United States v. Kaiser, No. 07-2365-cr (2d Cir. July 1, 2010) (Jacobs, Calabresi, Pooler, CJJ)
Mark Kaiser was convicted after a jury trial of securities fraud-related offenses in connection with an accounting fraud scheme at USF, a large food product distributor. The circuit, finding error in the conscious avoidance instruction and in an evidentiary ruling, vacated the judgment and remanded the case for a new trial.
From 1994 until 2001, Kaiser helped run USF’s Purchasing Department, and negotiated rebates from its vendors called promotional allowances (“PA”s”). Kaiser was charged with developing a scheme to fraudulently inflate the PA income for certain years and with committing other fraudulent acts, including making false statements, to hide the inflated numbers from USF’s outside auditors. The government’s case was built largely around the testimony of three cooperating witnesses, who testified that Kaiser was the mastermind. Kaiser’s defense was that the cooperators had cooked up the scheme, kept him in the dark about it, then collectively decided to make him the scapegoat once it all unraveled.
The Charge Error
First, the court found plain error in the district court’s conscious avoidance instruction. A conscious avoidance charge must communicate two points: that a jury may infer knowledge of the existence of a fact only if it finds that the defendant was aware of high probability of its existence, and second, that there can be no conscious avoidance of a fact that the defendant actually believed did not exist. So important are these concepts that a 1988 decision on the issue directed that the opinion be circulated to all AUSAs in the circuit. Remarkably, then, the charge at Kaiser’s trial omitted both of these key concepts.
The court agreed with Kaiser that the omission “might well have confused the jury” – the particular language used by the district court, which merely indicated that “there are times that a person can consciously avoid looking at facts that are available and that, in the law, is the equivalent of knowledge” – created “some risk” that the jury would convict if it found that Kaiser “was merely negligent.” Also troubling was the omission of the instruction that an actual belief in the nonexistence of the relevant information would absolve Kaiser entirely.
Lastly, the court found – on review for plain error – that Kaiser established that the erroneous charge affected his substantial rights. The documentary evidence in the case was consistent with his defense that he was unaware of the fraud. While the testimony of the cooperating witnesses tipped the balance, there was “ample reason for the jury to question” their credibility.
The Evidentiary Ruling
The court also found error in the admission of testimony from one of the cooperators, Lee, who reported that USF’s general counsel, Abramson, had learned of an accounting decision that Kaiser had made in connection with a particular PA payment and was “very upset and wanted to go to the SEC to expose” it. The circuit rejected the government’s argument that the statement was not admitted for its own truth. To the contrary, the government in summation used the supposed truth of the hearsay to rebut Kaiser’s assertion that his conduct had been approved by lawyer.
The court also rejected the government’s claim that the testimony was not hearsay because it was an assertion of the Abramson’s “then existing state of mind.” Here, the “obvious premise” of the statement was the Kaiser was doing something illegal. It was this assertion, not Abramson’s intent to report Kaiser to the SEC that “constitutes inadmissible hearsay.”
Moreover, and in any event, the court held that the statement should have been excluded under Rule 403. The mere identification of a non-hearsay use of a statement is insufficient to justify its admission if the jury is likely to consider it for its truth “with significant resultant prejudice.” Here, there could be “no doubt” that Abramson’s statement that he wanted to report Kaiser to the SEC was “highly prejudicial.” It went to the “important disputed issue” of whether Kaiser acted knowingly, and the jury would likely have concluded that Abramson, who, unlike the witness who reported the statement, had never been charged with a crime, was both knowledgeable and trustworthy. The prejudice was compounded by the district court’s refusal to give a limiting instruction. For hese same reasons, the court found that the error was not harmless.