Opinion ID: 711056
Heading Depth: 2
Heading Rank: 1

Heading: Treatment of Pro Forma Financial Documents under Sec. 1014

Text: 13 From the outset of this case, Messrs. Knapp and Sarno have assiduously argued that the term false statement, as used within the meaning of Sec. 1014, does not comprise--as a matter of fact or law--the class of allegedly hypothetical representations made by the June 28, 1988, pro forma financial package. The Defendants argue that the pro forma financial statement--which they equate to an explicitly hypothetical representation--is not an assertion of fact and, thus, cannot as a matter of law be either true or false. Hence, they conclude, the June 28 package could not have violated Sec. 1014, which by its terms requires a false statement. Cf. Williams v. United States, 458 U.S. 279, 284-85, 102 S.Ct. 3088, 3091-92, 73 L.Ed.2d 767 (1982) (holding that a bad check cannot qualify as a false statement under Sec. 1014 because technically speaking, a check is not a factual assertion at all, and therefore cannot be characterized as 'true' or 'false.' ). 14 It must be admitted that the Defendants' reasoning is not totally devoid of legal merit. Williams, fairly read, indicates that a transactional document need not be a factual representation within the meaning of Sec. 1014--even where, as in Williams, a document is commonly understood to imply the existence of certain factual conditions. 4 Beyond its resolution of the issue immediately before the Court, however, Williams gives little guidance to the task of defining, or even identifying, a statement of fact. Few other cases even touch on the general aspects of the question advanced by the Defendants--when can an allegedly hypothetical statement be treated as a criminal misrepresentation of fact?--and apparently no case addresses this issue in detail. This circuit has, without any analysis of this issue, affirmed a Sec. 1014 conviction based upon a pro forma financial statement submitted to a savings and loan institution. See United States v. Smith, 891 F.2d 703, 708 (9th Cir.1989). 15 We acknowledge that a hypothetical assertion clearly labeled as such cannot be held to the same standard of rectitude as a statement of pure historical fact. One who seeks to predict the future must be allowed some room for error. A bank that knowingly accepts a reasonable, good-faith, but ultimately erroneous, prognostication is guilty perhaps of poor business judgment, but is not the victim of a crime. We cannot, however, agree that, as a matter of law, affixing the label pro forma or hypothetical to a financial statement immunizes an individual from criminal prosecution. It would be absurd to allow an artful financier to circumvent the scope of Sec. 1014 by employing such a simple subterfuge: an unscrupulous businessman could run wildly inflated pro forma figures by overly-credulous banks and S & Ls without any fear of criminal liability. 5 To attach such force to a label would eviscerate the statute, and we refuse to ascribe such an intent to Congress in the absence of evidence far more compelling than any presented by the Defendants here. Thus, some allegedly hypothetical representations must qualify as statements of fact within the meaning of Sec. 1014. 6 16 There is, as noted above, apparently no case that analyzes this precise question. Ranging farther afield, the most cogent analysis of a related question--the criminal liability under 18 U.S.C. Sec. 1001 (the generic false statement statute) of accountants for the submission of an allegedly false audit opinion letter--comes from Judge Friendly in United States v. Simon, 425 F.2d 796, 805-06 (2d Cir.1969), cert. denied, 397 U.S. 1006, 90 S.Ct. 1235, 25 L.Ed.2d 420 (1970). In Simon, the court announced a two-part test for falsehood that recognized the often-fuzzy character of fact (and truth). First, did the financial statement taken as a whole  'fairly present[ ]'  the financial condition of the company and accurately report the relevant operations of the company? If not, were the inaccuracies presented in good faith? A negative answer to both questions would support a finding of criminal liability. See 425 F.2d at 805-06. This test generally accords with the reasonableness standard used in civil litigation to judge the truth of hypothetical financial statements. See, e.g., In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413-15 (9th Cir.1994) (collecting cases which hold that prospective or hypothetical financial statements can, if based upon unreasonable assumptions, be materially false so as to give rise to civil liability), cert. denied, --- U.S. ----, 116 S.Ct. 277, 133 L.Ed.2d 197 (1995). 17 Were it necessary for us to explore the intricacies of the falsehoods conceivably attributable to hypothetical representations, we would be inclined to adopt Judge Friendly's test. A good-faith prediction, which fairly and accurately discloses both its underlying assumptions and the actual financial condition(s) of the relevant players, does not merit criminal sanction. We see no need to conduct such an in-depth inquiry, however, in light of our broader conclusion that the labeling of a financial submission as a hypothetical, a pro forma, or an assumption does not of itself forestall criminal liability. Notwithstanding the care with which the Defendants prepared the June 28 financial statement, the record contains ample evidence that the June 28 financial package makes certain factual assertions that could have been found false by a reasonable jury. 18 As noted above, the approval of the loan hinged upon the submission of balance sheet that indicated a net worth for Trafalgar of $45 million. Thus, the balance sheet, with its accompanying assumptions, constituted the heart of the June 28 package. The balance sheet itself was plainly labeled as a PROFORMA [sic]; the assumptions were likewise plainly identified as such. The third assumption contains virtually all of the material financial information and is the only one which merits consideration here: 19 The proforma [sic] investment portfolio includes the following investments which have closed as of June 28, 1988: 20 (a) Paperulers, Inc. $ 3,000,000 21 (b) Geothermal Development Corp. 5,000,000 22 (c) Star-Glo. Corporation 2,000,000 23 (d) Detroit Body Products 2,000,000 24 (e) Old American Capital 4,000,000 25 (f) Circle C Ranch 71,000,000 26 (g) Stephen Moses Interests Mortgage Receivable 12,000,000 27 (h) Tennessee Resources, Ltd. 15,000,000