Securities and Exchange Commission v. Donna Yun, Jerry Burch

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
APRIL 16, 2003
No. 01-14490 THOMAS K. KAHN
CLERK

D.C. Docket No. 99-00117-CV-ORL-22A

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

versus

DONNA YUN,
JERRY BURCH,

Defendants-Appellants.

Appeals from the United States District Court
for the Middle District of Florida

(April 16, 2003)

Before TJOFLAT and COX, Circuit Judges, and HANCOCK*, District Judge.

_________________________________
* Honorable James H. Hancock, U.S. District Judge for the Northern District of Alabama, sitting
by designation.
TJOFLAT, Circuit Judge:

This is an insider trading case, brought by the Securities and Exchange

Commission (“SEC”) under section 10(b) of the Securities Exchange Act of 1934

(“Exchange Act”), 15 U.S.C. § 78j(b), and (SEC) Rule 10b-5, 17 C.F.R. §

240.10b-5, against Donna Yun and Jerry Burch. Answering special verdicts, a

jury found that the defendants had “violated Section 10(b)” under the

“misappropriation theory” of liability. Acting on those verdicts, the district court

entered judgment against the defendants, holding them “jointly liable” for

$269,000, the profits generated by the prohibited trading, plus prejudgment

interest, and individually liable for a penalty in the sum of $1,000. SEC v. Yun,

148 F. Supp. 2d 1287 (M.D. Fla. 2001).1

Yun and Burch now appeal, contending that the district court erred in

denying their motions for judgment as a matter of law and, alternatively, that the

court erred in instructing the jury on elements of the misappropriation theory of

liability.2

1
The district court’s opinion recites that the court imposed a $100,000 penalty on each
defendant. The court did so initially, but reduced the penalty to $1,000, apparently on its own
initiative.
2
Yun and Burch also contend that the court erred in denying their motions for summary
judgment. Because, in our view, the evidence presented on summary judgment and on motion
for judgment as a matter of law was the same in all material respects, our conclusion that the
court did not err in denying the motions for judgment as a matter of law disposes of the summary

2
 I.3

A.

Donna Yun is married to David Yun, the president of Scholastic Book Fairs,

Inc., a subsidiary of Scholastic Corporation (“Scholastic”), a publisher and

distributor of children’s books whose stock is quoted on the NASDAQ National

Market System and whose option contracts are traded on the Chicago Board

Options Exchange. On January 27, 1997, David attended a senior management

retreat at which Scholastic’s chief financial officer revealed that the company

would post a loss for the current quarter, and that before the quarter ended, the

company would make a public announcement revising its earnings forecast

downward. He cautioned the assembled executives not to sell any of their

Scholastic holdings until after the announcement, which would likely result in a

decline in the market price of Scholastic shares, and warned them to keep the

matter confidential. Approximately two weeks later, on February 13, Scholastic’s

chief financial officer informed David that the negative earnings announcement

would be made on February 20.

judgment issues.
3
We recite the facts in the light most favorable to the non-movant, here the SEC, as we
are required to do when reviewing the denial of a motion for summary judgment or judgment as a
matter of law. See Hyman v. Nationwide Mut. Fire Ins. Co., 304 F.3d 1179, 1185 (11th Cir.
2002).

3
 Over the weekend of February 15-16, David and Donna discussed a

statement of assets that he had provided her in connection with their negotiation of

a post-nuptial division of assets. David explained to Donna that he had assigned a

$55 value to his Scholastic options listed on the asset statement, even though

Scholastic’s stock was then trading at $65 per share, because he believed that the

price of the shares would drop following Scholastic’s February 20 earnings

announcement. He also told her not to disclose this information to anyone else,

and she agreed to keep the information confidential.4

The following Tuesday, February 18, Donna went to her place of work – a

real estate office located in a nearby housing development.5 The office was a

small sales trailer, approximately eleven by thirteen feet, that Donna shared with

other real estate agents, including Jerry Burch. During the late morning or early

afternoon, Donna telephoned Sam Weiss – the attorney assisting her in negotiating

the post-nuptial division of assets – from her office to discuss David’s statement of

assets. While she was speaking to Weiss, Burch entered the office to gather

materials for a real estate client. Standing three to four feet from Donna, Burch

4
David anticipated that Donna would discuss this information with her attorney, but
assumed her attorney would keep the information confidential.
5
The Yun’s lived in an Orlando, Florida suburb. David’s office was in Lake Mary.
Donna’s office was in Longwood.

4
heard her tell Weiss what David had said about Scholastic’s impending earnings

announcement and that David expected the price of the company’s shares to fall.

As he testified at trial, Burch did not learn enough from what he overheard to feel

“comfortable” trading in Scholastic’s stock.

That evening, Donna and Burch attended a real estate awards banquet at the

Isleworth Country Club. Donna, Burch, and another agent, Maryann Hartmann,

carpooled to the reception. All three stayed at the reception for three hours and

left together.

The next morning Burch called his broker and requested authority to

purchase put options in Scholastic.6 When the broker advised Burch that he knew

of no new information indicating the price of Scholastic stock would decline,

Burch stated that based on information he had obtained at a cocktail party, he

nonetheless wanted to purchase the put options. The broker warned Burch of the

risks of trading in options, and cautioned him about insider trading prohibitions.7

Despite these warnings, between the afternoon of February 19 and midday on

February 20, Burch purchased $19,750 in Scholastic put options, which was equal

6
A put option is an option contract that gives the holder of the option the right to sell a
certain quantity of an underlying security to the writer of the option, at a specified price up to a
specified date. The value of a put increases as the price of the stock decreases.
7
The broker, James Whitley, advised Burch that purchasing a put option is “just a bet”
that could result in the loss of his entire investment.

5
to two-thirds of his total income for the previous year and nearly half the value of

his entire investment portfolio.8

After the stock market closed on February 20, Scholastic announced that its

earnings would be well below the analysts’ expectations. When the market

opened the next day, the price of Scholastic shares had dropped approximately 40

percent to $36 per share. Burch then sold his Scholastic puts, realizing a profit of

$269,000 – a 1,300 percent return on his investment. Within hours, the SEC

commenced an investigation of Burch’s trades, to determine whether insider

trading had occurred. The investigation culminated in the present lawsuit. In a

one-count complaint, the SEC alleged that Donna and Burch had violated section

10(b) of the Exchange Act and Rule 10b-5,9 and sought both legal and equitable

8
Some of the put options Burch purchased expired within two days. The remaining
options expired within a month.
9
In pertinent part, section 10(b) of the Exchange Act provides:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce or of the
mails, or of any facility of any national securities exchange –
...
(b) To use or employ, in connection with the purchase or sale of
any security registered on a national securities exchange or any
security not so registered, any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the . .
. [SEC] may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
15 U.S.C. § 78j(b). Additional language was added to this subsection in 2000 but is irrelevant to
the issues before us today.

6
relief.10

B.

There are two theories of insider trading liability: the “classical theory” and

the “misappropriation theory.” The classical theory imposes liability on corporate

“insiders” who trade on the basis of confidential information obtained by reason of

their position with the corporation.11 The liability is based on the notion that a

corporate insider breaches “a . . . [duty] of trust and confidence” to the

shareholders of his corporation. United States v. O’Hagan, 521 U.S. 642, 652, 117

Pursuant to its § 10(b) rulemaking authority, the SEC adopted Rule 10b-5, that provides,
in pertinent part:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud, [or]
...
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.

10
In referring to the SEC’s complaint, we actually refer to the SEC’s amended
complaint. As legal relief, the complaint sought the imposition of civil penalties pursuant to
section 21A(a) of the Exchange Act. As equitable relief, the complaint asked for an order
enjoining the defendants from further violations of § 10(b) and Rule 10b-5, directing them to
disgorge the profits generated by Burch’s trades, and directing Burch to pay prejudgment interest.

11
In this opinion, the words “confidential information” mean “material, nonpublic
information.”

7
S. Ct. 2199, 2207, 138 L. E. 2d 724 (1997). The misappropriation theory, on the

other hand, imposes liability on “outsiders” who trade on the basis of confidential

information obtained by reason of their relationship with the person possessing

such information, usually an insider.12 The liability under the latter theory is based

on the notion that the outsider breaches “a duty of loyalty and confidentiality” to

the person who shared the confidential information with him. Id. at 652, 117 S.

Ct. at 2207.13

Not only are the insider and the outsider forbidden from trading on the basis

of the confidential information they have received, they are forbidden from

“tipping” such information to someone else, a “tippee,” who, being fully aware

that the information is confidential, does the trading.14 In other words, the insider

and outsider are forbidden from doing indirectly what they are forbidden from

12
This theory “holds that a person commits fraud ‘in connection with’ a securities
transaction, and thereby violates § 10(b) and Rule 10b-5, when he misappropriates confidential
information for securities trading purposes, in breach of a duty owed to the source of the
information.” O’Hagan, 521 U.S. at 652, 117 S. Ct. at 2207. A person’s “undisclosed, self-
serving use of a principal’s information to purchase or sell securities” is held to constitute a
breach of duty of loyalty and confidentiality. Id.
13
We think that “a duty of loyalty and confidentiality” is synonymous with “a duty of
trust and confidence,” and, accordingly, use the expressions interchangeably.
14
To join a co-venture to exploit the confidential information, and thereby subject one-
self to insider trading liability, a tippee must know, or have reason to know, that the tipper
disclosed the information in breach of a fiduciary duty. See Dirks v. SEC, 463 U.S. 646, 660
n.19, 103 S. Ct. 3255, 3264 n.19, 77 L. E. 2d 911 (1983); see also United States v. Falcone, 257
F.3d 226, 232 (2d Cir. 2001).

8
doing directly.15 To establish liability, however, the SEC need not show that the

tippee actually traded for the tipper and gave him the profits of the trades; all the

SEC needs to show is that the tipper received a “benefit,” directly or indirectly,

from his disclosure. See Dirks, 463 U.S. at 659-62, 103 S. Ct. at 3264-65.

This is a tipper-tippee case. The SEC prosecuted it under the

“misappropriation theory” of insider trading liability. Its complaint alleged that

Donna was an outsider who had a fiduciary relationship with David,16 and that she

breached that duty when she divulged to Burch confidential information, which

David had given her, “for her direct and/or indirect benefit because of her business

relationship and friendship with . . . Burch.” Under these circumstances, the

complaint alleged, Donna was liable under section 10(b) of the Exchange Act and

15
The seminal decision addressing tipper and tippee liability is Dirks, 463 U.S. at 646,
103 S. Ct. at 3255. In an action brought by the SEC under the classical theory, the Supreme
Court explained that tippee liability is based on a person’s role as a “participant after the fact” in
the breach of duty that occurred when the tipping insider disclosed the information. Id. at 659
(quoting United States v. Chiarella, 445 U.S. 222, 230 n.12, 100 S. Ct. 1108, 1116 n.12, 63 L. E.
2d 348 (1980)). That is, tippee liability arises only when the tippee joins his tipper in a co-
venture to exploit the confidential information. If the tipper is found not to have breached a duty,
then the tippee cannot be held liable. Courts which have considered the question of tipper and
tippee liability in cases brought under the misappropriation theory have assumed that the
approach taken in cases brought under the classical theory of liability applies. See, e.g., SEC v.
Maio, 51 F.3d 623, 634 (7th Cir. 1995).
16
The SEC’s complaint used the words “duty of trust and confidence” to describe
Donna’s fiduciary duty to David – that she would not share the confidential information he gave
her about Scholastic’s revised earnings forecast with anyone (except her attorney). In this
opinion, we treat the quoted words and the term “fiduciary duty” as synonymous.

9
Rule 10b-5 to disgorge the profits Burch realized from the put options trades.

Because Burch knew of Donna’s breach of her fiduciary duty to David, but

nonetheless traded on the confidential information she gave him, he, too, was

liable under § 10(b) and Rule 10b-5.

The separate answers filed by Donna and Burch admitted that Burch

engaged in the alleged put options transactions, but denied any violations of §

10(b) or Rule 10b-5. In short, the answers denied that a fiduciary relationship

existed between the Yuns and asserted, alternatively, that if Donna owed David a

fiduciary duty not to disclose Scholastic’s financial situation, she did not breach it

because she did not expect to benefit directly or indirectly from the disclosure to

Burch.17

The case was tried to a jury on the issues framed by the complaint and

these answers. At the close of the evidence, the defendants moved for judgment

as a matter of law pursuant to Rule 50(a) of the Federal Rules of Civil Procedure.

The court took the motions under advisement. After the jury returned its verdicts,

the defendants renewed their motions pursuant to Rule 50(b), reiterating the

grounds stated in their previous motions: (1) the evidence failed to establish a

17
The defendants’ answers also contained the affirmative defense of failure to state a
claim for relief, which the court never addressed.

10
fiduciary relationship between David and Donna Yun concerning Scholastic’s

financial earnings; and (2) if such a relationship existed, Donna did not breach it

by disclosing the earnings information to Burch for the purpose of obtaining a

direct or indirect benefit.18 The court denied their motions. SEC v. Yun, 130 F.

Supp. 2d 1348 (M.D. Fla. 2001).

The defendants now appeal, attacking the district court’s judgment on two

grounds. First, they contend, as they did in moving for judgment as a matter of

law, that the evidence was insufficient to establish a violation of § 10(b) or Rule

10b-5. Second, and alternatively, they contend that the district court erred in

instructing the jury on essential elements of the SEC’s claims. Such error, they

maintain, is not harmless; therefore, they should be afforded a new trial. We

address these two grounds in order.

II.

18
Alternatively, the defendants moved the district court to grant them a new trial. Fed.
R. Civ. P. 59(a) provides, in pertinent part: “A new trial may be granted . . . in an action in which
there has been a trial by jury, for any of the reasons for which new trials have heretofore been
granted in actions at law in the courts of the United States . . . .” The defendants’ motions for
new trial specified no reason(s) for granting a new trial in this case. Moreover, nowhere in their
briefs to us do the defendants argue that the district court abused its discretion in denying their
motions for new trial. We therefore make no further mention of the defendants’ motions for a
new trial. Instead, we focus our attention to the issues the defendants have raised in their briefs:
whether the district court erred in denying their Rule 50(b) motions for judgment as a matter of
law, and whether the court erred in charging the jury with respect to elements of the SEC’s
claims under § 10(b) and Rule 10b-5.

11
 A.

In assessing the district court’s ruling on appellants’ motions for judgment

as a matter of law, we first consider whether Donna owed David a duty of loyalty

and confidentiality not to disclose the revised earnings information he had

received in confidence.

As stated supra, to prevail in an insider trading case, the SEC must

establish that the misappropriator breached a duty of loyalty and confidentiality

owed to the source of the confidential information. Certain business

relationships, such as attorney-client19 or employer-employee,20 clearly provide

the requisite duty of loyalty and confidentiality. On the other hand, it is unsettled

whether non-business relationships, such as husband and wife, provide the duty

of loyalty and confidentiality necessary to satisfy the misappropriation theory.

The leading case on when a duty of loyalty and confidentiality exists in the

context of family members – the case relied on by the parties and the district court

for the elements of a confidential relationship – is United States v. Chestman, 947

F.2d 551 (2d Cir. 1991) (en banc).

In a divided en banc decision, the Second Circuit held that marriage alone

19
See, e.g., United States v. O’Hagan, 521 U.S. 642, 647-49, 117 S. Ct. 2199, 2205, 138
L. E. 2d 724 (1997).
20
See, e.g., United States v. Carpenter, 791 F.2d 1024, 1028 (2d Cir. 1986).

12
does not create a relationship of loyalty and confidentiality. Id. at 568. Either an

“express agreement of confidentiality” or the “functional equivalent” of a

“fiduciary relationship” must exist between the spouses for a court to find a

confidential relationship for purposes of § 10(b) and Rule 10b-5 liability. Since

the spouses had not entered into a confidentiality agreement, the court turned its

focus to determining what constitutes a fiduciary relationship or its functional

equivalent. “At the heart of the fiduciary relationship,” the court declared, “lies

reliance, and de facto control and dominance.” Id. at 568 (citations and internal

quotation marks omitted). Having so concluded, the court explained that the

functional equivalent of a fiduciary relationship “must share these qualities.” Id.

at 569. Applying the requisite qualities of reliance, control, and dominance to the

husband and wife relationship at hand, the Chestman majority held that no

fiduciary relationship or its functional equivalent existed. The spouses’ sharing

and maintaining of “generic confidences” in the past was insufficient to establish

the functional equivalent of a fiduciary relationship. Id. at 571. Accordingly, the

court decided that the defendants were not subject to sanctions for insider trading

violations.

A lengthy dissent by Judge Winter, joined by four judges, took issue with

the narrowness in which the majority would find a relationship of loyalty and

13
confidentiality amongst family members, pointing out that under the majority’s

approach, the disclosure of sensitive corporate information essentially could be

“avoided only by family members extracting formal, express promises of

confidentiality.” Id. at 580. Such an approach, in the view of the dissent, was

“unrealistic in that it expects family members to behave like strangers toward

each other.” Id. Moreover, the normal reluctance to recognize obligations based

on family relationships – the concern that intra-family litigation would exacerbate

strained relationships and weaken the sense of mutual obligation underlying

family relationships – was inapplicable in insider trading cases because the suits

are brought by the government. See id. at 580. Given the circumstances of the

case, the dissent concluded that a confidential relationship existed between the

husband and wife which gave rise to a duty of loyalty and confidentiality on his

part not to disclose the sensitive information.21

We are inclined to accept the dissent’s view that the Chestman decision too

narrowly defined the circumstances in which a duty of loyalty and confidentiality

is created between husband and wife. We think that the majority, by insisting on

21
In the context of family-controlled businesses, the dissent noted, “it is inevitable that
from time to time normal familial interactions will lead to the revelation of confidential corporate
matters to various family members[, and] the very nature of familial relationships may cause the
disclosure of corporate matters to avoid misunderstandings among family members or
suggestions that a family member is unworthy of trust.” Chestman, 947 F.2d at 579.

14
either an express agreement of confidentiality or a strictly defined fiduciary-like

relationship, ignored the many instances in which a spouse has a reasonable

expectation of confidentiality. 22 In our view, a spouse who trades in breach of a

reasonable and legitimate expectation of confidentiality held by the other spouse

sufficiently subjects the former to insider trading liability. If the SEC can prove

that the husband and wife had a history or practice of sharing business

confidences, and those confidences generally were maintained by the spouse

receiving the information, then in most instances the conveying spouse would

have a reasonable expectation of confidentiality such that the breach of the

expectation would suffice to yield insider trading liability. Of course, a breach of

an agreement to maintain business confidences would also suffice.23

22
We note that the Chestman majority emphasized that it was determining what
constitutes a fiduciary relationship in the context of a criminal case. The majority recognized
that “equity has occasionally established a less rigorous threshold for a fiduciary-like relationship
in order to right civil wrongs arising from non-compliance with the statute of frauds,” but
decided that “an elastic and expedient definition of confidential relations, i.e., relations of trust
and confidence, . . . has no place in the criminal law.” Id. at 569-70. It appears, therefore, that
the majority intimated that it would expand the definition of a duty of loyalty and confidentiality
in the civil context. Even so, many courts have employed Chestman’s narrow approach to
determining the existence of a duty of loyalty and confidentiality to civil actions. See, e.g., SEC
v. Falbo, 14 F. Supp. 2d 508, 523 (S.D.N.Y. 1998). Without commenting on the majority’s
analysis in Chestman as it pertains to the criminal context, we decline to follow its analysis in the
civil context.
23
Our conclusion is bolstered by statements the SEC has made since the trading in this
case took place. SEC Rule 10b5-2, which became effective August 24, 2000, defines three non-
exclusive circumstances “in which a person has a duty of trust or confidence for purposes of the

15
 For purposes of this case, then, the existence of a duty of loyalty and

confidentiality turns on whether David Yun granted his wife, Donna, access to

confidential information in reasonable reliance on a promise that she would

safeguard the information. See SEC v. Sargent, 229 F.3d 68, 75 (1st Cir. 2000)

(“[T]he misappropriation theory premises liability on a fiduciary-turned-trader’s

deception of those who entrusted him with access to confidential information.”)

‘misappropriation’ theory of insider trading.” 17 C.F.R. § 240.10b5-2 (2002) (preliminary note).
The three situations are as follows:
(1) Whenever a person agrees to maintain information in
confidence;
(2) Whenever the person communicating the material nonpublic
information and the person to whom it is communicated have a
history, pattern, or practice of sharing confidences, such that the
recipient of the information knows or reasonably should know that
the person communicating the material nonpublic information
expects that the recipient will maintain its confidentiality; or
(3) Whenever a person receives or obtains material nonpublic
information from his or her spouse, parent, child, or sibling,
provided, however, that the person receiving or obtaining the
information may demonstrate that no duty of trust or confidence
existed with respect to the information, by establishing that he or
she neither knew nor reasonably should have known that the
person who was the source of the information expected that the
person would keep the information confidential, because of the
parties’ history, pattern, or practice of sharing and maintaining
confidences, and because there was no agreement or understanding
to maintain the confidentiality of the information.
Rule 10b5-2, 17 C.F.R. § 240.10b5-2 (2002).
While the SEC’s new rule goes farther than we do in finding a relationship of trust and
confidence (e.g., the new rule creates a presumption of a relationship of trust and confidentiality
in the case of close family members), the following language on the background of the rule
supports the conclusion we reach: “[T]he Chestman majority’s approach does not fully recognize
the degree to which parties to close family and personal relationships have reasonable and
legitimate expectations of confidentiality in their communications.” Proposed Rules, Securities
and Exchange Commission, Selective Disclosure and Insider Trading, Dec. 28, 1999, 64 Fed.
Reg. 72590-01, 72602.

16
(citing O’Hagan, 521 U.S. at 652, 117 S. Ct. at 2199). If the SEC presented

evidence that David and Donna had a history or pattern of sharing business

confidences, which were generally kept, then Donna could have been found by

the jury to have breached a duty of loyalty and confidentiality by disclosing to

Burch the information regarding Scholastic’s upcoming earnings announcement.

Similarly, if the SEC presented evidence that Donna had agreed in this particular

instance to keep the information confidential, then Donna could have been found

to have committed the necessary breach of a duty of loyalty and confidentiality.

We conclude that the SEC provided sufficient evidence both that an

agreement of confidentiality and a history or pattern of sharing and keeping of

business confidences existed between David and Donna Yun such that David

could have reasonably expected Donna to keep confidential what he told her

about Scholastic’s pending announcement. First, the SEC presented evidence that

Donna explicitly accepted the duty to keep in confidence the business information

she received. She testified that she considered the information confidential

because, “David always told me, anything that he talks to me in regards to the

company is confidential and can’t go past he or I.” That she fully understood and

agreed to the understanding of confidentiality is further manifested by the fact

that she declined to disclose any information about David’s company to her

17
attorney until she had “absolute certainty that there was confidentiality with

everything [she] was sharing with him.” Second, both David and Donna testified

that David repeatedly shared confidential information about Scholastic with

Donna, including information regarding its sales goals. This certainly qualified

as a history or pattern of sharing business confidences. Overall, the SEC

presented evidence upon which a jury could find that a duty of loyalty and

confidentiality existed between David and Donna Yun; the SEC therefore

established the first element of a “misappropriation theory” claim.

B.

Having reached this conclusion, we turn to the question of whether the

evidence was sufficient to show that Donna breached her duty to David.

According to the allegations of the complaint, the answer to this question depends

on whether Donna deliberately communicated the confidential information to

Burch “for her direct and/or indirect benefit because of her business relationship

and friendship with . . . Burch.” The SEC contends – contrary to the position it

assumed in its complaint – that it did not have to prove that Donna divulged the

information for her own benefit; all it had to show was that Donna acted with

18
“severe recklessness.” 24 According to the SEC, the “intent to benefit” element

only applies in cases brought under the classical theory of liability; the element

has no application in cases brought under the misappropriation theory of liability.

In other words, whether Donna expected to benefit from the disclosure of the

confidential information is irrelevant.

Which position is correct – the one the SEC took in its complaint and the

appellants essentially take in this appeal or the one the SEC advances now – is an

issue we have not been called upon to decide. Several district courts have

addressed the issue, though, with some requiring an expected benefit25 and others

holding that no showing of an expected benefit is necessary. 26 None of these

24
The SEC’s initial complaint was dismissed for failure to state a claim on which relief
could be granted. In its order dismissing the complaint, the district court informed the SEC that
if it elected to file an amended complaint, “it should state the facts supporting its [allegation] that
Donna Yun acted for her direct or indirect benefit when she disclosed the confidential
information related to her by her husband.” The SEC filed an amended complaint which added
such facts. The addition consisted of two paragraphs outlining the “[R]elationship between
Donna Yun and Jerry Burch”; a clause explaining that Donna expected a benefit “because of her
business relationship and friendship with Jerry Burch as discussed in . . . [the two added
paragraphs]”; and a clause explaining that Donna was aware that Burch would trade on the
confidential information “based among other things, on their regular discussions concerning
investments and the nature of the information she gave [him].” The amended complaint
contained the latter clause in response to the district court’s announced view that O’Hagan
required that, to be held liable under § 10(b), a tipper had to anticipate that the tippee would trade
on the basis of the divulged confidential information.
25
See, e.g., SEC v. Trikilis, Fed. Sec. L. Rep. (CCH) ¶ 97,015, at 94,462 (C.D. Cal. July
28, 1992), vacated on other grounds, Fed. Sec. L. Rep. (CCH) ¶97,375, at 95,981 (C.D. Cal. Jan.
22, 1993).
26
See, e.g., SEC v. Willis, 777 F. Supp. 1165, 1172 n.7 (S.D.N.Y. 1991). The First
Circuit noted the disagreement on whether a showing of a misappropriator benefit is necessary,

19
courts, however, gave the issue more than perfunctory thought. After

considering the policies underpinning the insider trading rules, we are led to the

conclusion that the SEC must prove that a misappropriator expected to benefit

from the tip.

The origin of the benefit requirement is the Supreme Court’s decision in

Dirks v. SEC, 463 U.S. 646, 103 S. Ct. 3255, 77 L. Ed. 2d 911 (1983).

Addressing a case brought under the classical theory of insider trading liability,

the Supreme Court held that for a tippee to be liable, the tipper (a corporate

insider) would have to intend to benefit personally from his disclosure of the

confidential information to the tippee. The Supreme Court explained:

Whether disclosure is a breach of duty therefore depends in large
part on the purpose of the disclosure. . . . Thus, the test is whether
the insider personally will benefit, directly or indirectly, from his
disclosure. Absent some personal gain, there has been no breach of
duty to stockholders. And absent a breach by the insider, there is no
. . . [tippee] breach.

Id. at 662, 103 S. Ct. at 3265. The Court went on to recognize that the gain does

not always have to be pecuniary. A reputational benefit that translates into future

earnings, a quid pro quo, or a gift to a trading friend or relative all could suffice to

show that the tipper personally benefitted. Id. at 663-64, 103 S. Ct. at 3266.

but avoided weighing in on the issue. See Sargent, 229 F.3d at 77. The First Circuit did observe,
however, that the Second Circuit in United States v. Libera, 989 F.2d 596, 600 (2d Cir. 1993)
“strongly implied” there is no benefit requirement. Id.

20
Since the insiders (tippers) in Dirks, who disclosed the confidential information,

did not do so for monetary benefit or to make a gift of valuable information, they

did not personally gain, and the Court concluded that they and the tippees were

not subject to insider trading liability. Id. at 667, 103 S. Ct. at 3267-68.

The SEC submits that an analysis of the rationale behind Dirks’s tipper

benefit requirement demonstrates that the benefit requirement has no application

in misappropriation cases. The SEC’s argument proceeds in two steps. First, the

SEC points out that the benefit requirement is inextricably linked to determining

whether an insider has breached a duty to corporate shareholders. Second, the

SEC notes that the distinguishing feature of misappropriation theory cases is that

the outsider owes no fiduciary duty to the corporate shareholders. Put together,

the SEC contends, it is unnecessary in misappropriation cases that it show that an

outsider intended to benefit from his disclosure; since outsiders owe no duty to

corporate shareholders to begin with, applying the Dirks test to determine if there

was a breach of a duty to those same shareholders would be nonsensical.

We recognize the plausibility of the SEC’s logic, but are not persuaded –

mainly because it constructs an arbitrary fence between insider trading liability

based upon classical and misappropriation theories. In other words, we think the

SEC is unduly dichotomizing the two theories of insider trading liability. The

21
SEC’s approach essentially would allow the SEC and the courts to ignore

precedent involving the classical theory of liability whenever the SEC brings its

actions under a misappropriation theory, and vice versa.27 The Supreme Court,

however, has indicated that we should attempt to synthesize, rather than polarize,

insider trading law. See O’Hagan, 521 U.S. at 652, 117 S. Ct. at 2207 (stressing

that the two theories “are complimentary, each addressing efforts to capitalize on

nonpublic information through the purchase or sale of securities”). Our goal

should be like that of the Court in O’Hagan, which sought to explain how the

two theories work together to promote the policies underlying the securities

laws. We believe – as will be explained below – that requiring the SEC to

establish that the misappropriator intended to benefit from his tip will develop

consistency in insider trading caselaw.

First, we note that there is no reason to distinguish between a tippee who

receives confidential information from an insider (under the classical theory) and

a tippee who receives such information from an outsider (under the

misappropriation theory). In either case, the tippee is under notice that he has

27
The dichotomization of insider trading liability based on the classical and
misappropriation theories has grown over the last decade, with the SEC utilizing the
misappropriation theory with increasing regularity. We disagree with the way the SEC and
several courts have come to put insider trading cases in separate and discrete classical and
misappropriation boxes. Congress did not intend to create a scheme of law that depends on the
label or theory under which the SEC brings its case.

22
received confidential information through an improper breach of a duty of

loyalty and confidentiality. And should the tippee nonetheless trade on the

confidential information, his potential liability would not vary according to the

theory – classical or misappropriation – under which the case is prosecuted.

Finally, the harm to the securities market from such trading would not differ

depending on whether the tippee received the confidential information from an

insider or an outsider; the integrity of, and investor confidence in, the securities

markets are undermined by either method of insider trading. See id. at 658-59,

117 S. Ct. at 2210.

Given that the position of a tippee is the same whether his tipper is an

insider or an outsider, it makes “scant sense” for the elements the SEC must

prove to establish a § 10(b) and Rule 10b-5 violation depend on the theory under

which the SEC chooses to litigate the case. See id. at 659, 117 S. Ct. at 2210-11.

The tippee’s liability should be determined under the same principles. And for

better or worse, the Supreme Court has required that the only way to taint a

tippee with liability for insider trading is to find a co-venture with the fiduciary, 28

and that co-venture exists only if the tipper intends to benefit.29 To equalize the

28
See supra part I.B.
29
As discussed above, explicit in Dirks’s benefit requirement is that a tippee’s liability
hinges on the tipper’s expectation of a benefit. The SEC’s position that the benefit requirement
is inextricably linked to the insider’s duty to corporate shareholders, therefore, while accurate, is

23
position of tippees under both theories of liability, therefore, it is necessary to

require an outsider who tips to have intended to benefit by his tip.

Requiring an intent to benefit regardless of the theory of insider trading

liability also serves to equalize the positions of tippers. Since under both

theories of liability the tipper is breaching a duty of loyalty and confidentiality

by disclosing confidential information, and since the harm to marketplace traders

is identical under either breach, it again makes “scant sense” to impose liability

more readily on a tipping outsider who breaches a duty to a source of

information than on a tipping insider who breaches a duty to corporate

shareholders.

Nevertheless, the SEC urges us to hold that the breach by an outsider is

unique from a breach by an insider. In the SEC’s view, there is no need to show

that the misappropriating outsider intended to benefit. A breach of duty to the

incomplete. The benefit requirement is also inextricably linked to the tippee’s duty. As one
commentator stated regarding the Dirks benefit requirement:
This portion of the Court’s opinion merges a discussion of the
necessary state of mind for tippee liability (a scienter concept) with
a discussion of the nature of the breach necessary to create tipper
liability. One can read the opinion in two ways: (1) the personal
benefit requirement is imposed because it provides an objective
test for determining whether there has been the requisite notice to
the tippee, or (2) the personal benefit requirement is imposed
because it states the only situation in which the insider has
contravened the policy underlying the abstain or disclose rule, that
of avoiding unjust enrichment.
Donald C. Langevoort, Insider Trading Regulation, Enforcement, and Prevention § 4:3 n.7
(2002).

24
principal occurs when the outsider makes unauthorized disclosure of the

confidential information in a way that harms the principal; the harm done to the

principal constitutes a breach – whether or not the outsider intends to “profit”

from the unauthorized disclosure. We conclude, however, that no good reason

exists to treat the two types of breaches differently. Under the common law, a

corporate insider breaches a duty of loyalty and confidentiality by disclosing

confidential information (rather than trading or tipping on that information) just

as much as a misappropriating outsider who discloses the information. And the

“harm” to corporate shareholders under the classical theory could be just as – if

not more – egregious than the harm to the source of the information under the

misappropriation theory. Yet, the Supreme Court in Dirks held that such a

disclosure is insufficient to constitute a “breach” for purposes of imposing

classical insider trading liability;30 for there to be a “breach,” the tipping insider

must act with the goal of benefitting personally. To equate the positions of

tippers, we find it appropriate to require the SEC to show that a misappropriating

outsider expected to benefit from the disclosure.31 Mere disclosure by itself is

30
By insisting on an intent to benefit, the Supreme Court indicated that the common law
principles of fiduciary duty were not to be adhered to strictly in the insider trading context. After
all, an “intent to benefit” is clearly not an essential element of a case against a fiduciary under the
common law.
31
To the extent that the securities laws are premised upon a property rights doctrine, we
agree that unauthorized disclosure that harms the principal constitutes a breach of a duty of

25
insufficient to constitute a breach.32

We also think the SEC’s position is inconsistent with the principle “that §

10(b) is not an all-purpose breach of fiduciary duty ban.” O’Hagan, 521 U.S. at

655, 117 S. Ct. at 2209 (citing Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 97 S.

loyalty and confidentiality. However, the securities laws are not based on property rights alone.
An “animating purpose” of the Exchange Act is to “[e]nsure honest securities markets and
thereby promote investor confidence.” O’Hagan, 521 U.S. at 658, 117 S. Ct. at 2210 (citing 45
Fed. Reg. 60412 (1980)). For this reason, trading on material, nonpublic information (not just
possessing, disclosing, or stealing) is essential to incur insider trading liability. Judge Winter, in
his dissent in Chestman and his panel decision in United States v. Libera, 989 F.2d 596 (2d Cir.
1993), has advocated a property rights approach to insider trading laws. While his views make
practical sense, we cannot ignore the fact that insider trading prohibitions, in the end, must be
premised on fraud. Judge Winter’s statement in Libera, 989 F.2d at 600 – that the
misappropriation theory’s purpose “is to protect property rights in information” – is therefore
incomplete in that it ignores the fact that the theory’s essential purpose must be the prevention of
fraud. See O’Hagan, 521 U.S. at 655, 117 S. Ct. at 2209 (stating the misappropriation theory is
consistent with § 10(b) because it involves “manipulation or deception”).
32
We note that the SEC’s argument that mere disclosure is sufficient to constitute the
requisite breach for imposing insider trading liability is simply an extension of the same
argument it made in Dirks: “an insider invariably violates a fiduciary duty to the corporation’s
shareholders by transmitting nonpublic corporate information to an outsider when he has reason
to believe that the outsider may use it to the disadvantage of the shareholders. Thus, regardless
of any ultimate motive . . . [the insider] breached his duty to . . . [the corporate shareholders].”
Dirks, 463 U.S. at 666 n.27, 103 S. Ct. at 3267 n.27 (internal quotation marks omitted). The
Supreme Court rejected that argument, stating:
[The SEC’s] perceived “duty” differs markedly from the one . . .
that has been the basis for federal tippee-trading rules to date. . . .
[T]o constitute a violation of Rule 10b-5, there must be fraud.
There is no evidence that . . . [the insider’s] disclosure was
intended to or did in fact “deceive or defraud” anyone. [The
insider] . . . certainly intended to convey relevant information . . .
[but] [u]nder any objective standard . . . [the insider] received no
direct or indirect personal benefit from his disclosure. . . . [It is]
inside trading for personal gain [that] is fraudulent, and . . .
[constitutes] a violation of the federal securities laws.
Id. (internal citations omitted).

26
 Ct. 1292, 51 L. Ed. 2d 480 (1977)). Section 10(b) “trains on conduct involving

manipulation or deception.” Id. This manipulation or deception, i.e., fraud, “is

consummated . . . when, . . . [the fiduciary] uses the information to purchase or

sell securities” and thereby “gain no-risk profits”; if the information is put to an

“other” use, no breach has occurred for purposes of the securities laws. Id. at

656, 117 S. Ct. at 2209. In other words, § 10(b) “does not catch all conceivable

forms of fraud involving confidential information; rather, it catches fraudulent

means of capitalizing on such information through securities transactions.” 33 Id.

Should we adhere to the SEC’s approach of imposing liability merely because

the outsider “harmed” the principal in some way, however, the outsider

potentially could be liable for insider trading where not even the slightest intent

to trade on securities existed when he disclosed the information.34

33
The necessity that confidential information be put to use through securities transactions
stems from § 10(b)’s requirement that chargeable conduct involve a “deceptive device or
contrivance” used “in connection with the purchase or sale of [a] security.” 15 U.S.C. § 78j(b).
34
Suppose the CEO of a public company, decides, after conferring with select members
of the company’s management, to confide in his wife that he is an alcoholic and is entering a
rehabilitation center. Suppose he has continually confided with her over the years and she has
never broken his trust. Also suppose that the day after he enters rehab, his wife discovers that he
was having a love affair with another woman. Angry, the wife decides to humilate her husband
by disclosing his alcohol problems to the local newspaper editor. The editor is savvy, and
realizes that news of the CEO’s alcoholism would likely cause the stock price to fall.
Accordingly, the editor buys put options in the husband’s company before printing the story.
When the story hits the newstand, and the stock price falls, the editor makes lots of money. The
question is whether the wife and the editor are liable. The information regarding her husband’s
alchoholism is material and nonpublic, the wife breached a duty of loyalty and confidentiality
with her husband, the editor was aware of the wife’s breach, and the husband is harmed

27
 Our conclusion that the SEC must establish that all tippers, both insider

and outsiders, intend to benefit from their disclosure of confidential information

is amply supported by language in O’Hagan. There, the Court observed that an

outsider who “pretends loyalty to the principal while secretly converting the

principal’s information for personal gain dupes or defrauds the principal. Id. at

653-54, 117 S. Ct. at 2208 (emphasis added) (internal quotation marks and

alteration omitted). Likewise, an outsider “who trades on the basis of material,

nonpublic information, in short, gains his advantageous market position through

deception.” Id. at 656, 117 S. Ct. at 2209 (emphasis added). In the same vein:

“The misappropriation theory targets information of a sort that misappropriators

ordinarily capitalize upon to gain no-risk profits through the purchase or sale of

securities. . . . [The theory] catches fraudulent means of capitalizing on such

information through securities transactions.” Id. (emphasis added). Finally, it is

a fiduciary’s “self-serving use of a principal’s information to purchase or sell

(emotionally, financially, and in terms of his reputation). But, the wife did not disclose the
information with the intent that anyone would trade or benefit; she merely wanted to harm her
husband emotionally.
Under the SEC’s approach the wife would be liable for the disgorgement of all of the
editor’s profits. The securities laws, however, are not designed to impose liability on a person
who had no intent to trade or manipulate the market. Section 10(b) requires fraud “in connection
with” the purchase or sale of securities. Id.

28
securities” that constitutes a breach of duty of loyalty and confidentiality. 35 Id. at

652, 117 S. Ct. at 2207 (emphasis added).

All of the above quoted language from O’Hagan explicitly states or

implicitly assumes that a misappropriator must gain personally from his trading

on the confidential information. If we were to hold that a misappropriator who

tips – rather than trades – is liable even though he intends no personal benefit

from his tip, then we would impose liability more readily for tipping than

trading. Such a result would be absurd, and would undermine the Supreme

Court’s rationale for imposing the benefit requirement in the first place: the

desire to ensure that a tip rises to the level of a trade. See Dirks, 436 U.S. at 664,

103 S. Ct. at 3266 (“The tip and trade resemble trading by the insider himself

followed by a gift of the profits to the recipient.”). The better approach, in our

view, is to follow Dirks and ensure that an outsider who tips must have done so

with the intent of benefitting from the tippee’s trading.

Finally, and perhaps most importantly, the need for an identical approach

to determining tipper and tippee liability under the two theories becomes evident

when one realizes that nearly all violations under the classical theory of insider

35
We also highlight the fact that the misappropriating defendant in O’Hagan gained
personally from his trading.

29
trading can be alternatively characterized as misappropriations.36 See

Langevoort, supra note 29, at § 6:13. To allow the SEC to avoid establishing the

personal benefit element simply by proceeding under the misappropriation

theory instead of the classical theory would essentially render Dirks a dead letter

in this circuit. Such an effect would be unwarranted, particularly in light of the

fact that O’Hagan incorporated its principals with, rather than overruled, Dirks.37

Requiring an intent to benefit in both classical and misappropriation

36
Indeed, the case at hand – which involves the intentional disclosure of confidential
information by a corporate insider – fits the facts of a case typically brought under the classical
theory of insider trading.
37
One district court recently expressed its concern about the SEC skirting Dirks by
expanding the use of the misappropriation theory:
Misappropriation theory is targeted at “outsider” trading, i.e.,
breaches that do not involve a duty to the traded company and its
shareholders. This case, however, involves a breach of a duty
allegedly owed to an insider in the company whose securities were
traded. Generally speaking traditional insider trading liability
addresses such breaches through tipper-tippee liability [i.e.,
classical theory]. The government is attempting to redeploy
misappropriation theory here to the rare case w[h]ere the
intentional disclosure of material, nonpublic information by an
insider does not result in tipper-tippee liability. While this alone is
not reason to reject the government’s argument, it does show that
this case falls outside the misappropriation paradigm.
United States v. Kim, 184 F. Supp. 2d 1006, 1012-13 (N.D. Cal. 2002) (footnote omitted).
The case at hand, like Kim, is an example of an intentional disclosure of information by
an insider of a company whose securities were traded. And like Kim, the SEC could not
establish liability under the classical theory because the corporate insider had not tipped with the
requisite scienter. We agree with Kim that although the lack of being able to establish liability
under the classical theory does not forego liability under the misappropriation theory, the
imposition of liability under the misappropriation theory in the typical classical theory scenario
causes concern that liability for insider trading could turn on the label of the theory under which
the SEC brings its case and that Dirks is being systematically ignored in the process.

30
theory cases equalizes the positions of tippers and tippees and is also consistent

with Supreme Court precedent. Perhaps the simplest way to view potential

insider trading liability is as follows: (1) an insider who trades is liable; (2) an

insider who tips (rather than trades) is liable if he intends to benefit from the

disclosure; (3) an outsider who trades is liable; (4) an outsider who tips (rather

than trades) is liable if he intends to benefit from the disclosure.

Having concluded that the SEC must prove that Donna expected to benefit

from disclosing the confidential information to Burch – the position the SEC

took in its complaint – we now consider whether the SEC provided sufficient

evidence for a jury reasonably to find such an expectation.38 Viewing the facts in

the light most favorable to the SEC, we conclude that the SEC did so.

The showing needed to prove an intent to benefit is not extensive. The

Supreme Court in Dirks, after establishing the tipper benefit requirement,

proceeded to define “benefit” in very expansive terms. The Court declared that

not only does an actual pecuniary gain, such as a kickback or an expectation of a

reciprocal tip in the future, suffice to create a “benefit,” but also cases where the

tipper sought to enhance his reputation (which would translate into future

38
Determining whether a tipper expected to benefit personally from a particular
disclosure is a question of fact. See Dirks, 463 U.S. at 664, 103 S. Ct. at 3266. We, therefore,
can reverse only if the jury’s findings were clearly erroneous. See, e.g., Commody Futures
Trading Comm’n v. R.J. Fitzgerald & Co., 310 F.3d 1321, 1331 (11th Cir. 2002).

31
earnings) or to make a gift to a trading relative or friend. See Dirks, 463 U.S. at

663-64, 103 S. Ct. at 3266.

In this case, the SEC presented evidence that the two appellants were

“friendly,” worked together for several years, and split commissions on various

real estate transactions over the years. This evidence is sufficient for a jury

reasonably to conclude that Donna expected to benefit from her tip to Burch by

maintaining a good relationship between a friend and frequent partner in real

estate deals. See Sargent, 229 F.2d at 77 (finding evidence of personal benefit

when the tipper passed on information “to effect a reconciliation with his friend

and to maintain a useful networking contact”). Accordingly, the SEC has

sufficiently established the second element of a misappropriation theory claim –

a breach of a duty of loyalty and confidentiality.

III.

Having concluded that the evidence was sufficient to withstand appellants’

motions for judgment as a matter of law, we turn to the question of whether the

district court erred in instructing the jury on the elements of the SEC’s claims

and, if error occurred, whether it was harmless.39 The district court accepted the

39
A district court has broad discretion in formulating jury instructions; we accordingly
apply a deferential standard of review. Toole v. Baxter Healthcare Corp., 235 F.3d 1307, 1313

32
argument the SEC advances here: all it had to show to establish a breach of

loyalty and confidentiality was that Donna acted with “severe recklessness” in

letting Burch know what David had told her about Scholastic’s anticipated

earnings announcement. Over appellants’ objections, the court instructed the

jury as follows: (1) “the SEC must establish, by a preponderance of the evidence,

that Mrs. Yun breached a fiduciary duty or other duty of trust and confidence to

David Yun by disclosing to Mr. Burch material nonpublic information”; and (2)

“[t]he communication of such information must be intentional, or severely

reckless.” The court rejected the appellants’ argument that the SEC had to prove

that Donna acted out of a motive to benefit herself, and thus denied appellants’

proposed instruction, which stated: “[T]he disclosure has to be for the fiduciary’s

personal benefit to constitute a breach.”

Our role “in reviewing a trial court’s jury instructions [ ] is to assure that

the instructions show no tendency to confuse or to mislead the jury with respect

(11th Cir. 2000). We must assure, however, “that the instructions show no tendency to confuse
or to mislead the jury with respect to the applicable principles of law.” Mosher v. Speedstar Div.
of AMCA Int’l Inc., 979 F.2d 823, 824 (11th Cir. 1992) (quoting Rohner, Gehrig & Co. v.
Capital City Bank, 655 F.2d 571, 580 (5th Cir. Unit B Sept. 1991)). If the instructions do not
accurately reflect the law, “and the instructions as a whole do not correctly instruct the jury so
that we are ‘left with a substantial and ineradicable doubt as to whether the jury was properly
guided in its deliberations,’ we will reverse and order a new trial.” Broaddus v. Fla. Power
Corp., 145 F.3d 1283, 1288 (11th Cir. 1998) (quoting Carter v. DecisionOne Corp. through C.T.
Corp. Sys., 122 F.3d 997, 1005 (11th Cir. 1997) (quoting Johnson v. Bryant, 671 F.2d 1276,
1280 (11th Cir. 1982)).

33
to the applicable principles of law.” Mosher, 979 F.2d at 824 (internal quotation

marks omitted). “We will not disturb a jury’s verdict unless the charge, taken as

a whole, is erroneous and prejudicial.” Id. As our previous discussion makes

clear, the district court erred in accepting the SEC’s position that whether Donna

anticipated a benefit was irrelevant. The question thus becomes whether the

appellants were prejudiced.

The “severely reckless” instruction mentioned above, considered in the

light of the court’s overall charge on the SEC’s burden of proof, permitted the

SEC’s counsel to tell the jury that the case turned on whether Donna tipped

Burch “intentionally” or “severely recklessly.” On three separate occasions, the

SEC’s counsel told the jury that it could find that Donna breached a duty to her

husband – and therefore violated § 10(b) – if it found that she intentionally or

severely recklessly divulged the confidential information regarding Scholastic:

[I]t’s enough that Ms. Yun told . . . [Burch] the
Scholastic information at the party. She is then liable
for intentionally tipping him or for acting with severe
recklessness by revealing this highly confidential
information . . . .

...

If Donna Yun breached a duty to her husband because
she intentionally or severely recklessly gave Jerry
Burch this information, then they should both be found
liable.

34
 ...

During the telephone call with the SEC, Ms. Yun
claimed to specifically recall Mr. Burch walking into
the office during the February 18th call with her
attorney. . . . This admission is enough evidence . . .
[f]or your to find that at the very least, [that] she acted
with severe recklessness by revealing the information
when she saw Mr. Burch was present.

We have little difficulty in concluding that the “severely reckless”

instruction materially prejudiced the appellants, such that they are entitled to a

new trial.40 Given the court’s improper instruction and the SEC’s heavy reliance

on that instruction in arguing its case to the jury, it is likely that the jury found

against appellants on the ground that Donna acted with severe recklessness in

disclosing the confidential information to Burch. See Christopher v. Cutter

Labs., 53 F.3d 1184, 1195 (11th Cir. 1995) (commenting that counsel’s strong

reliance on an erroneous instruction in closing argument “improperly guided [the

jury] in its deliberations”). It is also likely that whether Donna disclosed the

40
In reaching this conclusion, we do not overlook that in instructing the jury as to the
misappropriation theory of liability, the court said that the SEC had to show that “Mrs. Yun
breached her alleged duty by sharing, for an improper purpose, material, nonpublic information
about Scholastic Corporation with Mr. Burch.” (emphasis added). The court did not go on to
define what improper purpose meant, and given what the SEC’s counsel said in closing
argument, we are satisfied that the jury did not translate “improper purpose” into an “intent to
benefit” directly or indirectly from Burch’s put options trades.

35
information for her personal benefit was not a factor in its deliberations.41

Rule 61 of the Federal Rules of Civil Procedure provides the standard for

harmless error. The rule states, in pertinent part:

No error in either the admission or the exclusion of
evidence and no error or defect in any ruling or order or
in anything done or omitted by the court or by any of
the parties is ground for granting a new trial . . . unless
refusal to take such action appears to the court
inconsistent with substantial justice. The court at every
stage of the proceeding must disregard any error or
defect in the proceeding which does not affect the
substantial rights of the parties.

Fed. R. Civ. P. 61.

The district court’s error, reinforced in the SEC’s closing argument to the

jury, affected the appellants’ substantial rights. Under the circumstances, our

failure to grant appellants a new trial would be inconsistent with substantial

justice. We therefore vacate the district court’s judgment and remand the case

for a new trial.

IV.

In conclusion, we AFFIRM the district court’s decisions denying

41
In the face of the erroneous instruction, the appellants’ attorneys were foreclosed from
arguing that the jury could not find against their clients unless they found that Donna tipped
Burch for her personal benefit.

36
appellants’ motions for judgment as a matter of law. Because we find prejudicial

error in the district court’s instruction on the elements of the misappropriation

theory of liability, we VACATE the court’s judgment and REMAND the case for

a new trial.

SO ORDERED.

37