Sunday, October 28th, 2007

Score: Form 1; Substance 0

United States v. Rutkoske, No. 06-4067-cr (2d Cir. October 25, 2007) (Newman, Winter, Katzmann, CJJ).

This stock fraud decision deals primarily with the timeliness of a superseding indictment.

An initial indictment not naming Rutkoske was filed on December 11, 2003; S1, the first superseder, was filed on April 6, 2004. It named Rutkoske, and described a single overt act within the five-year statute of limitations. Suspiciously, that act occurred “on or about April 9, 1999,” making the indictment timely by only about three days. After repeatedly being pressed by the defendant to pin down the details of the April 9 act, the government superseded again, in July of 2005. S2 charged Rutkoske with the same offenses as S1, but the government dropped the April 9 overt act and instead alleged two others, on April 15 and April 16, 1999. When Rutkoske moved to dismiss S2 as untimely under the five-year statute of limitations, the government conceded that the April 9 act had not occurred on that date, rendering S1 retroactively untimely. Nevertheless, the district court denied the motion, and the court of appeals affirmed.

The court began with the two-part test for relation back of a superseder: the original indictment must have been be validly pending and the superseder must not “materially broaden or substantially amend the charges.” The question raised here, one of first impression in this circuit, was “whether an indictment that is facially valid only because of one alleged overt act within the limitations period should be considered . . . validly pending . . . when the Government concedes that [that] overt act did not occur within the limitations period.” In answering this question in the affirmative, held that since S1 was “facially timely” when it was returned, it did not matter than it was, in actuality, untimely. The court noted that if the case had gone to trial on S1, the government could have satisfied the statute of limitations by proving a different, timely overt act. The court also noted that the government’s concession that S1 was untimely did not occur until after the return of S2. Thus, S1 was “facially timely and validly pending” at the time that S2 was returned.

The court also held that S2 did not broaden or amend the charges, since it merely extended the dates of the conspiracy by one week.

Comment: This is a disturbing decision. S1 was, as a factual matter, untimely both when it was filed and when S2 was filed. Why on earth should the case turn on the fact that S1 erroneously appeared to be timely? Is form really more important than substance? While the court carefully notes that there is no evidence that the government “deliberately withheld” its concession that the April 9 overt act had not occurred until after S2 was filed, the court’s confidence in the government would seem to be a bit naive. The facts here surely support a strong inference of deliberate withholding. The government must have known that there was a problem with the April 9 act when it decided to supersede; the defense had been pressing for an explanation of that act for more than a year. Given this, why else would the government have superseded unless it knew it had a timing problem? The government saved its case by not disclosing the defect until after S2 was filed. This decision would thus seem to give a free pass to all ethically challenged prosecutors – as long as they successfully hide their misconduct until it is cured, the defendant has no remedy.

On the brighter front, this case has a nice discussion of one of the most vexing Guidelines issues – the instruction that loss calculations under § 2B1.1 need not calculated with precision and that a “reasonable estimate” is sufficient.

Calculating loss can be particularly difficult in stock fraud cases because so many factors contribute to the decline of share prices. Surprisingly, this is not an area where the circuit has given much guidance. Here it does, turning, unusually, to civil law – the “principles governing recovery of damages in civil securities fraud cases” – for assistance. These principles a triggered remand for resentencing because the district court relied exclusively on the testimony of a NASD expert that, in essence, attributed the total decline in the stock price to the defendant’s conduct. The court’s failure to “even consider[] other factors” relevant to the decline was error.

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