Appeal from a judgment of the United States District Court for the Eastern District of New York (Sifton, J.) convicting appellant of violating 15 U.S.C. §§ 78n(a) and 78ff(a), 18 U.S.C. § 2, and 17 C.F.R. § 240.14a-9(a). Reversed and remanded with instructions to dismiss indictment.
Before: VAN GRAAFEILAND and NEWMAN, Circuit Judges, and WYATT, District Judge.*fn*
VAN GRAAFEILAND, Circuit Judge :
Clark J. Matthews, II, appeals from a judgment of the United States District Court for the Eastern District of New York (Sifton, J.) convicting Matthews of violating section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) and SEC's Implementing Rule 14a-9, 17 C.F.R. 240.14a-9. This conviction was based on the second count of a two-count indictment. The first count charged that Matthews and S. Richmond Dole conspired with each other and with others to bribe members of the New York State Tax Commission in order to obtain favorable rulings on tax matters of interest to the defendants' employer, The Southland Corporation, and to file United States income tax returns for Southland which falsely listed the bribe payment as a legal fee. Both defendants were acquitted on this count.
The second count, which was against Matthews alone, charged in substance that Matthews' election to the Southland Board of Directors in 1981 was accomplished by means of a proxy statement which failed to disclose, among other things, that he was a member of the conspiracy alleged in Count I. For the reasons that follow, we reverse the judgment of conviction and remand to the district court with instructions to dismiss the indictment.
Prior to his conviction in this case, Clark Matthews had had an honorable career. He was born in Arkansas City, Kansas, but lived most of his forty-eight years in Texas. After being graduated from high school in Midland, Texas, he attended Southern Methodist University and Southern Methodist Law School. Following his admission to the bar, he worked as a staff attorney for the SEC for two years. He then served for two years as a law clerk for Judge Joe Estes of the United States District Court for the Northern District of Texas (for some years Chief Judge of that Court). Thereafter, in 1965, he became a staff attorney for the Southland Corporation, a large commercial company with headquarters in Dallas. He subsequently became Southland's General Counsel and is now its Executive Vice President and Chief Financial Officer.
In 1972 Southland became involved in litigation with the New York State Department of Taxation and Finance regarding Southland's asserted obligation to pay sales taxes owed by some of its franchised stores. Eugene DeFalco, then manager of Southland's Northeastern Division, who was the Government's principal witness and an admitted liar and thief, testified under grant of immunity that he inquired of one John Kelly, another immunized thief and liar, whether Kelly knew of anyone who could help in resolving the tax problem. Kelly arranged for DeFalco to meet with a New York attorney and City Councilman, Eugene Mastropieri.
According to DeFalco, Mastropieri informed him that the matter might require "heavy entertainment", which DeFalco took to mean a bribe. DeFalco testified that he told S. Richmond Dole, Southland's Vice President for Franchise Stores, that, in his opinion, somebody was going to be paid off. This testimony was denied by Dole. DeFalco also testified that, when Dole refused Mastropieri's request that he be paid in cash, Kelly suggested payment by way of a bill purporting to cover the lease of an airplane. This proposal brought Matthews into the picture for the first time. When Dole conveyed the lease proposal to Matthews with the explanation that Mastropieri wanted to conceal the legal fee from his law partner, Matthews telephoned DeFalco and told him that "Southland doesn't pay legal bills in the form of airplane leases [and] he did not want to see any more funny proposals coming through like the airplane lease. . . " When DeFalco assured Matthews that the payment to Mastropieri was in fact a legal fee, Matthews replied that "if it's a legal fee, we are going to pay it as a legal fee, not as something else."
In July 1977 DeFalco sent Dole a bill from Mastropieri for legal services in the amount of $96,500, which Dole processed for payment. The bill neither was seen nor approved by Matthews. Southland's check in payment was delivered to Mastropieri by Kelly who, upon instructions from DeFalco, secured a blank check from Mastropieri in exchange, which Kelly filled out in the same amount as the Southland check. Kelly promptly deposited Mastropieri's check in a Toronto bank where "nobody would know about it". On August 8, 1977 DeFalco arranged to have $10,000 transferred from Kelly's Toronto account to DeFalco's account at The Chase Manhattan Bank. Thereafter, on August 23rd, DeFalco opened an account in his own name at the Toronto bank and had Kelly transfer $20,000 into that account. he also had five checks totalling $18,500 issued for his own personal use. On March 22, 1978 DeFalco started drawing from his Toronto account, and, by August 16, 1979, the account was closed. In all, DeFalco stole $48,500 of Southland's money. The balance of $48,000 was taken by Kelly, $20,000 on September 21, 1977 and $28,000 on July 10, 1979. Not a penny was used to bribe anyone.
While DeFalco and Kelly were in the process of stealing Southland's money, Southland, together with hundreds of other corporations, see Decker v. Massey-Ferguson, Ltd, 681 F.2d 111, 118 (2d Cir. 1982); Branch and Rubright, Integrity of Management Disclosures Under the Federal Securities Laws, 37 Bus. Law. 1447, 1450 (1982), was conducting an internal questionable payments investigation, which it called the Business Ethics Review. The respected Washington law firm of Arnold and Porter had been retained as consultant for the Review, which was being handled by Southland's legal department. John Fedders, and Arnold and Porter partner with extensive experience in the field, worked closely throughout the Review with Matthews, then General Counsel, advising and assisting him in the preparation of questionnaires, the handling of interviews, the evaluation of information, and the reporting of results.
In August 1977 Matthews learned for the first time of Mastropieri's $96,500 bill. Because Matthews thought the bill was much too high, he instructed Michael Davis, a staff attorney who was assisting in the Business Ethics Review, to add Mastropieri's fee to the matters to be investigated. Accordingly, when Eugene Pender, Southland's controller, reported in his Review questionnaire that he suspected Mastropieri's bill was inflated to cover costs other than legal fees, Matthews told Davis to interview him. Following the interview, Davis reported to Matthews that "pender did not have any specific facts which caused him to feel that way. . . he just felt that the bill appeared high."
Although DeFalco had indicated in his Review questionnaire that he had no knowledge of any wrongdoing, Matthews and Davis interviewed him together following a meeting of Division managers at a Dallas hotel on October 17, 1977. all three participants testified that at no time during this meeting did DeFalco reveal any plan to bribe a state tax official. DeFalco testified, however, that, following the meeting, he took Matthews aside in the hotel parking lot and told him that a $5,000 bribe already had been paid. Both Davis and Matthews denied that this parking lot conversation had taken place. If in fact DeFalco made the statement, it was a blatant lie. No bribe ever was paid.
Davis next interviewed Frank Kitchen, DeFalco's immediate supervisor. Kitchen told Davis that, some months before, he, John Thompson, Chairman of Southland's Board of Directors, and Dole had discussed the sales tax cases with DeFalco at a sales meeting in Hartford, Connecticut, and he formed a suspicion that an improper payment might be lurking somewhere in the background. When questioned by Davis as to the basis for this suspicion, Kitchen could point only to Mastropieri's Italian name, his high fee, the reference to entertainment expenses, and the location of the case in New York. When Matthews was informed of Kitchen's suspicions. Matthews insisted that kitchen amend his theretofore negative responses to the Review questionnaire to incorporate his orally expressed suspicions. Matthews also interviewed both Thompson and Dole, both of whom assured him that Kitchen's suspicions were groundless.
Matthews then consulted G. Daune Vieth, another Arnold and Porter partner, concerning the advisability of interviewing Mastropieri directly. After consulting with Fedders, Vieth told Matthews to go ahead with the interview. Fedders then gave Matthews detailed instructions on how the interview should be conducted. On January 10, 1978 Matthews spoke with Mastropieri by telephone from Philadelphia, after a snowstorm prevented a scheduled face-to-face meeting in New York City. Mastropieri's responses to Matthews' questions concerning the sales tax dispute disclosed a comprehensive knowledge of the cases. In response to Matthews' questions about his fee, Mastropieri indignantly told Matthews that the amount of the fee was justified, that he had received the entire amount, and none was being paid to anyone else.
When Matthews reported the results of his interview to Fedders, Vieth, and the audit committee of Southland's Board of Directors, it was agreed that, because they had no proof of a bribe and because of the possibility of a suit for libel and slander, the matter should not be discussed in the formal Business Ethics Review report which was submitted to the Board of Directors on January 25, 1978,*fn1 Nonetheless, despite Mastropieri's denial of wrongdoing,*fn2 despite the fact that DeFalco and Kelly already had stolen $48,500 of Southland's money, despite the fact that not a penny had been paid to a member of the New York State Tax Commission, and despite the district court's correct charge that Matthews could not be convicted of the crime of conspiracy if all he did was to conceal its existence, the Government contends that Matthews knowingly joined an ongoing conspiracy to bribe the tax officials on January 25, 1978 when he failed to disclose the existence of the conspiracy in his report to the Board of Directors
We are not at all surprised that the jury acquitted Matthews of the charges in Count I, and we are not completely comfortable with the Government's contention that the acquittal was based on the running of the statute of limitations. The Government argues that we must assume the jury followed the district court's instruction not to convict Matthews on Count II unless it either found him guilty of the crime charged in Count I or not guilty by reason of the statute of limitations. Although this argument states generally sound doctrine, United States v. Kaplan, 510 F.2d 606, 611 (2d Cir. 1974), it comes with poor grace from a prosecution team which successfully opposed Matthews' request for a special verdict or jury interrogatory that would have precluded the making of the argument. This interrogatory, which was requested not once, but twice, would have asked the jurors to state whether, if they found a verdict of not guilty on Count I, that verdict (verdict) was based on the running of the statute of limitations. It would have been quite proper for the district court to have submitted this query to the jury. See United States v. Ruggiero, 726 F.2d 913, 922-23 (2d Cir.), cert. denied, 469 U.S. 831, 105 S. Ct. 118, 83 L. Ed. 2d 60 (1984); United States v. Margiotta, 646 F.2d 729, 733 (2d Cir. 1981), cert. denied, 461 U.S. 913, 103 S. Ct. 1891, 77 L. Ed. 2d 282 (1983); United States v. Quicksey, 525 F.2d 337, 340-41 (2d Cir. 1975), cert. denied, 423 U.S. 1087, 47 L. Ed. 2d 97, 96 S. ...