Securities & Exchange Commission v. Happ

United States Court of Appeals
For the First Circuit

Nos. 04-1406, 04-1461

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff, Appellee/Cross-Appellant,

v.

ROBERT D. HAPP,

Defendant, Appellant/Cross-Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Robert E. Keeton, Senior U.S. District Judge]

Before

Torruella, Circuit Judge,
Campbell, Senior Circuit Judge,
and Howard, Circuit Judge.

Peter M. Casey with whom Stephen C. Warneck, Foley Hoag LLP,
Gary C. Crossen and Rubin & Rudman LLP were on brief for appellant,
cross-appellee.
Thomas Karr, Special Trial Counsel, Securities and Exchange
Commission, with whom Eric Summergrad, Deputy Solicitor, Giovanni
P. Prezioso, General Counsel, Melinda Hardy, Assistant General
Counsel, and Laura Walker, Senior Counsel, were on brief for
appellee, cross-appellant.

December 10, 2004
 CAMPBELL, Senior Circuit Judge. The Securities and

Exchange Commission (SEC) brought a civil enforcement action in the

district court against Robert D. Happ. After a jury trial, the

jury returned a special verdict against Happ, finding that he had

traded on material, nonpublic information in violation of the

federal securities laws. Happ appeals from the district court's

denial of his motion for judgment as a matter of law, or in the

alternative, for a new trial. Happ also appeals from the monetary

remedies imposed by the court -- the sum calculated as the

disgorgement amount and an additional civil penalty equivalent to

the disgorgement amount. The SEC cross-appeals from the portion of

the district court's judgment imposing sanctions against the SEC

for refusing to stipulate until mid-trial that no telephone call to

Happ was made from the office of the SEC's main witness on June 25,

1998, or earlier. We affirm.

I. Factual Background

We recite the facts in the light most favorable to the

verdict. See Wennik v. Polygram Group Distribution, Inc., 304 F.3d

123, 126 (1st Cir. 2002). Happ was a Director, Chairman of the

Board of Directors' Audit Committee, and the acknowledged financial

expert on the Board of Directors of Galileo Corporation

("Galileo"), formerly a Sturbridge, Massachusetts manufacturer of

fiber-optic and electro-optic products.

-2-
 On April 20, 1998, Happ participated by telephone in a

Galileo Board of Directors meeting. At that meeting, William T.

Hanley, the chief executive officer of Galileo, provided

information to the Board about "two areas of particular concern."

One was that shipments had been impacted for the second quarter due

to a jurisdictional dispute between the United States Departments

of Commerce and State with respect to export of some products.

Hanley testified that "[t]he impact was rather small for the second

fiscal quarter, but [he] had discussed [with the Board] the fact

that if it continued, it could be substantial in the June quarter."

Hanley informed the Board that Galileo believed that the export

issues "would be resolved in the June quarter, but if they weren't,

they would further -- obviously further impact shipments of those

products." Hanley also provided the Board with information that

Imagyn, a Galileo customer, was past due on $500,000 of the

$700,000 it owed Galileo. He indicated that Imagyn "had made some

payments in the March quarter," and that Galileo "had assurances

from both the CFO of Imagyn and the CEO that [Galileo was] going to

be paid." Hanley also noted that Galileo was negotiating an

exclusive marketing agreement with a company called Ethicon.

By late June, Galileo was having third quarter financial

difficulties. Hanley and Gregory Reidel, Galileo's chief financial

officer, met on Thursday, June 25, 1998, two business days before

-3-
the end of the third fiscal quarter, to discuss these problems.

During that meeting, they decided to seek Happ's advice.

Hanley testified at trial that he left two voicemail

messages for Happ, one on Thursday, June 25, 1998, and another on

Sunday, June 28, 1998. In the first voicemail message, Hanley told

Happ that Galileo was "having some difficulties during the quarter

and [he] would like [Happ's] advice on these issues," and he

requested a meeting with Happ the following Monday or Tuesday. The

second voicemail message was "a duplicate of the previous message,"

reiterating that Galileo was having "some difficulties" and that

Hanley wanted to meet with him Monday or Tuesday. Hanley rarely

telephoned Happ or requested a one-on-one meeting with a director

in his office. On Monday, June 29, Happ called Hanley's assistant

to schedule a meeting with Hanley. Thereafter, on the same day,

Happ sold all of his 4,000 shares of Galileo stock, excluding stock

options, for approximately $47,000, resulting in a profit of

approximately $14,500.

The following morning, Happ met with Hanley and Reidel to

discuss Galileo's difficulties, including the company's

difficulties in obtaining export licenses, the potential

uncollectibility of the Imagyn receivables, and the fact that the

Ethicon agreement had not yet been consummated. At the end of the

meeting, Happ mentioned to Hanley that he had sold his Galileo

-4-
stock the previous day. Happ told Hanley that he sold the stock

because he needed money from the sale to pay some bills.

On July 15, 1998, Galileo's Board met to discuss the

financial results for the third quarter. On July 23, 1998, Galileo

issued a press release publicizing the difficulties from the third

quarter and their impact on Galileo's financial performance. While

Galileo had forecast a net profit of $160,000 for the quarter, it

reported losses of $3.3 million. The following day, Galileo's

stock price dropped 64% from $8.25 to $3 per share. Soon

thereafter, Happ purchased 5,000 shares of Galileo stock.

II. Procedural Background

On October 5, 2000, the SEC filed a complaint against

Happ alleging that he traded on material, nonpublic information

when he sold 4,000 shares of Galileo stock on June 29, 1998,

thereby avoiding losses of $34,758, in violation of Section 10(b)

of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule

10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and Section

17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a).1 After

1
Section 10(b) of the Securities Exchange Act of 1934
provides:

It shall be unlawful for any person, . . . by the use of
any means or instrumentality of interstate commerce or of
the mails, or of any facility of any national securities
exchange . . . [t]o use or employ, in connection with the
purchase or sale of any security . . . any manipulative
or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may
prescribe . . . .

-5-
15 U.S.C. § 78j(b) (emphasis added). Rule 10b-5 promulgated
thereunder states:

It shall be unlawful for any person . . .
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, 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. Rule 10b5-1 provides in pertinent part:

The 'manipulative and deceptive devices' prohibited by
Section 10(b) of the Act (15 U.S.C. 78j) and § 240.10b-5
thereunder include . . . the purchase or sale of a
security . . . on the basis of material nonpublic
information . . . in breach of a duty of trust or
confidence that is owed . . . to the issuer of that
security or the shareholders of that issuer, or to any
other person who is the source of the material nonpublic
information.

17 C.F.R. § 240.10b5-1 (emphasis added). Section 17(a) of the
Securities Exchange Act of 1933 provides:

It shall be unlawful for any person in the offer or sale
of any securities . . . by the use of any means or
instruments of transportation or communication in
interstate commerce or by use of the mails, directly or
indirectly
(1) to employ any device, scheme, or artifice to defraud,
or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in light of the circumstances under which they were
made, not misleading; or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.

-6-
extensive discovery, the case went to a jury trial on September 29,

2003.

The court denied Happ's motions for judgment as a matter

of law at the close of the SEC's case and at the close of the

evidence. On October 9, 2003, the jury returned a special verdict

against Happ. After entering final judgment on the verdict, the

district court denied Happ's renewed motion for judgment as a

matter of law or, in the alternative, for a new trial, as well as

Happ's motion for a new trial based on allegedly improper remarks

made by the SEC's counsel in its closing argument. The district

court ordered Happ to pay $34,758 as disgorgement for loss avoided,

$15,726.63 in prejudgment interest, and an additional $34,758 as a

civil penalty. SEC v. Happ, 295 F. Supp. 2d 189, 200 (D. Mass.

2003). Happ appeals from the district court's denial of his

motions for judgment as a matter of law and for a new trial, and

from the portion of the judgment imposing disgorgement and the

civil penalty.2 As part of its final judgment, the court also

imposed sanctions on the SEC in the amount of $87,036 for refusing

to stipulate until the middle of the trial that the June 25 call

did not take place from Hanley's office to Happ's home. Id. at

192-94. The SEC cross-appeals from the sanctions.

15 U.S.C. § 77q(a).
2
Happ does not appeal from the court's award of prejudgment
interest, but only argues that it should be recalculated if the
disgorgement amount is reduced.

-7-
 III. Analysis

1. Motion for Judgment as a Matter of Law

We review de novo the denial of a motion for judgment as

a matter of law, viewing the evidence and reasonable inferences

therefrom in the light most favorable to the jury's verdict.

Tapalian v. Tusino, 377 F.3d 1, 5 (1st Cir. 2004). We will reverse

the district court "only if the facts and inferences point so

strongly and overwhelmingly in favor of the movant that a

reasonable jury could not have reached a verdict against that

party." Santos v. Sunrise Med., Inc., 351 F.3d 587, 590 (1st Cir.

2003).

A. Judicial Estoppel

Happ argues that the judgment should be reversed because

the district court refused to hold the SEC to its original

description of the material, nonpublic information Happ allegedly

received prior to selling his stock. Happ says that the SEC

initially argued, in successfully opposing his motions to dismiss

and for summary judgment, that the material, nonpublic information

upon which he had acted was Galileo's serious difficulties

adversely affecting its third quarter earnings. At trial, however,

the SEC's proof was merely that Happ received information from

Hanley that Galileo was having "some difficulties" during the third

quarter and that Hanley would like Happ's advice on these issues.

Even if these difficulties were of a financial nature, the SEC did

-8-
not show, according to Happ, that they specifically impacted third

quarter earnings.

Happ insists that this variance was so fundamental as to

call for application of judicial estoppel. This court has stated

that "[j]udicial estoppel should be employed when a litigant is

'playing fast and loose with the courts,' and when 'intentional

self-contradiction is being used as a means of obtaining unfair

advantage in a forum provided for suitors seeking justice.'"

Patriot Cinemas, Inc. v. Gen. Cinema Corp., 834 F.2d 208, 212 (1st

Cir. 1987) (quoting Scarano v. Central R. Co. of N.J., 203 F.2d

510, 513 (3d Cir. 1953)). The proponent must show "that the party

to be estopped 'succeeded previously with a position directly

inconsistent with the one [it] currently espouses.'" Fleet Nat'l

Bank v. Gray (In re Bankvest Capital Corp.), 375 F.3d 51, 60 (1st

Cir. 2004) (quoting Lydon v. Boston Sand & Gravel Co., 175 F.3d 6,

13 (1st Cir. 1999)).

Accepting that the SEC successfully urged in pretrial

proceedings that Galileo was having serious difficulties affecting

its third quarter earnings, the doctrine of judicial estoppel is

nonetheless inapposite. The SEC's trial theory was not "directly

inconsistent" with its earlier theory. Whatever the distinction

between difficulties affecting third quarter earnings and financial

difficulties emerging during the third quarter, the distinction

falls short of a direct inconsistency. Compare, e.g., Alternative

-9-
Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 34 (1st Cir.

2004) (holding that manufacturer was judicially estopped from

claiming a breach of an oral contract where it successfully argued

on a prior motion that its claim was not a breach of contract

theory but rather a claim for failure to negotiate in good faith),

and Cadle Co. v. Schlictmann, Conway, Crowley & Hugo, 338 F.3d 19,

22-23 (1st Cir. 2003) (holding that plaintiff was estopped from

arguing it was the agent of a note's owner where it had previously

argued that it was the owner of the note), with United States v.

Shea, 150 F.3d 44, 52 (1st Cir. 1998) (finding that government's

assertion at defendant's detention hearing that he possessed an

assault weapon was not inconsistent with later representations that

a codefendant possessed and used the same assault weapon, given its

pursuit of accomplice and principal theories of liability). Happ

points to no precedent imposing an estoppel in a comparable

situation. We find no legal error in the district court's failure

to hold that the SEC was estopped by inconsistency or self-

contradiction from pursuing the theory it presented at trial.

The district court also declined to grant judgment as a

matter of law for the SEC's failure to prove an element of its

complaint, namely, that Happ knew that Galileo's difficulties would

adversely affect its third quarter earnings. In dismissing that

theory, the court stated in its January 14, 2004 Memorandum and

Order, "it is elementary that a variance between allegations and

-10-
proofs, in order to be fatal, must be substantial and material."

(quoting Farris v. Meyer Schuman Co., 115 F.2d 577, 579 (7th Cir.

1940)). It concluded, and we agree, that the variance between the

SEC's complaint and what it proved at trial was not substantial and

material.

The amended complaint alleged that Happ possessed

material, nonpublic information that Galileo was experiencing third

quarter difficulties, which he knew, or was reckless in not

knowing, would adversely impact Galileo's third quarter earnings.

As more fully discussed below, the SEC presented evidence at trial

that Happ was told by Hanley at the end of Galileo's third fiscal

quarter that "we were having some difficulties during the quarter

and [he] would like [Happ's] advice on these issues." Because Happ

was the chair of the Board's Audit Committee and the financial

expert on the Board, and because he received a telephone call from

Hanley just a few days before the end of the third quarter

requesting an immediate meeting, a rational jury could infer that

Happ was aware those difficulties in the third quarter would likely

(indeed, would almost certainly) relate to financial issues, and

might well impact third quarter earnings. Hence, what the SEC

proved at trial was not substantially and materially different from

what it alleged in its complaint.3

3
Happ also asserts that the district court erred in denying
his request to instruct the jury that it must decide whether Happ
possessed and used nonpublic information about Galileo's third

-11-
B. Sufficiency of Evidence

Happ insists that Hanley's voicemail messages to him that

Galileo was having "some difficulties during the quarter" did not

amount to material, nonpublic information. Merely being told of

corporate "difficulties," Happ says, is too generic and too true of

all public companies to be material in and of itself. See Ronconi

v. Larkin, 253 F.3d 423, 430, 434 (9th Cir. 2001) ("Much of any

business consists of having problems and dealing with them. . . .

A company could experience 'serious operational problems,'

'substantial difficult[ies],' and 'difficult problems' and still

have increasing revenues.").

A fact is deemed material if there is "a substantial

likelihood that a reasonable shareholder would consider it

important in deciding how to vote." TSC Indus., Inc. v. Northway,

Inc., 426 U.S. 438, 449 (1976). "[T]here must be a substantial

likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered

the 'total mix' of information made available." Basic Inc. v.

Levinson, 485 U.S. 224, 231-32 (1988) (expressly adopting the TSC

quarter earnings having been adversely affected by serious
difficulties in the quarter. Happ bases this contention on the
same flawed judicial estoppel theory rejected above. As explained,
judicial estoppel does not apply because the SEC's theory at trial
was not directly inconsistent with its earlier theory. Similarly,
any variance between the SEC's allegation in its amended complaint
and what it proved at trial was not substantial and material.
Accordingly, we find no error.

-12-
Industries standard for Section 10(b) and Rule 10b-5 violations).

The Supreme Court has made clear, however, that the "role of the

materiality requirement is not to attribute to investors a

child-like simplicity . . . but to filter out essentially useless

information that a reasonable investor would not consider

significant." Id. at 234 (internal quotation marks and citation

omitted). Certain information may be so basic that any investor

can be expected to understand its implications. See Levitin v.

PaineWebber, Inc., 159 F.3d 698, 702 (2d Cir. 1998) ("certain

information is 'so basic that any investor could be expected to

know it'") (quoting Zerman v. Ball, 735 F.2d 15, 21 (2d Cir.

1984)).

Here, Happ was a financial expert and had closely

followed the affairs of Galileo. The jury could therefore find him

capable of drawing reasonable inferences from Hanley's messages.

Cf. Banca Cremi, S.A. v. Alex. Brown & Sons, Inc., 132 F.3d 1017,

1028-29 (4th Cir. 1997) ("A sophisticated investor requires less

information to call a '[mis-]representation into question' than

would an unsophisticated investor. . . . Likewise, when material

information is omitted, a sophisticated investor is more likely to

'know[ ] enough so that the . . . omission still leaves him

cognizant of the risk.'") (citation omitted).

Happ had participated in an earlier nonpublic meeting of

the Galileo Board of Directors on April 20, 1998. During that

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meeting, Hanley told the Board of two areas of potential financial

concern: the Departments of State and Commerce were holding up the

shipping of certain of Galileo's products, a policy that Hanley

indicated could, unless resolved, have a substantial impact on the

June quarter; and Galileo's largest endoscope customer, Imagyn, was

past due on $500,000 of the $700,000 it owed Galileo. Hanley

testified to calling Happ two months later and leaving voicemail

messages on June 25 and 28 that Galileo was experiencing third

quarter difficulties, that he desired Happ's advice on these

issues, and that he wanted to meet with Happ in his office the

following Monday or Tuesday. There was evidence that a call from

Hanley to Happ and an in-person meeting between Hanley and Happ in

Hanley's office were unusual occurrences.

Happ argues in response that the only negative

information about Galileo he was shown to have possessed at the

time he sold his stock were Hanley's vague statements of

"difficulties" in his voicemail messages seeking to arrange a

meeting. All other information he then possessed concerning

Galileo's financial health was positive, he says. The positive

information included the other matters discussed at the April 1998

Board meeting and the contents of a May 1998 Boston Business

Journal ("BBJ") article about Galileo. Hanley had devoted most of

the two-hour April Board meeting to discussing positive

developments and expectations; he spent less than ten minutes

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discussing the unfavorable export restrictions and Imagyn matters.

The article in the BBJ was not entirely favorable: it mentioned

the loss of the Xerox business a year and a half before, a "major

blow to the company," that had precipitated losses during six

consecutive fiscal quarters. But as Hanley testified, the article

as a whole "paint[ed] a very positive picture of the current status

[of Galileo] in May of 1998." Based on this information, Happ

urges that, in late June 1998, he believed Galileo was performing

well, and that his sale of stock on June 29 could not reasonably be

found to have been triggered by the vague information in the

voicemail messages.

In the circumstances, however, we believe a rational jury

could find that the information that Galileo was experiencing

"difficulties," communicated by Hanley to Happ in voicemail

messages near the end of the third quarter, constituted material,

nonpublic information triggering his stock sale. Happ knew from

the April 1998 Board meeting that Galileo potentially faced certain

financial problems in the third quarter. He also knew that a

telephone call from Hanley was unusual, and that a meeting between

him and Hanley at Hanley's office was likewise uncommon. Happ was

chair of the Board's Audit Committee; he was regarded as the

Board's financial expert. In this context, Hanley's statement that

Galileo was experiencing "difficulties" in the quarter, his

expressed desire for Happ's advice, and his summonsing of Happ to

-15-
a meeting, could be found to imply that the difficulties were

financial in nature and, quite possibly, urgent. Why else would

Hanley wish to schedule, on short-notice, the unusual meeting with

Happ? As Happ would know, the third quarter would close within a

few days. Hence, we believe a reasonable jury could find that Happ

inferred from the voicemail messages that Galileo faced significant

financial problems affecting its third quarter, and that this

information altered significantly the "total mix" of information

available to a reasonable investor in his posture. See Basic, 485

U.S. at 231-32.4

Happ argues that his subjective inferences from the bits

and pieces of information he received would not equate to knowing

possession of material, nonpublic information. In support of this

argument, Happ cites SEC v. Sargent, 229 F.3d 68 (1st Cir. 2000).

There, the SEC charged Sargent with insider trading for purchasing

and selling stock of Purolator while in possession of an alleged

tip from defendant Shepard, regarding Purolator's pending

4
According to Happ, the information that Galileo was facing
"some difficulties," communicated by Hanley to Happ, is immaterial
as a matter of law, and does not become material simply because one
insider (Hanley) communicated it to another (Happ). "A fact does
not become more material to the shareholder's decision because it
is withheld by an insider, or because the insider might profit by
withholding it." Pavlidis v. New England Patriots Football Club,
Inc., 737 F.2d 1227, 1231 (1st Cir. 1984). But in the
circumstances here, as explained above, there is a substantial
likelihood that a reasonable investor would consider the fact that
Galileo was experiencing difficulties near the end of the third
quarter significant.

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acquisition by another company. Id. at 72-73. Sargent asserted

that "he had acted on a hunch based on two pieces of information he

had learned" at a dinner with Shepard, namely the statements by

Shepard (1) that his partner Aldrich was on the Board of Purolator,

and (2) that he knew of a company that was going to be acquired,

but in which he could not invest because he was too close to the

situation. Id. at 73. On appeal, we stated:

[T]here could be no violation . . . if Sargent traded on
a mere hunch arrived at by putting together the fact that
Aldrich was on the Purolator Board, which was public
information, with the statement made by Shepard that he
knew of a company being pursued. To prevail on its
claims, the Commission must show that Shepard
communicated nonpublic information about Purolator to
Sargent.

Id. at 74 (alteration omitted). Happ argues that the SEC's theory

here is no better than the type of "hunch" that we rejected in

Sargent. Happ neglects to indicate, however, that the Sargent

court concluded that "a jury could reasonably infer from [the]

evidence that Sargent was operating on more than just a hunch and

that he had received nonpublic information from Shepard about

Purolator." Id. at 75 (emphasis added). On that basis, we

reversed the entry of a directed verdict for the defendants. Id.

Similarly, here, after resolving all doubts and credibility issues

in favor of the verdict, we find that a jury could reasonably infer

from Hanley's testimony that Happ operated on "more than just a

hunch," and had received material, nonpublic information just

before he sold his stock.

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 Happ suggests that there is insufficient evidence for the

jury to have found that Hanley actually called him and left him one

or more voicemail messages requesting a meeting the following

Monday or Tuesday to discuss the "difficulties" Galileo was

experiencing during its third fiscal quarter. The first such call

Hanley testified to was on June 25, 1998. Hanley said that his

"best memory" was that he telephoned Happ from his office that day,

requesting such a meeting about those difficulties. He said he

remembered the call because he met with Reidel the same day and

because his office desk ledger for that date shows that he wrote

down Happ's phone number. According to Hanley, it was his usual

practice to write down a phone number and then call the number.

Hanley's testimony to a June 25 call from his office to

Happ was seriously contradicted, however, by AT&T's billing

records. These failed to show the making of any such call. The

SEC ultimately stipulated with Happ as follows:

[T]he AT&T billing records for Galileo Corporation for
June 1998, do not reflect a call from Galileo to Mr.
Happ's home on June 25, 1998, or, for that matter on June
22, 23, or 24. The call did not take place from Mr.
Hanley's office on the 25th of June or on the 22nd, the
23rd, or the 24th. (emphasis added).

Having been stipulated, the emphasized language denying any call on

the 25th or earlier dates from Hanley's office was binding. See

PPX Enters., Inc. v. Audiofidelity, Inc., 746 F.2d 120, 123 (2d

Cir. 1984) ("Under federal law, stipulations and admissions in the

pleadings are generally binding on the parties and the Court.");

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Jackson v. United States, 330 F.2d 679, 681 (8th Cir. 1964) ("It is

a well-settled general rule of law that facts which are stipulated

during the course of a trial are to be taken by the jury as

conclusively proven."). Notwithstanding so, the district court

expressed the opinion that the jury could rationally have credited

Hanley's testimony to the limited extent of finding that Hanley

made the purported call on June 25 but from some other location.

Hanley testified that, in June of 1998, he had a phone in his car

that he sometimes used when he was in the car and needed to return

messages or make phone calls, although he never said he made the

call in question from that phone.

While the stipulation and telephone records left Hanley's

testimony of a June 25 call in some doubt, there was solid evidence

of a second, identical call prior to Happ's sale of the stock.

Hanley testified that, on June 28, he called Happ again, this time

from his home, and again left a voicemail message. Hanley's

telephone records reflected such a call on that date. According to

Hanley, this voicemail was a "duplicate" of the June 25 voicemail.

Hanley testified he again mentioned that Galileo was experiencing

"some difficulties." Happ himself acknowledged a telephone message

from Hanley requesting a meeting, although he testified that Hanley

said nothing about difficulties or troubles. Hence, even omitting

the earlier call on June 25, there was sufficient evidence of at

least one call having been made prior to the time Happ sold his

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stock during which, if the jury credited Hanley, a voicemail

message alluding to Galileo's "difficulties" was left for Happ.5

Additionally, Happ's own testimony can be said to lend

some support to the jury's conclusion that he possessed and used

material, nonpublic information. According to Happ, he himself

initiated contact with Hanley on June 26, 1998 "to get an update on

what was going on within the company," because he was thinking

about selling his stock. Happ said that he called to see if there

were any negative developments at Galileo that might lead someone

later to say that he had inside information when he sold his stock.

Hanley told him there were developments at Galileo, but Happ

admitted he never asked Hanley about the nature of the developments

or whether they were positive or negative. Happ said he assumed

from Hanley's upbeat tone that they were positive. The jury could

have reasonably concluded, however, that Happ would have held onto

his stock if he had interpreted Hanley as saying the company was

doing well. The jury could also have reasonably inferred that he

sold his stock, just after hearing from Hanley and just one day

5
Happ asserts that Hanley's trial testimony that he mentioned
"difficulties" in his June 28 voicemail was brand new. Hanley
admitted on cross examination that he had previously testified at
the SEC in October 1999 that he "didn't know" if he said anything
about "difficulties" in the June 28 voicemail message. Similarly,
Hanley conceded that he had testified in his deposition in August
2002 that all he could recall was that the June 28 voicemail was in
the nature of setting up an appointment and nothing more. But
Hanley consistently testified at trial that his "best memory" was
that he used the word "difficulties" in both voicemail messages.
We find that a reasonable jury could have credited this testimony.

-20-
before their meeting to discuss difficulties at Galileo, in an

attempt to avoid being charged later with insider trading.

Although "[s]uspicious trading by itself cannot suffice to warrant

an inference that [a trader] . . . traded on the basis of material

non-public information," SEC v. Truong, 98 F. Supp. 2d 1086, 1097

(N.D. Cal. 2000), there is sufficient evidence in addition to the

timing of the sale for the jury to have found that Happ possessed

and used material, nonpublic information in deciding to sell when

he did.

2. Motion for New Trial

The denial of a motion for a new trial is reviewed for

abuse of discretion. Johnson v. Spencer Press of Me., Inc., 364

F.3d 368, 375 (1st Cir. 2004). Generally speaking, "motions for a

new trial are directed to the trial court's discretion and th[e]

remedy is sparingly used." Dall v. Coffin, 970 F.2d 964, 969 (1st

Cir. 1992) (quoting United States v. Rivera-Sola, 713 F.2d 866, 874

(1st Cir. 1983)).

Happ argues that the district court abused its discretion

in denying his motion for new trial, relying broadly upon three

grounds: (1) the SEC counsel's misstatements in closing argument;

(2) allegedly erroneous evidentiary rulings by the court; and, (3)

alleged errors relating to the jury instructions. We address these

matters in turn.

A. SEC Counsel's Misstatement of Law in Closing Argument

-21-
 First, Happ asserts that he is entitled to a new trial

because counsel for the SEC misstated the law during the SEC's

closing argument. Happ testified at trial that, inter alia, he

sold his shares of Galileo stock on June 29, 1998 because he had a

profit in the stock. He testified he did not sell his Galileo

stock earlier because the securities laws prohibited the sale of

stock by an insider until six months after the insider's most

recent purchase, and he had purchased some of his shares on

December 22, 1997. The parties agree that the "short-swing profit

rule," Section 16(b) of the Securities Exchange Act, 15 U.S.C. §

78p(b), forbids an insider of a company to sell any shares of that

company for profit within six months of the most recent purchase of

any shares, regardless of whether the shares sold are the same

shares as those purchased.6 Because Happ's most recent purchase of

Galileo stock occurred on December 22, 1997, the restrictions of

the "short-swing profit rule" would have expired on June 22, 1998.

6
Section 16(b) of the Securities Exchange Act provides:

For the purpose of preventing the unfair use of
information which may have been obtained by such
beneficial owner, director, or officer by reason of his
relationship to the issuer, any profit realized by him
from any purchase and sale, or any sale and purchase, of
any equity security of such issuer . . . involving any
such equity security within any period of less than six
months, . . . shall inure to and be recoverable by the
issuer . . . .

15 U.S.C. § 78p(b).

-22-
 In closing argument, counsel for the SEC attacked Happ's

testimony as to why he sold his stock when he did:

Now, why did he say he sold his stock? He claims he sold
his stock simply because he saw a profit in the stock, as
if it were simply a coincidence that he saw a profit
exactly at the same time that he was receiving these
calls from Mr. Hanley. If he had truly wanted a profit
in the stock, he could have sold at even higher profit if
he had sold in March, April, May, or anytime earlier than
June of that year.

. . .

He now claims the reason that he didn't sell his stock
earlier was because of the six-month short-swing profit
rule. However, this is a new story. This is something
that he didn't tell Sandra Bailey of the SEC when she
called on the telephone. And, indeed, he admitted that
with respect to half the shares, that at the expiration
of that six-month period in mid-December, the six-month
period was up and he was permitted to sell those shares.

While Happ made no immediate objection to the SEC's argument, he

later asked the court, following argument and before the jury began

deliberations, for a curative instruction, citing the "short-swing

profit rule" and counsel's misstatement of law. The court denied

the request. Happ renewed his request after the jury submitted a

question about the second to last question on the special verdict

form concerning scienter. The court again denied the request. The

next morning, Happ requested a curative instruction for the third

time, submitting a supporting memorandum. That same morning, the

jury posed a question about the last question on the special

verdict form concerning the interstate commerce element.

-23-
 After further argument, the district court at last gave

the jury the precise curative instruction that Happ had earlier

requested in writing. That instruction was as follows:

During closing arguments, in reference to Mr. Happ,
counsel for the SEC made the following statement: "If he
had truly wanted a profit in the stock, he could have
sold at even higher profit if he had sold in March,
April, May, or anytime earlier than June of that year."
I am instructing you to disregard that statement in its
entirety. Under federal law, Mr. Happ was not permitted
to sell Galileo stock for a "profit" for a period of six
months after his most recent purchase of Galileo stock.

Approximately fifteen minutes after receiving the curative

instruction and the answer to the final question on the special

verdict form, the jury returned its special verdict in favor of the

SEC. Happ moved for a mistrial, and the district judge denied the

motion. Happ, 295 F. Supp. 2d at 195. On appeal, Happ claims that

the curative instruction came too late to undo the prejudice of the

SEC's misstatement because it apparently came after the jury had

already decided the questions of credibility and liability against

Happ.

Absent an abuse of discretion, this Court defers to a

district court's denial of a motion for a new trial based upon

improper argument or conduct of counsel. P.R. Aqueduct & Sewer

Auth. v. Constructora Lluch, Inc., 169 F.3d 68, 81-82 (1st Cir.

1999). "In assessing the effect of improper conduct by counsel,

the Court must examine the totality of the circumstances, including

the nature of the comments, their frequency, their possible

-24-
relevancy to the real issues before the jury, the manner in which

the parties and the court treated the comments, the strength of the

case, and the verdict itself." Id. at 82.7 This Court will only

reverse upon a showing of prejudice. Santos, 351 F.3d at 593.

The misstatement by the SEC's counsel was real and

serious. Counsel misleadingly proposed to the jury that Happ might

have sold his securities for a profit at a time when the law, in

fact, disallowed such a sale. A representative of the SEC, the

agency charged with enforcement of the securities laws, is expected

to know those laws and to refrain from either inadvertent or

intentional misstatements regarding them. The court, however,

rendered a curative instruction, albeit late in the day. Moreover,

Happ's counsel could have pointed out the error to the jury in the

course of his own later closing argument, which he did not do.

Overall, we are not persuaded that Happ was prejudiced by SEC

counsel's closing remarks, ill-advised though they were.

Happ argues that the misstatement was especially heinous

in light of the record before trial. At oral argument on Happ's

motion for summary judgment, the SEC had asserted that Happ could

7
As did the district court, the SEC relies on the standard we
have applied in criminal cases to determine whether misstatements
made in closing argument warrant a new trial. See United States v.
Palmer, 203 F.3d 55, 58 (1st Cir. 2000) (listing three factors);
United States v. Auch, 187 F.3d 125, 129 (1st Cir. 1999) (same).
In civil cases, we have employed the "totality of the
circumstances" standard, which we also apply here. P.R. Aqueduct
& Sewer Auth., 169 F.3d at 82.

-25-
have sold the shares he bought in June 1997 at any time six months

thereafter. Happ informed the court in his trial brief, served on

counsel in advance of trial, that this assertion was based on an

error of law, because he was prohibited, under the "short-swing

profit rule," from selling any Galileo stock for six months after

his purchase in December of 1997. The SEC does not now disagree

with Happ's reading of the rule, but instead argues that counsel's

remarks were inadvertent and not intended to mislead the jury about

the law, but rather simply to describe Happ's own understanding of

the situation when he sold his shares.

We find little to commend in the SEC's excuses for its

misconduct. Even if the remarks were intentional, however, the

district court's curative instruction cures any error. The

district court gave the instruction Happ requested. To be sure,

Happ contends that he was prejudiced by the late timing of the

instruction. The curative instruction was given after the jury

began its deliberations and only in response to Happ's third

request. The district court itself stated that the lateness of its

response "create[d] special problems." Nevertheless, the

instruction received special emphasis because it was in writing and

was separate from the other jury instructions. We are not disposed

to conclude that a jury will not follow a curative instruction.

See Refuse & Envtl. Sys., Inc. v. Indus. Servs. of Am., Inc., 932

F.2d 37, 40 (1st Cir. 1991) ("A basic premise of our jury system is

-26-
that the jury follows the court's instructions."). Happ contends

that the fact the jury returned its verdict against Happ only

fifteen minutes after receiving the curative instruction indicates

the jury's mind was already made up. But a more likely explanation

is that the jury simply thought the SEC's misstatement was not a

material factor in reaching its verdict.

Moreover, whether Happ could permissibly have sold his

stock earlier is a relatively small point in the overall case. The

jury had before it a vast reservoir of evidence including Happ's

testimony concerning his reasons to sell when he did. Aspects of

Happ's own testimony might well have seemed inconsistent and

implausible to the jury. Given the weight of the evidence, the

district court could reasonably determine that the SEC's

erroneously premised argument would not likely have affected the

outcome of the trial. Accordingly, we think it was within the

court's discretion to deny the motion for a new trial on this

ground.8

8
Happ also argues that the SEC, in its closing argument,
misrepresented the nature of the evidence adduced at trial by
stating that Happ's reliance on the short-swing profit rule was a
"new fabrication," which arose after his initial interview with the
SEC. Because Happ failed to timely object on this basis before the
jury began deliberating, the SEC asserts that Happ's argument is
waived. But as we have stated, "when no timely objection is made,
claims of improper closing argument are forfeited, not waived, and
thus amenable to review for plain error." Smith v. Kmart Corp.,
177 F.3d 19, 25 (1st Cir. 1999). Sandra Bailey, the SEC
investigator, testified that, during the initial interview, the
only reason Happ provided for selling his stock when he did was
that the "price had gone up." In response to a question from SEC's

-27-
B. Allegedly Erroneous Evidentiary Rulings and Jury Instructions

As a second basis for a new trial, Happ asserts alleged

evidentiary errors. Evidentiary rulings are reviewed for abuse of

discretion. United States v. Marino, 277 F.3d 11, 24 (1st Cir.

2002), cert. denied, 536 U.S. 948 (2002).

As a third basis, Happ contends he is entitled to a new

trial because of errors in the court's jury instructions. We

review jury instructions de novo. Seahorse Marine Supplies, Inc.

v. P.R. Sun Oil Co., 295 F.3d 68, 76 (1st Cir. 2002). We reverse

the giving of an instruction "if it (1) was misleading, unduly

complicating, or incorrect as a matter of law, and (2) adversely

affected the objecting party's substantial rights." Sheek v. Asia

Badger, Inc., 235 F.3d 687, 697 (1st Cir. 2000).

i. Admission of Evidence of Galileo's Insider Trading Policies

Happ argues the district court erred in admitting

evidence of Galileo's insider trading policies and in instructing

the jury that it must decide whether Galileo had such a policy. He

counsel concerning any other reasons Happ provided for selling the
stock, Bailey responded that Happ provided no further reasons. A
jury could have rationally concluded from Bailey's response that
Happ did not mention the short-swing profit rule during the
interview as a reason for not selling his stock in June. Even if
Happ could show some degree of prejudice resulting from SEC
counsel's argument, Happ cannot demonstrate, as he must, that the
error "resulted in a miscarriage of justice or seriously affected
the fairness, integrity or public reputation of the judicial
proceedings." Id. at 26 (quoting Coastal Fuels of P.R., Inc. v.
Caribbean Petroleum Corp., 79 F.3d 182, 189 (1st Cir. 1996)).

-28-
argues that such evidence is irrelevant, and, even if it were

relevant, that there was no evidence Happ knew about the policy.

No error in the admission of evidence is ground for

granting a new trial "unless refusal to take such action appears to

the court inconsistent with substantial justice." Fed. R. Civ. P.

61. Ordinarily, "the admission of evidence is not prejudicial if

the facts have already been shown by admissible evidence, but it

would be inconsistent with substantial justice if the evidence is

insufficient to support the verdict without the erroneously

admitted evidence." deMars v. Equitable Life Assurance Soc'y of

United States, 610 F.2d 55, 62 (1st Cir. 1979).

Here, the evidence of Galileo's insider trading policy

was arguably relevant to establish that Happ had a duty of trust or

confidence, which he violated, to refrain from using material,

nonpublic information. See supra note 1 (quoting 17 C.F.R. §

240.10b-5); Dirks v. SEC, 463 U.S. 646, 654-55 (1983); Chiarella v.

United States, 445 U.S. 222, 228-29 (1980). In this case, the

further evidence was of questionable necessity, as the parties

stipulated that Happ was a Galileo director, and the court

instructed the jury that a director of a corporation has a

fiduciary duty to the corporation and its shareholders. See id.

Happ testified that he knew of his fiduciary duty not to engage in

trades of Galileo stock while in possession of nonpublic

information. Given that Happ's duty to Galileo's shareholders was

-29-
well-established by the above, the court might possibly have

excluded as cumulative the evidence of Galileo's own insider

trading policies. However, we need not and do not decide whether

the court's decision to admit this evidence was error. At the very

worst, assuming error, the error was harmless. See deMars, 610

F.2d at 62 (admission of cumulative evidence was harmless error).9

By the same token, we see no adverse effect on Happ's substantial

rights in the court's instruction to the jury that it should find

whether Galileo had such a policy. See Sheek, 235 F.3d at 697.

ii. Admission of Evidence of Correspondence With CAI Wireless

Happ also challenges the admission of two letters he

wrote to counsel for CAI Wireless, a company for which he had been

a director in early 1997. The letters related to Happ's improper

9
Even if the evidence were relevant, Happ argues he did not
receive or know about Galileo's insider trading policy before he
sold his stock in June 1998. The district judge excluded Galileo's
policy statement published in the early 1990s or late 1980s (Trial
Ex. 41) and an October 1994 memorandum to the Board of Directors
reflecting Galileo's general trading policies (Trial Ex. 44),
because there was no evidence Happ, who became a Galileo Director
in 1995, received or knew about those particular documents. The
SEC, however, presented evidence from which a jury could reasonably
conclude Happ knew about Galileo's insider trading policy when he
sold his stock. Josef Rokus, Galileo's Vice President of Corporate
Development, testified that he sent a copy of a March 1996
memorandum about Galileo's insider trading policy to directors,
including Happ, in September 1998. While Rokus did not recall
specifically distributing the March 1996 memorandum to the
directors in 1996, he testified that "[o]bviously, [his September
1998] cover memo indicates that it was, so [he] would say that it
probably was." The jury could have found it was more likely than
not that Happ knew of the policy when he sold his stock on June 29,
1998.

-30-
purchase of CAI Wireless stock during a period that he believed an

approved trading window was open. As a result of Happ's purchase

of CAI Wireless stock, he was asked to sell the stock, causing him

to violate the "short-swing profit rule" and to disgorge his

profits to the company. Happ testified that he wrote to counsel

for CAI Wireless in both letters that he would in the future

confirm in advance with the company that a trading window was open

before purchasing its stock. Happ argues that the letters were

irrelevant and constituted impermissible impeachment evidence under

Fed. R. Evid. 608(b),10 designed to show that, because Happ knew

that CAI Wireless had an insider trading policy when he was a CAI

Wireless director, he should have known that Galileo did. But the

SEC responds that this evidence was admissible under Fed. R. Evid.

404(b)11 to show Happ's state of mind when he sold his Galileo

stock. We agree.

This Circuit applies a two-part test to determine whether

evidence of extrinsic acts is admissible. United States v.

10
Rule 608(b) of the Federal Rules of Evidence states that
"[s]pecific instances of the conduct of a witness, for the purpose
of attacking or supporting the witness' credibility, . . . may not
be proved by extrinsic evidence." Fed. R. Evid. 608(b) (2003).
11
Rule 404(b) of the Federal Rules of Evidence states in
pertinent part: "Evidence of other crimes, wrongs, or acts is not
admissible to prove the character of a person in order to show
action in conformity therewith. It may, however, be admissible for
other purposes, such as proof of motive, opportunity, intent,
preparation, plan, knowledge, identity, or absence of mistake or
accident . . . ." Fed. R. Evid. 404(b) (2003).

-31-
Frankhauser, 80 F.3d 641, 648 (1st Cir. 1996). First, the evidence

must be probative of an issue in the case, such as intent or

knowledge, without including bad character or propensity in the

inferential chain. Id.; Fed. R. Evid. 404(b). Second, its

probative value must not be "substantially outweighed by the danger

of unfair prejudice, confusion of the issues, or misleading the

jury." Fed. R. Evid. 403; see Frankhauser, 80 F.3d at 648-49.

Here, evidence of the correspondence from Happ to counsel

for CAI Wireless was probative of Happ's state of mind when he sold

his Galileo stock. The government had the burden to prove that

Happ had the requisite scienter, which the Supreme Court has

defined as "a mental state embracing intent to deceive, manipulate,

or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12

(1976). Happ testified at trial that his purchase and sale of CAI

Wireless stock made him more aware of insider trading policies. He

also testified that he first learned of the "short-swing profit

rule" during the incident with CAI Wireless, and that this incident

was on his mind when he contemplated selling his Galileo stock.

Due to the similarity of the violations alleged here and in the CAI

Wireless episode, we think the letters were admissible to show

Happ's understanding of what he could do under the securities laws

and why he sold his Galileo stock when he did. Moreover, given

Happ's awareness of insider trading policies and his expressed

intent to seek prior clearance of future CAI Wireless trades, his

-32-
failure to clear his sale of Galileo stock in advance and his

failure to inquire as to Galileo's insider trading policies were

probative of his intent. We also think the court could reasonably

determine that the probative value was not substantially outweighed

by the danger of unfair prejudice, confusion of the issues, or

misleading the jury. See Fed. R. Evid. 403.

iii. Instruction Concerning the Federal Securities Laws and the
SEC
Happ argues that the district court erred in instructing

the jury about the purposes of the federal securities laws and the

SEC's role in enforcing them. He claims that the instruction

invited the jury to find him liable without considering the

elements of an insider trading claim, and that the instruction

prejudiced him by presenting the SEC "in a very positive light."

We find no error. Although the district court gave the jury

background on the SEC and the statutes it enforces, it also gave

detailed instructions concerning each element of an insider trading

claim and instructed the jury not to favor the SEC by virtue of its

role as a government agency. We have no reason to believe that the

jury did not follow these instructions. See Indus. Servs. of Am.,

932 F.2d at 40. Accordingly, we find no error in the given

instructions.

iv. Instruction on Scienter

Happ also contends that the district court improperly

injected a negligence standard into its instruction on the scienter

-33-
element. The court instructed the jury that an element of the

Section 10(b) claim was that "the defendant engaged in an act,

practice, or course of business that operated, or, by an ordinarily

prudent person in his position at the time he acted, would be

expected to operate as a fraud or deceit upon some person." This

appears to be an attempt to restate one type of act which Rule 10b-

5 makes unlawful. See 17 C.F.R. § 240.10b-5 ("It shall be unlawful

for any person . . . (c) [t]o 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."). Although this instruction, standing alone, could

be said to inject an incorrect negligence standard, the district

court plainly instructed the jury that it must find intentional or

knowing conduct in order to find the requisite scienter. The

jury's special finding that Happ acted with intent and with

knowledge further demonstrates that there was no prejudice.

3. Monetary Awards Against the Defendant

A. Disgorgement Amount

Happ challenges the district court's so-called

disgorgement order. He argues that the sum awarded was

inappropriately based on the "loss avoided," i.e., the difference

between the value of his Galileo stock when sold on June 29, 1998

($46,758), and the value of the same number of shares on July 24,

1998, the day after Galileo's July 23 press release ($12,000).

-34-
Happ contends that the most he should be required to disgorge, if

anything, is the profit on the sale of his Galileo stock, i.e., the

difference between his proceeds on June 29, 1998 and his cost basis

for the shares ($14,508.42).

The district court's disgorgement order is reviewed for

abuse of discretion. SEC v. First Jersey Sec., Inc., 101 F.3d

1450, 1475 (2d Cir. 1996). In an insider trading case, the proper

amount of disgorgement is generally the difference between the

value of the shares when the insider sold them while in possession

of the material, nonpublic information, and their market value "a

reasonable time after public dissemination of the inside

information." SEC v. MacDonald, 699 F.2d 47, 54-55 (1st Cir.

1983); see also SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995); SEC

v. Shapiro, 494 F.2d 1301, 1309 (2d Cir. 1974). The amount of

disgorgement "need only be a reasonable approximation of profits

causally connected to the violation." SEC v. First City Fin.

Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989). The risk of

uncertainty in calculating disgorgement should fall on the

wrongdoer whose illegal conduct created that uncertainty. Id. at

1232; Patel, 61 F.3d at 140; see also MacDonald, 699 F.2d at 55

("doubts are to be resolved against the defrauding party"). Once

the SEC shows that the disgorgement is a reasonable approximation,

the burden shifts to the defendant to demonstrate that the amount

-35-
of disgorgement is not a reasonable approximation. First City

Fin., 890 F.2d at 1232.

Happ contends that the amount of disgorgement ordered was

not causally connected to the violation because he did not know the

information contained in the July 23 press release when he sold his

stock on June 29. The SEC argues that the fact that Happ did not

possess the exact information in the July 23 statement does not

detract from the fact that he received information that Galileo was

having difficulties in the third quarter.

The disgorgement order in the amount of the "loss

avoided" was not an abuse of the district court's discretion.

Although the SEC bears the ultimate burden of persuasion that a

disgorgement figure is a reasonable approximation of the amount of

unjust enrichment, id., the SEC's showing of the stock price drop

after Galileo publicly disclosed its third quarter difficulties on

July 23 presumptively satisfied that burden. The stock price drop

occurred after the release of the July press release, which

informed the public both that Galileo had experienced difficulties

during the third quarter and indicated the nature of some of those

difficulties. Among other things, the press release contained

information about the Imagyn receivable, the unsuccessful attempt

to negotiate a marketing relationship with Ethicon, decreased

orders, continued difficulty in obtaining export licenses due to

the jurisdictional dispute, a reorganization and a reduction in

-36-
force that would lead to substantial fourth quarter charges, and a

violation of Galileo's bank loan covenants. The loss in Galileo's

profits was causally connected to those difficulties. Although the

information Happ had earlier received did not disclose the actual

nature of Galileo's difficulties, Happ's impropriety nonetheless

consisted of selling his shares upon learning of the as yet

unspecified difficulties. It is not unreasonable to hold Happ

accountable for the drop in value attributable to those same

difficulties when fully revealed.

Once the burden shifted to Happ, he failed to show that

the amount of "loss avoided" was not a reasonable approximation.

Happ failed to demonstrate, for example, any "clear break in or

considerable attenuation of the causal connection between the

illegality and the ultimate profits." Id. Happ offers an

alternative calculation, based on his actual profits, but offers no

causal link between his cost basis and the losses he avoided

through insider trading. As the wrongdoer, Happ must bear the risk

of uncertainty in calculating the amount of disgorgement. See id.;

Patel, 61 F.3d at 140. We find no error.

B. Additional Civil Penalty

The Insider Trading and Securities Fraud Enforcement Act

("ITSFEA") authorizes courts to impose a penalty of up to "three

times the profit gained or loss avoided" as a result of the insider

trading. 15 U.S.C. § 78u-1(a)(2). ITSFEA civil penalties were

-37-
enacted to "enhance deterrence against insider trading, and where

deterrence fails, to augment the current methods of detection and

punishment of this behavior." H.R. Rep. No. 100-910, at 7 (1988),

reprinted in 1988 U.S.C.C.A.N. 6043, 6044. We review an order

imposing a civil penalty for abuse of discretion. SEC v. Sargent,

329 F.3d 34, 38 (1st Cir. 2003). A court may consider several

factors in evaluating whether or not to assess civil penalties,

such as:

(1) the egregiousness of the violations; (2) the isolated
or repeated nature of the violations; (3) the defendant's
financial worth; (4) whether the defendant concealed his
trading; (5) what other penalties arise as the result of
the defendant's conduct; and (6) whether the defendant is
employed in the securities industry.

Id. at 42. The district court found that factors 1, 2, 4, and 6

favor Happ while factors 3 and 5 favor the imposition of a civil

penalty. Happ, 295 F. Supp. 2d at 200. The court found the

factors "decidedly mixed" and exercised its discretion to impose a

penalty equal to the loss avoided, or $34,758, in order to

effectuate the Congressional intent to punish those who violate

securities law. Id. Happ does not appear to challenge the court's

findings as he raises no arguments concerning factors 3 and 5.

Instead, he simply argues that a penalty was not appropriate here.

We are satisfied that the court acted within its discretion to

impose a civil penalty on Happ, not only to punish him but to serve

as a deterrent on insider trading generally.

-38-
 4. Sanctions Against the SEC

During discovery, Happ served requests for admission,

which asked the SEC, inter alia, to admit that "Hanley did not make

a telephone call from Galileo's offices in Sturbridge,

Massachusetts to Happ's residence in Weston, Massachusetts,

telephone number 781-899-8081, on June 25, 1998." On November 7,

2002, the SEC denied the request based on Hanley's testimony that

he made the call from his office. Happ claimed that Galileo's AT&T

billing records, which did not show a call on June 25, 1998 to

Happ, established that no call was made from Hanley's office to

Happ that day. In order to prove that the call did not take place

from Hanley's office, Happ deposed AT&T, deposed Bell Atlantic

(Galileo's other telephone service provider during June 1998),

deposed Galileo's facilities manager who was responsible for

tracking telephone bills, and retained an expert concerning

business telephone systems and telephone service provider

facilities and records. On September 11, 2003, three weeks before

trial, the parties stipulated to the authenticity and accuracy of

the phone records, but not to their completeness. It was not until

Happ was about to call the first of two witnesses, including one

expert witness, to establish that the telephone records were

complete, that the SEC agreed to stipulate that the telephone

records did not reflect a call from Galileo to Happ on June 25,

-39-
1998 and that "[t]he call did not take place from Mr. Hanley's

office on the 25th of June or on the 22nd, the 23rd, or the 24th."

In its judgment, the district court imposed sanctions on

the SEC in the amount of $87,036 for its refusal to stipulate until

mid-trial that the June 25 call did not take place from Hanley's

office to Happ's home. Happ, 295 F. Supp. 2d at 192-94. The court

specifically rejected the SEC's contentions that, in declining to

stipulate earlier, it had both reasonable grounds to believe it

might prevail on the matter and that the admission sought by Happ

was of no substantial importance. See Fed. R. Civ. P. 37(c)(2)(B)

and (C), infra. While the SEC now contends on appeal that the

court was wrong on both counts and should have awarded no sanction,

the SEC does not now question the actual amount of the sanction,

which was based on Happ's attorneys' evidence of additional counsel

fees and costs related to preparations to prove that the call in

question was not made from Hanley's office.

Fed. R. Civ. P. 37(c)(2) provides:

If a party fails to admit . . . the truth of any matter
as requested under Rule 36, and if the party requesting
the admissions thereafter proves . . . the truth of the
matter, the requesting party may apply to the court for
an order requiring the other party to pay the reasonable
expenses incurred in making that proof, including
reasonable attorney's fees.

The rule requires an award of expenses unless the court finds that:

(A) the request was held objectionable pursuant to Rule
36(a), or (B) the admission sought was of no substantial
importance, or (C) the party failing to admit had
reasonable ground to believe that the party might prevail

-40-
 on the matter, or (D) there was other good reason for the
failure to admit.

Fed. R. Civ. P. 37(c)(2). We review for abuse of discretion an

award of Rule 37(c) sanctions. Marchand v. Mercy Med. Ctr., 22

F.3d 933, 936 (9th Cir. 1994). We will not reverse a Rule 37(c)

award of sanctions "unless we have a definite and firm conviction

that the district court committed a clear error of judgment." Id.

In contending that the district court abused its

discretion in awarding sanctions, the SEC argues that Hanley's

testimony gave it "reasonable ground to believe [it] might prevail

on the matter." Fed. R. Civ. P. 37(c)(2)(C). "[T]he true test

under Rule 37(c) is not whether a party prevailed at trial but

whether he acted reasonably in believing that he might prevail."

Fed. R. Civ. P. 37 Advisory Committee Notes, 1970 Amendment. Here,

the SEC eventually stipulated that the call did not take place from

Hanley's office on the 25th or on earlier dates but argues that

prior to that time it entertained reasonable doubts on the outcome

of the issue.

Whether the district court's ruling was the "right" one

is perhaps a close question, but we are not called on to engage in

de novo review but only to say whether the court abused its

discretion. See Marchand, 22 F.3d at 936. Favoring the court's

ruling is the fact that Hanley's deposition testimony prior to

trial concerning the June 25 voicemail was somewhat equivocal. He

testified in his deposition merely that he "believe[d]" he called

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Happ from his office on June 25. Later at trial, he testified only

that his "best memory" was that he called Happ from his office on

June 25. He said he remembered making the call that day because he

met with Reidel that day and because his office desk ledger for

that date contains Happ's name and phone number (consistent with

his habit of writing down a phone number and then calling the

number). The telephone company's records were, however,

unequivocal in their failure to show a call from Hanley's office to

Happ's phone number on June 25. There was nothing whatever to

suggest the telephone records were less than accurate or were

incomplete. By mid-trial the government tossed in the sponge. The

district court concluded that the government should have seen the

handwriting on the wall sooner. The court thought it unreasonable

for the SEC to have believed that the jury would credit Hanley's

equivocal testimony over the objective telephone records. See

Happ, 295 F. Supp. 2d at 193.

While, as noted, we find the point close, we cannot say

the district court abused its discretion in rejecting the SEC's

argument that Hanley's testimony provided it with reasonable

grounds until well into the trial to believe it might prevail on

the matter. The SEC eventually stipulated that the call was not

made from Hanley's office. It could have done so at some point

earlier, saving time and money for its opponent and enabling both

parties to focus on the many real disputes in the case. See

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Marchand, 22 F.3d at 937 (affirming sanctions where misleading

answers to requests for admission "significantly affected the cost

of [plaintiff's] prosecution and contravened the goal of full

discovery"). Moreover, the stipulation Happ had requested and that

was eventually granted was a narrow one -- that a call had not been

made to Happ from Hanley's office, not whether Hanley might have

called Happ on June 25 or on the earlier dates from somewhere else.

The SEC also argues that sanctions were inappropriate

because the admission sought was not of "substantial importance."

An issue is of substantial importance when it is material to the

disposition of the case. See, e.g., Wash. State Dep't of Transp.

v. Wash. Natural Gas Co., Pacificorp, 59 F.3d 793, 806 (9th Cir.

1995) (holding that request that plaintiff admit that pollutants

posed an immediate risk was of no substantial importance because

plaintiff was not required to make such a showing). We think the

district court was entitled to believe that it would be of

substantial importance for Happ to be able to show that the call

was not made on that date from Galileo's office as Hanley himself

testified. Such a showing could cast doubt on whether the call was

made at all, and it could possibly have affected the jury's view of

the credibility of the SEC's key witness, Hanley.

We conclude the district court did not abuse its

discretion in ordering the SEC to pay Happ the costs incurred in

preparing to prove this fact at trial.

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 IV. Conclusion

For the foregoing reasons, (i) the denial of the motion

for judgment as a matter of law, or in the alternative, for a new

trial, is affirmed; (ii) the calculation of the disgorgement amount

and the imposition of the additional civil penalty upon Happ is

affirmed; and (iii) the award of sanctions against the SEC is

affirmed.

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