Ct.App. 3 C051073, C051074 Sutter County Super. Ct. No.CRMS051001; CRMS051031
The opinion of the court was delivered by: Corrigan, J.
This case involves serious allegations against Robert E. Stark, the auditor-controller of Sutter County. In that position, Stark made decisions about allocations and expenditures of public money. Stark had significant disagreements with the Sutter County Board of Supervisors (Board) and the County Administrative Office (CAO) regarding questions of public finance. The Sutter County District Attorney's Office claims that Stark violated statutes, county rules and Board resolutions detailing the requirements of his office. Stark asserts the matters at issue were complex transactions in which he exercised his professional judgment as auditor-controller and handled the matters as the law and governmental accounting rules required. A grand jury ultimately indicted Stark on 13 counts of violating Penal Code section 424*fn1 for acts and omissions involving public funds between 2003 and 2005. The grand jury additionally returned a 15-count accusation under Government Code section 3060 for willful or corrupt misconduct that could lead to Stark's removal from office. We granted review to resolve the following questions:
1. Does a violation of section 424 require intentional violation of a known legal duty or is it a general intent crime?
2. May a defendant move to set aside an indictment under section 995, subdivision (a)(1)(B), on the ground that grand jurors were misinstructed on the scienter required to establish an element of the charged offense?
3. May a public official be removed from office pursuant to Government Code section 3060 in the absence of proof of a purposeful refusal to follow the law in carrying out the duties of his or her office?
4. When a defendant moves to set aside an indictment or accusation on the ground that the district attorney's participation in the grand jury proceedings created a potential for bias or the appearance of a conflict of interest, must the defendant satisfy the requirements for disqualification set forth in section 1424?
We resolve these questions as follows:
1. At issue here are four provisions of section 424, all of which proscribe general intent offenses. Three of those provisions criminalize acting without authority or failing to act as required by law or legal duty. We conclude those offenses additionally require that the defendant knew, or was criminally negligent in failing to know, the legal requirements that governed the act or omission.
2. A claim of misinstruction on the mens rea of a crime may be challenged under section 995, subdivision (a)(1)(B). It raises the possibility that, as instructed, the grand jury may have indicted on less than reasonable or probable cause.
3. Based on the record in this case, we need not and do not decide the question of whether willful misconduct under Government Code section 3060 requires a knowing and purposeful refusal to follow the law. Stark does not disagree with the instruction on mental state given by the district attorney to this grand jury. Rather, he claims that later closing argument by the district attorney and accompanying PowerPoint slides invalidated the instruction on mental state, requiring that the accusation be set aside. We address this claim as to the district attorney's argument and PowerPoint slides and conclude that it is without merit.
4. In a motion to set aside an indictment or accusation, a defendant claiming that the district attorney suffered from a conflict of interest during the grand jury proceeding must establish that his right to due process was violated.
I. FACTUAL AND PROCEDURAL BACKGROUND
We begin with a general overview. The specific counts of the indictment and accusation that remain in this appeal will be described more thoroughly in the discussion section.
The Board consists of five elected members. Stark has served as the elected auditor-controller of Sutter County since 1985. His primary duty is to serve as the chief accounting officer for the county. Larry Combs was the county administrative officer during the period at issue here, with responsibility to manage the county for the Board. His duties included recommending and enforcing policy decisions, as well as recommending and managing the county budget.
On September 7, 2004, Combs presented a report to the Board entitled "Analysis of Performance of Auditor-Controller & Recommendation for Action." The report criticized Stark for actions dating back to 1988, and discussed recent "serious problems" regarding his performance, which are the basis for some of the allegations in the indictment and accusation. Specifically, the report mentioned the following: Stark filed the final budget for fiscal year 2003-2004 six and one-half months late; Stark acted unilaterally in amending the county budget even though state law reserves that authority to the Board; Stark claimed he had the authority to approve the rates some county departments were charging other county departments for services provided; Stark withheld overtime pay from the county's firefighters in January 2003 based on his interpretation of the county's memorandum of understanding (MOU); and, in the final budget for 2003-2004, which Stark belatedly filed in June 2004, Stark unilaterally transferred money from the county's general fund reserve to Sutter County Waterworks District No. 1 (Waterworks District).
In fall 2004, the Sutter County Grand Jury, in its oversight function, began an informal investigation of the auditor-controller's office. The Sutter County District Attorney's Office was not involved in these proceedings. On February 9, 2005, the last day of the informal investigation, Stark appeared at the request of the grand jury and answered questions.
A formal grand jury proceeding began on March 3, 2005, conducted with the assistance of Sutter County District Attorney Carl Adams. Multiple days of testimony concluded on May 3, 2005. Additionally, the grand jury received exculpatory material from Stark.
On May 4, 2005, District Attorney Adams instructed the grand jury on 13 counts alleging violations of various provisions of Penal Code section 424 and 15 counts alleging willful and corrupt misconduct under Government Code section 3060. The grand jury returned the indictment and accusation on all counts.*fn2 The indictment and accusation, for the most part, were based on the same acts and omissions.
Stark moved to set aside the indictment and objected to the accusation. The superior court set aside one count of the indictment and two counts of the accusation.
In the Court of Appeal, Stark sought a writ of mandate or prohibition to review the trial court's order. When the Court of Appeal summarily denied the petition, Stark filed for review here. We granted the petition and transferred the matter back to the Court of Appeal with directions to issue an order to show cause why the requested relief should not be granted. On remand, the Court of Appeal issued the order to show cause. The Court of Appeal concluded that six counts of the indictment should have been set aside, and issued a peremptory writ of mandate to correct those errors. It concluded the trial court did not err in denying Stark's motion to set aside the remaining counts of the accusation.
As to the issues for which we granted review, the Court of Appeal ruled that, as to certain provisions of section 424, a defendant must know that his actions or omissions regarding public funds are without legal authority. As to the remaining counts for which that mental state is required, the Court of Appeal concluded that grand jurors "could reasonably entertain a strong suspicion" that Stark had such knowledge.
Regarding Stark's claims of instructional error as to section 424, the Court of Appeal concluded that section 995 does not provide a basis to set aside the indictment on the ground of instructional error. The court held that Stark's claim was cognizable only as a potential violation of his right to due process, and that Stark failed to make such a showing.
As to the mental state required to support an accusation under Government Code section 3060, the Court of Appeal concluded that "[t]here must be willful behavior, and that behavior must amount to misconduct . . . ." Because Stark identified no authority permitting a challenge to the accusation for instructional error, the Court of Appeal rejected his attack on the prosecutor's instructions and comments to the grand jury. Even assuming Stark could argue that the instructions violated his due process rights, he made no such showing.
Finally, the Court of Appeal rejected Stark's argument that the mere appearance of a conflict of interest by the Sutter County District Attorney's Office during the grand jury proceeding could support a section 995 motion to set aside the indictment. The Court of Appeal concluded that such a claim was not cognizable under that statute, but must be brought as a challenge to the indictment on due process grounds. The Court of Appeal concluded that Stark's claim regarding the district attorney's office did not suffice to make such a showing.
A. Penal Code Section 424 -- Mental State
Section 424 was enacted in 1872 as part of the original Penal Code. More than 80 years ago, this court explained in People v. Dillon (1926) 199 Cal. 1 (Dillon) that section 424 "has to do solely with the protection and safekeeping of public moneys as defined by section 426 of the Penal Code, and with the duties of the public officer charged with its custody or control . . . ." (Dillon, at p. 5.)*fn3
The current statute contains seven subparts, all of which were part of the statute as originally enacted, although renumbered by amendment in 1905. (Stats. 1905, ch. 59, § 1, pp. 53-54.) The remaining counts of the indictment allege violations of four of those provisions:*fn4
"(a) Each officer of this state, or of any county, city, town, or district of this state, and every other person charged with the receipt, safekeeping, transfer, or disbursement of public moneys, who either:
"1. Without authority of law, appropriates the same, or any portion thereof, to his or her own use, or to the use of another; or, [¶] . . . [¶]
"3. Knowingly keeps any false account, or makes any false entry or erasure in any account of or relating to the same; or, [¶] . . . [¶]
"6. Willfully omits to transfer the same, when transfer is required by law; or,
"7. Willfully omits or refuses to pay over to any officer or person authorized by law to receive the same, any money received by him or her under any duty imposed by law so to pay over the same; --
"Is punishable by imprisonment in the state prison for two, three, or four years, and is disqualified from holding any office in this state." (§ 424(a).)
We begin with a review of the evidence presented to the grand jury as to the counts of the indictment remaining on appeal.
a. Third Count (Section 424(a) 1)
The People claim that Stark misappropriated public money in violation of section 424(a) 1 when, without authorization by the Board, he transferred money in the 2003-2004*fn5 final budget from the county's general fund to the Waterworks District.
The county's annual budget is essentially an authorized spending plan for the year. The budget includes all of the operating departments of the county, as well as special districts over which the Board serves as the governing body. The budget is divided up into funds. Some funds consist of a single department. Others funds represent multiple departments. Assistant county administrator Curtis Coad testified, "We have to balance the budget. That means that in every fund in the budget the revenues have to equal the appropriations."
By June 30 of each year, the county administrative officer must submit a proposed budget to the Board. The Board then approves the proposed budget and holds budget hearings to be completed by August 30. By means of a final budget resolution, the Board must adopt the final budget by October 2. The auditor-controller then has until December 2 to publish the final budget and file it with the clerk of the Board.
County Administrator Combs testified that the final budget resolution authorizes the auditor-controller "to prepare the final budget with such adjustments as are necessary within restrictions that are contained in this resolution." Combs explained that the budget resolution authorizes two types of adjustments. First, the auditor-controller can "adjust interfund and intrafund accounts to reflect the effect of amendments and modifications adopted by the Board, and [can] adjust estimates of State and Federal revenue which are affected by the amendments and modifications, subject to review and approval by the County Administrative Officer." Second, the budget resolution allows the auditor-controller "to adjust the appropriation for contingencies in each fund, as necessary to balance the fund and the budget, and, if necessary, to balance any fund and reduce such fund's general reserve, subject to the review and approval of the County Administrative Officer." *fn6
Various county funds maintain reserves. Within the county general fund there are several different reserves, such as those for capital expenditures and vehicle replacement. At issue in this count of the indictment is the general fund's general reserve (hereafter general reserve). The general reserve is subject to unique restrictions. The Board is legally authorized to reduce or increase the amount of the general reserve during the budget process. Once the final budget is adopted, however, that reserve can be accessed only in an emergency declared by a four-fifths vote of the Board.
One of the special districts governed by the Board is the Waterworks District, an enterprise fund that provides sewer and water services to the community of Robbins. Under an enterprise fund operation, people in the area pay for the cost of services. No money from the county general fund is required to operate the Waterworks District. The Waterworks District's sewer system was installed and purchased by a grant obtained by the county on behalf of the residents of Robbins. The Board had decided not to fund the depreciation of the sewer system because those expenses would have had to be financed by user fees, which the Board considered too burdensome for the area residents.
In fiscal year 2003-2004, Stark and the CAO had significant disagreements over accounting principles applicable to the Waterworks District. Stark's position was that the Waterworks District fund must be included in the county budget. Stark considered the depreciation of the water system an expense that had not been funded, resulting in an imbalance in the fund of $336,000. Because the Waterworks District fund was out of balance, the county budget was out of balance as well.
The CAO disagreed. Assistant county administrator Coad told the grand jury that enterprise funds do not need to be included in the county budget, but the Waterworks District fund was included "more for public information and so we can include them in our hearing." Thus, if the Waterworks District fund was out of balance, it had no effect on the overall county budget.
When the final budget for the fiscal year 2003-2004 was released on June 14, 2004, the CAO discovered that the Waterworks District budget included a contribution from the county general fund of $336,485. Assistant county administrator Coad explained that Stark, through a series of transactions, took general reserve money, placed it into the general fund, and then transferred that money to the Waterworks District fund. As Coad explained, "Bottom line, he used general fund reserve money to balance the [Waterworks District] fund. And, no, we did not sign off on that."
Coad told the grand jury that nothing in the final budget resolution authorized Stark to transfer money from the general reserve, "which belonged to all the People of Sutter County," and give it to the Waterworks District serving the community of Robbins alone. Such a transfer from the general reserve required a vote of four-fifths of the Board and "special findings of general public benefit." The Board ordered Stark to return the money to the county's general fund. Stark complied.
On February 9, 2005, the grand jury interviewed Stark during its informal investigation before the criminal grand jury proceedings began. A copy of this transcript was entered into evidence during the criminal grand jury proceedings. During the interview Stark acknowledged that transfers from the general fund must be authorized by the Board, but stated he had been given this authorization. Stark elaborated on his answer. He told the grand jury that the Waterworks District was out of balance due to unfunded depreciation costs and advised the CAO that "the debits don't equal the credits." Stark claimed that the proposed budget adopted by the Board specifically recommended a "transfer in" to the Waterworks District to balance the budget. Stark testified that after reviewing all the funds, he could not find "the recognition of the transfer-out that was the source of funds for the transfer-in for the [Waterworks District]." "And since I have to balance the budget . . . I set up the . . . transfer-out for the general fund, which was the only place the money could actually come from to balance [the Waterworks District]. [¶] And under the direction that the Board gives me to balance the budget, I can very well read that as saying that I was authorized to set that up and the Board did in fact approve that transfer." Stark told the grand jurors that under the final budget resolution, he is authorized by the Board to balance the budget and transfer money from the reserves.
b. Ninth Count (Section 424(a) 6)
The ninth count of the indictment alleges that between March and May 2005 Stark violated section 424(a) 6 by "wilfully omit[ting] to transfer [public moneys], when transfer was required by law, to wit: post[ing] journal entries reflecting payment due and income earned by the Sutter County Department of Information Technology Services."
The Department of Information Technology (IT department) provides computer services for the entire county. The IT department collects payments for services provided to other county departments through "inter-fund charges." As we explain more fully below, rates for IT department services are set at least annually. When a county department is notified of an IT department billing, journal entries must be made by the auditor-controller to transfer money from the user department's budget to the IT department.
As of 2005, the IT department had been operating for five years. For the first four years, calculation of appropriate billing rates was accomplished through an informal process in which the IT department, Stark, and the CAO would agree on a methodology. Stark would set the rates. However, on September 7, 2004, the Board delegated the authority to set rates to the county administrator.
At the beginning of 2004-2005 fiscal year, the IT department had approximately $400,000 to $500,000 carried over from the previous year because the department's revenue exceeded its expenses. The IT department operated on that money until the beginning of November 2004. Bernadette Kucharczuk, director of the IT department, explained that the department's revenue is never enough to maintain a positive cash flow to year end when all claims are eventually paid. In each preceding year, the IT department operated in the red. Final budgets for the IT department anticipate that it will operate in the red. Nevertheless, Stark had never refused to post entries in earlier years.
In the 2004-2005 fiscal year, the process for setting the IT department's billing rate began in December 2004. On January 18, 2005, County Administrator Combs forwarded the billing rates to Stark. The IT department then submitted journal entries to the auditor's office for payment of services it had rendered in the previous six months.
Stark refused to process the journal entries. Stark maintained that he needed adequate documentation to assess whether the rate changes were cost based and calculated in accordance with generally accepted accounting principles. On January 27, 2005, Stark requested that the IT department provide him additional information, including an accounting for certain costs, in order to "complete a thorough analysis of the rates submitted by the IT Department." Although the IT department responded, Stark notified Kucharczuk that the response was inadequate and requested more information. Kucharczuk responded to this request, and later provided additional information requested by Stark. Kucharczuk testified that although the rates changed "somewhat" in fiscal year 2004-2005, the methodology for setting the rates was the same as had been used for the previous four years. In those previous years, when Stark's office was involved in the rate-setting process, journal entries were processed and claims paid.
County Administrator Combs notified Stark by letter on February 15, 2005, that Combs, in accordance with the authority delegated to him by the Board in September 2004, was approving the billing rates for the IT department that had been sent to Stark in January. Combs wrote that the rates were reasonable and followed the "rate methodology prescribed by your office." Combs stated that it was "imperative" that Stark process the journal entries immediately and pay any pending claims that were being held due to the department's deficit. Stark continued to refuse to post journal entries. As of March 3, 2005, when Kucharczuk first testified before the grand jury, the IT department was $600,000 in the red.
Additionally, at the beginning of February, Stark stopped paying the claims submitted by the IT department for services provided to the department by outside vendors. Kucharczuk was told by the auditor-controller's office that payment could not be made because the IT department had a deficit balance, a position Stark had not asserted in prior years. At the beginning of March, at least $185,000 in bills from outside vendors remained unpaid. At the same time, Stark was refusing to process journal entries for the IT department totaling more than $1 million.
On March 1, 2005, the Board directed Stark to make the journal entries for the first and second quarter of the fiscal year and to pay the outstanding claims against the IT department. Stark told the Board that he did not approve of the billing rates for processing the journal entries and was having difficulty obtaining documentation from the IT department in support of those rates. Kucharczuk told the Board that she had worked with Stark to provide him documentation. The next day, Stark told the county treasurer, Jim Stevens, that he would not process the journal entries because he disagreed with the billing rates. At the Board meeting on March 8, 2005, Stark informed the Board that he would not post the journal entries for the IT department because he had not yet received the requested documentation. The Board minutes indicate that a "[d]iscussion ensued regarding various emails and meetings on trying to obtain clarification on what the auditor-controller needs in order process the journal entries."
As of March 23, 2005, the date of Kucharczuk's final appearance before the grand jury, Stark had paid the IT department's outstanding bills but had still not posted the journal entries.*fn7
c. Tenth Count (Section 424(a) 7)
The tenth count of the indictment alleges that Stark violated sections 664 and 424(a) 7 by "wilfully and unlawfully attempt[ing] to withhold payment of wages to employees of the Sutter County Department of Information Technology Services."
During the same timeframe covered in count nine, the IT department was also faced with payroll obligations. Stark took the position that the IT department's payroll expenses could not be met because of its negative cash deficit. He relied on the county's deficit fund cash policy, which provides that if a fund's deficit cannot be corrected within 30 days, the auditor-controller should notify the Board of the need for a general fund loan to the deficient fund. Stark told county treasurer Jim Stevens that on March 1, 2005, the Board had denied his request for a general fund loan. Stevens testified that stopping payroll accounts when a department is running a deficit is not part of the deficit fund cash policy. Stevens explained that certain departments, including IT, typically have a negative cash balance at certain times of the year for various reasons. Stevens noted that for the preceding three fiscal years, the IT department had run negative balances, but its bills, including payrolls expenses, had always been paid by the auditor-controller's office. Stevens also said that if pending journal entries were processed, the IT department would have a positive cash balance of $380,000.
On March 8, 2005, Stark told Sylvia Oakley, an accountant in his office, that "upon advice of counsel, I have no choice but to ask you to stop direct deposit payment for the IT department."*fn8 Oakley then temporarily stopped direct deposit of wages for these employees. On that same day, Stark sent a memo to treasurer Stevens advising that Stark anticipated needing registered warrants to cover the IT department payroll since the Board had not yet acted to resolve the IT department's cash deficit. Stevens testified that a registered warrant is not immediately payable; it is an interest-bearing promissory note in the nature of an IOU. Later that day, Stark asked Stevens to issue registered warrants for the IT department payroll. Stevens responded that he would not do so until advised by county counsel.
During the afternoon of March 8, Sutter County District Attorney Carl Adams and a senior criminal investigator from the district attorney's office went to Stark's office and gave him copies of certain provisions of the Penal and Labor Codes. Adams told Stark that he wanted to make certain Stark was familiar with the law regarding payment to employees. Stark replied, "It doesn't matter. They're going to get paid anyway."
On the evening of March 8, Stark sent an e-mail to all IT department employees confirming that he had cancelled direct payroll deposits and planned to issue payroll warrants. He advised that unless the Board made funds available as he had requested, he would be required to issue registered warrants. Stark also sent a memo to the treasurer, Stevens, that evening stating, "Your refusal today to comply with our lawful request has prevented these [payroll] payments to employees. If you continue your refusal of doing your duty to register the warrants, you are preventing the lawful payments of claims against the county."
At its regularly scheduled meeting that night, the Board voted to refer the matter to the state labor commissioner if Stark refused to pay the IT department employees on March 11. Stark issued paychecks and the IT department employees were paid on March 11, 2005.
d. Eleventh Count (Section 424(a) 3)
The eleventh count of the indictment alleges that Stark violated section 424(a) 3 by knowingly keeping a false account or making a false entry in the "financial books and records for the County of Sutter for fiscal year 2003-2004."
Marilee Smith conducted an outside audit of the county's books for fiscal years 2002-2003 and 2003-2004. She explained that her certified public accounting firm begins its review of the county's financial records at the end of each fiscal year. Smith testified that eventually "we put all the financial statements together and any adjustments that we think should be posted. We come up with what we call proposed audit adjusting entries. We submit those to the county along with draft financial statements. We let the county, both the county administrator and the county auditor-controller review the proposed ...