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United States v. Goyal

Prabhat Goyal, the former CFO of software company Network Associates, appealed his convictions on 15 counts of securities fraud and making materially false statements to auditors. The government alleged that under Goyal's supervision, Network Associates violated GAAP by recognizing revenue from software sales earlier than it should have, namely by using "sell in" accounting when it should have used "sell through" accounting. The difference is that sell in accounting recognizes revenue from deals when products ship to distributors rather than when those distributors sell through to their customers, which occurs later. Goyal was indicted for concealing the allegedly improper accounting from the company's outside auditors and for filing reports with the SEC that misstated revenue. On appeal, Goyal argued that no jury could have found him guilty beyond a reasonable doubt under these facts.

Clifton, Circuit Judge

All of the securities countsone count of securities fraud and seven counts of making false filings with the SECrequired the government to prove that Network Associates materially misstated the revenue it earned in certain quarters and years through its choice of accounting method. Network Associates' reports of allegedly inflated revenue furnished the "untrue statement of material fact" required for each of the false filing counts, as well as the "misleading statement or omission of a material fact made with scienter" needed to sustain a fraud conviction under the general antifraud provision of 10(b) of the Securities Exchange Act of 1934.

The government's contention that Network Associates materially overstated its revenue necessarily entailed two claims: (1) that it recognized revenue at a different time than it should have; and (2) that its accounting produced artificially higher revenue figures in certain periods that "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224 (1988). The government relied on GAAP to make its case, on the first point, that sell-through accounting was required in instances where Network Associates used the sell-in method. But we need not decide whether the company actually violated GAAP, because the government clearly failed to carry its burden on the second point, materiality. The prosecution offered no evidence adequate to prove that any GAAP violations materially affected the revenue that Network Associates reported.

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The government relied at trial on the parties' stipulations that applying sell-through accounting to Network Associates' entire business would have resulted in "a revenue figure that is materially less than the reported figure" for the periods charged in the false filing counts. These stipulations are fatally overbroad, however, because the government did not contend that GAAP required Network Associates to use sell-through accounting for all sales. The government only offered evidence that sell-through accounting was required for [some] buy-in transactions, and the stipulations did not provide that applying sell-through accounting to those transactions alone would have made a material difference in any given period. Without evidence of how much less revenue Network Associates would have recognized on these deals if it had used sell-through accounting, the jury had no basis to conclude that the misstatement of reported revenue resulting from the transactions was material. Even presuming, as we must, that the jury drew all reasonable inferences in the prosecution's favor, there was no way it could have properly inferred materiality from the evidence it had before it. * * * Because Goyal's jury had no competent evidence of materiality before it, it could not have properly convicted him on any of the securities counts.

The judgment of the district court is REVERSED, and the case is REMANDED for entry of judgment of acquittal on all counts.

Chief Judge Kozinski, concurring:

This case has consumed an inordinate amount of taxpayer resources, and has no doubt devastated the defendant's personal and professional life. The defendant's former employer also paid a price, footing a multimillion dollar bill for the defense. And, in the end, the government couldn't prove that the defendant engaged in any criminal conduct. This is just one of a string of recent cases in which courts have found that federal prosecutors overreached by trying to stretch criminal law beyond its proper bounds. See Arthur Andersen LLP v. United States, 544 U.S. 696 (2005).

This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clearly separate conduct that is criminal from conduct that is legal. This is not only because of the dire consequences of a convictionincluding disenfranchisement, incarceration and even deportationbut also because criminal law represents the community's sense of the type of behavior that merits the moral condemnation of society. When prosecutors have to stretch the law or the evidence to secure a conviction, as they did here, it can hardly be said that such moral judgment is warranted.

Mr. Goyal had the benefit of exceptionally fine advocacy on appeal, so he is spared the punishment for a crime he didn't commit. But not everyone is so lucky. The government shouldn't have brought charges unless it had clear evidence of wrongdoing, and the trial judge should have dismissed the case when the prosecution rested and it was clear the evidence could not support a conviction. Although we now vindicate Mr. Goyal, much damage has been done. One can only hope that he and his family will recover from the ordeal. And, perhaps, that the government will be more cautious in the future.