Opinion ID: 168590
Heading Depth: 2
Heading Rank: 3

Heading: Circumvention of Internal Controls

Text: 60 We also must set aside the circumvention convictions, although the government is not foreclosed from retrying them. In pertinent part the circumvention statute, 15 U.S.C. § 78m(b)(5), states: 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). Paragraph (2) states: 61 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 to section 78o(d) of this title shall— 62 (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; 63 (B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that— 64 (I) transactions are executed in accordance with management's general or specific authorization; 65 (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; 66 (iii) access to assets is permitted only in accordance with management's general or specific authorization; and 67 (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; . . . 68 15 U.S.C. § 78m(b)(2). 69 All but one of the circumvention counts charged the defendants with circumvention by failing to report personal use of corporate aircraft on annual D & O questionnaires for Westar, Westar Industries, and Protection One (a home-security firm acquired by Westar). There is no question that Wittig and Lake failed to report such personal use on the questionnaires. The issue for trial was whether their failure was with the requisite intent. 70 Mr. Lake testified that he did not record personal use of company planes on the D & O forms because I didn't think my personal use was material. . . . [T]he vast majority of my flights involved me traveling all over the place on business. And flights that I thought were purely personal were a small fraction of that. Aplt.App. Vol. XXXIX at 11533. Mr. Wittig did not testify. In support of their position that their failure to disclose was neither knowing nor willful, they presented evidence that on only two occasions between 1995 and 2002 did any officer or director report personal travel on a D & O form, and, in particular, the corporation's general counsel neither reported his own personal flights nor took action when others failed to report. The essence of the government's contrary argument was that the value of the personal flights was so great that their disclosure was obviously material, the defendants wished to conceal their personal flights from shareholders and the public, and any self-proclaimed ignorance of disclosure requirements was an intentional ignorance. The government obtained from the court an instruction informing the jury that knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact. Id. Vol. III at 00718 (Instruction No. 14). 71 To assess the defendants' intent in not reporting this travel, the jury needed to know the purpose of the D & O forms. The cover of each form was in the following format: 72 [Name] 73 [Year] ANNUAL QUESTIONNAIRE 74 [Corporation] 75 Information Furnished by Each Director, 76 Nominee for Director, and Officer For Use in [Year] Proxy Statement and in Various Reports to the Securities and Exchange Commission and State Regulatory Commissions 77 Id. Vol. LIV at 15595, 15616, 15636, 15656, 15677, 15699, 15719, 15741, 15760, 15779 (emphasis added). The parties did not address what, if any, information on these forms was required by state agencies; so the only relevant purpose of the forms was to prepare SEC filings. 78 As we previously discussed in setting aside the wire-fraud convictions, Regulation S-K required disclosure of an executive's personal use of corporate aircraft only if the additional cost incurred by the corporation exceeded a threshold equal to the lesser of $50,000 or 10% of the executive's salary plus bonuses during the year, and the government offered no substantial proof that this threshold was ever exceeded by either defendant. Thus, there was no evidence that the defendants' failure to disclose information in the D & O forms ever caused a material omission in SEC reports. To be sure, this fact is not dispositive of defendants' intent. They may have thought that there was a risk that their travel would be publicly reported, and fear of such reporting may have caused them to refuse to report their personal travel on the D & O forms. Nevertheless, in assessing the state of mind of each defendant, the jury would likely be influenced by knowing that the omission on the D & O forms apparently did not cause any errors in the reports to the SEC. 79 The jury, however, was not fairly informed of what the SEC required. The defendants had to rely on a witness, Rick Terrill, Westar's general counsel during the alleged conspiracy. He testified that the SEC measured the value of personal aircraft use on an increased-cost basis and that reporting was required only if the value exceeded $50,000. Counsel for each defendant referred to this testimony in final argument. But Mr. Terrill's bona fides was easily challenged by the government; the prosecutor in closing argument asserted that Mr. Terrill had actively worked to prevent various disclosures, running interference for Mr. Wittig. Id. Vol. XLVIII at 13923. 80 And the government, which had devoted substantial time in its case to establishing the charter value of the alleged personal flights, argued to the court and the jury that it was this charter value that mattered. For example, in closing argument the prosecutor added figures for Mr. Lake's admittedly personal flights and concluded, For a total of $208,000 in chartered valued flights. Material. Id. Vol. XLVIII at 13946. Particularly ironic is the government's obtaining from the district court an instruction that informed the jury that a defendant could be charged with knowledge of something that he deliberately blinded himself to. One purpose of the instruction was to allow the jury to find that the defendants knew what was required to be reported on their D & O forms. Yet, at least as far as the trial evidence showed, there was no necessity to report their travel on corporate aircraft because it would not need to be reported to the SEC in any event. What the defendants allegedly blinded themselves to may well have been that there was no good reason to report their personal travel. 81 To respond to the government's arguments, the defendants requested the district court to instruct the jury on what disclosure was required by the SEC. The court denied the request. In the context of this case, we hold that this refusal was reversible error. When a defendant's defense is so dependent on an understanding of an applicable law, the court has a duty to instruct the jury on that law, rather than requiring the jury to decide whether to believe a witness on the subject or one of the attorneys presenting closing argument. Indeed, it is ordinarily improper to have a witness testify regarding what the applicable law is; it is the trial judge's duty to inform the jury on the matter. See Specht v. Jensen, 853 F.2d 805, 807-08 (10th Cir.1988) (en banc); United States v. Vreeken, 803 F.2d 1085, 1091 (10th Cir. 1986). It was error for the district court to abdicate its responsibility in this regard and let opposing counsel argue their competing theories, especially when the defendants' view of the law was the correct one. Accordingly, the convictions for failure to complete properly the D & O forms must be set aside. 82 We further hold that the remaining circumvention conviction must also be reversed. That conviction rested on Mr. Wittig's directive to an auditor not to audit the corporation's flight logs and his refusal to provide the logs to her. We of course are in no position to assess Mr. Wittig's intent, and we readily acknowledge that he may have intended to circumvent Westar's internal controls by forbidding the audit. But we doubt that the jury could fairly appraise Mr. Wittig's mens rea without being properly informed of the governing law. We have concluded that the district court's failure to instruct the jury on the SEC's regulations constituted error. The government bears the burden of showing that this error was harmless with regard to the remaining circumvention count. Yet it has not even argued harmless error to this court.