Rajnish K. Das and Stormy L. Dean, former chief financial officers of infoUSA, Inc., faced civil enforcement action by the Securities and Exchange Commission (SEC) for violations of the Securities Exchange Act of 1934 regarding improper related-party transactions and misuse of corporate assets. The SEC's inquiry into infoUSA began in late 2007, leading to a board investigation and ultimately the 2010 enforcement action against Dean and Das. The jury found Dean guilty of multiple securities law violations, prompting him to appeal the district court's trial management, post-trial findings, and evidence sufficiency. The court affirmed most of the ruling but remanded for further proceedings. The SEC's complaint against Dean included seven claims: securities fraud, soliciting false proxy statements, falsifying books and records, certifying false reports, deceiving auditors, and aiding and abetting in filing false SEC documents and record falsification.
The SEC sought various forms of relief against Dean, including an injunction against further violations, civil penalties, and a permanent ban from serving as an officer or director of any publicly traded company. At trial, the SEC provided extensive evidence demonstrating that infoUSA did not properly disclose related-party transactions and the benefits Gupta received. Eighteen witnesses testified, including Dean and expert witness Dr. Steven Henning, who criticized infoUSA’s filings for inadequate disclosure of perquisites and related-party transactions. The SEC presented evidence of substantial reimbursements by infoUSA for Gupta’s personal expenses, including private-jet travel, yacht costs, wedding expenses, luxury cars, and country club memberships, which were not reported as required under SEC regulations. Dean acknowledged that these payments should have been disclosed, despite telling the chief accounting officer that the company did not separate Gupta's personal and business expenses.
The trial also involved Das, infoUSA's former CFO, but Dean did not present any witnesses. The jury found in favor of the SEC on all claims. Following the verdict, the district court considered several issues regarding restitution and civil penalties, ultimately imposing a three-year ban on Dean from holding company positions, a $50,000 civil penalty, and indicating that Dean acted in bad faith towards shareholders. The court also barred Dean from seeking indemnification for the civil penalties. Dean subsequently appealed, raising four key arguments: insufficient evidence for the jury's findings, improper admission of the expert's testimony, jury instruction errors, and a mischaracterization of his actions as bad faith.
Dean argues that the district court should have granted judgment as a matter of law because the SEC did not prove the standard of care he was required to follow as CFO. The SEC counters that Dean waived this argument by not renewing his motion for judgment as a matter of law after the verdict. According to established precedent, a party cannot seek a new trial on appeal without filing a postverdict motion if their preverdict motion was denied. Dean admits he did not file a Rule 50(b) motion but claims an exception exists because the district court acknowledged sufficient evidence against him in a postverdict order. However, the court did not analyze the specific argument regarding the standard of care, leading to the conclusion that Dean cannot contest the sufficiency of the evidence due to his procedural failure.
Regarding expert witness testimony, Dean challenges the admission of Dr. Steven Henning’s testimony, asserting that he did not assess whether his findings were reasonable compared to infoUSA's actual filings and that he used a different standard than the SEC's for classifying expenses. The admissibility of expert testimony is reviewed for abuse of discretion, with specific criteria under the Federal Rules of Evidence guiding the court's gatekeeping role. Dr. Henning testified that infoUSA under-reported perquisite compensation by over $3.4 million from 2003 to 2006 and failed to disclose significant related-party transactions. While he found underreporting of Gupta's perquisites, he also stated the majority of Gupta's expenses were legitimate business costs.
Dean argues that Henning's testimony was unhelpful because he did not calculate an error rate between his conclusions and infoUSA's original reports, claiming this left the jury guessing. Dean also contends that Henning neglected relevant facts that could undermine his expert opinion, although it is unclear which facts are in question. Henning's testimony addressed federal securities-reporting requirements and infoUSA’s documentation, providing insights into the classification of personal versus business benefits. The court referenced Tuf Racing Prods. to affirm Henning’s qualifications as an expert witness, noting that his analysis helped the jury understand the implications of perquisite classification.
On methodology, Dean critiques Henning for allegedly applying the IRS’s "primary-purpose" test instead of the SEC’s "integrally- and-directly-related" test for perquisites. The SEC's guidance distinguishes between expenses necessary for job performance and those offered for other reasons. The district court supported the SEC's broader standard, suggesting it resulted in more disclosures compared to the IRS standard, and consequently permitted Henning's testimony while limiting it to aspects related to Dean's legal responsibilities and the nature of disclosures.
Dean relies on United States v. Wintermute, 443 F.3d 993, 1001 (8th Cir. 2006) to argue against the admissibility of expert testimony, noting that in Wintermute, an expert's testimony was excluded for misconstruing the legal question, specifically by raising the government’s burden of proof. However, case law differentiates between legitimate methodological disagreements and misconstruing legal issues. While alternative damage calculation methods exist, disagreement with an expert's assumptions does not justify exclusion of their testimony if the methods are scientifically valid.
During extensive cross-examination, Henning, the expert, affirmed that the criteria for determining a perquisite relate directly to an executive’s duties. He acknowledged that "directly and integrally related" could be interpreted as equivalent to "primary purpose," stating that the primary-purpose test is a valid methodology. Henning contended that all expenses he identified as perquisites qualified under the SEC's standards. Dean's challenge to Henning's methodology focused on the primary-purpose standard, yet Henning clarified that this standard was one of several approaches.
Despite Dean's assertions that the primary-purpose test was inapplicable, mere disagreement does not warrant excluding expert testimony. Dean did not demonstrate that any misclassification of expenses occurred in this case. The court concluded that Henning's methodology did not misconstrue legal issues, affirming the district court's discretion in admitting his testimony.
Additionally, Dean argued that the district court's jury instructions were erroneous. Jury instructions are reviewed for abuse of discretion, ensuring they fairly represent the evidence and law relevant to the case. Statutory interpretation claims are assessed de novo. The court noted that jury instructions need not be perfect, and errors only warrant reversal if they affect the substantial rights of the parties.
Dean argues that the district court mistakenly denied his request for a jury instruction allowing him to rely on information from infoUSA officers he deemed reliable. He contends that under Delaware law, as supported by the unpublished case Hampshire Group, Ltd. v. Kuttner, a corporate officer can rely on the statements of other officers without breaching their duty of care unless aware of relevant misreporting. However, Hampshire Group actually indicates that an officer breaches their duty of loyalty when certifying the absence of material weaknesses while being aware of financial misreporting. The district court provided an alternative instruction acknowledging reliance on professional advice but not on the same basis Dean proposed. Dean's role as chief financial officer obliges him to ensure accurate financial reporting, and evidence suggests he failed in this duty, undermining his argument for the proposed instruction. Furthermore, Dean claimed that the SEC needed to prove scienter for its claims under section 14(a) and Rule 14a-9, challenging Instruction Number 7, which required the SEC to show that he negligently approved misleading proxy statements. Rule 14a-9 prohibits false or misleading statements in proxy statements, and Dean's arguments did not establish a legal basis for his requested instructions. The court found that the instructions given sufficiently represented the law, and no abuse of discretion occurred.
The court has not definitively determined whether scienter is required in actions under section 14(a) against corporate managers or officers, and the Supreme Court has previously opted not to address this issue. In the Shanahan case, the court sided with other rulings indicating that scienter is necessary for Rule 14a-9 claims involving outside directors and accountants. However, in prior cases, it recognized that section 14(a) does not provide a clear standard of liability and rejected strict liability as inappropriate for addressing deceptive practices. The court found no negligence on the part of the defendants in issuing proxy statements.
Dean seeks to apply the Shanahan precedent for outside directors and accountants to corporate officers, citing the Sixth Circuit's ruling in Adams, which suggested that the legislative history of Rule 14a-9 implies scienter is an element. However, Adams limited its findings to outside accountants. The court concluded that scienter should indeed be an element of liability under the proxy provisions for outside accountants, but it will not extend this requirement to corporate officers. The distinction between corporate issuers and outside accountants, highlighted in Adams, supports this conclusion. The court's previous rulings have indicated a negligence standard rather than a scienter requirement, affirming the district court’s rejection of Dean’s arguments.
Regarding the SEC’s claims under Rules 13b2-1 and 13b2-2, Dean contends that the jury instructions were erroneous because they required a finding of violation based on a lack of reasonable action rather than a knowing violation. This marks a novel issue for the court. Rule 13b2-1 prohibits falsifying records as per section 13(b)(2)(A) of the Securities Exchange Act, which mandates accurate and fair record-keeping. The Seventh Circuit has interpreted Rule 13b2-1 as not necessitating scienter, following the SEC's regulations and applying Chevron deference.
The Commission clarified that SEC Rule 13b2–1 does not impose a scienter requirement, as section 13(b) of the 1934 Securities Exchange Act lacks explicit language for such an intent. The Second Circuit, aligning with the Seventh Circuit's McConville decision, noted that while knowing falsification is necessary for criminal liability, civil liability does not require knowledge. The analysis starts with the statute's plain language, which mandates that issuers maintain accurate records without a criminal liability clause under paragraph (2) unless specified in paragraph (5). Dean's argument, referencing the Ninth Circuit’s SEC v. Todd, which held that knowledge is essential for liability under Rule 13b2-2, is rejected. The court distinguishes that Todd’s conclusion applied sections 13(b)(4) and (5) in a criminal context, and applying the "knowing" requirement to Rule 13b2-2 contradicts the statute's language. Moreover, since Rule 13b2-2 was established under section 13(b)(2), the subsequent adoption of section 13(b)(5) does not retroactively require a knowledge standard. The SEC's interpretation of Rule 13b2-2 is given deference, leading to the affirmation of the district court’s instruction regarding the Rule 13b2-2 claim.
The district court properly instructed the jury on the SEC’s claims under Rules 13b2-1 and 13b2-2; however, the SEC requested the vacating of the judgment related to section 13(b)(5). The Supreme Court presumes that Congress intentionally includes or excludes specific language in statutes, as noted in Rodriguez v. United States. Section 13(b)(5) was added to the Exchange Act in 1988, and Rule 13b2-2 was established under Section 13(b)(2) of the Act. The SEC interprets that neither section 13(b)(2) nor Rule 13b2-2 requires a scienter element, instead applying a standard of reasonableness.
The SEC's complaint against Dean included allegations of violating section 13(b)(5), which necessitates a knowing violation, as well as Rule 13b2-1. Jury instructions indicated that the SEC must demonstrate Dean acted unreasonably, leading to ambiguity about whether the jury met the necessary standard for a finding under section 13(b)(5). Consequently, the judgment regarding Dean under this section was vacated.
Dean contested the district court's determination of bad faith toward infoUSA’s shareholders, asserting this finding was erroneous, especially since it was not presented to the jury. The district court's judgment declared Dean acted in bad faith, a finding deemed unnecessary for the resolution of the SEC's claims.
In conclusion, the court vacated the finding of a violation of section 13(b)(5), vacated the bad faith finding, remanded for reconsideration of civil penalties, and affirmed the case in all other respects.
