## Facts

- James E. Koenig, CFO of Waste Management, Inc., implemented accounting practices a jury found fraudulent during 1992–1996 to improve reported earnings.
- Koenig used “netting” by offsetting recurring operating expenses with a large nonrecurring gain (including a $160 million gain from stock transactions), inflating operating profit and suggesting sustainable earnings.
- Koenig used “basketing” and “bundling” to avoid required write-offs when landfill projects ended early by reallocating remaining depreciation to other assets.
- A jury found Koenig committed sixty securities-law violations.
- In an SEC civil enforcement action, the district court imposed a civil penalty of about $2.1 million, ordered disgorgement of bonuses for 1992, 1994, and 1995 totaling $831,500 plus over $1.2 million in prejudgment interest, and barred Koenig from serving as a director or top manager of a public company.
- Koenig appealed, not challenging the sufficiency of the evidence on liability, but challenging trial procedure (juror questions) and aspects of the remedies, including the 1992 bonus disgorgement calculation.

## Issues

1. Whether the district court abused its discretion by permitting jurors to submit questions for witnesses, screened and posed by the judge.
2. Whether the district court properly ordered disgorgement of Koenig’s bonuses (and interest) as proceeds causally connected to fraudulently inflated profits.
3. Whether the district court adequately explained the computation that treated Koenig’s “proper” 1992 bonus as zero for disgorgement purposes.
4. Whether the civil penalty and officer/director bar were within the court’s remedial authority and supported by the record.

## Decision

- The Seventh Circuit affirmed the liability judgment and most remedial orders.
- The court held that allowing jurors to submit questions, with the judge controlling which questions were asked and how, was not reversible error and fell within the trial court’s discretion.
- The court upheld the civil penalty, the officer/director bar, and disgorgement (with prejudgment interest) of the 1994 and 1995 bonuses.
- The court vacated and remanded in part for a limited purpose: the district court had not explained why Koenig’s “proper” 1992 bonus should be set at zero.

## Legal Principles

- Whether jurors may pose questions to witnesses is committed to the trial judge’s discretion; a controlled procedure in which the judge screens, reformulates, or rejects questions is permissible absent prejudice and abuse of discretion.
- In SEC enforcement actions, courts may order disgorgement of incentive compensation when it is tied to fraudulently misstated financial performance and thus constitutes ill-gotten gains.
- Civil penalties and officer/director bars may be imposed to address and deter serious securities fraud by senior corporate officers.
- Disgorgement need not be exact, but the court must provide a reasoned explanation connecting the evidence and methodology to the amount ordered; failure to explain a specific computation warrants remand.

## Conclusion

The Seventh Circuit upheld the verdict and nearly all remedies against a corporate CFO found liable for sustained accounting fraud, including juror-question trial management, substantial penalties, bonus disgorgement, and an officer/director bar, but remanded narrowly because the district court did not explain why the 1992 bonus should be treated as entirely improper for disgorgement purposes.


Sec. & Exch. Comm'n v. Koenig, 557 F.3d 736 (7th Cir. 2009)