filed: April 20, 1992; As Corrected May 4, 1992. .
On Appeal From the United States District Court For the Eastern District of Pennsylvania. (D.C. Crim. No. 89-00174-01). (D.C. Crim. No. 89-00174-02)
Before: Becker and Roth, Circuit Judges, and McCUNE, District Judge.*fn*
Defendants Frederick Gross and William Michael Searcy appeal from judgments against them in a criminal case arising from their participation in a scheme to deceive and defraud shareholders of a company in which they were officers. Gross was convicted of one count of conspiring to violate the securities laws, 18 USC § 371 (1988), and two counts of making false statements to the Securities and Exchange Commission ("SEC"), 15 USC §§ 78m(a), 78ff(a) (1988). Although Searcy was acquitted of both conspiracy to violate the securities laws and causing the filing of a false statement with the SEC, he was convicted of two counts of insider trading, see 15 USC §§ 78j(b) and 78ff (1988) and two counts of mail fraud, see 18 USC §§ 1341 and 1342 (1988). On appeal, Gross argues that the district court erred in not instructing the jury that "good faith" was a defense to the crimes with which he was charged. He also claims that the government violated the Jencks Act, 18 USC § 3500 (1988). Finally, he argues that the district court, in sentencing him, contravened FRCrP 32(c)(3)(D). Searcy also presses the Jencks Act claim. In addition, he contends that his convictions should be reversed because his acquittal on the false statements count was inconsistent with a finding of guilt on the remaining charges and because the district court made certain erroneous rulings at trial. For the reasons that follow, we will affirm.
I. FACTS AND PROCEDURAL HISTORY
Gross was co-founder and Chief Executive Officer of Systems and Computer Technology Corporation ("SCT"), a computer company headquartered in Malvern, Pennsylvania. Searcy was the company's Vice President and one of its Directors. SCT provided computer services to a number of leading American colleges and universities. According to the indictment, Gross and Searcy entered into a conspiracy (Count One) to artificially inflate the income recognition of SCT in order to make the company's publicly-traded stock more attractive to potential and current shareholders. The conspiracy allegedly arose in 1984 when Gross became concerned about the adverse appearance of the company's financial health and resolved to alter it.
According to the government's evidence, early in 1984, Gross directed employees of SCT to issue so-called "out letters" to individuals who had signed or might sign contracts for the provision of goods and services by SCT. The "out letters" gave the clients the option to escape from what would otherwise be legally binding contracts. Nonetheless, the company's revenue reports, prepared by individuals relying on the contracts alone without knowledge of the "out letters," treated the contracts as if they were binding, thereby falsely inflating the revenues reported in the company's revenue reports.
The government further established that because of Gross's deception, false statements about the company's revenue were included in filings with the SEC for the second (Count Two) and third quarters (Count Three) of 1984. The government contended that Searcy also caused the latter filing. In addition, the government's evidence showed that Searcy traded in SCT stock while aware that the stock's value was inflated by the false statements made in the SEC filings. On August 1 and 2, 1984, after the filing of the Third Quarter Report, Searcy sold SCT stock (Counts Four and Five). On August 3 and 4, 1984, Searcy was mailed brokerage confirmations regarding the sale of his stock (Counts Six and Seven). The scheme was exposed when the auditors for SCT uncovered one of the "out letters," and further investigation unveiled the rest of the deception. The indictments followed.
Gross acknowledged at trial that he had taken many of the actions that the government alleged; nevertheless, he contended that he had acted without knowledge of the wrongfulness of his actions and that he could not be convicted of the charged crimes because they required knowledge and willfulness, which he did not possess. Consistent with this theory, Gross requested a jury charge which stated that his good faith was a defense to all the crimes with which he was charged. Gross's proposed jury charge read:
Since an essential element of the crime charged is intent to defraud, it follows that good faith on the part of a defendant is a complete defense to a charge of securities fraud.
A defendant, however, has no burden to establish a defense of good faith. The burden is on the government to prove fraudulent intent and consequent lack of good faith beyond a reasonable doubt.
Even false representations or statements or omissions of material facts do not amount to a fraud unless done with fraudulent intent. However misleading or deceptive a plan may be, it is not fraudulent if it was devised or carried out in good faith. An honest belief in the truth of the representations made by a defendant is a good defense, however inaccurate the statements may turn out to be.
The district court gave this instruction with respect to Searcy on Counts Four through Seven. The court refused, however, to give it with respect to Gross on any of the counts on which he was charged.
Searcy also attempted to demonstrate that he was acting in good faith. He defended himself in part by producing evidence of his good character and arguing that it was inconsistent with the kind of deceptive practice alleged in the indictment. However, Searcy was not allowed to elicit one allegedly important response in this vein, from Peter Walsh, outside counsel for SCT and a government witness at trial. On redirect examination, the government asked Walsh why Searcy had been chosen to replace another SCT official to deal with questions from the public during the investigation of the SCT scandal. The prosecution withdrew the question, but during a subsequent colloquy, outside the hearing of the jury, Walsh stated that Searcy had been chosen for that job because he was "intelligent, articulate and a man of integrity." Searcy's counsel sought to have that testimony repeated in front of the jury, but the district court denied the request on the ground that Walsh had already "testified as to his estimate of [Searcy's] character" and because the court believed Walsh was not competent to testify about the motives of people inside SCT.
Searcy also objected to what he claimed was the government's attack in its closing on his character and on that of his counsel. The prosecution made its most damning comment when, in concluding, the prosecutor asked the jury to "end the defense charade, all the posturing, all the lies, and put the blame where it belongs." Defense counsel immediately moved for a mistrial on the ground that the prosecution's statement impugned the integrity of both defense counsel at trial. The district court denied the motion, but instructed the jury to disregard the prosecutor's statement.
As noted above, the jury convicted Gross on the conspiracy count and on both counts of filing of false statements. Searcy was acquitted on the conspiracy charge and on the filing of false statements charge. The jury convicted him, however, on both insider trading counts and on both mail fraud counts.
After trial but before sentencing, it became apparent that the government had not provided defense counsel with all the notes that it had taken of pre-trial investigative interviews of Henry Simmons, SCT's Chief Financial Official and a key government witness at trial. Counsel for Gross and Searcy became aware that not all the notes had been provided when they examined the government's sentencing memorandum regarding Simmons. That memorandum indicated that there had been thirteen government interviews with Simmons, but counsel for Gross and Searcy had been provided with notes for only six interviews, despite their requests for all Jencks material, including prosecutor's notes of interviews. The Jencks Act requires that district courts "order the United States to produce any statement . . . of the witness in the possession of the United States which relates to the subject matter to which the witness has testified." See 18 USC § 3500(b) (1988).
Upon making this discovery, defense counsel requested that the government provide the notes to them. The government declined initially because it stated that the notes were not notes related to a particular government interview. At a hearing on January 2, 1991, however, the Assistant United States Attorney changed his position and represented that the notes had been destroyed. Then, in February, 1991, the notes reappeared, and the government delivered them to the court for an in camera review in order to determine whether they were Jencks material. After its in camera review, the district court held that the notes were not Jencks material, and it denied the defendants' request for an adversarial hearing to determine whether these or any other notes had been altered or destroyed.
The presentence investigation report for Gross contained a section entitled "Victim Impact Statement," which purported to detail the various harms that the defendant's crimes had caused. Among other things, the report represented that Gross's crimes had caused SCT's shareholders' stock to decline in value by $140,000,000. Pursuant to FRCrP 32(c)(3)(D), Gross's counsel objected to the inclusion of that figure in the report. The government offered to provide testimony to support the figure, but the district court declined the offer, because, it represented, the determination of sentence would not be influenced by the $140,000,000 figure. The court entered an order stating, "The Court will not rely upon the $140 million shareholder loss figure cited in the Presentence Report as a basis for sentencing." When the district court sentenced Searcy, however, it stated with regard to Gross, "My decision [not to consider the $140,000,000 figure] did not mean that the enormity of the loss occasioned by the defendant's conduct is not a factor in sentencing." Indeed, in sentencing Gross, the court commented:
The dimensions of the fraud here were enormous, and the harm that was inflicted on so many people was enormous, and out of that rises a public interest to be vindicated . . .
Because the offense conduct in the case occurred before November 1, 1987, the effective date of the Sentencing Guidelines, the guidelines did not control the district court's sentencing decision. See 18 USC § 3551 (West Supp 1989). On Count One, the court sentenced Gross to two year's imprisonment and a fine of $100,000. On Counts Two and Three, the court suspended imposition of sentence and placed Searcy on two year's probation. The court placed Searcy on probation for two and one-half years and ordered him to do two hundred hours of community service. After entry of the judgments, both Gross and Searcy filed timely appeals. We have appellate jurisdiction under 28 USC § 1291 (1988).
II. FAILURE TO GIVE THE GOOD FAITH INSTRUCTION (GROSS)
We review Gross's claim that the district court erred in refusing to give an instruction on good faith under an abuse of discretion standard. See United States v. Leo, 941 F.2d 181, 200 (3d Cir 1991). We evaluate whether the proffered instruction was legally correct, whether it was not substantially covered by other instructions, and whether its omission prejudiced the defendant. United States v. Smith, 789 F.2d 196, 204 (3d Cir 1986).
Gross represents that his only real defense to the government's charges was good faith and that he stressed good faith throughout the presentation of his case and in his closing. He argues that the failure to provide such an instruction therefore deprived him of the defense and constitutes an abuse of discretion. He further claims that the failure to instruct on good faith was uniquely prejudicial in this case because the district court gave the instruction with respect to Searcy on Counts Four through Seven. Gross argues that the good faith instruction given for Searcy suggested, by negative implication, that the defense was not available to Gross. We must first consider whether the failure to give such an instruction, standing on its own, is an abuse of discretion. Then, we must consider whether giving such an instruction with respect to Searcy gave rise to any unique form of prejudice that requires reversal.
A. Failure to Give a Good Faith Instruction Generally
Count One, which charged Gross with conspiracy, required the government to show that he "agreed to participate in an unlawful scheme with knowledge of its essential nature." See United States v. Gomberg, 715 F.2d 843, 847 (3d Cir 1983) (citations omitted). Similarly, conviction on the false statements charges required the government to show that Gross acted with knowledge of the wrongfulness of his actions. See United States v. Dixon, 536 F.2d 1388, 1397 (2d Cir 1976). The government thus concedes that if Gross believed that what he was doing was lawful, he could not have been convicted of the crimes with which he was charged. The question for our consideration is whether the failure to instruct specifically on good faith as a defense was an abuse of discretion because, in its absence, the jury may not have recognized that proof of the defendant's bad faith was an element of the crimes with which Gross was charged and had to be proven beyond a reasonable doubt.
The district court's reasons for declining to give Gross's requested instruction on good faith are not clear. At one point, the court appears to have believed that such an instruction was unnecessary. Later, however, in its opinion on post-trial motions, the district court held that it had not committed error in refusing to instruct on good faith because:
The instructions that the court gave regarding Count I were as follows:
Before you may find that a defendant has become a member of a conspiracy, the evidence in the case must show beyond a reasonable doubt that the conspiracy was knowingly formed and that the defendant willfully participated in the unlawful plan with the ...