United States v. Harra
| Decision Date | 12 January 2021 |
| Docket Number | No. 19-1136,No. 19-1105, No. 19-1190, No. 19-1237,19-1105 |
| Citation | 985 F.3d 196 |
| Parties | UNITED STATES of America v. Robert V.A. HARRA, Jr., Appellant United States of America v. David Gibson, Appellant United States of America v. William B. North, Appellant United States of America v. Kevyn N. Rakowski, Appellant |
| Court | U.S. Court of Appeals — Third Circuit |
Sharon D. Feldman, Andrew M. Lawler, 641 Lexington Avenue, 15th Floor, New York, NY 10022, Avram D. Frey, Cambria County Office of District Attorney, 200 South Center Street, Cambria County Court House, Ebensburg, PA 15931, Jennifer A. Hradil, Lawrence S. Lustberg [ARGUED], Elizabeth A. Mancuso, Thomas R. Valen, Gibbons, One Gateway Center, Newark, NJ 07102, Michael P. Kelly, Steven P. Wood, McCarter & English, 405 North King Street, Renaissance Centre, 8th Floor, Wilmington, DE 19801, Geoffrey N. Rosamond, McCarter & English, 100 Mulberry Street, Four Gateway Center, 14th Floor, Newark, NJ 07102, Counsel for Appellant Robert V.A. Harra, Jr.
Kenneth M. Breen, Phara A. Guberman, John P. Nowak, Jena A. Sold, Paul Hastings, 200 Park Avenue, 30th Floor, New York, NY 10166, Stephen B. Kinnaird, Paul Hastings, 2050 M Street, N.W., Washington, DC 20036, Counsel for Appellant David Gibson
Andrea S. Brooks, Russell S. Nolte, David E. Wilks, Wilks Law, 4250 Lancaster Pike, Suite 200, Wilmington, DE 19805, Thomas A. Foley, 1905 Delaware Avenue, Wilmington, DE 19806, George W. Hicks, Jr. [ARGUED], Aaron L. Nielson, Kirkland & Ellis, 1301 Pennsylvania Avenue, N.W., Washington, DC 20004, Counsel for Appellant William B. North
Andrew C. Dalton, Bartholomew J. Dalton, Ipek K. Medford, Dalton & Associates, 1106 West 10th Street, Cool Spring Meeting House, Wilmington, DE 19806, Henry E. Klingeman [ARGUED], Klingeman Cerimele, 60 Park Place, Suite 1100, Newark, NJ 07102, Counsel for Appellant Kevyn N. Rakowski
Robert F. Kravetz [ARGUED], Jamie M. McCall, Lesley F. Wolf, Office of United States Attorney, 1313 North Market Street, Hercules Building, Suite 400, Wilmington, DE 19801, Counsel for Appellee United States of America
Before: KRAUSE, PHIPPS, and GREENBERG, Circuit Judges
When a defendant is charged with false reporting based on an ambiguous reporting requirement, what is the prosecution's burden at trial as to the element of falsity? Is it sufficient for the prosecution to prove the statement was false only under the Government's interpretation of the requirement, or must it prove the statement was false under each objectively reasonable interpretation of the requirement? In the balance hang the convictions of four former executives of Wilmington Trust Corporation, a bank that, in the wake of the Great Recession of 2008, excluded certain commercial real estate loans from those it reported as "past due" to the Securities and Exchange Commission and the Federal Reserve. The executives maintained that, under a reasonable interpretation of these requirements, the exclusion of the loans was proper, but the District Court denied their requests to introduce evidence concerning or instruct the jury about that alternative interpretation. The jury then found the executives’ reporting constituted "false statements" for purposes of 18 U.S.C. § 1001, 15 U.S.C. § 78m, and related statutes and convicted Defendants on all counts.
We hold today that to prove falsity beyond a reasonable doubt in this situation, the Government must prove either that its interpretation of the reporting requirement is the only objectively reasonable interpretation or that the defendant's statement was also false under the alternative, objectively reasonable interpretation. And because the Government here produced insufficient evidence from which a rational jury could find Defendants’ statements false under this rule, we will reverse Defendants’ false statements convictions and remand on those counts for entry of judgments of acquittal. As for Defendants’ conspiracy and securities fraud convictions, however, which were charged in the alternative on an independent theory of liability, we will vacate and remand for retrial.
For many years before the Great Recession, Wilmington Trust maintained a significant commercial real estate lending practice. This department responsible for this practice issued "term loans," meaning the borrower would make monthly interest payments and repay the principal sum at "maturity," i.e., the date "set forth in the promissory note and the loan agreement."
A5977–78; see, e.g. , A11755 (requiring "payment of all outstanding principal plus all accrued unpaid interest" on the date of maturity as well as "regularly monthly payments of all accrued unpaid interest" on a monthly basis). Because the loans typically financed construction projects, those terms were short—two or three years—and, upon their expiration, the loans could be repaid, extended, or refinanced. A3040. Extensions were commonplace in this context, and the Bank's loan documents reserved its right to "renew or extend (repeatedly and for any length of time) this loan ... without the consent of or notice to anyone." A11756.
For purposes of its internal classification of such loans, the Bank did not classify all mature loans with unpaid principals as past due. Instead—so long as loans were in the process of renewal and interest payments were current—the Bank did not classify those loans as "past due," even if the maturity date had passed. This treatment of the loans internally was known as a "waiver practice."
Through most of Wilmington Trust's history, the waiver practice had been a relatively minor feature of the Bank's portfolio. But this changed dramatically in 2009. By that point, the Bank had taken on an increasing number of commercial real estate loans, many with maturity dates around the same time. When borrowers on these loans were unable to repay their principals with the advent of the Great Recession, the volume of mature loans without full principal repayment exploded, ballooning to $303.6 million in total by year-end 2009. The effect on the Bank's reporting was commensurate: As the Bank applied its pre-existing waiver practice to many of these loans, the discrepancy between matured, non-repaid loans and Bank-defined "past due" loans ballooned as well. See A5359–65, A7740 ($8.5 million reported, $296.6 million in all).
The Bank reacted to this unprecedented volume in several ways. First, it approved mass extensions of loans that had matured or were nearing maturity. Second, for reasons not entirely clear, in July 2010 the Bank changed its waiver practice, resolving that "[a]ll matured/current loans" would be "reported in [the] Past Due numbers." A11044. Ultimately, however, the Bank was unable to weather the financial crisis unscathed. By the third quarter of 2010, a substantial number of loans were past due or placed on nonaccrual; the Federal Reserve issued a "troubled condition" letter, A3528; and by November 2010 the Bank had merged with M & T Bank.
Wilmington Trust's internal classification of its loans also carried over to its external reporting of loans so that, when required to report "past due" loans, it excluded the "waived" loans, which it treated as current. As a federally insured bank and a publicly traded company, Wilmington Trust reported to, as relevant here, three regulators: the SEC, the Fed, and the Office of Thrift Supervision (OTS), an agency within the Department of the Treasury that has since merged with the Office of the Comptroller.1 Each of these regulators required the Bank to report "past due" loans and, while none gave a definition, each described the reporting requirement in slightly different terms.
The SEC, in its "Industry Guide" for bank holding companies, instructed the Bank to identify "[a]ccruing loans which are contractually past due 90 days or more as to principal or interest payments." A9219 (emphasis added); see also 17 C.F.R. § 229.303(a)(1) instruction 13 (directing "bank holding companies" to the "information called for in Guide 3" when preparing quarterly and annual reports). The SEC provided no further guidance on the meaning of "past due."
The Fed, in its instructions to banks submitting quarterly "call reports," also used the word "contractual" to define "past due loans": It required the Bank to report "all loans ... that are past due," with "[t]he past due status of a loan ... determined in accordance with its contractual repayment terms." A9622. The Fed's instructions (the "call report instructions") then went further, stating that "grace periods allowed by the bank after a loan ... has become past due but before the imposition of late charges are not to be taken into account," id. , and clarifying, in relevant part, that loans "are to be reported as past due when either interest or principal is unpaid in the following circumstances":
The Bank's third regulator, OTS, also provided an "instruction manual" directing Wilmington Trust to "[r]eport all loans ... that are contractually past due" and, much like those from the Federal Reserve, specifying that "grace periods" should not be "take[n] ... into account when determining past due status." A12399. OTS also tracked the language of the Fed's "Circumstance 3" and "Circumstance 4" to describe its requirement, instructing that loans should be reported "as past due when either interest or principal is unpaid in the following circumstances":
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