United States v. Cuti

• Decision Date: 26 June 2013
• Docket Number: Docket Nos. 11–3756,11–3831.
• Citation: 720 F.3d 453
• Parties: UNITED STATES of America, Appellee, v. Anthony CUTI, William Tennant, Defendants–Appellants.
• Court: U.S. Court of Appeals — Second Circuit

720 F.3d 453

UNITED STATES of America, Appellee,

v.Anthony CUTI, William Tennant, Defendants–Appellants.

Docket Nos. 11–3756, 11–3831.

United States Court of Appeals,Second Circuit.

Argued: Oct. 25, 2012.

Decided: June 26, 2013.

Brian C. Brook, Clinton Brook & Peed (Matthew J. Peed, Clinton Brook & Peed, and Brian D. Waller, Simon & Partners, LLP, on the brief), New York, NY, for Defendant–Appellant Anthony Cuti.

John J. Kenney (Laura B. Hoguet, Tai–Heng Cheng, Caitlin N. Bush, Damian R. Cavaleri, on the brief), Hoguet Newman Regal & Kenney, LLP, New York, NY, for Defendant–Appellant William Tennant.

Sarah E. McCallum (Rebecca Monck Ricigliano, Katherine Polk Failla, on the brief), Assistant United States Attorneys, for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Appellee.

Before: JACOBS, Chief Judge, WALKER, Circuit Judge, and O'CONNOR, Associate Justice (retired).^*

JOHN M. WALKER, JR., Circuit Judge:

Defendants–Appellants Anthony Cuti and William Tennant appeal from judgments of conviction following a jury trial in the District Court for the Southern District of New York (Deborah A. Batts, Judge ).¹ This opinion addresses Cuti's claim that the district court erred in admitting testimony from two lay witnesses as to what the accounting treatment of certain fraudulent transactions would have been absent the fraud, and Tennant's claims that his conviction should be overturned for insufficient evidence to prove his knowledge of the fraud and that it was error for the district court to give a conscious avoidance jury instruction. We conclude that the district court did not abuse its discretion in admitting the testimony of the non-expert witnesses and that Tennant's claims are without merit.² AFFIRMED.

BACKGROUND

Cuti was the former president, chief executive officer, and board chairman of Duane Reade, a retail drugstore chain in the New York City metropolitan area. Tennant was Duane Reade's former chief financial officer or CFO and senior vice-president, who continued to consult for the company on real estate matters after his formal retirement.

The trial evidence, which we take as credited by the jury, showed that from 2000 to 2004, Cuti and Tennant (collectively, “defendants”) executed a number of schemes to inflate the company's earnings in quarterly and annual financial statements filed with the Securities and Exchange Commission (“SEC”).

The principal scheme consisted of the fraudulent sale of real estate concessions and other rights that Duane Reade held in its storefront leases. When Duane Reade vacated a storefront with an unexpired lease, the right to the remainder of the lease term could have residual value and be sold back to the landlord or to a broker, especially when rental rates had risen. Cuti and Tennant, however, inflated earnings by fraudulently selling real estate concessions that were virtually worthless and surreptitiously repaying the purchasers through payments disguised as expenses.

Cuti and Tennant's primary counterparty to the transactions in this scheme was the Winick Realty Group (“Winick Realty”), a commercial real estate brokerage firm and its subsidiaries (collectively, the “WRG entities”). At trial, Cory Zelnik, a partner at Winick Realty, testified that in 2000, the WRG entities paid $806,000 for concessions in eight leases that Duane Reade had already sold, assigned away or planned to abandon and another $890,000 for options to buy out Duane Reade from three leases that were of minimal value to Winick Realty. The defendants repaid the WRG entities for these outlays using a sham consulting agreement and padded brokerage fees. The revenue immediately recognized from these transactions helped Duane Reade bridge a gap between its true earnings and analysts' expectations for the fourth quarter of 2000. In subsequent quarters, the defendants continued to arrange other sham transactions to inflate company earnings and to repay the counterparties.

Because Duane Reade recognized such significant income from these activities, its external auditor, PricewaterhouseCoopers (“PwC”), required the company to include in its financial statements filed with the SEC, a note stating that the company had no side agreements with or other obligations to the transaction counterparties. At trial, the government produced evidence of side agreements and demonstrated, through witness testimony and voluminous documentation, how the defendants executed and concealed their fraudulent conduct from the company's internal accountants, PwC, the SEC, and the investing public.

As part of its case, the government called Kevin Hallinan, the PwC partner who was Duane Reade's lead outside auditor, and John Henry, Tennant's successor as CFO and the company's chief in-house accountant, to testify as to how they had accounted for the proceeds from the fraudulent transactions; how they would have accounted for the transactions had they been aware of the full facts; and how the material information that was withheld from them led to misstatements in the company's financial statements.

The rules governing the accounting of real estate concession transactions, as Hallinan and Henry explained, are set forth under generally accepted accounting principles(“GAAP”) including Financial Accounting Standards Board Statement No. 13 and SEC Staff Accounting Bulletin No. 104. In order for revenue generated from such a transaction to be recognized immediately, (1) Duane Reade had to have negotiated with the counterparty at arms' length, (2) the transaction must have had value, (3) to the extent the transaction relieved Duane Reade of its obligations under a lease agreement, the company could not be committed to enter into another lease with the same landlord, and (4) the transaction could not create any further obligations for Duane Reade to perform. If any of the foregoing criteria were not satisfied, immediate revenue recognition would have been inappropriate. Both the company's internal accountants and outside auditors adhered to these rules in booking revenue from real estate concession transactions. At trial, the defendants did not dispute that these rules were appropriately and consistently applied.

To demonstrate the impact of the defendants' deception on the preparation and review of the company's financial statements, the government presented Hallinan and Henry with information that Cuti and Tennant had withheld, such as side letters to the transactions, and asked how the withheld information would have affected their accounting. In each instance, Hallinan and Henry replied that if they had been aware of the withheld information, they would not have recognized the full amount of the transaction proceeds as immediate revenue. Defense counsel objected to the use of “what-if-you-had-known” questions as eliciting inadmissible expert opinion testimony from fact witnesses.

In his defense, Tennant asserted that, like Hallinan and Henry, he too was deceived by Cuti's fraudulent scheme and signed transaction documents without knowing that fraud was afoot so there was insufficient evidence of his criminal intent to support a conviction. He also objected to the district court's inclusion of a conscious avoidance instruction in the jury charge, which he claimed was unwarranted and prejudicial.

These arguments are again raised on appeal and we consider them in turn.

DISCUSSION

I. Cuti's claim as to the non-expert testimony

Cuti argues on appeal, as he did below, that the “what-if-you-had-known” questions posed to Hallinan and Henry improperly elicited expert opinion testimony from non-expert witnesses. Because both Hallinan and Henry, while professional accountants, were not qualified as experts, Cuti insists that their testimony as lay witnesses was inadmissible.

We accord a district court's evidentiary rulings deference, and reverse only for abuse of discretion. United States v. Robinson, 702 F.3d 22, 36 (2d Cir.2012). A district court has abused its discretion if its ruling is based on an erroneous view of the law or on a clearly erroneous assessment of the evidence, or if its decision cannot be located within the range of permissible decisions. In re Sims, 534 F.3d 117, 132 (2d Cir.2008).

The Federal Rules of Evidence allow the admission of fact testimony so long as the witness has personal knowledge, seeFed.R.Evid. 602,³ while opinion testimony can be presented by either a lay or expert witness, seeFed.R.Evid. 701⁴ & 702.⁵ The initial question is therefore whether the contested testimony should be characterized as fact or opinion. “[T]he distinction between statements of fact and opinion is, at best, one of degree.” Beech Aircraft Corp. v. Rainey, 488 U.S. 153, 168, 109 S.Ct. 439, 102 L.Ed.2d 445 (1988). We need not adopt verbatim Judge Posner's observation that “[a]ll knowledge is inferential, and the combined effect of [Federal] Rules [of Evidence] 602 and 701 is to recognize this epistemological verity but at the same time to prevent the piling of inference upon inference to the point where testimony ceases to be reliable” to acknowledge its essential truth. United States v. Giovannetti, 919 F.2d 1223, 1226 (7th Cir.1990).

In this case, the inference that Hallinan and Henry were asked to make in answering the hypothetical questions was limited by the factual foundation laid in earlier admitted testimony and exhibits, the factual nature of the hypotheticals, and the witnesses' reasoning, which was based on undisputed accounting rules. These limitations left little room for the witnesses to engage in speculation and ensured that their testimony fell near the fact end of the fact-opinion spectrum.

Moreover, the witnesses, although not qualified as experts, were fact witnesses of a unique sort. Each was a certified and experienced accountant personally familiar with the accounting of the transactions at issue. The hypothetical questions utilized facts that had been...