Non-Character Uses Of Guilt-Assuming Hypotheticals

A fine line generally applies to the use of guilt-assuming hypotheticals with character witnesses. The Second Circuit considered the admissibility of this evidence in a securities fraud trial involving the admission of "testimony from two lay witnesses as to what the accounting treatment of certain fraudulent transactions would have been absent the fraud"; the hypothetical questions called for factual testimony by the witnesses based on their personal knowledge of what they "did not know and how, if he had known that independently established fact, it would have affected his conduct or behavior," in United States v. Cuti, _ F.3d _ (2d Cir. June 26, 2013) (Nos. 11-3756, 11-3831)

In earlier essays, the Federal Evidence Blog has noted cases involving a careful scrutiny of guilt-assuming hypothetical questions. See, e.g., Circuit Consensus: Examining Use Of Guilt-Assuming Hypotheticals. The Second Circuit recently had the opportunity to assess non-character related guilt-assuming hypothetical questions at trial. While declining to take a broad view, the circuit suggested that many circuits had recognized the propriety of such hypotheticals in fraud trials.

In the case, defendant Cuti and his co-defendant Tennant were charged with arranging "fraudulent transactions to inflate" the reported earnings of their drugstore chain to the SEC. To prove these fraudulent transactions at trial, the prosecution called as a witness the drugstore chain's outside auditor and the chain's current in-house accountant. These two were "to testify as to how they had accounted for the proceeds from the fraudulent transactions; how they would have accounted for the transactions had they been aware of the full facts; and how the material information that was withheld from them led to misstatements in the company's financial statements." Cuti, __ F.3d at __.

The prosecutor's questions to the witness on this issue was one basis for the defendant's claim of trial error. In essence, the prosecution "presented the two witnesses with information that the defendant had withheld...and asked how the withheld information would have affected their [the witness's] accounting. In each instance the witnesses 'replied that if they had been aware of the withheld information,' they would not have reported the enterprise's condition to be so healthy. The defendant objected to this use of "what-if-you-had-known" questions. The defense alleged it essentially "elicit[ed] inadmissible expert testimony from fact witnesses" and encouraged witness speculation. Cuti, __ F.3d at __.

In rejecting the defense contentions, the circuit focused on three points:

  1. Hypotheticals And Speculation: The circuit rejected that the questions posed to the witness were speculative. Instead, the questions probed a fact: "a witness may testify to the fact of what he did not know and how, if he had known that independently established fact, [whether] it would have affected his conduct or behavior. As this case illustrates, “what-if-you-had-known” questions that present withheld facts to a witness are especially useful to elicit testimony about the impact of fraud." Cuti, __ F.3d at __.
  2. Factual Nature Of Inquiry: Although the hypotheticals asked the witness to make certain assumptions, these questions were not mere speculation. Rather, they were "limited by the factual foundation laid in earlier admitted testimony and exhibits, the factual nature of the hypotheticals, and the witnesses' reasoning, which was based on undisputed accounting rules. These limitations left little room for the witnesses to engage in speculation and ensured that their testimony fell near the fact end of the fact-opinion spectrum." Nor did the fact that answering the hypotheticals might involve "the accounting rules involved in the recognition of revenue from real estate concession transactions" the circuit did not consider this a matter of opinion. The circuit noted that the accounting rules only "appear technical and unfamiliar to everyday life, but those [accounting] rules or their interpretation were not in question in this case. The only issue was whether the withheld facts would have altered the rules' application."Cuti, __ F.3d at __. (emphasis added)
  3. FRE 701 vs. FRE 702: The circuit declined to find that the testimony was in the nature of expert testimony, having to comply with the requirements of FRE 702. "At first blush," the circuit opined, "the accounting rules involved in the recognition of revenue from real estate concession transactions appear technical and unfamiliar to everyday life," but because the accounting rules "or their interpretation were not in question in this case," the witnesses were not providing expert evidence. "The only issue was whether the [defendant's] withheld facts would have altered the [accounting] rules' application" by the witness. As a result, the witnesses "were not testifying to the existence of facts, but simply acknowledging that knowledge of such facts, already admitted into evidence, would have caused them to alter their accounting treatment." Cuti, __ F.3d at __. The circuit concluded this testimony was "plainly helpful" to the jury and would indicate that FRE 701(b) had been satisfied.

The Second Circuit noted a growing consensus that hypothetical questions could be used to "inquire into the effect of a fraud." It cautioned that "[a]lthough we have not addressed the issue squarely," other circuits had. Among the Circuits cited included:

  • First Circuit: United States v. Ranney, 719 F.2d 1183, 1187–88 (1st Cir. 1983) (allowing series of hypothetical questions to investors, "typically follow[ing] an investor's testimony about what had influenced him to purchase a Global Oil contract. After invariably citing one or more of the representations made to him by a Global Oil salesman as the reason for his purchase, the investor was asked whether he would have made the investment had he known that those representations were false. Not surprisingly, every investor answered in the negative.")
  • Seventh Circuit: United States v. Bush, 522 F.2d 641, 649–50 (7th Cir. 1975) ("The propriety of admitting speculative and hypothetical testimony in a [criminal] judicial proceeding is always questionable" but since judge "specifically stated that the issue of whether city officials would have recommended the contract in the absence of a misrepresentation by Bush was material in proving the crime charged[,] [e]ach city official was allowed to testify about his state of mind in order that the government could prove-up the fraud charges. Had the witnesses testified that Bush's interest would not have affected their decision then we doubt whether the jury or the court could have found that a fraud was committed. In circumstances such as this, a few limited authorities have sanctioned the admissibility of testimony elicited in response to a 'what if' question.")
  • Eighth Circuit: United States v. Jennings, 487 F.3d 564, 582 (8th Cir. 2007) ("the government asked Bernstein a hypothetical question regarding how a legislator's 'financial interest' would affect Bernstein's decision making. The government's question did not allude to the specific interest or assume wrongdoing on Jennings's part")
  • Ninth Circuit: United States v. Laurienti, 611 F.3d 530, 549 (9th Cir. 2010) (permitting government to ask guilt-assuming hypothetical questions on direct examination of its fact witnesses, in prosecution for conspiracy to commit securities fraud because the questions were material to proving defendants' guilt.)
  • Tenth Circuit: United States v. Orr, 692 F.3d 1079, 1096–97 (10th Cir. 2012) (allowing the prosecutor's hypothetical questions regarding the effect of defendant's misrepresentations on an investor's decision to invest in defendant's alternative fuel technology; questions focused on the investor's willingness to supply money if he discovered the tests did not show the promised advantages over other fuels, and were based on testimony presented to the jury)

As the Cuti case suggests, there seems to be a growing willingness to permit hypothetical questions in a crimina context. For instance, when the Fourth Circuit noted the problem in an appeal of a defendant's conviction for fraud in seeking to fund his companies with a guarantee that stock would be part of an IPO, the prosecution was allowed to “ask[ ] the witness whether his investment choice would have been different if [defendant] had altogether discounted the infrastructure companies' IPO chances.” Admission of this question was no error although the question was hypothetical because it “did not assume" that the defendant was guilty as charged. United States v. Dukes, 242 Fed.Appx. 37, 45 (4th Cir. 2007)

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