Opinion
CRIMINAL NO. 03-10197-RGS
April 12, 2004
MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO DISMISS
Defendant Arthur Goodwin, the former Senior Vice President of Worldwide Sales for Interspeed, Inc., a now defunct supplier of broadband access equipment, is charged in an eight count indictment with falsely inflating the company's revenues as a means of pumping up the value of its publicly traded stock. Goodwin seeks dismissal of counts one, three, and four of the indictment. Count one, which is a "speaking" count, describes in seventy-three incorporated paragraphs a scheme beginning in December of 1999 and continuing to September of 2000 to use "manipulative and deceptive devices" in connection with the purchase or sale of Interspeed securities, in violation of 15 U.S.C. § 78j(b). Counts two through four allege the filing of false Forms 10-Q with the Securities and Exchange Commission (SEC) in each of the quarters ending December 1999, March 2000, and June 2000, with the intent of defrauding the investing public.
The remaining four counts charging wire fraud, 18 U.S.C. § 1343, do not figure in the motion.
The scheme and artifice to defraud, as alleged in count one, consisted of six episodes in which goods were "parked" with erstwhile customers and improperly recognized as sales. Because in defendant's view, each of these sham transactions constituted a separate, chargeable crime under the securities laws, count one raises the specter of "duplicity" (the charging of more than one offense in a single count, see United States v. Valerio, 48 F.3d 58, 63 (1st Cir. 1995)), with the concomitant prospect that a general verdict will deprive him of his right to jury unanimity. Cf. Richardson v. United States. 526 U.S. 813, 820-824 (1999). The argument is based on United States v. Langford, 946 F.2d 798 (11th Cir. 1991), an inverse multiplicity case in which a similarly overarching scheme and artifice to defraud was broken out into separate counts involving three separate instances of false statement made in connection with a single sale of securities. The Eleventh Circuit Court of Appeals, while rejecting Langford's argument that "a single conspiracy to defraud under 15 U.S.C. § 78j(b), 78ff, and Rule 10b-5 will sustain only one conviction no matter how many times the defendant uses `a means or instrumentality of interstate commerce, or the mails' to further his scheme," also rejected the government's argument, based on an analogy to the mail fraud statute, "that each and every use of the mails under a scheme to defraud is a separate offense." Id. at 802-803. However, what distinguished Langford was the unusual fact that only a single sale of securities (the sale of the entire capital stock of a bank) figured in the case.
While Langford correctly concludes that not every use of the mails, or other means of interstate commerce, in furtherance of a fraudulent scheme is indictable, section 78j(b) makes it a crime to use or employ, in connection with the purchase or sale of a security, "any manipulative or deceptive device or contrivance" in contravention of the rules and regulations prescribed by the Securities and Exchange Commission (SEC). Under this authority, the SEC promulgated Rule 10b-5, which makes it unlawful for a person, in connection with such a purchase or sale, to (1) employ a device, scheme, or artifice to defraud, (2) make any false statement of material fact (or to make a material omission), or (3) engage in any act, practice, or course of business that operates as fraud or deceit upon any person. 17 C.F.R. § 240.10b-5 (1990). The allowable unit of prosecution under section 78j(b) is, therefore, the use of a manipulative device or contrivance, which, as clarified by the SEC in Rule 10b-5, does not have to be the complete scheme to defraud; rather, it can be any false statement of material fact in connection with a discrete purchase or sale of a security.
Defendant makes the same argument with respect to counts three and four, arguing that the March 2000 Form 10-Q reflects two of the allegedly fraudulent transactions, while the June 2000 Form 10-Q encompasses five transactions.
Id. at 803 (footnote omitted).
As the Court continued,
[i]t is also clear from our cases that the use of the mails (or other instrumentality of interstate commerce) in conjunction with separate purchase or sale transactions clearly is sufficient to ground multiple counts. . . . To avoid the vices of multiplicity in securities fraud cases, each count of the indictment must be based on a separate purchase or sale of securities and each count must specify a false statement of material fact — not a full-blown scheme to defraud — in connection with that purchase or sale.Id. at 804. Cf. United States v. Smith, 231 F.3d 800, 815 n. 16 (11th Cir. 2000) (noting that in Langford, the indictment failed to specify that each of the documents contained a specific misstatement in conjunction with a separate purchase or sale).See also United States v. Lilly, 983 F.2d 300, 304-305 (1st Cir. 1992) (reaching a similar result under the bank fraud statute, 18 U.S.C. § 1344, where twenty-nine packets of fraudulent documents were submitted by the defendant to a bank to obtain a single loan). But see United States v. Mackay, 491 F.2d 616, 619 (10th Cir. 1973) (finding a convincing similarity between the securities laws and mail fraud where "each mailing is regarded as a separate crime even though it relates to essentially the same fraudulent scheme").
This case does not, of course, involve a single sale of securities. Rather, it involves the manipulation of a market in which presumably thousands investors were deceived into buying shares of Interspeed stock. The prosecution is premised on securities laws and SEC regulations that broadly proscribe the use of manipulative or deceptive devices in connection with securities transactions. It is the deception that is illegal, not the sale of the securities themselves. As the Third Circuit Court of Appeals observed in United States v. Haddy, 134 F.3d 542, 544, 549 (3d Cir. 1998), the "statutory and regulatory language allow charging an overall scheme to defraud in a single count of an indictment," but it is not required, as "the individual purchase or sale [is] not the appropriate unit of prosecution," but only a "retail event" in the advancement of the overall scheme. See alsoUnited States v. Wiles, 102 F.3d 1043, 1062 (10th Cir. 1996) ("[C]harging a single offense of securities fraud involving a multitude of ways and courses of action as a result of an ongoing scheme to defraud does not render that charge duplicitous."). There are considerations of practicality that permit the government to plead less than in theory could be plead, as well as prudential concerns of fairness to the defendant that would result from a rule requiring the government to let fly with every arrow in its quiver. As the Third Circuit observed in interpreting Langford not to mandate such a result,
we decline to dictate an inflexible rule regarding the allowable unit of prosecution in a securities fraud case. The Federal Rules of Criminal Procedure require that an indictment be a "plain, concise, and definite written statement of the essential facts constituting the offense charged." Fed.R.Crim.P. 7(c)(1). Here, the offenses charged were schemes designed to manipulate the prices of securities. It may be that other violations of the securities laws would lend themselves to a differently enumerated indictment. For example, in a multiplicity case, United States v. Langford, 946 F.2d 798 (11th Cir. 1991), the issue was whether the use of multiple mailings in furtherance of a conspiracy to commit securities fraud in violation of section 10(b) and Rule 10b-5 could form the basis of separate counts of an indictment. The Court of Appeals for the Eleventh Circuit decided that it could not. In so concluding, the Eleventh Circuit recognized that the allowable unit of prosecution under section 10(b) is the use of a manipulative device or contrivance. Id. at 803. The court decided, however, that the overall scheme need not be charged in a single count. Instead, any false statement in connection with a discrete sale can be considered an appropriate unit of prosecution. Id. Langford does not mandate, however, that each sale must form the basis of a count of the indictment. Rather, it clarified that in addition to the allowable prosecution of a scheme to defraud, it can be something less.Haddy, 134 F.3d at 549.
The "something less" in this case is the filing of the Forms 10-Q, the allegedly deceptive "devices" which figure in counts three and four. (Conceding the logic of his argument, defendant does not challenge count two, the falsity of which is alleged to involve the misreporting of a single transaction). The essential element of the criminal acts alleged in counts three and four is the knowing filing of false Forms 10-Q. The scheming that caused them to be false is but descriptive of the means employed. So long as the jury concludes that the Forms 10-Q were materially false, and had the required connection to the purchase or sale of securities, it little matters whether jurors attribute the falsity to transaction (a), (b), or (c), or all of them. See United States v. Verrecchia, 196 F.3d 294, 299 (1st Cir. 1999) ("The crucial distinction [in matters of jury unanimity] is . . . between a fact that is an element of the crime and one that is `but the means' to the commission of an element."). The Forms 10-Q, it must be remembered, were simply an embellishment, not an essential component of the criminal plan; it remained open to the defendant to execute the scheme, albeit less perfectly, without filing the false Forms 10-Q.
Defendant complains that "[i]f the SEC were to change its rules and require the Form 10-Q to be filed on a monthly basis, in [the] future the government would have to charge an identical case in three times the number of counts because there would be more filings each year." Defendant's Reply Memorandum, at 2-3. "Have to," as the cases teach, is too strong a term, but it would be open to the government to do so if the requisite connection to the sale or purchase of securities could be established, as it would have been open to the government to charge each of the transactions described in count one as separate violations of the securities laws.
ORDER
For the foregoing reasons, the motion to dismiss is DENIED.SO ORDERED.