UNITED STATES OF AMERICA, Plaintiff-Appellee, v. GREGORY L. REYES, Defendant-Appellant. UNITED STATES OF AMERICA, Plaintiff-Appellee, v. STEPHANIE JENSEN, Defendant-Appellant.
No. 08-10047, No. 08-10140
United States Court of Appeals, Ninth Circuit
August 18, 2009
11195
Before: Mary M. Schroeder and Stephen Reinhardt, Circuit Judges, and Louis H. Pollak,* Senior District Judge. Opinion by Judge Schroeder
Appeal from the United States District Court for the Northern District of California. Charles R. Breyer, District Judge, Presiding. Argued and Submitted May 12, 2009—San Francisco, California. *The Honorable Louis H. Pollak, Senior United States District Judge for the Eastern District of Pennsylvania, sitting by designation.
Amber Rosen, San Jose, California, for the plaintiff-appellee.
Seth P. Waxman, Washington, DC., for defendant-appellant Gregory L. Reyes.
Steven A. Hirsch, Washington, DC., for defendant-appellant Stephanie Jensen.
OPINION
SCHROEDER, Circuit Judge:
I. Introduction
Gregory Reyes and Stephanie Jensen appeal from their convictions for falsifying corporate books and records, and related charges, stemming from their participation in a scheme to reward employees with grants of backdated stock options. The options were backdated to a time when the company’s stock price was low, but the options were not recorded
We reverse Reyes’ conviction because of prosecutorial misconduct in making a false assertion of material fact to the jury in closing argument. We affirm Jensen’s conviction but vacate the sentence and remand for resentencing because the sentence improperly included an obstruction of justice enhancement for which reprehensibility lay primarily with Jensen’s lawyer.
II. Facts and Procedural Background
Gregory Reyes was the Chief Executive Officer (“CEO“), and Stephanie Jensen was the Vice-President of the Human Resources Department, of Brocade Communication Systems, Inc. (“Brocade“), based in San Jose, California. The company is publically traded and engaged in the high-tech business of developing and selling network equipment and providing networking solutions. Because of the competitive demand for qualified information technology personnel in the Silicon Valley, the company began the practice of offering new personnel and valued employees compensation in the nature of stock options.
A stock option is the right to purchase a share of stock from a company at a fixed price, referred to as the “strike price,” on or after a specified vesting date. In a rising market, stock options generally help companies recruit employees desiring to share in the company’s growth and help persuade employees to stay with the company so that their increasingly valuable options may vest and be exercised.
In general, companies grant options with a strike price equal to the market price on the date the options are granted.
On August 10, 2006, the government charged Reyes and Jensen with securities fraud, falsification of corporate books and records, and violating related statutes and regulations. Their cases were severed for trial and represented the first such prosecutions to go before a jury.
A. The Reyes Trial
The jury convicted Reyes of conspiracy in violation of
At trial, Reyes’ principal defense was that he, as CEO and sole member of the Board of Directors’ Compensation Committee, signed off on the backdated options without any intent to deceive. He sought to establish reasonable doubt as to his intent by contending that Brocade’s Finance Department was well aware of the backdated options and the fact that the options were not properly expensed out on the books. Reyes also argued that he relied in good faith on the accuracy of the Finance Department’s documentation when he signed off on false financial statements.
Other, higher-up Finance Department employees, however, had given statements to the FBI describing their knowledge of the backdating scheme. Both prosecution and defense counsel were familiar with these statements. Those employees, who were themselves subject to possible criminal prosecution and had been targets of SEC civil suits, did not testify.
During trial, Reyes’ position was that he relied on the Finance Department to make sure that the corporate books were accurate, and that he was not responsible for the false records. Reyes’ counsel, in closing argument, therefore told the jury that the Finance Department knew about the backdating, thus supporting the defense position. The prosecutor, however, told the jury that the employees in the Finance Department “don’t have any idea” that the backdating was occurring. The prosecutor thereby asserted to the jury facts that he knew were belied by the statements to the FBI from responsible Finance Department officers, and by SEC complaints that had been filed against some of the Finance Department employees alleging they knew about the scheme.
Reyes moved for a new trial on the basis of prosecutorial misconduct. He also sought a new trial on the separate basis of what he asserted to be a recantation of Elizabeth Moore’s testimony that she did not know about the backdating. The district court denied the motions. Earlier, the court had denied a motion for directed verdict for insufficiency of the evidence to establish materiality, i.e., that knowledge of the backdating would have affected the judgment of a reasonable investor.
B. The Jensen Trial
In the Jensen trial, the principal issue was whether she knew that this was a fraudulent scheme and whether she possessed a criminal intent. Jensen sought an instruction that would have required the jury to find she knew what law she was violating, i.e., to find that the falsification was done “with the purpose of violating a known legal duty.” The district court instead instructed the jury that it must find the government proved Jensen acted “knowing the falsification to be wrongful.” United States v. Jensen, 532 F. Supp. 2d 1187, 1195 (N.D. Cal. 2008). The jury convicted Jensen on the two counts charged against her: (1) falsifying and aiding and abetting the falsification of books, records, and accounts in violation of
At sentencing, Jensen also argued she was within the provision of the penalty statute that exempts a defendant from imprisonment for violating a regulation if the defendant “had no knowledge of such rule or regulation.”
Jensen’s term included an enhancement for obstruction of justice for her lawyer’s reliance on a declaration made by Reyes. Her lawyer had obtained a severance of Jensen’s trial from Reyes’ on the basis of Reyes’ false declaration stating that Jensen was without any culpability, that Reyes had told Jensen that there was no backdating, and that Reyes would testify at Jensen’s trial if the trials were severed. Reyes did not testify at Jensen’s trial.
III. The Reyes Appeal
The Reyes trial was combative. The government had to prove Reyes was knowingly responsible for the false corporate records, and the stakes were high. The issue that is dispositive of Reyes’ appeal concerns the government attorney’s misconduct in falsely telling the jury that the Finance Department did not know about the backdating, when the prosecutor knew that their statements revealed that they did.
There is a threshold issue, however, of whether the government satisfied its burden of proving that the false records would have affected the judgment of a reasonable investor. If the government failed in its burden to establish the materiality of the falsification, then the prosecution must be dismissed, and no new trial would be possible. Burks v. United States, 437 U.S. 1, 18 (1978). The government did not, however, fail in its burden.
Materiality depends on the significance that a reasonable investor would assign to the withheld or misrepresented information. Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). To be material, “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having altered the ‘total mix’ of information made available.” Id. at 231-32 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448 (1976)).
McCormick testified that Fidelity used guidelines for the voting of shares Fidelity owned in other companies. These guidelines were “designed to maximize shareholder benefit,” and they instructed Fidelity managers to vote against plans that permitted a company to grant any backdated options. According to McCormick, Fidelity frowned upon granting backdated stock options because they result in share dilution, and they have a less incentivizing effect on employees than stock options that are not backdated. Catricks testified that granting backdated options inflates net income and earnings per share figures of the company, figures that Catricks stated he, as a reasonable investor, would want to know when he made his investment decisions.
McCormick’s and Catricks’ testimony further established that improper accounting of backdated options presents investors with an incorrect picture of a company’s finances. Supporting their testimony, Dr. Garvey testified that Brocade’s failure to expense more than $160 million from backdated options resulted in Brocade reporting profits in 2001 and 2002, when it should have reported large losses.
[2] We have recognized that information regarding a company’s financial condition is material to investment. SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980)
There is also a claim of instructional error with regard to the jury’s finding that misstatements to accountants were materially false. The instruction required the jury to find that the statements were capable of influencing actions of accountants, and did not expressly reference investors. In the circumstances of this case, there was no reversible error on this point. The main thrust of the government’s case was that the false statements were capable of misleading investors. The statements were the same as those the jury found, in other counts, capable of influencing reasonable investors. The remaining instructional challenges relate to the false entries count (
We therefore turn to whether prosecutorial misconduct requires a new trial. The principal issue before the jury was one of intent. There was no question that Reyes signed off on stock option grants that were priced retrospectively, and that the backdating allowed Brocade to understate its compensation expenses. That was indeed the way that the alleged scheme was supposed to operate, by providing a valuable option to employees at no apparent expense to the company.
At trial, an issue as to Reyes’ criminal state of mind was whether Reyes knew the corporate records falsely stated the company’s financial condition by under-reporting the company’s expenses. Reyes’ defense was that he thought the transactions were properly accounted for, in reliance on the
[3] Statements made to the FBI by responsible employees in the Finance Department during the FBI’s investigation established that Finance Department executives knew about the backdating and that one employee had resigned as a result of it. A lower-level Finance Department employee, however, Elizabeth Moore, testified for the government that she did not know about the scheme. During closing argument, the prosecutor did not confine his argument to the evidence before the jury or reasonable inferences that could have been drawn from that evidence. The prosecutor asserted as fact a proposition that he knew was contradicted by evidence not presented to the jury. In direct contravention of the statements given to the FBI by Finance Department executives that they did know about the backdating, the prosecutor asserted to the jury in closing that the entire Finance Department did not know about the backdating, and further that the government’s theory of the case was that “finance did not know anything.” “Our theory is that those people didn’t know anything . . . . Elizabeth Moore says finance didn’t know. Did you need everybody in the finance department to come and tell you that they didn’t know?” The government even displayed for the jury a diagram explaining the prosecutor’s position that the Finance Department did not know of the backdating. The prosecutor asked the jury to assume other employees of the Finance Department would testify that they did not know about Reyes’ backdating procedure when the prosecutor knew they did.
In denying the defense’s motion for a new trial, the district court focused not only on the prosecutor’s misstatements, but on defense counsel’s performance as well. Defense counsel
It was not, however, the defense’s burden to prove Reyes was innocent. It was the prosecutor’s burden to prove he was guilty. Defense counsel made no knowingly false statements. The prosecutor did. Indeed, on appeal the government does not seriously dispute the falsity of the prosecutor’s statements or the duty of the prosecutor to refrain from making such statements. Instead, it argues the misconduct was harmless.
In representing the United States, a federal prosecutor has a special duty not not to impede the truth. The United States Department of Justice’s Mission Statement describes the government’s duty as one “to ensure fair and impartial administration of justice for all Americans.” United States Department of Justice, About DOJ, http://www.usdoj.gov/02organizations/.
[4] There is good reason for such a high standard. A “prosecutor’s opinion carries with it the imprimatur of the Government and may induce the jury to trust the Government’s judgment rather than its own view of the evidence.” United States v. Young, 470 U.S. 1, 18-19 (1985) (citing Berger v. United States, 295 U.S. 78, 88-89 (1935)). For this reason, it is improper for the government to present to the jury statements or inferences it knows to be false or has very strong reason to doubt. United States v. Blueford, 312 F.3d 962, 968 (9th Cir. 2002) (citing United States v. Kojayan, 8 F.3d 1315, 1318-19 (9th Cir. 1993)).
Moreover, in civil suits brought by the SEC, parallel evidence was produced about the knowledge of Finance Department executives. For example, the SEC complaint charging Michael Byrd, a Chief Financial Officer at Brocade, did not state that Byrd was “deceived” regarding the stock option grant given to Brocade employee Richard Geruson, as the prosecutor had argued during closing argument during Reyes’ case. Rather, the civil complaint charged that Byrd acted with knowledge of the backdating of Geruson’s grant. The SEC’s complaint against Canova clearly alleges that Canova did know that backdating was occurring. As a joint press release emphasized, the FBI, SEC, and U.S. Attorney’s Office forged a strong, cooperative relationship in pursuing civil and criminal punishment for misconduct relating to backdating Brocade stock options. Press Release, U.S. Securities and Exchange Commission, U.S. Attorney’s Office and SEC Separately Charge Former Brocade CEO and Vice President in Stock Option Backdating Scheme (July 20, 2006), http://www.sec.gov/news/press/2006/2006-121.htm. The prosecution is legally charged with responsibility for informa
[5] The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt. Reyes objected below and therefore preserved the issue. Both Reyes and the government agree in their briefs that the error is not harmless if we conclude it is more likely than not that the misconduct materially affected the fairness of the trial. See United States v. McKoy, 771 F.2d 1207, 1212 (citing Young, 470 U.S. at 13 n.10).
[6] Although the government’s case was relatively strong, the jury took seven days to deliberate, and the case was complex and technical. Moreover, the prosecutor’s statements were particularly prejudicial given that Reyes’ defense rested on his delegating his responsibilities to others and reliance on them. At the end there was considerable focus on the issue of what the Finance Department knew. The prosecutor’s false statements went directly to this issue. Moreover, the statements were made during closing arguments, both orally and visually, and closing statements from the prosecution “matter a great deal.” Kojayan, 8 F.3d at 1323. Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system. We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt. See Blueford, 312 F.3d at 968. There is no reason to tolerate such misconduct here.
[7] Reyes goes further on appeal and argues that the misconduct was so flagrant that the indictment should be dismissed. See United States v. Chapman, 524 F.3d 1073, 1085-87 (9th Cir. 2008) (noting that dismissal of the indictment
IV. The Jensen Appeal
Jensen’s appeal first challenges a jury instruction given in her case. She also challenges her sentence.
[8] Jensen’s instructional challenge relates to the statutory term “willfully.” The substantive provision of the Securities and Exchange Act of 1934 (“Act“) at issue in this case requires issuers of registered securities to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”
The criminal penalty provision applicable to Jensen’s case is
Any person who willfully violates any provision of this chapter . . . or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any
application, report, or document required to be filed under this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement . . . which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, . . . but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.
Jensen proposed a jury instruction that would have required the jury to find that the falsification was done “with the purpose of violating a known legal duty,” or that the falsification was “unlawful.” It therefore would have required the jury to find Jensen knew she was violating a securities law. The district court rejected her proposed instructions, and instructed the jury that they must find that Jensen falsified or intentionally caused to be falsified books, records, or accounts, “knowing the falsification to be wrongful.” Jensen, 532 F. Supp. 2d at 1195.
[9] The Supreme Court has recognized that the meaning of “willfully” is often influenced by the context in which it is used. Ratzlaf v. United States, 510 U.S. 135, 141 (1994). The district court’s instruction in this case was in line with this court’s interpretation of “willfully” in the securities context. In United States v. Tarallo, 380 F.3d 1174 (9th Cir. 2004), this court interpreted the meaning of willfully in
[10] This argument is foreclosed by Tarallo. Tarallo observed that our circuit and others have rejected the argument that, in the context of the securities fraud statutes, willfulness requires a defendant know that he or she was breaking the law. Tarallo, 380 F.3d at 1187-88 (discussing United States v. Charnay, 537 F.2d 341, 351-52 (9th Cir. 1976), and United States v. Peltz, 433 F.2d 48, 54 (2d Cir. 1970)). The “knowing” requirement protects those who accidentally record incorrect information because, for example, they are confused by accounting rules. The district court correctly instructed the jury that it had to find that Jensen “was aware of the falsification and did not falsify through ignorance, mistake, or accident.” There is no higher standard for a willful violation of the securities laws.
[11] Jensen also tries to distinguish Tarallo on the ground that she was charged with the provision that prohibits “knowingly” falsifying books and records, whereas the defendant in Tarallo was charged with violating a provision that was silent on the requisite level of intent. In both this case and Tarallo, however, the penalty provision at issue punishes “willful” violations of the substantive provisions.
[12] Moreover, Congress actually explained its understanding of “knowingly” in connection with the 1977 amendments to the securities laws that added
The amendments to section 13(b) prohibiting the falsification of corporate books and records and the making of misleading representations to auditors are not intended to make unlawful conduct which is merely negligent. To clarify the purpose of these paragraphs, therefore, the committee inserted the term ‘knowingly’ in appropriate places in both paragraphs (3) and (4). As explained to the committee, the term ‘knowingly’ connotes a ‘conscious undertaking.’ Thus these paragraphs proscribe and make unlawful conduct which is rooted in a conscious undertaking to falsify records or mislead auditors through a statement or conscious omission of material facts.
The committee believes that the inclusion of the ‘knowingly’ standard is appropriate because of the danger, inherent in matters relating to financial recordkeeping, that inadvertent misstatements or minor discrepancies arising from an unwitting error in judgment might be deemed actionable. The committee does not, however, intend that the use of the term ‘knowingly’ will provide a defense for those who shield themselves from the facts. The knowledge required is that the defendant be aware that he is
committing the act which is false—not that he know that his conduct is illegal.
S. Rep. No. 95-114, at 9 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4107 (emphasis added). The final report on
The Conferees intend to codify current Securities and Exchange Commission (SEC) enforcement policy that penalties not be imposed for insignificant or technical infractions or inadvertent conduct. The amendment adopted by the Conferees accomplishes this by providing that criminal penalties shall not be imposed for failing to comply with the FCPA’s books and records or accounting control provisions. This provision is meant to ensure that criminal penalties would be imposed where acts of commission or omission in keeping books or records or administering accounting controls have the purpose of falsifying books, records or accounts, or of circumventing the accounting controls set forth in the Act. This would include the deliberate falsification of books and records and other conduct calculated to evade the internal accounting controls requirement.
H.R. Conf. Report. No. 100-576, 917 (1988), reprinted in 1988 U.S.C.C.A.N. 1547, 1950 (emphases added). The district court correctly concluded that the congressional history confirms that Congress intended “knowingly” only to require that the jury find that Jensen “was aware of that falsification and did not falsify through ignorance, mistake, or accident.” Jensen, 532 F. Supp. 2d at 1195.
[13] With respect to her sentence, Jensen first challenges the district court’s ruling that Jensen could be imprisoned for
[14] The district court framed the question as “whether Jensen has satisfied her burden of proving by a preponderance that she was unaware of a SEC rule or regulation prohibiting the falsification of books and records.” Jensen, 537 F. Supp. 2d at 1075. This was the proper formulation. See O’Hagan, 521 U.S. at 652 (“[A] defendant may not be imprisoned for violating Rule 10b-5 if he proves that he had no knowledge of the Rule.“). Other circuits have also observed that proof of no knowledge of the rule “can only mean proof of an ignorance of the substance of the rule, proof that the defendant did not know that [his or her] conduct was contrary to law.” United States v. Schwartz, 464 F.2d 499, 509 n.16 (2d Cir. 1972) (citing United States v. Lilley, 291 F. Supp. 989, 993 (S.D. Tex. 1968)).
[15] The evidence showed that Jensen tried to hide the backdating scheme and was conscious of her wrongdoing. Such evidence included Jensen’s attempt to minimize the obviousness of the backdated options, concealing the way options were actually dated, and directing employees to not communicate about options over the phone or email. Based on this evidence, and more, the district court appropriately concluded that Jensen had not carried her burden of establishing that she had no knowledge of the SEC rule prohibiting the falsification of books and records. Jensen, 537 F. Supp. 2d at 1072.
In arguing for the severance motion, Jensen’s counsel asserted that Reyes’ declaration was “as exculpatory as it gets.” The court thus granted the severance on the basis of Jensen’s counsel’s argument that Reyes would provide exculpatory testimony. Jensen did not call Reyes to testify at her trial.
[16] Because the district court had granted the severance on a false premise, the court imposed an enhancement under U.S.S.G. § 3C1.1 for obstruction of justice. That sentencing guideline provides a two-level increase in the offense level “[i]f (A) the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice with respect to the investigation, prosecution, or sentencing of the instant offense of conviction, and (B) the obstructive conduct related to (i) the defendant’s offense of conviction and any relevant conduct; or (ii) a closely related offense[.]” U.S.S.G. § 3C1.1. Although it was Jensen’s counsel who obtained the severance and solicited Reyes’ declaration, the district court held that Jensen was responsible for the court’s reliance on Reyes’ false declaration, because Jensen acted willfully in allowing her counsel to present the declaration and Jensen knew Reyes’ declaration was false or severely misleading.
[18] We affirm Jensen’s conviction but vacate her sentence and remand for resentencing without the enhancement for obstruction of justice.
V. Conclusion
We reverse Reyes’ conviction and remand for a new trial. We affirm Jensen’s conviction, vacate her sentence, and remand for resentencing.
Affirmed in part, reversed in part, and remanded.