SEC v. James Koenig

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-1373
S ECURITIES AND E XCHANGE C OMMISSION,
Plaintiff-Appellee,
v.
JAMES E. K OENIG,
Defendant-Appellant.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 02 C 2180—Wayne R. Andersen, Judge.
A RGUED D ECEMBER 3, 2008—D ECIDED F EBRUARY 26, 2009
Before E ASTERBROOK, Chief Judge, and M ANION and
W OOD , Circuit Judges.
E ASTERBROOK , Chief Judge. Waste Management, Inc.,
grew at an average annual rate of 26% from 1979 through
1991. When growth fell off, James Koenig, its Chief Finan-
cial Officer, decided to improve appearances. He devised
several accounting strategies that a jury found to be
fraudulent. The district judge imposed a civil penalty of
about $2.1 million and ordered Koenig to disgorge the
bonuses he received in 1992, 1994, and 1995 ($831,500,
2 No. 08-1373
plus more than $1.2 million in prejudgment interest).
Bonuses depended on Waste Management’s profits. If its
profits had been stated correctly, the judge concluded,
Koenig would not have received these bonuses. The court
also enjoined Koenig from again serving as a director or
top manager of a public company.
The details of Koenig’s strategies do not affect this
appeal; he does not contend that the evidence was insuf-
ficient to support the verdict. But we mention two of
the strategies to give a sense of what the trial was about.
Netting. One generally accepted accounting principle is
that the results of unusual transactions must be reported
separately from those of recurring events. Koenig violated
this rule by netting recurring and non-recurring transac-
tions. For example, in 1995 Waste Management made a
profit of $160 million by transactions in shares of a com-
pany called ServiceMaster. Instead of reporting this
$160 million as a one-time gain, Koenig used it to offset
some operating expenses. The result was that the (stated)
operating profits of Waste Management were improved
by $160 million in 1995, implying to investors that in the
absence of business reverses they could expect the
same annual return in future years. Similar netting
was performed for other one-time transactions.
Basketing and bundling. Another generally accepted
accounting principle is that, when a project subject to
depreciation winds up sooner than expected, the
remaining cost must be written off. Suppose Waste Man-
agement invested $50 million in a landfill with an ex-
pected life of 20 years, and charged $2.5 million in depreci-
No. 08-1373 3
ation annually against that asset. If Waste Management
closed the landfill early (say, after 10 years), a capital value
of $25 million would remain and, under GAAP, should be
taken as an immediate loss. Koenig instead transferred
the remaining depreciation to other landfills, a process
he called “basketing” (when the loss stemmed from
inability to maintain a waste-disposal permit) and “bun-
dling” (when some other reason led to early closure). In
our example, by transferring the depreciation Waste
Management was able to report a profit $25 million
higher than appropriate in the year of the landfill’s
closure. Ongoing depreciation would cause Waste Man-
agement to report lower profits in future years, but if
other landfills closed in the interim that reduction could
be postponed. Koenig’s practice of “basketing and bun-
dling” thus overstated current profits while burying in
the corporate books items that were bound to reduce
future profits, to investors’ surprise.
In October 1997 Waste Management issued a press
release declaring that its financial statements were unreli-
able and that its projections of future earnings were
being rescinded. The value of Waste Management’s
common stock lost $3 billion, far more than any
estimate of the accounting errors. This was in part
because, as we have emphasized, items of income that
investors had expected to continue vanished, so Waste
Management was revealing that future profits as well
as current profits would be reduced. And investors
likely feared that worse was to come. The latter fear
proved unwarranted. When Waste Management issued a
formal restatement of its accounts in February 1998,
4 No. 08-1373
showing no more bad news, its stock price rose (though
not to the level before the disclosures of October 1997). In
the restatement, Waste Management took a charge of
approximately $1.1 billion for the years 1992–96. Of this,
$361 million was attributable to netting and $198 million
to basketing and bundling. Koenig argued at trial that
his accounting devices, if dodgy, were not fraudulent.
He attributed the restatement and stock price slump to
new management’s decision to “take an earnings bath”—to
make the results of its predecessors look bad, so that
the new team’s performance would look better by com-
parison. The jury concluded, however, that the fault lay
with Koenig rather than with the new management.
Koenig presents on appeal six principal arguments, some
with subparts. We do not discuss them all but shall
cover the main themes.
1. Although all of Koenig’s misconduct occurred before
January 1997, when he stepped down as Waste Manage-
ment’s CFO, the SEC did not file its complaint until
March 26, 2002. The statute of limitations is five years, see
28 U.S.C. §2462, and Koenig argues that the demand
for civil penalties is untimely. But the district court con-
cluded that the SEC had not discovered the fraud until
October 1997, and that the claim accrued only then.
Koenig maintains that claims under federal law accrue
when the violations occur, not when agencies learn
about them. Section 2462 gives a federal agency five
years “from the date when the claim first accrued” to seek
a fine, forfeiture, or other penalty. In United States v.
Kubrick, 444 U.S. 111 (1979), the Justices read a statute
No. 08-1373 5
with the same reference to the claim’s accrual to start the
clock when the plaintiff knows both loss and causation—in
other words, when the wrong is discovered. (Kubrick
added that a would-be plaintiff need not know that the
injury is a legal wrong; only the injury and its cause, and
not potential for a legal remedy, need be discovered.) The
district court treated Kubrick and similar decisions as
establishing a norm that federal statutes of limitations do
not begin to run until the claim has been discovered. This
is a common view, see Rotella v. Wood, 528 U.S. 549, 555
(2000), but the Supreme Court pointedly remarked in TRW,
Inc. v. Andrews, 534 U.S. 19, 27 (2001), that “we have not
adopted that position as our own.” TRW concludes that
some periods of limitations start with discovery and
others not, with the difference depending on each provi-
sion’s text, context, and history.
According to Koenig, §2462 is one of those that starts
with the wrong rather than with the wrong’s discovery.
And that position has support in other circuits, which have
traced the language of §2462 back to 1839, long before the
“discovery rule” was invented. See 3M Co. v. Browner, 17
F.3d 1453, 1462 (D.C. Cir. 1994) (collecting cases). See also
TRW, 534 U.S. at 36–38 (Scalia, J., concurring) (discussing
the nineteenth century’s understanding of a claim’s
accrual).
We need not decide when a “claim accrues” for the
purpose of §2462 generally, because the nineteenth
century recognized a special rule for fraud, a concealed
wrong. See, e.g., Bailey v. Glover, 88 U.S. (21 Wall.) 342
(1875); Holmberg v. Armbrecht, 327 U.S. 392 (1946). These
6 No. 08-1373
days the doctrine is apt to be called equitable tolling, see
Cada v. Baxter Healthcare Corp., 920 F.2d 446 (7th Cir. 1990).
Whether a court says that a claim for fraud accrues only
on its discovery (more precisely, when it could have been
discovered by a person exercising reasonable diligence) or
instead says that the claim accrues with the wrong, but
that the statute of limitations is tolled until the fraud’s
discovery, is unimportant in practice. Either way, a
victim of fraud has the full time from the date that the
wrong came to light, or would have done had diligence
been employed. And the United States is entitled to the
benefit of this rule even when it sues to enforce laws
that protect the citizenry from fraud, but is not itself a
victim. Exploration Co. v. United States, 247 U.S. 435 (1918).
Koenig’s accounting maneuvers did not come to
public attention until October 1997; although the press
release did not convey their particulars, it put the SEC on
notice of the need for inquiry. Koenig does not contend
that a diligent SEC should have nosed things out earlier.
His maneuvers fooled Waste Management’s outside
accountant (Arthur Andersen), which knew a great deal
more than the SEC about the firm’s finances. Arthur
Andersen had detected some of Koenig’s stratagems
and notified Waste Management that, unless they were
discontinued, it could not certify the financial statements.
Koenig promised to change his ways but reneged, and
Arthur Andersen’s accounting team did not notice.
The overstated profits fooled professional investors and
analysts too; that’s why the stock’s price fell when the
news came out. If a formal announcement (whether by
No. 08-1373 7
press release or restatement of earnings) did not cause
much movement in the stock’s price, then there would
be room for an argument that the news either must
have been out already or could have been found by
reasonable inquiry. Cf. Flamm v. Eberstadt, 814 F.2d 1169(7th Cir. 1987) (discussing the “truth-on-the-market
doctrine”); Asher v. Baxter International Inc., 377 F.3d 727(7th Cir. 2004) (same). But information about Koenig’s
misleading accounting practices did not come out until
October 1997, so the SEC’s clock started no earlier than
the press release. The claim for penalties is timely.
2. Several of Koenig’s arguments concern trial manage-
ment. We discuss three of these.
a. After learning that Koenig planned to pitch his defense
on the theory that Waste Management’s new management
had taken an “earnings bath” to make its own performance
look good by comparison, the SEC filed a motion in limine
asking the district court to exclude all evidence related to
this theme. The right question, the SEC insisted, was
whether Koenig intentionally made (or caused Waste
Management to make) materially misleading statements
from 1992 through 1996, not why other managers of Waste
Management made other statements in 1997 or 1998.
According to the SEC, the motive of anyone other than
Koenig was irrelevant. Indeed, Koenig’s motive also
was irrelevant; securities fraud is wrongful even if com-
mitted in the belief that lies serve the issuer’s, or investors’,
interests. See Basic Inc. v. Levinson, 485 U.S. 224, 234–36
(1988). The plaintiff in a securities-fraud suit must show
intentional deceit, see Ernst & Ernst v. Hochfelder, 425 U.S.
185 (1976); the motive for that deceit is beside the point.
8 No. 08-1373
The district court should have granted the SEC’s motion.
Instead the judge denied the motion, while warning
Koenig that if motive became an issue he would allow the
SEC to introduce its own evidence (much of which was
sure to be hearsay) about why people acted as they did.
Koenig then presented his defense, the SEC responded
in kind, hearsay became rampant, and the trial dragged
on and on, lasting a total of 12 weeks.
A good deal of research shows that 20 days is about the
longest trial any jury can comprehend fully; the longer
the trial goes, the more the jury forgets and the less accu-
rate the decision becomes. See, e.g., Richard Lempert, Civil
Juries and Complex Cases: Taking Stock After Twelve Years
20 (Center for Research on Social Organization Working
Paper Series #488, Nov. 1992); A Handbook of Jury Research
§3.02(c) at 3–6 (Walter F. Abbott & John Batt eds. 1999);
Joe S. Cecil et al., Jury Service in Lengthy Civil Trials 1, 9,
11–13, 28 (tab. 7), 33 (tab. 8) (Fed. Judicial Center 1987);
Patrick E. Longan, The Shot Clock Comes to Trial: Time Limits
for Federal Civil Trials, 35 Ariz. L. Rev. 663, 703–07 (1993).
No wonder the ABA strongly recommends short trials.
“Principle 12: Courts Should Limit the Length of Jury
Trials Insofar As Justice Allows, and Jurors Should Be
Fully Informed of the Trial Schedule Established,” in
American Bar Association, Principles of Juries and Jury
Trials (Aug. 2005). Koenig does not complain about the
trial’s length; perhaps he was hoping that jurors would
lose focus. (A 12-week trial about accounting! Sounds like
material for Jay Leno.) But he does complain, and loudly,
about the hearsay that the SEC adduced to meet his
phantom “defense.”
No. 08-1373 9
Like the district judge, we are inclined to say that error
(if any) was invited. Koenig’s theme was that the
managers who issued the press release and restated
the firm’s financial position did so to serve their own
interests rather than to provide investors with accurate
information. That opened the door to questions about
what these persons’ motivation really was, and the
district judge remarked that “the SEC [therefore] is
entitled to allow [the] witnesses to explain why they did
what they did.” Koenig concedes that the judge’s
reasoning “is analytically sound as far as it goes.” But he
insists that it does not “justify permitting the restaters to
testify about what some other person told them about
past accounting practices”. Why not? If the reason X issued
a press release is that Y had told X that Koenig had mis-
stated earnings and depreciation, then Y’s statement to X
is part of X’s motive. Having put X’s motive in issue,
Koenig had to accept the consequence that X’s account of
his decision-making would be full of hearsay—for a top
manager at a large corporation rarely examines the
books on his own.
If you want to know what was in X’s mind when he
acted, you have to consider all the things X was told, as
well as the effect the statements had for X’s job tenure
and the value of X’s stock portfolio. The judge told the
jury that these statements were being introduced to
show what the managers knew (or thought they knew)
before they acted, not to show whether what the
managers had heard was true, so many of the statements
were not hearsay. (They were not being offered for the
truth of the matter stated, as distinct from the fact that
10 No. 08-1373
they had been made at all.) But to the extent genuine
hearsay came in, or the jury misunderstood the instruc-
tions: Well, Koenig asked for it. And although he insists
that the judge should have excluded much of the
evidence under Fed. R. Evid. 403 because its prejudicial
effect substantially outweighed the probative force, that
subject is committed to the district judge’s discretion,
which was not abused given that Koenig went into this
irrelevant and unnecessary subject with his eyes open.
b. Principle 13(C) of the ABA’s American Jury Project
recommends that judges permit jurors to ask questions of
witnesses. The Final Report of the Seventh Circuit’s
American Jury Project 15–24 (Sept. 2008) concurs, with the
proviso that jurors should submit their questions to the
judge, who will edit them and pose appropriate, non-
argumentative queries. District judges throughout the
Seventh Circuit participated in that project. The judges, the
lawyers for the winning side, and, tellingly, the lawyers
for the losing side, all concluded (by substantial margins)
that when jurors were allowed to ask questions, their
attention improved, with benefits for the overall quality
of adjudication. Keeping the jurors’ minds on their work is
an especially vital objective during a long trial about a
technical subject, such as accounting. The district judge
in this case permitted jurors to submit questions to him.
Some were asked; others were reformulated and asked;
some were not asked, when the judge thought them
inappropriate or repetitive.
Koenig contends that permitting the jurors to participate
in this fashion is a reversible error. That can’t be because
No. 08-1373 11
any statute or rule of procedure bans the process. There is
no such statute or rule. Nor has any court of appeals
forbidden the judge to ask questions submitted by the
jurors. See United States v. Richardson, 233 F.3d 1285, 1289
(11th Cir. 2003) (approving juror-initiated questions and
collecting cases from other circuits to the same effect). The
ABA and Seventh Circuit jury projects found benefits; so
have scholars. See, e.g., Shari Seidman Diamond, Mary R.
Rose, Beth Murphy & Sven Smith, Juror Questions During
Trial: A Window into Juror Thinking, 59 Vand. L. Rev. 1927(2006); Nicole L. Mott, The Current Debate on Juror Questions,
78 Chi.-Kent L. Rev. 1099 (2003).
In opposition to these studies, Koenig has only occasional
judicial skepticism. For example, we said more than a
decade ago that questions from jurors are “fraught with
risks”. United States v. Feinberg, 89 F.3d 333, 336 (7th Cir.
1996). Similar statements are easy to find. E.g., DeBenedetto
v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir.
1985); United States v. Ajmal, 67 F.3d 12, 14 (2d Cir. 1995).
These expressions reflect concern that allowing jurors to
ask questions will lead them to take positions too early in
the trial, emulating the advocates by choosing sides and
becoming argumentative rather than reflective. The jury
projects and other studies were designed to find out
whether these risks are realized so frequently that they
overcome the benefits, such as keeping jurors alert and
focused. Now that several studies have concluded that
the benefits exceed the costs, there is no reason to
disfavor the practice. Like other issues of trial manage-
ment—may jurors take notes? should written jury instruc-
tions and copies of exhibits be sent to the jury room
12 No. 08-1373
during deliberations?—whether to allow the jurors to
pose questions is a topic committed to the sound discre-
tion of the judge. That discretion was not abused in this
case; to the contrary, the judge’s decision, like his super-
vision of the questioning process, was well considered
and sensible.
Koenig contends that the judge should have limited the
jurors to “clarifying” questions, but jurors’ perspectives
are so different from those of lawyers that it is difficult to
see how such a limit could be enforced (or why it
would be appropriate). Testimony that seems clear to a
specialist in accounting or securities law may be con-
fusing to a juror encountering these subjects for the
first time, so a juror may see as “clarifying” a question that
the lawyer sees as unnecessary or obtuse. A judge
should serve as a filter for questions and eliminate or
rephrase those that are irrelevant or disguised argument
(as the judge at this trial did); more than that a court of
appeals cannot sensibly demand.
That some glitches occurred in the process—the judge
forgot to ask some of the jurors’ questions for some wit-
nesses, and he failed to call back one witness when the
jurors wanted to ask additional questions—is neither
surprising nor a ground for concern. Trials are complex
proceedings, and a judge must concentrate attention on
what is most pressing. Jurors were told not to draw
inferences from the judge’s decision not to ask particular
questions; there is little reason to think that jurors would
have held against Koenig the judge’s failure (even if
inadvertent) to ask any particular question. Nor does it
No. 08-1373 13
strike us as unusual or a source of concern that three
jurors collectively asked about two-thirds of the 127 total
questions submitted by the panel; some people are more
voluble than others. That the panel had members of
different interests and proclivities is a strength rather
than a weakness of the system. (Note that 127 questions
is roughly two per trial day; this litigation was not
taken over by the jury.)
Koenig sees in some of the proposed questions (princi-
pally those filtered out by the judge) signs that a few
jurors had made up their minds or taken an adversarial
position in mid-trial. It is dangerous to draw such infer-
ences from questions; judges often ask pointed questions
of both sides, and it would be a mistake to infer from
these questions that the judge was leaning against both
litigants. No matter. Koenig’s position seems to be that
ignorance is bliss: if some jurors have reached a tentative
conclusion in mid-trial, it is best not to know it. Why?
Jurors must be impartial, but like everyone else they
respond to evidence and may think that they know enough
even when lawyers want to feed them more. (We’ve
already said that this trial lasted far too long; it is no
surprise that some jurors thought they knew enough to
decide even while the trial was ongoing.) Lawyers should
want to know when some jurors are tending the other
side’s way, so that they can make adjustments to their
presentations in an effort to supply whatever proof the
jurors think vital, but missing. Just as questions from the
bench can supply insight that helps lawyers make a
stronger case, so questions from jurors can help lawyers
tailor their presentations. Keeping jurors silent won’t
14 No. 08-1373
prevent them from reacting to the evidence; it will just
make it harder for lawyers to know how things are
going. It is a lot easier (and more reliable) to read jurors’
questions than to read the expressions on their faces.
c. Koenig hired Frederick C. Dunbar, an economist on the
staff of National Economic Research Associates, to serve as
an expert witness on the question of materiality. He
prepared a report and was subject to a deposition, but
Koenig did not present his report or testimony at trial.
Dunbar conducted an event study, using stock price
changes (net of changes in the market as a whole) to
isolate the effects of particular disclosures. After using
statistical methods to remove the effects of what he
deemed confounding events (such as the resignation of
Waste Management’s top managers), Dunbar concluded
that disclosure of Koenig’s netting, basketing, and other
accounting devices caused Waste Management’s stock to
drop by $3.22 a share (a total loss of $1.45 billion, since
the firm had about 450 million outstanding shares). The
SEC found Dunbar’s conclusions helpful, because it
deems an effect of this magnitude to be material. (On
the definition of materiality in securities law, see TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), and
Higginbotham v. Baxter International Inc., 495 F.3d 753, 759
(7th Cir. 2007).) So the SEC introduced Dunbar’s testi-
mony via the video of his deposition. Koenig maintains
that the district court should not have let the SEC do this,
because the agency did not include him on its list of
potential witnesses.
Rule 26(a)(2)(A) requires litigants to alert the other side
to their intended expert witnesses, and Rule 37(c)(1)
No. 08-1373 15
provides that failure to identify a witness as Rule 26
requires means that “the party is not allowed to use
that . . . witness to supply evidence . . . at a trial, unless the
failure was substantially justified or is harmless.” What
Rule 26(a)(2)(A) says is that “a party must disclose to the
other parties the identity of any witness it may use at
trial to present” expert testimony. Disclosure of a
potential witness’s “identity” differs from disclosure of a
plan to call that witness. Koenig did not need to know the
identity of Frederick C. Dunbar; he was Koenig’s own
expert, after all, and appeared on the list of expert wit-
nesses that Koenig sent to the SEC. Whether the adverse
party wants to question an expert whose identity has
already been revealed is not a subject within the scope
of Rule 26(a)(2). A district judge may call for disclosure of
each party’s plans about who to put on the stand, but
Koenig does not contend that the SEC violated its obliga-
tions under the pretrial order. (The SEC included
Dunbar in its witness list for the pretrial order; Koenig’s
objection is not to a mid-trial surprise but to the fact that
the notice did not come before discovery closed, a year
or more before the witness lists of the pretrial order
were exchanged.)
Rule 26(a)(2)(A) facilitates preparation for expert testi-
mony. Disclosure of experts’ identities, and their conclu-
sions (reflected in their reports), is essential if lawyers
(who are not themselves experts in accounting,
economics, or other bodies of specialized knowledge) are
to prepare intelligently for trial. Disclosure also permits
lawyers to ask for other experts’ views on the soundness
of the conclusions reached by the testimonial experts.
16 No. 08-1373
None of these considerations calls for notice from the
SEC of a desire to call Dunbar. Koenig’s legal team had
his report, had been at the deposition, and for all we know
had a platoon of non-testimonial experts analyze every-
thing Dunbar wrote and said, which may be why Koenig
did not present Dunbar’s views at the liability portion of
the trial. (The trial was bifurcated, and Koenig did use
Dunbar in its remedial portion.)
Suppose this is wrong, however, and that the SEC should
have identified Dunbar during discovery as its own
witness. Rule 37(c)(1) says that a harmless lack of notice
may be overlooked. See also 28 U.S.C. §2111; Fed. R. Civ. P.
61. Delay in alerting Koenig that Dunbar might testify
was as harmless as they come, given Dunbar’s status as
Koenig’s expert. The Committee Note accompanying the
1993 amendment to Rule 37 (when Rule 37(c)(1) took its
current form) gives, as an example of a harmless viola-
tion, “the failure to list as a trial witness a person so
listed by another party”; that fits this case. Koenig main-
tains that with more advance notice from the SEC he
would have withdrawn Dunbar as an expert. But how
could that have helped? A witness identified as a testimo-
nial expert is available to either side; such a person can’t
be transformed after the report has been disclosed, and a
deposition conducted, to the status of a trial-preparation
expert whose identity and views may be concealed. See
Fed. R. Civ. P. 26(b)(4)(B). Disclosure of the report ends
the opportunity to invoke confidentiality. So if the SEC
had identified Dunbar as an expert it might call, nothing
Koenig could have done would have blocked the SEC
from using Dunbar’s conclusions. Any delay was harmless.
No. 08-1373 17
3. a. The district court ordered Koenig to disgorge some
$2.1 million (about $800,000 in bonuses and $1.2 million
in prejudgment interest) and to pay a penalty equal to the
total of bonuses and interest. A judge may select a penalty
“in light of the facts and circumstances”, see 15 U.S.C.
§77t(d)(2)(A), §78u(d)(3)(B)(i), but the award may not
exceed the greater of $100,000 or “the gross amount of
pecuniary gain to [the] defendant as a result of the viola-
tion”. 15 U.S.C. §77t(d)(2)(C), §78u(d)(3)(B)(iii). The
district judge treated prejudgment interest as part of
Koenig’s “pecuniary gain” and then imposed the highest
penalty allowed by these statutes.
Koenig contends that interest is not part of “pecuniary
gain” and that the highest lawful penalty therefore is the
principal amount of the disgorged bonuses. The argu-
ment that interest is itself some kind of penalty is not
novel; it has been made, and rejected, many times.
“[P]rejudgment interest is an element of complete com-
pensation”. West Virginia v. United States, 479 U.S. 305, 310
(1987). The reason is simple: Given inflation and the
power of money to earn an economic return, a dollar
received in 1992 is worth considerably more than a
dollar in 2009. How much more? The difference can be
specified by an appropriate rate of interest. See, e.g.,
Milwaukee v. Cement Division of National Gypsum Co., 515
U.S. 189 (1995); General Motors Corp. v. Devex Corp., 461
U.S. 648 (1983); In re Oil Spill by the Amoco Cadiz off the
Coast of France on March 16, 1978, 954 F.2d 1279, 1331–35
(7th Cir. 1992). Koenig’s “pecuniary gain” is the amount he
obtained by his fraudulent accounting, plus the
economic return he made (or could have made) by invest-
18 No. 08-1373
ing that sum between 1992 and the date of disgorgement.
And prejudgment interest is the right way to estimate
the second component. Depriving Koenig of both the
principal amount, and the economic return measured by
prejudgment interest, puts him in the same position as if
he had not received any ill-got gains in 1992 through 1996.
Koenig’s bonuses were paid in 1992 through 1996 dollars.
The penalty is being assessed in 2009 dollars. To make
these comparable, either prejudgment interest must be
added to the bonuses, or the penalty must be stated in
1992 dollars and the whole sum brought forward to
2009 with prejudgment interest. There would be no
conceivable reason to state the pecuniary gain in 1992
dollars and the penalty in 2009 dollars, without any
adjustment for the time value of money. And if any
adjustment is to be made, adding prejudgment interest to
each disgorged bonus is the simplest way. Koenig does not
contend that the rate of interest (which the judge set at
the rate imposed on underpayment of taxes, see 26 U.S.C.
§6621(a)(2)) is too high—indeed, given the rates of
return made on investments during the 1990s, and the
fact that Koenig most likely would have paid more than
the statutory rate to borrow money, it probably is too low
(though the SEC has not filed a cross-appeal). Thus the
district court was entitled to treat the disgorged bonuses,
plus prejudgment interest, as Koenig’s “pecuniary gain”
and to impose an equal penalty in 2009 dollars.
b. Waste Management awarded bonuses to its executive
managers based on increases in the company’s earnings
(per share) over the previous year. The firm originally
No. 08-1373 19
reported earnings per share of $1.60 in 1991, $1.86 per
share in 1992, $1.53 per share in 1993, $1.63 per share in
1994, and $1.78 per share in 1995. It paid Koenig bonuses
of $161,500 in 1992, $250,000 in 1994, and $420,000 in 1995.
The restatement of earnings changed all of the profit
numbers. Roman Weil, a professor of accounting at the
University of Chicago, testified as an expert for the SEC
about how the firm’s profits should be adjusted after the
restatement, and how those adjustments would have
affected Koenig’s bonuses. Weil concluded, and the
district judge found, that Koenig would not have
received a bonus for any of these years had Waste Manage-
ment’s profits been stated accurately. That’s the basis of
the judge’s disgorgement order.
Koenig contends that Weil’s testimony should not have
been received, but the district judge did not abuse his
discretion in qualifying Weil as an expert and concluding
that he had employed reliable methods. See Fed. R. Evid.
702. The problem is not Weil’s methods but the district
judge’s failure to discuss how Weil’s approach applied
to the 1992 bonus. For it was essential to restate not only
the 1992 profits but also those from 1991, to discover
whether Koenig would have received a bonus (and, if so,
how much) had profits been accounted for accurately
throughout the period.
Weil concluded that, with all accounting done correctly,
Waste Management should have reported a profit of $1.46
(rather than $1.60) per share for 1991, and $1.62 (rather
than $1.86) per share in 1992. This implies that Koenig
would have received some bonus in 1992 had all accounts
20 No. 08-1373
been stated truthfully. The district judge did not explain
why Koenig’s proper bonus for 1992 nonetheless should
be set at zero. The judge appears to have compared the
original (inflated) profits for year n with the restated
profits for year n+1 when deciding whether Koenig should
have received a bonus for year n+1. For consistency, the
court should use the restated profits throughout. To be
safe, the district judge should review all of the bonus
calculations for 1991 through 1996 as they would have
been, had the accounting been done correctly from the
outset. If this leads to a change in the amount of prejudg-
ment interest and the maximum statutory penalty, those
subjects too must be reopened.
Koenig’s other arguments have been considered but do
not require discussion. The judgment is affirmed except
with respect to the calculation of Koenig’s bonuses under
proper accounting, and the case is remanded for
further proceedings consistent with this opinion.
2-26-09