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  • November 16, 2022

    Circumstantial Evidence Sufficient to Sustain Securities Fraud Conviction

    Corroboration from multiple witnesses that a chief financial officer was aware of misleading entries in his corporation’s financial statements was sufficient to sustain a guilty verdict, the U.S. Court of Appeals for the Seventh Circuit has ruled.

    Jeff M. Brown

    A Group Of Business People Sitting Around A Table While A Female Executive Stands At A Whiteboard And Points To Figures On The Board

    Nov. 16, 2022 – Corroboration from multiple witnesses that a chief financial officer was aware of misleading entries in his corporation’s financial statements was sufficient to sustain a guilty verdict, the U.S. Court of Appeals for the Seventh Circuit has ruled.

    In U.S.. v. Armbruster, No. 21-3370 (Sept. 7, 2022), the Seventh Circuit also reiterated that circumstantial evidence is sufficient to prove the mental state necessary for a fraud conviction.

    Spate of Mergers

    Peter Armbruster, a certified public accountant, became the controller of Dawes Transportation in 1990 (Dawes).

    Jeff M. Brown Jeff M. Brown is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.

    In 2005, Dawes merged with Roadrunner and Armbruster became Roadrunner’s chief financial officer (CFO). Between 2005 and 2016, Roadrunner acquired 25 logistics companies and went public in 2010.

    As CFO, Armbruster was responsible for preparing, certifying, and filing Roadrunner’s consolidated financial statements with the federal Securities and Exchange Commission (SEC). The statements detailed the financial affairs of Roadrunner’s subsidiaries, including a transportation company called Morgan Southern.

    Books out of Whack

    Stephen Voorhees became Morgan Southern’s controller in November 2014. He discovered that Morgan Southern had inflated its balance sheet by between $2 million and $5 million.

    Much of the overstatement was attributable to a receivable from IKEA Maersk that was greater than the amount that Morgan Southern could reasonably expect to collect. Voorhees also discovered that Morgan Southern was continuing to report among its assets prepaid taxes when the taxes were due and owing.

    According to generally accepted accounting principles (GAAP), the IKEA Maersk receivable and the prepaid taxes asset both should have been reduced.

    Voorhees left Roadrunner in April 2016. Before Voorhees left, he communicated his worries about Morgan Southern’s books to both Armbruster and Roadrunner’s accountants.

    SEC Filing Doesn’t Meet GAAP

    Voorhees’ replacement, Christopher Lacey, quickly became aware of Morgan Southern’s accounting problems.

    Lacey alerted Heather Hipke, Roadrunner’s vice president of finance, and Mike Gettle, Roadrunner’s chief operating officer to the problems. Hipke and Gettle in turn notified Armbruster in the third quarter of 2016.

    Roadrunner filed its 2016 third-quarter form 10-Q with the SEC on Nov. 14, 2016.

    Included in the form were Roadrunner’s consolidated financial statements. The statements indicated no adjustments to the IKEA Maersk receivable or the prepaid tax asset; they also contained other misstatements.

    As a result, Roadrunner’s financial statements did not comply with GAAP.

    Drops in Share Price

    After Roadrunner filed the 2016 third-quarter form 10-Q, the company’s CEO learned from Gettle about the misstatements contained in the form. The CEO informed the company’s board of directors, and the board in turn notified the company’s independent auditor.

    In January 2017, the company filed with the SEC a form informing investors that they could no longer rely on any of the company’s financial filings from 2014 or 2015 or its quarterly reports for the first three quarters of 2016. The price of the company’s stock dropped significantly.

    Roadrunner filed restated financial statements in January 2018. The statements reflected $66.5 million less in net income during the period covered by the misstatements.

    The company’s share price nose-dived. The federal government charged Armbruster with 15 counts, including securities fraud and falsifying accounting records.

    Convicted on Four Counts

    In July 2021, a jury acquitted Armbruster on 11 counts and convicted him on four: two counts of knowingly falsifying Roadrunner’s accounting records; one count of fraudulently influencing Roadrunner’s independent auditor; and one count of filing fraudulent financial statements with the SEC.

    Armbruster filed a motion under Federal Rule of Civil Procedure 29(c), asking the U.S. District Court of the Eastern District of Wisconsin to enter judgment in his favor as a matter of law on the grounds that the trial evidence was insufficient.

    The district court denied Armbruster’s motion. Armbruster appealed.

    ‘A Nearly Insurmountable Hurdle’

    Writing for a three-judge panel, Appeals Court Judge Michael Scudder explained that Armbruster faced “‘a nearly insurmountable hurdle’” because Seventh Circuit precedent required the appellate panel to give great deference to the jury’s findings and view the evidence in the light most favorable to the government.

    Armbruster failed to clear that hurdle, Scudder concluded, because the government had introduced multiple pieces of evidence sufficient to sustain the jury’s verdict.

    For instance, Judge Scudder pointed out, Voorhees testified that he’d told Armbruster about Morgan Southern’s overstatement of the IKEA Maersk receivable and the inflation of the prepaid taxes.

    Scudder also noted the testimony of Hipke – who worked closely with Armbruster – that she’d given Armbruster the results of Lacey’s attempts to reconcile the Morgan Southern books, including information about the IKEA Maersk receivable and the inflated prepaid tax item.

    Additionally, Judge Scudder pointed out, the government had introduced a photo of a whiteboard, taken during a meeting in November 2016, that listed the myriad bookkeeping issues Roadrunner faced, including the IKEA Maersk receivable and inflated prepaid tax item at Morgan Southern.

    “Given the corroboration from various sources of evidence, from multiple witnesses at different levels of Roadrunner’s accounting and finance department to the documents spanning several years, the jury could—and did—reasonably find that Armbruster knowingly and willingly allowed the Morgan Southern IKEA Maersk receivable and prepaid taxes account to remain overstated in the company’s accounting records, and, in turn, in Roadrunner’s consolidated balance sheet during the relevant periods,” Scudder wrote.

    There was also sufficient evidence to support the charges of fraudulently influencing the independent auditor and filing fraudulent financial statements with the SEC, Judge Scudder reasoned.

    Circumstantial Evidence is Sufficient

    Armbruster argued that the government’s proof was too general. The government, Armbruster argued, was required to show that he had knowledge of the exact balance sheet items that led to the charges against him.

    But Scudder explained that that argument conflicted with the deferential standard that governed the appellate panel’s review of the jury’s conclusions.

    “We sit not to re-weigh evidence, assess witness credibility, or assign probabilities to what perspective on the government’s case was most persuasive,” Judge Scudder wrote.

    While the government had not presented evidence that Armburster admitted to fraud or was caught committing it “red-handed,” Scudder wrote that “[i]ndirect evidence is allowed, and time and time again we have recognized that the government can prove the mental state element of fraud charges with circumstantial evidence.”

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    WisBar Court Review, published by the State Bar of Wisconsin, includes summaries and analysis of decisions from the Wisconsin Supreme Court, the Wisconsin Court of Appeals, and the U.S. Court of Appeals for the Seventh Circuit, as well as other court developments. To contribute to this blog, contact Joe Forward.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

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