SDNY Drops Charges in Accounting Fraud Case—No Harm, No Foul?

April 6, 2021

By Sara Kropf

On March 31, 2021, the U.S. Attorney’s Office for the Southern District of New York asked the court to dismiss the indictment of two defendants in a complex accounting fraud case. The letter request said “we do not believe we can establish beyond a reasonable doubt” an element of the offense, namely the materiality of the supposed misstatements. The next day, the court dismissed the charges.

Good news for the defendants, right? Of course. I am sure it was a huge sigh of relief.

But these simple filings conceal the very real harm that the judicial process imposed on these two individuals. They have been under indictment for the last two years. This causes damage that is not easily erased.

By the way, DOJ may have dismissed the indictment because it can’t prove the case, but you wouldn’t know that from looking at its press page. The press release announcing the indictment—one that says that the two individuals engaged in “a years-long scheme to cook the books and deceive the investing public”—is still on the SDNY’s website. There’s no update to reflect that the office dismissed the charges. If you search these individuals’ names, the first hits are the press release and the indictment.

The Dismissal of the Charges

I’m not going to use the names of the two individuals. Their names have been dragged through the mud enough. I’ll call them by their initials, MC and MP. They worked for a public company that I’ll refer to as BX Co. (If you care enough to look at the docket, check out 19-CR-545 (CM)).

The thrust of the case was that BX Co., MP, and MC, engaged in securities fraud when they misstated a certain financial metric called “same store net operating income growth.”

MP and MC were indicted in July 2019. (There is also an ongoing SEC case.) In this type of criminal case, indictments do not happen overnight. There was likely a lengthy investigation before the indictment. During that investigation, MP’s and MC’s counsel would have very likely met with the prosecutors to convince them not to file charges. Obviously, the prosecutors went forward anyway.

MP filed a motion to dismiss the indictment in late 2019. He explained in that filing that the government could not prove the materiality of the supposed misstatements. The government, of course, opposed the motion to dismiss.

The government’s March 2021 letter says that it “received additional information” about the materiality of the supposed misstatements from defense counsel “beginning in or about October and November 2020.” Now, I’m not privy to the conversations between defense counsel and the government, but it looks like the government knew long before October 2020 that there were problems with proving materiality—as explained in the motion to dismiss in December 2019. And I bet that defense counsel made that point during its pre-indictment conversations with the government.

SDNY is trying to make itself look fair here. It suggests in its letter that it learned of the materiality problem in late 2020 and then “conducted extensive additional investigation,” and then decided to dismiss. It’s pretty clear that this was not the timeline of events.

But no matter. The government should have conducted its “extensive additional investigation” before indictment, rather than a year later. This was obviously a complex case. The supposed misstatements were subtle and not clearly tied to reported numbers that could mislead investors. This is not a straightforward case where a company overstated bottom-line revenue.

The Damage Done

The dismissal of the charges is no doubt a huge relief to MC and MP. They no longer have to worry about being convicted of a felony or going to prison as a result. I hope they can now sleep well at night.

I wonder if the prosecutors–the ones who brought the case and wrote the press release announcing the indictment and no doubt pressed for a guilty plea–understand the damage they did? I wonder if the prosecutors had a sleepless night over it?

I assume most people reading this blog have never been indicted. We’ve watched a lot of clients go through the process. It’s absolute hell, no matter who you are. Rich, poor, successful, struggling–it’s awful.

Here are just a few of the things that happen when you are under indictment:

  • You are arraigned and are formally “booked.” Mug shot, fingerprints, a million different forms. The government will take your passport.
  • You will need permission to travel outside a designated region. Some judges will say you can’t travel overseas at all.
  • You will pay attorney’s fees. A lot of them. MP and MC both had big firms representing them. I can only hope that BX Co. indemnified them, so they were not paying those costs out of pocket. But if they were not indemnified, they paid hundreds of thousands of dollars in attorney’s fees—maybe even more.
  • You will know that your friends, work colleagues, and family all know about the indictment. Things like this spread quickly. You may be lucky to have a supportive network, or you may become a professional pariah.
  • You may lose your job or be placed on leave. So, your whole “normal” life goes out the window.
  • You worry each day about losing the case and going to jail. You imagine what it would be like to miss years of your kids’ lives. Every defense attorney gives their client a “worst case scenario” sentencing range. Those numbers live in your brain somewhere.
  • You have to spend hours and hours working on the case, meaning that it’s hard to forget about it and find some peace along the way. Our clients are a key part of our defense team, helping us interpret documents and develop strategies. It is hard to escape the matter, week after week.

Being under indictment is a nightmare.

Dismissing the indictment is an amazing outcome. Congrats to MP and MC, and bravo to their lawyers for fighting the good fight.

Hey prosecutors, this is not a game. You shouldn’t win points for pushing the envelope by inventing creative ways to charge people with “crimes.” This dismissal is embarrassing. Think before you hurt an innocent person the next time around.

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