Opinion ID: 180862
Heading Depth: 5
Heading Rank: 2

Heading: NetTools

Text: The NetTools arrangement violated GAAP if NAI's commitments to repurchase prespecified quantities of its software from Ingram amounted to significant obligations for future performance to directly bring about resale of the product. FAS 48, ¶ 6(e). Goyal contends that the NetTools commitments were not significant obligations because they were not technically binding agreements, but merely forecast[s] of how much software NetTools would buy back from Ingram. One of Ingram's associate buyers testified that although there [were] no guarantees,... the forecast came in spot-on every time for Net Tools.... If they said Net Tools was going to do 25 million through the end of the quarter, on the last day of the quarter we were receiving Net Tools' [purchase orders] up until 2:00 in the morning to make sure that we hit 25 million. Ingram relied on the NetTools forecasts to predict its own inventory. And NAI used its NetTools forecasts, in quarter-end negotiations with Ingram, to assure it that certain quantities of software would sell in subsequent quarters. Even if these commitments were not formally enforceable, the evidence makes clear that both parties treated them as reliable and expected them to be honored. A reasonable juror could have concluded that the NetTools commitments fell within the meaning of significant obligations, and thus that using sell-in accounting violated GAAP. Even so, the prosecution had to prove that Goyal willfully and knowingly misled PwC when he asserted that NAI complied with GAAP. We are mindful that the mere fact that evidence submitted by the government is wholly susceptible to innocent explanations, such as Goyal's alternative understanding of commitments, is not enough to reverse a conviction on appeal. United States v. Wiseman, 25 F.3d 862, 866-67 (9th Cir.1994) (quoted and overruled by Nevils, 598 F.3d at 1166-67). As long as the jury could have accepted a culpable explanation consistent with the proof of defendant's conduct, we must assume, in the prosecution's favor, that the jury did so. Nevils, 598 F.3d at 1166-67; see United States v. Dinkane, 17 F.3d 1192, 1196 (9th Cir. 1994) (The relevant inquiry is not whether the evidence excludes every hypothesis except guilt, but whether the jury could reasonably arrive at its verdict.). The government nonetheless must offer some evidence to support a culpable explanation. [W]here there is a total failure of proof of the required mental state, we cannot affirm a conviction. Nevils, 598 F.3d at 1167 (quoting Briceno v. Scribner, 555 F.3d 1069, 1079 (9th Cir.2009)) (internal quotation marks omitted). The government's failure to offer any evidence supporting even an inference of willful and knowing deception undermines its case. The government offers several ways that the jury could have inferred fraudulent intent from Goyal's conduct, but none can support the inferences the government would draw. Goyal's desire to meet NAI's revenue targets, and his knowledge of and participation in deals to help make that happen, is simply evidence of Goyal's doing his job diligently. See, e.g., Anderson v. First Sec. Corp., 249 F.Supp.2d 1256, 1270 (D.Utah 2002) (effort to meet analysts' numbers and not disappoint Wall Street is merely an example of a company's shared motives to look good that does not imply that the company was engaged in fraudulent conduct). Similarly, Goyal's presumed knowledge of GAAP as a qualified CFO does not make him criminally responsible for his every conceivable mistake. If simply understanding accounting rules or optimizing a company's performance were enough to establish scienter, then any action by a company's chief financial officer that a juror could conclude in hindsight was false or misleading could subject him to fraud liability without regard to intent to deceive. That cannot be. Cf. Merck & Co., Inc. v. Reynolds, 559 U.S. ___, 130 S.Ct. 1784, 1796-97, 176 L.Ed.2d 582 (2010) (holding that facts that tend to show a materially false or misleading statement do not always suffice to show scienter as well). That Goyal's compensation was linked to NAI's successhalf of his bonus was based on achieving corporate goalsdoes not change matters. Such a general financial incentive merely reinforces Goyal's preexisting duty to maximize NAI's performance, and his seeking to meet expectations cannot be inherently probative of fraud. See Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir.2002) (financial incentive linked to company's performance cannot be enough to establish scienter if it does not go far beyond the usual arrangements of compensation based on the company's earnings). The government also argues that Goyal must have known about various revenue recognition problems because others at the company claimed that they were aware of accounting improprieties. Eric Borrmann, NAI's vice president (and later treasurer), testified that he believed there were balance-sheet issues that relate to the lack of reserves. Or perhaps not sufficient reserves. There is also ... lack of disclosure around issues relating to the [distribution] channel. Evan Collins, NAI's former corporate controller, offered his opinion that some of the terms ... in certain [buy-in] agreements ... would ruin [sell-in] revenue recognition. Neither of these witnesses found fault with the NetTools commitments, however, so neither shed any light on what Goyal knew or did not know about that arrangement. Borrmann's testimony concerned NAI's accounting for uncertain terms in the buy-in deals such as rebates and discounts; these are unrelated to NetTools. Collins's statement was about perceived problems with written buy-in letters; NAI made its NetTools commitments orally. Because neither Borrmann's nor Collins' testimony said anything about NetTools, that testimony did not prove anything about Goyal's knowledge on that subject. The government also suggests that a jury could infer intent from Goyal's statement that he couldn't know about a memo NAI's vice president of sales distribution had sent him questioning NAI's accounting for the terms of several buy-in deals and enclosing letters documenting those terms. The government appears to argue that Goyal did not want to know about the letters because that would have made his statements about GAAP compliance knowingly misleading. But this incident does not prove anything of the sort because the memo and letters were not related to whether NAI's use of sell-in accounting complied with GAAP and did not raise any red flags about it. The NAI vice president of sales did not claim that the terms in the letters violated GAAP; indeed, he admitted that he had no idea what the payments documented in the letters were for. The government therefore produced no evidence that Goyal's knowledge of the letters' contents would have made his statements to the auditors knowingly misleading. Cf. SEC v. Retail Pro, Inc., 673 F.Supp.2d 1108, 1142-43 (S.D.Cal.2009) (CFO violated Rule 13b2-2 by signing management representation letters stating he had no knowledge of allegations of fraud or suspected fraud after company's contract administrator sent him an email credibly alleging that there was a potential fraud); SEC v. Espuelas, 579 F.Supp.2d 461, 487 (S.D.N.Y.2008) (finding no violation of Rule 13b2-2 where there were no red flags indicating that statements to auditors were misleading). In sum, of the various GAAP violations alleged, only the problem with NetTools was supported by the government's proof. But no evidence supported a finding that Goyal knew that NetTools's commitments violated GAAP. The lying-to-auditors counts, therefore, cannot be sustained on the ground that Goyal's assertion of GAAP compliance to PwC was willfully and knowingly false.