We have recognized that information regarding a company's financial condition is material to investment. Murphy, 626 F.2d 633, 653 (9th Cir.1980) (“Surely the materiality of information relating to financial condition, solvency and profitability is not subject to serious challenge.”). In both this case and Tarallo, however, the penalty provision at issue punishes “willful” violations of the substantive provisions. Moreover, Congress actually explained its understanding of “knowingly” in connection with the 1977 amendments to the securities laws that added 15 U. As explained to the committee, the term ‘knowingly’ connotes a ‘conscious undertaking.’ Thus these paragraphs proscribe and make unlawful conduct which is rooted in a conscious undertaking to falsify records or mislead auditors through a statement or conscious omission of material facts.
Mc Cormick's and Catricks' testimony further established that improper accounting of backdated options presents investors with an incorrect picture of a company's finances. Garvey testified that Brocade's failure to expense more than 0 million from backdated options resulted in Brocade reporting profits in 20, when it should have reported large losses. Ed.2d 617 (1991), and financial structuring cases, see Ratzlaf, 510 U. Jensen also tries to distinguish Tarallo on the ground that she was charged with the provision that prohibits “knowingly” falsifying books and records, whereas the defendant in Tarallo was charged with violating a provision that was silent on the requisite level of intent. On the basis of the language and structure of the statute, there is no textual reason to hold “knowingly,” as used in § 78m(b)(5), was intended to modify or connote a higher scienter requirement than “willfully,” as used in § 78ff(a). To clarify the purpose of these paragraphs, therefore, the committee inserted the term ‘knowingly’ in appropriate places in both paragraphs (3) and (4).
“Backdating” stock options refers to the practice of recording an option's grant date and strike price retrospectively. The prosecutor thereby asserted to the jury facts that he knew were belied by the statements to the FBI from responsible Finance Department officers, and by SEC complaints that had been filed against some of the Finance Department employees alleging they knew about the scheme. The jury convicted Jensen on the two counts charged against her: (1) falsifying and aiding and abetting the falsification of books, records, and accounts in violation of 15 U. Defense counsel made no knowingly false statements. Indeed, on appeal the government does not seriously dispute the falsity of the prosecutor's statements or the duty of the prosecutor to refrain from making such statements. In representing the United States, a federal prosecutor has a special duty not to impede the truth.
In the circumstances of this case, there was no reversible error on this point. That was indeed the way that the alleged scheme was supposed to operate, by providing a valuable option to employees at no apparent expense to the company. In a rising market, stock options generally help companies recruit employees desiring to share in the company's growth and help persuade employees to stay with the company so that their increasingly valuable options may vest and be exercised. § 240.10b-5; falsifying corporate books and records in violation of 15 U. Reyes' counsel, in closing argument, therefore told the jury that the Finance Department knew about the backdating, thus supporting the defense position. It was not, however, the defense's burden to prove Reyes was innocent. Although we do not agree with the district court that the prosecutor may have been innocent of deliberate false statements, we recognize there were aggressive tactics on both sides. The Jensen Appeal Jensen's appeal first challenges a jury instruction given in her case. Jensen's instructional challenge relates to the statutory term “willfully.” The substantive provision of the Securities and Exchange Act of 1934 (“Act”) at issue in this case requires issuers of registered securities to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” 15 U. In general, companies grant options with a strike price equal to the market price on the date the options are granted. The prosecutor, however, told the jury that the employees in the Finance Department “don't have any idea” that the backdating was occurring. It was the prosecutor's burden to prove he was guilty. We do not conclude the prosecutor's conduct was so egregious as to require dismissal of the prosecution. Greg Reyes rose rapidly in the world of high tech to become CEO of Brocade at 36 and increased its revenues twenty-fold within three years-only to be felled by a miscarriage of justice.In this deeply researched work, Donway shows how Reyes became the victim first of a board made fearful by the power of regulators; then of a frenzied media attack on backdated options; and, finally, of prosecutors who charged him with fraud. These guidelines were “designed to maximize shareholder benefit,” and they instructed Fidelity managers to vote against plans that permitted a company to grant any backdated options. Tarallo, 380 F.3d at 1187-88 (discussing United States v. This provision is meant to ensure that criminal penalties would be imposed where acts of commission or omission in keeping books or records or administering accounting controls have the purpose of falsifying books, records or accounts, or of circumventing the accounting controls set forth in the Act. Mc Cormick testified that Fidelity used guidelines for the voting of shares Fidelity owned in other companies. Tarallo observed that our circuit and others have rejected the argument that, in the context of the securities fraud statutes, willfulness requires a defendant know that he or she was breaking the law. The amendment adopted by the Conferees accomplishes this by providing that criminal penalties shall not be imposed for failing to comply with the FCPA's books and records or accounting control provisions. We reverse Reyes' conviction because of prosecutorial misconduct in making a false assertion of material fact to the jury in closing argument. § 240.13b2-1; and making false comments to auditors in violation of 15 U. Other, higher-up Finance Department employees, however, had given statements to the FBI describing their knowledge of the backdating scheme. At sentencing, Jensen also argued she was within the provision of the penalty statute that exempts a defendant from imprisonment for violating a regulation if the defendant “had no knowledge of such rule or regulation.” 15 U. Her lawyer had obtained a severance of Jensen's trial from Reyes' on the basis of Reyes' false declaration stating that Jensen was without any culpability, that Reyes had told Jensen that there was no backdating, and that Reyes would testify at Jensen's trial if the trials were severed. The district court was understandably annoyed that the court had had to preside over two trials and had been misled by the false declaration. If the government failed in its burden to establish the materiality of the falsification, then the prosecution must be dismissed, and no new trial would be possible. In denying the defense's motion for a new trial, the district court focused not only on the prosecutor's misstatements, but on defense counsel's performance as well. For example, the SEC complaint charging Michael Byrd, a Chief Financial Officer at Brocade, did not state that Byrd was “deceived” regarding the stock option grant given to Brocade employee Richard Geruson, as the prosecutor had argued during closing argument during Reyes' case. Attorney's Office and SEC Separately Charge Former Brocade CEO and Vice President in Stock Option Backdating Scheme (July 20, 2006), The prosecution is legally charged with responsibility for information uncovered in its civil investigations and may be required to disclose it in criminal cases that it prosecutes. The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt. Moreover, the statements were made during closing arguments, both orally and visually, and closing statements from the prosecution “matter a great deal.” Kojayan, 8 F.3d at 1323. We affirm Jensen's conviction but vacate the sentence and remand for resentencing because the sentence improperly included an obstruction of justice enhancement for which reprehensibility lay primarily with Jensen's lawyer. Facts and Procedural Background Gregory Reyes was the Chief Executive Officer (“CEO”), and Stephanie Jensen was the Vice-President of the Human Resources Department, of Brocade Communication Systems, Inc. The company is publically traded and engaged in the high-tech business of developing and selling network equipment and providing networking solutions. Both prosecution and defense counsel were familiar with these statements. It imposed the obstruction of justice enhancement because Jensen was present in the courtroom when her attorney argued the motion to sever and did not interfere with her lawyer's presentation of the false declaration. Defense counsel had told the jury that the Finance Department did know, and told the jury that the Finance Department executives would have so testified if they had been called. Rather, the civil complaint charged that Byrd acted with knowledge of the backdating of Geruson's grant. Reyes objected below and therefore preserved the issue. Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system. He sought to establish reasonable doubt as to his intent by contending that Brocade's Finance Department was well aware of the backdated options and the fact that the options were not properly expensed out on the books. In direct contravention of the statements given to the FBI by Finance Department executives that they did know about the backdating, the prosecutor asserted to the jury in closing that the entire Finance Department did not know about the backdating, and further that the government's theory of the case was that “finance did not know anything.” “Our theory is that those people didn't know anything․ Elizabeth Moore says finance didn't know. The witness statements also reveal that Bossi complained about fraudulent practices relating to at least one employee's stock options, and that Bossi eventually resigned his position at Brocade. Although the government's case was relatively strong, the jury took seven days to deliberate, and the case was complex and technical. The criminal penalty provision applicable to Jensen's case is 15 U. Jensen proposed a jury instruction that would have required the jury to find that the falsification was done “with the purpose of violating a known legal duty,” or that the falsification was “unlawful.” It therefore would have required the jury to find Jensen knew she was violating a securities law. At trial, Reyes' principal defense was that he, as CEO and sole member of the Board of Directors' Compensation Committee, signed off on the backdated options without any intent to deceive. Materiality depends on the significance that a reasonable investor would assign to the withheld or misrepresented information. The prosecutor asserted as fact a proposition that he knew was contradicted by evidence not presented to the jury. For this reason, it is improper for the government to present to the jury statements or inferences it knows to be false or has very strong reason to doubt. Blueford, 312 F.3d 962, 968 (9th Cir.2002) (citing United States v. The district court, in denying the motion for a new trial, apparently did not view the prosecutor's statements to be culpably false, finding that the Finance Department witness statements that were provided to the FBI did not “put the lie” to the government's arguments. The FBI witness statements affirmatively assert that Bob Bossi, Brocade's controller, knew backdating was occurring regularly and that Reyes was backdating stock options. § 78m(b)(5) provides that “[n]o person shall knowingly falsify any book, record, or account described” above. § 78ff(a), which provides penalties for willful violations and false and misleading statements: Any 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 or any undertaking contained in a registration statement ․ which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than ,000,000, or imprisoned not more than 20 years, or both, ․ but 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.