to avoid learning the truth, a
professional accountant will more readily suffer a felony
conviction if a jury later concludes that he was
confronted with suspicious figures.'? Congress, however,
LMRDA, 29 U.S.C. §439%a)); Walters v. United States, 256 F.2d
840 (9th Cir.) cert. denied 358 U.S. 832 (1958) (willful vio’ation
of Securities Act of 1933, 15 U.S.C. §77x); Forster v. United
States, 237 F.2d 617, 620-621 (9th Cir. 1956) (willful and
knowing evasion of income tax, § 145(b) of Internal Revenue Code
of 1939).
Indeed, the decision below causes a further distortion in
that professionals will be more readily subject to criminal
sanction than the businessmen who retain them. The indicted
officers of NSMC, had they gone to trial, would have been
entitled to instructions stating that “knowing” conduct consists
at least of conscious disregard of the truth. The ample evidence
available from related litigation, showing that NSMC’s officers
33
has done nothing that would justify such a novel and
discriminatory application of Section 32(a), and it is not
for the courts to change the statutory standard of
criminal liability in order to impose upon professionals a
higher standard of care.
THIS CASE PRESENTS AN IMPORTANT
ISSUE OF SOUND JUDICIAL
ADMINISTRATION TO # £ASSURE
UNANIMOUS VERDICTS.
The indictment contained, in a single count, two
distinct specifications against petitioner, one involving
the footnote to the audited statement of earnings and the
other concerning the Eastern contract reflected in the
unaudited statement for a later period. The trial judge
charged the jury that it could convict upon finding that
the proxy statement was false in either respect charged.
Defense counsel asked the court to advise the jurors that
they must be unanimous as to which of the two
specifications, if either, established a violation of the
statute. This request was refused.”°
were engaged in a variety of fraudulent conduct with the
objective of deceiving the accountants, demonstrates the impro-
priety—and the injustice—of subjecting petitioner to a harsher
standard of criminal responsibility.
The trial judge charged that “if you find that the proxy
statement was false in either one of these two respects, that is
sufficient to support a conviction.” (Tr. 2340.) Much later in the
charge, the judge included the general admonition that the “verdict”
had to be unanimous. (Tr. 2380.)
34
The failure of the trial court to give the requested
charge created a substantial risk that the requirement of
unanimity was not satisfied; the jurors might have agreed
that the government had proved one specification of the
indictment beyond a reasonable doubt, but disagreed as
to which. This risk is particularly acute because of the
state of the evidence, which even the court below found
at most marginally sufficient. The court of appeals
acknowledged that it would have been “sound practice”
to instruct the jury as petitioner had requested, but was
nevertheless content to assume that a general admonition
that the “verdict’’ must be unanimous “suffices to
instruct the jury that they must be unanimous on
whatever specifications they find to be the predicate of
the guilty verdict.” (App. 26a-27a)
Unanimity of jury verdicts in federal prosecutions is
compelled by the Sixth Amendment and is specifically
commanded by Rule 3l(a) of the Federal Rules of
Criminal Procedure. See Johnson v. Louisiana, 406 U.S.
356, 369-371, (Powell, J.), 382-384 (Douglas, J.), 395
(Brennan, J.), 397-399 (Stewart, J.), 400-401 (Marshall,
J.) (1972). The requirement of unanimity “extends to all
issues—character or degree of the crime, guilt and
punishment—which are left to the jury.” Andres vy.
United States, 333 U.S. 740, 748 (1948).
This constitutional requirement was _ substantially
diluted in the present case, for the meaning of the
requirement as it affects the jury’s decision-making
process was not explained. Where the government’s
several factual theories are embodied in separate counts
of an indictment, the necessity of delivering a separate
verdict on each count insures that the jurors agree on
each evidentiary path to conviction. The indictment in
this case offered no such protection, since two specifica-
tions were contained in the same count. Moreover,
35
because the two specifications did not relate to the same
statement alleged to be false — ome concerned an
audited presentation, the other an unaudited statement
for a different period — there was no assurance that a
juror’s finding with respect to one specification implied a
similar finding on the other.
In these circumstances, when the jury was told that the
government need prove only one specification to prevail,
the trial judge’s admonition that “‘your verdict must be
unanimous” was insufficient. It directed the jury’s
attention to unanimity of result, but simply failed to
explain that unanimity means agreement about the basic
facts on which the ultimate conclusion is grounded.
The requirement of unanimity in federal criminal
verdicts is too important to become merely a symbol,
whose specific meaning for the jury’s deliberations is left
undefined. This Court should grant review in order to
establish a uniform principle for the effective implemen-
tation of the unanimity requirement of the Sixth
Amendment 2-4 Federal Criminal Rule 31 (a).
IV.
BY EXPRESSLY CONFINING “TO THE
FACTS” THIS COURT’S DECISION IN
TRAVIS v. UNITED STATES, 364 U.S. 631
(1964), AND IN SUSTAINING VENUE THE
COURT OF APPEALS OVERSTEPPED ITS
BOUNDS AND CREATED AN_INTER-
CIRCUIT CONFLICT ON THE PROPER IN-
TERPRETATION OF TRAVIS.
Section 27 of the Securities Exchange Act of 1934, 15
U.S.C. §78aa, provides that criminal proceedings
36
involving alleged violations of the Act are to be brought
in the district where “‘any act or transaction constituting
the violation occurred” [emphasis added]. The indict-
ment, tracking the language of Section 32(a), 15 U.S.C.
§78ff(a), charged petitioner with having made materially
false statements in a proxy statement “required to be
filed” with the SEC. While it is undisputed that the
statement was filed with the SEC at its offices in
Washington, D.C. (where petitioner had his office as
well), the prosecution was brought in the Southern
District of New York, where certain steps in the
preparation of the proxy statement occurred. But the
offense charged had occurred, if at all, where the
statement was filed with the SEC, and the act
“constituting the violation” of Section 32(a) occurred at
the SEC’s offices in Washington. Petitioner, therefore,
moved the trial court to dismiss on the ground that under
Section 27 venue properly lay only in the District of
Columbia. The trial judge denied the motion, and the
court of appeals affirmed.
While this Court has never construed the venue
provisions of Section 27, it has had occasion to consider
the situs of an offense analogous to the one with which
petitioner was charged. In Travis v. United States, 364
L.S. 631 (1964), this Court considered the proper venue
for a prosecution under a similar statute, the False
Statements Act, 18 U.S.C. § 1001, which punishes the
making of a false statement “in any matter within the
jurisdiction of any department or agency of the United
States.”” The statement there was an affidavit of
non-Communist affiliation, prepared in Colorado and
filed with the National Labor Relations Board in
37
Washington, D.C. pursuant to then section 9(h) of the
National Labor Relations Act, which provided that the
Board could not investigate any complaint filed by a
union “unless there is on file with the Board” such an
affidavit from each union officer. Emphasizing that the
underlying regulatory statute, section 9(h), did not itself
require the filing of a statement but simply conditioned
Board action upon its having been filed, this Court held
that there would be no violation of the False Statements
Act until the allegedly offending affidavit was actually
filed with the Board and, accordingly, that venue for such
an offense lay only in the District of Columbia, where the
filing had occurred.
The Travis holding clearly controls the instant
prosecution. Like the filing of the affidavit in Travis, the
submission of NSMC’s proxy statement to the SEC was
only required indirectly. While there is no affirmative
obligation to file a proxy statement with the
Commission, proxies may not lawfully be solicited until a
statement is on file. Securities Exchange Act, Section
14(a), 15 U.S.C. § 78n(a); SEC Reg. 240.14a-6. As in
Travis, any false statement was made, if at all, when the
document containing it was filed, and the place of filing
then fixed the venue for prosecution.
In refusing to follow the plain command of Travis, the
court of appeals expressed the view that that decision
was “surely meant to be confined to the facts based upon
the unusual statute involved.”*'’ (App. 30a.) The
**Purporting to distinguish Travis, the court of appeals
observed that while the filing of the union affidavit was a
jurisdictional prerequisite for certain NLRB action, the filing of a
proxy statement is “part of the continuous process of the
38
principles of Travis have been respected by other courts,
however. Only recently a decision of the Court of
Appeals for the District of Columbia Circuit construed
Section 27 of the Securities Exchange Act in line with
Travis in determining proper venue for a civil suit brought
by the SEC. See Investors Funding Corp. v. Jones, 495
F.2d 1000, 1001-1003 (D.C. Cir. 1974).?? Insofar as the
decision below limits Travis to its facts, it is in conflict
with that decision of another circuit. A determination
that a decision of this Court should be confined to its
solicitation of proxies.” (App. 30a) These remarks have no
analytical significance. Petitioner was not charged under the
provisions of the securities laws forbidding the making of false or
misleading statements to investors, e.g. 15 U.S.C. §$77q, or
unlawful sclicitation of proxies, 15 US.C. §78n, but with
making a false statement in a document “required to be filed”
with the SEC. The provisions of §32(a) charged here are
concerned with the accuracy of information filed with a
yovernment agency and are clearly comparable to the provisions
involved in Travis.
The court of appeals also considered it “paradoxical” that
petitioner is pressing for venue in the District of Columbia when
other defendants, not living and working in Washington, would
rather be tried in “their home districts” (App. 30a, n.17). The
venue question here pertains to a relatively distinct class of “false
filing” charges, and if a defendant considers the District of
Columbia an unfavorable forum he can either waive any
objection to bringing an indictment elsewhere or seek a change
of venue out of the District of Columbia pursuant to Rule 21(b)
of the Federal Rules of Criminal Procedure.
?2 Investors Funding held that in light of Travis and United
States v. Lombardo, 241 U.S. 73 (1916), a civil action alleging
late filing of reports to the SEC required by Sections 13(a) and
15(d) of the Securities Exchange Act, 15 U.S.C. § §78m(a) and
780fd), could be brought in the District of Columbia. While the
lawsuit was civil in nature, the court was construing and applying
the same language in the venue provision of the Act, Section 27,
that governs the instant prosecution.
39
facts ought not to be usurped by a lower court. Review
by this Court is especially urgent now that two courts of
appeals have disagreed as to whether 7ravis has applica-
tion to securities act violations.
V.
PETITIONER WAS DEPRIVED OF A FAIR
TRIAL WHEN THE GOVERNMENT WITH-
HELD CRUCIAL FACTS AND MADE AF-
FIRMATIVE MISREPRESENTATIONS TO
THE JURY...
The government asserted throughout petitioner’s trial
that the Eastern commitment letter had been a fabrica-
tion devised by the participants in the August 14 meeting
at NSMC’s printer. For example, government counsel
argued to the jury in summation:
“If anything has been proved in this case, ladies
and gentlemen, the Government submits that you
must have been satisfied beyond any doubt that that
Eastern contract was known to be a complete phony
when it came up.
“The fact is this has to be one of the most cynical
events that you will probably ever hear about, at 3
o’clock in the morning at the printers plant where
they are printing up this very proxy statement,
there’s going to be a big hole in the earnings because
the Pontiac contract has to come out.
“By magic 3 o’clock in the morning the first time
it is mentioned the Eastern Airlines contract comes
up. It is supposed to be a contract for the period
which ended two months before and yet in the two
months between May and August nobody seems to
40
have peeped a word [about] it to the controller of
National Student Marketing or anybody else who
had any business with this matter.’’?? |
Counsel’s assertion that the existence of the Eastern
commitment was fabricated that evening by the partici-
pants in the meeting has been directly contradicted by the
government’s own proof in a related prosecution brought
only after petitioner’s conviction was obtained. Less than
a month after the jury found petitioner guilty, the
government indicted Thomas Mullen, the Eastern Airlines
executive who signed the commitment letter, charging
him, inter alia, with conspiring with NSMC’s officers to
deceive NSMC’s independent accountants. Cortes Ran-
dell, formerly NSMC’s president, who had pleaded guilty
prior to petitioner’s trial but had not been called by the
government to testify there, appeared as the principal
government witness in Mullen’s trial on October 14,
1975. There Randell testified that, sometime prior to the
day on which they went to the printers, petitioner had
told him that the Pontiac figures could not be included in
the nine-month unaudited statement of earnings. Randell —
then explained:
I then asked the account executives if
any of them knew of other contracts
which were pending which we could put
on our books and Dennis Kelly said
that—
?3Government counsel made comparable remarks in his
opening statement, asserting that “[N]obody but nobody had
mentioned this enormous sale, virtually the same size as the
Pontiac contract, between May and August.” (Tr. 56).
ee =
Oe OE Sy Re ee ae
4]
** *
Q. What did Dennis Kelly say to you?
A.
> O PO
> ©
» ©
He said he had been working on a contract with
Eastern for a number of months and he felt as
though it was at the point that he could get a
commitment letter on that. He didn’t know, but
he would see if he could.
* * *
. Did Kelly say anything else to you?
. Yes, he said that Bob had been working with
Tom for a number of months.
. Bob who?
. Bob Bushnell [the NSMC account executive in
charge of the Eastern account].
. And Tom who?
. Tom Mullen and at that time, as I recollect,
Eastern was our biggest client the previous year
and for the coming year they had been working
two or three months on a large program.
* * *
.Mr. Randell, at the time you had _ this
conversation with Dennis Kelly or prior to that,
did you know of any commitment from Eastern
Airlines to spend $800,000 with National
Student Marketing in 1970?
* * *
. No, other than, as I know, other than the fact
that Mr. Mullen had agreed to the program, but
that is all. That is all that I knew. That Mr.
Mulien had agreed to go ahead with the program
hack in May.
. Who told you this?
. Kelly had told me this a couple of months
previously or Bob, one or the other, Bob
Bushnell or Dennis Kelly.
* * *
42
Q. What happened after you had this conversation
with Kelly?
A. Kelly came back and said that he could get a
commitment letter.
* * s
Q. What happened next?
A
. He brought one into my offices and again just
within the same day or the next day.
* a *
[Tr. 46-54, United States v. Mullen (S.D. N.Y. 74
Crim. 172)]
Randell’s testimony in the subsequent prosecution
supports the representations made to petitioner at the
August 14 meeting—that NSMC executives had expended
substantial resources on an Eastern proposal for several
months and had obtained an oral commitment from
Mullen in May-~—facts also supported by the workpapers
delivered to petitioner the following day.** Randell’s
testimony demonstrates clearly that the prosecutor
misstated the facts at petitioners trial when
he made the inflammatory argument to the jury that the
Eastern commitment was a mythical construct that had
first appeared “by magic [at] 3 o’clock in the morning”
and that no responsibie NSMC official had previously
“neeped a word” concerning it.
Moreover, the circumstances strongly support an
inference that the misstatements were deliberate. Randell
pleaded guilty to conspiracy and fraud counts of the
multi-count indictment in August 1974, and subse-
quently appeared before the grand jury in September and
October 1974, before petitioner’s trial began. Mullen was
indicted in December 1974, less than a month after
| AS e¢ pp. 17-19 supra.
43
petitioner’s conviction. The assistant U.S. attorney who
prosecuted petitioner was in charge of the entire
investigation relating to NSMC, including the grand jury
appearances of Randell, Kelly, and Mullen and the
acceptance of guilty pleas from four NSMC officers,
including Randell and Kelly. It is virtually certain,
therefore, that he was aware, as Randell was later to
testify as a government witness, that the Eastern
commitment had in fact been given orally in May and
that petitioner was testifying truthfully when he stated at
the trial that Randell had told him, earlier in August, that
written confirmation of an oral commitment from
Eastern was expected. In any event, quite apart from the
likely personal knowledge government counsel must have
had as to the falsity of his opening and closing arguments
the prosecution is chargeable with awareness of the
evidence within its possession—evidence that directly
contradicted by the version of key facts the government
urged upon the jury. See Giglio v. United States, 405 U.S.
150, 154 (1972).
By failing to bring out all the facts surrounding the
Eastern contract, the government was able to mislead the
jury, and the court of appeals, into believing that if
petitioner had sought confirmation of the Eastern
contract by communication with Mullen, he would have
discovered the falsity of that commitment. Randell’s
testimony at the Mullen trial, however, established that
the commitment letter shown to petitioner was not
binding only because of a secret side letter Randell gave
Mullen simultaneously, making the “commitment”
cancellable at will. The prosecution understandably chose
a
44
not to offer any proof of the secret side letter in support
of the prosecutor’s otherwise barren assertion that the
Eastern contract was a “phony” and known to be bogus
by petitioner. The revelation that Mullen and Randell had
concealed the sham character of the transaction from
NSMC’s accountants would have devasted the govern-
ment’s contention at trial that petitioner had knowingly
and willfully assisted NSMC’s officers in distorting
NSMC’s financial condition. But by omitting any proof
of the side letter, the government failed to show that the
commitment letter Mullen signed was not binding.
Accordingly, there was nothing in the government’s case
to show that the inclusion of Eastern in the unaudited
statement of earnings rendered it “false,” an essential
element of the offense with which petitioner was
charged. The government attempted to cover this gaping
hole in its proof by asserting in counsel’s argument a
version that even its own witness now contradicts. Such
conduct to procure a conviction certainly offends the
dignity of the United States and petitioner’s right to fair
treatment. Berger v. United States, 295 U.S. 78, 88
(1935).
Exposure of all the facts concerning the Eastern
contract shows that the key assumption made by
the court below in affirming the conviction was unten-
able. The court of appeals concluded that petitioner’s
failure “to take the next step of seeking verification from
Eastern” (App. 22a-23a) was chargeable as a knowing
misstatement, the implicit assumption being that if
petitioner had taken that step he would have discovered
the “commitment” to have been a “phony.” Yet the
complete account of Mullen’s duplicity shows the utter
fallacy of this supposition: had petitioner made the
additional inquiry the court below demanded, Mullen
ere ete ee een Le ee ee my
- mae eres
a ae
45
would have provided the necessary confirmation—as
indeed he did a short time later in connection with
petitioner’s audit of the 1969 figures.
It is settled law that the government deprives the
defendant of a fair trial when it knowingly uses perjured
testimony to convict, see Mooney v. Holohan, 294 U.S.
103 (1935), or selectively elicits testimony from a
witness so that the jury is deliberately left with a “false
impression.”’ Alcorta v. Texas, 355 U.S. 28, 31 (1957).
Indeed the prosecution’s obligation to insure the fairness
of the trial extends further, to the duty to correct a
known misstatement of a witness, Napue v. Illinois, 360
U.S. 264 (1959), and to disclose evidence favorable to
the accused, Brady v. Maryland, 373 U.S. 83 (1963). The
government’s conduct in this case, withholding from the
jury the complete account of the Eastern contract and
affirmatively misstating the actual facts in counsel’s
argument, is as antithetical to a fair proceeding as the
actions this Court has previously condemned.
While the government’s failure to prove the falsity of
the Eastern contract was a point raised on petitioner’s
appeal to the court of appeals, the evidence of the
government’s misconduct was not fully revealed until
Randell testified in the Mullen trial, while petitioner’s
petition for rehearing was pending in the court of
appeals.** Accordingly, petitioner's contentions are
properly cognizable by this Court and warrant summary
action. Ring v. United States, U.S. ____ (No.
73-6969, Nov. 11, 1974).
*5Petitioner promptly advised the court of appeals of the
substance of Randell’s testimony by letter dated October 28,
1975. The petition for rehearing was denied without comment
on November 5.
46
CONCLUSION
This petition for a writ of certiorari should be
granted.
Respectfully submitted,
PHILIP A. LACOVARA
Hughes Hubbard & Reed
1660 L Street, N.W.
Washington, D.C. 20036
JOHN S. MARTIN, JR.
Martin, Obermaier & Morvillo
1290 Avenue of the Americas
New York, New York 10019
Attorneys for Petitioner
December 5, 1975
la
APPENDIX A
UNITED STATES COURT OF APPEALS
For tHe Seconp Circuit
a
Nos. 1035 & 1036—September Term, 1974.
(Argued April 10, 1975 Decided July 28, 1975.)
Docket Nos. 75-1004, 75-1008
a =
——_
Unitep States or AMERICA,
Appellee,
against
AntHony M. Nateiui and Josern ScanxsaRout,
Defendants-Appellants.
———__—_—_—~e--
Before:
Hays, MuLuGan and GuRFEIN,
Circuit Judges.
— Oe
Appeal from judgments of cenviction entered after a
jury verdict in the United States District Court for the
Southern District of New York, Harold R. Tyler, J., find-
ing appellants, two accountants, guilty on a single count
of violating 15 U.S.C. § 78ff(a) by making materially false
statements in a proxy statement filed with the Securities
Exchange Commission.
Held; As to Natelli, the evidence was sufficient to support
the conviction and no errors of law were made. As to
Seansaroli, the evidence with regard to one of the two spec-
ifications in the count was insufficient to show that he had
failed to fulfill a duty arising from his position.
Affirmed in part; reversed and remanded in part.
+o
2a
Joun S. Martin, Jr., New York, N.Y. (Martin,
Obermaier & Morvillo, Philip A. Lacovara
and Betty J. Santangelo, New York, N.Y.,
and Hughes, Hubbard & Reed, Washington,
D.C., of counsel), for Defendant-A ppellant
Natelli.
Cuartes A. Stitpman, New York, N.Y. (Mor-
rison, Paul, Stillman & Beiley, Peter H.
Morrison, Benjamin Zelermyer and Edward
D. Tanenhaus, New York, N.Y., of counsel),
for Defendaat-Appellant Scansaroli.
Fraxkury B. Vette, Assistant United States At-
torney, New York, N.Y. (Paul J. Curran,
United States Attorney, and Jed S. Rakoff,
Audrey Strauss and John D. Gordan, III,
Assistant United States Attorneys, of coun-
sel), for Appellee.
Vicror M. Earte, II] and Canmt Gorpon &
Rernpeu (Howard J. Krongard, William E.
Hegarty, Mathias E. Mone, George Wai-
land, of counsel), for Peat, Marwick, Mitch-
ell & Co. as Amicus Curiae.
CravatH, Swatne & Moore, New York, N.Y.
(John R. H{upper, Robert Rosenman and
J. Barclay Collins, New York, N.Y., of
counsel), for American Institute of Certi-
fied Public Accountants as Amicus Curiae.
os
Gunrein, Circuit Judge:
Anthony M. Natelli and Joseph Seansaroli appeal from
judements of conviction entered in the United States Dis-
trict Court for the Southern District of New York on
3a
December 27, 1974 after a four week trial before the Hon.
Haroid R. Tyler and a jury. Judge Tyler imposed a one
year sentence and a $10,000 fine upon Natelli, suspending
all but 60 days of imprisonment, and a one year sentence
and a $2,509 fine upon Seansaroli, suspending all but 10
days of the imprisonment.
Both appellants are certified public accountants. Natelh
was the partner in charge of the Washington, D.C. office
of Peat, Marwick, Mitchell & Co. (‘Peat’), a large inde-
pendent firm of auditors, and the engagement partner with
respect to Peat’s audit engagement for National Student
Marketing Corporation (“Marketing”). Seansaroli was an
employee of Peat, assigned as audit supervisor on that
engagement.
Appellants were charged and tried only on Count Two
of a multi-count indictment against other defendants con-
nected with Marketing.
Count Two of the indictment charged that, in violation
of Section 32(a) of the Securities Exchange Act of 1934,
15 U.S.C. 6 78ff(a),' four of Marketing's officers and the
appellants, as independent auditors, “wilfully and know-
ingly made and caused to be made false and misleading
statements with respect to material facts” in a proxy state-
ment for Marketing dated Sentember 27, 1969 and filed with
the Securities Exchange Commission (SEC) in accordance
with Section 14 of the 1954 Act, 15 U.S.C. § 78n.
1 Section 52 provides in relevant part:
“Any person... who willfully and kuowingly makes, or causes
to Le made, anu statement in any application, report, or document
reguircd to Le pled under this chepter or anu rule or reaulation
thereunder or any undertaking contnined in a registration statement
as provided in subsection (d) of section 7Se of this title, which
statement was false or wisiceding with respect to any material
fact, shall upon eonvietion be fined not more than $10,000, or im-
prisoned not more than two years, ..." (Emphasis added.)
——
f
;
- ~-- eS - -
' ~- -__- ~
a ht A
4a
The proxy statement was issued by Marketing in connec-
tion with a special meeting of its stockholders to consider
inter alia a charter amendment inereasing its authorized
capital stock and the merger of six companies, inelud-
ing Interstate National Corporation (“Interstate”) into
Marketing.
Count Two of the indictment further charged that appel-
lants, in attempting to reconcile net sales and carnings as
originally reported in the annual report for the fiscal year
ending August 31, 1968 with the amounts shown in the
statement of earnings in the proxy statement, filed less
than a year later, created an explanatory footnote that was
materially false and misleading.’ It was alleged that “as
the defendants well knew but failed to disclose ... (a)
approximately one million dollars, or more than 20%, of
the 1968 ‘net sales originally reported’ had proven to be
nonexistent by the time the proxy statement was filed and
had been written off on [Marketing’s] own internal books
of account; (b) net sales and profits of ‘pooled companies
reflected retroactively’ were substantially understated; and
(ec) net sales and profits of [Marketing] were substantially
overstated.”
2 The footnote read in relevant part:
“Net sales and earnings as originally reported to stockholders in
the annual report [for the year 1968] and the amounts as shown
in the stetement of earnings in this proxy statement are reconciled
as follows:
Net sales 1968
eM E A A LEE TLD T NADA ee $ 4.9589,446
Pooled companies reflected retroactively 0.000... 6,552,449
Per statement of earnings 200 ccc cerca $11,541,895
Net earnings
OR i eceniestiaieiies sa $ 388,031
Pooled companies reflected retroactively 00... 385,121
Per statement of earmings 000. ceeceecceeeeeee.. § 773,102"
Sa
Count Two charged further that the proxy statement
also contained an unaudited statement of earnings for the
nine months ended May 31, 1869 which was materially false
and misleading in that it stated “net sales” as $11,213,56!
and “net earnings” as $702,270, when, in faet, as the defen-
dants well knew, “net sales” for the period were less than
$10,500,000 and Marketing bad no carnings at all.
In order to understand the theory of the government’s
case, we must retrace our steps to the beginning of the Peat
engagement at Marketing. The inry could permissibly have
found the following facts.
Marketing was formed in i866 by Cortes W. Randell. It
provided to major ecrporate accounts a diversified range of
products to the youth market a diversified range of adver-
tising, promotional and marketing services desiened to
reach the youth market. In April 1968 Marketing had its
first and only publie offering of stock. Peat was not its
auditor at the time.
Peat took on the engagement in Aueust 1968 after check-
ing with the previous auditors that there had been no
professional disagreement with management. Natelli, the
partner in charge of Peat’s Washington office, nnderteok
the engagement to audit the financial statements of Mar-
keting for the fiseal vear ended Aneust 31, 1968, and Netelli
assigned Seansaroli to serve as supervisor on the eneage-
ment.
In late September or early Octoher 1968 (after the close
of the fisea! vear), Randell and Bernard Kurek, Varket-
ine’s Comptroller, met with heth appellants and disenssed
the method of acconnting that Marketing had been using
with respect to fixed-fee programs. In the fixed-fee pro-
gram, Marketing would develop overall marketing pro-
grams for the client to reach the vonth market by utilizing
a combination of the mailings, posters and other advertis-
6a
ing services offered by Marketing. Randel] explained that
Marketing and the client agreed upon a fixed fee to be
charged for participating in the various programs. Randell
stated that the company believed that it was proper te
recognize income on these fixed-fee contracts at the time
the clients committed themselves to participate in the pro-
grams presented to them by the account executives, and
that this was the accounting method that had been used
in preparing the financial statements for the period ended
May 31, 1968, which had been distributed to stockholders.
After considering alternative methods of accounting,
Natelli coneluded that he would use a percentage-of-com-
pletion approach to the recognition of income on these
commitments, pursuant to which the company would accrue
that percentage of the gross income and related costs on
a client’s “commitment” that was equal to the proportion
of the tine spent by the account exccutive on the project
before August 31, 1968 to the total time it was estimated
he would have to spend to complete the project.
The difficulty immediately encountered was that the “com-
mitments” had not been booked during the fiscal year, and
were not in writing. The Marketing stock which had ini-
tially been sold at $6 per share was selling in the market
by September 1968 for $80, an increase of $74 in five
months. A refusal to book the oral “commitments” would
have resulted in Marketing’s showing a large loss for the
fiseal year—aceording to Kurek’s computations, a loss of
$232,000.
Secansaroli, upon Natelli’s order, attempted to verify
the “commitments,” the sales not previously included in
the company records, in a rather haphazard manner by
telephone to representatives of companies which had pur-
portedly indicated some intent to use Marketing’s services.
Pursuant to Randell’s urging, Seansaroli did not seek any
Ta
written verifications. He accepted a schedule prepared by
Kurek which showed about $1.7 millon in purported “eom-
mitmenis.” He also received from the account executives
forms indicating estimates of the gross amonnt of the
client’s commitment, the printing and distribution costs to
be incurred on the program, and the account exeentive’s
estimate of the percentage of completion of the prograin.
On the basis of the above, Natelli decided not only to ree-
ognize income en a pereentage-of-corimletion basis, but to
permit adjustment to be made en the books after the close
of the fiscal vear in the amount of $1.7 million for such
“unbilled accounts receivable.” This adjustment turned the
loss for the vear into a handsome profit of £238,051, show-
ing an apparent doubling of the profit of the prior year.
Appellants were not charged with a criminal violation
With respect to this decision, It aay be observed, how-
ever, that in the footnote to the enudited financial <tate-
ment for 1963 explaining this method of accounting for
“Contracts in Progress,” no indication is given of the
flimsy nature of the evidence that such client) “eciit-
nents” actually existed.
After the 1968S audit had been given a full certificate
by the anditors on November 14, 1958. Natelli in December
19GS told the officers of Marketing thet in the future Peat
would gllew income to be recorded only on written com-
mitments, supported by contemporancous logs kent by
the aecount execntives with rospeet to each contract. A
form letter was drafted to spell ont a binder ecutraetun]
ecommitinent to be signed by each client,
In the meentime, following the issuance ef the 1968
audited annual report and before the September £969
proxy statement, seven companies were acquired largely
in exchange for Morketing stock, in relence on the 1958
annual report.
8a ;
Things began to happen with respect to the $1.7 million
of ‘‘sales” that had been recorded as income after fiscal
year end. Within five months of publication of the annual
report, by May 1969, Marketing had written off over $1
million of the $1.7 million in “sales” which the auditors
had permitted to be booked.
Of the total $1 million written off, $748,762 was attrib-
utable to “sales” purportedly made by one Ronald
Michaels, an account executive who was fired for taking
kickbacks and who was said to be dishonest. The other
quarter of a million dollars of sales written off hed noth-
ing to do with Michaels. When accrued costs were taken
into account, the effect of the write-off of the Michaels
contracts was to reduce 1968 income by $209,750. It ap-
peared that of the $1 million of sales requiring retroactive
write-off, $350,000 had already been written off by the
company by subtracting these “sales” from 1969 current
year figures. An additional $678,000 was to be written
off sales for the prior year 1968, and appellants were
asked to design the write-off. The write-off suggested by
appellants was accepted and entered in the general ledger
as a journal voucher entry sometime in late April or
early May.
That entry wrote off the $678,000 retroactively as a de-
duction from 1968 sales. Instead of reducing 1968 earn-
ings commensurately, however, no such reduction was
made. Appellants were informed by tax accountants in
Peat’s employ that a certain deferred tax item should be
reversed, resulting in a tax credit that happened to be
approximately the same amount as the profit to be written
off. Seansaroli “netted” this extraordinary item (the tax
credit) with an unrelated ordinary item (the write-off of
sales and profits). By this procedure he helped to con-
ceal on the bocks the actual write-off of profits, further
9a
using the device of rounding off the tax item to make it
conform exactly to the write-off. The effect of the netting
procedure was to bury the retroactive adjustment which
should have shown a material decrease in earnings for
the fiseal vear ended August 31, 1968.
The Proxy Statement
A. The Footnote
As part of the proxy statement, appellants set about to
draft a footnote purporting to reconcile the Company’s
prior reported net sales and carnings from the 1968 re-
port with restated amounts resulting from pooled com-
panies reflected retroactively. The earnings summary in
the proxy statement included companies acquired after
fiscal 1968 and their pooled earnings. The footnote was
the only place in the proxy statement which would have
permitted an interested investor to see what Marketing’s
performance had been in its preceding fiscal vear 1968,
as retroactively adjusted, separate from the earnings and
sales of the companies it had acquired in fiscal 1969.
At Natelli’s direction, Scansaroli subtracted the written-
off Marketing sales from the 1968 sales figures for the
seven later acquired pooled companies without showing
4 This procedure was approved ly Natelli, for in the first printed draft
of the proxy statement he prepared a footnote which lumped contract
losses for 1°68 and the tax adjustment, stating that “the net effect of
the retroactive adjustment was a $21,000 decrease in net earnings for
the year 1968,"
4 A vigilent and knewledgealble stoekholder who had saved his 1968
financial report could bave discovered, hwo mctening it with the ' alance
sheet in the proxy statement, that untilled receivalles for the vear ended
August 31, 196s were now $1,915,250 as aurainst $1,765,992 in the earlier
document, but he would not know why there was a difference. Footnote
"e’ read: “Figures for 1968 have been restated in certain instances to
make their presentation consistent with current: accounting practices.
There was no material effect as a result of such restatement.”
10a
any retroactive adjustment for Marketing’s own fiscal
1968 figures. There was no disclosure in the footnote
that over $1 millien of previously reported 1968 sales of
Marketing had been written off. All narrative disclosure
in the footnote was stricken by Natelli, This was a viola-
tion of Accounting Principles Board Opinion Number 9,
which requires disclosure of prior adjustments which af-
fect the net income of prior pcriods.®
B. The False Nine Months Farnings Statement
The proxy statement also required an unaudited state-
ent of nine months earnings through May 51, 1969. This
was prepared by the Company, with the assistance of
Peat on the same percentage of completion basis as in
the 1968 audited statement. A commitment from Pontiac
Division of General Motors amounting to $1,260,000 was
»roduced two months after the end of the fiscal period.
It was dated April 28, 1969.
The proxy statement was to be printed at the Pandick
Press in New York on August 15, 1969. At about 3 A.M.
on that day, Natelli informed Randell that the “sale” to
the Pontiae Division for more than $1 million could not
be treated as a valid commitment because the letter from
5 Accounting Principles Board Opinion Number 9, issued December,
1966, reads im relevant part:
"26. When prior period adjastments are recorded, the resulting
effects (hoth cross and net of applicable income tax) on the net
income of prior periods should be disclosed in the annual report
for the year in which the adjaustments are made. [The Rourd ree-
ommends diselosare, in addition. In interim reports issued daring
that vear sulsequent to the date of recerding the adjustments. |
When finaneial statements for a single period only are presented,
this disclosure should indi: ate the effeets of such restatement on the
halanee of retained earnings at the beginning of the period and on
the net income of the immediately preveding period.”
APE Accounti g lrineiples: Origioal Prenouneements, Vol. 2, p. 6562
(1909).
Pontiac was not a legally binding obligation. Randell
responded at once that he lad a “commitment from East-
ern Airlines” in a somewhat comparable amount attribu-
table to the nine months fiscal period (which had ended
more than two months earlier). Kelly, a salesman for
Marketing, arrived at the printing plant several hours
later with a commitment letter from Eastern Airlines,
dated August 14, 1969, purporting to confirm an $820,000
commitment ostensibly entered into on May 14, just be-
fore the end of the nine-month fiseal period of September
1, 1968 through May 21, 1969. When the proxy statement
was printed in final form, the Pontiac “sale” had been
deleted, but the Eastern “commitment” had heen inserted
in its place.
Soon after the incident at Pandick Press, Douglas Ober-
lander, an accountant at Peat assigned by Natelli to re-
view Marketine’s accounts, discovered $177,547 worth of
“had” contracts from 1968 which were known to Scansaroli
in May, as donbtful, but which had not been written off.
Oberlander snegested to Kurek that these contracts and
others amounting to over $520,000 in addition to the
¢1 million in bad contracts previously disposed of, be
written off. Kurek consulted Scansaroli, who, after con-
sulting with Natelli, decided against the suggested write-
off.
The proxy statement was filed with the SEC on Sep-
tember 30, 1969. There was no disclosure that Marketing
had written off S1 million of its 1968 sales (over 20%)
and over $2 million of the $3.5 million in unbilled sales
booked in 1968 and 1969. A true disclosure, which was
not made, would have <hewn that without these unbilled
receivables, Marketing had no profit in the first nine
months of 1969.
12a :
Each appellant contends that the evidence was insuffi-
cient to support his conviction. We shall consider each
appellant separately.®
I
Natelli—Sufficiency of Evidence
It is hard to probe the intent of a defendant. Cireum-
stantial evidence, particularly with proof of motive, where
available, is often sufficient to convince a reasonable man
of criminal intent beyond a reasonable doubt. When we
deal with a defendant who is a professional accountant,
it is even harder, at times, to distinguish between simple
errors of judgment and errors made with sufficient criminal
intent to support a conviction, especially when there is no
financial gain to the accountant other than his legitimate
fee. .
Natelli argues that there is insufficient evidence to estab-
lish that he knowingly assisted in filing a proxy statement
6 Nitelli contends that a later incident reveals his lack of intent to
deceive. In September 1969, John Johnston, a staff accountant with
Peat, was assigned to prepare the audit of Marketing's hooks for the
fiscal year ended August 31, 1969. He discovered the uncollectille con-
tracts foun’ by Oberlander in August and reported them to his superior,
William Colona, who had replaced Scansaroli as andit supervisor when
Seansaroli joined Marketing as an employee in October. Later in Octo-
her, Peat was asked to prepare a “comfort letter” in connection with
Marketin,z’* acquisition of Interstate National Cor; oration, to assure
Interstate that no adverse information concerning the unaudited state.
ments for the period ended May 31, 1969 had Leen discovered sinee the
acquisition contract had heen signed in August. Colona and Johnston
drafted a “comfort letter” noting adjustments which completely wiped
out Marketing's first three-quarter carnings for 1960 of $700,000 as they
had heen carried in the proxy statement. Natelli acquiesced. The draft
comfort letter” did not deter Interstate from closing the transaction,
and Peat decided, at the suggestion of Natelli, to send the letter to the
other companies leing aequired, whieh had failed to require such a
“comfort letter” in their contracts, Natelli urged this at trial as proof
of his good faith, and the trial judge fairly stated to the jary his
contention in that regard.
13a
which was materially false. After searching consideration,
we are constrained to find that there was sufficient evidence
for his conviction.
The arguments Natelli makes in this court as evidence
of his innocent intent were made to the jury and presented
fairly. There is no contention that Judge Tyler improperly
excluded any factual evidence offered. While there is sub-
stance to some of Natelli’s factual contentions for jury
consideration, we cannot find, on the totality of the evi-
dence, that he was improperly convicted.
The original action of Natelli in permitting the hooking
of unbilled sales after the close of the fiscal period in an
amount sufficient to convert a loss into a profit was con-
trary to sound accounting practice, particularly when the
cost of sales based on time spent by account executives in
the fiscal period was a mere guess. When the uncollect-
ibility, and indeed, the non-existence of these large re-
ecivables was established in 1969, the revelation stood to
‘ause Natelli severe criticism and possible liability. He
had a motive, therefore, intentionally to conceal the write-
offs that had to he made.
Whether or not the deferred tax item was properly con-
verted to a tux eredit, the jury had a right to infer that
“netting” the extraordinary item against ordinary earn-
ings on the hooks in a special journal entry was, in the
circumstances, motivated by a desire to conceal.
With this hackgronnd of motive, the jury could assess
what Natelli did with regard to (1) the footnote and (2)
the Eastern commitment snd the Oberlander “had” con-
tracts.
A. The Footnote
Honesty should have impelled appellant to disclose in the
footnote which annotated their own andited statement for
14a
fiscal 1968 that substantial write-offs had been taken, after
vear end, to reflect a loss for the year. A simple desire to
right the wrong that had been perpetrated on the stock-
holders and others by the false audited financial statement
should have dietated that course. The failure to inake open
disclosure could hardly have been inadvertent, or a jury
at least could so find, for appellants were themselves in-
volved in determining the write-offs and their accounting
treatment. The concealment of the retroactive adjustments
to Marketing’s 1968 year revenues and earnings could prop-
erly have been found to have been intentional for the very
purpose of hiding earlier errors.’ There was evidence that
Natelli himself changed the feotnote to its final form .
That the proxy Statement did not contain a formal re-
audit of fiscal 1968 is not determinative. The accountant
has a duty to correct the earlier financial statement which
he had audited himself and upon which he had issued his
certificate, when he discovers “that the figures in the annual
report were substantially false and misleading,” and he
has a chance to correct them, See Fischer v. Kletz, 266 F.
Supp. 180, 183 (S.D.N.Y. 1967) (Tyler, J.). See also Gold
v. DCL Ine., 1973 CCH Fed, See. L. Rep. 194,056 at p.
94.168 (Frankel, J.). The accountant owes a duty to the
publie not to assert a privilege of silence until the next
audited annual statement comes around in due time. Since
companies were being acquired by Marketing for its shares
in this peried, Natelli had to know ‘that the 1968 audited
statement was being used continuously.
7 Natelli contends that the write-offs were of sales of Michaels, an
allegedly corrupt salesman, and that since Miehaels had been fired, the
problem was not likely to recur. But the Government proved that at
a mecting on June 9, 1969 at which Natelli was present, the Controller
produced charts showing that of the $1.5 million of 1968 sales analyzed,
about $900,000 had been written off. Of there, about £700,000 were
sales of Michaels, $200,000 of another salesman, Ganis. (In addition,
a third salesman had accounted for £213,000 of the 1968 sales, not a
dollar of which ind yet been billed).
15a
The argument that the disclosure was not material is
weak, since applying write-offs only against pooled carn-
ings, Without further explanation, conceals the effect of the
write-oifs on the prior reported earnings of the principal
company. [tis the disclosure of the true operating results
of Marketing for 1868, now come to light, that was material.
Materiality is an objective matter, not necessarily limited
by the accountant’s own uncontroiled subjective estimate of
materiality, see (uited States vy. Simon, 425 F.2d 796, 806
(2 Cir, 1569), cert, denied, 3u7 US. 1006 (1970). In any
event, the Court charged that the carnines figures would
have to be “known to be false in a material way’—a sub-
jective test.
B. The Eastern Commitinent and the Nine-Mouth
Karnings Statement
The Fastern contract was a matter for deep suspicion
heeause it was substituted so rapidly for the Pontiae eon-
tract to which Natelli had objected, and whieh had. itself,
heen produeed after the end of the fiseal peviod, though
dated earlier, It was still acsother unbilled commitment
produced by Marketing lows after the close of the (eeu
period, Its spectacular oprearenee, ns Natelli Idmsclf
noted at the time, made its reploe cvent of the Pentive
contract “weird.’* The Eostern “commitient’ was not
only in substitution for the challenged Pontiae “cornit-
ment” but strancely close enough in amount to leave the
projected earnings figures for the oroxy statement rela-
tively imtaect. Marketing had only time loves of a sales-
man relating to the making of the proposals but no reeord
- Natelli's exolonation that only the sugzestion of Randell for compl te
replacement of the Voutine coutreet without chanaing the faures at «all,
was “weird” is net couvinein’. Certainly the jury could find otherwise.
16a . -
of expenditures on the Eastern “commitment,” no record
of having ever billed Eastern for services on this “sale,”
and not one serap of paper from Eastern other than the
suddenly-produeced letter. Nevertheless, it was booked
as if more than $500,000 of it had already been earned.
Natelli contends that he had no duty to verify the East-
ern “commitment” because the carnings statement within
which it was included was “unaudited.”
This raises the issue of the duty of the CPA in rela-
tion to an unaudited financial statement contained within
a proxy statement where the ficures are reviewed and to
some extent supplied by the auditors. It is common
cround that the auditors were “associated” with the
statement and were required to object to anything they
actually “knew” to be materially false. In the ordinary
case involving an unaudited statement, the auditor would
not be chargeable simply because he failed to discover
the invalidity of booked accounts reeeivable, inasmuch as
he had not undertaken an audit with verification. In this
case, however, Natelli “knew” the history of post-period
bookings and the dismal consequences later diseovered.
Was he under a duty in these circumstances to object or
to go bevond the usual scope of an accountant’s re-
view and insist upon some independent verification? The
American Institute of Certified Public Accountants, State-
ment of Auditing Standards No. 1—Coidification of Audit-
ing Standards and Procedures (1972), 1 CCH AICPA
Professional Standards (516.00, recognizes that “if the
certified public accountant concludes in the basis of facts
known to him that unaudited financial statements with
which he may hecome associated are not in conformity
with generally accepted accounting principles, which in-
17a
clude adcauate disclosure, he should insist .. . wpon appro-
priate revision...” (emphasis added).
We do not think this means, in terms of professional
standards, that the accountant may shut his eyes in reck-
less disregard of his knowledge that highly suspicious
figures, known to him to be suspicious, were being included
in the unandited earnings figures with which he was “as-
sociated” in the proxy statement.
The auditor’s duty is not as restricted as appellants
urge where, as here, the auditors, rather than the company,
controlled the figures, as is evidenced by Natelli’s rejection
of the Pontiae contract as one he would not accept for the
subsequent audited financial statement for 1969, and where
the erroncous figures had previously heen certified by his
firm. Cf. Fischer v. Aletz, supra, 266 F. Supp. at 188, 189
(S.D.N.Y. 1967). We reject the argument of insufficiency
as to Natelli, who eould have pointed out the errer of his
previous certification and deliberately failed to do so, our
function being limited to determining whether the evidence
was sufficient for submission to the jury. United States v.
Simon, supra, 425 F.2d at 799. We hold that it was. We
discuss the objections te the charge helow,
There are points in favor of Natelli, to be sure, but
these were presented to the jury And rejected, These
included, with their connterbalanee: his rejeetion of the
Pontiac commitment (with substitution of the Eastern con-
tract); his discussion of the footnote with his superior,
Leon Otkiss (without full disclosure to Otkiss of all rel-
evant factors); his insistence on dissemination of the com-
fort letter (See note 6) (but his failure to disclose the
hnge past write-offs of Marketing resulting in no profit for
1968 or nine months of 1969).
18a
Scansaroli—Sufficiency of Evidence
The ¢eluim of Seansaroli with respect to insufficiency of
the evidence is somewhat more difficult. As Judge Tyler
noted after both sides had rested, “It is a close question,
I think frankly as to Seansaroli, as I see it. Certainly if I
were the factfinder, I would be more troubled with his case
for a variety of reasons.”
Scansaroli contends that there was insufficient evidence
to prove beyond a reasonable doubt that (1) he participated
ina criminal act with respeet to the footnote or (2) that
he qiade an aecounting judgment permitting Marketing to
include in sales certain contracts-in-progress with the req-
nisite criminal intent. We hold that there was enough
evidence to establish the former, but not the latter. For
reasons relating to the form of the charge, we will reverse
and remand for a new trial,
A. The Footnote
The essence of Seanssroli’s argument on his conviction
with respeet to the false footnote is that he was really
convieted for his conduet during the 1968 andit, for which
he was not indicted, This misses the thrust of the Gov-
ermment’s claim. The unjustifiable’manner of treating the
nubiled conumitments in the 1968 andit bore upon the il-
legal acts connected with the 1969 proxy statement in two
wavs: fa) it created a motive to conceal the accounting
errors made in the 1968 andit; and (b) the 1968 andited
-tatement was part of the 1969 proxy statement and was
not disclosed therein to have been wrong in the light of
the subsequent known write-offs. In view of the estab-
‘ished motive to conecal, the jury could properly find, as
we have seen, that both the netting of the tax eredit ayainst
19a
earnings and the subsequent subtracting of the write-offs
from the pooled carnings tn the foetiete without forther
explanation were done ‘n order to conecal the true retrone.
tive deerease in the Marketing earnings for fi<enl 1968,
There is some merit to Scean-aroli’s point that he was
simply carrying out the judgments of his superior Natelli.
The defense of obedience to higher authority has always
been troublesome. There ts no sere yardstick to measure
criminal responsibility exeept by measurement of the
degree of awareness on the part of a defendant that he
is participating in a eriminal aet, in the ab-ence of pliyvs-
ical coercion such asa -oldier might face. Tere the moti-
vation to conecal undermines Seansaroli’s argument that
he was merely iaplementing Netelli’s instructions, at least
with respect to conccohuent of matters that were with'n
his own ken.
We think the jury could properly have found him enilty
on the specification relating to the footnote, Scaiu-aroli
himself wrote the jousnal entry in Marketing’s books whieh
improperly netted the tax credit with earnings, the trae
effeet never being pointed out in he financial <tatoment.
This, with the backeround of Seansaroli’s implication in
preparation of the 1O6S statement, comld be found to have
been motivated by intent to coccer) the 1968 Gverstatoment
of earnings.
Scansaroli participated in the decision to subtroeet in the
proxy statement footuote s€¢*.000 of weitten-off Market
ing sales from the Ugures for leter-nequired pooled com:
pames instend of from its own figures, without further
disclosure, Kven if Scansaroli did not write the footnote,
he supplied the misteading computations and subtreetions
though he was conscious of the true facets.
20a . °
B. The Eastern Commitment
Having concluded that there was sufficient evidence to
convict both appellants on the footnote specification, we
turn to the nine-months earnings statement which, in turn,
included two items, the Eastern contract and the doubtful
conunitments discovered by Oberlander. We put aside the
decision to ignore Oberlander’s questioning of certain com-
mitments on the ground that, if it stood alone, the evidence
would have been too equivocal to support proof beyond
a reasonable doubt that this was not a mere error of
judgment.
With respect to the major item, the Eastern commit-
ment, we think Seansaroli stands in a position different
from that of Natelli. Natelli was his superior. He was the
man to make the judgment whether or not to object to the
last-minute inclusion of a new “commitment” in the nine-
month statement. There is insufficient evidence that Sean-
saroli engaged in any conversations about the Eastern
commitment at the Pandick Press or that he was a partici-
pant with Natelli in any check on its authenticity. Since
in the hierarchy of the accounting firm it was not his
responsibility to decide whether to book the Eastern con-
tract, lis mere adjustment of the figures to reflect it under
orders was not a matter for his discretion. As we have
seen, Natelli bore a duty in the circumstanees to be suspi-
cious of the Mastern commitment and to pursue the matter
further. Scansaroli may also have been suspicious, but
rejection of the Eastern contract was uot within his sphere
of responsibility. Absent sueh duty, he cannot be held to
have acted in reckless disregard of the facets.
III
Appellants contend that the trial court erroneously
instructed the jury on the issue of knowledge. We do not
agree.
21a
The thrust of appellant’s argument, as we understand
it, is that the judge charged that each appellant could be
convicted “if [his] failure to discover the falsity of [Mar-
keting’s] financial statements was the result of some form
of gross negligence.’ We do not read the charge that
way. It followed the charge of Judge Mansfield) which
was sustained in United States v. Sion, supra.’
It was a balanced charge which made it clear that negli-
gence or mistake would be insufficient to constitute guilty
knowledge. See United States v. Bright, —— F.2d ——,
Slip Op. 3625 (2 Cir., May 21, 1975). Judge Tyler also
earefully instructed the jury that “good faith, an honest
belief in the truth of the data set forth in the footnote
and entries in the proxy statement would constitute a
complete defense here.” On the other hand, “Congress
equally could not have intended that men holding them-
selves out as members of these ancient professions [law
and accounting] should be able to eseape criminal Habil-
ity on a plea of ignorance when they have shut their eyes
9 Judge Tyler charged, in pertinent part, as follows:
“While I have stated that negligence or mistake do not constitut:
guilty knowledge or intent. nevertheless, tadies and gentlemen, you
are entitled to coun<ider in determining whether a defendant ated
with such intent if he deliberately closed his eves to the ol vir
or to the facts that certainly would be olserved or ascertained in
the course of his accounting work or whether he recklessly stated
as facts matters of which he knew he was ignorant.
If you find such reckless deliberate indifference to or disregard
for truth or falsity on the part of a given defendant. the lew
entitled you to infer th refro that that defevdant wilfully and
knowingly filed or caused to be filed false financial informotion of
a material nature with the SEC.
Rut such an inference, of course, must depend upon the vi
and credibility extended to th evidence of reckless and indi fer
conduct, if any.
I repeat: Ordinary or simple negligence or mistake alone would
be insufficient to support a finding of guilty knowledge or wilful
ness or intent.”
22a
to what was plainly to be seen or have represented a
knowledge they knew they did not possess.” United States
v. Benjamin, 328 F.2d $54, 863 (2 Cir.) cert. denied, sub
nom. Howard v. United States, 377 U.S. 9538. (1964); and
see United States v. Brawer, 482 F.2d 117, 128-29 (2 Cir.
1973).
One of the bases for attack on the charge is that in
charging “reckless disregard for the truth or falsity” or
“closing his eyes,” there must also be an instruction like
“and with a conscious purpose to avoid learning the
truth.”
It is true that we have favored this charge in false
statement cases, (nited States v. Sarrantos, 455 F.2d 877,
SS0-82 (2 Cir, 1972), while noting that both phrases “mean
essentially the same thing,” id. at 882; and in eases in-
volving knowledge that goods were stolen, United States
v. Brawer, supra, 482 F.2d at 128-29 (2 Cir. 1973); United
States v. Jacobs, 475 F.2d 270, 287 (2 Cir.), cert. denied,
414 U.S. 821 (1973). The dual instruction is not necessar-
ily required, however, when the defendant is under a spe-
cific duty to discover the true facts, the facts tendered
are suspect, and he does nothing to correct them. In
United States v. Benjamin, supra, 328 F.2d at 862, this
court said, regarding an accountant, that “the Govern-
ment can meet its burden by proving that a defendant
deliberately closed his eyes to facts he had a duty to see.”
And United States v. Simon, supra, which affirmed the
conviction of an accountant, as we have seen, sustained
a charge in the very language Judge Tyler tracked.
While the facets in each case are not precisely the same,
we think this appeal quite analogous to Simon, supra, be-
enuse Natelli was suspicious enough of the Eastern con-
tract to check it with Kelly, the account executive in house,
but not to take the next step of seeking verification from
23a
Eastern, despite his obvious doubt that it could be booked
as a true commitment. And with respect to the footnote,
we think the language of this court in Simon to be quite
pertinent, “The jury could reasonably have wondered |i.
accountants who were really secking to tell the truth
could have construeted a footnote so well designed to eon
ceal the shocking facts.” 425 F.2d at S07.
Appellants argue strenuously, however, that (. S. vy.
Simon, supra, involved an andited statement while the nine
months statement here involved was an unaudited state-
ment, and, that hence, the dutics of appellants here were
different from those enunciated in Simon, They urge as
a corollary that the District Court failed to instrnet the
jury on the difference, and that his failure to do so was
reversible error,
It is true that the point on appeal might have been
eliminated if the judge had charged on the differences in
the abstract. But in the circumstances he was not required
to do so, As we have seen, supra, Point I, the duty of
Natelli, given this set of facts, was not so different from
the duty of an accountant upon an audit as to require
sharply different treatment of that duty in the charge to
the jury.
We agree with Judge Tyler when he charged the jury
that they could find Natelli “knew” of the falsely material
fact if he acted in “reckless disregard” or deliberately
closed his eyes to the obvious. The issue on this appeal
is not what an auditor is qeuverally under a duty to do
with respect to an unaudited statement, but what these
defendants had a duty to do in these unusual and hiehly
suspicious cireumstances, Cf. United States v. Simon, su-
pra, 425 F.2d at 806-07, Nor was a proper charee re-
quested,
24a
The duly requested suppicmental charge on Natelli’s
duty with respect to the unaudited earnings statement was
properly denied. It read:
“The defendants’ only responsibility as to this
statement [unaudited statement of earnings for the
nine months ended May 31, 1969] was to be satisfied
that, as far as they knew, the statement contained
no misstatement of material facts.” (emphasis added).
This requested charge was not correct, for even on an
unaudited statement with which Natelli was “associated”
and where there were suspicious circumstances, his duty
went further, as we have seen. As the Court correctly
charged, Natelli was culpable if he acted in “reckless dis-
regard” of the facts or if he “deliberately closed his eyes.”
We expound no rule, to be sure, that an accountant in
reviewing an unaudited company statement is bound, with-
out more, to seek verification and to apply auditing pro-
cedures. We lay no extra burden on the normal activities
of accountants, nor do we assume the role of an Account-
ing Principles Board. We deal only with such deviations
as fairly come within the common understanding of dis-
honest conduct which jurors bring into the box as applied
to the particular conduct prohibited by the particular
statute.
It was not for Judge Tyler in his instructions to deal
with the abstract question of an accountant’s responsibility
for unaudited statements, for that was not the issue. So
long as we find that the Judge expheated the proper test
applicable to the facts of this case, the duty inherent in
the circumstances, and we do, we must also find that he
gave the appellants a fair charge.
25a
IV
The Charge on “Unanimity”
The trial judge charged as follows:
“Now, I instruct you that if you find that the proxy
statement was false in either one of these two re-
spects that is sufficient to support a conviction.”
As we have seen, there were two specifications of fals ty
in Count II, namely, the footnote and the earnings state.
ment. The defense requested that the court advise the
jury that in order to convict, they must be unanimons
on which, if either, of the two specifications had been
proven materially false beyond a reasonable doubt.” This
request was refused, and the court did not charge ae.
cordingly.
Appellants now contend that the charge viven left the
jury free to convict if only six of them believed the proxy
statement to be materially false in one respect but the
other six believed the proxy statement to be materially
false in the other respect. Appellants conclude that even if
the evidence was sufficient to warrant the submission of
each of the allegedly false statements to the jury, the con-
viction still cannot stand, since it cannot he determined
whether the jury did in fact unanimously agree on a sinele
specification of falsity. Appellants cite no authority «i-
rectly in point. The government cites no direct authority
in this circuit, but cites two cases in the Ninth Cirenit.
United States v. Friedman, 445 F.2d 1076. 1085-84, cert,
denied, sub nom. United States vy. Jacobs, 404 U.S, 958
(1971) and Vitello v. United States. supra, 425 F.2d at
422-23, as directly in point. However, these ¢ases ar
distinguishable.
10 This was not a request for a special verdict. Cf. United Stor,
Spock, 416 F.2d 165, 140-83 (1 Cir, 1969): and see U.S. ¥. Adene, , 447
F.2d 1137 (2 Cir. 1971).
26a
In Friedman, the indictment alleged a conspiracy to
violate several substantive statutes. The jury found ap-
pellants guilty of the conspiracy and of acts charged in
particular substantive counts, thus indicating which vio-
lations in the conspiracy count the jury had found unan-
imously.
litello turned largely on the failure of counsel to ob-
ject at trial, The court noted, however, that it would have
had te follow Yates v. United States, 354 U.S. 298, 311-12
(1957) if “there was insufficient evidence to be submitted
to the jury on any one or more of the specifications of
falsity’, 425 F.2d at 419.
The charge given by Judge Tyler is a charge generally
viven in this cireuit. It is assumed that a general instrue-
tion on the requirement of unanimity suffices to instruct
the jury that they must be unanimous on whatever spe-
cifieations they find to be the predicate of the guilty ver-
dict. We do not say it would be wrong for a trial judge
to «ive the charge requested, but it is not error to refuse
it? And we do not change that rule.
The court properly charged that the jury needed only
to find a defendant guilty on cither of the two specifica-
tions in order to convict. Inasinuch as the evidence was
sufficient to support Natelli’s conviction on either specifi-
11 In reaching this result, we believe that we are following United States
v. Remington, 191 F.2d 246, 250 (2 Cir. 1951) (L. Hand, A. Hand &
Swan, JJ.). There the defendant was convicted of perjury in falsely
testifying before the Grand Jury that he had never been a member of
the Communist Party. He had requested a charge that “all jurors must
he eonvineed that the accused was a member of the Party ‘at a par-
tienlar time and place,’ and if some thought he was at one time only
und some another, they could not conviet him.” Judge Swan agreed that
“that request was right and should be given if there is a new trial”
hot he refused to label it reversible error to refuse the charge “since
the substance of it was probably covered, though not so explicitly, by
the charge that the jury must be unanimous.”
27a
cation, the charge given presents no preblem to afirmance
as to him.
A difficulty does arise, however, if it is found as a mat-
ter of law that there should have been a directed verdict
for a defendant on one of the specifications for insufli-
ciency of evidence, The verdict then beeomes ambicuous,
for the jury could have rejected the specification whieh
the appellate court holds sufficiently proved, and have
convicted only on the specification held to he insufficiently
proved. In that event, there seems to he no alternative to
remand for a new trial, That is the general principle.
Yates v. United States, supra; Stromberg v. California,
983 U.S. Bod, 207-68 (1931). See United States v. Jacobs.
supra, 475 F.2d at 283 and cases cited therein.
It is true, of course, that sometimes, as in conspiracy
to violate two different substantive statutes, the same
evidence may support conviction of conspiracy to violate
either or hoth. Sve e.g, Jacobs, supra, 475 F.2d at 283-84.
When there is more than one specification as a pred-
leate for gnilt, each dependent on particular evidence
which is vnrelated to the other, it would be sound prae-
tice to instruct the jury that they imnst be unanimous on
a particular specification to convict. Since that was net
done here and since we have found that Scansaroli was
not culpable on the earnings stetement specification, the
essence of which was the inclusion of the Mastern com
mitment, We must reverse his convieiion and remand for
trial on the footnote specification alone. We realize thet
we are reversing a conviction invelving only 10 days of
jail time. Whether it is ieeortant enoveh for the United
States to retry him in the cireimmstances is a metter for
decision by the United States Attorney on which we
cannot pass judgement.
28a
\
Appellants contend that Count II of the indictment
should be dismissed for lack of proper venue. Prior to
trial, appellants had jointly moved to dismiss Count IT on
the ground that proper venue lay only where the proxy
statement had been filed with the Securities and Exchange
Commission, the District of Columbia, The trial court de-
nied the motion. We must consider the issue with the
recognition that venue in criminal cases may raise “deep
issues of public policy”. See United States v. Johnson,
323 U.S. 273, 276 (1944).
Section 27 of the Sceurities Exchange Act, 15 U.S.C.
‘ 78na, provides that criminal proceedings for violations of
the Act are to be brought in a district where “any act or
transaction constituting the violation oceurred.” Appel-
lants contend that the only critical act here was the filing
of the proxy statement containing the false statements in
the District of Columbia where it was delivered to the
(Commission, which is also where appellants’ and Market-
ing’s principal offices were. The government contends that
there is venue for a charge of violation of section 32 of
the 1924 Act, 15 U.S.C. 6 78ff,"2 in the Southern District of
Now York as well. The government asserts that it has
proved that the false footnote and the false nine months
earnines statement were prepared in Manhattan, and that
this suffices.*®
In denying the pre-trial motion, the Distriet Court held
that the eravamen of the violation under Section 32 was
the making of the false statement, not the filing, the words
of the statute “required to be filed” merely describing a
category of documents rather than the essence of the of-
12 See note 1, supra.
13 Appellants do not seriously contend that there was no preparation
in the Southern District as a matter of fact.
29a
fense. The government, in support, notes the general venue
provision for continuing offenses."
Appellants retort that Section 27 of the 1934 Act stands
apart from the continuing offense statute, arguing that
it comes within the exception used when Congress has
specifically provided for alternate venue. Appellants find
support in Travis v. United States, 364 U.S. 631 (1961)
which held that the proper venne for an offense under 18
U.S.C. $1001, the False Statements Act, was not the dis-
trict in which the false statement was made, but only the
district where the affidavit had to be filed, the District of
Columbia. The rationale of the decision, as we read it,
was that section 1001 proscribes false statements “in any
matters within the jurisdiction of any department or aveney
of the United States” and that the National Labor Rela-
tions Board had no such “jurisdiction” under Section 9(h)
of the National Labor Relations Act as amended,” until
the non-Communist affidavit required by the statute as a
precondition to N.L.R.B. investigation was actually filed
in Washington, D.C."* |
The majority opinion in Travis was careful to note that
“{t}he decisions are discrete, each looking to the nature
of the crime charged.” 364 U.S. at 635. And this court has
14 18 U.S.C. §3237(a) reads:
(a) Except as otherwise expressly provided by enactment of Con-
gress, any offense against the United States begun in one district
and completed in another, or committed in more than one district
may be inquired of and proseeuted in any district in which sesh
offense was begun, continued, or completed.
15 G1 Stat. 136, 146, amended, 61/4), 65 Stat. 601, 602, repealed, § 201
(d) of the Labor-Management Reporting and Disclosure Act of 1059
73 Stat. 519, 525.
16 If the “jurisdiction of the agency” exists where the false statement
is made, however, the continuing offense statute is applicable to ve:
even in section 1001 cases, United States v. Candclla, 487 F.2d
(2 Cir. 1975), cert. denied, 415 U.S. 977 (1974).
30a ; . lb
annotated Travis by stating that “the decision surely was APPENDIX B
meant to be confined to the facts based on the unusual stat-
ute involved.” See United States v. Slutsky, 487 F.2d 832, af
: Clnuted States Court of Qppeals
839 n.& (2 Cir. 1973), cert. denied, 416 U.S. 937 (1974). | SrconD Circuit
See also United States v. Ruehrup, 333 F.2d 641, 643 (7 eee |
‘ir.), cert. denied, 379 U.S. 903 (1964); Imperial Meat Co.
C )s : . U S Se ( ) ’ P ” 4 At a stated Term of the United States Court of Appeals for the Second
v. United States, 316 F.2d 435, 440 (10 Cir.), cert. denied, Circuit, held at the United States, Courthouse in the City of New York, on the
age 7 twenty-cighth day of Jul
ayes) L - 4 S20 (1963). one thousand nine hundred and rventy-f aos .
Appellant seeks to come within the Travis holding by Present:
arguing that just as in 7’ravis where the filing of the non- HON, PAUL R. NAYS
Communist affidavit was simply a prerequisite to future HON, WILLIAM H. MULLIGAN
conduct, resort to NLRB nrocesses, so the filing of a proxy o HON. MUKRAY I. GURFEIN :
~tatement is merely the prerequisite to future conduct, the aan Circuit Judges, ~
solicitation of proxies. The argument is unsound. ial as Se ee eos
In Travis, the labor board had no jurisdiction to make iat be cacesit
‘ie : ; “Appellee,
an investigation of labor practices “unless there is on file Ve
with the Board” a non-Communist affidavit. Here the | Cortes W. Randell, Robert C, Pushnell,
pas . . John G. Davies, Dennis M, Kelly, Bernard > 75-1004
filing of the proxy statement is part of the continuous J. Kurek, Anthony M. Notelli, Joseph
os : , Scansaroli, 75-1008
process of the solicitation of proxies. Proxy statements are Defendants
filed only at such time as the persons filing require proxies J wkhony Mi. Matelii, Joscph”Scuasarcll,
for some corporate purpose.’? The filing and solicitations wg ft as _.__.__ Defendant s-Appcllants,
are part of the same process. We hold that there was venue
in the Southern District of New York.
We have considered the other arguments raised by ap- ceakthe
5 ppeal from the United States District Court for the er
pellants and find them without merit. Judgment affirmed District of Now York. , commer
as to appellant Natelhi; as to appellant Seansaroli judg- y tegntls cause came on to be oa on the transcript of record from the
. n PS Distr. 0 istric
ment reversed and remanded for a new trial. i setae felipe Southern SOTOS oS
New York , and was aryued by counsel,
‘1
ON CONSIDE RATION WHEREGF, it is now hereby ordered, adjudged,
and decreed that the jud jment of said District
Court be and it hereby is affirmed as to appellant Anthony M, Natelli
but the judgment as to appeliant Joseph Scansaroli be and it
hereby is reversed and that the action as to appellant Joseph
Scansaroli be and it hereby is riemonded to said District Court for
17 We may note. that paradoxically, in most es arising under the 1934 further proceedings in accordance with the opinion of this court.
Act. the defendants would presumably contend that they wished to be
tried on their home distriets rather than in the District of Colombia.
liere the appellants happen te live and work in the District of Columbia
and have been tried elsewhere, a rather unusual situation. ;
—_—
A. DANIEL FUSARO,
Clerk
By Ua a.t A (‘oi
BEST Cary AVAILABLE Chief Deputy Clerk
le
APPENDIX C"
UNITED STATES COURT OF APPEALS
For trr Sxconp Ciecvitr
Nos. 1035 & 10°¢—Sentember Term, 1974.
TN,,!
, eQr=
’ cr C, 207.)
(Deeicec
Docket Nov. 77-1004, 75-2098
Unrrep Svates or Areca,
Lppeliee,
Vv.
Axstnoxy M. Nateunr end Jose Scansarezy,
Nelondents-Lnvelants.
j+o
Before:
YYays, Muturcan and Crear,
Circuit Judges.
—_——
Ow Prrivion For ruraRInc BY UNITED STATES
o>
Gunrrin, Circuit Judge:
The United States petitions for rehearing of that por-
tion of our decision, filec July 28, 1975, sip op. 51€5, which
reversed the conviction o” Seansaro': and remanded for
a new trial as to him.
Xatelli an? Seansaro!! were tried and convictec on a
since count of wilfully mn’ting and causing to »¢ made
~
"alse and misteacing materia! statements in a proxy state-
2c
ment. The single count specified two false statements: the
“footnote” and the “nine-mont!is earnings statement.” This
court found sufficient evidence on each specification to sus-
tain Natelli’s conviction but held as to Seansaroli that
there was insufficient evidence to go to the jury on the
second specification. On that basis, we concluded that as
to Seansaroli the jury might have convicted only on the
specification heid to he insufficiently proved. Slip op. at
5191. We accordingly remanded for a new trial.
The government calls our attention to cases in tlis
eireuit whieh have held that a general motion to dism'ss
a count with several specifications is insufficient to pre-
serve on appen! the po.nt that where one of the speci%ea-
tions is insuMciently proved the conviction on the entire
count must 'e reversed. These cases hold that, to preserve
the point on apnea!, a specific motion must be made in
the trial court to withdraw the particular specification
from jury consiceration. United States v. Mascuch, 111
F.2d 602, 605 (2 Cir.), cert. denied, 311 U.S. 650 (1940):
United States v. Goldstein, 168 F.2d 666, 671 (2 Cir. 1948).
No separate motion was made by Seansaroli to withdraw
the earnings statement snecification from consideration by
‘he Jury. Ile Cid move to strike evidence concerning the
TMastern Airlines a!Tair and also asked for an instruction
that the jury had to be wnanimous on each specification,
but he did not move to dismiss the snecifiecation for in-
sufficiency. The failure to move may have hen dictated by
tactical considerations on the theory of his able counsel
that it is easier to attack a weak snecifeation in the hone
of x spillover to the stronger one. Be that as it may, we
“eel bound to follow the J/ascuch-Guldstein rule, vartien-
inrly In view of its eminent authors in,
Accordingly, we are constrained to grant the govern-
ment’s netition for rebesring, and, upon rehearing, we
3c
withdraw ovr former determination and affirm the convic-
tion of Seansaroli as well as Natelli.
We might suggest that in view of the turn Seansarol:’s
ease has taken and the s‘:ort sentenee he received from
Judge Tyler, the District Judge who inherits the case
ought carefully to consider 2. Rule 35 application to sus-
pend the 10 days of jail time imposed.
ld
APPENDIX D
United States Court of Appeals
SECOND CIRCUIT
At a Stated Term of the United States Court of Appeals, in and for the Second Circuit,
held at the United States Court House, in the City of New York, on the fifth
day of November , one thousand nine hundred and seventy-five.
Present: HON. Pavl BR. HAYS
HON. MU.tea Ie GUALSELIS
Circuit Judges.
Unit’? States of Axncric:,
Plaintiffeaunellec,
Vv.
Cort-2 We Randgeli, Rodert C. suchacll,
Jonn SG. Davies, Dennis HH. welly,
Sernar@a J. Kurek, Anthony “. wrtelli, 73-109:
Jos->. Scsnsaroli, 38015%:
ont Me Natelli, Josep® Scansanroali,
U feacontu-aap< ll ait: . |
a
A petition for a rehearing having been filed herein
by counsel for the anpellant, Natell:
Upon consideration thereof, it is
Ordered that said petition be and hereby is DENIED.
D Miu A
Li At Fre
A. DANIEL FUSARC
Clerk
le
APPENDIX E
1. Amendment VI of the United States Constitution
provides in pertinent part:
In all criminal prosecutions, the accused shall
enjoy the right to a speedy and public triai, by an
impartial jury of the State and district wherein the
crime shall have been committed, which district
shall have been previously ascertained by law....
2. Section 27 of the Securities Exchange Act of
1934, 15 U.S.C. §78aa, provides in pertinent part:
The district courts of the United States, and the
United States courts of any Territory or other place
subject to the jurisdiction of the United
States shall have exclusive jurisdiction of violations
of this chapter or the rules and regulations
thereunder, and of all suits in equity and actions
at law brought to enforce any liability or duty
created by this chapter or the rules and regulations
thereunder. Any criminal proceeding may be
brought in the district wherein any act or
transaction constituting the violation occurred.
3. Section 32(a) of the Securities Exchange Act of
1934, 15 U.S.C. §78ff, provides in pertinent part:
(a) 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 . . . which statement was
false or misleading with respect to any material fact,
shall upon conviction be fined not more than
$10,000, or imprisoned not more than two years,
or both, except that when such person is an
exchange, a fine not exceeding $500,000 may be
imposed; 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.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.