Keating v. Hood

• Decision Date: 16 September 1999
• Docket Number: RESPONDENTS-APPELLANTS,PETITIONER-APPELLEE,No. 98-55468,98-55468
• Citation: 191 F.3d 1053
• Parties: (9th Cir. 1999) CHARLES H. KEATING,, v. ROBERT HOOD; ATTORNEY GENERAL OF THE STATE OF CALIFORNIA,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1053

191 F.3d 1053 (9th Cir. 1999)

CHARLES H. KEATING, PETITIONER-APPELLEE, v. ROBERT HOOD; ATTORNEY GENERAL OF THE STATE OF CALIFORNIA, RESPONDENTS-APPELLANTS.

No. 98-55468

U.S. Court of Appeals, Ninth Circuit

Argued and Submitted November 5, 1998

September 16, 1999

Amended October, 1999

[Copyrighted Material Omitted]

Sanjay T. Kumar, Deputy Attorney General, Los Angeles, California, for the respondents-appellants.

Scott D. Devereaux and Stephen C. Neal, Cooley Godward, Palo Alto, California, for the petitioner-appellee.

Andrew R. McGaan, Kirkland & Ellis, Chicago, Illinois, for the petitioner-appellee.

Appeal from the United States District Court for the Central District of California. John G. Davies, District Judge, Presiding D.C. No. CV-98-00578-JDG

Before: Robert Boochever, Stephen Reinhardt, and Pamela Ann Rymer, Circuit Judges.

Opinion by Judge Reinhardt; Partial Concurrence and Partial Dissent by Judge Rymer

Reinhardt, Circuit Judge

Most readers of this opinion will be well acquainted with the activities of Charles Keating, whose corporations, American Continental Corporation and Lincoln Savings & Loan, bilked elderly individuals out of millions of dollars of savings by selling them worthless savings bonds. Keating was prosecuted in both federal and state court, and sentenced to substantial terms of imprisonment, to be served concurrently. He ultimately spent five years in prison. His federal and state trials were both marred, however, by errors which led our court to reverse his federal conviction¹ and a federal district court to grant his state habeas petition. Following these actions, Keating was released from prison prior to the completion of his prison sentences. At the time, only six months remained before he would have become eligible for parole on his state sentence. Keating subsequently pleaded guilty to the federal charges and, pursuant to a plea agreement, was sentenced to time served.

We now consider whether the district court's decision granting Keating habeas relief from his state conviction was legally correct. The decision was based on the ground that the jury instruction defining the offense of securities fraud erroneously omitted the mens rea element. We affirm the district court's holding that the omission of this essential element of the offense violated due process and requires the reversal of Keating's conviction.

I. BACKGROUND

In 1990, Keating was indicted in California state court for violating sections 25401 and 25540 of the California Corporations Code, which make it a criminal offense to offer or sell a security "by means of any written or oral communication which includes an untrue statement of material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. " The state contended, in essence, that the bond sellers were misled by Keating's failure to inform them of American Continental's poor financial condition and the riskiness of the bonds, and that they, in turn unwittingly misled the bond purchasers. It is undisputed that in 1989, when American Continental's financial circumstances had deteriorated to the point where the company was no longer able to make payments on the bonds, it filed for bankruptcy and most of the bond purchasers lost the money they had invested.²

Prior to trial, the Judge informed the jury that Keating could be held criminally responsible either as a direct perpetrator or for aiding and abetting the offense. Before the parties' closing arguments, however, a dispute erupted over whether a direct perpetrator theory of liability would be presented to the jury. The defense requested a jury instruction that, because Keating had not personally sold or offered the securities to the purchasers, he could only be convicted as an aider and abettor. The prosecution objected, informing the court that it planned to argue both theories to the jury. Keating renewed his protest, pointing out that he had had no face-to-face contact or direct communication with the individuals named in the indictment, and the trial Judge concurred with his skepticism about the direct perpetrator theory. The prosecutor countered that a direct perpetrator instruction was "supported in an evidentiary sense" if Keating was viewed as the original source of the offer and of the misleading omission of information. The prosecution characterized Keating "as the alter ego for the corporation" and stated that in its view "the gravaman of the offense... is not so much an actual sale as it is the omission or misrepresentation aspect of it." This theory identified Keating as the source of the failure to notify anyone of the financial risks of the bonds, a material omission that was ultimately transmitted to the bond purchasers, and that was "violative of the statute just as much as an actual sale." As the Judge's discomfort with the prosecution's theory of liability became increasingly clear, the prosecution urged one last possible way to view Keating as a direct perpetrator:

[O]ne thing the evidence does demonstrate is that it was the defendant who singly was setting the terms of the offer, interest rates in the offer, maturity dates in the offer and that [American Continental] was promulgating various material in the form of track records, annual reports and the like that were utilized as part of an offer as well for these individuals. And I would state in that regard, the bond seller becomes a communicator of that; but it is the defendant again who is the source of the bond.

The Judge was not convinced. While acknowledging that "both theories are in a technical sense before the jury," he concluded that the direct perpetrator theory was inconsistent with both the wording of the indictment, which charged "a completed sale" rather than an offer, and the statute under which the prosecution had charged Keating. The defendant continued to urge the Judge to offer the instruction that Keating could only be convicted as an aider and abettor, arguing that the need for such an instruction was clearly demonstrated by the prosecution's insistence that a direct perpetrator theory was supported by the evidence. Realizing that if it did not back off of its insistence that a direct perpetrator theory was viable, the Judge would give the instruction proposed by the defense, the prosecution promised to argue the case only under an aiding and abetting theory.

When the defense attorney later renewed his request for an instruction limiting the basis on which Keating could be convicted, the Judge announced, "I had previously declined to so instruct because I think the evidence is clear that Mr. Keating never actually had any face-to-face contact with any of the bond purchasers. So clearly his only liability can be as an aider and abettor. I think that's already abundantly clear."

After closing arguments, which are discussed in greater detail later in this opinion, the Judge instructed the jury.³ Because the content of the jury instructions is of paramount importance in this case, they are excerpted here:

Every person who willfully sells or offers to sell a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, is guilty of a violation of sec tions 25401/25540 of the California Corporations Code.

In order to prove such crime, each of the following elements must be proved:

1. The defendant willfully sold or offered to sell a security in the state of California;

2. By means of any written or oral communication which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

The term "offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or an interest in a security for value.

The term "sale" or "sell" includes every contract of sale of, contract to sell, or Disposition of, a security or interest in a security for value.

The persons concerned in the commission of a crime who are regarded by laws as principals in the crime thus committed and equally guilty thereof include:

1. Those who directly and actively commit the act constituting the crime, or;

2. Those who aid and abet the commission of the crime.

Trial Transcript at 7468-70.

The jury was then instructed that, in order to convict Keating under the aiding and abetting theory, it would have to find that he knew that the bond sellers were making untrue statements or omitting material facts and that he intended to facilitate, encourage or promote these untrue statements or omissions.⁴

Two key facts are apparent from a reading of the instructions. First, the instructions did not limit the jury to an aiding and abetting theory, but outlined two possible bases for Keating's criminal liability and allowed the jury to convict him on either theory it deemed proven. Second, the instructions allowed the jury to convict Keating as a direct perpetrator without finding that he had any knowledge of the falsity of the information that he conveyed or that he was negligent or reckless for failing to know; in other words, with respect to the direct perpetrator theory, the instructions contained no mens rea requirement. This was consistent with the interpretation that the California Court of Appeals had given the law at the time. See People v. Baumgart, 267 Cal.Rptr. 534, 540-41, 218 Cal.App.3d 1207, 1219-20 (Cal. Ct. App. 1990) (concluding that SS 25401 and 25540 required no criminal intent); People v. Johnson, 262 Cal.Rptr. 366, 369, 213 Cal.App.3d 1369, 1375 (Cal. Ct. App. 1989) (same).

The jury returned a verdict convicting Keating of seventeen of...