[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
Securities and Exchange Commission v. Donna Yun, Jerry Burch
Court: Court of Appeals for the Eleventh Circuit
Date filed: 2003-04-16
Citations: 327 F.3d 1263
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