U.S. v. McVay

• Decision Date: 05 May 2006
• Docket Number: No. 04-13455.,04-13455.
• Citation: 447 F.3d 1348
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. Malcolm E. McVAY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

447 F.3d 1348

UNITED STATES of America, Plaintiff-Appellant, v. Malcolm E. McVAY, Defendant-Appellee.

No. 04-13455.

United States Court of Appeals, Eleventh Circuit.

May 5, 2006.

Joyce White Vance, Birmingham, AL, for U.S.

Sam Heldman, Gardner, Middlebrooks, Gibbons & Kittrell, Washington, DC, J. Don Foster, Jackson, Foster & Graham, LLC, Mobile, AL, for McVay.

Appeal from the United States District Court for the Northern District of Alabama.

Before DUBINA and MARCUS, Circuit Judges, and GOLDBERG^*, Judge.

MARCUS, Circuit Judge:

The United States appeals from a sentence of 60 months' probation imposed by the district court on Malcolm E. McVay, the former Chief Financial Officer, Senior Vice-President, and Treasurer of HealthSouth Corporation ("HealthSouth"). McVay pled guilty to conspiracy to commit wire and securities fraud that resulted in losses of some $400 million, and to false certification of financial information filed with the Securities and Exchange Commission ("SEC"). On appeal, the government argues that the trial court erred by downwardly departing so drastically from the Sentencing Guidelines range — from an offense level 29 to an offense level 8 — based on the government's substantial-assistance motion, filed pursuant to 18 U.S.C. § 3553(e) and U.S.S.G. § 5K1.1. This 21-level departure resulted in an adjustment from a Guidelines sentencing range of 87 to 108 months' imprisonment to a sentencing range of 0 to 6 months' imprisonment. The government says that this extraordinary downward departure was unwarranted as a substantial-assistance adjustment.

After careful review of the record and the parties' briefs and oral arguments, we conclude the district court reversibly erred by downwardly departing so sharply, based on substantial assistance, virtually without explanation, and on a wholly improper basis. Accordingly, we vacate McVay's sentence and remand for resentencing consistent with this opinion.

I.

This is the fourth appeal by the United States challenging what we have called "dramatic" and "extraordinary" downward departures awarded by the district court, without sufficient record support. See United States v. Livesay, 146 Fed.Appx. 403 (11th Cir.2005) (reversing "dramatic" 18-level reduction in offense level based on record that provided "scant basis to assess reasonableness" of departure); United States v. Botts, 135 Fed.Appx. 416 (11th Cir.2005) (reversing "extraordinary" 26-level reduction in offense level based on record that "is incapable of meaningful appellate review"); United States v. Martin, 135 Fed.Appx. 411 (11th Cir.2005) (reversing "extraordinary" 21-level reduction in offense level based on record that "is incapable of meaningful appellate review"). All arise out of crimes, to which all four defendants, former executives of HealthSouth, pled guilty, in connection with a massive, multibillion-dollar securities fraud. As in the other three cases, the instant offenses occurred in the course of a conspiracy by senior officers of HealthSouth, one of the nation's largest providers of outpatient surgery, diagnostic imaging, and rehabilitative healthcare services. HealthSouth has approximately 1,800 locations in all fifty states, Puerto Rico, the United Kingdom, Australia, and Canada. HealthSouth is an issuer of a class of securities registered under Section 12 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78l. Because its common stock was listed on the New York Stock Exchange, HealthSouth was required to comply with federal securities laws and regulations to ensure that the company's financial information was accurately reported and disclosed to the public.

Beginning in 1994, if not earlier, senior officers of HealthSouth conspired to inflate sharply financial statements filed with the SEC, including the company's Forms 10-Q and 10-K for years 1994 through 2002. Publicly traded corporations must file the Form 10-Q quarterly and the Form 10-K annually with the SEC, pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78m, and 17 C.F.R. §§ 240.13a-1, 240.13a-13. The conspirators accomplished this earnings inflation in the financial statements by making false entries in HealthSouth's books and records and presenting false financial reports to banks and other lenders. Some of HealthSouth's officers, including McVay, took these actions after recognizing that the company's financial results were not producing sufficient earnings to meet or exceed Wall Street "earning expectations" or "analyst expectations" and that these shortfalls would lead to a decline in the market price of HealthSouth's securities.

Over the course of the conspiracy, the cumulative inflations amounted to about $400 million. When the conspiracy was uncovered in March 2003, the SEC temporarily suspended trading and the total drop in value of the outstanding stock was approximately $1.4 billion. While the investing public, HealthSouth shareholders, and the company were the direct victims of the conspiracy, the scheme collaterally affected many others, including: HealthSouth employees, several of whom were fired when the conspiracy was discovered, and particularly those who had participated in the company's stock ownership plan or pension fund and were long-time employees close to retirement; employees of contractors who were dependent on HealthSouth contracts for income; banks and other lenders who loaned money to HealthSouth based on the false financial information; and health-service competitors who lost business or financing, again based on HealthSouth's false financial representations.

Malcolm McVay was employed at HealthSouth from September 1999 to May 2003. In September 2000, he was promoted to Senior Vice-President and Treasurer. From August 27, 2002 to January 3, 2003, McVay was the Chief Financial Officer ("CFO") and Treasurer of the company. Finally, in April 2003, he served solely as Treasurer. Shortly after he became CFO in August 2002, McVay learned that revenue had been materially overstated in prior quarters and that cash was materially overstated on the balance sheet. At the plea colloquy, McVay informed the district court that the person who told him about the irregularities was Emery Harris, who was then serving as Group Vice-President and Controller. McVay also spoke to the then-current CEO, Richard Scrushy, who informed McVay that it was okay to sign the 10-Q because irregularities in the numbers on the form were "commonplace." Despite this knowledge, on or about November 14, 2002, McVay signed HealthSouth's 10-Q Form for the third quarter of 2002, knowing that it did not fairly represent the financial condition at Health South.

On April 21, 2003, in a three-count information, McVay was charged with conspiracy to commit wire and securities fraud, in violation of 18 U.S.C. § 371 ("Count 1"), and falsification of financial information filed with the SEC, in violation of 18 U.S.C. § 1350 and 18 U.S.C. § 2 ("Count 2"). The information also included a forfeiture count, pursuant to 18 U.S.C. § 981 and 28 U.S.C. § 2461(c). McVay pled guilty to all three counts under a plea agreement in which the government agreed to recommend that McVay be given a three-level reduction to his offense level for his acceptance of responsibility, and also agreed to file a motion for a downward departure based on substantial assistance, pursuant to U.S.S.G. § 5K1.1 and 18 U.S.C. § 3553(e), if the government determined that McVay's cooperation and substantial assistance warranted such a motion.

At sentencing, the presentence investigation report ("PSI") recommended a base offense level of 6 and the following adjustments: (1) a 26-level upward adjustment based on a $1,390,800,000 loss (representing the total drop in value of the outstanding stock when the conspiracy was uncovered in March 2003 and the SEC temporarily suspended trading), pursuant to U.S.S.G. § 2B1.1(b)(1)(N) (2002); and (2) a 3-level reduction for acceptance of responsibility, pursuant to U.S.S.G. § 3E1.1. With an adjusted offense level of 29 and a criminal history category I (based on 0 criminal history points), McVay's Guidelines sentencing range was 87 to 108 months' imprisonment. The PSI recommended a sentence at the bottom of that range, 87 months.¹

The government and McVay filed objections to the PSI.² The government also filed a § 5K1.1 motion for a downward departure from the Guidelines, citing McVay's substantial assistance in the investigation and prosecution of others. The government noted that McVay made himself available on a "continuous and regular basis" and provided "information implicating several other culpable individuals." McVay's "immediate cooperation has allowed the HealthSouth case to be prosecuted at a pace which, on a relative basis, constitutes swift and efficient enforcement of the United States' criminal laws. Further, the details of the fraudulent scheme were exposed to the public shortly after discovery of the fraud due, in part, to the defendant's cooperation." The government continued: "The United States expects the defendant to continue his substantial assistance in the investigation and prosecution of others after the sentencing hearing is complete."

In connection with the substantial-assistance motion, based on McVay's adjusted offense level of 29, the government recommended that, despite McVay's cooperation, a "substantial term of imprisonment is required" given the seriousness of McVay's crimes. After noting that McVay "knowingly submit[ted] false and misleading financial statements to the markets ..., knowing that the document he submitted had between 2 and $400 million of phoney cash," the government urged that "giving Mr. McVay anything other than a substantial term of imprisonment in this case sends the message to the markets that this type of conduct can be committed and committed successfully without punishment." The government ultimately urged a term of not less than 65 months'...