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Ninth Circuit Reverses Conviction of Former McAfee CFO

By Katerina Milenkovski, Litigation News Associate Editor – March 30, 2011

The U.S. Court of Appeals for the Ninth Circuit has reversed the conviction of Prabhat Goyal [PDF], the former Chief Financial Officer of McAfee, acquitting him on 15 counts of securities fraud and making materially false statements to auditors. The government had alleged that, under Goyal’s supervision, the company violated generally accepted accounting principles by recognizing revenue from certain software sales sooner than it should have. According to the government, Goyal’s actions and statements hid losses and inflated revenues. This conduct allegedly inflated stock values and allowed Goyal to personally profit.


The Ninth Circuit, however, held that the prosecution failed to adequately prove its allegations and, instead, based its case on improper inferences and speculation about Goyal’s intent. The court pointedly noted, “[i]f simply understanding accounting rules or optimizing a company’s performance were enough to establish scienter, then any action by a company’s chief financial officer that a juror could conclude in hindsight was false or misleading could subject him to fraud liability without regard to intent to deceive. That cannot be.”


Chief Judge Blasts Prosecution
Chief Judge Alex Kozinski, in a scathing concurrence, noted that although the case had consumed “an inordinate amount of taxpayer resources” and had personally and professionally damaged the defendant and his employer, “in the end, the government couldn’t prove that the defendant had engaged in any criminal conduct.” He noted, “[t]his is not the way criminal law is supposed to work.”


“[C]riminal law should clearly separate conduct that is criminal from conduct that is legal,” Kozinski continued. “This is not only because of the dire consequences of a conviction . . . but also because criminal law represents the community’s sense of the type of behavior that merits the moral condemnation of society.” “Where prosecutors have to stretch the law or the evidence to secure a conviction, as they did here, it can hardly be said that such moral judgment is warranted,” he concluded.


Criminal Liability Versus Civil
“I am somewhat gratified that the court is recognizing, at least where these accounting provisions are involved, that it is really hard to make a criminal case,” says D. Grayson Yeargin, Washington, DC, cochair of the ABA Section of Litigation’s Criminal Litigation Committee. “I think the court’s comment asking why the government wasn’t using civil law to right some of these alleged wrongs was spot on.” According to Yeargin, “this was, quite simply, a failure of evidence. This case shouldn’t have reached appeal. It should have been decided in the middle of the trial, when the prosecution rested its case.”


“This case presents some typical examples of government overreaching and its tendency to rely on circumstantial evidence that is a step away from where it needs to be to properly demonstrate intent,” observes Stacey F. Gottlieb, Phoenix, AZ, cochair of the Section of Litigation’s Criminal Litigation Committee. “I found it unusual, although very appropriate, that the court of appeals looked at and analyzed this case in such great detail. I wish they would give this attention to detail to the amount of proof necessary in other cases. In most criminal cases where issues of proof are involved, the court usually comes out the other way. The government is used to getting more leeway than perhaps it should.”


Need to Establish Scienter
“A line has to be drawn as to whether there was any evidence of intentional misleading behavior by the defendant,” says Yeargin. “They found some mistakes, but what was missing was any evidence that this was an intentional act. It is hard to turn a gray area into a criminal case.”


“In complex cases—like securities fraud cases—you are going to have to spend money to do it right,” says Gottlieb. “If anything, I question whether the government went as far as it should have. For example, with respect to certain allegations of misconduct, we don’t know if any evidence existed, or if the government looked at it but chose not to present it —in which case, they probably shouldn’t have brought the case. Did they not have enough resources to dig deeper, or were they concerned they wouldn’t like the answer?”


Keywords: litigation, Ninth Circuit, court of appeals, conviction reversal, criminal litigation


 
Related Resources

  • » United States v. Goyal, 629 F.3d 912 (9th Cir. 2010).


 

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