The opinion of the court was delivered by: Seybert, District Judge
In connection with the upcoming criminal forfeiture trial, Defendant David H. Brooks has raised certain evidentiary issues (Docket No. 1269 at p. 1 n. 1; Docket No. 1308 at p. 4-5), which he apparently wants the Court to construe as a motion in limine (see Docket No. 1340 at p. 2). Specifically, Mr. Brooks argues that he cannot be required to forfeit assets he supposedly obtained through the Interceptor Vest Inventory and R&D Schemes, because the Court largely acquitted him of insider trading in connection with those allegations. For purposes of clarifying and advancing these proceedings, the Court agrees to treat Mr. Brooks' evidentiary arguments as a motion in limine. Having done so, the Court DENIES this motion as premature.
I. The Superseding Indictment and Trial
In 2006, the Government charged Mr. Brooks and co-Defendant Sandra Hatfield with, among other things, insider trading, securities fraud, conspiracy to commit securities fraud, conspiracy to commit mail and wire fraud, mail fraud, wire fraud, and obstruction of justice.
At trial, the Government crystallized its case as six separate schemes. Four of those schemes related to the Superseding Indictment's insider trading counts: (1) the "R&D Scheme," whereby the Defendants allegedly inflated DHB Inc.'s gross profit margins by fraudulently reclassifying expenses from "cost of goods sold" to "research and development," and manipulated those reclassifications to enable the Company to hit specific gross profit margin targets; (2) the "Inceptor Vest Inventory Scheme," whereby the Defendants allegedly inflated the value of the Company's inventory of bulletproof vests, causing DHB to materially overstate its profits and earnings;*fn1 (3) the "Unauthorized Compensation Scheme," whereby the Defendants received compensation from DHB that was not authorized (i.e., stolen) and was not disclosed to the public; and (4) the "TAP Scheme," whereby the Defendants caused DHB to not fully disclose all material information concerning its dealings with Tactical Armor Products, a company that Mr. Brooks' wife owned and that he allegedly controlled.
II. The Rule 29(a) Motions
At the close of the Government's case, both Defendants filed FED. R. CRIM. P. 29(a) motions. In early July, the Court largely denied those motions, although it found that the Government could not proceed to verdict on certain theories.*fn2 (See Docket Nos. 1155, 1162). However, and crucially relevant here, the Court found that Defendants raised serious arguments concerning whether the Government had sufficiently proven all of the Superseding Indictment's allegations concerning the R&D and Interceptor Vest Inventory Schemes, particularly for insider trading purposes. The Court discusses what happened to each of those schemes below:
The Superseding Indictment described the R&D Scheme in Paragraphs 19-22. In her motion to dismiss, Ms. Hatfield requested, as an alternative remedy to acquittal, that the Court strike the narrative portions of the Superseding Indictment that the Government failed to prove at trial. Paragraphs 19-21 alleged, essentially, that Ms. Hatfield manipulated DHB's financial results to generate the "27 percent to 28 percent" gross profit margin that professional stock market analysts expected. The paragraphs alleged that she did so by fraudulently reclassifying costs of goods sold as research and development expenses, in whatever amount DHB needed to hit its gross profit margin targets. Construing the evidence in the light most favorable to the Government, the Court found enough in the record to justify keeping Paragraphs 19-21 in the Superseding Indictment, because the Government did evidence a few incidents in which the Defendants conspired to increase R&D for the purpose of hitting a gross profit margin, or, during a particularly good quarter, conspired to not book R&D that the Company actually performed, because they did not want to "highlight" the Company's strong financial results.
The Court did not view Paragraph 22 as kindly. That paragraph alleged that DHB fraudulently reclassified $22 million as R&D between 2003 and 2005. The parties agreed that DHB had reclassified $22 million from cost of goods sold to R&D during that time frame. But they disagreed as to whether these reclassifications were fraudulent. In this regard, Defendants cited significant testimony from the Government's own witnesses establishing that: (1) DHB lacked internal controls sufficient to keep track of how much they actually spent on R&D; (2) in light of those non-existent internal controls, Ms. Hatfield instructed DHB's Chief Financial Officer, Dawn Schlegel, to reclassify a percentage of gross sales each month as R&D, with this percentage supposedly reflecting Ms. Hatfield's estimate of the R&D that DHB actually performed (later a consistent 3% each month); and (3) DHB did a significant amount of R&D, which it did not otherwise account for in its financial statements because of these weak internal controls. In light of this evidence, the Court concluded that, although the Government had sufficiently evidenced a few fraudulent "acts," they did not provide the Court with sufficient evidence of the "larger fraudulent scheme" alleged in the Superseding Indictment. 2010 WL 2710616, at *3; see also 2010 WL 2793806, at *3-4. Specifically, the Government had not shown that each of the monthly reclassifications were intrinsically fraudulent, "much less that [the reclassifications were] fraudulent in the amounts the Superseding Indictment specifies." 2010 WL 2710616, at *3. Rather than strike Paragraph 22 then, however, the Court ordered the Government to show cause why Paragraph 22 should not be struck. Specifically, the Court ordered the Government to bring to its attention evidence in the record that "support[ed] Ms. Hatfield's involvement in a larger fraudulent scheme (beyond sloppy recordkeeping)." Id.
The Government responded to this order to show cause, but failed to present any persuasive argument. Among other things, the Court found that the Government failed to present any evidence that reflected the total amounts DHB actually spent on R&D during this time period, or, evidence suggesting that Ms. Hatfield typically reclassified expenses as R&D for fraudulent purposes. See 2010 WL 2816326, at *1-3. And, in the absence of such evidence, the Court concluded that the Government had failed to prove a "larger fraudulent scheme, covering several other fiscal quarters" beyond those reflected in the few identified fraudulent incidents. Rather, the Court held, the evidence suggested that -- for most fiscal quarters -- the reclassifications reflected only a "crude," "negligent" attempt to account for R&D not tracked by DHB's "woefully inadequate internal controls," not a fraudulent attempt to manufacture R&D expenses that never occurred. Id. at *2 n. 2. The Court noted, in passing, that because DHB did not adequately disclose its nearly nonexistent internal controls, or use of estimates to track R&D expenses,*fn3 and the Defendants traded while knowing this material non-disclosed information, the Government's proof did establish a securities fraud -- just not the one pled in Paragraph 22. Id. The Government did not seek reconsideration of this Order.
By the time of the charge conference, it became clear that the parties had significantly different interpretations of the Court's Orders. At the charge conference, Mr. Brooks argued that the Court held that "there was no R&D scheme." (Tr. 19401). The Government, for its part, appeared to understand the Court's Orders as limited to Paragraph 22, and did not interpret them as impacting its ability to argue that Ms. Hatfield typically ordered reclassifications to meet specified financial targets. (See Tr. 20308-20346).*fn4 The Court did not entirely agree with either side. The Court noted that, although it found insufficient evidence of the larger scheme alleged in the Superseding Indictment (i.e., fraudulent reclassifications in nearly every quarter, with the amount calculated to bring gross profit margin to a desired level), the Government had adduced evidence of at least two fraudulent acts, and "two acts can make up a scheme." (Tr. 19404; see also 19426). But the Court instructed the jury that they could not consider reclassifications "based on a fixed percentage of sales to have been part of a fraudulent scheme," though they could ...