U.S. v. Lake, 06-3140.

• Citation: 472 F.3d 1247
• Decision Date: 05 January 2007
• Docket Number: No. 06-3141.,No. 06-3140.,06-3140.,06-3141.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Douglas T. LAKE, Defendant-Appellant, United States of America, Plaintiff-Appellee, v. David C. Wittig, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

472 F.3d 1247

UNITED STATES of America, Plaintiff-Appellee, v. Douglas T. LAKE, Defendant-Appellant, United States of America, Plaintiff-Appellee, v. David C. Wittig, Defendant-Appellant.

No. 06-3140.

No. 06-3141.

United States Court of Appeals, Tenth Circuit.

January 5, 2007.

COPYRIGHT MATERIAL OMITTED

Seth P. Waxman, Wilmer, Cutler, Pickering, Hale & Dorr, LLP, Washington, DC, for Defendant-Appellant Douglas T. Lake, Steven Alan Reiss, Weil, Gotshal & Manges LLP, New York, New York, for Defendant-Appellant David C. Wittig, (Edward C. DuMont, Theodore D. Chuang, Demian S. Ahn, Michael P. Spence, Daniel S. Volchok, Wilmer, Cutler, Pickering, Hale & Dorr, Washington, DC, on the brief for Defendant-Appellant Douglas T. Lake, and Gregory S. Coleman, Lisa R. Eskow, and Edward C. Dawson, Weil, Gotshal & Manges LLP, Austin, Texas, on the brief for Defendant-Appellant David C. Wittig).

Richard L. Hathaway, Assistant United States Attorney (Eric F. Melgren, United States Attorney, Christine E. Kenney, Assistant United States Attorney, with him on the brief), Topeka, Kansas, for Plaintiff-Appellee.

Before HARTZ, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and McCONNELL, Circuit Judge.

HARTZ, Circuit Judge.

The defendants, David C. Wittig and Douglas T. Lake, came to Kansas from Wall Street investment banks to run the state's largest public utility, now known as Westar Energy, Inc. The government convinced the jury in this case that the two men had conducted a far-reaching scheme to milk the company for all they could through a pattern of fraud and deceit. But the prosecution hung by a thin legal thread. Despite the scope of the alleged fraudulent scheme, all the counts of the indictment depended on proving the efforts of the defendants to conceal from the United States Securities and Exchange Commission (SEC) their personal use of corporate aircraft. The attempt to prove concealment was flawed, however, because the government produced no evidence that the defendants failed to comply with SEC regulations governing the reporting of such personal use and the jury was never instructed regarding the SEC's reporting requirements. As a result, we must set aside the convictions on every count, most of which cannot be retried.

The indictment charged 7 counts of wire fraud, 17 counts of money laundering, 14 counts of circumvention of internal financial controls, and 1 count of conspiracy to engage in these substantive offenses. A fortieth count sought forfeiture of the fruits of the alleged offenses. The offense of wire fraud requires a scheme to defraud and the use of an interstate wire communication to further the scheme. Each wire-fraud count alleged the wire transmission to the SEC of a different required report. Transmission of a required report can serve as the predicate for a wire-fraud offense only if the report is itself false or fraudulent. The government alleged that the reports were deceptive because they failed to disclose the great value to the defendants (about $1 million each) of their personal use of corporate aircraft. But SEC regulations require reporting only the additional cost to the corporation incurred as a result of the corporate officer's personal travel, and then only if the total additional cost exceeds a certain threshold per year for the officer. The government offered no evidence that the additional cost to Westar of either defendant's personal travel ever exceeded this threshold; indeed, it offered no evidence of the additional cost to Westar for any of the personal trips. Therefore, the jury could not possibly determine that the reports, which disclosed no personal travel by the defendants, were false. Consequently, we must reverse the wire-fraud convictions because of insufficient evidence. Further prosecution of these charges is barred by the Double Jeopardy Clause.

As the government properly conceded at oral argument, if the wire-fraud charges fall, then so must the money-laundering convictions. The money-laundering charges alleged that the defendants had used the fruits of their wire-fraud scheme to acquire various assets. If there was no wire fraud, there was no money laundering. These charges, too, cannot be retried.

As for the circumvention charges, they were based on the failure of the defendants to disclose their personal travel on corporate aircraft in various internal forms used to prepare reports for the SEC. The core issue with respect to these failures to disclose is the defendants' intent. They argued at trial that other Westar officers almost always failed to report such travel and that one could infer that they thought such disclosure was unnecessary. To counter this inference, the government offered evidence of the great value to the defendants of this travel (again, about $1 million each), making it unlikely that they would think it inconsequential. The defendants sought from the district court an instruction to the jury explaining that the proper consideration was not the value of the travel to the defendants but the (much lower) additional cost of the travel to Westar. The court refused to give the instruction. Because this instruction could easily have influenced the jury in deciding whether the defendants' failure to disclose was with the requisite intent, we must also reverse the circumvention convictions, although without prejudice to a retrial.

Finally, given the dependence of the conspiracy charges on the evidence and instructions regarding the substantive charges, we must also reverse the conspiracy convictions and remand for retrial. The forfeitures likewise cannot stand. In light of our reversal of all the convictions on the above grounds, we need not address a number of other issues raised by the defendants regarding the conduct of the trial and their sentences.

I. BACKGROUND

We summarize the evidence at trial in the light most favorable to the jury's verdict. See United States v. Espinoza, 338 F.3d 1140, 1146-47 (10th Cir.2003). In 1995 John Hayes, the Chief Executive Officer (CEO) of Westar (then known as Western Resources, Inc.), recruited Mr. Wittig (a New York investment banker who had performed services for Westar) to join Westar as Executive Vice President of Corporate Strategy to develop and implement a diversification plan for the utility. Mr. Wittig's original compensation included a salary of $425,000, a relocation benefit, stock, various short- and long-term incentives, and other benefits. By early 1999 Mr. Hayes had left Westar, the Board of Directors had appointed Mr. Wittig as President, CEO, and Chairman of the Board, and Mr. Lake, also a New York investment banker, had joined Westar as Executive Vice President and Chief Strategic Officer.

The diversification strategy initiated in 1995 involved the acquisition of various unregulated businesses. In 1996-97 Westar attempted to acquire ADT, a national home-and-business security company. Although the acquisition ultimately failed, Westar made approximately $856 million purchasing and then selling ADT stock. In 1997 Westar acquired a home-security company, Protection One, and bought stock in Guardian International, a security-alarm business. Westar's stock price increased dramatically and between 1995 and 1998 its assets grew from $5.5 billion to $8 billion (although its long-term debt increased from $1.6 billion to $3 billion).

As Mr. Wittig replaced Mr. Hayes at the helm, however, the tide began to turn. In early 1999 accounting irregularities and an SEC investigation caused Protection One's share price to plummet. Westar's share price also fell sharply, from a high of almost $44 in 1998 to about $17 by the end of 1999.

Westar hired two investment banks to help restore shareholder value. They recommended that the regulated utility business be split from Westar's unregulated businesses and merge with another utility (the split-merge transaction). Westar's Board approved the proposal in 2000, the unregulated businesses were split from the utility to create Westar Industries, and the search for a merger partner began. But the Kansas Corporation Commission (KCC) in 2001 rejected the plan, scuttling a proposed merger. It also ordered Westar to cut rates by $20 million (when Westar had been seeking a $150 million rate increase). Westar's stock hit a low of near $9 per share in late 2002, about the time of the departures of Mr. Wittig and Mr. Lake.

Although at trial the defendants portrayed the diversification efforts as attempts to uplift and then save Westar, the government presented a far different view. It contended that the efforts were the central feature of a wide-ranging scheme by the defendants to loot Westar. The most ambitious prospect of the scheme was to collect huge sums ($37 to $65 million for Mr. Wittig and $18 to $35 million for Mr. Lake) from change-in-control provisions of their employment contracts that would be triggered by completion of the split-merge transaction.

A second component of the alleged scheme was profiting by Mr. Wittig ($6.1 million) and Mr. Lake ($2.9 million) from complex transactions in Guardian shares that caused a $4.2 million loss to Westar. Also parts of the alleged scheme were acceleration of a $5.37 million signing bonus to Mr. Wittig that was to have been paid over a 10-year period beginning in 2010; improper payment of relocation expenses; improper loans from Westar; acquisition of a split-dollar life-insurance contract for Mr. Wittig at a far greater cost to Westar than the bonus it was ostensibly to replace; and personal use of Westar aircraft. To accomplish this looting, the defendants misled the Board of Directors and connived to remove two Board members who asked challenging questions (the two resigned voluntarily).

The defendants' personal use of Westar aircraft was of central importance to the prosecution's case. Mr. Wittig, Mr. Lake, and their families apparently flew on the aircraft on numerous personal trips. The flight...