Monday, August 22nd, 2022

No GAAP violation, no expert, no problem

Are accounting standards and securities laws as complex as the tax code? Not according to the Second Circuit. In United States v. Petit, Taylor, Nos. 21-543-cr, 21-559-cr (2d Cir. Aug. 22, 2022) (summary order), the Second Circuit upheld the securities fraud convictions of two former public company executives charged with using “accounting tricks to artificially inflate” their company’s reported revenue in quarterly reports.

The defendants, who were convicted after trial, argued that the government failed to prove their so-called “tricks” violated any Generally Accepted Accounting Principles (GAAP). They also argued that the district court gave erroneous jury instructions on the scienter element (“knowingly and willfully”) and conscious avoidance.

The Circuit was unmoved. According to the Circuit, the “government was not required to prove” the defendants “violated GAAP,” so long as the defendants “intentionally misled investors.” Similarly, to prove the charged fraud, the government “did not need to offer expert testimony on accounting principles.” Accounting is apparently not that complicated.

The Circuit also declined to find error with the district court’s jury instructions. The Circuit recognized that “willfulness” requires a defendant to act with the intent “to do something that the law forbids.”  But it rejected application of the “heightened” standard applied to tax code violations, which requires proof of “knowledge of the specific law that one is violating.”

Finally, the Circuit found no error with the conscious avoidance instruction, though it avoided clarifying exactly what factual predicate the instruction requires. While both the Supreme Court and Second Circuit have stated that the doctrine requires a defendant to take “deliberate action,” there seems to be some lack of clarity around the margins: when does reckless disregard of some fact (not enough) become deliberate action to avoid learning the fact (enough)? The Circuit offers no real clues here.

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