liquidity or operational results, and 17 C.F.R. § 229.503, incorporated in Form S-1 by Item 3, which requires that a registrant provide a discussion of "the principal factors that make the offering speculative or one of high risk."
The IC's argument involves a lengthy chain of inferences. Crop Growers' Forms S-1 discussed the implications of proposed legislative changes in the Federal Multi-Peril Crop Insurance Program. However, those forms did not discuss the alleged FECA violation, which could have jeopardized Crop Growers' participation in the Program. Thus, the IC argues, the discussion of the risk to the Program from the pending legislation was incomplete. To make the forms complete and not misleading under Rule 12B-20, the IC claims that Defendants would have had to disclose and discuss the alleged violations of FECA. The Court finds this argument both attenuated and untenable.
The specific forms at issue do not specify that criminal liability can be imposed if the forms are not completed in compliance with law. Further, the terms of the regulations do not set forth required disclosures in precise terms. Qualitative terms such as "risk", "trend", and "uncertainty" do not provide sufficient notice that a particular disclosure is required to allow criminal liability to attach for alleged non-disclosure. Accord Matthews, 787 F.2d at 48 (citations omitted). Such terms are, quite simply, too vague and amorphous to give fair notice, required by the Due Process clause, of what disclosure is required. As to the specific regulations, the Court has found no case law supporting the IC's view that these general disclosure requirements can provide a basis for criminal liability, and the IC does not cite any case supporting that view. Nor was the Court able to find any federal case which specifically discussed 17 C.F.R. § 229.503, the risk factors provision, in conjunction with required disclosures. As for the general disclosure of trends under 17 C.F.R. § 229.303, the Court was also unable to find any case supporting the IC's broad reading of that regulation. Thus, neither regulation, even when read in conjunction with 17 C.F.R. § 240.12B-20, will support criminal liability for failing to disclose uncharged, uninvestigated criminal conduct.
The other alleged omissions, namely, that a material contingent liability existed because of the alleged FECA violations, that Crop Growers' financial statements were misleading, and that Crop Growers, its subsidiaries, and their officers faced potential criminal liabilities, also fail to support a Section 1001 concealment charge because Defendants had no duty to disclose that information.
First, since the Defendants had no duty to disclose uncharged criminal conduct underlying these additional omissions, it logically follows that they had no duty to disclose the additional facts. Second, to the extent that any duty to disclose is predicated on professional standards not codified in any statute or regulation, there can be no criminal liability. As previously stated, the predicate for criminal behavior must be set out with sufficient clarity to put a potential defendant on notice that the conduct is proscribed. Criminal liability cannot be extended to violations of Financial Accounting Standards Board (FASB) standards not codified in criminal statutes and open to varying interpretations. See In re Verifone Secs. Litig., 11 F.3d 865, 870 (9th Cir. 1993) (stock exchange rules cannot be imported into body of securities laws).
For the reasons discussed above, the portions of the Indictment relating to Counts Six through Fifteen, based on a Section 1001 concealment charge and the corresponding claims under 18 U.S.C. § 2, must be dismissed because Defendants had no duty to disclose the conduct alleged.
B. Section 1001 False Representations
The elements of a false representation prosecution under Section 1001 are that (1) the defendant made a statement; (2) the statement was false, fictitious or fraudulent as far as the defendant knew; (3) the statement was made knowingly or willfully; (4) the statement was within the jurisdiction of a federal agency; and (5) the statement was material. United States v. Irwin, 654 F.2d 671, 675-76 (10th Cir. 1981) (citations omitted). Thus, a false representation charge requires that the defendant made a misrepresentation or used a document that contained a false statement or entry, in other words, that the defendant made some sort of active misrepresentation. United States v. London, 550 F.2d 206, 212 (5th Cir. 1977); United States v. Diogo, 320 F.2d 898, 902 (2d Cir. 1963).
Defendants contend that the Indictment fails because it does not allege the use of affirmatively false documents or writings. The Indictment itself rests only on the alleged omissions discussed in Section IIA, above, and is thus fatally deficient.
The IC simply misstates the law when it says that no falsehood is required under the false representations prong of Section 1001. Diogo, 320 F.2d at 902. The IC contends that a Section 1001 prosecution can rest on omissions in statements if those omissions make the statements "misleading in light of the other contents in the document and a duty to disclose." Government's Combined Opposition at 32. A false representations prosecution cannot rest
upon the omission of an explanation, which omission only carries with it 'implications of a state of facts which were not . . . true.' To so hold would distort the language of the statute and assimilate the separate offence of concealment into the different one of false representations solely because of a similarity of prohibited objectives.
Diogo, 320 F.2d at 905 (quoting Lutwak v. United States, 344 U.S. 604, 612, 97 L. Ed. 593, 73 S. Ct. 481 (1953)). Thus, the IC's argument must fail.
The IC also relies on United States v. Mattox, 689 F.2d 531, 533 (5th Cir. 1982) (per curiam), and Irwin, 654 F.2d at 676, for the proposition that silence may be falsity. These cases are unconvincing because they are predicated on a duty to speak. See Mattox, 689 F.2d at 532-33 ("Silence may be falsity when it misleads, particularly if there is a duty to speak."); Irwin, 654 F.2d at 676 ("If there are facts that should be reported, leaving a blank belies the certification . . . that the information is 'true and correct.'") (emphasis added).
Thus, neither Mattox nor Irwin is sufficiently on point to provide support for the IC's contentions.
The Indictment does not assert that there are any affirmatively false statements in the SEC filings. Thus, the Indictment must fail on that basis. Accordingly, the portions of the Indictment relating to alleged false misrepresentations under 18 U.S.C. § 1001 and 18 U.S.C. § 2 are dismissed.
V. Liability Under 15 U.S.C. §§ 77q(a) and 77x
Defendants argue that Count Sixteen of the Indictment, which alleges securities fraud in violation of 15 U.S.C. §§ 77q(a) and 77x, should be dismissed because there was no duty to disclose the allegedly material facts to the investing public. Although the IC does not specifically address the duty argument as it relates to these statutory provisions, the Court assumes that their duty arguments relating to 18 U.S.C. § 1001 apply here as well.
There are no cases in this Circuit that squarely address the issue of silence in a prosecution for violation of Section 17(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 77q(a).
However, the language of that provision closely tracks the language of Rule 10b-5,
17 C.F.R. § 240.10b-5, promulgated pursuant to Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b). Although Rule 10b-5 is somewhat broader than Section 17(a) because it refers to "any person" rather than "purchaser", in the context of this case both proscriptions operate in a substantially similar way. See S.E.C. v. Maio, 51 F.3d 623, 631 (7th Cir. 1995) (citing S.E.C. v. International Loan Network, Inc., 770 F. Supp. 678, 694 (D.D.C. 1991), aff'd, 297 U.S. App. D.C. 22, 968 F.2d 1304 (D.C. Cir. 1992)); Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 531 (7th Cir. 1985); S.E.C. v. Lauer, 864 F. Supp. 784, 793 (N.D. Ill. 1994), aff'd, 52 F.3d 667 (7th Cir. 1995)); Kirshner v. Goldberg, 506 F. Supp. 454, 458 n.4 (S.D.N.Y. 1981), aff'd mem., 742 F.2d 1430 (2d Cir. 1983); Branham v. Material Sys. Corp., 354 F. Supp. 1048, 1054 (S.D. Fla. 1973). Thus, the interpretation of Section 17(a) is guided by principles articulated in Rule 10b-5 cases.
The Supreme Court has squarely held that "when an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Chiarella v. United States, 445 U.S. 222, 235, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980). Thus, whether Defendants can be held criminally liable for failing to disclose certain information in their submissions to the SEC turns on whether they had a duty to do so. Although the cases interpreting Chiarella have arisen in the context of insider trading with non-public information, the logic of the cases is equally applicable to the case at bar. According to our Court of Appeals, a duty to disclose attaches "only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws." Dirks v. S.E.C., 220 U.S. App. D.C. 309, 681 F.2d 824, 837 (D.C. Cir. 1982), rev'd on other grounds, 463 U.S. 646, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983).
Reading these holdings against the backdrop of due process concerns outlined in Part IV A of this opinion, the Court concludes that Defendants had no duty to disclose the allegedly material facts listed in the Indictment. Thus, Count Sixteen of the Indictment must be dismissed.
VI. Multiplicity of Counts Six Through Fifteen
Defendants next argue that Counts Six through Fifteen are multiplicitous because the same alleged omissions form the basis of each Count. Therefore, they move that the Counts be dismissed pursuant to Fed. R. Crim. P. 12(b)(2).
In general, the law protects a defendant against multiplicitous indictments to avoid multiple sentences for what is, in essence, a single offense, and because such indictments might be unduly suggestive to a jury. 1 Charles A. Wright, Federal Practice and Procedure: Criminal 2d § 142 (1982). See United States v. Duncan, 850 F.2d 1104, 1108 n.4 (6th Cir. 1988). Defendants rely on United States v. Clarridge, 811 F. Supp. 697 (D.D.C. 1992) to support their contention that only separate and distinct false statements can provide a basis for separate counts under 18 U.S.C. § 1001.
In Clarridge, a CIA officer was indicted on five counts of perjury in violation of 18 U.S.C. § 1621 and two counts of making false statements under 18 U.S.C. § 1001. The Section 1001 charges arose from testimony elicited before various Congressional committees and in depositions regarding Colonel Oliver North's involvement in the shipment of military equipment to Iran. 811 F. Supp. at 699. The court held that the Blockburger18 "same elements" test for determining whether subsequent prosecutions for the same conduct are barred by the Double Jeopardy clause applied, with some modifications, to the defendant's multiplicity claim. Id. at 702. The test articulated by that court was:
each count must set forth a separate lie or false statement, and in cases where the facts present a close question of whether separate lies exist, it is relevant to inquire into the degree to which the second statement impaired the body before which it was made.
Id. at 703.
Defendants contend that Clarridge dictates a finding that Counts Six through Fifteen are multiplicitous because the IC alleges that the same lies make up the bases for each Count. However, Defendants cite no cases where this test has been adopted in the context of a false or fraudulent writing. Moreover, the majority of courts applying the Blockburger test in the false writings context have held that each and every false document submitted to the government can be charged as a separate violation of Section 1001. See United States v. Guzman, 781 F.2d 428, 432-33 (5th Cir. 1986) (per curiam), cert. denied, 475 U.S. 1143, 90 L. Ed. 2d 343, 106 S. Ct. 1798 (1986); United States v. Bennett, 702 F.2d 833 (9th Cir. 1983).
The language of Section 1001 itself leads the Court to the conclusion that Congress intended to make each use of a false writing or statement a separate offense. The statute imposes liability for "any false writing or document." 18 U.S.C. § 1001. The use of the singular form of the words "writing" and "document" implies that each document or writing filed is actionable. Accord, United States v. Bettenhausen, 499 F.2d 1223, 1234 (9th Cir. 1974) (allowing multiple charges for each document in a group of documents filed at the same time).
This finding is not inconsistent with Clarridge. In Clarridge, the defendant made false statements in response to questioning by government officials, raising concerns that the government could increase the number of charges against a defendant by repeatedly asking him the same question. 811 F. Supp. at 702-03. The same coercive concerns are not implicated here. The government was not eliciting false statements from Defendants. Rather, Defendants affirmatively submitted documents on their own initiative to obtain government approval to engage in economic activity they believed would ultimately be profitable.
For the reasons stated above, Defendants' Motion to Dismiss Counts Six through Fifteen because of multiplicity is denied.
Defendants contend that Counts Four, Five, Seventeen, and Eighteen should be dismissed because venue for those crimes does not lie in the District of Columbia.
The Court must first address the IC's contention that venue may only be decided by the jury. The IC argues that, so long as conduct is alleged in the District of Columbia, the Indictment is sufficient and the IC bears the burden of proving venue by a preponderance of the evidence at trial. Government's Combined Opposition at 39-40.
Venue is an affirmative defense, S.E.C. v. Ernst & Young, 775 F. Supp. 411, 412 (D.D.C. 1991), which ordinarily is submitted to the jury. United States v. Lam Kwong-Wah, 288 U.S. App. D.C. 54, 924 F.2d 298, 300 (D.C. Cir. 1991). Venue may be proper in more than one district, id. (citation omitted), but must be proper for each count of the indictment. United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181, 1188 (2d Cir. 1989), cert. denied, 493 U.S. 933 (1989). In this case, because no one disagrees about where the books, records and financial records were compiled and made (Montana and Texas) or where they were filed (the District of Columbia), it is perfectly appropriate for this Court to decide the issue of whether venue is proper. See United States v. Anderson, 328 U.S. 699, 90 L. Ed. 1529, 66 S. Ct. 1213 (1946) (determination of venue on basis of defendant's demurrer).
The Constitution and the Federal Rules of Criminal Procedure guarantee that a defendant will be tried in the state and district where the charged offense was allegedly committed. U.S. Const. Art. III, § 2, cl. 3; U.S. Const. Amend. VI; Fed. R. Crim. P. 18; Jones v. Gasch, 131 U.S. App. D.C. 254, 404 F.2d 1231, 1234 (D.C. Cir. 1967), cert. denied, 390 U.S. 1029, 20 L. Ed. 2d 286, 88 S. Ct. 1414 (1968). Venue is determined by the locus of the offense and the locus is to be "determined from the nature of the crime alleged and the location of the act or acts constituting it." Anderson, 328 U.S. at 703 (citations omitted). It is important to remember that
questions of venue in criminal cases . . . are not merely matters of formal legal procedure. They raise deep issues of public policy in the light of which legislation must be construed. If an enactment of Congress equally permits the underlying spirit of the constitutional concern for trial in the vicinage to be respected rather than to be disrespected, construction should go in the direction of constitutional policy even though not commanded by it.