United States v. Reyes ( 2009 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, 
Plaintiff-Appellee, No. 08-10047
v.  D.C. No.
CR-06-00556-1-
GREGORY L. REYES, CRB
Defendant-Appellant.

UNITED STATES OF AMERICA,  No. 08-10140
Plaintiff-Appellee, D.C. No.
v.  CR-06-00556-2-
STEPHANIE JENSEN, CRB
Defendant-Appellant.
 OPINION
Appeal from the United States District Court
for the Northern District of California
Charles R. Breyer, District Judge, Presiding
Argued and Submitted
May 12, 2009—San Francisco, California
Filed August 18, 2009
Before: Mary M. Schroeder and Stephen Reinhardt, Circuit
Judges, and Louis H. Pollak,* Senior District Judge.
Opinion by Judge Schroeder
*The Honorable Louis H. Pollak, Senior United States District Judge
for the Eastern District of Pennsylvania, sitting by designation.
11195
UNITED STATES v. REYES 11199
COUNSEL
Amber Rosen, San Jose, California, for the plaintiff-appellee.
Seth P. Waxman, Washington, DC., for defendant-appellant
Gregory L. Reyes.
Steven A. Hirsch, Washington, DC., for defendant-appellant
Stephanie Jensen.
OPINION
SCHROEDER, Circuit Judge:
I. Introduction
Gregory Reyes and Stephanie Jensen appeal from their con-
victions for falsifying corporate books and records, and
related charges, stemming from their participation in a
scheme to reward employees with grants of backdated stock
options. The options were backdated to a time when the com-
pany’s stock price was low, but the options were not recorded
11200 UNITED STATES v. REYES
on the company’s books as an expense of the corporation, so
the books showed the corporation to be more profitable than
it was. The convictions represent the first criminal convictions
for a backdating practice that was widespread in the late
1990s, particularly in the Silicon Valley, where the appel-
lants’ company was located.
We reverse Reyes’ conviction because of prosecutorial
misconduct in making a false assertion of material fact to the
jury in closing argument. 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.
II. 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. (“Brocade”), based in San Jose, California. The company
is publically traded and engaged in the high-tech business of
developing and selling network equipment and providing net-
working solutions. Because of the competitive demand for
qualified information technology personnel in the Silicon Val-
ley, the company began the practice of offering new personnel
and valued employees compensation in the nature of stock
options.
A stock option is the right to purchase a share of stock from
a company at a fixed price, referred to as the “strike price,”
on or after a specified vesting date. In a rising market, stock
options generally help companies recruit employees desiring
to share in the company’s growth and help persuade employ-
ees to stay with the company so that their increasingly valu-
able options may vest and be exercised.
In general, companies grant options with a strike price
equal to the market price on the date the options are granted.
UNITED STATES v. REYES 11201
“Backdating” stock options refers to the practice of recording
an option’s grant date and strike price retrospectively. Back-
dating is not itself illegal, provided that the benefit to the
employees is recorded on the corporate books as a non-cash
compensation expense to the corporation, in accordance with
an accounting convention promulgated in 1972 referred to as
Accounting Principles Board Opinion No. 25. It is not now
disputed that the options in this case were not recorded in the
books as having been backdated.
On August 10, 2006, the government charged Reyes and
Jensen with securities fraud, falsification of corporate books
and records, and violating related statutes and regulations.
Their cases were severed for trial and represented the first
such prosecutions to go before a jury.
A. The Reyes Trial
The jury convicted Reyes of conspiracy in violation of 18
U.S.C. § 371; securities fraud and making false filings with
the Securities and Exchange Commission (“SEC”) in viola-
tion of 15 U.S.C. §§ 78j(b) and 78ff, and 17 C.F.R.
§ 240.10b-5; falsifying corporate books and records in viola-
tion of 15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and 17 C.F.R.
§ 240.13b2-1; and making false comments to auditors in vio-
lation of 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2.
At trial, Reyes’ principal defense was that he, as CEO and
sole member of the Board of Directors’ Compensation Com-
mittee, signed off on the backdated options without any intent
to deceive. 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. Reyes
also argued that he relied in good faith on the accuracy of the
Finance Department’s documentation when he signed off on
false financial statements.
11202 UNITED STATES v. REYES
The government witnesses provided evidence as to how
this scheme operated and how Reyes participated in the
scheme. One of the witnesses, Elizabeth Moore, who was an
employee of the Finance Department and who administered
Brocade’s stock options, testified that she and other members
of the Finance Department did not know that the backdating
was occurring.
Other, higher-up Finance Department employees, however,
had given statements to the FBI describing their knowledge of
the backdating scheme. Both prosecution and defense counsel
were familiar with these statements. Those employees, who
were themselves subject to possible criminal prosecution and
had been targets of SEC civil suits, did not testify.
During trial, Reyes’ position was that he relied on the
Finance Department to make sure that the corporate books
were accurate, and that he was not responsible for the false
records. Reyes’ counsel, in closing argument, therefore told
the jury that the Finance Department knew about the backdat-
ing, thus supporting the defense position. The prosecutor,
however, told the jury that the employees in the Finance
Department “don’t have any idea” that the backdating was
occurring. 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 com-
plaints that had been filed against some of the Finance
Department employees alleging they knew about the scheme.
Reyes moved for a new trial on the basis of prosecutorial
misconduct. He also sought a new trial on the separate basis
of what he asserted to be a recantation of Elizabeth Moore’s
testimony that she did not know about the backdating. The
district court denied the motions. Earlier, the court had denied
a motion for directed verdict for insufficiency of the evidence
to establish materiality, i.e., that knowledge of the backdating
would have affected the judgment of a reasonable investor.
UNITED STATES v. REYES 11203
The district court sentenced Reyes to 21 months’ imprison-
ment, and imposed a $15 million fine. This appeal followed.
B. The Jensen Trial
In the Jensen trial, the principal issue was whether she
knew that this was a fraudulent scheme and whether she pos-
sessed a criminal intent. Jensen sought an instruction that
would have required the jury to find she knew what law she
was violating, i.e., to find that the falsification was done “with
the purpose of violating a known legal duty.” The district
court instead instructed the jury that it must find the govern-
ment proved Jensen acted “knowing the falsification to be
wrongful.” United States v. Jensen, 532 F. Supp. 2d 1187,
1195 (N.D. Cal. 2008). The jury convicted Jensen on the two
counts charged against her: (1) falsifying and aiding and abet-
ting the falsification of books, records, and accounts in viola-
tion of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff, and
17 C.F.R. § 240.13b2-1; and (2) conspiracy to falsify books
and records in violation of 18 U.S.C. § 371.
At sentencing, Jensen also argued she was within the provi-
sion 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.S.C. § 78ff(a).
The district court declined to hold she was within the “No
Knowledge Clause,” and sentenced her to a term of imprison-
ment of four months.
Jensen’s term included an enhancement for obstruction of
justice for her lawyer’s reliance on a declaration made by
Reyes. 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. Reyes did
not testify at Jensen’s trial.
11204 UNITED STATES v. REYES
The district court was understandably annoyed that the
court had had to preside over two trials and had been misled
by the false declaration. 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 declara-
tion. The district court’s order on Jensen’s sentence is pub-
lished at United States v. Jensen, 537 F. Supp. 2d 1069 (N.D.
Cal. 2008).
III. The Reyes Appeal
The Reyes trial was combative. The government had to
prove Reyes was knowingly responsible for the false corpo-
rate records, and the stakes were high. The issue that is dispo-
sitive of Reyes’ appeal concerns the government attorney’s
misconduct in falsely telling the jury that the Finance Depart-
ment did not know about the backdating, when the prosecutor
knew that their statements revealed that they did.
There is a threshold issue, however, of whether the govern-
ment satisfied its burden of proving that the false records
would have affected the judgment of a reasonable investor. 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. Burks v. United States,
437 U.S. 1, 18 (1978). The government did not, however, fail
in its burden.
Materiality depends on the significance that a reasonable
investor would assign to the withheld or misrepresented infor-
mation. Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). To
be material, “there must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the
reasonable investor as having altered the ‘total mix’ of infor-
mation made available.” Id. at 231-32 (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 448 (1976)).
UNITED STATES v. REYES 11205
[1] The prosecution did not present any witnesses who
actually invested in Brocade’s stock. The government relied
on the expert testimony of three witnesses: (1) Steve Catricks,
a portfolio manager and equity analyst at Delaware Invest-
ments, (2) Robert McCormick, an employee who was a proxy
lawyer at Fidelity Investments, and (3) Dr. John Garvey, an
accounting expert. Although Reyes now attempts to discredit
the witnesses’ testimony because they made no personal deci-
sion to invest in Brocade’s stock, the standard of materiality
is judged from the perspective of a “reasonable investor,” and
is therefore an objective one. See TSC Indus., Inc., 426 U.S.
at 448. Reyes did not contest the expertise of these witnesses
to present the testimony.
McCormick testified that Fidelity used guidelines for the
voting of shares Fidelity owned in other companies. 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.
According to McCormick, Fidelity frowned upon granting
backdated stock options because they result in share dilution,
and they have a less incentivizing effect on employees than
stock options that are not backdated. Catricks testified that
granting backdated options inflates net income and earnings
per share figures of the company, figures that Catricks stated
he, as a reasonable investor, would want to know when he
made his investment decisions.
McCormick’s and Catricks’ testimony further established
that improper accounting of backdated options presents inves-
tors with an incorrect picture of a company’s finances. Sup-
porting their testimony, Dr. Garvey testified that Brocade’s
failure to expense more than $160 million from backdated
options resulted in Brocade reporting profits in 2001 and
2002, when it should have reported large losses.
[2] We have recognized that information regarding a com-
pany’s financial condition is material to investment. SEC v.
11206 UNITED STATES v. REYES
Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (“Surely the mate-
riality of information relating to financial condition, solvency
and profitability is not subject to serious challenge.”). The
witnesses’ testimony, taken cumulatively, and in the light
most favorable to the prosecution, United States v. Gonzalez-
Torres, 309 F.3d 594, 598 (9th Cir. 2002) (citation omitted),
permitted a rational trier of fact to find beyond a reasonable
doubt that the omissions and misstatements were material to
a reasonable investor.
There is also a claim of instructional error with regard to
the jury’s finding that misstatements to accountants were
materially false. The instruction required the jury to find that
the statements were capable of influencing actions of accoun-
tants, and did not expressly reference investors. In the circum-
stances of this case, there was no reversible error on this
point. The main thrust of the government’s case was that the
false statements were capable of misleading investors. The
statements were the same as those the jury found, in other
counts, capable of influencing reasonable investors. The
remaining instructional challenges relate to the false entries
count (15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and 17 C.F.R.
§ 240.1362.1). They are without merit.
We therefore turn to whether prosecutorial misconduct
requires a new trial. The principal issue before the jury was
one of intent. There was no question that Reyes signed off on
stock option grants that were priced retrospectively, and that
the backdating allowed Brocade to understate its compensa-
tion expenses. 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.
At trial, an issue as to Reyes’ criminal state of mind was
whether Reyes knew the corporate records falsely stated the
company’s financial condition by under-reporting the compa-
ny’s expenses. Reyes’ defense was that he thought the trans-
actions were properly accounted for, in reliance on the
UNITED STATES v. REYES 11207
Finance Department’s expertise to comply with accounting
principles and SEC regulations. The government, however,
argued that the Finance Department was unaware of the back-
dating, and thus powerless to get the accounting right. A key
question therefore became whether the Finance Department
knew that the backdating scheme was taking place.
[3] Statements made to the FBI by responsible employees
in the Finance Department during the FBI’s investigation
established that Finance Department executives knew about
the backdating and that one employee had resigned as a result
of it. A lower-level Finance Department employee, however,
Elizabeth Moore, testified for the government that she did not
know about the scheme. During closing argument, the prose-
cutor did not confine his argument to the evidence before the
jury or reasonable inferences that could have been drawn
from that evidence. The prosecutor asserted as fact a proposi-
tion that he knew was contradicted by evidence not presented
to the jury. 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 the-
ory 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. Did you need
everybody in the finance department to come and tell you that
they didn’t know?” The government even displayed for the
jury a diagram explaining the prosecutor’s position that the
Finance Department did not know of the backdating. The
prosecutor asked the jury to assume other employees of the
Finance Department would testify that they did not know
about Reyes’ backdating procedure when the prosecutor knew
they did.
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. Defense counsel
11208 UNITED STATES v. REYES
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. In the district court’s
view, defense counsel was almost as culpable as the govern-
ment because defense counsel asserted what the Finance
Department knew about the backdating without calling
Finance Department executives as witnesses. According to the
district court, defense counsel should have sought immunity
for the witnesses, and then proved, through their testimony,
that the Finance Department did know about the scheme.
It was not, however, the defense’s burden to prove Reyes
was innocent. It was the prosecutor’s burden to prove he was
guilty. Defense counsel made no knowingly false statements.
The prosecutor did. 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. Instead, it argues the misconduct was harmless.
In representing the United States, a federal prosecutor has
a special duty not to impede the truth. The United States
Department of Justice’s Mission Statement describes the gov-
ernment’s duty as one “to ensure fair and impartial adminis-
tration of justice for all Americans.” United States
Department of Justice, About DOJ, http://www.usdoj.gov/
02organizations/.
[4] There is good reason for such a high standard. A “pros-
ecutor’s opinion carries with it the imprimatur of the Govern-
ment and may induce the jury to trust the Government’s
judgment rather than its own view of the evidence.” United
States v. Young, 470 U.S. 1, 18-19 (1985) (citing Berger v.
United States, 295 U.S. 78, 88-89 (1935)). For this reason, it
is improper for the government to present to the jury state-
ments or inferences it knows to be false or has very strong
reason to doubt. United States v. Blueford, 312 F.3d 962, 968
(9th Cir. 2002) (citing United States v. Kojayan, 8 F.3d 1315,
1318-19 (9th Cir. 1993)).
UNITED STATES v. REYES 11209
The district court, in denying the motion for a new trial,
apparently did not view the prosecutor’s statements to be cul-
pably false, finding that the Finance Department witness
statements that were provided to the FBI did not “put the lie”
to the government’s arguments. We are unable to agree. The
FBI witness statements affirmatively assert that Bob Bossi,
Brocade’s controller, knew backdating was occurring regu-
larly and that Reyes was backdating stock options. The wit-
ness 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. The witness statements further reveal that Tony
Canova, a Chief Financial Officer at Brocade, also knew
backdating was taking place. Bossi and Canova even dis-
cussed discovering specific instances of inconsistencies in
stock option paperwork, and attributed the errors to Reyes’
backdating practice.
Moreover, in civil suits brought by the SEC, parallel evi-
dence was produced about the knowledge of Finance Depart-
ment executives. 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. Rather, the civil complaint charged that Byrd acted with
knowledge of the backdating of Geruson’s grant. The SEC’s
complaint against Canova clearly alleges that Canova did
know that backdating was occurring. As a joint press release
emphasized, the FBI, SEC, and U.S. Attorney’s Office forged
a strong, cooperative relationship in pursuing civil and crimi-
nal punishment for misconduct relating to backdating Brocade
stock options. Press Release, U.S. Securities and Exchange
Commission, U.S. Attorney’s Office and SEC Separately
Charge Former Brocade CEO and Vice President in Stock
Option Backdating Scheme (July 20, 2006),
http://www.sec.gov/news/press/2006/2006-121.htm. The
prosecution is legally charged with responsibility for informa-
11210 UNITED STATES v. REYES
tion uncovered in its civil investigations and may be required
to disclose it in criminal cases that it prosecutes. See e.g.,
United States v. Wood, 57 F.3d 733, 737 (9th Cir. 1995). It is
charged with knowledge of the parallel SEC investigation.
[5] 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. Reyes objected
below and therefore preserved the issue. Both Reyes and the
government agree in their briefs that the error is not harmless
if we conclude it is more likely than not that the misconduct
materially affected the fairness of the trial. See United States
v. McKoy, 771 F.2d 1207, 1212 (citing Young, 470 U.S. at 13
n.10).
[6] Although the government’s case was relatively strong,
the jury took seven days to deliberate, and the case was com-
plex and technical. Moreover, the prosecutor’s statements
were particularly prejudicial given that Reyes’ defense rested
on his delegating his responsibilities to others and reliance on
them. At the end there was considerable focus on the issue of
what the Finance Department knew. The prosecutor’s false
statements went directly to this issue. Moreover, the state-
ments 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. Deliberate false state-
ments by those privileged to represent the United States harm
the trial process and the integrity of our prosecutorial system.
We do not lightly tolerate a prosecutor asserting as a fact to
the jury something known to be untrue or, at the very least,
that the prosecution had very strong reason to doubt. See
Blueford, 312 F.3d at 968. There is no reason to tolerate such
misconduct here.
[7] Reyes goes further on appeal and argues that the mis-
conduct was so flagrant that the indictment should be dis-
missed. See United States v. Chapman, 524 F.3d 1073, 1085-
87 (9th Cir. 2008) (noting that dismissal of the indictment
UNITED STATES v. REYES 11211
may be warranted where the prosecutor’s actions rise to the
level of flagrant prosecutorial misconduct, a defendant suffers
substantial prejudice, and no lesser remedial action is avail-
able for the misconduct). Although we do not agree with the
district court that the prosecutor may have been innocent of
deliberate false statements, we recognize there were aggres-
sive tactics on both sides. We do not conclude the prosecu-
tor’s conduct was so egregious as to require dismissal of the
prosecution. Reyes’ case must be remanded for a new trial.
IV. The Jensen Appeal
Jensen’s appeal first challenges a jury instruction given in
her case. She also challenges her sentence.
[8] 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.S.C. § 78m(b)(2)(A). This
provision was an amendment to the Act enacted by the For-
eign Corrupt Practices Act of 1977. See Foreign Corrupt Prac-
tices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494. In turn,
15 U.S.C. § 78m(b)(5) provides that “[n]o person shall know-
ingly falsify any book, record, or account described” above.
The criminal penalty provision applicable to Jensen’s case
is 15 U.S.C. § 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 obser-
vance 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
11212 UNITED STATES v. REYES
application, report, or document required to be filed
under this chapter or any rule or regulation thereun-
der or any undertaking contained in a registration
statement . . . which statement was false or mislead-
ing with respect to any material fact, shall upon con-
viction be fined not more than $5,000,000, 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.
Jensen proposed a jury instruction that would have required
the jury to find that the falsification was done “with the pur-
pose 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. The dis-
trict court rejected her proposed instructions, and instructed
the jury that they must find that Jensen falsified or intention-
ally caused to be falsified books, records, or accounts, “know-
ing the falsification to be wrongful.” Jensen, 532 F. Supp. 2d
at 1195.
[9] The Supreme Court has recognized that the meaning of
“willfully” is often influenced by the context in which it is
used. Ratzlaf v. United States, 510 U.S. 135, 141 (1994). The
district court’s instruction in this case was in line with this
court’s interpretation of “willfully” in the securities context.
In United States v. Tarallo, 380 F.3d 1174 (9th Cir. 2004),
this court interpreted the meaning of willfully in § 78ff(a). In
upholding a conviction for securities fraud in violation of 15
U.S.C. §§ 78j(b) and 78ff(a), and 17 C.F.R. § 240.10b-5, we
held in Tarallo that willfully means “intentionally undertak-
ing an act that one knows to be wrongful; ‘willfully’ in this
context does not require that the actor know specifically that
the conduct was unlawful.” Id. at 1188 (emphasis in original).
Tarallo thus rejected the instruction Jensen seeks.
UNITED STATES v. REYES 11213
Jensen nevertheless argues that a higher scienter require-
ment is warranted because the substantive securities provision
she violated involved books, records, and accounts. Accord-
ing to Jensen, the knowing falsification of books, records, and
accounts is not “inevitably nefarious,” see Ratzlaf, 510 U.S.
at 144, and therefore a higher scienter requirement is neces-
sary to prevent ensnaring innocent persons. Jensen tries to
equate a violation of 15 U.S.C. § 78m(b)(5) to other viola-
tions in which the word “willfully” requires knowledge of the
law. She relies on criminal tax, see Cheek v. United States,
498 U.S. 192, 201 (1991), and financial structuring cases, see
Ratzlaf, 510 U.S. at 149.
[10] This argument is foreclosed by Tarallo. Tarallo
observed that our circuit and others have rejected the argu-
ment that, in the context of the securities fraud statutes, will-
fulness requires a defendant know that he or she was breaking
the law. Tarallo, 380 F.3d at 1187-88 (discussing United
States v. Charnay, 537 F.2d 341, 351-52 (9th Cir. 1976), and
United States v. Peltz, 433 F.2d 48, 54 (2d Cir. 1970)). The
“knowing” requirement protects those who accidentally
record incorrect information because, for example, they are
confused by accounting rules. The district court correctly
instructed the jury that it had to find that Jensen “was aware
of the falsification and did not falsify through ignorance, mis-
take, or accident.” There is no higher standard for a willful
violation of the securities laws.
[11] Jensen also tries to distinguish Tarallo on the ground
that she was charged with the provision that prohibits “know-
ingly” falsifying books and records, whereas the defendant in
Tarallo was charged with violating a provision that was silent
on the requisite level of intent. In both this case and Tarallo,
however, the penalty provision at issue punishes “willful”
violations of the substantive provisions. 15 U.S.C. § 78ff(a).
A “knowing” falsification does not require knowledge of the
securities laws being violated. On its face, the provision
means only that the defendant must knowingly commit the act
11214 UNITED STATES v. REYES
of falsification. 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).
[12] Moreover, Congress actually explained its understand-
ing of “knowingly” in connection with the 1977 amendments
to the securities laws that added 15 U.S.C. §§ 78m(b)(2) and
(b)(3). In an early version of the legislation, the Senate Report
stated:
The amendments to section 13(b) prohibiting the
falsification of corporate books and records and the
making of misleading representations to auditors are
not intended to make unlawful conduct which is
merely negligent. To clarify the purpose of these
paragraphs, therefore, the committee inserted the
term ‘knowingly’ in appropriate places in both para-
graphs (3) and (4). As explained to the committee,
the term ‘knowingly’ connotes a ‘conscious under-
taking.’ 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 mate-
rial facts.
The committee believes that the inclusion of the
‘knowingly’ standard is appropriate because of the
danger, inherent in matters relating to financial
recordkeeping, that inadvertent misstatements or
minor discrepancies arising from an unwitting error
in judgment might be deemed actionable. The com-
mittee does not, however, intend that the use of the
term ‘knowingly’ will provide a defense for those
who shield themselves from the facts. The knowledge
required is that the defendant be aware that he is
UNITED STATES v. REYES 11215
committing the act which is false—not that he know
that his conduct is illegal.
S. Rep. No. 95-114, at 9 (1977), reprinted in 1977
U.S.C.C.A.N. 4098, 4107 (emphasis added). The final report
on § 78m(b)(5) that was adopted in 1988 and that provided it
was a crime to “knowingly falsify” books or records,
explained its meaning as follows:
The Conferees intend to codify current Securities
and Exchange Commission (SEC) enforcement pol-
icy that penalties not be imposed for insignificant or
technical infractions or inadvertent conduct. 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.
This provision is meant to ensure that criminal pen-
alties would be imposed where acts of commission
or omission in keeping books or records or adminis-
tering accounting controls have the purpose of falsi-
fying books, records or accounts, or of
circumventing the accounting controls set forth in
the Act. This would include the deliberate falsifica-
tion of books and records and other conduct calcu-
lated to evade the internal accounting controls
requirement.
H.R. Conf. Report. No. 100-576, 917 (1988), reprinted in
1988 U.S.C.C.A.N. 1547, 1950 (emphases added). The dis-
trict court correctly concluded that the congressional history
confirms that Congress intended “knowingly” only to require
that the jury find that Jensen “was aware of that falsification
and did not falsify through ignorance, mistake, or accident.”
Jensen, 532 F. Supp. 2d at 1195.
[13] With respect to her sentence, Jensen first challenges
the district court’s ruling that Jensen could be imprisoned for
11216 UNITED STATES v. REYES
her violation of the books, records, and accounts provision
because she had failed to prove by a preponderance of the evi-
dence that she qualified for the protection of the No Knowl-
edge Clause. See Jensen, 537 F. Supp. 2d at 1073-75. The
relevant statute provides that “no person shall be subject to
imprisonment . . . for the violation of any rule or regulation
if he proves that he had no knowledge of such rule or regula-
tion.” 15 U.S.C. § 78ff(a). This provision is an affirmative
defense to a sentence of imprisonment, and the burden to
prove the defense is on the defendant. United States v.
O’Hagan, 521 U.S. 642, 677 n.23 (1997).
[14] The district court framed the question as “whether Jen-
sen has satisfied her burden of proving by a preponderance
that she was unaware of a SEC rule or regulation prohibiting
the falsification of books and records.” Jensen, 537 F. Supp.
2d at 1075. This was the proper formulation. See O’Hagan,
521 U.S. at 652 (“[A] defendant may not be imprisoned for
violating Rule 10b-5 if he proves that he had no knowledge
of the Rule.”). Other circuits have also observed that proof of
no knowledge of the rule “can only mean proof of an igno-
rance of the substance of the rule, proof that the defendant did
not know that [his or her] conduct was contrary to law.”
United States v. Schwartz, 464 F.2d 499, 509 n.16 (2d Cir.
1972) (citing United States v. Lilley, 291 F. Supp. 989, 993
(S.D. Tex. 1968)).
[15] The evidence showed that Jensen tried to hide the
backdating scheme and was conscious of her wrongdoing.
Such evidence included Jensen’s attempt to minimize the
obviousness of the backdated options, concealing the way
options were actually dated, and directing employees to not
communicate about options over the phone or email. Based on
this evidence, and more, the district court appropriately con-
cluded that Jensen had not carried her burden of establishing
that she had no knowledge of the SEC rule prohibiting the fal-
sification of books and records. Jensen, 537 F. Supp. 2d at
1072.
UNITED STATES v. REYES 11217
Jensen’s second sentencing challenge relates to the obstruc-
tion of justice enhancement to her prison sentence. The
enhancement was for obtaining a severance of her trial from
Reyes’. Reyes and Jensen were jointly indicted, and Jensen
moved to sever their trials on the ground that Reyes was a
critical witness who could provide exculpatory evidence for
her. To support this position, Jensen’s counsel submitted an
ex parte declaration by Reyes under seal. In relevant part,
Reyes declared that if the trials were severed, he would testify
that he and Jensen did not conspire to backdate. He further
declared that only he had the authority to choose the date or
price of stock options, not Jensen, and that he told Jensen that
he was not backdating stock options.
In arguing for the severance motion, Jensen’s counsel
asserted that Reyes’ declaration was “as exculpatory as it
gets.” The court thus granted the severance on the basis of
Jensen’s counsel’s argument that Reyes would provide excul-
patory testimony. Jensen did not call Reyes to testify at her
trial.
[16] Because the district court had granted the severance on
a false premise, the court imposed an enhancement under
U.S.S.G. § 3C1.1 for obstruction of justice. That sentencing
guideline provides a two-level increase in the offense level
“[i]f (A) the defendant willfully obstructed or impeded, or
attempted to obstruct or impede, the administration of justice
with respect to the investigation, prosecution, or sentencing of
the instant offense of conviction, and (B) the obstructive con-
duct related to (i) the defendant’s offense of conviction and
any relevant conduct; or (ii) a closely related offense[.]”
U.S.S.G. § 3C1.1. Although it was Jensen’s counsel who
obtained the severance and solicited Reyes’ declaration, the
district court held that Jensen was responsible for the court’s
reliance on Reyes’ false declaration, because Jensen acted
willfully in allowing her counsel to present the declaration
and Jensen knew Reyes’ declaration was false or severely
misleading.
11218 UNITED STATES v. REYES
[17] There is no evidence that Jensen procured Reyes’ dec-
laration. Jensen’s attorney even told the district court that
counsel was responsible for obtaining the declaration and sub-
mitting it to the district court. Unlike some other obstruction
cases, where the defendant threatened or attempted to influ-
ence a witness, see e.g., United States v. Sayetsitty, 107 F.3d
1405, 1410 (9th Cir. 1997), or where the defendant personally
suborned witness perjury, see e.g., United States v. Garcia,
135 F.3d 667, 671 (9th Cir. 1988), this enhancement was
based on the conduct of defense counsel. The sentencing
guidelines do not suggest an obstruction of justice enhance-
ment can be imposed for a defense attorney’s arguments. The
guidelines provide that a defendant is accountable only for the
conduct of others that he or she helped bring about or cause.
See U.S.S.G. § 3C1.1 cmt. 9 (“Under this section, the defen-
dant is accountable for his own conduct and for conduct that
he aided or abetted, counseled, commanded, induced, pro-
cured, or willfully caused.”). Our law on obstruction of justice
is consistent with this limitation. See e.g., United States v.
Collins, 90 F.3d 1420, 1423 (9th Cir. 1996) (upholding
enhancement where defendant personally told two witnesses
to give police false statements, as evidenced by recorded calls
from jail).
[18] We affirm Jensen’s conviction but vacate her sentence
and remand for resentencing without the enhancement for
obstruction of justice.
V. Conclusion
We reverse Reyes’ conviction and remand for a new trial.
We affirm Jensen’s conviction, vacate her sentence, and
remand for resentencing.
Affirmed in part, reversed in part, and remanded.