Opinion ID: 180862
Heading Depth: 3
Heading Rank: 1

Heading: Securities Counts

Text: All of the securities countsone count of securities fraud and seven counts of making false filings with the SEC required the government to prove that NAI materially misstated the revenue it earned in certain quarters and years through its choice of accounting method. NAI's reports of allegedly inflated revenue furnished the untrue statement of material fact required for each of the false filing counts, as well as the misleading statement or omission of a material fact made with scienter needed to sustain a fraud conviction under the general antifraud provision of § 10(b) of the Securities Exchange Act of 1934. United States v. Smith, 155 F.3d 1051, 1063 (9th Cir.1998) (internal quotation marks and numbering of elements omitted). The government's contention that NAI materially overstated its revenue necessarily entailed two claims: (1) that NAI recognized revenue at a different time than it should have; and (2) that NAI's accounting produced artificially higher revenue figures in certain periods that would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available. Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). The government relied on GAAP to make its case, on the first point, that sell-through accounting was required in instances where NAI used the sell-in method. But we need not decide whether NAI actually violated GAAP, because the government clearly failed to carry its burden on the second point, materiality. The prosecution offered no evidence adequate to prove that any GAAP violations materially affected the revenue that NAI reported. The government relied at trial on the parties' stipulations that applying sell-through accounting to NAI's entire business would have resulted in a revenue figure that is materially less than the reported figure for the periods charged in the false filing counts. [5] These stipulations are fatally overbroad, however, because the government did not contend that GAAP required NAI to use sell-through accounting for all sales. The government only offered evidence that sell-through accounting was required for the Ingram buy-in transactions, and the stipulations did not provide that applying sell-through accounting to those transactions alone would have made a material difference in any given period. Without evidence of how much less revenue NAI would have recognized on the Ingram deals if it had used sell-through accounting, the jury had no basis to conclude that the misstatement of reported revenue resulting from the Ingram transactions was material. Even presuming, as we must, that the jury drew all reasonable inferences in the prosecution's favor, see Nevils, 598 F.3d at 1164, there was no way it could have properly inferred materiality from the evidence it had before it. Confronted with this problem, the government argued after the verdict that the jury could have inferred materiality from the mere fact that the buy-in deals with Ingram were substantial. The dollar amounts in the purchase orders for these transactions, according to the government's calculations, represented approximately 24% of the total revenue for NAI during 1998, 1999, and 2000 and between approximately 7% to 40% of NAI's total revenue on a quarterly basis. But this argument failed to bridge the materiality gap because Goyal's jury had to make the materiality findings that his convictions required, and it never saw these figures. See United States v. Rigas, 490 F.3d 208, 231 n. 29 (2d Cir.2007) (declining, in a sufficiency-of-the-evidence challenge, to consider in the first instance arguments regarding materiality that were not presented to the jury). The jury could not have inferred materiality from this evidence even if it had seen it, because it was not the absolute magnitude of the buy-in deals that mattered. The jury needed to assess whether NAI's use of sell-in accounting for the Ingram transactions materially increased NAI's overall revenue when compared to using sell-through accounting. But the jury had no evidentiary basis for making the required comparisons. There was simply no evidence that the effect of using sell-in rather than sell-through accounting for the Ingram transactions was so substantial that it made a material difference. By the government's own calculations, non-Ingram sales always accounted for most of NAI's revenue. It would have been mere speculation, rather than reasonable inference, Nevils, 598 F.3d at 1167, for the jury to conclude that applying sell-through accounting to the revenue from the Ingram sales by themselves would have made a material difference in the company's total revenue figures. Because Goyal's jury had no competent evidence of materiality before it, it could not have properly convicted him on any of the securities counts.