Ecurities And Exchange Commission v. Apuzzo

689 F.3d 204 (2d Cir. 2012)

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Nature of the Case

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Facts

The Terex Corporation (Terex) manufactures equipment for use in the construction, infrastructure, and surface to mining industries. D was the Chief Financial Officer of Terex. United Rentals, Inc. (URI) is one of the largest equipment rental companies in the world. Michael J. Nolan was URI's, Chief Financial Officer. URI and Nolan, with D's assistance, carried out two fraudulent 'sale-leaseback' transactions. URI sold used equipment to General Electric Credit Corporation (GECC) and leased the equipment back for a short period. URI convinced Terex to agree with GECC to resell the equipment for GECC at the end of the lease periods. Terex and URI also agreed that Terex would provide a residual value guarantee to GECC. That guarantee provided that after resale, GECC would receive no less than 96% of the purchase price that GECC had paid URI for the used equipment. URI secretly agreed to indemnify Terex for any losses Terex incurred from the Residual Value Guarantee. URI also agreed to make substantial purchases of new equipment from Terex to improve Terex's year-end sales. Under Generally Accepted Accounting Principles (GAAP), URI could immediately recognize the revenue generated by the sale of equipment to GECC if the 'risks and rewards of ownership' had been fully transferred to GECC and the sale price was 'fixed and determinable.' Because URI had secretly agreed to indemnify Terex, URI had not fully transferred the risks and rewards of ownership. D knew that if the full extent of the three-party transactions was transparent, URI would not be able to claim the increased revenue. D executed various agreements that disguised URI's continuing risks and financial obligations, and he also approved inflated invoices from Terex that were designed to conceal URI's indemnification payments to Terex. On December 29, 2000, URI and GECC entered into a contract for GECC to buy a fleet of used equipment for $25.3 million. D and Nolan agreed that URI would purchase $20 million of new equipment from Terex before the end of the 2000 calendar year. URI also agreed to pay Terex $5 million immediately to cover the anticipated losses that Terex would suffer from the Residual Value Guarantee. The initial $5 million indemnification payment from URI to Terex was made in conjunction with URI's purchase of $20 million of new equipment from Terex. On December 29, 2000, D approved two Terex invoices that listed the value of the equipment as $25 million rather than $20 million. Nolan forwarded the inflated invoices to URI's accounting department, 'knowing that the accounting department would enter the incorrect prices in URI's books and records'; in so doing, Nolan hoped to conceal the $5 million indemnification payment from URI to Terex. Before agreeing to anything, D received an internal appraisal of the Equipment and knew that URI sold the Equipment to GECC at a price above fair market value. Terex was likely to suffer 'substantial losses' when the Equipment was resold. D was asked to provide URI's auditor with a valuation letter. D did not reveal the results of Terex's appraisal stated that 'nothing has come to his attention' to cause him to believe that URI's valuations were incorrect. To hide the additional indemnification payments D signed another contract between URI and Terex. URI agreed to make an $8 million 'prepayment' on the purchase of additional equipment from Terex in the first six months of 2003. Terex would keep this prepayment even if URI did not make any additional equipment purchases. D knew that this was intended to disguise the real purpose of the prepayment, which was to indemnify Terex for the losses it suffered because of the Residual Value Guarantee. A second Terex deal was structured similarly to Terex I. P brought charges against D for aiding and abetting. D moved to dismiss in that the complaint failed to allege that D had actual knowledge of the fraud and that he rendered substantial assistance to the primary violator. The district court found that P had adequately alleged actual knowledge of the violation. But then found that P had not adequately alleged substantial assistance. It held that the complaint did not support a conclusion that D's conduct proximately caused the primary violation. It reasoned that proximate causation was required to satisfy the 'substantial assistance' component of aider and abettor liability. P appealed.