Wide-ranging scheme to loot the company?

United States 10th Circuit Court of Appeals Reports

U.S. v. LAKE, 06-3140 (10th Cir. 1-5-2007) UNITED STATES OF
AMERICA, Plaintiff-Appellee, v. DOUGLAS T. LAKE,
Defendant-Appellant, UNITED STATES OF AMERICA,
Plaintiff-Appellee, v. DAVID C. WITTIG,
Defendant-Appellant. No. 06-3140, No. 06-3141. United
States Court of Appeals, Tenth Circuit. January 5, 2007.

Appeal from the United States District Court for the
District of Kansas (D.C. No. 03-CR-40142-JAR).

Seth P. Waxman, Wilmer, Cutler, Pickering, Hale & Dorr,
LLP, Washington, DC, for Defendant-Appellant
Douglas T. Lake, Steven Alan Reiss, Weil, Gotshal & Manges
LLP, New York, New York, for Defendant-Appellant
David C. Wittig, (Edward C. DuMont, Theodore D. Chuang,
Demian S. Ahn, Michael P. Spence, Daniel S. Volchok,
Wilmer, Cutler, Pickering, Hale & Dorr, Washington, DC, on
the brief for Defendant-Appellant Douglas T. Lake,
and Gregory S. Coleman, Lisa R. Eskow, and Edward C.
Dawson, Weil, Gotshal & Manges LLP, Austin, Texas, on the
brief for Defendant-Appellant David C. Wittig).

Richard L. Hathaway, Assistant United States Attorney (Eric
F. Melgren, United States Attorney, Christine E. Kenney,
Assistant United States Attorney, with him on the brief),
Topeka, Kansas, for Plaintiff-Appellee.

Before HARTZ, Circuit Judge, McWILLIAMS, Senior Circuit
Judge, and McCONNELL, Circuit Judge.

HARTZ, Circuit Judge.

The defendants, David C. Wittig and Douglas T. Lake, came
to Kansas from Wall Street investment banks to run the
state’s largest public utility, now known as Westar Energy,
Inc. The government convinced the jury in this case that
the two men had conducted a far-reaching scheme to milk the
company for all they could through a pattern of fraud and
deceit. But the prosecution hung by a thin legal thread.
Despite the scope of the alleged fraudulent scheme, all the
counts of the indictment depended on proving the efforts of
the defendants to conceal from the United States Securities
and Exchange Commission (SEC) their personal use of
corporate aircraft. The attempt to prove concealment was
flawed, however, because the government produced no
evidence that the defendants failed to comply with SEC
regulations governing the reporting of such personal use
and the jury was never instructed regarding the SEC’s
reporting requirements. As a result, we must set aside the
convictions on every count, most of which cannot be
retried.

The indictment charged 7 counts of wire fraud, 17 counts of
money laundering, 14 counts of circumvention of internal
financial controls, and 1 count of conspiracy to engage in
these substantive offenses. A fortieth count sought
forfeiture of the fruits of the alleged offenses. The
offense of wire fraud requires a scheme to defraud and the
use of an interstate wire communication to further the
scheme. Each wire-fraud count alleged the wire transmission
to the SEC of a different required report. Transmission of
a required report can serve as the predicate for a
wire-fraud offense only if the report is itself false or
fraudulent. The government alleged that the reports were
deceptive because they failed to disclose the great value
to the defendants (about $1 million each) of their personal
use of corporate aircraft. But SEC regulations require
reporting only the additional cost to the corporation
incurred as a result of the corporate officer’s personal
travel, and then only if the total additional cost exceeds
a certain threshold per year for the officer. The
government offered no evidence that the additional cost to
Westar of either defendant’s personal travel ever exceeded
this threshold; indeed, it offered no evidence of the
additional cost to Westar for any of the personal trips.
Therefore, the jury could not possibly determine that the
reports, which disclosed no personal travel by the
defendants, were false. Consequently, we must reverse the
wire-fraud convictions because of insufficient evidence.
Further prosecution of these charges is barred by the
Double Jeopardy Clause.

As the government properly conceded at oral argument, if
the wire-fraud charges fall, then so must the
money-laundering convictions. The money-laundering charges
alleged that the defendants had used the fruits of their
wire-fraud scheme to acquire various assets. If there was
no wire fraud, there was no money laundering. These
charges, too, cannot be retried.

As for the circumvention charges, they were based on the
failure of the defendants to disclose their personal travel
on corporate aircraft in various internal forms used to
prepare reports for the SEC. The core issue with respect to
these failures to disclose is the defendants’ intent. They
argued at trial that other Westar officers almost always
failed to report such travel and that one could infer that
they thought such disclosure was unnecessary. To counter
this inference, the government offered evidence of the
great value to the defendants of this travel (again, about
$1 million each), making it unlikely that they would think
it inconsequential. The defendants sought from the district
court an instruction to the jury explaining that the proper
consideration was not the value of the travel to the
defendants but the (much lower) additional cost of the
travel to Westar. The court refused to give the
instruction. Because this instruction could easily have
influenced the jury in deciding whether the defendants’
failure to disclose was with the requisite intent, we must
also reverse the circumvention convictions, although
without prejudice to a retrial.

Finally, given the dependence of the conspiracy charges on
the evidence and instructions regarding the substantive
charges, we must also reverse the conspiracy convictions
and remand for retrial. The forfeitures likewise cannot
stand. In light of our reversal of all the convictions on
the above grounds, we need not address a number of other
issues raised by the defendants regarding the conduct of the
trial and their sentences.

I. BACKGROUND

We summarize the evidence at trial in the light most
favorable to the jury’s verdict. See United States v.
Espinoza, 338 F.3d 1140, 1146-47 (10th Cir. 2003). In 1995
John Hayes, the Chief Executive Officer (CEO) of Westar
(then known as Western Resources, Inc.), recruited Mr.
Wittig (a New York investment banker who had performed
services for Westar) to join Westar as Executive Vice
President of Corporate Strategy to develop and implement a
diversification plan for the utility. Mr. Wittig’s original
compensation included a salary of $425,000, a relocation
benefit, stock, various short-and long-term incentives, and
other benefits. By early 1999 Mr. Hayes had left Westar,
the Board of Directors had appointed Mr. Wittig as
President, CEO, and Chairman of the Board, and Mr. Lake,
also a New York investment banker, had joined Westar as
Executive Vice President and Chief Strategic Officer.

The diversification strategy initiated in 1995 involved the
acquisition of various unregulated businesses. In 1996-97
Westar attempted to acquire ADT, a national
home-and-business security company. Although the
acquisition ultimately failed, Westar made approximately
$856 million purchasing and then selling ADT stock. In 1997
Westar acquired a home-security company, Protection One,
and bought stock in Guardian International, a
security-alarm business. Westar’s stock price increased
dramatically and between 1995 and 1998 its assets grew from
$5.5 billion to $8 billion (although its long-term debt
increased from $1.6 billion to $3 billion).

As Mr. Wittig replaced Mr. Hayes at the helm, however, the
tide began to turn. In early 1999 accounting irregularities
and an SEC investigation caused Protection One’s share
price to plummet. Westar’s share price also fell sharply,
from a high of almost $44 in 1998 to about $17 by the end
of 1999.

Westar hired two investment banks to help restore
shareholder value. They recommended that the regulated
utility business be split from Westar’s unregulated
businesses and merge with another utility (the split-merge
transaction). Westar’s Board approved the proposal in 2000,
the unregulated businesses were split from the utility to
create Westar Industries, and the search for a merger
partner began. But the Kansas Corporation Commission (KCC)
in 2001 rejected the plan, scuttling a proposed merger. It
also ordered Westar to cut rates by $20 million (when
Westar had been seeking a $150 million rate increase).
Westar’s stock hit a low of near $9 per share in late 2002,
about the time of the departures of Mr. Wittig and Mr.
Lake.

Although at trial the defendants portrayed the
diversification efforts as attempts to uplift and then save
Westar, the government presented a far different view. It
contended that the efforts were the central feature of a
wide-ranging scheme by the defendants to loot Westar. The
most ambitious prospect of the scheme was to collect huge
sums ($37 to $65 million for Mr. Wittig and $18 to $35
million for Mr. Lake) from change-in-control provisions of
their employment contracts that would be triggered by
completion of the split-merge transaction.

A second component of the alleged scheme was profiting by
Mr. Wittig ($6.1 million) and Mr. Lake ($2.9 million) from
complex transactions in Guardian shares that caused a $4.2
million loss to Westar. Also parts of the alleged scheme
were acceleration of a $5.37 million signing bonus to Mr.
Wittig that was to have been paid over a 10-year period
beginning in 2010; improper payment of relocation expenses;
improper loans from Westar; acquisition of a split-dollar
life-insurance contract for Mr. Wittig at a far greater
cost to Westar than the bonus it was ostensibly to replace;
and personal use of Westar aircraft. To accomplish this
looting, the defendants misled the Board of Directors and
connived to remove two Board members who asked challenging
questions (the two resigned voluntarily).

The defendants’ personal use of Westar aircraft was of
central importance to the prosecution’s case. Mr. Wittig,
Mr. Lake, and their families apparently flew on the
aircraft on numerous personal trips. The flight logs,
however, always listed the purpose of the trip as
“business.” To identify personal trips, the government had
an accountant, John Meara, review the logs and select those
trips on which (1) only a defendant’s family members and
non-Westar employees were passengers, (2) the flight took
place over a weekend or holiday or the defendant’s calendar
noted a vacation, and (3) there was no business entry on
the defendant’s calendar within 24 hours of arrival.
Personal use of the aircraft violated a Westar ethics
policy that forbade personal use of corporate property in
the absence of a policy allowing such use, although the
defendants apparently were not alone in this violation.
Evidence indicated that a number of other Westar executives
(including Westar’s general counsel) and directors flew
family members on corporate aircraft between 1995 and 2002.

[…]

III. CONCLUSION

We REVERSE the defendants’ convictions for wire fraud and
money laundering, and these counts cannot be retried. We
also REVERSE their convictions for conspiracy and
circumvention, though without prejudice to retrial. The
forfeiture count is also REVERSED and REMANDED for retrial.

[fn1] The 2002 versions of the cited regulations were in
effect at all times pertinent to this case.

[fn2] The entire text of § 1341 is:

Whoever, having devised or intending to devise any scheme
or artifice to defraud, or for obtaining money or property
by means of false or fraudulent pretenses,
representations, or promises, or to sell, dispose of,
loan, exchange, alter, give away, distribute, supply, or
furnish or procure for unlawful use any counterfeit or
spurious coin, obligation, security, or other article, or
anything represented to be or intimated or held out to be
such counterfeit or spurious article, for the purpose of
executing such scheme or artifice or attempting to do so,
places in any post office or authorized depository for
mail matter, any matter or thing whatever to be sent or
delivered by the Postal Service, or deposits or causes to
be deposited any matter or thing whatever to be sent or
delivered by any private or commercial interstate carrier,
or takes or receives therefrom, any such matter or thing,
or knowingly causes to be delivered by mail or such
carrier according to the direction thereon, or at the
place at which it is directed to be delivered by the
person to whom it is addressed, any such matter or thing,
shall be fined under this title or imprisoned not more
than 20 years, or both. If the violation affects a
financial institution, such person shall be fined not more
than $1,000,000 or imprisoned not more than 30 years, or
both.