United States v. Ferguson, No. 08-6211-cr (2d Cir. August 1, 2011) (Jacobs, Kearse, Straub, CJJ)
For 3Q of 2000, the insurer AIG’s stock price dropped significantly, even though its earnings were satisfactory. The company concluded that the cause was a $59 million decline in its loss reserves – a measure of the company’s risk exposure.
In the true spirit of 21st Century American business ingenuity – the same, it seems, that caused the company to all but collapse entirely, and require a $90 billion government bailout, in 2008 – AIG, or at least some of its principals, decided that the best course would be – rather than actually increasing its loss reserves and satisfying its stockholders – to engage in an accounting fraud. The company accordingly entered into a sham reinsurance contract with General Re. The deal was structured to look – to AIG’s investors and auditors – like it was causing an increase in its loss reserves, but did not actually transfer any risk to General Re, which is, ordinarily, the sine qua non of a reinsurance contract. So shady was the deal that, while AIG booked the transaction – this opinion calls it the Loss Portfolio Transfer, or LPT – as a reinsurance contract (it had to, since that was its ostensible purpose) General Re booked it as a deposit.
Five defendants – four from General Re and one from AIG – were convicted after a jury trial of conspiracy, mail and securities fraud, and making false statements to the SEC. Although the circuit rejected a number of claims – including conscious avoidance, insufficiency, severance claims, evidentiary errors and prosecutorial misconduct – it found that two significant trial errors – one evidentiary and one in the jury charge – warranted a new trial.
The Evidentiary Error
Materiality was an element of “most of the charged offenses.” The government had to prove a “substantial likelihood” that the LPT misstatements “would be important to a reasonable investor.” And the government could have done so in legitimate ways, such as expert testimony on the LPT’s effect on AIG’s stock price. Instead, the district court permitted the government to show this in an unfairly prejudicial way.
AIG’s stock price declined by twelve percent in 2005, once the nature of the LPT’s impropriety was publicly revealed in a series of new articles. While the district court excluded as overly prejudicial a chart graphing this decline as a line, it permitted the government to use a “functionally identical” chart in its opening, and also allowed the government to introduce bar charts showing single-day stock prices for the days following each article’s publication. These charts were “prejudicial” because there were several other problems affecting AIG’s stock price at the time; unrelated allegations of bid-rigging, self-dealing, earnings manipulation “and more,” which had been redacted from the articles.
Thus, the defendants faced a dilemma: they either had to allow the jury to attribute the full stock drop to the LPT, or accept the introduction of evidence of how thoroughly corrupt the company had become. To avoid this, the defendants offered to stipulate to materiality, but the government refused.
The circuit strongly suggested that the government should have been forced – Old Chief-style – to accept the stipulation. With no stipulation, the government not only got the benefit of an inflated sense of the effect of the LPT transaction on AIG’s stock, it “exploite[d] it [in summation] to emphasize the losses caused by the transaction.”
Since the charts suggested – without foundation – that the LPT was the sole cause of the twelve per cent “plummet” in the value of AIG’s stock, they should not have been admitted.
The Jury Instruction
The court also found reversible error in the district court’s “willfully caused” jury instruction. Willful causation is a theory of culpability akin to aiding and abetting, set out in 18 U.S.C. § 2(b). Under this section a defendant commits an offense if he “willfully causes an act to be done which if directly performed by him or another would be an offense.” Here, largely misled by the requests to charge, the district court structured the § 2(b) part of its jury instruction as a series of questions that omitted entirely the concept of causation. Instead, the jury was instructed to consider only whether each defendant acted knowingly, willfully and with the intent to defraud, and whether he intended that the crime would actually be committed by others.
The circuit found plain error, since the government “argued for guilt on a causation theory.” In addition, willful causation was a “likely theory of liability,” since the AIG accountants who actually filed the false LPT forms were not named as co-conspirators. A new trial was therefore warranted because it was “improbable, let alone absolutely certain, that the jury based its verdict on a properly instructed ground.”