In a case of first impression in the Circuit, the court clarified the prosecution’s burden of proof to demonstrate that a statement was false in response to "an ambiguous reporting requirement."
In reversing or vacating certain criminal convictions of four former bank executives of Wilmington Trust Corporation for purportedly having "falsely" excluded certain commercial real estate loans from those it reported as "past due" to the Federal Reserve and the Securities and Exchange Commission, the U.S. Court of Appeals for the Third Circuit determined that the evidence was insufficient to support the convictions, based on the executives’ allegedly "false statements" and the trial court’s challenged jury instructions on falsity. Addressing an issue of first impression in the Third Circuit, the federal appellate court held that "the prosecution must prove a statement false under each objectively reasonable interpretation of an ambiguous reporting requirement." As a result, the court reversed the executives’ convictions for their "false statement and certification" convictions, remanding those counts for entry of judgments of acquittal, and separately vacated their convictions for conspiracy and securities fraud—remanding those two counts for a new trial (U.S. v. Harra, Jan. 12, 2021, Krause, C.A.).
During the relevant time period, Wilmington Trust maintained a significant commercial real estate lending practice, mainly involving term loans that required a borrower to make monthly interest payments and to repay the principal sum at maturity. For purposes of its internal classification of these loans, the bank did not classify all mature loans with unpaid principal as "past due." Rather, for a portion of some of these loans, so long as the loans were in the process of renewal and interest payments were current, Wilmington Trust did not classify the loans as "past due," even if the maturity date had passed—a treatment the bank referred to as its "waiver practice." However, with the onset of the Great Recession and afterward, the volume of mature loans without the corresponding full payment of principal dramatically increased for the bank.
This development affected Wilmington Trust’s internal reporting practices commensurately. 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." Eventually, Wilmington Trust approved extensions of the loans and changed its waiver practice, but the bank "was unable to weather the financial crisis unscathed," and, in 2010, the Federal Reserve issued the bank a "troubled condition" letter. Soon afterward, Wilmington Trust merged with another bank.
Regulatory oversight. As observed by the court, 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." Wilmington Trust reported to three federal financial regulators: the Fed, the SEC, and the Office of Thrift Supervision (OTS). Notably, while each of these regulators required the bank to report "past due" loans, none of them provided a definition of "past due," and each regulator described the pertinent reporting requirement "in slightly different terms."
Indictments. Against this backdrop, in August 2016, a grand jury returned a "Third Superseding Indictment" charging Wilmington Trust and certain bank executives—David Gibson, Robert Harra, Jr., William North, Kevyn Rakowski—with conspiring to defraud the United States by "making false statements to the regulators in violation of 18 U.S.C. § 371 (Count One); securities fraud in violation of 18 U.S.C. § 1348 (Count Two); making false statements to the Fed and SEC in violation of 18 U.S.C. § 1001 and 15 U.S.C. § 78m (Counts Three through Sixteen); and falsely certifying financial reports in violation of 18 U.S.C. § 1350 (Counts Seventeen through Nineteen, as to David Gibson only)."
Stances of Government, bank. The Government emphasized that every offense with which the defendants were charged "involved the alleged falsity of the Bank’s reporting of ‘past due’ loans." According to the Government, the "starting point" for each criminal charge was that each defendant knew that the "past due loan statements were false" but "nonetheless made them with the requisite criminal intent." In contrast, the defendants advanced a theory throughout the jury trial that their statements were not actually false because the SEC’s and Fed’s reporting instructions were ambiguous. Thus, under an "objectively reasonable interpretation" of those instructions, the defendants were not required to report the waived loans as "past due," they contended.
Along these lines, the defendants asked the federal trial court to instruct the jury that, to prove that any statement was false, the government was required to prove beyond a reasonable doubt that the statement was not true under any reasonable interpretation of the reporting standards, regardless of what any defendant actually believed. In addition, the defendants asked that the jury be instructed to consider a "Q&A" by the OTS when "ascertaining the reasonable interpretations of what ‘past due’ meant." However, the trial court denied both of these requests, and, after the jury found the defendants guilty on all counts, the defendants appealed to the Third Circuit Court of Appeals in the consolidated cases.
Appellate review. On appeal, the defendants challenged the sufficiency of the evidence supporting their convictions. Principally, they asserted that the Government failed to prove beyond a reasonable doubt that their statements were actually "false." As observed by the Third Circuit, in doing so, the defendants "raise an issue of first impression in this Circuit as to the prosecution’s burden to prove that a statement was ‘false’ in response to an ambiguous reporting requirement: Must the prosecution prove the statement false under each objectively reasonable interpretation of that reporting requirement, as Defendants argue and as several of our sister circuits require? Or is it enough, as the Government contends, for the prosecution to prove that a statement is false under one reasonable interpretation, as long as a defendant accepted that interpretation at the time she made the statement?"
Ultimately, the Third Circuit agreed with the defendants, stating that the court was joining "our sister circuits in holding that the prosecution must prove a statement false under each objectively reasonable interpretation of an ambiguous reporting requirement." In reaching its decision, the Third Circuit stressed that: (i) due process demands that the falsity element "stand independent of a defendant’s subjective intent"; (ii) where a reporting requirement is ambiguous, the Government bears the burden of proving falsity "under each objectively reasonable interpretation of the requirement"; and (iii) the determination of reasonableness is for the jury, not the judge.
The federal appellate court found the pertinent reporting requirements for the defendants to be ambiguous. More specifically, the Third Circuit agreed with the defendants that, "particularly given the OTS Q&A, both the SEC instructions and the call report instructions are ambiguous with respect to the ‘precise question at issue’ : whether mature loans with unpaid principals that were current for interest and in the process of being extended were to be reported as ‘past due.’" Moreover, especially regarding the call reports, the court pointed out that the "OTS Q&A represented the position of another regulatory agency interpreting a nearly identically worded provision to mean that a loan that has been ‘informally extended when the bank has agreed to accept interest payments until the property is rented or sold" is not ‘past due.’"
Consequently, the Government "failed to prove that its view of either the SEC or the Fed requirements is the only reasonable interpretation," the court concluded.
The consolidated cases are Nos. 19-1105, 19-1136, 19-1190, and 19-1237.
Attorneys: Robert F. Kravetz, Jamie M. McCall, and Lesley F. Wolf, Office of U.S. Attorney, for the United States. Jennifer A. Hradil, Lawrence S. Lustberg, Elizabeth A. Mancuso, and Thomas R. Valen (Gibbons P.C.) and Michael P. Kelly, Steven P. Wood, and Geoffrey N. Rosamond (McCarter & English, LLP) for Robert V.A. Harra, Jr. Kenneth M. Breen, Phara A. Guberman, John P. Nowak, Jena A. Sold, and Stephen B. Kinnaird (Paul Hastings) for David Gibson. Andrea S. Brooks, Russell S. Nolte, and David E. Wilks (Wilks Law), and George W. Hicks, Jr. and Aaron L. Nielson (Kirkland & Ellis), and Thomas A. Foley for William North. Andrew C. Dalton, Bartholomew J. Dalton, and Ipek K. Medford (Dalton & Associates) and Henry E. Klingeman (Klingeman Cerimele) for Kevyn Rakowski.
Companies: Wilmington Trust Corporation
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