In the Courts

The defendants were indicted for violations of 15 U.S.C. ' 78j(b) and Securities and Exchange Rule 10b-5. After the New Jersey District Court dismissed the government's theory of omission liability under Rule 10b-5 and excluded its materiality expert, the government filed an interlocutory appeal to the Third Circuit.

Rule 10b-5 provides that “It [is] unlawful ' (b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

The government stipulated that there were no affirmative misstatements in the 10-Q documents, relying entirely on theories of omission liability. The Third Circuit found that “the Government ha[d] engaged in a game of musical chairs with its pursuit of changing legal theories under Rule 10b-5″ and dismissed a wide range of government theories on substance and waiver grounds.

The court found that Schiff did not have a duty to correct Lane's allegedly material misstatements in subsequent SEC filings. The Panel dismissed a number of government theories in support of this argument, ultimately finding that “the plain language of ' 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to rectify misstatements of others.”

The court also found that Schiff could not be liable for his own alleged omissions and alleged failures to update and correct those omissions in later SEC filings. It also held that the district court did not abuse its discretion by excluding, under Daubert, a government expert who asserted that the company's drop in stock price was evidence of materiality under Rule 10b-5. The government sought to meet its burden to prove materiality under Rule 10b-5, with expert testimony addressing the April 2002 announcements and the resulting stock drop. The government, however, did not ask its expert to exclude other negative aspects of the announcements to determine the effect of only the correction of the wholesaler inventory issue, although the expert could have done so.

In addition, the court found that the government had not asked the expert to determine to what extent prior disclosures about the information in question had already corrected the stock price. As a result of these issues, the district court excluded the expert under the Daubert “fit” requirement.

Benefit Received by Bribery Must Be Offset by the 'Direct Costs' of Performance

In United States v. Lianidis, 2010 WL 988488 (3d Cir. Mar. 19, 2010), the Third Circuit Court of Appeals held that, to calculate the proper benefit received due to a contract obtained by bribery, the court must offset the “direct,” but not the “indirect,” costs of performing that contract. As a result, it vacated the defendant's sentence and remanded for resentencing.

Maria Lianidis and her husband owned and operated a computer services engineering company that contracted with the Federal Aviation Administration (“FAA”) to provide computer applications for aviation systems. Lianidis pleaded guilty to three counts of 18 U.S.C. ' 201, for bribing a friend who worked at the Federal Aviation Administration to obtain government contracts. At sentencing, the district court imposed a 16-level increase after finding that the “benefit received” as a result of the bribery was between $1 million and $2,500,000. It based this on an analysis of the profit from the contracts in question and, in the alternative, on the salaries that the defendant and her husband, the other principal in the business, had drawn. The defendant appealed, claiming that the district court's determination of this “benefit” was improper under either approach.

Under U.S. Sentencing Guidelines ' 2C1.1(b)(2), the court must determine the “benefit received or to be received” as a result of the improper payment.

The Third Circuit first reviewed its prior decisions addressing “benefit received,” which had used the gross receipts, i.e., the income without any costs, of a defendant's illegal gambling operation to calculate the “benefit received.” The Lianidis panel found that this application was limited to situations in which the underlying business itself was illegal, as in the case of an illicit gambling operation.

For situations, such as this one, where the underlying transaction was legitimate, the court looked to the Fifth Circuit's opinion in United States v. Landers, 68 F.3d 882 (5th Cir. 1995). The court agreed with the Fifth Circuit's analysis of the “benefit received,” finding that it would “subtract only direct costs, and not indirect costs ' ” from the gross income from the contract. The Third Circuit held that the dividing line between direct and indirect costs will depend upon “ whether it can be easily attributed to the specific contract at issue.”

The Third Circuit disagreed with the district court's alternative measure of “benefit received.” It found that, in prior cases, it had expressly precluded salary as the measure of “benefit” where bribery had resulted in additional company business.

Judge Hardiman dissented, arguing that the defendant's salary could be considered as the “benefit received” in this case because the business in question was a closely held company.

Instructing Recipient of Funds on Avoidance of Reporting Requirements Constitutes Aiding and Abetting Money Laundering

In United States v. Bronzino, 598 F.3d 276 (6th Cir. Mar. 16, 2010), the Sixth Circuit upheld the sufficiency of the defendant's conviction for aiding and abetting money laundering where he advised the recipient of the money how to avoid IRS reporting requirements.

The defendant, Vincenzo Bronzino, had lawfully obtained $15,000 worth of casino chips. He used those to pay a $15,000 illegal gambling debt to co-defendant Peter Messina. When Messina balked at accepting the chips because of concern about reporting requirements, Bronzino advised Messina that he could avoid any such requirements by cashing them in using multiple transactions under $10,000 each. Messina accepted and cashed the chips in a manner to avoid the reporting requirements. Because the chips were proceeds of an illegal activity (at least once they were in Messina's hands), the attempt to structure the transactions to avoid reporting was money laundering.

After a bench trial, Bronzino was found guilty of aiding and abetting money laundering and sentenced to two years' probation and a $2,500 fine. Bronzino appealed, claiming insufficient evidence in that the information he provided was common knowledge and thus a minimal contribution to the crime, and that he did not have the requisite intent to commit money laundering.

The Sixth Circuit disagreed, finding that the defendant was the driving force behind the illegal transaction and that, absent his encouragement, Messina would not have accepted the chips. Further, both individuals had the same goal: to avoid the federal reporting requirements. The panel also found that Bronzino's participation and support was sufficient evidence of his intent to further the success of the illegal venture.

In the Courts was written by Kenneth S. Clark, an associate at Kirkland & Ellis LLP, Washington, DC. Business Crimes Hotline was written by Associate Editor Matthew Alexander, an associate in the same office.

Third Circuit: Government's Theory of Omission Liability Not Viable

In United States v. Schiff, 2010 WL 1338141 (3d Cir. Apr. 7, 2010), the Third Circuit upheld the district court's dismissal of the government's Rule 10b-5 claim, which resulted from the defendants' alleged misstatements in quarterly conference calls.

Defendants Frederick Schiff and Richard Lane were both executives at Bristol-Myers Squibb: Schiff was the Chief Financial Officer (“CFO”) and Lane was the President of the Worldwide Medicines Group. Both participated in quarterly conference calls with Wall Street analysts. The government alleged that both approved millions of dollars in incentives to wholesalers as a part of a deceptive scheme to increase short-term sales and earnings. It also claimed that both made false statements and omissions in calls and meetings with investors. In quarterly calls in 2001, Schiff discussed the wholesaler inventories and repeatedly noted that there was nothing unusual about them. But Bristol's 10-K for 2001, released in early 2002, identified significant excess inventory levels at wholesalers. Immediately after that announcement, the stock dropped 5%. The next day, Bristol announced the departure of Lane and reduced expectations for 2002. The following day the stock dropped another 14.7%.

The defendants were indicted for violations of 15 U.S.C. ' 78j(b) and Securities and Exchange Rule 10b-5. After the New Jersey District Court dismissed the government's theory of omission liability under Rule 10b-5 and excluded its materiality expert, the government filed an interlocutory appeal to the Third Circuit.

Rule 10b-5 provides that “It [is] unlawful ' (b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

The government stipulated that there were no affirmative misstatements in the 10-Q documents, relying entirely on theories of omission liability. The Third Circuit found that “the Government ha[d] engaged in a game of musical chairs with its pursuit of changing legal theories under Rule 10b-5″ and dismissed a wide range of government theories on substance and waiver grounds.

The court found that Schiff did not have a duty to correct Lane's allegedly material misstatements in subsequent SEC filings. The Panel dismissed a number of government theories in support of this argument, ultimately finding that “the plain language of ' 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to rectify misstatements of others.”

The court also found that Schiff could not be liable for his own alleged omissions and alleged failures to update and correct those omissions in later SEC filings. It also held that the district court did not abuse its discretion by excluding, under Daubert, a government expert who asserted that the company's drop in stock price was evidence of materiality under Rule 10b-5. The government sought to meet its burden to prove materiality under Rule 10b-5, with expert testimony addressing the April 2002 announcements and the resulting stock drop. The government, however, did not ask its expert to exclude other negative aspects of the announcements to determine the effect of only the correction of the wholesaler inventory issue, although the expert could have done so.

In addition, the court found that the government had not asked the expert to determine to what extent prior disclosures about the information in question had already corrected the stock price. As a result of these issues, the district court excluded the expert under the Daubert “fit” requirement.

Benefit Received by Bribery Must Be Offset by the 'Direct Costs' of Performance

In United States v. Lianidis, 2010 WL 988488 (3d Cir. Mar. 19, 2010), the Third Circuit Court of Appeals held that, to calculate the proper benefit received due to a contract obtained by bribery, the court must offset the “direct,” but not the “indirect,” costs of performing that contract. As a result, it vacated the defendant's sentence and remanded for resentencing.

Maria Lianidis and her husband owned and operated a computer services engineering company that contracted with the Federal Aviation Administration (“FAA”) to provide computer applications for aviation systems. Lianidis pleaded guilty to three counts of 18 U.S.C. ' 201, for bribing a friend who worked at the Federal Aviation Administration to obtain government contracts. At sentencing, the district court imposed a 16-level increase after finding that the “benefit received” as a result of the bribery was between $1 million and $2,500,000. It based this on an analysis of the profit from the contracts in question and, in the alternative, on the salaries that the defendant and her husband, the other principal in the business, had drawn. The defendant appealed, claiming that the district court's determination of this “benefit” was improper under either approach.

Under U.S. Sentencing Guidelines ' 2C1.1(b)(2), the court must determine the “benefit received or to be received” as a result of the improper payment.

The Third Circuit first reviewed its prior decisions addressing “benefit received,” which had used the gross receipts, i.e., the income without any costs, of a defendant's illegal gambling operation to calculate the “benefit received.” The Lianidis panel found that this application was limited to situations in which the underlying business itself was illegal, as in the case of an illicit gambling operation.

For situations, such as this one, where the underlying transaction was legitimate, the court looked to the Fifth Circuit's opinion in United States v. Landers , 68 F.3d 882 (5th Cir. 1995). The court agreed with the Fifth Circuit's analysis of the “benefit received,” finding that it would “subtract only direct costs, and not indirect costs ' ” from the gross income from the contract. The Third Circuit held that the dividing line between direct and indirect costs will depend upon “ whether it can be easily attributed to the specific contract at issue.”

The Third Circuit disagreed with the district court's alternative measure of “benefit received.” It found that, in prior cases, it had expressly precluded salary as the measure of “benefit” where bribery had resulted in additional company business.

Judge Hardiman dissented, arguing that the defendant's salary could be considered as the “benefit received” in this case because the business in question was a closely held company.

Instructing Recipient of Funds on Avoidance of Reporting Requirements Constitutes Aiding and Abetting Money Laundering

In United States v. Bronzino , 598 F.3d 276 (6th Cir. Mar. 16, 2010), the Sixth Circuit upheld the sufficiency of the defendant's conviction for aiding and abetting money laundering where he advised the recipient of the money how to avoid IRS reporting requirements.

The defendant, Vincenzo Bronzino, had lawfully obtained $15,000 worth of casino chips. He used those to pay a $15,000 illegal gambling debt to co-defendant Peter Messina. When Messina balked at accepting the chips because of concern about reporting requirements, Bronzino advised Messina that he could avoid any such requirements by cashing them in using multiple transactions under $10,000 each. Messina accepted and cashed the chips in a manner to avoid the reporting requirements. Because the chips were proceeds of an illegal activity (at least once they were in Messina's hands), the attempt to structure the transactions to avoid reporting was money laundering.

After a bench trial, Bronzino was found guilty of aiding and abetting money laundering and sentenced to two years' probation and a $2,500 fine. Bronzino appealed, claiming insufficient evidence in that the information he provided was common knowledge and thus a minimal contribution to the crime, and that he did not have the requisite intent to commit money laundering.

The Sixth Circuit disagreed, finding that the defendant was the driving force behind the illegal transaction and that, absent his encouragement, Messina would not have accepted the chips. Further, both individuals had the same goal: to avoid the federal reporting requirements. The panel also found that Bronzino's participation and support was sufficient evidence of his intent to further the success of the illegal venture.

In the Courts was written by Kenneth S. Clark, an associate at Kirkland & Ellis LLP, Washington, DC. Business Crimes Hotline was written by Associate Editor Matthew Alexander, an associate in the same office.