United States v. Simon - 425 F.2d 796 (2d Cir. 1969)

Rule:

While there is no allowable inference of knowledge from the mere fact of falsity, there are many cases where from the actor's special situation and continuity of conduct an inference that he did know the untruth of what he said or wrote may legitimately be drawn. 

Facts:

Valley Commercial Corp., which was run by Harold Roth out of a single office on Continental Vending Machine Corp.'s premises, was engaged in lending money at interest to Continental and others in the vending machine business. Continental would issue negotiable notes to Valley, which would endorse these in blank and use them as collateral for drawing on two lines of credit, of $1 million each, at Franklin National Bank ("Franklin") and Meadowbrook National Bank ("Meadowbrook"), and would then transfer to Continental the discounted amount of the notes. These transactions, beginning as early as 1956, gave rise to what is called "the Valley payable." By the end of fiscal 1962, the amount of this was $1,029,475, of which $543,345 was due within the year. In addition to the Valley payable, there was what is known as the "Valley receivable," which resulted from Continental loans to Valley. Most of these stemmed from Roth's custom, dating from mid-1957, of using Continental and Valley as sources of cash to finance his transactions in the stock market. At the end of fiscal 1962, the amount of the Valley receivable was $3.5 million, and by February 15, 1963, the date of certification, it has risen to $3.9 million. The Valley payable could not be offset, or "netted," against the Valley receivable since, as stated, Continental's obligations to Valley were in the form of negotiable notes which Valley had endorsed in blank to the two banks and used as collateral to obtain the cash which it then lent to Continental.

By the certification date, the auditors had learned that Valley was not in a position to repay its debt, and it was accordingly arranged that collateral would be posted. Roth and members of his family transferred their equity in certain securities to Arthur Field, Continental's counsel, as trustee to secure Roth's debt to Valley and Valley's debt to Continental. Some 80% of these securities consisted of Continental stock and convertible debentures. Continental’s financial statements in 1962 reported that the Valley receivable was in the amount of $3.9M, with the securities offered having a market value of $2,978,000. However, the actual market value of the securities was actually 1M less than that, which the defendant-accountants allegedly knew about. Thus, they were charged under three counts of an indictment for drawing up and certifying a false or misleading financial statement. In their defense, the defendants argued that the treatment of the Valley receivable in Note 2 was in no way inconsistent with generally accepted accounting principles or generally accepted auditing standards, since it made all the informative disclosures reasonably necessary for fair presentation of the financial position of Continental as of the close of the 1962 fiscal year. The judge fined each of the three defendants.

Issue:

Did the Government fail to show through evidence the defendants’ criminal intent?

Answer:

No.

Conclusion:

It is quite true that there was no proof of motive in the form usual in fraud cases. None of the defendants made or could make a penny from Continental's putting out false financial statements. Neither was there evidence of motive in the sense of fear that telling the truth would lose a valuable account. Continental was not the kind of client whose size would give it leverage to bully a great accounting firm, nor was it important to the defendants personally in the sense of their having brought in the business. One would suppose rather that the Continental account had become a considerable headache to the Lybrand firm generally and to the defendants in particular; they could hardly have been unaware of the likelihood that the many hours the firm had devoted to the 1962 audit would not be compensated and that another might never occur. Ordinary commercial motivation is thus wholly absent. Instead, the Government found motive in defendants' desire to preserve Lybrand's reputation and conceal the alleged dereliction of their predecessors and themselves in former years -- the failure to advise Continental's board of directors of Roth's role in creating the Valley receivable; the failure to expand the scope of the audit for those years to determine the nature and collectibility of the Valley receivable, despite the injunction in a well-known text originally authored by one of the founders of the Lybrand firm, that receivables from affiliates must be scrutinized carefully to determine they "are what they purport to be"; and the certification of the 1961 statements despite Simon's warning to Roth that a further increase in the receivable would necessitate an examination of Valley's books. The apparent failure of the defendants to consult with the Lybrand executive committee, or with the partner in the firm to whom "problems" in audits were supposed to be referred, on what would seem highly important policy questions concerning the 1962 audit adds force to these arguments. Even if there were no satisfactory showing of motive, the Government produced sufficient evidence of criminal intent. Its burden was not to show that defendants were wicked men with designs on anyone's purse, which they obviously were not, but rather that they had certified a statement knowing it to be false. Moreover, so far as criminal intent is concerned, the various deficiencies in the footnote should not be considered in isolation. Evidence that defendants knowingly suppressed one fact permitted, although it surely did not compel, an inference that their suppression of another was likewise knowing and willful.