USA v. Henke

• Decision Date: 10 April 2000
• Docket Number: Nos. 99-10015,99-10050,s. 99-10015
• Parties: (9th Cir. 2000) UNITED STATES OF AMERICA, Plaintiff-Appellee/Cross-Appellant, v. STEVEN J. HENKE, Defendant-Appellant/Cross-Appellee. UNITED STATES OF AMERICA, Plaintiff-Appellee/Cross-Appellant, v. CHAN M. DESAIGOUDAR, Defendant-Appellant/Cross-Appellee. Office of the Circuit Executive
• Court: U.S. Court of Appeals — Ninth Circuit

Page 633

222 F.3d 633 (9th Cir. 2000)

UNITED STATES OF AMERICA, Plaintiff-Appellee/Cross-Appellant, v. STEVEN J. HENKE, Defendant-Appellant/Cross-Appellee.

UNITED STATES OF AMERICA, Plaintiff-Appellee/Cross-Appellant, v. CHAN M. DESAIGOUDAR, Defendant-Appellant/Cross-Appellee.

Nos. 99-10015, 99-10050

Office of the Circuit Executive

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted April 10, 2000--San Francisco, California

Filed August 25, 2000

[Copyrighted Material Omitted]

Nina Wilder, Weinberg & Wilder, San Francisco, California, and Sanford Svetcov, Landels Ripley & Diamond, LLP, San Francisco, California, for the defendants-appellants.

Laurie Kloster Gray, Assistant United States Attorney, San Francisco, California, for the plaintiff-appellee.

Appeals from the United States District Court for the Northern District of California, D.C. No. CR-97-00294-VRW; Vaughn R. Walker, District Judge, Presiding

Before: Mary M. Schroeder, Robert R. Beezer, and Stephen S. Trott, Circuit Judges.

PER CURIAM:

Chan Desaigoudar and Steven Henke, former executives of California Micro Devices, Inc. ("Cal Micro"), appeal their convictions for conspiracy to make false statements to the Securities Exchange Commission (18 U.S.C. S 371), making false statements (18 U.S.C. S 1001), securities fraud (15 U.S.C. SS 78m(a), 78ff(a)), and insider trading (15 U.S.C. SS 78j(b), 78ff(a)). The government cross-appeals the defendants' sentences.

The defendants claim that their convictions must be set aside because a conflict of interest prevented their counsel from cross-examining a key government witness and because there was insufficient evidence to support their insider trading convictions. They also argue that the district court erred in admitting lay opinion testimony and an out-of-court statement into evidence, and in failing to conduct an in camera review of government notes from an interview with a key government witness to ensure that the notes did not contain information that the government was required to disclose to the defense. Finally, they claim that the prosecutor committed misconduct in forcing Desaigoudar to testify that various government witnesses were lying. We agree with the defendants that a new trial is necessary because their lawyers' ability to conduct their defense was impaired by a conflict of interest. We also agree that the district court erred in admitting lay opinion testimony on the key issue of knowledge. We disagree, however, that the evidence was insufficient to support their insider trading convictions. We therefore remand the case to the district court for a new trial. While we address the defendants' remaining claims because they present issues that may recur on re-trial, because we vacate the convictions and sentences, we do not address the government's sentencing appeal.

BACKGROUND

This case arises from a false revenue reporting conspiracy carried out by Cal Micro executives in order to preserve the appearance that the company was a good investment option when in fact it was struggling financially. Cal Micro designs, manufactures, and markets electronic components and semiconductor products for the defense and electronics industries. The company was purchased in 1980 by Desaigoudar, who turned it into a multi-million dollar company during the 1980s. In addition to being Cal Micro's largest shareholder, Desaigoudar served as its Chief Executive Officer and Chairman of the Board until he was removed in 1994.

In 1993, Cal Micro had two objectives. It hoped both to attract a strategic outside partner to invest in the company and to raise about $40 million in outside capital through a second public offering. Making the company an attractive investment option for outside companies and private investors was crucial to achieving these objectives and Desaigoudar instituted an incentive-based stock option plan to motivate officers and managers to meet revenue goals. These goals became increasingly difficult to meet, however, because Apple Computers, one of the company's largest customers, substantially reduced its orders.

Unable to close the widening gap between revenue targets and actual sales, some Cal Micro executives devised a plan to make it appear on paper that the company was meeting its financial goals. Under Cal Micro's stated revenue recognition policy, revenue was recognized when an order was shipped. These Cal Micro executives began to deviate from this practice in several ways. They started: (1) recognizing revenue when some orders were received, rather than when shipped; (2) shipping orders earlier than requested in order to recognize the revenue during a certain fiscal period; (3) sending unwanted shipments; (4) creating false orders; and (5) executing "title transfers" falsely reflecting that products stored at Cal Micro had been purchased by a client.

While this was occurring, Cal Micro successfully negotiated an agreement with Hitachi under which Hitachi would purchase two million shares of Cal Micro stock at $23 a share. Cal Micro and its investment bankers also put in motion plans for a second public offering.

Things then took a turn for the worse. Those involved began to worry about the implications of the revenue scheme. Moreover, the company's plan to write off several million dollars in "bad debts" caused Cal Micro's investment bankers to balk at a second public offering. The Board eventually instituted an investigation and ultimately ousted Desaigoudar.

Desaigoudar and Henke, a former Chief Financial Officer, Vice President, and Treasurer of Cal Micro, were indicted on charges of conspiracy, making false statements, securities fraud, and insider trading. Surendra Gupta, Cal Micro's President during the revenue reporting scheme, was also indicted, but reached a plea agreement with the government shortly before trial was to begin. The central issue at trial was whether the defendants had early knowledge of the false revenue reporting scheme and whether they traded their stock because of this inside information. Several of Cal Micro's executive officers, including former co-defendant Gupta, testified that the defendants did have such early knowledge. The jury believed the government's witnesses and convicted the defendants.

CONFLICT OF INTEREST

The defendants' principle claim is that they are entitled to a new trial because their attorneys worked under an actual conflict of interest that prohibited them from cross-examining one of the government's key witnesses, Gupta.

Before trial, Desaigoudar, Henke, and Gupta participated in joint defense meetings during which confidential information was discussed. Communications made during these pre-trial meetings were protected by the lawyers' duty of confidentiality imposed by a joint defense privilege agreement. Before trial was to begin, Gupta accepted a plea agreement and promised to testify for the government.

Desaigoudar's attorney then moved for a mistrial and to withdraw because his duty of confidentiality to Gupta under the joint defense agreement prevented him from crossexamining Gupta on matters involving information he learned as a result of the privileged pre-trial meetings. Henke's lawyer was also present at the joint defense meetings and felt that his duty to Gupta impaired his ability to adequately represent Henke.

The district court denied the motion to withdraw. It reasoned that any privileged impeaching information counsel learned about Gupta would not be known to new counsel and the defendants were therefore no worse off for being represented by their original attorneys. The court granted the motion for a mistrial to allow defense counsel to regroup after Gupta's plea.

Once the new trial began, Gupta testified for the government. Defense counsel conducted no cross-examination for fear that the examination would lead to inquiries into material covered by the joint defense privilege.

The issue for our decision is whether the government's use of a former defendant, with whom both Henke's and Desaigoudar's attorneys had an attorney-client relationship arising from a joint defense agreement, as a key witness at trial created a conflict of interest that impaired defense counsel's ability to defend their clients.

The joint defense privilege is an extension of the attorney-client privilege. It has been recognized by this Circuit since at least 1964. Waller v. Financial Corp. of America, 828 F.2d 579, 583 n.7 (9th Cir. 1987). A joint defense agreement establishes an implied attorney-client relationship with the co-defendant, here between Henke's and Desaigoudar's attorneys and Gupta. See United States v. McPartlin, 595 F.2d 1321, 1337 (7th Cir. 1979); Wilson P. Abraham Constr. Corp. v. Armco Steel Corp., 559 F.2d 250, 253 (5th Cir. 1977). The government concedes in its brief the existence of this privilege in this case.

This privilege can also create a disqualifying conflict where information gained in confidence by an attorney becomes an issue, as it did in this case. As the court said in Abraham Construction,

Just as an attorney would not be allowed to proceed against his former client in a cause of action substantially related to the matters in which he previously represented that client, an attorney should also not be allowed to proceed against a co-defendant of a former client wherein the subject matter of the present controversy is substantially related to the matters in which the attorney was previously involved, and wherein confidential exchanges of information took place between the various codefendants in preparation of a joint defense.

559 F.2d at 253; see also Westinghouse Elec. Corp. v. KerrMcGee Corp., 580 F.2d 1311, 1319 (7th Cir. 1978) (defense attorney breaches fiduciary duty if he uses information obtained in a joint defense meeting). Here, what Gupta allegedly said in confidence during pre-trial joint defense meetings about the defendants' presence at a critical meeting...