## Facts

- Clark J. Matthews II served as an executive at The Southland Corporation, later becoming Executive Vice President, General Counsel, and Chief Financial Officer, and was nominated for Southland’s board.
- Southland faced a dispute with New York tax authorities over alleged sales taxes owed by franchised stores.
- Government witnesses described a plan to use a New York attorney and public official, Eugene Mastropieri, to help resolve the tax matter, allegedly involving a concealed payoff.
- A proposed method to disguise a payment used a purported airplane-lease bill; Matthews rejected this approach and insisted that if the payment was a legal fee, it should be paid and recorded as a legal fee.
- In 1981, Southland issued a proxy statement soliciting votes for directors, including Matthews; the proxy materials did not disclose any alleged bribery conspiracy or Matthews’s alleged participation.
- Matthews was elected to the board based on the proxy solicitation.

## Issues

1. Whether a criminal conviction under Exchange Act § 14(a) and Rule 14a-9 could be sustained where the alleged omitted fact was Matthews’s participation in a conspiracy of which the jury acquitted him.
2. Whether the nondisclosure of Matthews’s alleged involvement in the bribery scheme was a material omission for purposes of § 14(a) and Rule 14a-9.
3. Whether the evidence was sufficient to prove beyond a reasonable doubt that the proxy statement was materially false or misleading “by means of” the alleged omission.

## Decision

- The Second Circuit reversed Matthews’s conviction on the proxy-fraud count.
- The court remanded with instructions to dismiss the indictment.
- The court held the government’s proof was legally insufficient to establish a material omission under § 14(a) and Rule 14a-9 where the theory depended on misconduct the jury rejected and the record did not substantiate.

## Legal Principles

- A § 14(a)/Rule 14a-9 violation requires a materially false or misleading statement or omission in connection with a proxy solicitation.
- Materiality turns on whether there is a substantial likelihood that the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder.
- A proxy statement is not rendered misleading by failure to disclose alleged wrongdoing where the government cannot substantiate the wrongdoing as an actual, provable fact on the trial record.
- When a proxy-fraud theory is premised on the defendant’s participation in a specific criminal scheme, an acquittal on that underlying scheme can defeat the factual predicate for treating nondisclosure of that participation as a material omission.

## Conclusion

The Second Circuit set aside Matthews’s criminal proxy-fraud conviction because the government’s case depended on nondisclosure of Matthews’s alleged membership in a bribery conspiracy that the jury rejected and that the evidence did not adequately prove as actual misconduct requiring disclosure to shareholders.


United States v. Matthews, 787 F.2d 38 (2d Cir. 1986)