In a series of insider trading cases, the Second Circuit has appeared to hike the government’s burden of proof in showing the “willfulness” of conduct needed for conviction by requiring evidence that a defendant acted with the knowledge that he was violating the securities laws. This additional layer of proof, common to prosecutions of many regulatory offenses, helpfully requires a jury to find more than the usual mens rea standard of “knowing and intentional” conduct. Recently, a defendant sought to have the enhanced level of proof applied in a conventional securities fraud case, but the court declined to do so.
Mark Kaiser was a corporate officer of U.S. Food Service, a distributor of food products to restaurants, and he supervised the company’s purchasing department. He had received bonuses based on the amount of promotional allowances paid to USF by its vendors; those allowances increased as USF’s purchases from the vendors increased. Apparently not content with the ordinary course amount of the payments, Kaiser, according to the government, inflated the amount of payments USF appeared to receive, and his resulting bonuses, by having vendors pre-pay large bonuses based on purchasing targets not yet achieved. Kaiser then allegedly hid the scheme by causing false bookkeeping entries and by personally lying to outside auditors about the nature of various payments received by his company. He was convicted in the Southern District of New York of securities fraud and causing false filings to be made to the SEC.
Kaiser appealed on several grounds, including the claim that the jury instruction on the “willfulness” element under 15 U.S.C. § 78ff(a) (penalizing "[a]ny person who willfully violates any provision of this chapter ....") was erroneous because the trial judge failed to instruct that a defendant could only act “willfully” if he had knowledge that his actions were illegal. He succeeded in vacating his conviction and winning a new trial, but on other issues, including a flawed “conscious avoidance” charge; the Second Circuit flatly rejected his argument that “willfulness” in this context requires knowledge of illegality. United States v. Kaiser, 609 F.3d 556 (2nd Cir. 2010).
While noting recent its own precedent that endorsed a higher standard for willfulness in insider trading cases, the appeals court distinguished insider trading, which does not necessarily involve deception and, therefore, where an insider may be unaware that his conduct was illegal and therefore wrongful. The court explained that the same cannot be said of one who deliberately misleads investors about a security.
Although the appeals court held the district court erred in instructing the jury on “conscious avoidance”, the court upheld the district court’s instruction on willfulness. The Second Circuit disagreed with Kaiser’s argument that “willfulness” requires knowledge of illegality and held that Section 32(a) of the Exchange Act does not require proof that the defendant knew he was violating the law, only that which was charged in this case: knowingly false statements made with an intent to deceive, with an absence of good faith on the defendant’s part. Those requirements, the court noted, necessarily suffice to prove that Kaiser knew he was committing a wrongful act.