Thursday, January 21, 2021

Convictions vacated against bank executives: government must prove a statement false under each objectively reasonable interpretation of an ambiguous reporting requirement

United States v. Harra, --- F.3d ---, 2021 WL 97446, Appeal Nos. 19-1105, 19-1136, 19-1190, 19-1237 (Jan. 12, 2021); https://www2.ca3.uscourts.gov/opinarch/191105p.pdf

Wilmington Trust financed commercial real estate/construction projects. Extensions were common: the loan documents reserved its right to “renew or extend (repeatedly and for any length of time) this loan . . . without the consent of or notice to anyone.” Wilmington called this the “waiver process” and its internal policy did not classify loans in the “waiver process” as past due if the loans were in the process of renewal and interest payments were current. Even though regulatory agencies required Wilmington to report loans that were “contractually past due,” Wilmington excluded loans in the “waiver process” from those it reported as “past due” to the SEC and the Federal Reserve. Around 2009, these commercial loans were a large feature of Wilmington’s portfolio and represented over $300 million in loans. The defendant bank executives argued that under a reasonable interpretation of the reporting requirements, they properly excluded these loans from the “past due” classification. The District Court denied their requests to introduce evidence concerning or instruct the jury about that alternative interpretation. The jury convicted on all counts, including conspiracy to defraud the United States, commit securities fraud, and make false statements to regulators, 18 U.S.C. § 371; securities fraud, 18 U.S.C. § 1348; making false statements to the SEC and Federal Reserve, 18 U.S.C. § 1001 and 15 U.S.C. § 78m; and falsely certifying financial reports, 18 U.S.C. § 1350.

The Third Circuit found that, to prove falsity beyond a reasonable doubt, the government must prove a statement false under each objectively reasonable interpretation of an ambiguous reporting requirement. That is, the government must prove either (1) that its interpretation of the reporting requirement is the only objectively reasonable interpretation or (2) that the defendant’s statement was also false under the alternative, objectively reasonable interpretation. To hold otherwise would violate Due Process and the government’s burden to prove each element: because falsity and knowledge are distinct elements, the government must prove a statement was false beyond a reasonable doubt, regardless of the defendant’s subjective intent to lie.

Under this standard, the evidence was insufficient on the false statements convictions and the Court entered a judgment of acquittal. The Court found sufficient evidence of an alternative theory of liability on the conspiracy and securities fraud convictions, improper short-term mass waivers, but the error as to the false statements theory of liability infected all counts and was not harmless and so the conspiracy and securities fraud convictions were vacated and remanded for retrial.

 

 

 

 

 

 

 

 

 

 


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