# Petition — Natelli v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_1406%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1976 - **Citation:** 425 U.S. 934 ## Text 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 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_1406%3A1. Public record. Not legal advice.