Case No. 16-cr-00462-CRB-1
Sushovan Hussain moves to dismiss the superseding indictment in this criminal prosecution for wire fraud and securities fraud. Hussain argues that the wire fraud charges against him represent an impermissible extraterritorial application of federal criminal law, and that allowing the government to proceed on the securities fraud charge would threaten anyone who makes a misrepresentation to corporate management with criminal liability. Disagreeing, the Court DENIES Hussain's motion.
On August 18, 2011, Hewlett-Packard Company ("HP") and a subsidiary, Hewlett-Packard Vision B.V. ("HP Vision"), made an $11 billion offer for Autonomy Corporation plc ("Autonomy"), a British software company. The deal closed that October. It was not, suffice it to say, a match made in high-technology heaven. By the end of the following year, HP was alleging that Autonomy had duped it into making the purchase by cooking its books, and wrote off $8.8 billion due to what it claimed was faulty accounting. Floyd Norris, "A Clash of Auditors in H.P. Deal," N.Y. Times (Nov. 29, 2012), http://www.nytimes.com/2012/11/30/business/auditors-clash-in-hp-deal-for- autonomy.html. In short order, the United States Attorney's Office opened an investigation into the circumstances surrounding the acquisition. See Decl. of AUSA Robert S. Leach (dkt. 9) ¶ 2. The government filed an indictment against Hussain—Autonomy's former chief financial officer—in late 2016, alleging wire fraud and conspiracy to commit wire fraud. Dkt. 1. It filed a superseding indictment on May 4, 2017, adding a claim for securities fraud. Superseding Indictment ("SI") (dkt. 52). Hussain now moves to dismiss. Dkt. 113.
In considering Hussain's motion to dismiss, the Court only considers the allegations in the indictment. References to facts not alleged in the indictment are offered merely for context.
II. LEGAL STANDARD
In reviewing a motion to dismiss pursuant to Federal Rule of Criminal Procedure 12(b), a court views the indictment's allegations as a whole and takes them to be true. United States v. Buckley, 689 F.2d 893, 897, 899 (9th Cir. 1982). The indictment is to be "read in its entirety, construed according to common sense, and interpreted to include facts which are necessarily implied." United States v. Berger, 473 F.3d 1080, 1103 (9th Cir. 2007). At the same time, the court does not stray beyond the "four corners" of the charging document. United States v. Boren, 278 F.3d 911, 914 (9th Cir. 2002).
A. Wire Fraud Charges
The government brings one count of conspiracy to commit wire fraud, 18 U.S.C. § 1349 (count 1), and fourteen counts of the substantive offense of wire fraud, id. § 1343 (counts 2-15). Hussain argues that these charges represent impermissible extraterritorial applications of the statutes at issue.
1. Extraterritorial Application of § 1343
Wire fraud has three elements: (1) a scheme to defraud, (2) the use of wire, radio, or the television in furtherance of the scheme, and (3) intent to defraud. United States v. Jinian, 725 F.3d 954, 960 (9th Cir. 2013). The basis for the fourteen charged counts of wire fraud are alleged misrepresentations about Autonomy's financial condition made by Hussain in e-mails, press releases, phone calls, and videos transmitted within the Northern District of California in the months leading up to the 2011 sale to HP. SI at ¶ 28. Each of the fourteen counts of wire fraud charges a single, distinct communication.
Hussain seeks dismissal of the wire-fraud charges on the ground that the indictment impermissibly gives 18 U.S.C. § 1343 extraterritorial application. Binding authority from the Supreme Court and the Ninth Circuit are somewhat in tension in this area. As described below, while Hussain's test is arguably more in line with the former, Ninth Circuit authority compels the adoption of the government's test.
Hussain also urges the Court to prevent the government from "pleading its way around" extraterritoriality issues by bringing charges for wire fraud rather than securities fraud. Mot. at 8-9. Because Hussain fails to argue that the wire fraud statute is otherwise inapposite, the Court declines this invitation.
The leading case on extraterritoriality is Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 255 (2010). Prior to Morrison, circuit courts had adopted a number of tests for making extraterritoriality determinations. 561 U.S. at 256. Morrison specifically concerned the question of when § 10(b) of the Securities Exchange Act of 1934 could apply to conduct with an international component. The Second Circuit had reasoned that, with respect to § 10(b), "Congress would have wanted to redress harms perpetrated abroad which have a substantial impact on investors or markets within the United States." Morrison v. Nat'l Australia Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008), aff'd, 561 U.S. 247, 130 S. Ct. 2869, 177 L. Ed. 2d 535 (2010). It thus held that the statute applied to the particular conduct at issue in a given case if "the wrongful conduct occurred in the United States," or if that conduct "had a substantial effect in the United States." Id. at 171.
The Supreme Court criticized this "conduct and effects" test as being untethered from statutory interpretation, insisting that it did away with the canon of construction that Congress does not legislate outside the territorial jurisdiction of the United States "unless a contrary intent appears." Morrison, 561 U.S. at 255 (quoting EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991)). The Court also described the tests developed by circuit courts to determine extraterritoriality as "complex in formulation and unpredictable in application." Id. at 256.
The Court replaced the Second Circuit approach with a two-step analysis. First, applying the presumption against extraterritoriality, a court must examine whether a statute gives a "clear indication of extraterritorial application." Morrison, 561 U.S. at 255. If so, the statute may properly be applied to the conduct at issue. If not, the court must proceed to the second step, evaluating whether the indictment involves a "permissible domestic application" of the statute. RJR Nabisco, Inc. v. European Cmty., —U.S.—, 136 S. Ct. 2090, 2100 (2016). The court undertakes this analysis by considering "the focus of congressional concern." Id. For example, in evaluating the application of Exchange Act § 10(b), which prohibits deception in connection with the purchase or sale of securities, the Morrison Court asked whether the provision's focus was "the place where the deception origination" or instead "purchases and sale of securities in the United States," and held it was the latter. Morrison, 561 U.S. at 266.
As applied to this case, Morisson's first step is straightforward: § 1343 does not apply extraterritorially. See United States v. Sidorenko, 102 F. Supp. 3d 1124, 1127 (N.D. Cal. 2015).
The more difficult question comes at the second step: whether the particular application of the statute here is domestic or extraterritorial. There is little precedent regarding how to assess whether § 1343 is properly applied domestically in a particular instance. The opinions that have attempted to answer this question "generally break into two camps: those emphasizing the wires and those looking to the fraud." United States v. Gasperini, No. 16-CR-441 (NGG), 2017 WL 2399693, at *7 (E.D.N.Y. June 1, 2017) (internal quotation marks omitted).
The parties' arguments here track this schism. The government contends that the focus of the wire fraud statute is the use of domestic wires to achieve a scheme to defraud. According to the government, counts two through fifteen allege uses of domestic wires to communicate misleading statements in furtherance of such a scheme. Therefore, it insists, the statute covers the alleged conduct.
Hussain, meanwhile, insists that the statute is focused largely on the broader scheme to defraud. He urges the Court to forego the government's proposed test and instead adopt the more expansive test elaborated in United States v. All Assets Held at Bank Julius, 251 F. Supp. 3d 82 (D.D.C. April 27, 2017), for determining whether a particular instance of alleged wire fraud is domestic or extraterritorial. In Bank Julius, Judge Friedman held that § 1343 is only properly applied domestically where (1) a "substantial amount of conduct" occurs stateside, (2) the conduct is "integral to the commission of the scheme to defraud," and (3) "at least some of the conduct involves the use of U.S. wires" in furtherance of the scheme. Id. at 103. Judge Friedman reasoned that this test "accurately reflects the focus of congressional concern: (1) preventing schemes to defraud through the use of U.S. wires and (2) allowing the wire fraud statute to apply to the use of U.S. wires to send a communication between the United States and a foreign country." Id.
At first blush, the Bank Julius test appears to chafe with Morrison's rejection of the Second Circuit "conduct and effects" test as unwieldy and unpredictable. See 561 U.S. at 256. Indeed, another case cited by Hussain, Gasperini, 2017 WL 2399693, illustrates the difficulties of applying the Bank Julius test. In Gasperini, the government alleged that the defendant, while residing in Rome, remotely accessed servers around the world and used those servers as a platform (a "botnet" in hacker parlance) from which to launch a "click fraud" scheme. Id. at *1. Applying the Bank Julius test, the court looked to the number of domestic computers affected and the "importance of wires to the fraud" in concluding that the alleged conduct was sufficiently domestic. No. 16-CR-441 (NGG), 2017 WL 2399693, at *8. This would appear to be just the kind of all-things-considered approach the Morrison Court sought to avoid. See 561 U.S. at 258-59 ("There is no more damning indictment of the 'conduct' and 'effects' tests than the Second Circuit's own declaration that 'the presence or absence of any single factor which was considered significant in other cases . . . is not necessarily dispositive in future cases.'") (citation omitted).
But it is not in fact so clear that Morrison should be read as rejecting multi-factor tests in favor of a "bright-line rule," as some courts have concluded. See, e.g., City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014). Judge Leval has argued forcefully against this interpretation, contending that the Second Circuit test's unpredictability stemmed, in the Morrison Court's analysis, from the test's disregard of the presumption against extraterritoriality. Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F. 3d 198 (2d Cir. 2014) (Leval, J., concurring). The problem was not that the Second Circuit's test was multi-factor, but rather that the court was substituting its own policy views for questions that should have been resolved through statutory interpretation. Id. at 220.
Judge Leval's analysis is quite persuasive, particularly in light of the perverse consequences that might arise from adopting bright-line rules in this area. See id. at 221 ("Bright-line rules (unless seriously over-inclusive) would permit unscrupulous securities dealers to design their transactions with their victims so as to stay on the side of the line that is outside the reach of the statute."). And difficult questions about what constitutes a "domestic" application of a statute will continue to arise in this age of international electronic data flows no matter what test is applied, resulting inevitably in inconsistent applications. Consider, for example, Microsoft's recent motion to quash a warrant issued under the Stored Communications Act ("SCA"), which elicited written opinions from six of the eight non-recused judges on the Second Circuit, each with a different view of how the court should determine the "focus" of the relevant SCA provision under Morrison. Matter of Warrant to Search a Certain E-Mail Account Controlled & Maintained by Microsoft Corp., 829 F.3d 197 (2d Cir. 2016), cert. granted sub nom. United States v. Microsoft Corp., No. 17-2, 2017 WL 2869958 (U.S. Oct. 16, 2017); id. at 222 (Lynch, J., concurring); 855 F.3d 53, 60 (2d Cir. 2017) (Jacobs, J., dissenting from denial of rehearing); id. at 62 (Cabranes, J., dissenting from denial of rehearing); id. at 69 (Raggi, J., dissenting from denial of rehearing); id. at 74 (Droney, J., dissenting from denial of rehearing). These cases seem to validate Justice Stevens' concurrence in Morrison, in which he argued that the "real motor" of the majority opinion was its application of the "focus" test, and hinted that the test would not be easy to apply in future cases. 561 U.S. at 280-81, 284 (Stevens, J., concurring).
The government's proposed rule that § 1343 is properly applied domestically whenever a wire is transmitted within the United States is in some tension with Morrison's insistence on the presumption against extraterritoriality, because it would tend to allow the government to prosecute conduct with minimal domestic connections. One can imagine, for instance, a global click-fraud scheme similar to the one in Gasperini in which a defendant combines servers worldwide into a "botnet" from which to launch an attack on an extraterritorial entity. So long as one of the servers is in the United States, application of § 1343 would be proper. "Morrison's focus test is a tool of statutory interpretation," Doe I v. Nestle USA, Inc., 766 F.3d 1013, 1017 (9th Cir. 2014), but this result is dubious as a matter of statutory interpretation. The drafters of § 1343 did not envision the statute applying to internationals bouncing wires into and out of the United States, with no participation from any U.S. resident, in order to defraud international entities. The government's bright-line rule thus appears to be problematically broad in application, if not "seriously over-inclusive." See Parkcentral, 763 F. 3d at 221.
Hussain's argument for a more holistic test also gains support from dicta in Morrison regarding the extraterritorial application of § 1343. In arguing that the application of Exchange Act § 10(b) at issue there was domestic, the government analogized the purchase of foreign securities to § 1343's application to schemes in which the victims are located outside the United States. The government invoked Pasquantino v. United States, 544 U.S. 349, 371 (2005), in which the Court held that § 1343 properly applied to defendants who had allegedly used domestic wires to order liquor that they planned to smuggle into Canada, thereby depriving the Canadian government of tax revenue. Id.
The Solicitor General argued by analogy that § 10(b) is properly domestic in application where "the fraud involves significant conduct in the United States that is material to the fraud's success"—its interpretation of the rule applied in Pasquantino. Morrison, 561 U.S. at 270-72. The Court disagreed with this argument, but it did not reject the Solicitor General's interpretation of Pasquantino. The Court might have distinguished Pasquantino on the ground that § 1343's focus is the use of domestic wires, and the defendants made a domestic phone call to order the liquor. Instead, it attacked the basis for the Solicitor General's analogy—reasoning that the wire fraud statute punishes "deception alone," whereas § 10(b) punishes "deception with respect to certain purchases or sales." Id. at 272. "Section 1343 prohibits 'any scheme or artifice to defraud,'—fraud simpliciter, without any requirement that it be 'in connection with' any particular transaction or event." Id. at 271-72. The Bank Julius court relied on this language to support its reasoning that the wire fraud statute concerns itself with the execution of the fraudulent scheme as a whole, not just the transmission of wires. 251 F. Supp. at 102.
Accordingly, Hussain's argument in favor of the Bank Julius test or a similar holistic mode of analysis has merit. Unfortunately for him, however, the test is out of step with Ninth Circuit case law concerning how the government may charge a § 1343 violation. United States v. Garlick, 240 F.3d 789, 793 (9th Cir. 2001). The defendant in Garlick was convicted on two counts of wire fraud related to sales of helicopter rotor blades. Id. at 790. The first count was based on a fax transmission the defendant made in which he misrepresented the age of the blades, the second on a fax from the buyer to the defendant in which the buyer agreed to the purchase. Id. Garlick argued that the counts were duplicative and thus should not have been charged separately. Id. The panel disagreed. Looking to Congress's intent in passing the wire fraud statute, the court concluded that § 1343 is directed at "the misuse of the instrumentality of communication." Id. at 793. It noted that the wire fraud statute "was meant to replicate the mail fraud statute," which it interpreted to focus on the "use of the mails itself, not on the underlying scheme or a particular fraud victim." Id. at 792 (emphasis added).
Even if Garlick is not directly controlling on the extraterritoriality question, the court's analysis provides a strong indication that the Ninth Circuit would hold that the use of the wires is the conduct relevant to the focus of that statute for the purpose of determining whether a particular application is extraterritorial. Hussain does not argue that the analysis of a statute's focus for the purpose of determining extraterritoriality is any different from the analysis of a statute's focus for the purpose of determining whether charges are duplicative. It would be anomalous to hold that a defendant violates § 1343 each time he sends a domestic wire in furtherance of a fraud, while maintaining that the statute's application to a given domestic transmission may nevertheless be extraterritorial. Garlick thus dictates the outcome here. For purposes of step two of Morrison's extraterritoriality analysis, the focus of § 1343 is the use of domestic wires to help perpetuate a fraud. So long as the government identifies a domestic wire transmission, the statute is not improperly extraterritorial in its application. While this rule rests somewhat uneasily with Morrison, that case does not necessarily compel a contrary result, and the Court is bound by Ninth Circuit precedent.
The test is easily applied here. Counts two through fifteen all allege the use of domestic wires, so the indictment does not allege an extraterritorial application of the wire fraud statute.
Hussain devotes a significant amount of energy in his briefing to arguing that the alleged fraud here really furthered two distinct schemes: one to artificially inflate the price of Autonomy securities, harming Autonomy shareholders; the other to dupe HP into buying Autonomy. This contention is dubious, given that artificially inflating share prices tends to injure both current and future shareholders (e.g., HP) by deceiving them about the company's value. In any event, given its holding that the transmission of domestic wires is the only conduct relevant to the focus of § 1343, the Court need not decide the issue.
2. Extraterritorial application of § 1349
The conclusion that the charges do not represent an extraterritorial application of the wire fraud statute does not necessarily resolve Hussain's contention that the same is true of the charge of conspiracy to commit wire fraud. Conspiracy requires an agreement among two or more persons that would satisfy the elements of the substantive offense. See Salinas v. United States, 522 U.S. 52, 65 (1997). The government alleges that Hussain conspired with others to "devise a scheme and artifice to defraud" by making false and misleading statements and omissions, and committed wire fraud in furtherance of the conspiracy. SI at ¶ 25.
Because the substantive wire-fraud statute does not apply extraterritorially, it stands to reason that a charge for conspiracy to commit wire fraud does not, either. See United States v. Ballestas, 795 F.3d 138, 144 (D.C. Cir. 2015), cert. denied, 136 S. Ct. 1229 (2016) (extraterritorial reach of ancillary offense is generally "coterminous with that of the underlying criminal statute"); United States v. Valenzuela, 849 F.3d 477, 485 (1st Cir. 2017), cert. denied, No. 16-9352, 2017 WL 2342586 (U.S. Oct. 2, 2017); see also Nabisco, 136 S.Ct. at 2103 (assuming without deciding that the extraterritoriality of the conspiracy provision of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, "tracks that of the provision underlying the alleged conspiracy").
Given that § 1349 does not apply extraterritorially when a conspiracy to commit wire fraud is charged, the next question under Morrison is what the "focus" of § 1349 is. The Ninth Circuit has suggested (though not explicitly held) that the focus of a conspiracy statute is the object of the conspiracy, and thus that the conspiracy is domestic so long as the object, if executed, would constitute a domestic violation of the underlying statute. See United States v. Chao Fan Xu, 706 F.3d 965, 978-79 (9th Cir. 2013), abrogated on other grounds by RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 195 L. Ed. 2d 476 (2016); see also United States v. Hawit, No. 15-CR-252 (PKC), 2017 WL 663542, at *4 (E.D.N.Y. Feb. 17, 2017) (section 1349 applies domestically if "the Superseding Indictment sufficiently alleges that [the defendant] participated in a conspiracy to commit a 'domestic' violation of the wire fraud statute"). This is a sensible rule, given that the law of conspiracy is aimed in large part at preventing harm by stopping inchoate offenses before they occur. See 2 Wayne R. LaFave, Substantive Criminal Law § 12.1(c) (2d ed. 2017). Applying the rule to the facts here leads inexorably to the conclusion that the superseding indictment alleges a domestic conspiracy, because the objects of the conspiracy were instances of domestic wire fraud.
It has also been suggested that conspiracy law is aimed at "the special danger incident to group activity," id., raising the possibility that a second focus of § 1349 is the conspiratorial activity itself—and that the statute might also be applied domestically where the "means and methods" of carrying out the conspiracy have a sufficient domestic nexus, even if the object of the conspiracy would be extraterritorial. The Court need not reach the issue of whether the "means and methods" described in the superseding indictment were domestic, however, given that the conspiracy's objects were.
3. Due Process
Hussain also argues that several of the counts involving the "scheme" to defraud holders of Autonomy securities must be dismissed under the Due Process Clause of the Fifth Amendment. However, Hussain cites no case establishing that a defendant who has engaged in domestic conduct for purposes of the extraterritoriality inquiry may nevertheless lack a sufficient nexus to the United States, such that applying the statute to him would be "arbitrary or fundamentally unfair." United States v. Davis, 905 F. 2d 245, 248-49 (9th Cir. 1990). The superseding indictment charges Hussain with using and conspiring to use wires within the United States. Because that is the conduct the statutes penalize, Hussain was on notice that he might be called to account for it here.
B. Securities Fraud Charge
The government also brings one count alleging securities fraud under 18 U.S.C. § 1348 (count 16). Section 1348 was enacted as part of the Sarbanes-Oxley Act of 2002. As relevant here, it punishes the knowing execution of a scheme to defraud "any person" "in connection with . . . any security" registered under the Exchange Act. 18 U.S.C. § 1348. As laid out in the superseding indictment, the government's claim is that Hussain violated § 1348 by misrepresenting the financial state of Autonomy to HP, which in turn issued a press release incorporating those misrepresentations. SI at ¶¶ 9, 26bb, 30. Hussain contends that the indictment is insufficient because his alleged misrepresentations regarding Autonomy's financial condition were too remote from any purchase or sale of HP securities to satisfy the requirement that the fraud be "in connection with . . . any security." 18 U.S.C. § 1348.
There are few decisions interpreting this requirement. However, Hussain and the government agree that courts should look to the securities fraud provision of the Exchange Act in construing § 1348. See Mot. at 12; Opp'n at 13-14. Section 10(b) of the Exchange Act makes unlawful the use of deception "in connection with the purchase or sale" of a security registered on a national securities exchange. 15 U.S.C. 78j(b).
The Court agrees with the parties that the "in connection with" requirement of 18 U.S.C. § 1348 is meant to reach at least as much conduct as the Exchange Act's similar requirement. On its face, Sarbanes-Oxley's requirement that the fraud be "in connection with . . . a security," 18 U.S.C. § 1348, appears broader than the Exchange Act's requirement that the fraud be "in connection with the purchase or sale" of a security, 15 U.S.C. § 78ff (emphasis added). This distinction may not have much practical relevance, given that courts have construed the "purchase or sale" language in the Exchange Act quite broadly. See John J. Farvey Jr. & Matthew A. Wolfman, "The Criminal Provisions of Sarbanes-Oxley: A Tale of Sound and Fury?," 12 Andrews' Prof. Liab. Litig. Rep. 18 (2002). In any event, it is clear that the language of 18 U.S.C. § 1348 is not more restrictive than that of 15 U.S.C. § 78ff when it comes to the nexus to securities.
The legislative history of the Sarbanes-Oxley Act supports the interpretation that its nexus requirement is at least as broad as the Exchange Act's. The Exchange Act provided the sole basis for criminal securities fraud prosecutions prior to the passage of Sarbanes-Oxley. 15 U.S.C. § 78ff. Congress passed Sarbanes-Oxley following a spate of scandals involving financial improprieties at major corporations, including Enron and WorldCom. See 148 Cong. Rec. S7418, S7419-21 (July 26, 2002) (statement of Sen. Leahy). According to Sen. Patrick Leahy, a co-sponsor of the bill, 18 U.S.C. § 1348 was "intended to provide needed enforcement flexibility in the context of publicly traded companies to protect shareholders and prospective shareholders against all the types of schemes and frauds which inventive criminals may devise in the future." 148 Cong. Rec. at S7421. It accomplishes this by providing broad-textured language to prosecute securities fraud while foregoing the Exchange Act's requirement that it first specify particular violations through rulemaking. Id. at S7420-21. It thus stands to reason that 18 U.S.C. § 1348 provides for liability based on at least as broad a nexus to securities as 15 U.S.C. § 78ff. Accordingly, the Court looks to cases decided under Exchange Act § 10(b) and the rules passed under that statute in construing the nexus to securities required under 18 U.S.C. § 1348.
Securities and Exchange Commission Rule 10b-5 creates a private right of action to enforce § 10(b). 17 CFR § 240.10b-5 (2013). To recover damages for violations of § 10(b) and Rule 10b-5, a plaintiff must prove "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Halliburton Co. v. Erica P. John Fund, Inc., —U.S.—, 134 S. Ct. 2398, 2407 (2014). The government need not prove that investors actually relied on the misrepresentation in a criminal action under 10b-5, because "reliance is relevant only to the identification of the private persons entitled to bring suit." United States v. Vilar, 729 F.3d 62, 88 (2d Cir. 2013). Nor must it establish the amount of investors' loss in order to obtain a conviction—both because there is no need to establish standing, United States v. Berger, 587 F.3d 1038, 1043 (9th Cir. 2009), and because the purpose of such actions is deterrence, not compensation, S.E.C. v. Apuzzo, 689 F.3d 204, 212 (2d Cir. 2012). Finally, criminal liability requires a showing of willfulness under Rule 10b-5 (though not, as we will see, under 18 U.S.C. § 1348). See United States v. Peltz, 433 F.2d 48, 53 (2d Cir. 1970). The elements are otherwise the same in civil and criminal actions brought under 10b-5.
The total amount of the loss, or some comparable measure of the harm to society, may be relevant at the sentencing phase, however. Berger, 587 F.3d at 1043-45.
Hussain does not challenge the premise that a securities fraud charge can be based on the public dissemination of misinformation in a communication such as a press release. See SEC v. Rana Research, Inc., 8 F.3d 1358, 1361-62 (9th Cir. 1993). Instead, he argues that he was too far removed from HP's issuance of the press release to be held liable for its dissemination. He claims that allowing the government to proceed on this theory would effectively criminalize making misrepresentations to public companies or their subsidiaries, "regardless of whether the speaker has any interest in [affecting] or purpose to affect the purchase or sale of the public company's securities." Mot. at 14.
Hussain's argument goes to the elements of both misrepresentation and intent (scienter). As for Hussain's contention about intent, 18 U.S.C. § 1348, unlike Exchange Act § 10(b), does not require purpose or willfulness. Instead, it premises liability on mere knowledge that one is executing a scheme to defraud. Compare 18 U.S.C. § 1348 with 15 U.S.C. § 78ff. That the statute does not apply to one who makes a misrepresentation to a public company without such knowledge should help to assuage Hussain's apparent fear that the government will use the statute to sweep in just any mendacious loudmouth.
Meanwhile, Hussain's argument that a speaker cannot be liable for a misrepresentation where he has no personal interest in affecting publicly-traded securities—that is, where the speaker himself does not get any benefit from his misrepresentation—rests on insecure footing. Hussain directs the Court to language in United States v. Mahaffy which explains that § 1348's nexus requirement is satisfied where, "as a result of the scheme, the defendants either benefitted, or attempted to benefit, from trading in securities." No. 05-cr-613, 2006 WL 2224518, at *11 (E.D.N.Y. Aug. 2, 2006). But the Mahaffy court presented its rule as a sufficient condition, not a necessary one, see id., and appeared to be restating a standard that applies specifically to liability for insiders who divulge nonpublic information, see Dirks v. S.E.C., 463 U.S. 646, 662 (1983). The superseding indictment in this case does not allege insider trading, so Mahaffy is inapposite.
Next, Hussain turns to the requirement of a nexus between the misrepresentation and the purchase or sale of a security. He argues that his alleged misrepresentation lacked a sufficient nexus to HP securities because he neither drafted nor disseminated the press release that incorporated it. The Ninth Circuit has found that "substantial participation or intricate involvement in the preparation of fraudulent statements" is sufficient for liability under § 10(b). Howard v. Everex Sys., Inc., 228 F.3d 1057, 1060 (9th Cir. 2000) (citing In re Software Toolworks Inc., 50 F.3d 615, 628 (9th Cir. 1994)). However, no reported Ninth Circuit case involves facts analogous to those here—that is, where the defendant is alleged to have made misrepresentations that a third party incorporated into a public statement.
The Court disagrees with the interpretation that the Ninth Circuit meant the "substantial participation" test to apply in every § 10(b) case. See S.E.C. v. Wolfson, 539 F.3d 1249, 1259 (10th Cir. 2008). --------
Cases in other circuits have, however. The Tenth Circuit has held that liability may attach for a misrepresentation in a § 10(b) action brought by the SEC when the defendant "can fairly be said to have caused [the speaker] to make the relevant statements," and "knew or should have known that the statements would reach investors." S.E.C. v. Wolfson, 539 F.3d 1249, 1261 (10th Cir. 2008). The Seventh Circuit has adopted a similar causation standard. McConville v. S.E.C., 465 F.3d 780, 786-87 (7th Cir. 2006). The Eleventh and Second Circuits have added a requirement that the statement be "publicly attributable to the defendant." Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1205 (11th Cir. 2001); see also Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998). Those courts drew the attribution requirement from the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), where the Court held that private civil liability under § 10(b) did not extend to those who aided or abetted a manipulative or deceptive act. However, the attribution requirement is not relevant in public enforcement actions by the SEC in 10b-5 cases, because it relates directly to the need for private litigants to establish reliance in private actions. Wolfson, 539 F.3d at 1259; see also S.E.C. v. Tambone, 597 F.3d 436, 447 n.9 (1st Cir. 2010) (en banc). There is no such need in public enforcement actions, for the reasons already given. Accordingly, this requirement is inapposite in criminal actions under 18 U.S.C. § 1348. To the extent that the Second and Eleventh Circuits would hold otherwise, the Court disagrees with them. Instead, it follows the Seventh and Tenth Circuits in holding that a defendant may be held liable for violating § 1348 if he "can fairly be said to have caused [the speaker] to make the relevant statements," and "knew or should have known that the statements would reach investors." See Wolfson, 539 F.3d at 1261.
Under this theory, the government has sufficiently alleged that Hussain was involved in making the statement. Hussein argues that he only made the statement to HP Vision Co., and that HP incorporated those statements into its press release. But this is not an insufficient allegation as a matter of law under the causation-plus-knowledge test. Whether Hussain caused HP to repeat his representations about the state of Autonomy's finances and whether he knew that he was causing HP to do so is a question reserved for the trier of fact. Accordingly, Hussain's argument fails.
Hussain also argues that 18 U.S.C. § 1348 is unconstitutionally vague as applied to him because he lacked notice of its boundaries. Not so. The government has been prosecuting criminal securities fraud for a long time. Combined with the plain language of § 1348, the cases decided under § 10(b) described above sufficed to put Hussain on notice of the government's theory here.
For the foregoing reasons, Hussain's motion to dismiss the indictment is DENIED.
IT IS SO ORDERED.
Dated: Oct. 27, 2017
CHARLES R. BREYER
United States District Judge