Opinion ID: 615264
Heading Depth: 2
Heading Rank: 2

Heading: Sufficiency of the Materiality Evidence

Text: A. [A]ny person who uses or employs a manipulative or deceptive device in connection with the sale of any security commits securities fraud. United States v. Jenkins, 633 F.3d 788, 801-02 (9th Cir. 2011) (citing 15 U.S.C. § 78j(b)), 17 C.F.R. § 240.10b-5(b) (prohibiting any untrue statement of a material fact). Materiality is one element of securities fraud. Id. at 802 (citing In re Cutera Secs. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010)) (Central to a 10b-5 claim is the requirement that a misrepresentation or omission of fact must be material.). For an omission 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 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) (citation and internal quotation marks omitted); United States v. Tarallo, 380 F.3d 1174, 1182 (9th Cir. 2004) (For securities fraud, a statement is material if there is a substantial likelihood that a reasonable investor would consider it important in making a decision.). [T]he standard of materiality is judged from the perspective of a `reasonable investor,' and is therefore an objective one. Reyes, 577 F.3d at 1075 (rejecting Reyes's argument that witnesses' testimony failed to establish materiality because they made no personal decision to invest in Brocade's stock). Reyes argues that the prosecution failed to prove that additional disclosures related to the APB 25 non-cash expenses would have been material to investors. In particular, Reyes argues that the testimony of Bowie and Robert McCormick, a lawyer who supervised proxy voting for Fidelity Investments, only related to proxy voting decisions and did not establish that APB 25 expenses could influence a reasonable investor's decision. Reyes also maintains that the two Brocade investors who testified, Kevin Kilgannon and David Ryan, did not establish that they found APB 25 information important. [5] We disagree with Reyes's highly theoretical and distorted reading of the materiality standard. We have recognized that information regarding a company's financial condition is material to investment. Id. at 1076 (citing SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (Surely the materiality of information relating to financial condition, solvency and profitability is not subject to serious challenge.)); see also Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008) ([A] statement is misleading if it would give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists. (Internal citations and quotation marks omitted)). Here, there was substantial evidence for the jury to rely on in finding materiality based on the extent to which Brocade's true financial condition was not disclosed to investors. In particular, the Government presented evidence that the backdating scheme affected Brocade's reported earnings. Brocade's net income was overstated by almost $1 billion between 2000 and 2004; it reported profits in 2001 and 2002 when it should have reported losses, and underreported losses by almost $500 million in 2003 and 2004. Government expert Fujuimoto testified that APB 25 calculations affected the reported earnings (unlike FAS 123 disclosures). Further, McCormick provided identical testimony to that which he gave at Reyes's first trial that Fidelity's policy was to vote against company plans that allow in-the-money options because it costs the company more money and can affect shareholder returns. Bowie's testimony was consistent with McCormick's. A jury could reasonably conclude based on this testimony that investors would want to know information that affects investment returns. Further, two actual Brocade investors testified that they cared about accurately stated earnings. Kilgannon testified that, as an investor, whether a company was really suffering a loss but reported profits, would have been important to him. He also testified that he sold his remaining Brocade shares after he learned that the company was restating its earnings. Ryan traded on a basis of the stock's price and trading volume. He testified that price follows earnings and that he decided to sell when he heard of Brocade's restated earnings. While the Brocade investors' testimony is not specific to APB 25 non-cash expenses, it is sufficient to help establish materiality in this case because investors care about earnings, which at that time were required to reflect APB 25 non-cash expenses. Taking into account the cumulative testimony of the witnesses regarding the materiality of the Company's misstatement of its earnings, coupled with the information in the Company's financial statements and SEC filings, and viewing the evidence in the light most favorable to the Government, a rational jury could find that Brocade's significantly overstated net income and underreported losses were material to investors. Reyes, 577 F.3d at 1076; Berson, 527 F.3d at 985. Accordingly, we reject Reyes's narrow reading of the materiality standard. B. Reyes also contends the prosecution improperly suggested to the jury that it could find materiality based on proxy-voting decisions, and that the district court erred because it did not give an instruction that would prevent the jury from being mislead. We disagree. Reviewing for plain error, Geston, 299 F.3d at 1134, Reyes does not point to any place in the record where we could find that the prosecutors acted in a well-calculated manner to mislead the jury as to this issue. Having various unconnected references in the record is not sufficient to show prosecutorial misconduct where the Government did not offer the proxy voting to establish materiality. Rather, the voting preferences testimony largely related to the reasons why the witnesses voted against plans permitting in-the-money options, because they can lead to lesser earnings, about which investors do care. Second, while improper accounting requiring a restatement does not, by itself, establish materiality, it can be used as evidence. See DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002) ([T]he mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter. (citation omitted)); Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824, 829 (8th Cir. 2003) (We do not believe that restating earnings makes the original misstatement material per se... [but] those facts are part of the total mix of information available to investors and are deserving of some consideration.). Here, the Government did not argue that Brocade's financial restatement alone, which was required because the Company's accountants found material discrepancies in the financials, rendered Reyes criminally culpable. The district court did not abuse its discretion by not giving Reyes's proposed jury instruction. The jury was properly instructed as to the materiality requirements under Basic, 485 U.S. at 231-32, 108 S.Ct. 978, and is presumed to follow those instructions, Zafiro, 506 U.S. at 540, 113 S.Ct. 933. That is sufficient, particularly where the context for the testimony related to how granting in-the-money option affects earnings. Further, the trial court gave limiting instructions during trial concerning the materiality of accounting restatements, and gave correct materiality instructions at the end of trial.