<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): January 3, 1997
CROP GROWERS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-23830 81-0491497
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
10895 LOWELL, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive offices) (zip code)
(913) 338-7800
(Registrant's telephone number, including area code)
201 CROP GROWERS DRIVE, GREAT FALLS, MONTANA, 59401
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5: OTHER EVENTS
On January 3, 1997, the court in the matter of UNITED STATES OF AMERICA V. CROP
GROWERS CORPORATION, JOHN J. HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181
(GK)) ruled upon Crop Growers Corporation's (the "Company"), and its former
President and Chief Executive Officer John Hemmingson's and its former Executive
Vice President Gary Black's motions to dismiss and strike matters alleged in the
Second Superseding Indictment related to the referenced case.
By virtue of the court's order, 12 of the 13 counts against the Company were
dismissed on various grounds. The remaining count against the Company
charges the Company with conspiring to violate certain federal laws,
including federal election laws. No assurance can be given that the
Independent Counsel will not appeal or take other actions in response to the
court's order, including, without limitation, bringing a seperate indictment
against the Company on one count dismissed on venue grounds.
By the court's order, count's six through fifteen of the Second Superseding
Indictment were dismissed in their entirety because defendants had no duty to
disclose uncharged criminal conduct under the concealment prong of 18 U.S.C.
("Section 1001") and because such Indictment does not adequately allege the use
of an affirmatively false writing under the false statement prong of Section
1001. Further, count Sixteen of the Second Superseding Indictment was dismissed
because defendants had no duty to disclose the alleged omissions to the
investing public. Count Four of the Second Superseding Indictment was dismissed
because the court held that venue does not lie in the District of Columbia for
the charge of making and keeping false records and accounts, but rather venue
is determined by the laws of the offense (the making and keeping of books,
records and accounts).
A copy of the Company's press release dated January 6, 1997, the court's Order,
the court's Memorandum Opinion and the Second Superseding Indictment are filed
as exhibits hereto.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit No. Description
----------- -----------
99(1) Press Release dated January 6, 1997
99(2) Order dated January 3, 1997
99(3) Memorandum Opinion dated January 3, 1997
99(4) Second Superseding Indictment
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Crop Growers Corporation
By: /s/ David Hill
-----------------------
David Hill
Chief Financial Officer
Date: January 14, 1997
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Exhibit Index
Exhibit No. Description Page
----------- ----------- ----
99(1) Press Release dated January 6, 1997 5
99(2) Order dated January 3, 1997 6
99(3) Memorandum Opinion dated January 3, 1997 9
99(4) Second Superseding Indictment 63
4
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Exhibit 99(1)
Crop Growers Corporation
CROP GROWERS RECEIVES FAVORABLE
COURT RULING
FOR IMMEDIATE RELEASE
Monday, January 6, 1997
Contact: Bob Rousey
Crop Growers Corporation
913-323-5612
Overland Park, KS--Crop Growers Corporation (NASDAQ: CGRO) reported today that
it has received a ruling from the United States District Court for the District
of Columbia on several of its motions to dismiss certain charges against it
related to the investigation of former Secretary of Agriculture Mike Espy by an
Independent Counsel. As a result of the court's order, the court dismissed 12
of the 13 counts against the company and 15 of the 18 counts against two of its
former executive officers. The remaining count against the company charges the
company with conspiring to violate federal election laws. The company intends
to continue to vigorously defend against that allegation.
No assurance can be given that the Independent Counsel will not appeal or take
other actions in response to the court's order. The trial date for the company
on its remaining allegation is tentatively set for the end of January, 1997.
5
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA :
:
v. :
:
CROP GROWERS CORPORATION, :
: Criminal No. 96-0181 (GK)
JOHN J. HEMMINGSON, :
:
AND :
:
GARY A. BLACK, :
:
Defendants. :
______________________________
O R D E R
This matter is before the Court upon Defendants' three Motions to Dismiss
and one Motion to Strike. The motions arise out of Independent Counsel Donald
Smaltz's criminal prosecution of Defendants for conspiring to make illegal
campaign contributions and then concealing those contributions from various
federal agencies.
For the reasons discussed in the accompanying Memorandum Opinion, it is
this 3rd day of January, 1997, hereby
ORDERED, that Defendants' Motion to Dismiss the Second Superseding
Indictment as Beyond the Independent Counsel's Jurisdiction [89] is DENIED; and
it is further
ORDERED, that Defendants' Motion to Dismiss the Second Superseding
Indictment Based on Inconsistent Theories of Prosecution [92] is DENIED; and it
is further
ORDERED, that Defendants' Motion to Dismiss Based on Defects in the Second
Superseding Indictment is GRANTED IN PART AND DENIED
<PAGE>
IN PART. Specifically:
COUNTS SIX THROUGH FIFTEEN of the Second Superseding Indictment are
DISMISSED in their entirety because Defendants had no duty to disclose uncharged
criminal conduct under the concealment prong of Section 1001 and because the
Indictment does not adequately allege the use of an affirmatively false writing
under the false statement prong of Section 1001;
COUNT SIXTEEN of the Second Superseding Indictment is DISMISSED because
Defendants had no duty to disclose the alleged omissions to the investing
public;
COUNTS FOUR, FIVE, SEVENTEEN AND EIGHTEEN of the Second Superseding
Indictment are DISMISSED because venue does not lie in the District of Columbia
for the crimes charged; and it is further
ORDERED, that Defendants Motion to Strike Surplusage from the Second
Superseding Indictment [88] is DENIED.
/s/ Gladys Kessler
---------------------------------
GLADYS KESSLER
United States District Judge
COPIES TO:
Donald Smaltz
Joseph Savage
Jacob S. Frenkel
Office of Independent Counsel
103 Oronoco Street, Suite 200
Alexandria, VA 22314
2
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Barry William Levine
Mark Packman
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, NW
Washington, DC 20037
William J. Mauzy, Esq.
2885 Norwest Center
Minneapolis, MN 55403
Theodore V. Wells, Jr., Esq.
Lowenstein Sandler Kohl Fisher & Boylan
65 Livingston Avenue
Roseland, NJ 07068-1791
3
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
:
UNITED STATES OF AMERICA :
:
V. :
:
CROP GROWERS CORPORATION, :
: Criminal No. 96-0181 (GK)
JOHN J. HEMMINGSON, :
:
AND :
:
GARY A. BLACK, :
:
Defendants. :
________________________________________
MEMORANDUM OPINION
This matter is before the Court upon Defendants' three Motions to Dismiss
and one Motion to Strike.(1) The motions arise out of Independent Counsel
Donald Smaltz's criminal prosecution of Defendants for conspiring to make
illegal campaign contributions and then concealing those contributions from
various federal agencies.
____________________
(1) The motions are: (1) Motion of Defendants Crop Growers, Hemmingson,
and Black to Dismiss the Second Superseding Indictment as Beyond the Independent
Counsel's Jurisdiction [89]; (2) Motion of Defendants Crop Growers and
Hemmingson to Dismiss the Second Superseding Indictment Based on Inconsistent
Theories of Prosecution [92]; (3) Motion of Defendants Crop Growers, Hemmingson,
and Black to Dismiss Based on Defects in the Second Superseding Indictment [91];
and (4) Motion of Defendants Crop Growers, Hemmingson, and Black to Strike
Surplusage from the Second Superseding Indictment [88].
<PAGE>
I. BACKGROUND(2)
Defendant Crop Growers Corporation ("Crop Growers") is a holding company
for several wholly-owned subsidiary companies, including Crop Growers Insurance,
Inc. ("CGI"), Crop Growers Software, Inc. ("CGS"), and Prairie Mountain
Insurance, Inc. ("PMI"). Defendants John J. Hemmingson ("Hemmingson") and Gary
A. Black ("Black") were officers of Crop Growers at all relevant times.
Hemmingson was an officer and director of CGI and a director of CGS. Black was
also a director of Crop Growers, an officer of CGI, an officer and director of
CGS, and an officer of PMI. CGI obtains a significant portion of its revenue
from the federal Multi-Peril Crop Insurance Program, which the Department of
Agriculture regulates.
All three Defendants are charged in an eighteen-count indictment (the
"Indictment"), returned on October 31, 1996.(3) Independent Counsel Donald
Smaltz (the "IC") is prosecuting Defendants as part of his investigation of the
acceptance of gifts by former Secretary of Agriculture Alphonso Michael ("Mike")
Espy ("Secretary Espy" or the "Secretary") from organizations or
___________________
(2) The facts of this case are somewhat involved and will be developed
more fully in the Court's discussion of each challenge to the Indictment. This
section summarizes the overall factual background and the counts of the
Indictment.
(3) This is the Second Superseding Indictment. The Original Indictment,
returned on May 30, 1996, and the Superseding Indictment, returned on
October 1, 1996, were both dismissed without prejudice as subsequent superseding
indictments were returned.
2
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individuals with business pending before the Department of Agriculture.
The Indictment charges an elaborate scheme, involving indicted and
unindicted co-conspirators, to violate the Federal Election Campaign Act
("FECA") and to conceal that violation in contravention of the campaign finance
and securities laws. Essentially, the Indictment charges that Defendants
facilitated the making of illegal campaign contributions to Secretary Espy's
brother, Henry William Espy, Jr. ("Henry Espy"). These contributions were
allegedly hidden by Defendants' falsification of the accounting and business
records of Crop Growers and its subsidiaries CGI, CGS, and PMI. Specifically,
the Counts of the Indictment charge as follows:
Count One: A five-object conspiracy, existing from 1993 through 1995, to
make and conceal illegal campaign contributions of approximately $46,000 to the
Henry Espy for Congress Committee.
Counts Two and Three: Causing the Henry Espy for Congress Committee to
falsely report the identities of campaign contributors to the Federal Election
Commission ("FEC") on March 24, 1993, and August 31, 1993. Crop Growers is not
a named defendant in these Counts of the Indictment.
Count Four: Making and keeping false records and accounts comprising the
information underlying the financial statements filed by Crop Growers with the
Securities and Exchange Commission ("SEC"), from June 23, 1994 through December
31, 1995.
Count Five: Making and keeping false accounting records, from June 23,
1994 through December 31, 1995. Crop Growers is not a
3
<PAGE>
named defendant in this Count of the Indictment.
Counts Six through Fifteen: Failing to disclose material facts in filings
with the SEC on ten different dates, from April 11, 1994 through March 31, 1995.
Count Sixteen: Failing to provide information about the alleged false
information comprising the first fifteen Counts of the Indictment in information
relied upon by purchasers and potential purchasers of securities when Crop
Growers became a publicly traded corporation registered with the SEC.
Counts Seventeen and Eighteen: Failing to disclose potentially illegal
conduct to independent auditors, namely, that management of Crop Growers had
been involved in making illegal campaign contributions, on March 25, 1994 and
March 28, 1995. Crop Growers is not a named defendant in these Counts of the
Indictment.
Defendant Hemmingson and several other persons not indicted here, including
Henry Espy, have been indicted and tried in the Eastern District of Louisiana
for crimes arising out of similar and/or interrelated events. UNITED STATES V.
ESPY, ET AL., No. CR. 96-198 (E.D. La. Aug. 1996). Secretary Espy is not a
defendant in either action.
Defendants raise several challenges to the substance of the Indictment in
their many motions, each of which will now be considered in turn.
II. INDEPENDENT COUNSEL JURISDICTION
All three Defendants challenge the IC's jurisdiction to bring the charges
in the Indictment, and move that all eighteen Counts be
4
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dismissed under Fed R. Crim. P. 12(b)(1) and (2).
The IC acts pursuant to the Ethics in Government Act, 28 U.S.C. SECTION
591 ET SEQ.(4) The IC was appointed on September 9, 1994, to investigate the
acceptance of gifts by Secretary Espy from organizations or individuals with
business pending before the Department of Agriculture. IN RE ESPY, Order
Appointing Independent Counsel, Div. No. 94-2 (D.C. Cir. Sept. 9, 1994) ("the
Appointment Order"). The Appointment Order provided that:
The Independent Counsel shall have jurisdiction and authority to
investigate other allegations or evidence of violation of any federal
criminal law, other than a Class B or C misdemeanor or infraction, by any
organization or individual developed during the Independent Counsel's
investigation referred to above and connected with or arising out of that
investigation . . . [and] to seek indictments and to prosecute any
organizations or individuals involved in any of the matters described
above, who are reasonably believed to have committed a violation of any
federal criminal law arising out of such matters, including organizations
or individuals who have engaged in an unlawful conspiracy or who have
aided or abetted any federal offense.
ID. at 2. On September 14, 1994, the Department of Justice ("DOJ") referred an
additional matter to the IC (the "Supplemental Referral") for investigation,
namely, that "Secretary Espy hosted a fundraising dinner, attended by
agricultural lobbyists, the purpose of which was to retire the campaign debt of
his brother." Notice of Prosecutorial Jurisdiction, UNITED STATES V. CROP
GROWERS CORP. ET AL., Criminal No. 96-181 (D.D.C. May 30, 1996). Defendants
assert both constitutional and statutory arguments in
__________________________
(4) The statutory scheme is fully explained in MORRISON V. OLSON, 487 U.S.
654, 659-65 (1988).
5
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support of their position that the IC has exceeded his jurisdiction in bringing
these charges.
First, Defendants rely on MORRISON V. OLSON, SUPRA, for the proposition
that an IC who attempts to perform more than a "single task" has been improperly
appointed by the judiciary in violation of the Appointments Clause of the
Constitution, Art. II, Section 2, cl. 2. The single task to which the Supreme
Court referred in MORRISON was the limited grant of authority in an IC's
appointment order and any supplemental referrals. ID. at 672. Because the
Court concludes that the conduct at issue here is sufficiently related to the
investigatory powers granted the IC in the Appointment Order and Supplemental
Referral, SEE INFRA pp. 7-9, it follows that the IC has acted within MORRISON'S
single task parameter.
Second, Defendants contend that they are not "covered persons" under the
Act. By its terms, the Act is triggered by the alleged illegal conduct of high
ranking executive branch officials. 28 U.S.C. Section 591(a), (b). However,
the IC is not limited to investigating only those persons covered by the Act.
UNITED STATES V. TUCKER, 78 F.3d 1313, 1321-22 (8th Cir. 1996), CERT. DENIED,
117 S. Ct. 76 (1996). When the IC investigates non-covered persons, he must
show that the persons or organizations and matters being investigated are
related to the original subject matter of his investigation so that "there is a
reasonable causal or logical connection between the two." UNITED STATES V.
SECORD, 725 F. Supp. 563, 566 (D.D.C. 1989). ACCORD, UNITED STATES V. SUN-
DIAMOND GROWERS OF CA., 941 F. Supp. 1262, 1273 (D.D.C. 1996) [SUN-DIAMOND
6
<PAGE>
I]. Again, given the Court's decision relating to the scope of this Appointment
Order and Supplemental Referral, the Court finds that a significant connection
exists between gratuities allegedly accepted by Secretary Espy and contributions
made to retire his brother's campaign debt because both could conceivably
influence the Secretary's opinions and decisions on matters pending before the
Department of Agriculture.
Finally, Defendants argue lack of IC jurisdiction under the Appointment
Order and the Supplemental Referral. Preliminarily, the Court notes that two
other courts have already rejected these arguments, finding that allegations
similar to these -- illegal campaign contributions made to Secretary Espy's
brother by companies with business pending before the Department of Agriculture
- -- fall squarely within the jurisdiction granted to this IC under this
Appointment Order. SUN-DIAMOND I, 941 F. Supp. at 1273-74; UNITED STATES V.
ESPY, No. Crim. A. 96-198, 1996 WL 586364 (E.D. La. Oct. 9, 1996).
Defendants assert that neither the original Appointment Order nor the
Supplemental Referral provides jurisdiction over the subject matter of the
Indictment. Defendants' contention that the only powers granted to the IC are
related to the acceptance of gratuities by Secretary Espy is simply without
merit. The language of both the Appointment Order and the Supplemental Referral
clearly gives the IC the authority to investigate persons and organizations
other than Secretary Espy and violations of federal laws other than
7
<PAGE>
the gratuities statute.(5)
Defendants also argue that, because the Indictment does not allege any
wrongful conduct by Secretary Espy, the conduct it does charge is insufficiently
related to the authority granted the IC in the Appointment Order and
Supplemental Referral to satisfy the requirements of 28 U.S.C. Section
593(b)(3). To prove relatedness, the IC must show that "there is a reasonable
causal or logical connection" between the organizations and the matters being
pursued by the IC and the subject matter of the original investigation. SECORD,
726 F. Supp. at 566.
In SUN-DIAMOND I, the defendants argued that several counts of the
indictment did not relate specifically to the subject of gratuities and, thus,
at most, should have been referred to the DOJ for prosecution. 941 F. Supp. at
1273. The SUN-DIAMOND I court rejected the argument, pointing out that the
indictment alleged that those defendants had made an illegal campaign
contribution to Henry Espy, had conspired to conceal the contribution, and had
business pending before the Department of Agriculture. ID. The court found
that the alleged purpose of the contribution, to gain improper influence with
Secretary Espy, was "intertwined with the original core subject matter of the
Attorney General's investigation, as well as the subsequent related referral
dealing with the allegations that Secretary Espy hosted a fundraising
_______________
(5) Our Court of Appeals has recognized that the IC's jurisdiction is both
"wide in perimeter and fuzzy at the borders." UNITED STATES V. WILSON, 26 F.3d
142, 148 (D.C. Cir. 1994), CERT. DENIED SUB NOM., BRISCOE V. UNITED STATES, 115
S.Ct. 1430 (1995).
8
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dinner to help retire his brother's campaign debt." ID. at 1274.
The logic of the SUN-DIAMOND I analysis is applicable here. The same
Appointment Order and Supplemental Referral define the jurisdiction of the IC in
this case as they did in SUN-DIAMOND I, and the interpretation of those
documents is the same in both cases. The underlying concern of the IC's
investigation of Secretary Espy is that the "Secretary may have been influenced
improperly to favor or intervene in the gift-givers' cause pending before his or
her Department." IN RE ESPY, 80 F.3d 501, 508 (D.C. Cir. 1996). The
Appointment Order, by its terms, allows the IC to investigate the acceptance of
gratuities by Secretary Espy and to investigate individuals and organizations
who may have violated any federal law in connection with the investigation of
the Secretary. Clearly, allegations that an organization with business pending
before the Department of Agriculture made an illegal campaign contribution to
Secretary Espy's brother to curry favor with the Secretary falls within the
mandate of that Appointment Order. Further, the Supplemental Referral clearly
covers allegations of Hemmingson's attendance at the fundraising dinner hosted
by Secretary Espy. Allegations relating to the fundraising dinner are part and
parcel of the overarching theory that all these activities were designed to
curry favor with the Secretary.
Defendants attempt to distinguish SUN DIAMOND I on the basis that the SUN
DIAMOND I indictment specifically alleged, in other counts, that the defendants
had paid gratuities to Secretary Espy himself. However, Defendants' argument is
unpersuasive because the
9
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analysis of the contribution to Henry Espy was not based on the existence of
gratuities charges in other counts of the indictment.
The Court's conclusions are also consistent with UNITED STATES V. ESPY,
1996 WL 586364, which rejected the identical arguments of defendants about the
same contribution to Henry Espy's campaign that is at issue in this case.
"Hemmingson's representation of an agricultural concern, his attendance at a
fundraising dinner, and his alleged signing of a $20,000 check fall within the
express purpose of the AG's referral." ID. at * 4.
Thus, Defendant's Motion to Dismiss the Second Superseding Indictment as
Beyond the Independent Counsel's Jurisdiction is DENIED.
III. INCONSISTENT THEORIES OF PROSECUTION
Defendants Hemmingson and Crop Growers assert that the IC's theory of
prosecution in the Eastern District of Louisiana is inconsistent with its theory
of prosecution in this District and thus move that Counts One, Four, Five,
Eleven through Fifteen, Sixteen, and Eighteen of the Indictment be dismissed
under Fed. R. Crim. P. 12(b)(2) and the Due Process Clause of the Constitution.
Although few cases address this issue, those that do overwhelmingly favor the
position of the IC.
The Louisiana indictment charges that Defendant Hemmingson and other co-
conspirators perpetrated a fraud upon Crop Growers by taking $20,000 from Crop
Growers and directing it to Henry Espy's campaign, disguising it as a legal fee.
Thus, in Louisiana, the IC charges that Crop Growers was a victim of the alleged
criminal
10
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activity. The District of Columbia Indictment charges that Crop Growers itself
made illegal campaign contributions to the Henry Espy campaign. Defendants
assert that it is completely inconsistent for the IC to assert that the same
behavior makes Crop Growers a victim in Louisiana and a perpetrator in the
District of Columbia Thus, Defendants argue that the Counts of the Indictment
resting on the alleged $20,000 contribution should be dismissed.
Defendants rely heavily on a concurring opinion in DRAKE V. KEMP, 762 F.2d
1449 (11th Cir. 1985) (EN BANC), CERT. DENIED, 478 U.S. 1020 (1986), where two
defendants were tried separately for the same murder. The prosecution presented
inconsistent theories about whom the actual murderer was and obtained two death
penalty convictions. DRAKE, 762 F.2d at 1478 (Clark, J., concurring). The
majority of the EN BANC panel declined to reach Drake's argument that the
theories of prosecution were inconsistent and relied instead on other grounds to
overturn his conviction. ID. at 1451. Judge Clark, concurring, found that the
prosecutor's actions violated notions of fundamental fairness inherent in the
Fourteenth Amendment's due process clause. ID. at 1478-79.
For the following reasons, the Court finds Judge Clark's concurrence of no
help to Defendants. First, no other judge joined Judge Clark's opinion and, as
noted above, the EN BANC court did not reach the issue.(6) Second, Judge
Clark's opinion, which turned
- ------------------
(6) The prior panel opinion rejected the defendant's claim. DRAKE V.
FRANCIS, 727 F.2d 990, 994 (11th Cir. 1984) ("A review of the record reveals
that the state's theories in the two trials were not totally inconsistent.").
11
<PAGE>
largely on factual inconsistencies between the two trials, condemned what he
perceived to be false evidence. ID. at 1477, 1479. Third, subsequent case law
has narrowly construed Judge Clark's view, applying it only where the prosecutor
has used "evidence that he could not have believed." PARKER V. SINGLETARY, 974
F.2d 1562, 1578 (11th Cir. 1992). Finally, a concurring opinion from the
Eleventh Circuit does not bind this Court.(7)
In addition, as a corporation, rather than a natural person, Crop Growers
can be both a victim and a participant in crimes arising out of the same facts.
It is a basic principle of corporate law that, in a shareholder derivative suit,
a corporation plays the role of both plaintiff and defendant. SEE COHEN V.
BENEFICIAL INDUS. LOAN CORP., 337 U.S. 541, 547-48 (1949). SEE ALSO WEAVER V.
UNITED MINE WORKERS OF AM., 492 F.2d 580, 586 (D.C. Cir. 1973) (recognizing that
a union, like a corporation, can reverse its position with respect to derivative
litigation) (citing with approval IN RE PENN CENT. SEC. LITIG., 335 F. Supp.
1026 (E.D. Pa. 1971)).
Judge Clement ruled similarly when Hemmingson raised the same issue in a
Motion to Transfer Venue in HENRY ESPY, Crim. Act. 96-198 (E.D. La. Nov. 6,
1996). In that motion, Hemmingson argued that transferring the indictment from
Louisiana to the District of
- -------------------------
(7) GREEN V. GEORGIA, 442 U.S. 95 (1979) (PER CURIAM), adds nothing to
Defendants' argument. GREEN reversed the state court's exclusion of exculpatory,
mitigating evidence, saying that "the hearsay rule may not be applied
mechanistically to defeat the ends of justice." ID. at 96-7 (internal quotation
omitted). Green is totally inapposite since it related to evidentiary rulings in
the punishment phase of a trial.
12
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Columbia would prevent the government from arguing inconsistent legal theories
at the two trials. ID. slip. op. at 12. That court rejected Hemmingson's
request, relying in part on theories of corporate law. ID. at 12-13.
Finally, Defendants cite no authority, and the Court has found none, where
a court has dismissed a criminal prosecution based on inconsistent theories of
prosecution. For all these reasons, Defendants' Hemmingson and Crop Growers
Motion to Dismiss the Second Superseding Indictment Based on Inconsistent
Theories of Prosecution is DENIED.
IV. LIABILITY UNDER 18 U.S.C. SECTION 1001
Counts Six through Fifteen of the Indictment charge Defendants with
violations of 18 U.S.C. Section 1001(8) and 18 U.S.C. Section 2.(9) Section 1001
proscribes two different types of conduct: concealment of material facts and
false representations. SEE UNITED STATES V.
- ---------------------
(8) 18 U.S.C. SECTION 1001 provides:
Whoever, in any matter within the jurisdiction of any department or
agency of the United States knowingly and wilfully falsifies,
conceals or covers up by any trick, scheme, or device a material fact,
or makes any false, fictitious or fraudulent statements or
representations, or makes or uses any false writing or document
knowing the same to contain any false, fictitious or fraudulent
statement or entry, shall be fined not more than $10,000 or
imprisoned not more than five years, or both.
(9) 18 U.S.C. SECTION 2(b) provides:
Whoever willfully causes an act to be done which if directly performed
by him or another would be an offense against the United States, is
punishable as a principal.
13
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CURRAN, 20 F.3d 560, 566 (3d Cir. 1994); UNITED STATES V. MAYBERRY, 913 F.2d
719, 722 n.7 (9th Cir, 1990); UNITED STATES V. TOBON-BUILES, 706 F.2d 1092, 1096
(11th Cir. 1983); UNITED STATES V. DIOGO, 320 F.2d 898, 902 (2d Cir. 1963). The
Indictment alleges violations of both prohibitions, which will be discussed in
turn.
The Indictment specifically identifies ten different SEC filings from which
material facts were allegedly omitted. These material facts are: (a) that Crop
Growers violated FECA by making illegal campaign contributions; (b) that a
material contingent liability existed for potential criminal and civil fines
because of said violations; (c) that Crop Growers' financial statements were
misleading; (d) that Crop Growers maintained false books and records; and, (e)
that Crop Growers, its subsidiaries, and their key officers faced criminal and
civil sanctions under provisions other than FECA and that their ability to
operate could be severely affected as a result.
A. SECTION 1001 CONCEALMENT
Although our Court of Appeals has not squarely addressed the issue, (10)
the majority of Circuits have ruled that a violation of Section 1001 predicated
on concealment requires that the defendant must have had a legal duty to
disclose the facts at the time of the alleged concealment. CURRAN, 20 F.3d at
566; UNITED STATES V. ZALMAN, 870 F.2d 1047, 1055 (6th Cir. 1989), CERT. DENIED
SUB NOM.,
- -------------------------
(10) Our Court of Appeals upheld a Section 1001 concealment conviction
where it concluded that a HUD form completed by defendant required him to
disclose the business relationship at issue. UNITED STATES V. MUNTAIN, 610 F.2d
964, 972-73 (D.C. Cir. 1979).
14
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SHARIFINASSAB V. UNITED STATES, 492 U.S. 921 (1989); UNITED STATES V.
NERSESIAN, 824 F.2d 1294, 1312 (2d Cir. 1987), CERT. DENIED, 484 U.S. 958
(1987); UNITED STATES V. MURPHY, 809 F.2d 1427 (9th Cir. 1987); UNITED STATES
V. HERNANDO OSPINA, 798 F.2d 1570, 1578 (11th Cir. 1986); UNITED STATES V.
LARSON, 796 F.2d 244, 246 (8th Cir. 1986) UNITED STATES V. ANZALONE, 766 F.2d
676, 683 (1st Cir. 1985); UNITED STATES V. IRWIN, 654 F.2d 671, 678-79 (10th
Cir. 1981), CERT. DENIED, 455 U.S. 1016 (1982). At least one district court
in this circuit has stated that "[t]he case law is clear that the deliberate
failure to disclose material facts in the face of a specific duty to disclose
such information constitutes a violation of the concealment provision of
SECTION 1001." UNITED STATES V. DALE, 782 F. Supp. 615, 626 (D.D.C 1991).
The rationale of these cases has rested, in large part, on due process
considerations. SEE MURPHY, 809 F.2d at 1431 (citations omitted); UNITED STATES
V. BUCEY, 876 F.2d 1297, 1307-08 (7th Cir. 1989), CERT. DENIED, 493 U.S. 1004
(1989) (citation omitted). For example, in MURPHY, the defendant was charged
with conspiring to conceal information from and falsify information to the
Internal Revenue Service by submitting Currency Transaction Reports ("CTRs")
that misidentified the source of funds deposited. 809 F.2d at 1429. The court
found that because the CTR form was ambiguous, criminal liability could not be
predicated on the failure to fill out the form completely, stating:
Due process requires that penal statutes define criminal offenses with
sufficient clarity that an ordinary person can understand what conduct is
prohibited. KOLENDER V. LAWSON, 461 U.S. 352, 357 (1983). [The statute and
15
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regulations at issue] do not clearly require depositors to identify the
source of their funds. Therefore, the imposition of criminal sanctions on
these facts would violate due process. [citation omitted].
MURPHY, 809 F.2d at 1431.
In MURPHY, where the statute and its implementing regulations were
ambiguous as to whether they required disclosure, the Ninth Circuit concluded
that imposition of criminal liability would offend due process considerations.
A FORTIORI, where a statute or regulation imposes NO duty whatever to disclose
information, due process concerns require that criminal liability not be based
on omission of such information.
Turning to the issue of whether Defendants herein had a duty to disclose
the five pieces of information that the IC alleges as the basis for liability,
the Court must first decide, as a matter of law, whether such duty existed.
ZALMAN, 870 F.2d at 1055 (citations omitted); UNITED STATES V. POARCH, 878 F.2d
1355, 1360 (11th Cir. 1989).
Defendants contend that they had no duty to disclose that Crop Growers
violated FECA by making illegal campaign contributions or that they illegally
maintained false books and records. In support of their argument, Defendants
cite UNITED STATES V. MATTHEWS, 787 F.2d 38 (2d Cir. 1986), for the proposition
that there is no duty to disclose uncharged criminal conduct.
The defendant in MATTHEWS appealed from a criminal conviction for
violations of securities laws for failing to disclose on a
16
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proxy statement that he was guilty of conspiracy.(11) 787 F.2d 38, 44.
Matthews allegedly joined the conspiracy in 1978. ID. at 39-40. In 1981, the
chair of the board of directors of a corporation asked him to run for election
to the board and, to that end, Matthews filed a proxy statement. ID. at 39, 44.
At the time of the 1981 proxy filing, Matthews was the subject of a grand jury
investigation. ID. at 44. He was indicted on the conspiracy charge in July 26,
1984, and on the securities violation on August 2, 1984. ID. at 43. The
government claimed that Matthews violated securities laws and regulations by not
disclosing on the proxy statement, filed in 1981, that he was guilty of
conspiracy. ID. at 43.
The key issue in MATTHEWS was whether section 14(a) of the Securities
Exchange Act of 1934, 15 U.S.C. Section 78n(a), and SEC Implementing Rule 14a-9,
17 C.F.R. 240.14a-9, required that the defendant "state to all the world that he
was guilty of the uncharged crime of conspiracy." ID. at 46. The court looked
to the language of the statute and rule in concluding that the defendant had no
such duty. ID. at 47-48. In particular, the court pointed to the problems
inherent in management evaluation of qualitative disclosures, which were
inherently subject to varying interpretation, rather than quantitative
disclosures, such as net income, profits, losses, and the due process concerns
thereby implicated ID. at 48-50. Therefore, "so long as uncharged
- --------------------
(11) Matthews was acquitted of the conspiracy charges in the same trial.
MATTHEWS, 787 F.2d at 39.
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criminal conduct is not required to be disclosed by any rule lawfully
promulgated by the SEC, nondisclosure of such conduct cannot be the basis of a
criminal prosecution." ID. at 49.
The MATTHEWS analysis is persuasive precisely because it is a logical
extension of the omission/duty principles outlined above, SEE SUPRA pp.
14-16. Due process concerns dictate the finding that, where there is no fair
notice that specific conduct is forbidden, or compelled, that conduct cannot
be prosecuted. SEE UNITED STATES V. HARRISS, 347 U.S. 612 (1954).
Further, the SEC itself has, in conjunction with the proxy statement
provisions of the securities law, failed to adopt such a broad disclosure
requirement. The provisions of Item 6 of Schedule 14A, which require only
disclosure of criminal convictions or pending criminal proceedings, were
proposed in 1976, Securities Exchange Act Release No. 5758, 1976-77 Transfer
Binder, Fed. Sec. L. Rep. (CCH) PARA 80,783, and adopted in 1978, Securities
Exchange Act Release No. 5949, 1978 Transfer Binder, Fed. Sec. L. Rep (CCH) PARA
81,649. The Commission found that information about directors' and officers'
involvement in litigation was material to investors. Securities Exchange Act
Release No. 5949, SUPRA, at p. 80,618. The Commission considered requiring
disclosure of questionable or illegal payments, SEE Securities Exchange Act
release No. 13185, 1976-77 Transfer Binder, Fed. Sec. L. Rep (CCH) PARA 80, 897
at 87,382-84, but failed to adopt such a requirement. SEE Securities Exchange
Act Release No. 15570, 1979 Transfer Binder, Fed. Sec. L. Rep. (CCH) PARA 81,
959 at 81,392. Thus, the SEC clearly knows how to
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write specific disclosure requirements into its regulations, and has chosen not
to do so for uncharged criminal conduct.
The IC seems to suggest in its Opposition that, even if the Court finds
MATTHEWS to be applicable to Hemmingson and Black, it should not apply to Crop
Growers because a corporation has no Constitutional right against self-
incrimination. However, Fifth Amendment concerns merely "buttressed" the
holding of MATTHEWS. 787 F.2d at 49. That court's overriding concern, as
previously noted, was related to according due process protections, which are as
applicable to corporate defendants as to individual defendants.
As the IC points out, there is a line of cases requiring the disclosure of
uncharged criminal or improper conduct under the federal securities laws. SEE
S.E.C. V. FEHN, 97 F.3d 1276 (9th Cir. 1996); IN RE PAR PHARMACEUTICAL, INC.
SEC. LITIG., 733 F. Supp. 668 (S.D.N.Y. 1990); BALLAN V. WILFRED AM. EDUC.
CORP., 720 F. Supp. 241 (E.D.N.Y. 1989); GREENFIELD V. PROFESSIONAL CARE, INC.,
677 F. Supp. 110 (E.D.N.Y. 1987). Each and every one of those cases, however,
recognizes the validity of MATTHEWS in the criminal context. FEHN, 97 F.3d at
1290 n.12; PAR PHARMACEUTICAL, 733 F. Supp. at 675 n.8; BALLAN, 720 F. Supp. at
249; GREENFIELD, 677 F. Supp. at 112-13. In addition, each of those cases was a
civil action, not, like MATTHEWS, a criminal action.
Further, the IC's reliance on ROEDER V. ALPHA INDUS., INC., 814 F.2d 22
(1st Cir. 1987), is misplaced. Although the ROEDER court did find that illegal
activities may be material under the securities laws, ID. at 25-26, it concluded
that the criminal
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conduct in that case did not need to be disclosed. While acknowledging the
holding in MATTHEWS, the ROEDER court noted that MATTHEWS was a criminal case
raising significantly different concerns that the civil complaint involved in
ROEDER. Further, in ROEDER, both the corporation and one of its vice-presidents
had already pled guilty to a bribery-related crime. ID. at 23, 26. The court
went on to note, however, that the materiality of the undisclosed information
was not alone sufficient to sustain liability, and that a duty to disclose was
required to state any violation of the securities laws. ROEDER, 814 F.2d at 25-
27. The court then held that no such duty existed and dismissed the entire
complaint. ID. at 26-28. In short, ROEDER supports the position of Defendants,
not that of the IC.
The issue now before the Court is whether the specific statutes and
regulations governing each filing unambiguously required disclosure of uncharged
criminal conduct. In support of its position that Defendants had a duty to
disclose the information at issue in paragraphs (a) and (d), the IC cites the
general disclosure provision of the Securities Exchange Act of 1934. That
provision requires that issuers of registered securities file periodic and other
reports containing the information prescribed in the SEC's rules. 15 U.S.C.
Section 78m(a). In general, the provisions of SEC Regulation S-K set forth the
specific information that must be disclosed. 17 C.F.R. Part 229.
Under SEC Rule 12b-20, an issuer of securities has a duty to supply "such
further information, if any, as may be necessary to
20
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make the required statements, in light of the circumstances under which they are
made, not misleading." The IC argues that this general duty, in essence,
transforms all of the specific rules set forth in Regulation S-K into
affirmative duties to disclose. Even assuming that this is true, the Court can
still find no basis in the specific regulations for requiring disclosure. Each
required disclosure references specific portions of Regulation S-K, set forth
at 17 C.F.R. Part 229, which in turn set forth the specific information that
must be disclosed.
Defendants argue that the regulations that govern the disclosures at issue
in this case are 17 C.F.R. Sections 229.401 and 229.103. The IC contends that
17 C.F.R. Sections 229.303 and 229.503 are the appropriate regulations. The
Court finds that under any of these regulations, the alleged omissions in
paragraphs (a) and (d) need not have been disclosed.
Defendants argue that MATTHEWS is dispositive with respect to 17 C.F.R.
Sections 229.401. MATTHEWS examined the language of 17 C.F.R. Section
229.401,(12) which governs disclosures relating to directors and executive
officers on Form S-1 and on the proxy statements. SEE Form S-1, Item 11(j)
(incorporating the disclosure requirements of 17 C.F.R. Section 229.401).
The MATTHEWS courts found that the specific language did not require the
defendant to disclose uncharged
____________________
(12) 17 C.F.R. Section 229.401(f)(2) provides for disclosure of legal
proceedings where:
(2) Such person was convicted in a criminal proceeding or is a named
subject of a pending criminal proceeding (excluding traffic violations
and other minor offenses).
21
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criminal conduct. The Court's own examination of the language leads it to the
same conclusion.
The regulations governing corporate disclosures are set forth at 17 C.F.R.
Section 229.103.(13) SEE Form S-1, Item 11(c). By its plain language, the
regulation requires only the disclosure of proceedings "known to be contemplated
by governmental authorities" and does not require the disclosure of uncharged
criminal conduct. One court has even held that the receipt of a target letter
is insufficient to trigger an obligation to disclose under this section. IN RE
BROWNING-FERRIS INDUS., INC. SHAREHOLDER DERIVATIVE LITIG., 830 F. Supp. 361,
369 (S.D. Tex. 1993), AFF'D MEM., 20 F.3d 465 (5th Cir. 1994). The government
does not contend that Defendants, at the time of the filings at issue, had any
knowledge that the government was contemplating formal criminal proceedings or
even an investigation. The Court cannot find that the regulation unambiguously
requires disclosure of the conduct alleged in paragraphs (a) and (d).
The IC relies on two other disclosure provisions, 17 C.F.R.
____________________
(13) 17 C.F.R. Section 229.103 provides:
Describe briefly any material pending legal proceedings, other
than ordinary routine litigation incidental to the business, to which
the registrant or any of its subsidiaries is a party or of which any
of their property is the subject. Include the name of the court or
agency in which the proceedings are pending, the date instituted, the
principal parties thereto, a description of the factual basis alleged
to underlie the proceeding and the relief sought. Include similar
information as to any such proceedings known to be contemplated by
governmental authorities.
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Section 229.303, incorporated by Item 11(h), which requires that an issuer
discuss "any known trend or uncertainty" likely to influence the registrant's
liquidity or operational results, and 17 C.F.R. Section 229.503, incorporated in
Form S-1 by Item 3, which requires that a registrant provide a discussion of
"the principal factors that make the offering speculative or one of high risk."
The IC's argument involves a lengthy chain of inferences. Crop Growers'
Forms S-1 discussed the implications of proposed legislative changes in the
Federal Multi-Peril Crop Insurance Program. However, those forms did not
discuss the alleged FECA violation, which could have jeopardized Crop
Growers' participation in the Program. Thus, the IC argues, the discussion
of the risk to the Program from the pending legislation was incomplete. To
make the forms complete and not misleading under Rule 12B-20, the IC claims
that Defendants would have had to disclose and discuss the alleged violations
of FECA. The Court finds this argument both attenuated and untenable.
The specific forms at issue do not specify that criminal liability can be
imposed if the forms are not completed in compliance with law. Further, the
terms of the regulations do not set forth required disclosures in precise
terms. Qualitative terms such as "risk", "trend", and "uncertainty" do not
provide sufficient notice that a particular disclosure is required to allow
criminal liability to attach for alleged non-disclosure. ACCORD MATTHEWS,
787 F.2d at 48 (citations omitted). Such terms are, quite simply, too vague
and amorphous to give fair notice, required by the Due
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Process clause, of what disclosure is required. As to the specific
regulations, the Court has found no case law supporting the IC's view that
these general disclosure requirements can provide a basis for CRIMINAL
liability, and the IC does not cite any case supporting that view. Nor was
the Court able to find any federal case which specifically discussed 17
C.F.R. Section 229.503, the risk factors provision, in conjunction with
required disclosures. As for the general disclosure of trends under 17
C.F.R. Section 229.303, the Court was also unable to find any case supporting
the IC's broad reading of that regulation. Thus, neither regulation, even
when read in conjunction with 17 C.F.R. Section 240.12B-20, will support
criminal liability for failing to disclose uncharged, uninvestigated criminal
conduct.
The other alleged omissions, namely, that a material contingent liability
existed because of the alleged FECA violations, that Crop Growers' financial
statements were misleading, and that Crop Growers, its subsidiaries, and their
officers faced potential criminal liabilities, also fail to support a Section
1001 concealment charge because Defendants had no duty to disclose that
information.
First, since the Defendants had no duty to disclose uncharged criminal
conduct underlying these additional omissions, it logically follows that they
had no duty to disclose the additional facts. Second, to the extent that any
duty to disclose is predicated on professional standards not codified in
any statute or regulation, there can be no criminal liability. As previously
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stated, the predicate for criminal behavior must be set out with sufficient
clarity to put a potential defendant on notice that the conduct is proscribed.
Criminal liability cannot be extended to violations of Financial Accounting
Standards Board (FASB) standards not codified in criminal statutes and open to
varying interpretations. SEE IN RE VERIPHONE SECS. LITIG., 11 F.3d 865, 870
(9th Cir. 1993) (stock exchange rules cannot be imported into body of securities
laws).
For the reasons discussed above, the portions of the Indictment relating to
Counts Six through Fifteen, based on a Section 1001 concealment charge and the
corresponding claims under 18 U.S.C. Section 2, must be dismissed because
Defendants had no duty to disclose the conduct alleged.(14)
B. SECTION 1001 FALSE REPRESENTATIONS
The elements of a false representation prosecution under Section 1001 are
that (1) the defendant made a statement; (2) the statement was false, fictitious
or fraudulent as far as the defendant knew; (3) the statement was made knowingly
or willfully; (4) the statement was within the jurisdiction of a federal agency;
and (5) the statement was material. UNITED STATES V. IRWIN, 654 F.2d 671,
675-76 (10th Cir. 1981) (citations omitted). Thus, a
____________________
(14) Where a defendant with no duty to disclose particular information
knowingly and willingly keeps a third party from making a required disclosure,
the defendant is liable under 18 U.S.C. Section 2(b), even though he lacks the
scienter requisite for a primary violation. SEE CURRAN, 20 F.3d at 567-68;
UNITED STATES V. RICHESON, 825 F.2d 17, 20 (4th Cir. 1987). However, because
the Court concludes that Crop Growers had no duty to disclose the information at
issue, a Section 2(b) claim against Hemmingson or Black cannot be sustained.
25
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false representation charge requires that the defendant made a misrepresentation
or used a document that contained a false statement or entry, in other words,
that the defendant made some sort of active misrepresentation. UNITED STATES V.
LONDON, 550 F.2d 206, 212 (5th Cir. 1977); UNITED STATES V. DIOGO, 320 F.2d 898,
902 (2d Cir. 1963).
Defendants contend that the Indictment fails because it does not allege the
use of affirmatively false documents or writings. The Indictment itself rests
only on the alleged omissions discussed in Section IIA, above, and is thus
fatally deficient.
The IC simply misstates the law when it says that no falsehood is required
under the false representations prong of Section 1001. DIOGO, 320 F.2d at 902.
The IC contends that a Section 1001 prosecution can rest on omissions in
statements if those omissions make the statements "misleading in light of the
other contents in the document and a duty to disclose." Government's Combined
Opposition at 32. A false representations prosecution cannot rest
upon the omission of an explanation, which omission only carries with it
'implications of a state of facts which were not . . . true.' To so hold
would distort the language of the statute and assimilate the separate
offence of concealment into the different one of false representations
solely because of a similarity of prohibited objectives.
DIOGO, 320 F.2d at 905 (quoting LUTWACK V. UNITED STATES, 344 U.S. 604, 612
(1953)). Thus, the IC's argument must fail.
The IC also relies on UNITED STATES V. MATTOX, 689 F.2d 531, 533 (5th Cir.
1982) (PER CURIAM), and IRWIN, 654 F.2d at 676, for the proposition that silence
may be falsity. These cases are
26
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unconvincing because they are predicated on a duty to speak. SEE MATTOX, 589
F.2d at 532-33 ("Silence may be falsity when it misleads, particularly if there
is a duty to speak."); IRWIN, 654 F.2d at 676 ("If there are facts that SHOULD
be reported, leaving a blank belies the certification . . . that the information
is 'true and correct.') (emphasis added).(15) Thus, neither MATTOX nor IRWIN
is sufficiently on point to provide support for the IC's contentions.
The Indictment does not assert that there are any affirmatively false
statements in the SEC filings. Thus, the Indictment must fail on that basis.
Accordingly, the portions of the Indictment relating to alleged false
misrepresentations under 18 U.S.C. Section 1001 and 18 U.S.C. Section 2 are
dismissed.
V. LIABILITY UNDER 15 U.S.C. SECTIONS 77q(a) AND 77x
Defendants argue that Count Sixteen of the Indictment, which alleges
securities fraud in violation of 15 U.S.C. Sections 77q(a) and 77x, should be
dismissed because there was no duty to disclose the allegedly material facts to
the investing public. Although the IC does not specifically address the duty
argument as it relates to these statutory provisions, the Court assumes that
their duty arguments relating to 18 U.S.C. Section 1001 apply here as well.
There are no cases in this Circuit that squarely address the issue of
silence in a prosecution for violation of Section 17(a) of
____________
(15) MATTOX and IRWIN also present a different situation because, in both
cases, the defendants left blank answers to clear, closed-ended questions. The
SEC forms at issue in this case, by comparison, ask open-ended questions and
require subjective narrative explanations.
27
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the Securities and Exchange Act of 1934, 15 U.S.C. Section 77q(a).(16) However,
the language of that provision closely tracks the language
________________
(16) Section 17(a), 15 U.S.C. Section 77q(a), provides in relevant part:
(a) It shall be unlawful for any person in the offer or sale of any
securities by the use of any means or instruments of transportation or
communication in interstate commerce or by the use of the mails, directly
or indirectly -- . . .
(2) to obtain money or property by means of any untrue statement
of a material fact or any omission to state a material fact necessary
in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or deceit upon the
purchaser.
28
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of Rule 10b-5,(17) 17 C.F.R. Section 240.10b-5, promulgated pursuant to Section
10(b) of the Securities and Exchange of 1934, 15 U.S.C. Section 78j(b).
Although Rule 10b-5 is somewhat broader than Section 17(a) because it refers to
"any person" rather than "purchaser", in the context of this case both
proscriptions operate in a substantially similar way. SEE S.E.C. V. MAIO, 51
F.3d 623, 631 (7th Cir. 1995) (citing S.E.C. V. INTERNATIONAL LOAN NETWORK,
INC., 770 F. Supp. 678, 694 (D.D.C. 1991), AFF'D, 968 F.2d 1304 (D.C. Cir.
1992)); TEAMSTERS LOCAL 282 PENSION TRUST FUND V. ANGELOS, 762 F.2d 522, 531
(7th Cir. 1985); S.E.C. V. LAUER, 864 F. Supp. 784, 793 (N.D. Ill.> 1994),
AFF'D, 52 F.3d 667 (7th Cir. 1995)); KIRSHNER V. GOLDBERG, 506 F. Supp. 454,
458 n.4 (S.D.N.Y. 1981), AFF'D MEM., 742 F.2d 1430 (2d Cir. 1983); BRANHAM V.
MATERIAL SYS. CORP., 354 F. Supp. 1048, 1054 (S.D. Fla. 1973). Thus, the
interpretation of Section 17(a) is guided by principles articulated in Rule
10b-5 cases.
__________
(17) Rule 10b-5, 17 C.F.R. Section 240.10b-5, provides in relevant part:
(a) It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange,
(2) to make any untrue statement of a material fact or to omit
to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made,
not misleading, or
(3) to engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
29
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The Supreme Court has squarely held that "[w]hen an allegation of fraud is
based upon nondisclosure, there can be no fraud absent a duty to speak."
CHIARELLA V. UNITED STATES, 445 U.S. 222, 235 (1980). Thus, whether Defendants
can be held criminally liable for failing to disclose certain information in
their submissions to the SEC turns on whether they had a duty to do so.
Although the cases interpreting CHIARELLA have arisen in the context of insider
trading with non-public information, the logic of the cases is equally
applicable to the case at bar. According to our Court of Appeals, a duty to
disclose attaches "only when a party has legal obligations other than a mere
duty to comply with the general antifraud proscriptions in the federal
securities laws." DIRKS V. S.E.C., 681 F.2d 824, 837 (D.C. Cir. 1982), REV'D
ON OTHER GROUNDS, 463 U.S. 646 (1983).
Reading these holdings against the backdrop of due process concerns
outlined in Part IV A of this opinion, the Court concludes that Defendants had
no duty to disclose the allegedly material facts listed in the Indictment.
Thus, Count Sixteen of the Indictment must be dismissed.
VI. MULTIPLICITY OF COUNTS SIX THROUGH FIFTEEN
Defendants next argue that Counts Six through Fifteen are multiplicitous
because the same alleged omissions form the basis of each Count. Therefore,
they move that the Counts be dismissed pursuant to Fed. R. Crim. P. 12(b)(2).
In general, the law protects a defendant against multiplicitous indictments
to avoid multiple sentences for what is,
30
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in essence, a single offense, and because such indictments might be unduly
suggestive to a jury. 1 Charles A. Wright, FEDERAL PRACTICE AND PROCEDURE;
CRIMINAL 2D Section 142 (1982). SEE UNITED STATES V. DUCAN, 850 F.2d 1104, 1108
n.4 (6th Cir. 1988). Defendants rely on UNITED STATES V. CLARRIDGE, 811 F. Supp.
697 (D.D.C. 1992) to support their contention that only separate and distinct
false statements can provide a basis for separate counts under 18 U.S.C. Section
1001.
In CLARRIDGE, a CIA officer was indicted on five counts of perjury in
violation of 18 U.S.C. Section 1621 and two counts of making false statements
under 18 U.S.C. Section 1001. The Section 1001 charges arose from testimony
elicited before various Congressional committees and in depositions regarding
Colonel Oliver North's involvement in the shipment of military equipment to
Iran. 811 F. Supp. at 699. The court held that the BLOCKBURGER(18) "same
elements" test for determining whether subsequent prosecutions for the same
conduct are barred by the Double Jeopardy clause applied, with some
modifications, to the defendant's multiplicity claim. ID. at 702. The test
articulated by that court was:
each count must set forth a separate lie or false statement, and in cases
where the facts present a close question of whether separate lies exist, it
is relevant to inquire into the degree to which the second statement
impaired the body before which it was made.
ID. at 703.
Defendants contend that CLARRIDGE dictates a finding that Counts Six
through Fifteen are multiplicitous because the IC
- --------------------
(18) BLOCKBURGER V. UNITED STATES, 284 U.S. 299 (1932).
31
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alleges that the same lies make up the bases for each Count. However, Defendants
cite no cases where this test has been adopted in the context of a false or
fraudulent writing. Moreover, the majority of courts applying the BLOCKBURGER
test in the false writings context have held that each and every false document
submitted to the government can be charged as a separate violation of Section
1001. SEE UNITED STATES V. GUZMAN, 781 F.2d 428, 432-33 (5th Cir. 1986) (PER
CURIAM), CERT. DENIED, 475 U.S. 1143 (1986); UNITED STATES V. BENNETT, 702 F.2d
833 (9th Cir. 1983).
The language of Section 1001 itself leads the Court to the conclusion that
Congress intended to make each use of a false writing or statement a separate
offense. The statute imposes liability for "any false writing or document." 18
U.S.C. Section 1001. The use of the singular form of the words "writing" and
"document" implies that each document or writing filed is actionable. ACCORD,
UNITED STATES V. BETTENHAUSEN, 499 F.2d 1223, 1234 (9th Cir. 1974) (allowing
multiple charges for each document in a group of documents filed at the same
time).
This finding is not inconsistent with CLARRIDGE. In CLARRIDGE, the
defendant made false statements in response to questioning by government
officials, raising concerns that the government could increase the number of
charges against a defendant by repeatedly asking him the same question. 811 F.
Supp. at 702-03. The same coercive concerns are not implicated here. The
government was not eliciting false statements from Defendants. Rather,
Defendants affirmatively submitted documents on their own
32
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initiative to obtain government approval to engage in economic activity they
believed would ultimately be profitable.
For the reasons stated above, Defendants' Motion to Dismiss Counts Six
through Fifteen because of multiplicity is DENIED.
VII. VENUE
Defendants contend that Counts Four, Five, Seventeen, and Eighteen should
be dismissed because venue for those crimes does not lie in the District of
Columbia.
The Court must first address the IC's contention that venue may only be
decided by the jury. The IC argues that, so long as conduct is alleged in the
District of Columbia, the Indictment is sufficient and the IC bears the burden
of proving venue by a preponderance of the evidence at trial. Government's
Combined Opposition at 39-40.
Venue is an affirmative defense, S.E.C. V. ERNST & YOUNG, 775 F. Supp. 411,
412 (D.D.C. 1991), which ordinarily is submitted to the jury. UNITED STATES V.
LAM KWONG-WAH, 924 F.2d 298, 300 (D.C. Cir. 1991). Venue may be proper in more
than one district, ID. (citation omitted), but must be proper for each count of
the indictment. UNITED STATES V. BEECH-NUT NUTRITION CORP., 871 F.2d 1181, 1188
(2d Cir. 1989), CERT. DENIED, 493 U.S. 933 (1989). In this case, because no one
disagrees about where the books, records and financial records were compiled and
made (Montana and Texas) or where they were filed (the District of Columbia), it
is perfectly appropriate for this Court to decide the issue of whether venue is
proper. SEE UNITED STATES V. ANDERSON, 328 U.S. 699 (1946)
33
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(determination of venue on basis of defendant's demurrer).
The Constitution and the Federal Rules of Criminal Procedure guarantee that
a defendant will be tried in the state and district where the charged offense
was allegedly committed. U.S. Const. Art. III, Section 2, cl. 3; U.S. Const.
Amend. VI; Fed. R. Crim. P. 18; JONES V. GASCH, 404 F.2d 1231, 1234 (D.C. Cir.
1967), CERT. DENIED, 390 U.S. 1029 (1968). Venue is determined by the locus of
the offense and the locus is to be "determined from the nature of the crime
alleged and the location of the act or acts constituting it." ANDERSON, 328 U.S.
at 703 (citations omitted). It is important to remember that
[q]uestions of venue in criminal cases . . . are not merely matters of
formal legal procedure. They raise deep issues of public policy in the
light of which legislation must be construed. If an enactment of Congress
equally permits the underlying spirit of the constitutional concern for
trial in the vicinage to be respected rather than to be disrespected,
construction should go in the direction of constitutional policy even
though not commanded by it.
UNITED STATES V. JOHNSON, 323 U.S. 273, 276 (1944).
To determine where a crime was committed, a court must "examine 'the key
verbs in the statute defining the criminal offense' to find the scope of the
relevant conduct." UNITED STATES V. GEORGACARAKOS, 988 F.2d 1289, 1293 (1st Cir.
1993) (quoting UNITED STATES V. TEDESCO, 635 F.2d 902, 905 (1st Cir. 1980),
CERT. DENIED, 452 U.S. 962 (1981)). SEE ALSO UNITED STATES V. MENDEL, 746 F.2d
155, 164 (2d Cir. 1984) (citations omitted). To decide if venue is proper for
each of the challenged Counts, the court must examine the statute under which
each Count is brought.
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Count Four of the Indictment charges Defendants with violating 15 U.S.C.
Sections 78m(b)(2)(A) by keeping false books and records. Section 78m(b)(2)(A)
provides that issuers of public securities must "make and keep books, records,
and accounts, which, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the issuer." The key language of
the statute is that which defines the violation as the making and keeping of
books and records. Neither Crop Growers nor its subsidiary companies (whose
books and records are implicated in the Indictment) is located in or has an
office in the District of Columbia. There is no allegation that any of the false
entries were made in the District of Columbia. Indeed, the government concedes
that the books and records were created and maintained in Montana. It is
unclear, then, how venue could lie in the District of Columbia when it had no
connection to the actual making or keeping of the entries at the offices of Crop
Growers and its subsidiaries.
Count Five charges Defendants with violating 15 U.S.C. Section 78m(b)(5) by
falsifying accounting records. Section 78m(b)(5) provides that "[n]o person
shall . . . knowingly falsify any book, record, or account described in [Section
78m(b)(2)]." The key language of the statute defines the violation as the
falsification of books and records. There is again no allegation that the
falsification occurred in the District of Columbia. The government has presented
no evidence demonstrating that a company with no office in Washington could have
falsified records in this District.
35
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In sum, examining "the key verbs" of 15 U.S.C. Sections 78m(b)(2)(A) and
78m(b)(5) compels the conclusion that violations of these statutory provisions
are committed at the time the records are made or kept, not when transmitted to
the SEC.
Counts Seventeen and Eighteen charge Hemmingson and Black with violations
of 17 C.F.R. Section 240.13b2-2 for making false statements and failing to
disclose material facts to auditors. That regulation prohibits a director or
officer of an issuer, in conjunction with the preparation of reports and
documents required under the securities laws, from "[m]aki[ing] or caus[ing] to
be made a materially false or misleading statement, or [o]mitting to state . . .
any material fact necessary in order to make statements made" not misleading in
context. 17 C.F.R. Section 240.13b2-2. The language on which this violation is
predicated is the making of the statement or the omitting to state a material
fact necessary to avoid misleading the public. Under the plain language of the
statute, the locus of the crime is the district where the statement was made or
omitted. There is no allegation in the Indictment that Hemmingson or Black ever
spoke with auditors in the District of Columbia, either in person or by
telephone, or in any other way communicated with auditors in Washington.
The IC attempts to predicate venue for Counts Four and Five on the fact
that the books, records, and accounting records at issue were financial
statements filed with the SEC in the District of Columbia. The IC justifies
venue for Counts Seventeen and Eighteen by stating that Defendants made the
statements "with the knowledge
36
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that [they] would be incorporated in written reports submitted to the SEC in the
District of Columbia." Essentially, the IC attempts to turn these four Counts
into false filing counts because venue for filing a false statement may lie
either where the statement was prepared or where it was filed. SEE MENDEL,
SUPRA, 746 F.2d at 165 (citation omitted) (rejecting defendant's argument that
venue for false statements was proper only where the statements were filed,
rather than prepared).
That argument is unavailing. The cases holding that venue for false filing
can lie in the district where the statement was prepared or where it was filed
are limited to prosecutions under 18 U.S.C. Section 1001. SEE ID.; UNITED
STATES V. BILZERIAN, 926 F.2d 1285, 1300-01 (2d Cir. 1991), CERT. DENIED, 502
U.S. 813 (1991); UNITED STATES V. STEPHENSON, 895 F.2d 867, 875 (2d Cir. 1990).
The Defendants are not being charged, in these four Counts, with violating 18
U.S.C. Section 1001. Significantly, the particular provisions under which
Defendants are charged do not require filing of the records for the crime to be
completed. The IC cites no case law standing for the proposition that a court
can graft a filing component onto a statute that does not require filing for the
crime to be completed.
The charging statutes in Counts Four, Five, Seventeen and Eighteen present
the mirror image of those charged in TRAVIS V. UNITED STATES, 364 U.S. 631
(1961). In TRAVIS, the defendant was charged with making and filing false non-
Communist affidavits in violation of a now-repealed section of the National
Labor Relations
37
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Act. The provision in question read that "[n]o investigation shall be
made ... unless there is on file with the Board an affidavit ...
[by an officer saying] that he is not a member of the Communist Party." ID.
at 632-33. The affidavits at issue were prepared in Colorado, but filed in
the District of Columbia. ID. at 635. The Supreme Court parsed the statute,
concluding that the language of the statute -- "unless there is on file with
the Board" -- showed that there was no offense until the filing was completed.
Thus, venue could lie only in the District of Columbia, where the false
affidavits were filed, and not in Colorado, where the false affidavits
were prepared. ID.
In this case, the statutes are drafted in precisely the opposite way. The
statutes prohibit "mak[ing]," "keep[ing]," and "falsify[ing]" of records. That
makes the "locus delicti" of the crime charged the place where the actual
entries were made. ID. SEE ALSO ANDERSON, 328 U.S. at 703; UNITED STATES V.
WALDEN, 464 F.2d 1015, 1018 (4th Cir. 1972), CERT. DENIED SUB NOM., UNITED
STATES V. ARD, 409 U.S. 867 (1972).
The IC makes an additional attempt to base venue for Counts Four and Five
on the fact that Crop Growers books and records, by way of their SEC filings,
are "kept" at the SEC in the District of Columbia: This argument must be
rejected. First, such a basis would allow third parties to significantly
increase the criminal exposure of defendants merely by maintaining records in
another
38
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District.(19) This simply could not have been Congress' intent when it passed
the securities laws. Second, if such a tortured reading of the statute was
accepted, it would actually be the SEC who "kept" Crop Growers' records in
Washington. Clearly, such an absurd result could not reflect Congressional
intent. For all of these reasons, Defendants' Motion to Dismiss Counts Four,
Five, Seventeen and Eighteen is GRANTED because venue for the crimes alleged
does not lie in this District.
VIII. FEC'S STATUS UNDER 18 U.S.C. SECTION 1001
Defendant's contend that Counts Two and Three, involving reports filed with
the FEC, should be dismissed pursuant to Fed. R. Crim. P. 12(b)(2) because the
FEC was not an agency of the executive branch during the relevant period, as
required by 18 U.S.C. Section 1001.
Section 1001 applies only to executive branch agencies or departments.
HUBBARD V. UNITED STATES, 115 S. Ct. 1754, 1758, 1765 (1995); UNITED STATES V.
DEAN, 55 F.3d 640, 658-59 (D.C. Cir. 1995), CERT. DENIED, 116 S. Ct. 1288
(1996). One court in this District has already held, in a well-reasoned and
persuasive opinion, that the FEC is an agency under Section 1001. UNITED STATES
V. ROSTENKOWSKI, 1996 WL 342110 at *5 (D.D.C. Mar. 12, 1996) (unpublished).
Other courts have merely upheld Section 1001 convictions for false statements to
the FEC, although without
- --------------------
(19) For example, a common practice for businesses operating in downtown
Washington is to open a storage facility or satellite office in suburban
Maryland or Virginia where real estate is less expensive.
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squarely addressing the issue. UNITED STATES V. OAKAR, 924 F. Supp. 232, 239
(D.D.C. 1996); UNITED STATES V. HOPKINS, 916 F.2d 207, 214-15 (5th Cir. 1990).
In finding that the FEC was an agency under Section 1001, the ROSTENKOWSKI
court applied F.E.C. V. NRA POLITICAL VICTORY FUND, 6 F.3d 821 (D.C. Cir. 1993),
CERT. DISMISSED, 115 S. Ct. 537 (1994), where our Court of Appeals held that
Congressional involvement with the FEC violated the constitutional separation of
powers doctrine because the FEC's powers were executive in nature.
ROSTENKOWSKI, 1996 WL 342110 at *5. It further relied on the definition of
"agency" found in 18 U.S.C. Section 6, BUCKLEY V. VALEO, 424 U.S. 1 (1975), and
NRA, SUPRA, to find that the FEC was a sufficiently independent commission to
make it an "agency" under Section 1001. Defendants have provided no compelling
reasons why this logic should be rejected in this case.(20) Thus, Defendants'
Motion to Dismiss Counts Two and Three because Section 1001 does not prohibit
false statements to the FEC is DENIED.
IX. LITERAL TRUTH OF STATEMENTS FILED WITH THE FEC
Defendants contend that Counts Two and Three, involving reports filed with
the FEC, should be dismissed pursuant to Fed. R.
- ----------------------
(20) Defendants contend that the alleged FECA violations occurred in 1993,
prior to the D.C. Circuit's decision in NRA, and, thus, during the relevant time
frame, the FEC was not sufficiently independent enough to be a constitutionally
valid agency. However, the basis for the NRA decision was that Congressional
involvement was improper because the FEC was an executive agency exercising
executive power. NRA, 6 F.3d at 826. Further, after the NRA decision, the FEC
reconstituted itself and re-affirmed all its previous actions. SEE F.E.C. V.
LEGI-TECH, INC., 75 F.3d 704, 706 (D.C. Cir. 1996).
40
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Crim. P. 12(b)(2) because the statements filed with the FEC were literally true.
According to Defendants, because the reports correctly identified the persons
who wrote the contribution checks, the FEC statements were correct on their
face.
Falsity is an essential element of a case brought under Section 1001.
UNITED STATES V. GAHAGAN, 881 F.2d 1380, 1382 (6th Cir. 1989) (cited with
approval in UNITED STATES V. MILTON, 8 F.3d 39, 45 n.7 (D.C. Cir. 1993), CERT.
DENIED, 115 S. Ct. 299 (1994)). Defendants cite several cases where criminal
convictions have been reversed because, as a matter of law, the allegedly false
statements could not have been false. SEE UNITED STATES V. HIXON, 987 F.2d 1261
(6th Cir. 1993); GAHAGAN, SUPRA, 881 F.2d 1380. However, those cases provide no
support for the contention that the statements at issue in this case were
literally true when made. That is a question for the jury to resolve. SEE
UNITED STATES V. HOPKINS, 916 F.2d 207 (6th Cir. 1990). Thus, Defendants'
Motion to Dismiss Counts Two and Three because the statements made to the FEC
were true is DENIED.
X. APPLICATION OF 15 U.S.C. SECTION 78m TO CROP GROWERS
Defendants contend that 15 U.S.C. Section 78m applies only to public
corporations and therefore cannot provide a basis for liability for acts or
omissions occurring prior to Crop Growers' registration as a public company with
the SEC. They further contend that financial statements are books and records
under the statute. Pursuant to Fed. R. Crim. P. 7(d), they move to strike any
references to entries allegedly made before June 23, 1994, when Crop Growers
41
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became a public company, and all references to financial statements in Counts
One, Four, and Five. Preliminarily, the Court notes that, although styled as a
Motion to Strike, Defendants' Motion with respect to Counts Four and Five is
actually a motion to dismiss.
Count Four of the Indictment charges that Defendants violated Section
13(b)(2)(A) of the Securities and Exchange Act of 1934, 15 U.S.C. Section
78m(b)(2)(A), (21) by failing to make and keep accurate books, records and
accounts. Count Five of the Indictment charges that Hemmingson and Black
falsified Crop Growers books and records in violation of 15 U.S.C. Section
78m(b)(5)(22) and 17 C.F.R. Section 240.13b2-1.(23) The allegations and charges
in both Counts arise from entries made in Crop Growers' books from approximately
June 23, 1994 through December 31, 1995.
__________________
(21) 15 U.S.C. Section 78m(b)(2)(A) provides:
Every issuer which has a class of securities registered
pursuant to [the securities laws] and every issuer which
is required to file reports pursuant to [those laws] shall
make and keep books, records, and accounts, which in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the issuer.
(22) 15 U.S.C. Section 78m(b)(5) provides:
No person shall knowingly circumvent or knowingly fail to
implement a system of internal controls or knowingly falsify
any book, record, or account described in [15 U.S.C.
Section 78m(b)(2)].
(23) 17 C.F.R. Section 240.13b2-1 provides that "[n]o person shall...
falsify or cause to be falsified, any book, record or account subject to
[15 U.S.C. S 78m(b)(2)(A)."
42
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A. ENTRIES PRIOR TO REGISTRATION AS A PUBLIC COMPANY
Defendants argue that no duty arose under Section 78m(b)(2)(A), Section
78m(b)(5), or 17 C.F.R. S 240.13b-2 until June 23, 1994, the date on which Crop
Growers was actually registered as a public company.
Defendants rely largely on the plain text of the statute and the
legislative history of the statutory amendments. The 94th Congress modified the
Securities and Exchange Act of 1934 to include the accurate books and records
provisions currently embodied in 15 U.S.C. Section 78m(b). SEE Act of June 4,
1975, Pub. L. 94-29, 89 Stat. 199. In passing the 1975 amendments, Congress
sought to address the problems associated with American companies doing business
overseas. SEE Corrupt Overseas Payments by U.S. Business Enterprises, S. Rep.
No. 94-1031 (1976). The Congressional reports suggest that only public
corporations would have a duty to conform to the standards set forth in the
statute. SEE S. Rep. No. 94-1031 at 6 (Section 78m(b)(2)(A) would create
stricter requirements for publicly held companies).
The IC argues that the duty to keep accurate books and records must be
deemed to arise two or three years before an actual registration because the
audited financial statements which a company must file with the SEC as part of
the registration process are based on the previous two and three years'
financial data. SEE 17 C.F.R. Sections 210.3-01 (consolidated balance sheets
for the two most recent fiscal years) and 210.3-02 (consolidated statements of
income and changes in financial position for the three most recent
43
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fiscal years). Therefore, the IC argues, a finding that a violation of Section
78m(b)(2)(A) requires a corporation to be public at the time of its acts would
vitiate the protections of the securities laws by allowing companies seeking to
become public to willfully keep inaccurate records and then base their
registration statements on those inaccurate records.
By its terms, Section 78m(b)(2)(A) applies only to companies registered
pursuant to the securities law, or public companies. However, the IC points to
definitive regulations issued by the SEC governing the conduct at issue. The
SEC's interpretation is entitled to deference under CHEVRON so long as it is
reasonable.(24) The Court concludes that the FEC's interpretation is
eminently reasonable, since Congress could not have intended that companies
seeking public status from the SEC base their registration statements on
inaccurate financial data.
For the reasons discussed above, Defendants' Motion to Strike all
references in Counts Four and Five alleging falsification of Crop Growers' books
and records before June 23, 1994, when Crop
___________________
(24) The Supreme Court's landmark decision in CHEVRON, USA, INC. V. NATURAL
RESOURCES DEFENSE COUNCIL, 467 U.S. 837 (1984) governs questions of statutory
construction. Under CHEVRON, where the plain language of the statute does not
indicate that Congress has spoken to the precise question at issue, the agency's
interpretation should be upheld so long as it is a "permissible construction of
the statute." ID. at 842-43. A court "need not conclude that the agency
construction was the only one it permissibly could have adopted to uphold the
construction, or even the reading the court would have reached if the question
originally had arisen in a judicial proceeding." ID. at 843 n.11.
44
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Growers became a public company, is DENIED.(25)
B. STATUS OF FINANCIAL STATEMENTS UNDER 15 U.S.C. SECTION
13(b)(2)(A) AND 13(b)(5)
Defendants contend that Section 13(b)(2)(A) clearly differentiates "books
and records" from "financial statements" and, as a matter of law, financial
statements cannot be books and records.
In deciding whether to grant Defendants' Motion to Strike, several key
principles need to be kept in mind. First, motions to strike are rarely
granted, UNITED STATES V. GUERRERIO, 670 F. Supp. 1215, 1225 (S.D.N.Y. 1987).
Second, for such a motion to be granted, Defendants must show that the
challenged allegations are both irrelevant and prejudicial. ID.; UNITED STATES
V. POINDEXTER, 725 F. Supp. 13, 35 (D.D.C. 1989).
According to Defendants, the statute covers only books and records and not
the allegedly false financial statements. The statute requires that "books,
records, and accounts" be accurately kept so that financial statements can be
prepared. 15 U.S.C. Section 78m(b)(2)(B)(ii). To support their argument that
the difference between "books and records" and "financial statements" is clear
and well-defined, Defendants cite language in S.E.C V. WORLD-WIDE COIN
INVESTMENTS, LTD., 567 F. Supp. 724, 748 (N.D. Ga. 1983)
______________________
(25) Defendants' alternative argument that, even if the securities laws
imposed a duty on Crop Growers prior to it's becoming a public company, Crop
Growers adopted other company's books rather than making and keeping its own is
similarly untenable. Congress could not have intended that holding companies
file information based on the financial records of their subsidiaries without
imposing upon them some duty to insure the accuracy of such records.
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("transactions should be properly reflected on books and records in such a
manner as to permit the preparation of financial statements in conformity
with [generally accepted accounting principles] and other criteria applicable
to such statements"), and in the legislative history of the provision,
Securities and Exchange Commission, 94th Cong., 2d Sess., Report of the
Securities and Exchange Commission on Questionable and Illegal Corporate
Payments and Practices 58-59 (Comm. Print 1976) (purpose of Section
78m(b)(2)(A) is, INTER ALIA, "to permit the preparation of financial
statements in conformity with generally accepted accounting principles").
In response, the IC points to language undercutting this clear separation
contained in the American Institute of Certified Public Accountant's
STATEMENT ON ACCOUNTING STANDARDS NO. 62, Professional Std. at 5 (April 1994)
(a financial statement is "[a] presentation of financial data, including
accompanying notes, derived from accounting records and intended to
communicate an entity's economic resources or obligations at a point in
time").
No case law squarely addresses this issue. However, a common sense reading
of the statute suggests that financial statements and records are not
sufficiently distinct to warrant differential treatment. When Congress has
provided no definition for a particular term, the ordinary meaning associated
with that term applies. INTERNATIONAL BHD. OF ELEC. WORKERS, LOCAL UNION NO.
474, AFL-CIO V. N.L.R.B., 814 F.2d 697, 710 (D.C. Cir. 1987). The Court
concludes that financial statements are books and records under the securities
laws.
46
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Finally, given the non-inflammatory nature of the language relating to
financial statements in Counts One, Four, and Five, Defendants can demonstrate
no prejudice from its inclusion. Defendants' Motion to Strike references to
financial statements in Counts One, Four, and Five of the Indictment is DENIED.
XI. POST-ELECTION CONTRIBUTIONS
Defendants argue that post-election contributions to a losing candidate do
not violate FECA and that, therefore, all references to FECA violations must be
stricken from the Indictment pursuant to Fed. R. Crim. P. 7(b).
Again, it must be remembered that motions to strike are rarely granted,
GUERRERIO, 670 F. Supp. at 1225, and that Defendants must show that the
challenged allegations are both irrelevant and prejudicial. ID.; POINDEXTER,
725 F. Supp. at 35.
FECA's prohibitions apply only to those contributions made "for the purpose
of influencing any election for Federal office." 2 U.S.C. Section 431(8)(A).
Defendants contend that a post-election contribution to a losing candidate, when
there is no allegation that the candidate plans to run again, cannot influence
an election and, thus, is outside the ambit of FECA. While there is logical
appeal to this argument, it must be rejected.
There is already existing case law holding that such contributions do
violate FECA. SEE UNITED STATES V. SUN-DIAMOND GROWERS OF CA., SUPRA, 941 F.
Supp. 1277 [SUN DIAMOND II]; F.E.C. V. TED HALEY CONGRESSIONAL COMM., 852 F.2d
1111 (9th Cir. 1988); F.E.C. V. LANCE, 617 F.2d 365 (5th Cir. 1980), CERT.
DENIED, 453
47
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U.S. 917 (1981). Defendants contend that all these cases are distinguishable
because they applied the deferential CHEVRON administrative review standard to
the FEC's interpretation of a FECA regulation which it has since repealed. That
regulation provided that "[c]ontributions made to retire debts resulting from
elections held after December 31, 1974 are subject to the limitations of [these
regulations]." 11 C.F.R. 110.1(g). Since that regulation was repealed,
effective November 9, 1995, 60 Fed. Reg. 56,506 (Nov. 9, 1995), Defendants argue
that any previous decisions granting it deference no longer provide support for
subjecting post-election contributions to the limits of FECA. This contention
must be rejected for two reasons.(26)
First, the decisions cited above rested not only on the regulation, but on
FEC Advisory Opinions holding that post-election contributions are subject to
FECA. Those opinions are also entitled to deference under CHEVRON and still
exist as precedent explaining the FEC's interpretation of the statute.
Second, and more importantly, an examination of the repeal of Section
110.1(g) itself does not provide support for such a broad reading. On June 15,
1995, the FEC proposed the repeal of three provisions of its rules that it
believed had become obsolete. 60 Fed. Reg. 56, 506 (Nov. 9, 1995). Congress
received no adverse comments in response to the FEC's June 15, 1995 proposal,
which
______________
(26) Both Defendants and the IC argue that the enactment and repeal of
the various regulations reflects some intent by Congress to change the
meaning of the statute. For many reasons, the Court is unwilling to accord
any significance to Congressional action or inaction in this context.
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then became effective November 9, 1995. ID. One provision repealed was 11
C.F.R. 110.1(g) which, according to the announcement in the Federal Register,
"exempted certain contributions made to retire debts from elections held prior
to January 1, 1975, from the" contribution limits. 60 Fed. Reg. 56,506 (Nov. 9,
1995). Although Section 110.1(g) stated that debts resulting from elections
held after December 31, 1974 were subject to the limits of the campaign finance
laws, it is clear from the FEC's summary of action that the intent of the repeal
was to eliminate provisions of the regulations that had become obsolete.(27)
The language of the repeal evidences an awareness that pre-1975 elections and
contributions were no longer an issue because ALL federal elections had now
become fully covered by FECA. SEE ID. Read in context of the overall
legislative scheme, the repeal does not have the significance that Defendants
attach to it, namely that the Commission no longer considers post-election
contributions to be subject to FECA.
Two significant policy concerns buttress the Court's holding. First,
exempting post-election contributions from FECA's provisions
_______________
(27) The announcement read, in part:
On June 15, 1995 (60 Fed. Reg. 31,381), the Commission published
the text of revised regulations repealing three obsolete
provisions of the Commission's rules. The repealed provisions
addressed contributions to retire pre-1975 debts; certain 1976
payroll deductions for separate segregated funds; and an
alternative reporting option for candidates in presidential
elections held prior to January 1, 1981.
60 Fed. Reg. 56,506.
49
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would provide an opportunity for the exception to swallow the rule, as the Fifth
Circuit has persuasively explained. SEE LANCE, SUPRA, 617 F.2d at 372 n.4
(exempting post-election contributions "would permit candidates to evade FECA's
restrictions by running their campaigns at a deficit and then collecting
contributions after the election"). Second, the Court can see no rational basis
for basing FECA's applicability on the success or failure of a candidate. Even
if such a distinction were tenable, there is no way of knowing whether a losing
candidate will bide her time, seek federal office at a more propitious point
and, therefore, be subject to the improper influence FECA seeks to avoid.
Defendants' suggestion that there be an exception for losing candidates who
again seek office provides a host of enforcement problems. The Court is not
willing to create a complicated regime of exceptions within exceptions that may
require monitoring long after completion of a particular election.
Defendants further contest FECA's Constitutionality. These challenges must
be rejected, as they have been in other cases. SEE SUN-DIAMOND II, 941 F. Supp.
at 1281. The logic of that well-reasoned opinion governs here.
Further, Defendant's argument that FECA is so vague as to violate due
process is entirely without merit. At the time of the alleged contribution, 11
C.F.R. Section 110.1(g) was already in place and the FEC had rendered a number
of advisory opinions holding that post-election contributions, even to losing
candidates, violated the statute. SEE, E.G., Advisory Opinion 1983-2, 1 Fed.
Election
50
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Camp. Fin. Guide (CCH) PARA 5709 (Feb. 24, 1983); Advisory Opinion 1981-16, 1
Fed. Election Camp. Fin Guide (CCH) PARA 5604 (Apr. 15, 1981). Thus, contrary
to their suggestion, Defendants were on notice that this type of conduct was
unlawful and prohibited. SEE CONNALLY V. GENERAL CONSTR. CO., 269 U.S. 385, 391
(1926).
The Court holds that post-election contributions to an unsuccessful
candidate fall within the ambit of FECA. Thus, Defendants' Motion to Strike
references to FECA from the Indictment is DENIED.
XII. LEGAL CONCLUSIONS
Defendants also contend that the Indictment contains many prejudicial legal
assertions in Counts One, Four, Five, and Six through Fifteen, which should be
stricken pursuant to Fed. R. Crim. P. 7(b). Defendants argue that the IC is
invading the province of the court by including language from the law under
which Defendants are charged. The Court finds this contention to be without
merit.
Moreover, the cases cited by Defendants for the proposition that an
indictment containing legal conclusions interferes with the court's function are
inapposite. Each case cited turned on the trial judge's admission of opinion
testimony as to the ultimate issues to be determined by the litigation. SEE
UNITED STATES V. SCOP, 846 F.2d 135, 140 (2d Cir. 1988) (citation omitted)
(perjury convictions based on improper opinion testimony); MARX & CO. V. DINERS'
CLUB, INC., 550 F.2d 505, 510-12 (2d Cir. 1977) (expert witness cannot testify
to ultimate issue of illegality of transaction), CERT. DENIED, 434 U.S. 861
(1977); UNITED STATES V.
51
<PAGE>
ZIPKIN, 628 F.2d 284, 387 (6th Cir. 1984) (witness improperly allowed to testify
as to legal conclusion); UNITED STATES V. PHILLIPS, 478 F.2d 743 (5th Cir. 1973)
(conclusory testimony improperly admitted).
Defendants' concerns that the jury will have a copy of the Indictment and
may use it to decide Defendants' guilt or innocence are also unconvincing.
This Court will instruct the jury at the proper time as to the applicable
substantive law. In both opening and closing instructions, this Court
instructs the jury that it may draw no inferences of guilt from the filing of
an indictment and that an indictment is merely a statement of charges. The
instructions will thoroughly explain the role of the jury and what law
governs the various charges brought by the IC. The Court will instruct the
jury that the only law to be applied is that which is set forth in its final
instructions. Finally, a copy of those instructions will accompany the jury
into the jury room for reference during deliberations.
For all the forgoing reasons, Defendants' Motion to Strike legal
conclusions from the Indictment is DENIED.
XIII. CONCLUSION
Defendants' Motion to Dismiss the Second Superseding Indictment as Beyond
the Independent Counsel's Jurisdiction [89] is DENIED. Defendants' Motion to
Dismiss the Second Superseding Indictment Based on Inconsistent Theories of
Prosecution [92] is DENIED. Defendants' Motion to Dismiss Based on Defects in
the Second Superseding Indictment [91] is GRANTED IN PART AND DENIED IN
52
<PAGE>
PART. Specifically, Counts Six through Fifteen of the Second Superseding
Indictment are dismissed in their entirety because Defendants had no duty to
disclose uncharged criminal conduct under the concealment prong of Section 1001
and because the Indictment does not adequately allege the use of an
affirmatively false writing under the false statement prong of Section 1001.
Count Sixteen of the Indictment is dismissed because Defendants had no duty to
disclose the alleged omissions to the investing public. Counts Four, Five,
Seventeen and Eighteen of the Indictment are dismissed because venue does not
lie in the District of Columbia for the crimes charged. All other arguments
raised by Defendants in their Motion to Dismiss Based on Defects in the Second
Superseding Indictment are rejected. Defendants Motion to Strike Surplusage
from the Second Superseding Indictment [88] is DENIED.
An Order will issue with this Opinion.
Jan. 3, 1997 /s/ Gladys Kessler
- -------------------- --------------------
Date GLADYS KESSLER
United States District Judge
COPIES TO:
Donald Smaltz
Joseph Savage
Jacob S. Frenkel
Office of Independent Counsel
103 Oronoco Street, Suite 200
Alexandria, VA 22314
Barry William Levine
Mark Packman
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, NW
Washington, DC 20037
53
<PAGE>
William J. Mauzy, Esq.
2885 Norwest Center
Minneapolis, MN 55403
Theodore V. Wells, Jr., Esq.
Lowenstein Sandler Kohl Fisher & Boylan
65 Livingston Avenue
Roseland, NJ 07068-1791
54
<PAGE>
UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF COLUMBIA
HOLDING A CRIMINAL TERM
GRAND JURY SWORN IN ON JANUARY 6, 1995
SECOND SUPERSEDING INDICTMENT
_____________________________
)
UNITED STATES OF AMERICA, ) Criminal No. 96-0181(GK)
)
) Violations:
)
-v- ) 18 U.S.C. Section 371 (Conspiracy)
) 18 U.S.C. Section 1001 (False Statement
CROP GROWERS CORPORATION, ) to a Government Agency)
) 18 U.S.C. Section 2 (Aiding and
JOHN J. HEMMINGSON, ) Abetting)
) 15 U.S.C. Sections 77q(a), 77x
AND ) (Securities Fraud)
) 15 U.S.C. Section 78m(b)(2)(A) (Public
GARY A. BLACK, ) Company Books and Records)
) 15 U.S.C. Section 78m(b)(5) (Falsifying
) Books and Records)
Defendants. ) 15 U.S.C. Section 78ff(a)
) 17 C.F.R. Section 240.13b2-1 (Falsifying
) Books and Records)
) 17 C.F.R. Section 240.13b2-2 (False
_____________________________) Statements to Auditors)
THE GRAND JURY CHARGES:
COUNT ONE
CONSPIRACY
I. INTRODUCTION
At times material to this Indictment:
<PAGE>
A. THE DEFENDANTS
1. Defendant CROP GROWERS CORPORATION (hereinafter "CROP GROWERS") was a
corporation with principal offices located in Great Falls, Montana, primarily
engaged in the business of marketing and servicing federal multi-peril crop
insurance and private crop hail and other named peril insurance on behalf of
insurance companies.
2. Defendant CROP GROWERS was incorporated in the State of Delaware in
April 1994 to act as the holding company for corporations under common control
to facilitate CROP GROWERS' June 1994 initial public offering of shares of its
common stock. In forming, CROP GROWERS became the holding company for several
companies, including:
a. Crop Growers Insurance, Inc. (hereinafter "CGI"), a Montana
corporation, which was primarily engaged in the business of
marketing and servicing federal multi-peril crop insurance and
crop hail insurance;
b. Crop Growers Software, Inc. (hereinafter "CGS"), formerly known
as AgriPeril, Inc., a Texas corporation, which was primarily
engaged in the business of developing proprietary software
systems to assist affiliated crop insurance agents and farmers;
and
c. Prairie Mountain Insurance, Inc. (hereinafter "PMI"), a Montana
corporation, which was an independent insurance agency offering
federal multi-peril, crop hail and other lines of
2
<PAGE>
insurance, and was formerly known as the Hemmingson Agency, Inc.
Beginning on or about May 15, 1994, CGI, CGS and PMI were wholly-owned
subsidiaries of CROP GROWERS. These subsidiaries are not named as defendants in
this Indictment.
3. Defendant JOHN J. HEMMINGSON (hereinafter "HEMMINGSON") was the
Chairman of the Board of Directors, Chief Executive Officer, and President of
CROP GROWERS. HEMMINGSON was Chairman of the Board of Directors, President and
Chief Executive Officer and a director of CGI. HEMMINGSON also was a director
of CGS.
4. Defendant GARY A. BLACK (hereinafter "BLACK") was the Executive Vice
President, Chief Financial Officer, Treasurer and a director of CROP GROWERS.
BLACK also was the Chief Financial Officer and Secretary-Treasurer of CGI,
Secretary-Treasurer and a director of CGS, and the Secretary-Treasurer of PMI.
BLACK was a certified public accountant licensed in Montana.
B. THE FEDERAL AGENCIES
5. The Federal Election Commission (hereinafter "FEC") was the agency of
the United States Government entrusted with responsibility for enforcement of
the reporting requirements of the Federal Election Campaign Act,
3
<PAGE>
(hereinafter "FECA"), and for detection, investigation, and institution of
enforcement actions against violations of FECA. The FEC was also responsible
for collecting and making available to the public specific and accurate
information concerning the dates, amounts and sources of political
contributions, including the identity of the contributors, to federal candidates
such as Henry William Espy, Jr. (hereinafter "Henry Espy"), who is not a
defendant in this indictment.
a. FECA governs "contributions," which include any gift, subscription,
loan, advance or deposit or anything of value made by any person for
the purpose of influencing any election for federal office. It also
provides in relevant part:
(1) Corporations are prohibited sources of contributions, and it is
illegal for a corporation to make a contribution of any amount in
connection with a federal election.
(2) Individuals who are United States citizens may make contributions
of up to $1,000 per candidate, per election.
(3) It is illegal for an individual to contribute more than $1,000
per election per candidate.
(4) It is illegal to make a contribution through a "conduit," that
is, in the name of another.
(5) It is illegal to reimburse an individual for making a
contribution.
4
<PAGE>
b. Penalties, including imprisonment and fines, may be imposed for
criminal violations of FECA.
c. Civil remedies, including injunctive relief and civil penalties, may
be imposed for violations of FECA.
6. The United States Securities and Exchange Commission (hereinafter "the
SEC") was the agency of the United States Government entrusted with
responsibility for, among other things, enforcing the securities laws of the
United States, which are designed to provide the investing public with full
disclosure of all material facts regarding the offer, sale and purchase of
securities. In the performance of its duties, the SEC required all publicly
held companies which had securities traded on a national securities exchange to
file certain periodic reports.
7. The United States Department of Agriculture (hereinafter "Department
of Agriculture") was a department of the United States Government. The
Secretary of Agriculture, a Cabinet appointee, was in charge of the Department
of Agriculture.
5
<PAGE>
C. THE HENRY ESPY CAMPAIGN
8. On or before January 5, 1993, Henry Espy publicly announced his
candidacy for the Democratic Party nomination for the United States House of
Representatives from the State of Mississippi in a special primary election to
fill the seat vacated by his brother, Alphonso Michael Espy, also not named as a
defendant in this indictment. Alphonso Michael Espy was resigning his
Congressional seat to accept the position of Secretary of Agriculture, for which
he had been nominated by President-Elect Clinton on December 23, 1992.
9. Alphonso Michael Espy resigned from the United States Congress on or
effective January 21, 1993, when he was confirmed as Secretary of Agriculture
(hereinafter Alphonso Michael Espy is referred to as "Secretary of Agriculture
Espy"). He served as Secretary of Agriculture until December 31, 1994.
10. In connection with Henry Espy's candidacy, and pursuant to the
requirements of FECA:
a. The Henry Espy for Congress Committee was subject to the
reporting provisions and the campaign financing limitations of
FECA.
b. The Henry Espy for Congress Committee was required to file
periodic reports with the FEC, which reports were required to
accurately identify all individuals and entities who contribute in
excess of $200 and the disbursements made for or on behalf of
candidates.
6
<PAGE>
11. On or about March 30, 1993, Henry Espy lost the special primary
election for Congress. As a result of Henry Espy's unsuccessful campaign for
Congress, campaign debts were incurred. As of June 30, 1993, the Henry Espy for
Congress Committee reported a campaign debt of approximately $144,000.
12. Alvarez T. Ferrouillet, Jr. (hereinafter "Ferrouillet"), named as a
co-conspirator but not a defendant herein, was an attorney licensed to practice
law in the State of Louisiana. In or about April 1993, Ferrouillet contacted
Henry Espy and volunteered to coordinate and supervise all efforts to retire
Henry Espy's campaign debt. Henry Espy accepted this offer and appointed
Ferrouillet as Chairman of the Henry Espy for Congress Committee.
13. The violations of FECA alleged herein related to the making, receiving
and reporting of contributions that aggregated more than $2,000 during each of
the calendar years 1993 and 1994.
D. CROP GROWERS - THE PUBLIC COMPANY
14. CROP GROWERS decided to sell its stock to the public by conducting an
initial public offering of common stock. On or about April 11, 1994, in
connection therewith, CROP GROWERS filed a Registration Statement on Form S-1
with the SEC in the District of Columbia.
7
<PAGE>
15. On or about June 23, 1994, CROP GROWERS became a publicly-held
company, and its common stock began trading on the National Association of
Securities Dealers Automated Quotation System (hereinafter "NASDAQ"), a national
securities exchange.
16. In connection with its initial public offering of 2,500,000 shares of
common stock to raise approximately $17,437,500, CROP GROWERS filed a prospectus
with the SEC in the District of Columbia and with NASDAQ. In November 1994,
CROP GROWERS conducted a second offering of 1,400,000 shares of common stock to
raise approximately $18,326,000 for the company.
17. As a publicly-held company with securities traded on a national
securities exchange, CROP GROWERS was required by federal law to accurately
report financial information to the SEC.
18. As a publicly-held company, CROP GROWERS, as well as its subsidiaries,
were required by federal law to make and keep books, records and accounts which,
in reasonable detail, accurately and fairly reflected its transactions and the
disposition of its assets. Financial statements are a summary of the books,
records and accounts of a company, and themselves are books, records and
accounts of that company.
8
<PAGE>
E. MULTI-PERIL CROP INSURANCE
19. In calendar years 1991 through and including 1995, CGI derived
substantially all of its revenues from marketing and servicing federal Multi-
Peril Crop Insurance (hereinafter "MPCI"), a program within the jurisdiction of
the Department of Agriculture and Secretary of Agriculture Espy.
20. Defendant CROP GROWERS, and defendants HEMMINGSON and BLACK, as its
two largest shareholders, had a substantial financial interest in the MPCI
program.
21. Defendants CROP GROWERS, HEMMINGSON and BLACK recognized that it was
within the power of the Department of Agriculture to reduce or eliminate the
funding of, discontinue, or otherwise significantly change the MPCI program.
22. During 1993 and early 1994, the Department of Agriculture and
Secretary of Agriculture Espy were considering potential legislation that would
change the MPCI program. Defendants CROP GROWERS, HEMMINGSON and BLACK
recognized that the MPCI program might change in a manner that would adversely
affect the financial condition of CGI and CROP GROWERS.
23. In or about April 1994, through and including June 1994, and
thereafter, defendant CROP GROWERS published certain "Risk Factors" in
9
<PAGE>
certain filings with the SEC, which were subsequently available or disseminated
to prospective shareholders and shareholders, which stated in part, the
following:
[T]here can be no assurance that Congress will not decide in the future to
reduce or eliminate funding of, or discontinue or otherwise significantly
change, the MPCI program. Additionally, there can be no assurance that the
degree of federal support of the MPCI program...will not be changed in the
future in a manner that would materially adversely affect the MPCI market
as a whole or the results of operations and financial condition of the
Company.
. . .
Although Crop Growers views the proposed Federal Crop [Insurance] Reform
Act [of 1994] in its entirety favorably,...the volume of premium serviced
by the Company would likely be adversely affected if large numbers of
farmers presently in the program obtained basic coverage directly from USDA
offices and did not elect to purchase additional coverage through private
companies.... No assurance can be given that any ultimate enactment or
implementation of the Federal Crop [Insurance] Reform Act [of 1994]...will
not materially adversely affect the Company's results of operations and
financial condition.
II. THE CONSPIRACY
24. Beginning on a date unknown to this Grand Jury, but no later than
January 30, 1993 as to defendants HEMMINGSON and BLACK, and beginning on April
11, 1994 as to defendant CROP GROWERS, and continuing until on or about December
31, 1995, in the District of Columbia and elsewhere, the defendants CROP
GROWERS, HEMMINGSON, and BLACK, did knowingly and willfully combine, conspire,
confederate and agree with one another and with
10
<PAGE>
others, both known and unknown to the Grand Jury, to commit offenses against the
United States, to wit:
a. To defraud the United States, and in particular the Federal
Election Commission, by impairing, obstructing, impeding and
defeating its lawful governmental functions and duties under the
Federal Election Campaign Act in connection with a scheme to make
illegal corporate campaign contributions to the Henry Espy for
Congress Committee in the approximate amount of $46,000; and
b. To violate Title 15, U.S.C. Section 78m(b)(2)(A) and Title 15,
U.S.C. Section 78ff(a) by failing to make and keep books, records
and accounts, which, in reasonable detail, accurately and fairly
reflected the transactions and dispositions of the assets of CROP
GROWERS; and
c. To defraud the United States, and in particular the Securities
and Exchange Commission, by impairing, obstructing, impeding and
defeating its lawful governmental functions and duties under the
Securities Act of 1933 [Title 15, U.S.C. Section 77, et seq.],
specifically in the offer of and in connection with sales of
common stock by CROP GROWERS; and
d. To violate Title 18, U.S.C. Section 1001 by making and using
false writings and documents, by making statements that were
false by omitting to state material facts, and by falsifying,
concealing and covering up by trick, scheme and device material
facts, in Registration Statements, Prospectuses and an annual
report filed with the Securities and Exchange Commission; and
e. To violate Title 15, U.S.C. Section 77q(a) and Title 15, U.S.C.
Section 77x, in the offer and sale of securities, by using means
and instrumentalities of transportation and communication in
interstate commerce, and by the use of the mails, to employ a
11
<PAGE>
device, scheme and artifice to defraud; to obtain money by means
of omissions to state material facts; and to engage in
transactions, practices and courses of business which would
operate as a fraud and deceit upon the purchaser.
A. PURPOSES OF THE CONSPIRACY
25. The conspiracy was undertaken, at least in part, for the following
purposes:
a. To generate money to be used for illegal corporate campaign
contributions to Henry Espy, the brother of Secretary of
Agriculture Espy, for the purpose of gaining access to Secretary
Espy in order to favorably influence his decisions concerning
matters affecting CROP GROWERS before the Department of
Agriculture;
b. To make and conceal the illegal corporate campaign contributions
to the Henry Espy for Congress Committee without the Federal
Election Commission detecting the illegal source of the
contribution;
c. To falsify the financial books and records of CROP GROWERS and
its subsidiaries in order to conceal the illegal campaign
contributions;
d. To conceal from CROP GROWERS' outside independent auditors the
creation and existence of false books, records and accounts;
e. To conceal from the Securities and Exchange Commission certain
material facts by omission in connection with CROP GROWERS'
offerings of common stock and in an annual report; and
12
<PAGE>
f. To conceal from the purchasers of CROP GROWERS' common stock
certain material facts by omission.
B. MEANS AND METHODS OF THE CONSPIRACY
The unlawful combination, conspiracy, and agreement was to be and was
accomplished by the means and methods, and in the following manner:
ACCESS TO SECRETARY OF AGRICULTURE ESPY
26. Defendants, CROP GROWERS, HEMMINGSON, and BLACK, along with others,
would and did make and cause to be made illegal contributions to the Henry Espy
for Congress Committee to gain access to Secretary of Agriculture Espy for the
purpose of favorably influencing him on issues of concern to defendant CROP
GROWERS.
THE ILLEGAL CORPORATE CAMPAIGN CONTRIBUTIONS IN 1993
27. Defendants, HEMMINGSON and BLACK, along with others, would and did set
in motion a scheme to use corporate assets of CGI, CGS and PMI to make illegal
corporate campaign contributions to the Henry Espy for Congress Committee.
28. Defendants, HEMMINGSON and BLACK, along with others, would and did
solicit contributions from persons affiliated with CGI, CGS and PMI as part of a
scheme by which such persons who contributed to the Henry Espy for
13
<PAGE>
Congress Committee, and in certain instances, the spouses of such persons
(hereinafter sometimes referred to collectively as "conduits"), would be
reimbursed for their campaign "contributions."
29. Defendants, HEMMINGSON and BLACK, along with others, would and did
cause conduits each to prepare and transmit personal checks in the amount of
$1,000 as contributions to the Henry Espy for Congress Committee. Defendants
HEMMINGSON and BLACK, and others, delivered the checks to the Henry Espy for
Congress Committee.
30. At the direction of defendants HEMMINGSON and BLACK, during the period
February 1, 1993 through September 23, 1993, corporate funds were used for the
purpose of reimbursing the conduits.
31. From February 1, 1993 through September 23, 1993, defendants
HEMMINGSON and BLACK would and did cause CGI, CGS and PMI to reimburse conduits
from corporate funds.
32. As a result of the conduit scheme, the Henry Espy for Congress
Committee would and did falsely report to the Federal Election Commission
contributions by individuals described above, rather than by CGI, PMI, and CGS.
14
<PAGE>
THE ILLEGAL CORPORATE CAMPAIGN CONTRIBUTION IN 1994
33. Defendants, CROP GROWERS and HEMMINGSON, together with Ferrouillet, in
order to assist with the retirement of the campaign debt of Henry Espy, would
and did use CROP GROWERS' corporate funds to make an additional illegal
corporate contribution to the Henry Espy for Congress Committee in 1994.
34. Ferrouillet would and did create and transmit to defendants CROP
GROWERS and HEMMINGSON a fictitious attorney-client engagement letter.
35. Defendant HEMMINGSON, for and on behalf of CROP GROWERS, would and did
purportedly execute, and caused to be executed, the fictitious engagement letter
calling for the payment of a $20,000 "retainer" in order to conceal and disguise
the fact that the $20,000 "retainer" payment was instead a contribution to the
Henry Espy for Congress Committee.
36. By this device, defendants CROP GROWERS and HEMMINGSON, on or about
July 26, 1994, would and did make, and caused to be made, an illegal corporate
campaign contribution of $20,000 to the Henry Espy for Congress Committee.
15
<PAGE>
FALSIFICATION OF RECORDS TO CONCEAL THE ILLEGAL CORPORATE CAMPAIGN
CONTRIBUTIONS
37. Defendants, HEMMINGSON and BLACK, would and did cause CGI, CGS and PMI
to create false and fictitious records of corporate expenses. Thereafter,
defendants HEMMINGSON and BLACK did cause CROP GROWERS to create and maintain
these false and fictitious records of corporate expenses, thereby falsifying
CROP GROWERS' financial books and records.
38 Defendants, HEMMINGSON and BLACK, would and did direct certain
conduits to create:
a. false vouchers, specifically check requisitions for travel
reimbursement;
b. false invoices, specifically increasing bills submitted to CGI;
and
c. fictitious entries;
all in order to make the illegal corporate campaign contributions appear as
legitimate expenses.
39. Defendants HEMMINGSON and BLACK, would and did cause the false
vouchers, invoices, and fictitious entries to be made in the financial books and
records, including the subsidiary and general ledgers of CGI, CGS and PMI,
16
<PAGE>
knowing that these ledgers would be the financial books and records from which
CROP GROWERS would prepare its financial statements.
AUDIT OF CROP GROWERS FINANCIAL STATEMENTS FOR
INITIAL PUBLIC STOCK OFFERING
40. In preparing to conduct a public offering of stock, defendants CROP
GROWERS, BLACK and others, would and did create and cause the creation of
financial statements, which were a summary of the financial books and records of
CROP GROWERS, and were false, in part, in that they failed to accurately reflect
the transactions and dispositions of assets of CGI, CGS and PMI, knowing that
CROP GROWERS' outside independent auditors would review these financial books
and records during the course of its 1993 and 1994 audits.
41. On or about March 25, 1994 and on or about March 28, 1995, defendants
HEMMINGSON and BLACK, would and did make, and caused to be made, false written
representations to CROP GROWERS' outside independent auditors.
CROP GROWERS SELLS ITS STOCK TO THE PUBLIC
42. Defendants, CROP GROWERS, HEMMINGSON and BLACK, would and did file
and deliver, and caused to be filed and delivered, with the SEC, to shareholders
and others, Registration Statements and amendments thereto,
17
<PAGE>
prospectuses, and the 1994 annual report of CROP GROWERS which were false in
that they omitted to state certain material facts, including:
a. CROP GROWERS violated FECA by making illegal corporate
campaign contributions;
b. a material contingent liability existed for potential
criminal and civil penalties as a result of the FECA
violations;
c. that the financial statements were misleading;
d. that it had maintained false books and records; and
e. that CROP GROWERS, CGI, CGS and PMI and their key officers
faced potential criminal and civil sanctions in addition to
those possible under FECA, and that these corporations were
potentially subject to restrictions on their ability to
operate as a result of the illegal conduct.
43. Defendants, CROP GROWERS, HEMMINGSON and BLACK, and others not charged
herein, would and did conduct these activities in a manner calculated to conceal
and cover-up the fraudulent nature of their transactions and otherwise mislead
and deceive the FEC, SEC and others.
C. OVERT ACTS IN FURTHERANCE OF THE CONSPIRACY
44. In furtherance of this conspiracy and to accomplish the objects
thereof, the defendants, CROP GROWERS, HEMMINGSON, and BLACK, and the unindicted
co-conspirators, committed and caused to be committed in the District of
Columbia and elsewhere the following overt acts, among others:
18
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OVERT ACTS IN 1993 AND 1994, PRECEDING THE 1994 ILLEGAL
CORPORATE CAMPAIGN CONTRIBUTION
(1) On or about March 4, 1993, defendant HEMMINGSON met in the
District of Columbia with a consultant concerning a future
meeting with Secretary of Agriculture Espy.
(2) On or about March 19, 1993, that consultant wrote to defendant
HEMMINGSON and proposed the text of a draft letter from
HEMMINGSON to Secretary of Agriculture Espy which stated in part:
"Perhaps, at some time in the future, we will be able to
arrange a Mississippi tour for you and Congressman Henry
Espy if our efforts on his behalf are successful (this part
has to be subtle)."
(3) On or about April 7, 1993, defendant HEMMINGSON sent a letter to
Secretary of Agriculture Espy in the District of Columbia that
thanked him for an appointment on April 14, 1993, and requested
the opportunity "to discuss a number of points related to crop
insurance/disaster assistance." Enclosed with the letter were
"talking points" which referenced four policy positions
attributed to Secretary of Agriculture Espy that were of concern
to the crop insurance industry, as follows:
- "Crop insurance is not a sound program and must be changed."
- "Disaster assistance is a preferred method of providing
financial assistance to farmers adversely impacted by
natural catastrophes."
- "The area yield plan, advocated by OMB [the Office of
Management and Budget], will be submitted for individualized
coverage currently provided to farmers."
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<PAGE>
- "That you are not inclined to appeal the 1994 House
appropriations bill markup that reduces crop insurance by
$105 million, an amount that could cripple the effectiveness
of the program."
(4) On or about March 24, 1993, defendants HEMMINGSON and BLACK
caused the Treasurer of the Henry Espy for Congress Committee to
file a false Report of Receipts and Disbursements with the FEC in
the District of Columbia for the period covering January 1, 1993,
through March 10, 1993.
(5) On or about April 14, 1993, defendant HEMMINGSON and Henry Espy
met with Secretary of Agriculture Espy in the District of
Columbia.
(6) On or about August 24, 1993, defendant HEMMINGSON wrote to
Secretary of Agriculture Espy in the District of Columbia
concerning the potential "drastic" effect on private insurers of
proposed legislation for the Agricultural Stabilization and
Conservation Service ("ASCS") to deliver MPCI.
(7) On or about August 24, 1993, defendant HEMMINGSON faxed to Henry
Espy the August 24, 1993 letter to Secretary of Agriculture Espy,
with a cover note stating that "these thoughts are for Mike's
consideration in response to the recent rumors regarding the ASCS
involvement in the crop insurance program."
(8) On or about August 31, 1993, defendants HEMMINGSON and BLACK
caused the Treasurer of the Henry Espy for Congress Committee to
file a false Report of Receipts and Disbursements with the FEC in
the District of Columbia for the period covering March 11, 1993
through April 19, 1993.
20
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(9) On or about September 17, 1993, defendant HEMMINGSON and Henry
Espy met with Secretary of Agriculture Espy in the District of
Columbia.
(10) On or about February 22, 1994, defendant HEMMINGSON and Henry
Espy met with Secretary of Agriculture Espy in the District of
Columbia.
$20,000 CONTRIBUTION IN 1994 TO THE HENRY ESPY CAMPAIGN
(11) On or about March 31, 1994, defendant HEMMINGSON attended a
fundraising dinner in the District of Columbia for Henry Espy at
the 116 Club. In attendance, in addition to HEMMINGSON, were
Henry Espy, Ferrouillet and various others who had business
before the USDA. The attendees were urged to raise $10,000 or
more each in order to assist with the retirement of Henry Espy's
campaign debt.
(12) On or about July 26, 1994, defendant CROP GROWERS, through CGI,
over the signature of defendant HEMMINGSON, issued a $20,000
check payable to Ferrouillet.
(13) On or about July 26, 1994, false records were created in the
financial books and records of defendant CROP GROWERS as follows:
a. a voucher, specifically an entry on the $20,000 check,
falsely recorded the payment to Ferrouillet as "legal fees;"
and
b. a false entry in the general ledger of CGI reflecting a
"debit" for legal fees in the amount of $20,000 to
Ferrouillet.
(14) Between on or about July 28, 1994 and August 19, 1994, the
$20,000 check was negotiated as follows:
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a. On or about July 28, 1994, Ferrouillet traveled to a grocery
store in Algiers, Louisiana, delivered the $20,000 check
from CGI that was payable to him, and received partial
payment of $5000 cash.
b. By on or about August 8, 1994, Ferrouillet obtained the
remaining $15,000 in cash from the same grocery store.
c. On or about August 8, 1994, Ferrouillet deposited $10,000
cash into a bank account of the Henry Espy for Congress
Committee in Kenner, Louisiana.
d. On or about August 10, 1994, Ferrouillet deposited $9,000
cash into the same bank account of the Henry Espy for
Congress Committee in Kenner, Louisiana.
e. On or about August 11, 1994, Ferrouillet deposited $1,000
cash into the same bank account of the Henry Espy for
Congress Committee in Metairie, Louisiana.
f. On or about August 19, 1994, Ferrouillet transferred by wire
$21,000 from the bank account of the Henry Espy for Congress
Committee in Louisiana to a bank in Clarksdale, Mississippi.
CROP GROWERS' SEC FILINGS
(15) On or about March 25, 1994, defendants HEMMINGSON and BLACK
issued a letter to the accounting firm that audited the financial
statements of CGI, CGS and PMI as of December 31, 1993 in
preparation for CROP GROWERS' public offering that contained, in
substance, the following representations concerning CGI:
a. "There have been no. . .[i]rregularities involving any
member of management or employees who have significant roles
in the internal control structure."
22
<PAGE>
b. Members of management or employees with significant roles in
the internal control structure of CGI had not, in substance,
intentionally misstated or omitted to disclose in financial
statements the effects of events or transactions;
manipulated, falsified or altered records or documents; or
omitted significant information from records or documents.
c. "There have been no. . .violations or possible violations of
laws or regulations, the effects of which should be
considered for disclosure in the financial statements or as
a basis for recording a loss contingency."
(16-20) In connection with an initial public offering of securities,
defendant CROP GROWERS, on or about the dates following, did
file with the SEC in the District of Columbia certain forms,
each such filing constituting a separate overt act:
Overt
Act No. Date Filing
------- ---- ------
(16) April 11, 1994 Registration Statement on Form S-1.
(17) May 24, 1994 First amendment to the Registration
Statement on Form S-1.
(18) June 17, 1994 Second amendment to the Registration
Statement on Form S-1.
(19) June 22, 1994 Third amendment to the Registration
Statement on Form S-1.
(20) June 24, 1994 Prospectus.
(21) On or about April 11, 1994, defendant CROP GROWERS published
financial statements for the year ended December 31, 1993, that
were certified on or about March 25, 1994 by its independent
auditors.
23
<PAGE>
(22) On or about May 24, 1994, in response to a comment letter from
the SEC, defendant CROP GROWERS caused a response to be sent to
the SEC in the District of Columbia.
(23) On or about May 24, 1994, defendant CROP GROWERS issued to the
accounting firm that audited CROP GROWERS' financial statements a
letter, signed by defendants HEMMINGSON and BLACK, reaffirming
the representations set forth in the letter of March 25, 1994
(Overt Act number 15).
(24) On or about each of June 22, 1994, June 29, 1994, and July 8,
1994, defendant CROP GROWERS issued to the accounting firm that
audited CROP GROWERS' financial statements a letter, signed by
defendants HEMMINGSON and BLACK, affirming that:
"[E]xcept as set forth in the registration statement and
related prospectus, no events have occurred that have a
material effect on the consolidated financial statements as
of December 31, 1993, and for each of the years in the
three-year period then ended or that should be disclosed in
order to keep those statements from being misleading."
(25) On or about June 22, 1994, Defendant CROP GROWERS' caused an
amended Registration Statement to be declared effective by the
SEC in the District of Columbia, thereby allowing CROP GROWERS'
stock to be sold to the public.
(26) On or about June 23, 1994, defendant CROP GROWERS, through
certain broker-dealers, conducted an initial public offering of
2,500,000 shares of its common stock at $7.50 per share, using
securities offering documents, including a prospectus, that
omitted to state material facts.
(27) On or about June 23, 1994, the common stock of defendant CROP
GROWERS commenced public trading and did trade thereafter on the
NASDAQ.
24
<PAGE>
(28-31) In connection with an offering of additional CROP GROWERS
securities to the public, defendant CROP GROWERS, on or
about the dates following, did file with the SEC in the
District of Columbia certain forms, each such filing
constituting a separate overt act:
Overt
Act No. Date Filing
------- ---- ------
(28) October 31, 1994 Registration Statement on Form S-1.
(29) November 21, 1994 First amendment to the Registration
Statement on Form S-1.
(30) November 22, 1994 Second amendment to the Registration
Statement on Form S-1.
(31) November 30, 1994 Prospectus.
(32) On or about November 30, 1994, defendant CROP GROWERS, through
certain broker-dealers, conducted an additional public offering
of 1,400,000 shares of its common stock at $14.00 per share,
using securities offering documents, including a prospectus, that
omitted to state material facts.
(33) On or about March 28, 1995, defendant CROP GROWERS, over the
signatures of defendants HEMMINGSON and BLACK, issued a letter to
the accounting firm that audited CROP GROWERS' financial
statements as of December 31, 1994 that contained, in substance,
the following representations:
a. "There have been no. . .[i]rregularities involving any
members of management or employees who have significant
roles in the internal control structure."
b. Members of management or employees with significant roles in
the internal control structure of CROP GROWERS had not, in
substance, intentionally misstated or omitted to
25
<PAGE>
disclose in financial statements the effects of events or
transactions; manipulated, falsified or altered records or
documents; or omitted significant information from records or
documents.
c. "There have been no ... violations or possible violations of laws
or regulations, the effect of which should be considered for
disclosure in the financial statements or as a basis for
recording a loss contingency."
(34) On or about March 31, 1995, defendant CROP GROWERS filed a Form 10-K
for the year ended December 31, 1994 with the SEC in the District of
Columbia.
(In violation of Title 18, United States Code, Section 371.)
THE GRAND JURY FURTHER CHARGES:
COUNT TWO
CAUSING FALSE STATEMENT TO BE MADE TO
A GOVERNMENT AGENCY
1. Paragraphs 1 through 5 and 27 through 32 of Count One of this
Indictment are realleged and incorporated herein by reference as though set
forth in full.
2. On or about March 24, 1993, in the District of Columbia and elsewhere,
in a matter within the jurisdiction of an agency of the United States, the
Federal Election Commission, defendants HEMMINGSON AND BLACK did knowingly and
willfully cause the Henry Espy for Congress Committee to make a
26
<PAGE>
material false statement, namely a false Report of Receipts and Disbursements
filed with the FEC that included the identification of individuals in the Report
as contributors, each in the amount of $1000 to the Henry Espy for Congress
Committee, when in truth and in fact defendants HEMMINGSON and BLACK then
and there well knew that the individual contributions reported were, in fact,
illegal corporate campaign contributions to the Henry Espy for Congress
Committee.
(In violation of Title 18, United States Code, Sections 1001 and 2.)
THE GRAND JURY FURTHER CHARGES:
COUNT THREE
CAUSING FALSE STATEMENT TO BE MADE TO
A GOVERNMENT AGENCY
1. Paragraphs 1 through 5 and 27 through 32 of Count One of this
Indictment are realleged and incorporated herein by reference as though set
forth in full.
2. On or about August 31, 1993, in the District of Columbia and
elsewhere, in a matter within the jurisdiction of an agency of the United
States, the Federal Election Commission, defendants HEMMINGSON and BLACK did
27
<PAGE>
knowingly and willfully cause the Henry Espy for Congress Committee to make a
false statement, namely, a false Report of Receipts and Disbursements filed
with the FEC that included the identification of individuals in the Report as
contributors, each in the amount of $1000 to the Henry Espy for Congress
Committee, when in truth and in fact defendants HEMMINGSON and BLACK then and
there well knew that the individual contributions reported were, in fact,
illegal corporate campaign contributions to the Henry Espy for Congress
Committee totaling approximately $3,000.
(In violation of Title 18, United States Code, Sections 1001 and 2.)
THE GRAND JURY FURTHER CHARGES:
COUNT FOUR
FALSE BOOKS AND RECORDS
1. Paragraphs 1 through 4, 6, 15, 17 and 18, of Count One of this
Indictment are realleged and incorporated herein by reference as though set
forth in full.
2. As a publicly held company, defendant CROP GROWERS made and kept
books, records and accounts which comprised the information underlying the
28
<PAGE>
financial statements, which were themselves books and records, that CROP GROWERS
filed with the SEC in the District of Columbia.
3. In particular, defendant CROP GROWERS adopted, incorporated and
otherwise maintained and kept as its own books and records, the various books
and records previously created by CGI, CGS and PMI for the two years prior to,
and in anticipation of, defendant CROP GROWERS' public offering of stock.
4. From on or about June 23, 1994 through December 31, 1995, within the
District of Columbia, and elsewhere, defendant CROP GROWERS did knowingly and
willfully fail to make and keep books, records and accounts, and defendants
HEMMINGSON and BLACK did knowingly and willfully cause CROP GROWERS to fail to
make and keep books, records and accounts which, in reasonable detail,
accurately and fairly reflected the transactions and dispositions of the assets
of CROP GROWERS by falsely recording or causing the recording as, in substance,
"travel advances," "expense advances," "consulting fees," "computer purchases,"
"advances on crop loss adjustments," "professional fees" and "legal fees" what,
in truth and in fact, were illegal corporate campaign contributions, including
reimbursements for contributions to the Henry Espy for Congress Committee, and
which were included in the consolidated financial statements of CROP GROWERS and
in other books and records, as follows:
29
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRIBUTOR TO THE HENRY DATE OF, AMOUNT OF, METHOD/DESCRIPTION CORPORATE BOOKS AND
ESPY FOR CONGRESS AND CROP GROWERS OF REIMBURSEMENT OR RECORDS, ENTRY DATES AND
COMMITTEE AND DATE SUBSIDIARY MAKING PAYMENT IN CORPORATE FALSE ENTRIES
REIMBURSEMENT BOOKS AND RECORDS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
a. PMI Insurance Agent, 1/31/93, $1000 2/1/93, $1000, PMI travel reimbursement 2/1/93, accounts payable system
2/1/93, trial balance
- ----------------------------------------------------------------------------------------------------------------------------------
b. Officer of PMI, 2/1/93, $1000 2/1/93, $2000, PMI travel reimbursement 2/1/93, accounts payable system
2/1/93, trial balance
wife, 2/1/93, $1000
- ----------------------------------------------------------------------------------------------------------------------------------
c. REIMBURSEMENT BY CGI OF PMI'S 2/3/93, $3,000, CGI 1992 commission 2/3/93, accounts payable system
THREE CONTRIBUTION REIMBURSEMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
d. BLACK, 2/1/93, $1000 2/2/93, $2000, CGI travel advance 2/2/93, accounts payable system
2/12/93, general ledger
wife, 2/1/93, $1000 2/26/93, aged trial balance
3/31/93, aged trial balance
4/30/93, aged trial balance
5/28/93, aged trial balance
6/30/93, aged trial balance
7/30/93, aged trial balance
8/31/93, aged trial balance
10/31/93, general ledger
- ----------------------------------------------------------------------------------------------------------------------------------
e. Administrative Vice President of CGI, 2/2/93, $1000, CGI travel advance 2/2/93, accounts payable system
2/1/93, $1000 2/12/93, general ledger
2/26/93, aged trial balance
3/31/93, aged trial balance
4/30/93, aged trial balance
5/28/93, aged trial balance
6/30/93, aged trial balance
7/30/93, aged trial balance
8/31/93, aged trial balance
10/26/93, general ledger
- ----------------------------------------------------------------------------------------------------------------------------------
30
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRIBUTOR TO THE HENRY DATE OF, AMOUNT OF, METHOD/DESCRIPTION CORPORATE BOOKS AND
ESPY FOR CONGRESS AND CROP GROWERS OF REIMBURSEMENT OR RECORDS, ENTRY DATES AND
COMMITTEE AND DATE SUBSIDIARY MAKING PAYMENT IN CORPORATE FALSE ENTRIES
REIMBURSEMENT BOOKS AND RECORDS
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
f. HEMMINGSON, 2/1/93, $1000 2/2/93, $3000, CGI travel advance 2/2/93, accounts payable system
2/12/93, general ledger
HEMMINGSON's father, 2/1/93, 2/26/93, aged trial balance
$1000 3/31/93, aged trial balance
4/30/93, aged trial balance
HEMMINGSON's mother, 2/1/93, 5/28/93, aged trial balance
$1000 6/30/93, aged trial balance
7/30/93, aged trial balance
8/31/93, aged trial balance
10/31/93, general ledger
- ----------------------------------------------------------------------------------------------------------------------------------
g. HEMMINGSON's brother, 2/2/93, 2/2/93, $2000, CGI crop loss adjustment 2/2/93, accounts payable system
$1000 2/2/93, general ledger
HEMMINGSON's sister-in-law,
2/1/93, $1000
- ----------------------------------------------------------------------------------------------------------------------------------
h. Controller of CGI, 2/1/93, $1000 2/3/93, $2000, CGI computer equipment 2/3/93, accounts payable system
2/3/93, general ledger
wife, 2/1/93, $1000 12/31/93, general ledger
- ----------------------------------------------------------------------------------------------------------------------------------
i. Vice President of Hail Insurance of 2/3/93, $2000, CGI purchase of computer 2/3/93, accounts payable system
CGI, 2/1/93, $1000 2/3/93, general ledger
12/31/93, general ledger
wife, 2/1/93, $1000
- ----------------------------------------------------------------------------------------------------------------------------------
j. Principal of AgriPeril, 2/2/93, $1000 2/9/93, $2000, CGS expense account advance 2/9/93, subsidiary ledger
(AgriPeril) 2/9/93, general ledger
wife, 2/2/93, $1000
- ----------------------------------------------------------------------------------------------------------------------------------
31
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRIBUTOR TO THE HENRY DATE OF, AMOUNT OF, METHOD/DESCRIPTION CORPORATE BOOKS AND
ESPY FOR CONGRESS AND CROP GROWERS OF REIMBURSEMENT OR RECORDS, ENTRY DATES AND
COMMITTEE AND DATE SUBSIDIARY MAKING PAYMENT IN CORPORATE FALSE ENTRIES
REIMBURSEMENT BOOKS AND RECORDS
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
k. President of CGS, 2/2/93, $1000 2/10/93, $2000, CGS expense advance 2/10/93, subsidiary ledger
(AgriPeril) 2/10/93, general ledger
wife, 2/2/93, $1000
- ----------------------------------------------------------------------------------------------------------------------------------
l. Accountant, 2/2/93, $1000 2/3/93, $2398, CGS professional fees/ 2/3/93, subsidiary ledger
(AgriPeril)-- included consulting, check 2/3/93, general ledger
wife, 2/2/93, $1000 $898 to pay estimated included estimated tax
personal income tax liability
liability
- ----------------------------------------------------------------------------------------------------------------------------------
m. Regional Vice President of Crop 2/3/93, $2398, CGS professional fees/ 2/3/93, subsidiary ledger
Growers, 2/3/93, $1000 (AgriPeril)-- included consulting, check 2/3/93, general ledger
$898 to pay estimated included estimated tax
husband, 2/3/93, $1000 personal income tax liability
liability
- ----------------------------------------------------------------------------------------------------------------------------------
n. Graphics Consultant, 3/22/93, $1000 6/16/93, $1000, CGI added to monthly labor 6/16/93, accounts payable system
8/13/93, $500, CGI charges 8/13/93, accounts payable system
husband, 3/22/93, $1000 9/23/93, $500, CGI 9/23/93, accounts payable system
- ----------------------------------------------------------------------------------------------------------------------------------
o. Co-founder of CGI, 3/29/93, $1000 3/29/93, $2300, CGI travel advance 3/29/93, accounts payable system
3/29/93, general ledger
3/31/93, aged trial balance
4/30/93, aged trial balance
5/28/93, aged trial balance
6/30/93, aged trial balance
7/30/93, aged trial balance
8/31/93, aged trial balance
- ----------------------------------------------------------------------------------------------------------------------------------
p. CGI through un-indicted co- legal fees 7/26/94, accounts payable system
conspirator #1, 7/26/94, $20,000 7/26/94, general ledger
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
32
</TABLE>
<PAGE>
(In violation of Title 15, United States Code, Sections 78m(b)(2)(A) and
78ff(a), and Title 18, United States Code, Section 2.)
THE GRAND JURY FURTHER CHARGES:
COUNT FIVE
FALSIFICATION OF ACCOUNTING RECORDS
1. Paragraphs 1 through 4, 6, 15, 17, and 18, and paragraphs 27 through
41 of Count One of this Indictment are realleged and incorporated herein by
reference as though set forth in full. Crop Growers is not named in this count
as a defendant.
2. As a publicly held company, Crop Growers made and kept books, records
and accounts which comprised the information underlying the financial
statements, which were themselves books and records, that Crop Growers filed
with the SEC in the District of Columbia.
3. In particular, Crop Growers adopted, incorporated and otherwise
maintained and kept as its own books and records, the various books and records
previously created by CGI, CGS and PMI for the two years prior to, and in
anticipation of, Crop Growers' public offering of stock.
4. Beginning on or about June 23, 1994 through on or about December 31,
1995, within the District of Columbia and elsewhere, defendants
33
<PAGE>
HEMMINGSON and BLACK, did knowingly and willfully falsify and cause the
falsification of Crop Growers' books, records and accounts by, among other
things, causing Crop Growers to maintain books and records that inaccurately
recorded and failed to note illegal corporate campaign contributions.
(In violation of Title 15, United States Code, Sections 78m(b)(5)
and 78ff(a), Title 18 United States Code, Section 2,
and Title 17, Code of Federal Regulations, Section 240.13b2-1.)
THE GRAND JURY FURTHER CHARGES:
COUNTS SIX THROUGH FIFTEEN
FALSE STATEMENTS TO THE SEC
1. Paragraphs 1 through 4, 6 and 42 of Count One of this Indictment are
realleged and incorporated by reference as though set forth in full.
2. On or about the dates set forth in paragraph 4, below, defendant CROP
GROWERS filed, and defendants HEMMINGSON and BLACK caused CROP GROWERS to file,
certain forms with the Securities and Exchange Commission. These forms included
Registration Statements on Form S-1, amendments thereto, prospectuses, and an
annual report on Form 10-K. Rules and regulations promulgated by the Securities
and Exchange Commission required
34
<PAGE>
affirmative disclosure of material information relating to the condition of the
corporation and required that disclosures be complete, truthful and not
misleading.
3. In connection with the forms filed on each of the dates identified in
paragraph 4 below, and incorporated by reference herein, defendants HEMMINGSON
and BLACK did knowingly and willfully cause defendant CROP GROWERS to make and
use documents and writings which themselves were false and fraudulent in that
they made statements that were false and misleading and they omitted to state
material facts, and defendants CROP GROWERS, HEMMINGSON and BLACK did knowingly
and willfully falsify, conceal and cover up by trick, scheme and device material
facts, including, but not limited to, the following:
a. CROP GROWERS violated FECA by making illegal corporate campaign
contributions;
b. A material contingent liability existed for potential criminal
and civil fines as a result of the FECA violations;
c. That the financial statements were misleading;
d. That it had maintained false books and records; and
e. That CROP GROWERS, CGI, CGS and PMI and their key officers faced
potential criminal and civil sanctions in addition to those
possible under FECA, and that these corporations were potentially
subject to restrictions on their ability to operate as a result
of the illegal conduct.
35
<PAGE>
4. On or about the following dates in the District of Columbia, and
elsewhere, in a matter within the jurisdiction of the Securities and Exchange
Commission, an agency of the United States, defendants CROP GROWERS,
HEMMINGSON and BLACK did knowingly and willfully make and use and cause to be
made and used documents and writings which themselves were false and
fraudulent in that they omitted to state material facts including but not
limited to those in paragraph 3 above, and did knowingly and willfully
falsify, conceal and cover up by trick, scheme and device material facts,
including but not limited to those in paragraph 3 above, each such filing
constituting a separate count of this indictment as follows:
Count Date Filing
----- ---- ------
Six April 11, 1994 Form S-1 Registration Statement
Seven May 24, 1994 First Amendment to the Form S-1
Registration Statement
Eight June 17, 1994 Second Amendment to the Form S-1
Registration Statement
Nine June 22, 1994 Third Amendment to the Form S-1
Registration Statement
Ten June 23, 1994 Prospectus
Eleven October 31, 1994 Form S-1 Registration Statement
36
<PAGE>
Twelve November 21, 1994 First Amendment to the Form S-1
Registration Statement
Thirteen November 22, 1994 Second Amendment to the Form S-1
Registration Statement
Fourteen November 30, 1994 Prospectus
Fifteen March 31, 1995 Annual Report on Form 10-K.
(In violation of Title 18, United States Code, Sections 1001 and 2.)
THE GRAND JURY FURTHER CHARGES:
COUNT SIXTEEN
SECURITIES FRAUD
1. Paragraphs 1 through 4, 6, 14 through 18 and 42 of Count One, and
paragraphs 2 and 3 of Counts Six through Fifteen of this Indictment are
realleged and incorporated herein by reference as though set forth in full.
2. Beginning on or about April 11, 1994 and continuing through on or
about December 31, 1995, in the District of Columbia and elsewhere, defendant
CROP GROWERS did make, and defendants HEMMINGSON and BLACK did cause CROP
GROWERS to make, certain filings with the SEC in the District of Columbia which
were necessary to engage in the offer or sale of securities to the public. CROP
GROWERS was required to make such filings with the SEC prior to disseminating
them to the public.
37
<PAGE>
3. Beginning on or about April 11, 1994 and continuing through on or
about December 31, 1995, in the District of Columbia and elsewhere, by the
use of means and instrumentalities of transportation and communication in
interstate commerce and by the use of the mails, defendant CROP GROWERS did,
and defendants HEMMINGSON and BLACK caused CROP GROWERS to, knowingly and
willfully obtain money and property by means of an omission to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading, and did engage
in a transaction, practice and course of business which would and did operate
as a fraud and deceit upon the purchaser, in the offer and sale of CROP
GROWERS common stock, as follows:
a. The offer and sale of Crop Growers stock was accomplished by the
making and filing of certain reports with the SEC in the District
of Columbia which were available to and relied on by potential
purchasers and purchasers of Crop Growers common stock.
b. Defendant CROP GROWERS did file, and defendants HEMMINGSON and
BLACK did cause CROP GROWERS to file with the SEC the Registration
Statements, Prospectuses and annual report enumerated in Counts
Six through Fifteen above.
c. Defendant CROP GROWERS did omit to state, and defendants
HEMMINGSON and BLACK did cause CROP GROWERS to omit to state,
material facts including, but not limited to, those
38
<PAGE>
material facts enumerated in paragraph 3 of Counts Six through
Fifteen of this Indictment.
(In violation of Title 15, United States Code, Sections 77q(a) and
77x, and Title 18, United States Code, Section 2.)
THE GRAND JURY FURTHER CHARGES:
COUNT SEVENTEEN
FALSE STATEMENTS TO AUDITORS
1. Paragraphs 1 through 4, 6, 15, 17 and 18 of Count One of this
Indictment are realleged and incorporated herein by reference as though set
forth in full. Crop Growers is not named as a defendant in this count.
2. As part of the process of proposing to issue stock of Crop Growers,
defendants HEMMINGSON and BLACK, made and caused to be made statements and
representations to its outside independent auditors for the purpose, as required
by law, of filing documents, including its audited financial statements, with
the Securities and Exchange Commission in the District of Columbia.
3. On or about March 25, 1994, in the District of Columbia and elsewhere,
defendants HEMMINGSON and BLACK, while officers of Crop Growers, did knowingly
and willfully make and cause to be made materially false
39
<PAGE>
and misleading statements which they then and there well knew were materially
false and misleading, in substance:
a. "There have been no...[i]rregularities involving any member
of management or employees who have significant roles in the
internal control structure."
b. Members of management or employees with significant roles in
the internal control structure of CGI had not, in substance,
intentionally misstated or omitted to disclose in financial
statements the effects of events or transactions;
manipulated, falsified or altered records or documents; or
omitted significant information from records or documents.
c. "There have been no...violations or possible violations of
laws or regulations, the effects of which should be
considered for disclosure in the financial statements or as
a basis for recording a loss contingency."
and omitted to state and caused other persons to omit to state, material facts
necessary in order to make statements made, in light of the circumstances under
which such statements were made, not misleading, to an accountant in connection
with audits of financial statements and the preparation of Registration
Statements filed with the Securities and Exchange Commission on Form S-1,
Prospectuses, and an annual report on Form 10-K on behalf of Crop Growers which
defendants knew would be and were filed in the District of Columbia and
elsewhere.
(In violation of Title 15, United States Code, Section 78ff(a), Title 18,
United States Code Section 2, and Title 17, Code of Federal Regulations, Section
240.13b2-2.)
40
<PAGE>
THE GRAND JURY FURTHER CHARGES:
COUNT EIGHTEEN
FALSE STATEMENTS TO AUDITORS
1. Paragraphs 1 through 4, 6, 15, 17 and 18 of Count One of this
Indictment are realleged and incorporated herein by reference as though set
forth in full. Crop Growers is not named as a defendant in this count.
2. As a publicly held company, Crop Growers, through defendants
HEMMINGSON and BLACK, made and caused to be made statements and representations
to its outside independent auditors for the purpose, as required by law, of
filing documents, including audited financial statements, with the SEC in the
District of Columbia.
3. On or about March 28, 1995, in the District of Columbia and elsewhere,
defendants HEMMINGSON and BLACK, while officers of Crop Growers, did knowingly
and willfully make and cause to be made materially false and misleading
statements which they then and there well knew were materially false and
misleading, specifically:
a. "There have been no...[i]rregularities involving any members
of management or employees who have significant roles in the
internal control structure."
b. Members of management or employees with significant roles in
the internal control structure of Crop Growers had not, in
41
<PAGE>
substance, intentionally misstated or omitted to disclose in
financial statements the effects of events or transactions;
manipulated, falsified or altered records or documents; or
omitted significant information from records or documents.
c. "There have been no...violations or possible violations of
laws or regulations, the effect of which should be
considered for disclosure in the financial statements or as
a basis for recording a loss contingency."
and omitted to state and caused other persons to omit to state, material facts
necessary in order to make statements made, in light of the circumstances under
which such statements were made, not misleading, to an accountant in connection
with audits of Crop Growers' financial statements and the preparation of an
annual report on Form 10-K on behalf of Crop Growers which defendants knew would
be and were filed in the District of Columbia and elsewhere.
(In violation of Title 15, United States Code, Section 78ff(a), Title 18,
United States Code Section 2, and Title 17, Code of Federal Regulations, Section
240.13b2-2.)
A TRUE BILL:
-----------------------------------
Foreperson
Grand Jury 95-1
DONALD C. SMALTZ
Independent Counsel
- -----------------------------------
by: Jacob S. Frenkel
Associate Independent Counsel
42
