Header graphic for print
White Collar Defense & Compliance Developments in Criminal Law, Federal Case Law and Statutory Developments

Civil Complaint Does Not By Itself Prove The Occurrence Of Prior Bad Acts And So May Not Be Admitted Under FRE 404(b) Even To Prove Notice

Posted in Evidence

Alain Leibman writes:

Under Fed. R. Evid. 404(b), the government often seeks to introduce evidence of prior conduct by a defendant, ostensibly because such conduct is probative of one of the Rule’s permitted purposes for introducing extraneous evidence, such as showing that the presently-charged conduct was committed intentionally and not by accident or mistake.  Even when the prior act is nothing more than the previous assertion of allegations of misconduct by the defendant, the government argues that it should be admitted to show that the defendant was on notice that a course of conduct was improper, and so later engaged in that course of conduct knowingly and cognizant of his legal obligation to refrain from such conduct.

The Ninth Circuit recently made it harder for prosecutors to handily use prior allegations to show notice to the defendant of the illegality of a particular course of conduct.  In United States v. Bailey, 696 F.3d 794 (9th Cir. 2012), the court reversed the conviction of Bailey, a health-products company CEO, who had been convicted of violating the SEC’s Rule S-8, which requires that public companies issue stock to consultants only for bona fide services performed, or otherwise make a rigorous set of disclosures about the stock issuance.  Bailey had allegedly issued stock in order secretly to raise capital from the third party transferee, who paid money for the stock.  The SEC had in 2003 filed a civil complaint against Bailey and others making the same allegation, and Bailey settled the SEC case without admission.  When he engaged in the same conduct thereafter, the indictment followed.

At the criminal trial, the government introduced the SEC complaint, arguing that its allegations had put Bailey on notice that the stock transfers were illegal, so when Bailey in 2004 engaged in similar conduct, he did so knowingly.  In closing, the prosecutor went even further, arguing that the previous SEC complaint showed that Bailey had broken the law twice.

In a 2-1 decision, the court of appeals held that the SEC complaint was erroneously introduced.  Under Huddleston v. United States, 485 U.S. 681, 685 (1988), a proponent of Rule 404(b) evidence is not only required to show a proper purpose for the evidence of a prior act (such as notice to a defendant), but must proffer evidence sufficient to support a finding that the prior act had been committed by the defendant, and here the government had failed to do so.  Bailey never admitted the allegations in the SEC complaint, and his settlement was held not to be probative of whether he had committed the alleged violations.  While "there is some logic" to the argument that the SEC complaint, even if denied, put Bailey on notice of the law’s requirements, the naked complaint was not by itself sufficient evidence under Huddleston.  "All a complaint constitutes is knowledge of what a plaintiff claims.  It does not establish the truth of either the facts asserted in the complaint, or of the law asserted in the complaint." Without further evidence that Bailey had in 2003 engaged in the conduct alleged in the complaint, the SEC’s mere assertion that he had was insufficient to meet a foundational element of the Rule.

To be sure, the majority’s reasoning is hyper-technical.  The proof-of-commission element of Huddleston should have arguably not been applied to the underlying acts alleged in the SEC complaint, but to the mere filing of the complaint itself and its service upon Bailey whether the allegations were true or not.  The "prior act" of the filing and service upon Bailey of an adverse complaint was undisputed, and arguably should have been sufficient to support admission of the complaint with a limiting instruction if only to show that its recipient was immediately then aware that an agency of the United States considered such stock sales illegal. The opinion thus confuses the evidentiary utility of the making of an allegation (slight, but permissible under the Rule to show knowledge of the law’s requirements) from that of the underlying activity.  Undoubtedly, the prosecution’s heavy-handed and inaccurate use of the SEC complaint in summation, arguing as if the underlying allegations had been true, did not help the government’s cause on appeal.  No matter, this Ninth Circuit opinion may be very helpful in frustrating the introduction of similar notice pleadings in other cases under the Rule.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)