Quality Control at the Second Circuit: 38 Years of Willfulness Jurisprudence Thrown Out in Kaiser?

GUEST BLOGGER-SOLOMON L. WISENBERG

Former U.S. FoodService ("USF") purchasing and marketing chief Mark Kaiser's convictions on charges of conspiracy and securities fraud were reversed on Thursday, and the case was remanded for a new trial. The Second Circuit's opinion is here. The reversal was based on Judge Griesa's faulty charge on conscious avoidance which was held to constitute plain error. Judge Griesa's conscious avoidance jury instruction did not contain two elements that the Second Circuit has repeatedly stated are necessary: "that knowledge of the existence of a particular fact is established (1) if a person is aware of a high probability of its existence, (2) unless he actually believes that it does not exist." When Judge Griesa suggested sua sponte that a conscious avoidance charge was appropriate, the government reminded him that the two elements must be included, but they did not make their way into the final instruction. Although the defense did not object to the conscious avoidance charge in its final form, the law is so settled on this point that the Second Circuit had little difficulty finding plain error. Failure to include these two limiting elements in a conscious avoidance charge is a longstanding pet peeve of the Second Circuit.

Kaiser also complained that Judge Griesa's instruction on willfulness did not inform the jury that willfulness required knowledge of illegality. Under 15 U.S.C. Section 78ff(a), a/k/a Section 32(a) of the Exchange Act, "[a]ny person who willfully violates any provision of this chapter...or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder...which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both."

A long line of Second Circuit precedent, going back at least to United States v. Dixon and reconfirmed in United States v. Cassese, has established that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his conduct under the securities laws. To paraphrase Senator McCarthy, virtually every schoolboy knows this, and the standard jury instruction to this effect is included in Judge Sand's widely used treatise, Modern Federal Jury Instructions-Criminal. The government does not have to prove the defendant's knowledge of the particular Exchange Act provision or SEC regulation or rule that he is charged with violating. (This would be inconsistent with Section 32(a)'s language that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation."  If a defendant can be convicted, although not imprisoned, under Section 32(a), even if he had no knowledge of the specific SEC rule he was violating, it stands to reason that the willfulness required to convict under the statute does not encompass knowledge of these same specific rules and regulations.)

The standard Second Circuit Exchange Act criminal willfulness instruction sets a high scienter requirement for the government and can literally make the difference between a verdict of guilty or not guilty. The Kaiser Court examined Judge Griesa's willfulness instruction under plain error analysis. Although both the government and the defense submitted the standard Second Circuit charge requiring the government to prove Kaiser's knowledge that his conduct was illegal, Judge Griesa "did not give the proposed instructions, and did not rule on the proposed instructions before giving the charge, calling the practice 'a waste of time.'" In other words, Judge Griesa appeared to disregard the clear mandate of Federal Rule of Criminal Procedure 30(b). But neither party objected to the final charge, thereby bringing plain error review into play. 

It is hard to read the Court's opinion on the willfulness issue as anything other than a fundamental misinterpretation of Second Circuit precedent in this area, complete with importation of contrary precedent from other circuits. (I will have more to say on the specifics of the opinion in a future post.) The really unfortunate thing about this decision is that it is unlikely to be taken up and reconsidered en banc. Why? The defendant already has his new trial. The government now has a ruling that significantly lessens its burden of proof in future criminal Exchange Act prosecutions.

(slw)

P.S. - This case, reversing the conviction, was handled by Dan Brown of the law firm of Murphy & McGonigle. See also here. As noted by a comment to the blog - the case was argued, on behalf of Mr. Kaiser, by Alexandra A.E. Shapiro of Macht, Shapiro, Arato & Isserles LLP.

(esp)