SECURITIES and EXCHANGE COMMISSION, Plaintiff-Appellee v. Rajnish K. DAS, Defendant Stormy L. Dean, Defendant-Appellant.
No. 12-2780.
United States Court of Appeals, Eighth Circuit.
Submitted: May 16, 2013. Filed: July 29, 2013.
723 F.3d 943
Before SHEPHERD, BEAM, and MELLOY, Circuit Judges.
SHEPHERD, Circuit Judge.
Vinod Gupta lived a life of luxury as the chief executive officer of infoUSA, Inc. From frequent private jet travel to payments and upkeep for the American Princess, his 80-foot yacht, infoUSA reimbursed Gupta, or one of his separate business entities, for a wide variety of expenditures. This arrangement effectively allowed Gupta to reap the benefits of additional income without paying additional income taxes. For some infoUSA employees, this was acceptable because infoUSA was viewed as Gupta‘s company—he started it, engineered its growth, and had significant influence with the board of directors. The Securities and Exchange Commission (“SEC“) had a different perspective because infoUSA was a publicly traded corporation owned by its shareholders.
As a result of these transactions and reimbursements, the SEC brought a civil enforcement action against former infoUSA chief financial officers (“CFO“) Rajnish Das and Stormy Dean, alleging they violated provisions of the Securities Exchange Act of 1934 (the “Exchange Act“). This appeal concerns only Stormy Dean. After a ten-day trial, a jury found that Dean violated various securities laws, and the district court imposed several civil penalties. Dean now appeals, challenging the district court‘s handling of the trial, its post-trial findings, and the sufficiency of the evidence against him. We affirm the matter in all respects but one, and remand the case for further proceedings.
I. Background and Procedural History1
Headquartered in Omaha, Nebraska, infoUSA was a publicly traded corporation that sold business and consumer databases. Gupta founded infoUSA‘s predecessor company in 1972 and served as its CEO and chairman until 2008. Dean began working in infoUSA‘s accounting department in 1995. He served as infoUSA‘s CFO from January 2000 to October 2003, and again from February 2006 to December 2008.
The SEC made an informal inquiry into infoUSA‘s activities in late 2007, following a separate lawsuit that infoUSA‘s shareholders brought against the board of directors in Delaware.2 As a result of the SEC inquiry, infoUSA‘s board of directors formed a director-led committee, and with the assistance of outside legal counsel and forensic accountants, it investigated allegations of improper related-party transactions and misuse of corporate assets.
In 2010, the SEC brought this civil enforcement action against Dean and Das. In the complaint, the SEC asserted the following seven claims against Dean:
- Securities fraud in violation of
Section 10(b) of the Exchange Act andRule 10b-5 .15 U.S.C. § 78j(b) ;17 C.F.R. § 240.10b-5 . - Soliciting false proxy statements in violation of
Section 14(a) of the Exchange Act andRule 14a-3 and14a-9 .15 U.S.C. § 78n(a) ;17 C.F.R. §§ 240.14a-3 and14a-9 . - Falsifying books, records, or accounts in violation of
Section 13(b)(5) of the Exchange Act andRule 13b2-1 .15 U.S.C. § 78m(b)(5) ;17 C.F.R. § 240.13b2-1 .
Certifying false reports filed by infoUSA in violation of Rule 13a-14 of the Exchange Act .17 C.F.R. § 240.13a-14 .- Deceiving auditors in violation of
Rule 13b2-2 of the Exchange Act .17 C.F.R. § 240.13b2-2 . - Aiding and abetting infoUSA in filing false SEC filings in violation of
Section 13(a) of the Exchange Act andRules 12b-20 and13a-1 .15 U.S.C. § 78m(a) ;17 C.F.R. §§ 240.12b-20 and240.13a-1 . - Aiding and abetting infoUSA in falsifying books and records in violation of
Section 13(b)(2) of the Exchange Act .15 U.S.C. § 78m(b)(2) .
For relief, the SEC requested that the court enjoin Dean from violating the provisions outlined in the complaint, order civil penalties, permanently prohibit Dean from serving as an officer or director of any publicly traded company, and grant such other relief the court deemed just or appropriate.
At trial, the SEC presented substantial evidence to support its claims that infoUSA failed to report related-party transactions3 and the perquisite benefits4 Gupta received. The SEC called eighteen witnesses, including Dean. The SEC also presented an expert witness, Dr. Steven Henning, a partner of a financial advisory firm, licensed certified public accountant, and former professor. Henning testified that after independently reviewing infoUSA‘s filings, he believed the filings did not adequately disclose perquisites or related-party transactions. The SEC introduced flight logs of private jet travel, credit card statements, Dean‘s calendar, and invoices from separate business entities wholly owned by Gupta. The jury heard that infoUSA reimbursed Gupta‘s private jet travel, yacht payments and expenses, portions of his wedding in South Africa, luxury cars, a home in California, membership dues to approximately thirty private country clubs, and personal life insurance policies. Additionally, infoUSA made payments for some of these expenses by reimbursing Annapurna and Aspen Leasing, businesses Gupta owned. According to the SEC‘s expert, infoUSA reported zero perquisite compensation related to these personal benefits.
The SEC also presented evidence that Dean knew these payments should have been reported in infoUSA‘s filings, which Dean certified. When Michael Schultz, infoUSA‘s chief accounting officer, raised the issue of sorting Gupta‘s business and personal expenses, Dean told him, “we don‘t do that here.” Further, Dean had issued a press release in which he stated he “considered some of the expenditures entirely wrong.”
Dean‘s trial was consolidated with that of Das, who served as infoUSA‘s CFO from 2003 to 2006. At the close of the SEC‘s case, Dean moved for judgment as a matter of law; the district court denied the motion. Das then presented two witnesses, but no expert. Dean presented no witnesses or other evidence. After closing argument, the jury deliberated for a few hours and returned a verdict, finding in favor of the SEC on every claim.
The SEC subsequently moved for remedial relief and entry of judgment against Dean. The district court sua sponte ordered that the parties address whether the court could order Dean to pay restitution to infoUSA, whether that restitution
II. Analysis
Dean raises four argument on appeal: (1) there is insufficient evidence presented to support the jury‘s findings; (2) the district court erred by admitting the testimony of the SEC‘s expert witness; (3) the district court abused its discretion in instructing the jury; (4) the district court erred by finding that he acted in bad faith toward infoUSA‘s shareholders.
A. Sufficiency of the Evidence
Dean contends the district court should have granted judgment as a matter of law because the SEC failed to establish the standard of care that Dean was required to follow as CFO. The SEC responds that because Dean failed to renew his motion for judgment as a matter of law, he waived the argument. “[A] party is not entitled to pursue a new trial on appeal unless that party makes an appropriate postverdict motion in the district court.” Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 404 (2006). This rule applies equally whether a party on appeal is seeking judgment as a matter of law or a new trial. Id. at 402. Courts have uniformly applied but limited the Unitherm holding “to sufficiency of the evidence challenges where parties fail to file a postverdict motion under Rule 50(b) after the denial of a Rule 50(a) preverdict motion.” Linden v. CNH Am., LLC, 673 F.3d 829, 833 (8th Cir. 2012).
Dean concedes that he failed to file a Rule 50(b) motion after the jury returned its verdict. Dean instead argues that his case is an exception to Unitherm because in a postverdict order, the district court addressed the evidence against Dean and concluded it supported the jury‘s verdict. Although the district court did generally acknowledge that sufficient evidence existed, it did not engage in any analysis relating to the argument that Dean now raises on appeal—specifically, that the government failed to adequately prove the standard of care he should have observed as CFO. Therefore, we conclude that Dean cannot now challenge the sufficiency of the evidence against him because he failed to file a postverdict motion under Rule 50(b) after the district court denied his Rule 50(a) motion. See Unitherm, 546 U.S. at 404; Linden, 673 F.3d at 833.
B. Expert Witness Testimony
Next, Dean raises two claims with respect to Dr. Steven Henning‘s expert testimony that, according to Dean, demonstrate the district court abused its discretion by allowing Henning to testify. First, Henning failed to consider whether his findings of error were within the zone of reasonableness when compared
Dr. Henning testified to assist the jury in determining whether infoUSA misstated perquisite compensation paid to Gupta and related party transactions involving Gupta‘s separate business interests. Under the
(a) the expert‘s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.
Henning testified that infoUSA underreported perquisite compensation in the amount of $2,153,700 in 2003 and $1,320,500 in 2006. Henning testified that from 2003 through 2006 infoUSA disclosed zero perquisites related to travel on private jets, the 80-foot yacht, credit card expenses, club memberships, vehicles, private residences, and life insurance policies. Although Henning found that Gupta‘s perquisite benefits were underreported, he testified that the majority of the expenses Gupta charged infoUSA were proper business expenses. Henning also testified that infoUSA did not adequately disclose related-party transactions in the amount of $1,955,000 in 2003.
1. Rate of Error
Dean first contends that Henning‘s testimony was not helpful to the jury because Henning failed to calculate whether an error rate existed between what Henning concluded should have been reported and what infoUSA originally reported. According to Dean, “[s]imply providing an alternative calculation, with no explanation for the differences . . . did not help the jury do anything more than guess about the differences.” To support this argument, Dean also asserts that Henning failed to consider relevant facts associated with the case.
Aside from calculating an error rate, however, it is not clear what facts Dean contends Henning failed to consider that render his expert opinion invalid. Henning testified regarding his analysis of federal securities-reporting requirements and infoUSA‘s documentation. Cf. Tuf Racing Prods., Inc. v. Am. Suzuki Motor Corp., 223 F.3d 585, 591 (7th Cir. 2000) (finding CPA was proper expert witness regarding damages calculations, because “[a]nyone with relevant expertise enabling him to offer responsible opinion testimony helpful to judge or jury may qualify as an expert witness“). Henning testified that for several broad categories, including jet travel, cars, residences, credit cards, and yachts, infoUSA reported no perquisite compensation to Gupta. Henning‘s conclusions benefitted the jury: they assisted the jury in understanding how a professional financial officer or auditor would analyze whether a benefit was personal or business, as well as Henning‘s application of that analysis to the facts of this case.
During closing arguments, Dean‘s counsel told the jury, “You can trust [Henning] if you want. That is within the scope of
2. Methodology
Next, Dean asserts that Henning erroneously relied upon an incorrect standard for determining whether an expense was a perquisite. More specifically, Dean argues that Henning used the IRS‘s “primary-purpose” test rather than the SEC‘s “integrally-and-directly-related” test when determining whether Gupta‘s expenses were perquisites. The SEC has promulgated guidance on this “integrally-and-directly-related” test, noting that it is intentionally broader than tax laws:
The concept of a benefit that is “integrally and directly related” to job performance is a narrow one. The analysis draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit. Some commenters objected that “integrally and directly related” is too narrow a standard, suggesting that other business reasons for providing an item should not be disregarded in determining whether an item is a perquisite. We do not adopt this suggested approach. As we stated in the Proposing Release, the fact that the company has determined that an expense is an “ordinary” or “necessary” business expense for tax or other purposes or that an expense is for the benefit or convenience of the company is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes. Whether the company should pay for an expense or it is deductible for tax purposes relates principally to questions of state law regarding use of corporate assets and of tax law; our disclosure requirements are triggered by different and broader concepts.
Executive Compensation and Related Person Disclosure, 71 Fed.Reg. 53, 158, 53, 177 (Sept. 8, 2006) (emphasis added). Relying on this language, the district court found that the SEC standard—“integrally and directly related“—results in a company disclosing more items than the IRS standard—“primary purpose“—and overruled Dean‘s objections to Henning‘s testimony. See District Ct. Order, Feb. 22, 2012, ECF No. 210. Although the district court allowed Henning to testify, it limited the scope of his testimony as it related to Dean‘s legal duties, the misleading nature of any disclosures, and Dean‘s intentions. See District Ct. Order 20, Sept. 20, 2011, ECF No. 139.
In support of his argument, Dean relies on United States v. Wintermute, 443 F.3d 993, 1001 (8th Cir. 2006). There, this court affirmed the district court‘s decision to exclude an expert‘s testimony because it misconstrued “the legal question at issue.” Id. In Wintermute, the expert‘s testimony erroneously heightened the government‘s burden of proof. Id. While an expert cannot misconstrue a legal issue, our case law has distinguished instances where parties disagree over the appropriate methodology. Thus, “[w]hile other methods for calculating damages may be available, so long as the methods employed are scientifically valid, Appellants’ mere disagreement with the assumptions and methodology used does not warrant exclusion of expert testimony.” Synergetics, Inc. v. Hurst, 477 F.3d 949, 956 (8th Cir. 2007).
Dean‘s counsel subjected Henning to a thorough, multi-day cross-examination,
Henning‘s reliance on the primary-purpose test was not a basis for excluding his testimony. Instead, the approach available to Dean—and the approach he took—was attacking Henning‘s methodology on cross-examination. Dean misconstrues Henning‘s approach by indicating that he relied solely on the “primary-purpose” standard. Henning testified repeatedly that the primary-purpose test was used to determine whether a benefit was integrally and directly related to Gupta‘s position as CEO of infoUSA. Despite Dean‘s contention that this standard does not “fit” within this case, “mere disagreement with the assumptions and methodology used does not warrant exclusion of expert testimony.” Synergetics, 477 F.3d at 956. And although Dean repeatedly emphasizes that the primary-purpose test could hypothetically result in a business expense being misclassified as a perquisite, he does not assert that happened in this case.
We conclude that Henning‘s use of the primary-purpose test as a means for applying the integrally-and-directly-related standard did not misconstrue a legal issue or alter the legal standard that Dean was required to apply as CFO. Therefore, the district court did not abuse its discretion by admitting Henning‘s testimony.
C. Jury Instructions
Dean also contends the district court erred when instructing the jury. We review jury instructions for an abuse of discretion and limit our review to considering whether the instructions, “taken as a whole, fairly and adequately represent the evidence and applicable law in light of the issues presented to the jury in a particular case.” Brown v. Sandals Resorts Int‘l, 284 F.3d 949, 953 (8th Cir. 2002) (internal quotation marks omitted). We review de novo, however, the aspects of Dean‘s claims that relate to statutory interpretation because they are issues of law. United States v. Petrovic, 701 F.3d 849, 858 (8th Cir. 2012). We do not require that jury instructions “be technically perfect or even a model of clarity.” B & B Hardware, Inc. v. Hargis Indus., Inc., 252 F.3d 1010, 1012 (8th Cir. 2001) (internal quotation marks omitted). Finally, even if “a jury instruction is erroneously given to the jury, reversal is warranted only where the error affects the substantial rights of the parties.” Brown, 284 F.3d at 953.
1. Reliance on Officers Instruction
According to Dean, the district court erred by failing to instruct the jury that he was entitled to rely on information provided by infoUSA officers whom he reasonably believed were reliable and competent. “A party is entitled to an instruction reflecting that party‘s theory of the case if the instruction is legally correct and
In discharging his duties, an officer of a corporation is entitled to rely on information, opinions, reports, or statements prepared or presented by officers or employees of the corporation whom the officer reasonably believes to be reliable and competent in the matters presented. An officer is not acting in good faith if the officer has knowledge concerning the matter in question that makes reliance otherwise permitted unwarranted.
The district court declined to give the instruction.
Dean contends this instruction is legally correct based on an unpublished Delaware case, Hampshire Group, Ltd. v. Kuttner, C.A. No. 3607-VCS, 2010 WL 2739995 (Del. Ch. July 12, 2010). Relying on Hampshire Group, Dean argues that “[u]nder Delaware law, a corporate chief financial officer does not breach his duty of care to the corporation in his review of expenses of the chief financial officer by relying on the representations of the chief executive officer.” But the court in Hampshire Group actually held that “when a corporate officer is aware of financial misreporting that involves high-level management and that has evaded the corporation‘s auditors, and nonetheless certifies that he is not aware of any material weakness in the company‘s internal controls, he is making a false statement and failing to bring material information to the board, in breach of his duty of loyalty.” Id. at *34. The portion of the case Dean cites relates to a corporate officer approving internal expense reports in violation of a company‘s own policy. Id. at *16-20. Hampshire Group does not support Dean‘s position and actually weakens his argument that the proposed jury instruction was proper based on Delaware law.
Although the district court rejected Dean‘s proposed instruction, it did give Instruction Number 17, instructing the jury that “[r]eliance on the advice of a professional may be evidence of the absence of a Defendant‘s intent to defraud.” At trial, Dean‘s counsel argued that his proposed instruction correctly stated “the ability of an officer to rely on information provided by other officers,” as opposed to the instruction that was ultimately given to the jury that allowed for reliance on information provided by professionals. A litigant is not entitled to a “specific formulation” of a jury instruction. Gray v. Bicknell, 86 F.3d 1472, 1485 (8th Cir. 1996).
Dean blames other infoUSA professionals for infoUSA filing false statements, which Dean certified, with the SEC. “As chief financial officer, [Dean]‘s very job at [infoUSA] was to manage its financial department and ensure its records and accounts were accurately and fairly maintained, and there is substantial evidence that []he failed to do so.” See McConville v. SEC, 465 F.3d 780, 790 (7th Cir. 2006). The requirement of
2. Rule 14a-9 Instruction
Next, Dean contends that the SEC was required to prove scienter for its
Whether scienter is an element of an action brought under
Dean asks this court to extend Shanahan‘s holding regarding outside directors and accountants to corporate officers. Relying on the Sixth Circuit‘s decision in Adams, Dean argues that the legislative history of Rule 14a-9 suggests scienter was intended as an element. While the court in Adams concluded that
We decline to extend our holding in Shanahan to corporate officers. Scien-
3. Rule 13b2-1 and Rule 13b2-2 Instructions
Dean contends that the district court abused its discretion when instructing the jury on the SEC‘s 13b2-1 claim and 13b2-2 claim because each instruction required the jury to find Dean violated the law if he did not act “reasonably.” Dean argues that the SEC was required to prove that Dean acted “knowingly.” This issue, as it relates to both claims, is an issue of first impression for our court.
to be falsified, any book, record or account subject to
The Seventh Circuit, relying on the SEC‘s interpretations of its own regulations and applying Chevron deference, has held that
We agree with the analysis of our sister circuits in McConville and McNulty and affirm the district court‘s instruction on the SEC‘s Rule 13b2-1 claim.
We address
(2) Every issuer which has a class of securities registered pursuant to
section 78l of this title and every issuer which is required to file reports pursuant tosection 78o(d) of this title shall—(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
. . . .
(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as provided in paragraph (5) of this subsection.
(5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).
In support of his argument that the SEC was required to prove that he knowingly violated
Based on the foregoing, we conclude that
3. Section 13(b)(5) Claim
Although we conclude the district court properly instructed the jury regarding the SEC‘s Rule 13b2-1 and 13b2-2 claims, the SEC has requested that we vacate the district court‘s judgment regarding the
As a result, we vacate the district court‘s May 29, 2012 Judgment as to Defendant Stormy L. Dean, as well as the accompanying Memorandum and Order, but only as each relates to
Finally, Dean argues the district court erred by finding that he acted in bad faith toward infoUSA‘s shareholders. In its May 29, 2012 judgment, the district court “declare[d] that Defendant Stormy L. Dean acted in bad faith toward shareholders of InfoUSA, Inc., when committing the acts and omissions that led to this proceeding, and knew his actions were contrary to the interests of InfoUSA and its shareholders.” See J. as to Def. Stormy L. Dean 6, May 29, 2012, ECF No. 258. Significantly, whether Dean acted in bad faith was not an issue before the jury, and neither the SEC nor infoUSA raised the issue. Based on the claims the SEC asserted against Dean, the bad-faith finding was unnecessary to a final resolution of this matter. Accordingly, we vacate the district court‘s finding regarding Dean‘s bad faith toward infoUSA shareholders.
III. Conclusion
Accordingly, we: (1) vacate the conclusion that Dean violated