U.S. v. Bradstreet

• Decision Date: 08 October 1997
• Docket Number: 97-1204,Nos. 97-1164,s. 97-1164
• Citation: 135 F.3d 46
• Parties: Fed. Sec. L. Rep. P 90,135 UNITED STATES, Appellee, v. Bernard F. BRADSTREET, Defendant, Appellant. UNITED STATES, Appellant, v. Bernard F. BRADSTREET Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 46

135 F.3d 46

Fed. Sec. L. Rep. P 90,135

UNITED STATES, Appellee, v. Bernard F. BRADSTREET, Defendant, Appellant.

UNITED STATES, Appellant, v. Bernard F. BRADSTREET Defendant, Appellee.

Nos. 97-1164, 97-1204.

United States Court of Appeals First Circuit.

Heard Oct. 8, 1997.

Decided Jan. 29, 1998.

William J. Kopeny, with whom John W. Powell and Kopeny & Powell, P.C., Irvine, CA, were on brief, for appellant/cross-appellee.

John J. Falvey, Jr. and Jonathan L. Kotlier, Assistant United States Attorneys, with whom Mark W. Pearlstein, Acting United States Attorney, Boston, MA, was on brief, for appellee/cross-appellant.

Before TORRUELLA, Chief Judge, STAHL, Circuit Judge, and LYNCH, Circuit Judge.

STAHL, Circuit Judge.

Bernard F. Bradstreet is the former President and Chief Financial Officer of Kurzweil Applied Intelligence, Inc., a Massachusetts company that develops and sells voice recognition software. Following a twenty-day trial, a jury convicted Bradstreet of conspiring to commit securities fraud, see 18 U.S.C. § 371; securities fraud, see 15 U.S.C. §§ 78j(b), 78ff(a), and 17 C.F.R. § 240.10b-5 ("Rule 10b-5"); and knowingly falsifying Kurzweil's books and records in an attempt to conceal his fraud, see 15 U.S.C. §§ 78m(b)(5), 78ff(a), and 17 C.F.R. § 240.13b2-2. Thereafter, the district court departed downward from the applicable guidelines sentencing range of 51-63 months and sentenced Bradstreet to 33 months in prison, followed by 24 months of supervised release. It also ordered him to pay $2.3 million in restitution.

Bradstreet appeals from his convictions on a number of grounds, only two of which are preserved for plenary appellate review. The government cross-appeals from the district court's sentence, arguing that, on the facts of this case, the downward departure was not within the court's discretion. We affirm the convictions but vacate the judgment and remand for resentencing.

I.

We limit ourselves here to a general overview of the case, deferring more detailed recitations of the facts to later discussions of relevant issues.

To sell stock to the general public on the publicly-traded securities markets, a company must apply for and receive the approval of the Securities and Exchange Commission (SEC), and thereafter make an initial public offering (IPO). In connection with the IPO, the company must file with the SEC a prospectus detailing its overall financial condition and recent financial performance. Subsequently, it also must make quarterly filings of SEC Forms 10-Q, which contain information about the company's financial performance during the preceding quarter.

Sometime in the early 1990's, the Kurzweil management hierarchy, led by Bradstreet, initiated a substantial effort to "take the company public." To this end, Bradstreet established quarterly projections for revenues and profits. Bradstreet then pressured Kurzweil's sales force to meet these projections because investment bankers were unlikely to underwrite the contemplated IPO unless Kurzweil could demonstrate profitability for several quarters in a row.

Companies determine quarterly profits or losses on either a cash or an accrual basis. In cash basis accounting, profit or loss constitutes actual dollars received less actual dollars spent. In accrual basis accounting, profit or loss constitutes revenue due, whether received or not, less expense incurred, whether paid or not. Because informed judgment often determines whether and when revenue actually is "due," public companies that use accrual basis accounting must develop revenue recognition policies that both guide the exercise of such judgment and conform to generally accepted accounting principles (GAAP).

Prior to the decision to go public, Kurzweil, an accrual basis accounter, adopted a revenue recognition policy. In June 1992, management circulated to the sales staff a memorandum reminding the staff of Kurzweil's "policies regarding shipment and revenue recognition." Attached to the memorandum was a document dated "7/28/87" and labeled "Kurzweil Applied Intelligence, Inc. Revenue Recognition Policy." In relevant part, it stated that anticipated revenue should not be recognized if "major uncertainties ... surround culmination of the [revenue-generating] transaction" or if "final acceptance by the customer requires an event out of [Kurzweil's] control...."

After an earlier false start, the IPO closed on August 17, 1993. Thereafter, as required, Kurzweil submitted Forms 10-Q for the quarters ending July 31, 1993 and October 31, 1993. The essence of the government's case was that each of these submissions contained fraudulently-inflated revenue figures indicating that Kurzweil was profitable when, in fact, it was operating near or at a loss. In making its case, the government sought to prove that Bradstreet; Thomas E. Campbell, Kurzweil's vice president in charge of sales; and Debra J. Murray, Kurzweil's treasurer and also a vice president, conspired to and actually did "book" as revenue the anticipated proceeds of a number of contingent sales which occurred in time periods covered by the prospectus and the Forms 10-Q. The government also endeavored to show that these same individuals, along with David R. Earl, Kurzweil's vice president in charge of operations, engaged in a scheme to conceal the fraud from the company's auditors and underwriters. The underlying indictment charged Bradstreet and Campbell with conspiracy (Count I); substantive securities fraud in connection with each of the three fraudulent submissions (Counts II--IV respectively); and knowing falsification of company records (Count V). It also charged Earl with knowing falsification in Count V. Murray had previously entered into a cooperation and plea agreement with the government and had waived indictment.

The indictment set forth 14 improperly-booked "sales" (and alluded to a fifteenth) as overt acts in the conspiracy count. The transactions in question, which took place between June 1992 and January 1994, were of two basic types: (1) those in which, near the end of a fiscal-year quarter, a Kurzweil salesperson had forged a prospective customer's signature to a sales quote; and (2) those in which the prospective customer had signed a sales quote, but had conditioned its agreement to purchase Kurzweil equipment on the occurrence of some event not within Kurzweil's control, such as a future commitment from a third-party purchaser. At trial, the government introduced evidence regarding these transactions and several others, the defendants' knowledge of the nature of these transactions, and the defendants' efforts to conceal the nature of these transactions from Kurzweil's auditors and underwriters. These efforts included the creation of side agreements, not shown to the auditors, which memorialized the conditions of unfinalized sales Kurzweil had recorded as revenue; the forging by Kurzweil personnel of responses to audit "confirmation letters" which the auditors had sent to Kurzweil customers to confirm the details of certain recorded sales; the pretextual shipment of Kurzweil products to a storage facility in order to create, on the books, the illusion of shipment to customers; and the giving of false explanations of the high and ever-growing percentage of Kurzweil revenues made up of accounts receivable. The jury acquitted Earl, but convicted Bradstreet and Campbell on all charges.

II.

Bradstreet's appellate brief presents six developed arguments for reversal of his convictions, but hints at a good number more. As usual, we confine our discussion to the issues accompanied by developed argumentation. See United States v. Bongiorno, 106 F.3d 1027, 1034 (1st Cir.1997).

Because four of Bradstreet's arguments, including the primary one, surface for the first time on appeal, we address them together under the plain-error rubric. See Fed.R.Crim.P. 52(b) ("Plain errors or defects affecting substantial rights may be noticed although they were not brought to the attention of the court."). We then address the two arguments Bradstreet has preserved.

A. Arguments Governed by Rule 52(b)

Bradstreet asserts that the trial court plainly erred in failing to give the jury two instructions he never requested. The first is that "the government bears the burden of negating a reasonable interpretation of the revenue recognition policy upon which [its] false statement theory depends" [sic]; the second is that the jury must "unanimously agree on either the factual basis for each count, or the precise legal theory on which [Bradstreet] was guilty" as to the conspiracy and securities fraud counts. Bradstreet further contends that the court plainly erred in permitting the indictment to have been constructively amended and/or in permitting the facts at trial to have varied prejudicially from those alleged in the indictment.

In two recent cases, the Supreme Court has emphasized and then reaffirmed the circumscribed authority Rule 52(b) confers upon appellate courts. To be correctable under Rule 52(b), an error or defect raised for the first time on appeal must be "plain," meaning "clear" or "obvious," United States v. Olano, 507 U.S. 725, 734, 113 S.Ct. 1770, 1777-78, 123 L.Ed.2d 508 (1993), at the time of appellate consideration, Johnson v. United States, --- U.S. ----, ---- - ----, 117 S.Ct. 1544, 1549-50, 137 L.Ed.2d 718 (1997); and it must have "affect[ed] substantial rights," meaning, in most cases, "[i]t must have affected the outcome of the district court proceedings," Olano, 507 U.S. at 734, 113 S.Ct. at 1778. Even then, an appellate court should exercise its discretion to notice an error or defect, see id. at 735-36, 113 S.Ct. at 1778-79 (noting the permissive language of the Rule), only if it "seriously affects the fairness, integrity or public reputation of judicial proceedings," id. at 736, 113 S.Ct. at 1779 (citation and internal quotation marks omitted). Although the Court has not described the...