## Facts

- Continental Vending Machine Corporation, a public company, made advances of about $3.5 million to an affiliated company, Valley Commercial Corporation, both controlled by Harold Roth.
- The advances were booked as a “Valley Receivable,” but the funds flowed through Valley to Roth for largely personal stock market activities.
- Three accountants from Lybrand, Ross Bros. & Montgomery—Carl J. Simon, Robert H. Kaiser, and Melvin S. Fishman—audited and certified Continental’s financial statements for the fiscal year ending September 30, 1962.
- The certified statements included a note (Note 2) describing the receivable and referring to collateral, but the government contended the note omitted material facts known to the auditors.
- The alleged omissions included that much of the collateral consisted of Continental’s own stock, that a substantial portion of collateral was subject to prior liens, and that the receivable increased significantly between year-end and certification.
- Evidence showed the auditors investigated Roth’s finances, understood repayment depended on Roth, pressed for collateral, and knew the collateral did not meaningfully secure repayment.
- The government’s theory was that the auditors knowingly certified financial statements that were materially misleading by omission and thereby furthered a scheme to defraud.

## Issues

1. Whether the evidence was sufficient for a reasonable jury to find beyond a reasonable doubt that the certified financial statements were materially false or misleading and that defendants acted knowingly and willfully.
2. Whether conformity with generally accepted accounting principles (GAAP), if found, required acquittal or otherwise precluded criminal liability.
3. Whether the jury instructions improperly failed to make GAAP compliance dispositive or otherwise misstated the scienter and falsity requirements.

## Decision

- The Second Circuit affirmed the convictions for conspiracy and mail fraud based on mailings of the certified financial statements.
- The court held that the evidence permitted a finding that the statements, including Note 2, were materially misleading and that defendants acted knowingly and willfully.
- The court rejected the argument that GAAP compliance, even if assumed, automatically barred criminal liability.
- The court found the jury charge, taken as a whole, adequately instructed on materiality, falsity or misleadingness, and the requirement of knowing and willful conduct, while permitting consideration of expert accounting testimony.

## Legal Principles

- In fraud and related prosecutions predicated on financial reporting, the ultimate question is whether the statement is false or misleading as to a material fact, not whether it fits within professional accounting conventions alone.
- GAAP and expert testimony on accounting practice are relevant evidence, but they do not control the legal determination of material falsity or misleadingness under criminal statutes.
- Material omissions in footnotes or disclosures can render financial statements materially misleading, including omissions bearing on collectibility, related-party nature of receivables, and the real character and sufficiency of collateral.
- Criminal liability requires proof beyond a reasonable doubt that the defendant acted knowingly and willfully; proof of personal enrichment or a specific financial motive is not required.

## Conclusion

The court upheld criminal convictions of auditors who certified financial statements that a jury could find materially misleading by omission, holding that professional accounting standards inform but do not determine criminal falsity when defendants act knowingly and willfully.


United States v. Simon, 425 F.2d 796 (2d Cir. 1969)