United States v. Goyal

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,  No. 08-10436
Plaintiff-Appellee,
v.  D.C. No.
3:04-cr-00201-SI
PRABHAT GOYAL,
OPINION
Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of California
Martin J. Jenkins and
Susan Illston, District Judges, Presiding

Argued and Submitted
January 12, 2010—San Francisco, California

Filed December 10, 2010

Before: Alex Kozinski, Chief Judge, J. Clifford Wallace and
Richard R. Clifton, Circuit Judges.

Opinion by Judge Clifton;
Concurrence by Chief Judge Kozinski

19741
 UNITED STATES v. GOYAL 19745

COUNSEL

Amber S. Rosen (argued), Brian Stretch, Elise Becker, Assis-
tant United States Attorneys, San Jose, California, for
plaintiff-appellee United States of America.

Seth P. Waxman (argued), Jonathan E. Nuechterlein, Carey
Bollinger, Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., and Mark C. Fleming, Wilmer Cutler Pick-
ering Hale and Dorr LLP, Boston, Massachusetts, for
defendant-appellant Prabhat Goyal.

OPINION

CLIFTON, Circuit Judge:

Prabhat Goyal, former chief financial officer of Network
Associates, Inc. (“NAI”), appeals from his convictions on fif-
teen counts of securities fraud and making materially false
statements to auditors. The government alleged that NAI,
under Goyal’s supervision, violated generally accepted
accounting principles (“GAAP”) by recognizing revenue from
certain software sales earlier than it should have. Goyal was
indicted for concealing the allegedly improper accounting
from NAI’s outside auditors and for filing reports with the
Securities and Exchange Commission that, because of NAI’s
accounting, allegedly misstated revenue in certain reporting
periods between 1998 and 2000. Goyal argues that no jury
could have found him guilty beyond a reasonable doubt, as
the jury below did, based on the evidence the prosecution
19746 UNITED STATES v. GOYAL
presented at trial. We agree, and we reverse his convictions on
all counts.

I. Background

From approximately 1997 to 2001, Goyal was chief finan-
cial officer of NAI. NAI, formerly known as McAfee, was
and remains a major vendor of antivirus and network security
software.

Before 1998, NAI used a “direct sales” business model,
meaning that it primarily sold its software directly to end
users. In 1998, the company added a “distribution channel”
model, selling products through distribution companies. These
distributors in turn sold NAI’s software to retail stores that
resold the software to end users.

The prosecution’s case against Goyal challenged the
accounting method that NAI used, under Goyal’s supervision
as CFO, to recognize revenue from sales to its largest domes-
tic distributor, Ingram Micro. In particular, the government
took issue with the accounting method NAI used to recognize
large sales that it made to Ingram at the end of financial quar-
ters between 1998 and 2000. Following a practice common in
the software industry, which the government did not contend
was illegal, NAI negotiated significant quarter-end deals with
Ingram, called “buy-in” transactions, to help meet its quar-
terly revenue projections.1 To close these sales, NAI granted
Ingram substantial discounts, rebates, and other favorable
sales terms. One enticement that NAI offered Ingram in the
last two quarters of 1998 and the first quarter of 1999, was a
guarantee that its wholly owned subsidiary, NetTools, would
1
Quarter-end buy-in transactions took place every quarter between 1998
and 2000, except for the second quarter of 1999, when Ingram and other
distributors already had too much inventory.
 UNITED STATES v. GOYAL 19747
repurchase unsold product from Ingram in specified amounts.
NetTools would then sell the repurchased product to customers.2

The government did not contend that any of the sales con-
cessions that NAI gave Ingram in the buy-in deals were
improper or that NAI claimed revenue that it never earned.
Rather, the government objected to the timing of NAI’s rec-
ognition of revenue from these deals. The government main-
tained that NAI violated GAAP by using “sell-in” accounting
to recognize revenue from these deals earlier than it should
have and thereby overstated its revenue. Under sell-in
accounting, a manufacturer like NAI recognizes revenue
when it ships products to its distributors (i.e., “sells in” to the
distribution channel). The manufacturer must estimate the
amount of future rebates, discounts or returns and then reduce
its stated revenue by this amount.

By contrast, a company using “sell-through” accounting
recognizes revenue when its distributors sell the product to a
reseller (i.e., “sells through” the distribution channel). Sell-
through accounting recognizes revenue later than sell-in
accounting does and nets out rebates, discounts, and returns.
Thus the manufacturer does not need to estimate their effect
on its revenue.

The jury convicted Goyal of one count of securities fraud
and seven counts of making false filings with the SEC (collec-
tively, “the securities counts”),3 and seven counts of making
materially false statements to NAI’s auditors at Pricewater-
houseCoopers (“PwC”) (the “lying-to-auditors counts”).4
2
NAI’s former Senior Manager of Finance and Operations explained
that this arrangement, in which NAI sold and then repurchased its own
product, arguably made business sense at the time. It allowed NAI to push
what were effectively direct sales (sales between NAI and end users) into
its fledgling distribution channel, which it was then trying to promote.
3
See 15 U.S.C. §§ 78j(b) & 78ff; 17 C.F.R. § 240.10b-5.
4
See 15 U.S.C. §§ 78m(b)(2) & 78ff; 17 C.F.R. § 240.13b2-2.
19748 UNITED STATES v. GOYAL
After Goyal’s conviction, the district court denied his
motions for judgment of acquittal and for a new trial. Goyal
appealed.

II. Discussion

We review de novo the district court’s denial of Goyal’s
Rule 29 motion for judgment of acquittal. See United States
v. Mosley, 465 F.3d 412, 415 (9th Cir. 2006). We must decide
“whether ‘after viewing the evidence in the light most favor-
able to the prosecution, any rational trier of fact could have
found the essential elements of the crime[s] beyond a reason-
able doubt.’ ” United States v. Nevils, 598 F.3d 1158, 1163-64
(9th Cir. 2010) (en banc) (quoting Jackson v. Virginia, 443
U.S. 307, 319 (1979)); see also McDaniel v. Brown, 558 U.S.
__, 130 S. Ct. 665, 673 (2010). We apply this standard to the
securities counts and the lying-to-auditors counts in turn.

A. Securities Counts

[1] All of the securities counts—one count of securities
fraud and seven counts of making false filings with the SEC
—required the government to prove that NAI materially mis-
stated the revenue it earned in certain quarters and years
through its choice of accounting method. NAI’s reports of
allegedly inflated revenue furnished the “untrue statement of
material fact” required for each of the false filing counts, as
well as the “misleading statement or omission of a material
fact made with scienter” needed to sustain a fraud conviction
under the general antifraud provision of § 10(b) of the Securi-
ties Exchange Act of 1934. United States v. Smith, 155 F.3d
1051, 1063 (9th Cir. 1998) (internal quotation marks and
numbering of elements omitted).

[2] The government’s contention that NAI materially over-
stated its revenue necessarily entailed two claims: (1) that
NAI recognized revenue at a different time than it should
have; and (2) that NAI’s accounting produced artificially
 UNITED STATES v. GOYAL 19749
higher revenue figures in certain periods that “would have
been viewed by the reasonable investor as having signifi-
cantly altered the ‘total mix’ of information made available.”
Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). The gov-
ernment relied on GAAP to make its case, on the first point,
that sell-through accounting was required in instances where
NAI used the sell-in method. But we need not decide whether
NAI actually violated GAAP, because the government clearly
failed to carry its burden on the second point, materiality. The
prosecution offered no evidence adequate to prove that any
GAAP violations materially affected the revenue that NAI
reported.

[3] The government relied at trial on the parties’ stipula-
tions that applying sell-through accounting to NAI’s entire
business would have resulted in “a revenue figure that is
materially less than the reported figure” for the periods
charged in the false filing counts.5 These stipulations are
fatally overbroad, however, because the government did not
contend that GAAP required NAI to use sell-through account-
ing for all sales. The government only offered evidence that
sell-through accounting was required for the Ingram buy-in
transactions, and the stipulations did not provide that applying
sell-through accounting to those transactions alone would
have made a material difference in any given period. Without
evidence of how much less revenue NAI would have recog-
nized on the Ingram deals if it had used sell-through account-
5
There were seven such stipulations, one for each relevant accounting
period. The first stipulation provided:
With respect to Count Three of the Indictment: In its Form 10-K
for the fiscal year ended December 13, 1998, Network Asso-
ciates, Inc. (“NAI”), reported net revenue in the amount of
$990,045,000. The application of sell-through accounting for that
same period would result in a revenue figure that is materially
less than the reported figure.
The other stipulations were identical, except that the net revenue figure
was revised to reflect the period covered by the stipulation.
19750 UNITED STATES v. GOYAL
ing, the jury had no basis to conclude that the misstatement
of reported revenue resulting from the Ingram transactions
was material. Even presuming, as we must, that the jury drew
all reasonable inferences in the prosecution’s favor, see
Nevils, 598 F.3d at 1164, there was no way it could have
properly inferred materiality from the evidence it had before
it.

Confronted with this problem, the government argued after
the verdict that the jury could have inferred materiality from
the mere fact that the buy-in deals with Ingram were substan-
tial. The dollar amounts in the purchase orders for these trans-
actions, according to the government’s calculations,
“represented approximately 24% of the total revenue for NAI
during 1998, 1999, and 2000” and “between approximately
7% to 40% of NAI’s total revenue” on a quarterly basis. But
this argument failed to bridge the materiality gap because
Goyal’s jury had to make the materiality findings that his con-
victions required, and it never saw these figures. See United
States v. Rigas, 490 F.3d 208, 231 n.29 (2d Cir. 2007) (declin-
ing, in a sufficiency-of-the-evidence challenge, to “consider
in the first instance arguments regarding materiality that were
not presented to the jury”).

[4] The jury could not have inferred materiality from this
evidence even if it had seen it, because it was not the absolute
magnitude of the buy-in deals that mattered. The jury needed
to assess whether NAI’s use of sell-in accounting for the
Ingram transactions materially increased NAI’s overall reve-
nue when compared to using sell-through accounting. But the
jury had no evidentiary basis for making the required compar-
isons. There was simply no evidence that the effect of using
sell-in rather than sell-through accounting for the Ingram
transactions was so substantial that it made a material differ-
ence. By the government’s own calculations, non-Ingram
sales always accounted for most of NAI’s revenue. It would
have been “mere speculation, rather than reasonable infer-
ence,” Nevils, 598 F.3d at 1167, for the jury to conclude that
 UNITED STATES v. GOYAL 19751
applying sell-through accounting to the revenue from the
Ingram sales by themselves would have made a material dif-
ference in the company’s total revenue figures. Because
Goyal’s jury had no competent evidence of materiality before
it, it could not have properly convicted him on any of the
securities counts.

B. Lying-to-Auditors Counts

[5] The lying-to-auditors counts depended on two indepen-
dent statements that Goyal made in management representa-
tion letters to PwC: (1) that NAI’s financial statements
complied with GAAP and (2) that NAI had disclosed all
“sales terms.” The government charged Goyal with willfully
and knowingly making false statements to PwC. Willfulness
requires that Goyal’s actions were “voluntarily and knowingly
wrongful.” United States v. Tarallo, 380 F.3d 1174, 1189 (9th
Cir. 2004). Knowledge requires that Goyal “was aware of the
falsification and did not falsify through ignorance, mistake, or
accident.” United States v. Reyes, 577 F.3d 1069, 1080 (9th
Cir. 2009) (internal quotation marks omitted). The govern-
ment therefore had to prove that Goyal voluntarily made
statements to PwC that he knew were false.6
6
The SEC promulgated Rule 13b2-2, the basis for the lying-to-auditors
charges, to implement 15 U.S.C. § 78m(b)(2). Promotion of the Reliability
of Financial Information, 44 Fed. Reg. 10,964, 10,969 (Feb. 23, 1979).
Only those who “knowingly circumvent or knowingly fail to implement
a system of internal accounting controls or knowingly falsify any book,
record, or account described in [§ 78m(b)(2)]” are subject to criminal
prosecution under that provision. 15 U.S.C. § 78m(b)(4), (5). Criminal lia-
bility under Rule 13b2-2 therefore also requires that a false statement to
an auditor be made knowingly. Rule 13b2-2 could not impose a lesser
mens rea requirement, because the SEC cannot promulgate a rule whose
scope exceeds that of the statute it implements, and a lesser mens rea
requirement would criminalize a broader swath of conduct. See Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 213-14 (1976) (holding that Rule 10b-
5 cannot impose liability for negligent conduct, because the statute under
which it was promulgated requires scienter).
19752 UNITED STATES v. GOYAL
When the events in this case occurred, NAI’s accounting
for sales to distributors was governed by two GAAP guide-
lines: Financial Accounting Standards Board Statement No.
48 (“FAS 48”) and Statement of Position 97-2 (“SOP 97-2”).
FAS 48 allowed the use of sell-in accounting only when:

1. The seller’s price to the buyer is substantially
fixed or determinable at the date of sale;

2. The seller does not have significant obligations
for future performance to directly bring about
resale of the product by the buyer; and

3. The amount of future returns can be reasonably
estimated.7

FAS 48, ¶ 6 (Fin. Accounting Standards Bd., June 1981). The
only SOP 97-2 provision at issue in this case required that a
“[v]endor’s fee” be “fixed or determinable” when revenue
was recognized. The parties agreed that this condition was
functionally equivalent to the “substantially fixed or deter-
minable” prong of FAS 48.

1. Compliance with GAAP

The first basis for the lying-to-auditors counts requires us
to decide whether the jury could have concluded that NAI’s
method of recognizing revenue violated GAAP. The govern-
ment had to prove that Goyal’s representations to PwC that
NAI complied with GAAP were materially false or mislead-
ing, and that he knew that.

It aids the analysis to group NAI’s alleged GAAP viola-
tions into two categories. The first category encompasses alle-
gations that sell-in accounting was improper under GAAP
7
FAS 48 imposed several more conditions on the timing of revenue rec-
ognition, but only these three are disputed in this case.
 UNITED STATES v. GOYAL 19753
because terms of the Ingram deals allegedly involved prices
that were not “substantially fixed or determinable,” or
allowed “future returns” that could not “be reasonably esti-
mated” at the time of sale. FAS 48, ¶ 6(a), (f). The second cat-
egory involves NetTools, the subsidiary NAI used in 1998
and 1999 to repurchase product from Ingram. The govern-
ment alleged that NAI’s use of NetTools precluded sell-in
revenue recognition because the arrangement amounted to
NAI’s “significant obligation[ ] for future performance to
directly bring about resale of the product.” FAS 48, ¶ 6(e).

a. Uncertain prices and returns

[6] The government argues that terms in the Ingram deals
allowing for future adjustments to prices, such as sell-through
rebates, meant that prices were not “substantially fixed or
determinable” when NAI made the sales.8 It is undisputed,
however, that future contingencies do not render sell-in reve-
nue recognition improper if the seller can reasonably estimate
the effect of the contingencies and set aside reserves adequate
to cover them. The prosecution, therefore, could only prove
this species of GAAP violation beyond a reasonable doubt by
showing that NAI’s reserves did not reasonably account for
the terms of the quarter-end sales. The prosecution failed to
make its case on this point.

[7] The government offered no evidence that NAI’s
reserves were, in fact, inadequate. Instead, it relied on equivo-
cal and conclusory statements from witnesses—principally
Hans Winters and Robert Stavers, two of NAI’s auditors at
PwC—to the effect that sales terms like rebates would “raise
questions about the accounting the company was using.” Even
where the witnesses testified that certain terms would pre-
8
For example, one deal granted Ingram a “[g]uaranteed 3% [profit] mar-
gin” on resales of software licenses. Another, executed at the end of the
first quarter of 1999, promised a “3% rebate on retail/academic box” sales
in the second quarter of that year.
19754 UNITED STATES v. GOYAL
clude sell-in accounting, the government admits that adequate
reserves would resolve these GAAP problems, and the wit-
nesses had no basis to opine on whether NAI’s reserves actu-
ally were inadequate.

[8] As the district court observed, no witness had “done the
work, [or] perform[ed] the computations that would establish
a basis to render an opinion” about how FAS 48 applied to
NAI’s financial statements, including the reserves it set aside.9
With no evidence of what NAI’s reserves were, or how they
fell short of amounts that the Ingram sales required, no rea-
sonable juror could have found a GAAP violation that
depended on insufficient reserves.

A similar problem arose with respect to sales terms that
allowed Ingram to return software to NAI. GAAP only allows
sell-in accounting to be used when “[t]he amount of future
returns can be reasonably estimated.” FAS 48, ¶ 6(f). The
government argued that certain terms in the buy-in transac-
tions gave Ingram an unlimited right to return software it pur-
chased, and that an unlimited right of return automatically
defeated sell-in accounting.

[9] Stavers testified, in response to a hypothetical question,
that “if the distributor had an unlimited right of return, then
. . . we do not believe it would have been possible to estimate
the return.” But he did not base this statement on an analysis
of NAI’s actual return estimations. FAS 48 lays out four “fac-
tors [that] may impair the ability to make a reasonable esti-
mate” of future returns. FAS 48, ¶ 8. No witness applied these
factors to NAI’s buy-in deals or concluded that NAI could not
9
The district court prevented Winters and Stavers (and all of the prose-
cution’s witnesses) from offering conclusions about the application and
requirements of GAAP independent of their previous experience with NAI
because they were not put forward as expert witnesses. We decline to
decide whether accounting evidence of the sort the prosecution needed to
make its case requires expert testimony, because such evidence was not
offered, properly or improperly, in this case.
 UNITED STATES v. GOYAL 19755
accurately estimate returns. The prosecution needed to prove
what NAI did, not what the buy-in terms made hypothetically
possible. Without evidence that Ingram’s returns were not
amenable to reasonable estimation, no reasonable juror could
have found that using sell-in accounting for these sales vio-
lated GAAP.

b. NetTools

[10] The NetTools arrangement violated GAAP if NAI’s
“commitments” to repurchase prespecified quantities of its
software from Ingram amounted to “significant obligations
for future performance to directly bring about resale of the
product.” FAS 48, ¶ 6(e). Goyal contends that the NetTools
“commitments” were not “significant obligations” because
they were not technically binding agreements, but merely
“forecast[s]” of how much software NetTools would buy back
from Ingram.

One of Ingram’s associate buyers testified that although
“there [were] no guarantees, . . . the forecast came in spot-on
every time for Net Tools . . . . If they said Net Tools was
going to do 25 million through the end of the quarter, on the
last day of the quarter we were receiving Net Tools’ [purchase
orders] up until 2:00 in the morning to make sure that we hit
25 million.” Ingram relied on the NetTools forecasts to pre-
dict its own inventory. And NAI used its NetTools forecasts,
in quarter-end negotiations with Ingram, to assure it that cer-
tain quantities of software would sell in subsequent quarters.
Even if these commitments were not formally enforceable, the
evidence makes clear that both parties treated them as reliable
and expected them to be honored. A reasonable juror could
have concluded that the NetTools commitments fell within the
meaning of “significant obligations,” and thus that using sell-
in accounting violated GAAP.

Even so, the prosecution had to prove that Goyal willfully
and knowingly misled PwC when he asserted that NAI com-
19756 UNITED STATES v. GOYAL
plied with GAAP. We are mindful that the mere fact that “evi-
dence submitted by the government is wholly susceptible to
innocent explanations,” such as Goyal’s alternative under-
standing of “commitments,” is not enough to reverse a con-
viction on appeal. United States v. Wiseman, 25 F.3d 862,
866-67 (9th Cir. 1994) (quoted and overruled by Nevils, 598
F.3d at 1166-67). As long as the jury could have accepted a
culpable explanation consistent with the proof of defendant’s
conduct, we must assume, in the prosecution’s favor, that the
jury did so. Nevils, 598 F.3d at 1166-67; see United States v.
Dinkane, 17 F.3d 1192, 1196 (9th Cir. 1994) (“The relevant
inquiry is not whether the evidence excludes every hypothesis
except guilt, but whether the jury could reasonably arrive at
its verdict.”). The government nonetheless must offer some
evidence to support a culpable explanation. “[W]here there is
a total failure of proof” of the required mental state, we can-
not affirm a conviction. Nevils, 598 F.3d at 1167 (quoting Bri-
ceno v. Scribner, 555 F.3d 1069, 1079 (9th Cir. 2009))
(internal quotation marks omitted). The government’s failure
to offer any evidence supporting even an inference of willful
and knowing deception undermines its case.

The government offers several ways that the jury could
have inferred fraudulent intent from Goyal’s conduct, but
none can support the inferences the government would draw.
Goyal’s desire to meet NAI’s revenue targets, and his knowl-
edge of and participation in deals to help make that happen,
is simply evidence of Goyal’s doing his job diligently. See,
e.g., Anderson v. First Sec. Corp., 249 F. Supp. 2d 1256, 1270
(D. Utah 2002) (effort “to meet analysts’ numbers and not
disappoint Wall Street is merely an example of a company’s
shared motives to look good” that does not imply “that the
company was engaged in fraudulent conduct”). Similarly,
Goyal’s presumed knowledge of GAAP as a qualified CFO
does not make him criminally responsible for his every con-
ceivable mistake. If simply understanding accounting rules or
optimizing a company’s performance were enough to estab-
lish scienter, then any action by a company’s chief financial
 UNITED STATES v. GOYAL 19757
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. Cf. Merck & Co., Inc. v.
Reynolds, 559 U.S. __, 130 S. Ct. 1784, 1796-97 (2010)
(holding that “facts that tend to show a materially false or
misleading statement” do not always suffice “to show scienter
as well”). That Goyal’s compensation was linked to NAI’s
success—half of his bonus was based on achieving corporate
goals—does not change matters. Such a general financial
incentive merely reinforces Goyal’s preexisting duty to maxi-
mize NAI’s performance, and his seeking to meet expecta-
tions cannot be inherently probative of fraud. See Aldridge v.
A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002) (financial
incentive linked to company’s performance “cannot be
enough to establish scienter” if it does not “go far beyond the
usual arrangements of compensation based on the company’s
earnings”).

The government also argues that Goyal must have known
about various revenue recognition problems because others at
the company claimed that they were aware of accounting
improprieties. Eric Borrmann, NAI’s vice president (and later
treasurer), testified that he believed there were “balance-sheet
issues that relate to the lack of reserves. Or perhaps not suffi-
cient reserves. There is also . . . lack of disclosure around
issues relating to the [distribution] channel.” Evan Collins,
NAI’s former corporate controller, offered his opinion that
“some of the terms . . . in certain [buy-in] agreements . . .
would ruin [sell-in] revenue recognition.”

Neither of these witnesses found fault with the NetTools
commitments, however, so neither shed any light on what
Goyal knew or did not know about that arrangement. Borr-
mann’s testimony concerned NAI’s accounting for uncertain
terms in the buy-in deals such as rebates and discounts; these
are unrelated to NetTools. Collins’s statement was about per-
ceived problems with written buy-in letters; NAI made its
NetTools commitments orally. Because neither Borrmann’s
19758 UNITED STATES v. GOYAL
nor Collins’ testimony said anything about NetTools, that tes-
timony did not prove anything about Goyal’s knowledge on
that subject.

The government also suggests that a jury could infer intent
from Goyal’s statement that “he couldn’t know about” a
memo NAI’s vice president of sales distribution had sent him
questioning NAI’s accounting for the terms of several buy-in
deals and enclosing letters documenting those terms. The gov-
ernment appears to argue that Goyal did not want to know
about the letters because that would have made his statements
about GAAP compliance knowingly misleading. But this inci-
dent does not prove anything of the sort because the memo
and letters were not related to whether NAI’s use of sell-in
accounting complied with GAAP and did not raise any red
flags about it. The NAI vice president of sales did not claim
that the terms in the letters violated GAAP; indeed, he admit-
ted that he had no idea what the payments documented in the
letters were for. The government therefore produced no evi-
dence that Goyal’s knowledge of the letters’ contents would
have made his statements to the auditors knowingly mislead-
ing. Cf. SEC v. Retail Pro, Inc., 673 F. Supp. 2d 1108, 1142-
43 (S.D. Cal. 2009) (CFO violated Rule 13b2-2 by signing
management representation letters stating he had no “knowl-
edge of allegations of fraud or suspected fraud” after compa-
ny’s contract administrator sent him an email credibly
alleging that there was a potential fraud); SEC v. Espuelas,
579 F. Supp. 2d 461, 487 (S.D.N.Y. 2008) (finding no viola-
tion of Rule 13b2-2 where there were no “red flags” indicat-
ing that statements to auditors were misleading).

[11] In sum, of the various GAAP violations alleged, only
the problem with NetTools was supported by the govern-
ment’s proof. But no evidence supported a finding that Goyal
knew that NetTools’s commitments violated GAAP. The
lying-to-auditors counts, therefore, cannot be sustained on the
ground that Goyal’s assertion of GAAP compliance to PwC
was willfully and knowingly false.
 UNITED STATES v. GOYAL 19759
2. Disclosure of sales terms

[12] Goyal also affirmed in seven signed management rep-
resentation letters to PwC that NAI had “fully disclosed to
[PwC] all sales terms, including all rights of return or price
adjustments, and all warranty provisions.” The government
argued that this statement was willfully and knowingly false,
independent of any GAAP violation, because NAI, at Goyal’s
direction, did not turn over the buy-in letters memorializing
the quarter-end Ingram transactions.

Goyal contends that his affirmations of disclosure were not
false, because PwC had access to all “sales terms” through
Ingram’s debit memos. Whenever Ingram claimed a conces-
sion from a buy-in deal, it sent NAI a debit memo requesting
that the promised discount or rebate be honored. Ingram typi-
cally cited the deal term it sought to apply, and sometimes
attached its copy of the relevant buy-in letter for reference.

The government maintains that NAI could only satisfy its
duty to disclose “sales terms” by disclosing the buy-in letters
themselves. Equivalent information, trickling in piecemeal in
the form of debit memos from Ingram, did not, according to
the government, measure up to what Goyal claimed to have
disclosed.

[13] Whether this is correct is a close question. NAI recog-
nized revenue based on Ingram’s purchase orders, invoices,
and debit memos, not the buy-in letters that spelled out what
sales terms would be. Goyal reasonably could have thought,
in good faith, that conveying the sales terms in one of the
forms NAI used to recognize revenue was sufficient. Our
review of a motion to acquit limits us, however, to what a rea-
sonable juror could have found, and there was enough evi-
dence for a juror to conclude that nondisclosure of the buy-in
letters mattered. Stavers testified that “[i]t would have been
important for [PwC] to have seen these letters in order to
determine the proper accounting for the sales transactions.”
19760 UNITED STATES v. GOYAL
He further explained that a debit memo did not adequately
provide him with “the terms of the deal” because the debit
memos came in “after the fact”: “It doesn’t help us on June
30th to look at a document issued in August, in order for us
to determine the accounting at the end of June.” A reasonable
juror could have concluded that buy-in letters were necessary
for a “full[ ]” disclosure of “all sales terms,” and that Goyal’s
representations to PwC on that subject were materially false.

[14] But even if sales terms were not disclosed to PwC, the
government’s case suffered from a “total failure of proof,”
Nevils, 598 F.3d at 1167, that Goyal willfully and knowingly
misled PwC. Several of the government’s arguments for infer-
ring mens rea in connection with GAAP violations, see part
II.B.1.b supra, apply equally to Goyal’s knowledge of with-
holding of buy-in letters. The inferences the government
would have a juror draw—from Goyal’s accounting knowl-
edge and participation in buy-in transactions, from his incen-
tives to use the deals to meet NAI’s projected revenue, and by
attributing Borrmann and Collins’ claimed knowledge to
Goyal—are no more valid in this context. We reject them for
the reasons already articulated and turn now to arguments
specific to the buy-in letters.

The government points to Collins’ testimony that he, as
corporate controller, withheld buy-in letters from PwC
because that is what he believed Goyal wanted. Collins left
NAI before the time periods covered by the lying-to-auditors
counts. His opinion, therefore, is only pertinent to the extent
it supports an inference that Goyal’s intentions in the relevant
period were the same as Collins assumed they were during his
tenure. More fundamentally, though, Collins offered no basis
for his belief about Goyal’s intentions. He admitted that
Goyal had never told him to withhold buy-in letters from
PwC, and the government introduced no other evidence that
Goyal wanted them withheld. To the contrary, Collins told
Goyal that he would “[e]nsure [SOP 97-2] compliance for the
year end audit,” and “[m]eet all filing requirements.” Baseless
 UNITED STATES v. GOYAL 19761
speculation by a cooperating witness is not proof of fraudu-
lent intent, especially when it contradicted evidence that
Goyal had reason to expect compliance with auditing require-
ments.

[15] Finally, the district court relied on the notion that
Goyal could be convicted of lying to PwC because he “had an
affirmative responsibility—as set forth in the management
representation letters—to disclose” the buy-in letters. But
even if he did, his failure to do so does not indicate scienter.
The district court’s theory is therefore untenable because it
makes a strict-liability crime out of one that requires willful
and knowing deception. Cf. United States v. Smith, 155 F.3d
1051, 1068 n.25 (9th Cir. 1998) (declining to adopt a con-
struction of 15 U.S.C. § 78ff(a) that “de facto eliminates the
mens rea requirement”). Absent any proof that Goyal will-
fully concealed buy-in letters from PwC, his convictions on
this basis must be reversed.

III. Conclusion

[16] Even viewing the evidence in the light most favorable
to the prosecution, no reasonable juror could have found
Goyal guilty beyond a reasonable doubt of any of the charges
against him. The judgment of the district court is
REVERSED, and the case is REMANDED for entry of judg-
ment of acquittal on all counts.

Chief Judge KOZINSKI, concurring:

This case has consumed an inordinate amount of taxpayer
resources, and has no doubt devastated the defendant’s per-
sonal and professional life. The defendant’s former employer
also paid a price, footing a multimillion dollar bill for the
defense. And, in the end, the government couldn’t prove that
the defendant engaged in any criminal conduct. This is just
19762 UNITED STATES v. GOYAL
one of a string of recent cases in which courts have found that
federal prosecutors overreached by trying to stretch criminal
law beyond its proper bounds. See Arthur Andersen LLP v.
United States, 544 U.S. 696, 705-08 (2005); United States v.
Reyes, 577 F.3d 1069, 1078 (9th Cir. 2009); United States v.
Brown, 459 F.3d 509, 523-25 (5th Cir. 2006); cf. United
States v. Moore, 612 F.3d 698, 703 (D.C. Cir. 2010) (Kava-
naugh, J., concurring) (breadth of 18 U.S.C. § 1001 creates
risk of prosecutorial abuse).

This is not the way criminal law is supposed to work. Civil
law often covers conduct that falls in a gray area of arguable
legality. But criminal law should clearly separate conduct that
is criminal from conduct that is legal. This is not only because
of the dire consequences of a conviction—including disen-
franchisement, incarceration and even deportation—but also
because criminal law represents the community’s sense of the
type of behavior that merits the moral condemnation of soci-
ety. See United States v. Bass, 404 U.S. 336, 348 (1971)
(“[C]riminal punishment usually represents the moral con-
demnation of the community . . . .”); see also Wade v. United
States, 426 F.2d 64, 69 (9th Cir. 1970) (“[T]he declaration
that a person is criminally responsible for his actions is a
moral judgment of the community . . . .”). When 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 judg-
ment is warranted.

Mr. Goyal had the benefit of exceptionally fine advocacy
on appeal, so he is spared the punishment for a crime he
didn’t commit. But not everyone is so lucky. The government
shouldn’t have brought charges unless it had clear evidence of
wrongdoing, and the trial judge should have dismissed the
case when the prosecution rested and it was clear the evidence
could not support a conviction. Although we now vindicate
Mr. Goyal, much damage has been done. One can only hope
that he and his family will recover from the ordeal. And, per-
haps, that the government will be more cautious in the future.