United States v. Simon

Facts

Harold Roth, was president of Continental, supervised the day-to-day operations of Valley, and owned about 25% of the stock of each company. Valley, which was run by Roth out of a single office on Continental's premises, was engaged in lending money at interest to Continental and others in the vending machine business. Continental would issue negotiable notes to Valley, which would endorse these in blank and use them as collateral for drawing on two lines of credit, of $1 million each, at Franklin National Bank and Meadowbrook National Bank, and would then transfer to Continental the discounted amount of the notes. These transactions, beginning as early as 1956, gave rise to what is called 'the Valley payable.' By the end of fiscal 1962, the amount of this was $1,029,475, of which $543,345 was due within the year. A 'Valley receivable,' resulted from Continental loans to Valley. Most of these stemmed from Roth's custom, dating from mid-1957, of using Continental and Valley as sources of cash to finance Roth's transactions in the stock market. At the end of fiscal 1962, the amount of the Valley receivable was $3.5 million, and by February 15, 1963, the date of certification, it had risen to $3.9 million. The Valley payable could not be offset, or 'netted,' against the Valley receivable since, as stated, Continental's obligations to Valley were in the form of negotiable notes , which Valley had endorsed in blank to the two banks and used as collateral to obtain the cash which it then lent to Continental. Simon (D) was a senior partner at the accounting firm Lybrand, Ross Bros. & Montgomery. When D and others reviewed Continental’s financial statements, they found that Roth could not repay the loans made by Valley. They accordingly arranged that collateral would be posted. Roth transferred their equity in certain securities to Arthur Field, Continental's counsel. Some 80% of these securities consisted of Continental stock and convertible debentures. As of February 15, 1963, those securities had a market value of $2,978,000. D and others were aware of these facts and value of the collateral but made no mention of them on Continental’s audited statements. They also failed to account for an increase in the Valley Receivables from $3.5 to $3.9 million. The United States brought charges against Ds. Count One of the indictment was for conspiracy to violate 18 U.S.C. §§ 1001 and 1341 and § 32 of the Securities Exchange Act of 1934, 15 U.S.C. § 78ff. Ds were charged with making false or misleading financial statements. Ds called eight expert independent accountants, an impressive array of leaders of the profession. They testified generally that, except for the error with respect to netting, the treatment of the Valley receivable was in no way inconsistent with generally accepted accounting principles or generally accepted auditing standards, since it made all the informative disclosures reasonably necessary for fair presentation of the financial position of Continental as of the close of the 1962 fiscal year. They testified that neither generally accepted accounting principles nor generally accepted auditing standards required disclosure of the make-up of the collateral or the increase of the receivable after the closing date of the balance sheet, although three of the eight stated that in light of hindsight they would have preferred that the make-up of the collateral be disclosed. The witnesses likewise testified that disclosure of the Roth borrowings from Valley was not required, and seven of the eight were of the opinion that such disclosure would be inappropriate. They reasoned since the Valley receivable was adequately secured in the opinion of the auditors and was broken out and shown separately as a loan to an affiliate with the nature of the affiliation disclosed, this was all that the auditors were required to do. To go further and reveal what Valley had done with the money would be to put into the balance sheet things that did not properly belong there. They reasoned that this would imply that there was the duty of an auditor to investigate each loan to an affiliate to determine whether the money had found its way into the pockets of an officer of the company under audit, an investigation that would ordinarily be unduly wasteful of time and money. Ds asked for two instructions which, in substance, would have told the jury that a defendant could be found guilty only if, according to generally accepted accounting principles, the financial statements as a whole did not fairly present the financial condition of Continental and then only if his departure from accepted standards was due to willful disregard of those standards with knowledge of the falsity of the statements and an intent to deceive.  The judge declined. The judge said that the 'critical test' was whether the financial statements as a whole 'fairly presented the financial position of Continental as of September 30, 1962, and whether it accurately reported the operations for fiscal 1962.' If they did not, the basic issue became whether defendants acted in good faith. Proof of compliance with generally accepted standards was 'evidence which may be very persuasive but not necessarily conclusive that he acted in good faith, and that the facts as certified were  not materially false or misleading.'  Ds were found guilty and were fined. Ds appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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