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United States Securities & Exchange Commission v. Ginsburg

Court: Court of Appeals for the Eleventh Circuit
Date filed: 2004-03-19
Citations: 362 F.3d 1292
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                                                                           [PUBLISH]


                  IN THE UNITED STATES COURT OF APPEALS
                                                                             FILED
                            FOR THE ELEVENTH CIRCUITU.S. COURT OF APPEALS
                              ________________________ ELEVENTH CIRCUIT
                                                                          March 19, 2004

                                     No. 03-10848                       THOMAS K. KAHN
                                                                            CLERK
                               ________________________

                           D. C. Docket No. 99-08694-CV-KLR

UNITED STATES SECURITIES
AND EXCHANGE COM MISSION,

                                                                           Plaintiff-Appellant,

                                             versus

SCOTT K. GINSBURG,

                                                                         Defendant-Appellee.


                               ________________________

                       Appeal from the United States District Court
                           for the Southern District of Florida
                             _________________________

                                      (March 19, 2004)


Before EDMONDSON, Chief Judge, CARNES and DUHE *, Circuit Judges.

CARNES, Circuit Judge:

       *
        Honorable John M. Duhe, Jr., United States Circuit Judge for the Fifth Circuit, sitting by
designation.
       The SEC brought a civil action against Scott Ginsburg alleging violations of

§ 10(b) and § 14(e) of the Securities and Exchange Act, 15 U.S.C. §§ 78j(b),

78n(e), and accompanying Rules 10b-5 and 14e-3, 17 C.F.R. §§ 240.10b-5,

240.14e-3. The allegations were that Ginsburg had communicated material

nonpublic information to his brother Mark Ginsburg and to his father Jordan

Ginsburg regarding EZ Communications, Inc., and Katz Media Group, and that

Mark and Jordan had traded on EZ stock using that information.1

       The case was tried to a jury which found that Ginsburg had violated the

insider trading provisions. The district court initially ordered him to pay

$1,000,000 in penalties but denied the SEC’s request to enjoin him from violating

securities laws in the future. Later the district court granted Ginsburg’s renewed

motion for judgment as a matter of law and vacated the judgment against him,

because it concluded that the evidence was insufficient to permit a reasonable jury

to find that he had tipped off his brother or father about inside information.

       The SEC appeals from that judgment as a matter of law, and also contends

that if we reverse it, we should direct the district court to enjoin Ginsburg from

violating securities laws in the future. In addition to defending the district court’s



       1
         Throughout this opinion, we will refer to Scott Ginsburg as “Ginsburg” and will refer to
his father and brother by their first names. We do so not out of disrespect or to imply familiarity,
but for ease of reference and to avoid confusion.

                                                 2
judgment on the specific insufficiency of evidence ground given for it, Ginsburg

offers two other grounds for affirming it. First, he contends that even if the

evidence is sufficient to show he communicated insider information to Mark or

Jordan, it is insufficient to show the information’s materiality. Second, he

contends the evidence is insufficient to show substantial steps were taken toward a

tender offer of Katz, and Ginsburg’s knowledge of the tender offer. Finding merit

in the SEC’s position and none in Ginsburg’s, we conclude that the judgment is

due to be reversed, the civil penalty reinstated, and an injunction entered against

future violations of the securities laws by Ginsburg.

                                      I. FACTS

      The nature of a judgment as a matter of law and our review of it is such that

we take the evidence at trial in the light most favorable to the party who won

before the jury only to have its victory taken away by the court. Russell v. North

Broward Hosp., 346 F.3d 1335, 1343 (11th Cir. 2003). We draw from the

evidence all reasonable inferences in support of the verdict, because the jury could

have done so. United States v. Gregory, 730 F.2d 692, 700 (11th Cir. 1984).

                      A. EZ TRANSACTIONS AND CALLS

      Ginsburg was chairman and CEO of Evergreen Media Corporation, which

owned and operated a number of radio stations. In 1996 Evergreen became



                                           3
interested in acquiring EZ, a corporation that owned radio stations. Ginsburg met

with EZ’s CEO Alan Box on Friday, July 12, 1996, and Box told him EZ was

considering several “strategic alternatives.” Before the meeting no decision had

been made to sell the company. On Sunday evening, July 14, Ginsburg called

Mark at 10:02 p.m., and they spoke for 26 minutes. The next day, M onday, July

15, M ark bought 3800 shares of EZ stock. Mark spoke with Jordan in person and

on the telephone over the next few days, and they admit they discussed the

purchase of EZ stock.

        On July 15, EZ’s investment banker called Ginsburg and they discussed the

possibility of Evergreen submitting a bid on EZ. Ginsburg asked to be sent a

confidentiality agreement that he could sign in order to receive financial

information about EZ. He received the confidentiality agreement on July 16. That

same day Jordan purchased 20,000 shares of EZ. After signing the confidentiality

agreement, Ginsburg received the financial information about EZ on July 17. On

July 18, a four minute telephone call was placed from Ginsburg’s office to Mark’s

home.

        On July 24, EZ’s investment banker faxed a letter to Ginsburg stating that

EZ bids were due by July 26. At 7:40 a.m. July 25, a call was placed from

Ginsburg’s cell phone to his parents’ home. Later that day Mark purchased 3200



                                           4
shares of EZ stock for Mark and his wife’s joint account. On July 26, Mark

purchased 4300 shares of EZ stock for the same joint account and 7500 shares for a

trust account for his son. Also on July 26, Ginsburg, on Evergreen’s behalf,

submitted a written offer to acquire EZ for cash and stock. On Sunday, July 28, a

ten minute call was placed from Ginsburg’s home to Mark’s home. On Monday,

July 29, Jordan bought 5000 shares of EZ stock, and an hour later Mark bought

30,000 shares.

      Evergreen’s bid for EZ ultimately fell through, but on August 5, 1996, EZ

announced its merger with another radio company, at which time the price of EZ

stock rose 30%. Between July 15 and July 29, Mark had bought 48,800 shares of

EZ and Jordan had bought 25,000 shares, which increased in value $664,024 and

$412,875 respectively by August 5, 1996.

                    B. KATZ TRANSACTIONS AND CALLS

      In early 1997, Ginsburg’s company, Evergreen, was in the process of

merging with Chancellor Broadcasting. On March 20, 1997, Ginsburg attended a

meeting with senior executives of Katz Media Group and Hicks, M use, Tate, &

Furst, an investment firm that owned a majority interest in Chancellor

Broadcasting, at which a possible acquisition of Katz by Chancellor was discussed.

Tom Hicks, Chairman and CEO of Hicks, Muse, appointed a due diligence team



                                         5
headed by Ginsburg. A confidentiality agreement was executed April 7, 1997, and

due diligence began. On June 16, 1997, Stuart Olds, a Katz executive, met with

Ginsburg. Olds encouraged Ginsburg to call Katz chairman Tom Dean to discuss

the purchase of Katz. Olds also told Ginsburg that Katz was having discussions

with other companies and Ginsburg would have to act quickly.

      That same evening, June 16, a call was placed from a cell phone registered

to Ginsburg to a phone registered to Mark. The next day, June 17, Mark bought

150,000 shares of Katz. On July 14, Evergreen/Chancellor announced it would

acquire Katz through a tender offer for Katz stock at $11 a share. On July 16 or

17, 1997, Mark sold 132,500 shares of Katz and tendered the rest, resulting in a

total profit of $729,000.

                            II. STANDARD OF REVIEW

      We review a decision to grant a motion for judgment as a matter of law de

novo, applying the same standards used by the district court. SEC v. Adler, 137

F.3d 1325, 1340 (11th Cir. 1998). A judgment as a matter of law is warranted only

“[i]f during a trial by jury a party has been fully heard on an issue and there is no

legally sufficient evidentiary basis for a reasonable jury to find for that party on

that issue.” Fed. R. Civ. P. 50(a)(1). That means, as we have already said, that we

review the evidence, and the inferences arising therefrom, in the light most



                                           6
favorable to the non-moving party. We “may not weigh the evidence or decide the

credibility of witnesses.” Adler, 137 F.3d at 1340. However, the nonmoving party

“must provide more than a mere scintilla of evidence to survive a motion for

judgment as a matter of law.” Isenbergh v. Knight-Ridder Newspaper Sales, Inc.,

97 F.3d 436, 439 (11th Cir. 1996).

      We review denial of equitable relief for abuse of discretion. Preferred Sites,

LLC v. Troup County, 296 F.3d 1210, 1220 (11th Cir. 2002). Any factual findings

made by the district court with regard to its denial of an injunction are reviewed for

clear error. Id.

                                  III. DISCUSSION

                     A. JUDGMENT AS A MATTER OF LAW

          1. Sufficiency of Evidence that Ginsburg Tipped Mark or Jordan

      In order to establish liability under § 10(b) and § 14(e) of the Securities and

Exchange Act and accompanying Rules 10b-5 and 14e-3, the SEC must prove that

Ginsburg acted with scienter, “a mental state embracing intent to deceive,

manipulate, or defraud.” SEC v. Adler, 137 F.3d 1325, 1340 (11th Cir. 1998)

(quoting Aaron v. SEC, 446 U.S. 680, 695-96, 100 S. Ct. 1945, 1955 (1980)).

Scienter requires that the insider (or tippee, if the trader is not the insider) possess

material nonpublic information at the time of the trade. Id. at 1340. In addition, it



                                            7
requires that the material nonpublic information be used in a trade. Id. Proof of

knowledge of such information at the time of a trade “gives rise to a strong

inference of use.” Id.

      The SEC must prove violations of § 10(b) and § 14(e), and their

supplementary Rules, by a preponderance of the evidence, and may use direct or

circumstantial evidence to do so. Herman & MacLean v. Huddleston, 459 U.S.

375, 390 & n.30, 103 S. Ct. 683, 691-92 & n.30 (1983). “Circumstantial evidence

has no less weight than direct evidence as long as it reasonably establishes that fact

rather than anything else.” Burrell v. Bd. of Trustees of Ga. Military College, 970

F.2d 785, 788 (11th Cir. 1992).

      The parties disagree about which body of precedent controls the sufficiency

of the evidence issue upon which the district court granted judgment as a matter of

law. The sufficiency issue in general involves the circumstances in which it will

be inferred from A’s act following a conversation with B, who knew a given fact,

that A had been informed of that fact when he acted. As it arises in insider trading

cases, the more specific issue is when it may be inferred from a trade in stock by A,

following a conversation with insider B, that B disclosed inside information to A

who acted upon it. The SEC argues, logically, that the sufficiency of the evidence

and the permissibility of inferences that may be drawn from the evidence in this



                                           8
insider trading case are governed by our insider trading decisions, especially SEC

v. Adler, 137 F.3d 1325 (11th Cir. 1998), which is the closest of those cases to the

facts we have here.

      Ginsburg argues, and the district court concluded, that four employment

retaliation decisions, which he views as inconsistent with Adler on the issue of

what may be inferred from conversations of an actor with one in the know, control

instead. See Burrell, 970 F.2d 785 (11th Cir. 1992); Clover v. Total Sys. Servs.,

Inc., 176 F.3d 1346 (11th Cir. 1999); Brungart v. Bellsouth Telecomm., Inc., 231

F.3d 791 (11th Cir. 2000); Brochu v. City of Riviera Beach, 304 F.3d 1144 (11th

Cir. 2002). The last three of those employment decisions cannot possibly trump

Adler to the extent of any inconsistency. Where prior panel decisions conflict, we

follow the first one released, Cohen v. Office Depot, Inc., 204 F.3d 1069, 1072

(11th Cir. 2000) (“where two prior panel decisions conflict we are bound to follow

the oldest one”); United States v. Dailey, 24 F.3d 1323, 1327 (11th Cir. 1994)

(where there is an intra-circuit conflict, “the earliest panel opinion resolving the

issue in question binds this circuit until the court resolves the issue en banc”), and

Adler came out before any of those three decisions.

      However, Burrell, one of the four employment decisions that Ginsburg cites,

and upon which the district court relied to award him judgment as a matter of law,



                                           9
preceded Adler. If an evaluation of the sufficiency of the evidence should not take

into account the specific factual context from which that evidence arose, then we

would be bound to follow Burrell and disregard Adler to the extent of any

inconsistency. But it should, so we are not.

      This is what we are talking about. Decision maker A comes into contact

with information possessor B and soon thereafter engages in conduct C. When will

that factual scenario support an inference that, despite their denials, A was told the

information by B and on that basis A did C? More to the point, does an earlier

decision of this Court concluding that scenario would not support an inference the

information was communicated and acted upon in an employment retaliation case,

compel us to conclude that the same scenario would not support an inference of

communicated information and action based upon it in insider trading cases?

      We think the earlier employment retaliation decision in Burrell does not

control this case, because insider trading cases are different from employment

retaliation cases. The context in which the facts arise and the strength of the

competing inferences can differ. As a result, evidence that may appear to be

materially identical for purposes of determining whether a decision maker knew a

particular fact can actually have different probative force in an insider trading case

than in an employment retaliation case.



                                          10
      There are many sound, non-retaliatory business reasons to take some job

action that is challenged as retaliatory. That multitude of potential reasons dilutes

the strength of any inference that because a decision maker took an action against

an employee he must have been told of a fact which could have led him to take the

action for a prohibited reason.

      By contrast, people do not make large stock trades for as many reasons as

businesses take job actions. Although there are exceptions, people generally buy

when they believe the price of a stock is going up and sell when they believe it is

going down (either absolutely or relative to the expected performance of other

stock). The factfinder in an insider trading case need only infer the most likely

source of that belief. The temporal proximity of a phone conversation between the

trader and one with insider knowledge provides a reasonable basis for inferring

that the basis of the trader’s belief was the inside information. The larger and more

profitable the trades, and the closer in time the trader’s exposure to the insider, the

stronger the inference that the trader was acting on the basis of inside information.

The magnitude of the incentive to trade on insider information is illustrated by the

trades that were made in this case. In less than a month Jordan made $412,875 by

trading EZ stock in the direction someone with knowledge of the insider

information his son possessed would have, and Mark made a total of $1,393,022



                                           11
by trading EZ and Katz stock as someone privy to the insider information of his

brother would have.

      It is not at all clear that the same considerations apply with equal force in job

discrimination cases. The inference that a job action was based on a retaliatory

motive which arose from imparted information may well be weaker than the

comparable inferences in insider trading cases for several reasons. For one thing,

the incentive to tip and to act on tipped information is usually a great deal stronger

than the incentive to impart and act upon information about an employee engaging

in legally protected conduct. We expect that most people would rather make

$412,875 or $1,393,022 in a short period trading stocks than they would like to see

an employee be punished for something the employee had a legal right to do.

      Because it is far from clear that employment retaliation cases are

interchangeable with insider trading cases, the district court should have looked to

the more specifically applicable precedent instead of regarding it as wrongly

decided in light of decisions that had nothing to do with insider trading. Cf.

Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484, 109 S.Ct.

1917, 1921-22 (1989) (“If a precedent of this Court has direct application in a case,

yet appears to rest on reasons rejected in some other line of decisions, the Court of

Appeals should follow the case which directly controls, leaving to this Court the



                                          12
prerogative of overruling its own decisions.”). It is insider trading decisions,

instead of employment retaliation cases, to which we will look for guidance in

deciding this case.

      In the Adler insider trading case, Richard Adler, an outside director of

Comptronix Corporation, attended a November 15 board meeting at which he was

asked to investigate the activities of two Comptronix executives for potential fraud.

Adler, 137 F.3d at 1329. The next day, November 16, Adler’s friend and associate

Harvey Pegram called Adler’s home at 7:53 a.m. The call lasted 72 seconds. At

7:55 a.m. Pegram called his wife at home. At 8:07 a.m. Pegram’s wife called their

stockbroker and placed an order to sell 50,000 shares of Comptronix, and over an

eight-day period beginning with that telephone call they sold a total of 150,000

shares. On the evening of November 16 at 8:02 p.m., Pegram called his business

associate Philip Choy in Hong Kong. At 9:39 p.m. Choy faxed his stockbroker an

order to sell 5000 shares of Comptronix. Another associate of Pegram, Domer

Ishler, called Adler on November 15 and again on November 23. On November

24, Ishler purchased 300 put options on Comptronix stock. On November 25

Comptronix announced that certain officers had been suspended for overstating

gross profits, and Comptronix common stock lost 72% of its value. Id. at 1329.




                                          13
The Pegrams avoided losses of $2,315,375, Choy avoided losses of $75,000, and

Ishler realized gains of $368,750. Id. at 1331.

      The SEC brought a civil action against Adler, Pegram, Choy, and Ishler for

violations of § 10(b) and Rule 10b-5. Id. at 1327. After a hung jury, the district

court granted judgment as a matter of law to Pegram, Adler and, Choy, and

summary judgment to Ishler. Id. at 1331-32. The court concluded that the phone

calls raised a “possible reasonable inference” that Pegram received inside

information from Adler, but any such inference was rebutted by Pegram’s evidence

of a preexisting plan to sell his Comptronix stock. The circumstances related to the

other defendants were similar, and the district court made the same determination

for each one. Id. at 1331-32.

      We reversed, concluding that the phone calls and stock sales raised a

reasonable inference that Pegram was tipped by Adler, and thus that Pegram

possessed nonpublic information. We noted that a credible and innocent

explanation for the timing of calls and sales can rebut the inference of possession

of information. Id. at 1341. Nevertheless, though Pegram provided “strong

evidence” that his plan to sell Comptronix stock predated the alleged tip, and

evidence of innocent explanations for the relevant telephone calls, we stated that

the jury is not required to believe the defendant’s explanations. “[T]hese fact-



                                          14
intensive issues should be decided by a jury, which is in the position to observe the

demeanor of witnesses and make appropriate credibility determinations.” Id. at

1342. Choy’s calls and sales similarly created a reasonable inference, as did

Ishler’s. Id. at 1342-43.

             In Adler the calls/trades pattern repeated twice on one day and once again

the next week. In this case there is evidence of one clear call/trade pattern

concerning EZ stock (the July 14 call from Ginsburg to Mark followed the next

day by his purchase of 3,800 shares), and one concerning Katz stock (the June 16

call from Ginsburg to Mark followed the next day by his purchase of 150,000

shares). The other EZ calls match less well with trades. The July 25 call to Jordan

was followed by a purchase by Mark, and the July 28 call to Mark followed with a

purchase by Jordan. But because Mark and Jordan admitted discussing EZ

throughout that period, the mismatch of calls and trades is not a big problem. The

multiple occurrences of the pattern in this case are similar enough to those in

Adler.

         This case does have stronger evidence suggesting that conversations

between the parties were more frequent, 2 and that the types of trades made were


         2
         Between December 1995 and November 1997, 148 calls were placed from phone
numbers registered to Ginsburg to phone numbers registered to Mark, and between April 1996
and October 1997 there were 46 calls the other way. Evidence was introduced that some of the
calls between those numbers involved family members other than Ginsburg and Mark.

                                               15
not unique,3 and it also features longer spans of time between the conversations

and trades. Ginsburg offered evidence of public information about the companies

as motivation for Mark’s trading,4 argued that the trades were consistent with prior

trading history, and put forward innocent explanations for the calls. The district

court commented that “it is plausible that the investments . . . were driven not by

tips but rather by public knowledge.” It is also plausible that they were driven by

insider information. And it was up to the jury to choose between those competing

plausible theories of fact.

       The jury was free to disbelieve Ginsburg’s evidence just as the Adler jury

was free to disbelieve what we characterized as the “strong” evidence of a

preexisting stock trade plan in Adler. Evidence of the innocent explanations for

the calls between the parties in this case and of Mark’s trading habits is not enough

to justify overturning the jury’s verdict. If it were otherwise, family members who



       3
         Mark owned a significant stake in Evergreen and frequently invested in broadcast
related stocks. Both Ginsburg and Mark purchased significant blocks of stock in EZ beginning
in January 1996. Jordan had never invested in EZ before, but had been in the radio business
since the 1960s. Mark made 253 trades in individual stocks between January 1996 and
November 1997, 66 of which involved amounts greater than $250,000. Roughly 50% of his
portfolio over this period was made up of stock in radio and other media.
       4
        In the summer of 1996, before Mark bought stock in EZ, EZ’s CFO Ron Peale was
quoted in the Dallas Morning News, saying that EZ was constantly having conversations about a
possible sale, and that if EZ received the “proverbial offer that can’t be refused” they would take
it. From June 25-28, 1996 EZ officers traveled around the country talking to investors and
discussing what price they might get upon acquisition. Mark testified he bought shares of Katz
in June 1997 due to media reports that Katz was likely to be acquired.

                                                16
regularly traded in a particular stock or type of stock could trade based on insider

information with impunity.

      The district court stated that “[t]he phone records are insufficient to compel

an inference that Scott Ginsburg conveyed material, non-public information to

Mark,” but that is not the issue. The SEC did not have the burden of putting in

evidence that compelled the inference Ginsburg conveyed nonpublic information

to Mark. All it was required to do was put in evidence that reasonably permitted

that inference. It did that. The call/trade pattern occurrences coupled with the

jury’s right to disbelieve the innocent explanations of the calls and trades are

enough to support the verdict.

                          2. Alternative Grounds to Affirm

      Ginsburg argues that even if sufficient evidence was presented that he tipped

Mark and Jordan, the district court’s decision to grant judgment as a matter of law

can be affirmed on two independent grounds. Though not reached by the district

court, these arguments were presented in Ginsburg’s renewed Rule 50 motion, and

they raise legal issues over which we would exercise de novo review, so we may

decide them in the first instance.




                                          17
      a. Sufficiency of Evidence that the Information Tipped Was Material and

                                      Nonpublic

      Ginsburg contends that the SEC did not provide sufficient evidence to

permit a reasonable jury to find that the information tipped was material and

nonpublic, as required by Rule 10b-5. “An omitted fact is material if there is a

substantial likelihood a reasonable shareholder would consider it important in

deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96

S. Ct. 2126, 2132 (1976). Materiality is proved by showing 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.” Id.

      The insider information in this case meets the materiality standard. In Basic

Inc. v. Levinson, 485 U.S. 224, 238, 108 S. Ct. 978, 987 (1988), the Supreme

Court held that preliminary merger talks can be material well before any agreement

is reached. The materiality of an uncertain prospective event “depend[s] at any

given time upon a balancing of both the indicated probability that the event will

occur and the anticipated magnitude of the event in light of the totality of the

company activity.” Id. The Court explained that “a factfinder will need to look to

indicia of interest in the transaction at the highest corporate levels,” and consider



                                           18
factors such as “board resolutions, instructions to investment bankers, and actual

negotiations between principals or their intermediaries.” Id. at 239, 108 S. Ct. at

987. The determination of materiality “requires delicate assessments of the

inferences a ‘reasonable shareholder’ would draw from a given set of facts and the

significance of those inferences to him, and these assessments are peculiarly ones

for the trier of fact.” TSC Indus., Inc., 426 U.S. at 450, 96 S. Ct. at 2133. “In an

analogous context, the jury’s unique competence in applying the ‘reasonable man’

standard is thought ordinarily to preclude summary judgment in negligence cases.”

Id. at 450 n.12, 96 S. Ct. at 2133 n.12.

      Alan Box, EZ’s CEO, and Ginsburg discussed a specific share price, and

Ginsburg knew both that Evergreen was interested in acquiring EZ and that EZ

was talking to other companies. The jury was free to find that a reasonable

investor would view Evergreen executives talking to EZ executives about a

possible acquisition at the specific price of $50 a share as altering the total mix of

information available. A merger is an event of considerable magnitude to an

investor, and preliminary merger negotiations constitute concrete steps indicating

an increasing possibility of a merger occurring. As for the nonpublic nature of the

evidence, the jury heard testimony from Ron Peale, EZ’s CFO, that the talks were

confidential. The jury could recognize as material the difference between public



                                           19
information that EZ was having conversations about a possible sale and about

potential sale prices, see supra n.4, and nonpublic information about a private

meeting between executives and the specific share price they discussed

confidentially.

      As to Katz, Ginsburg was clearly privy to information gleaned under a

confidentiality agreement. The jury had before it sufficient evidence to conclude

that Ginsburg’s June 16 meeting with Olds indicated to Ginsburg that a deal had to

happen fast. The jury could reasonably infer that the information was material and

nonpublic.

          b. Sufficiency of Evidence of Substantial Steps under Rule 14e-3

      Ginsburg also argues that there was not enough evidence to permit an

inference that, at the time of his alleged Katz tip on June 16: (1) substantial steps

had been taken to commence a tender offer, as required by Rule14e-3; and (2)

Ginsburg knew of the tender offer, as Ginsburg claims is required by Rule 14e-3.

Rule 14e-3 prohibits purchase or sale of a company’s stock by “any person who is

in possession of material information relating to [a] tender offer” if an “offering

person” has taken “a substantial step or steps to commence, or has commenced, a

tender offer.” 17 C.F.R. § 240.14e-3(a). Rule 14e-3(d) prevents any insider of the

target or acquiring company, or any person in possession of material information



                                          20
relating to a tender offer, from communicating that information to another likely to

trade on it, after substantial steps have been taken. The SEC release accompanying

Rule 14e-3 states:

      [S]ubstantial step or steps to commence a tender offer include, but are not
      limited to, voting on a resolution by the offering person's board of directors
      relating to the tender offer; the formulation of a plan or proposal to make a
      tender offer by the offering person or the person(s) acting on behalf of the
      offering person; or activities which substantially facilitate the tender offer
      such as: arranging financing for a tender offer; preparing or directing or
      authorizing the preparation of tender offer materials; or authorizing
      negotiations, negotiating or entering into agreements with any person to act
      as a dealer manager, soliciting dealer, forwarding agent or depository in
      connection with the tender offer.

Tender Offers, Exchange Act Release No. 17,120, 20 SEC Docket 1350 n.33 (Sept.

4, 1980).

      In this case, Katz CEO Tom Olson had sent a letter to Tom Hicks, CEO of

the majority shareholder of Chancellor, on February 24, 1997, asking whether

Chancellor was interested in acquiring Katz. On M arch 20, Olson, Hicks, Olds,

Ginsburg, and others met to discuss the possible acquisition. Hicks was interested

in Chancellor acquiring Katz. He appointed a due diligence team, and a

confidentiality agreement was signed on April 7. Ginsburg met with Olds on June

16, and Olds told him that Katz was in discussions with other companies and

Chancellor needed to act quickly. Testimony at trial indicated that the parties had




                                         21
not settled on a tender offer as the form of the transaction until the last few days

before the deal was announced on July 14.

      These activities do not fall into the specifically enumerated examples of

activities described as “substantial steps” in the SEC release. However, the release

makes it clear that the examples listed are only that; they are not a complete list of

“substantial steps.” Neither this Court nor the Supreme Court has defined

“substantial steps,” but other circuits have confronted the issue. In SEC v. Maio,

51 F.3d 623 (7th Cir. 1995), the Seventh Circuit concluded that a meeting between

officers of the target and acquiring companies, held after the target had solicited an

offer from the acquiring company, which was “much more serious than any

previous discussion between the parties,” and which was followed the next day by

the onset of the due diligence process, constituted “substantial steps.” Id. at 636.

A confidentiality agreement had not yet been entered at the time of the alleged tip

in that case. Id. In SEC v. Mayhew, 121 F.3d 44 (2d Cir. 1997), where the

merging companies had retained a consulting firm, signed confidentiality

agreements, and held meetings between top officials, the Second Circuit concluded

that the “substantial steps” requirement was satisfied, despite the fact that the

companies had not settled on a tender offer as the form of the merger. Id. at 53.




                                           22
      In this case there was a meeting between executives, which was followed by

due diligence procedures, a confidentiality agreement, and by a meeting between

Ginsburg and Olds – from which Ginsburg realized that the deal had to go down

fast. These activities, which did result in a tender offer, were substantial steps for

purposes of Rule 14e-3. Were it otherwise, liability could be avoided by taking

care to tip only before the formal steps finalizing the acquisition are completed,

leaving a substantial gap between the acquisition of inside information and the

regulation of its disbursement.

      Rule 14e-3, by its terms, does not require that the offender know or have

reason to know that the information relates to a tender offer, so long as the

information in fact does relate to a tender offer and the offender knows or has

reason to know the information is nonpublic and was acquired by a person with the

required status. The accompanying SEC release explicitly states that there is no

“knows or has reason to know” standard attached to the Rule’s requirement that the

information relate to a tender offer. Tender Offers, Exchange Act Release No.

17,120, 20 SEC Docket 1350 (Sept. 4, 1980). We agree with the First Circuit that

we should defer to the SEC’s interpretation of its Rule. See SEC v. Sargent, 229

F.3d 68, 78-79 (1st Cir. 2000). Under United States v. O’Hagan, 521 U.S. 642,

673, 117 S. Ct. 2199, 2217 (1997), we owe the judgment of the SEC expressed in



                                           23
its release “more than mere deference or weight.” It follows that Ginsburg’s

substantial steps argument fails.



                                    B. INJUNCTION

      Having decided that we should reverse the judgment and reinstate the jury

verdict, we come now to the SEC’s contention that the district court abused its

discretion in refusing to permanently enjoin Ginsburg from future violations of the

Exchange Act. Our review is for an abuse of discretion, which occurs when “the

district court has made a clear error of judgment or has applied an incorrect legal

standard.” Doe v. Chiles, 136 F.3d 709, 713 (11th Cir. 1998).

      In order to be entitled to injunctive relief the SEC had to show a reasonable

likelihood that Ginsburg would violate the securities laws in the future. SEC v.

Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir. 1982). The district court cited

the proper factors to consider in making this determination: “the egregiousness of

the defendant’s actions, the isolated or recurrent nature of the infraction, the degree

of scienter involved, the sincerity of the defendant’s assurances against future

violations, the defendant’s recognition of the wrongful nature of his conduct, and




                                          24
the likelihood that the defendant’s occupation will present opportunities for future

violations.” Id.; SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978). 5

       The district court applied the correct legal standard, so the question is

whether it made a clear error of judgment in the result it reached applying that

standard. We believe it did, because every one of the factors to be considered

weighs in favor of enjoining Ginsburg. As CEO of Evergreen, he breached his

fiduciary duty to his company and to its shareholders on two separate occasions for

the financial gain of his family members. Deliberately tipping material nonpublic

information for family members’ financial gain is a bad thing, and doing it twice in

a year is doubly so. See Blatt, 583 F.2d at 1334-35 (affirming injunction of a

defendant whose conduct encompassed just the type of “knowing and intentional

misconduct” § 10(b) was intended to proscribe, where defendant was the

“mastermind” behind two violations). It is this type of intentional, knowing

conduct, as opposed to more minor, technical violations, for which injunctions are

reserved. See id. at 1335 (reversing injunction of defendant whose single violation

was relatively minor); accord SEC v. Steadman, 967 F.2d 636, 648 (D.C. Cir.

1992) (considering whether defendant’s violation was “flagrant and deliberate or

merely technical in nature”).


       5
        In Bonner v. Prichard, 661 F.2d 1206, 1207 (11th Cir.1981) (en banc), we adopted as
binding precedent all decisions of the former Fifth Circuit rendered prior to October 1, 1981.

                                               25
      Scienter is a required element of a § 10(b) violation, Adler, 137 F.3d at

1340, and thus the jury, in finding that such a violation occurred, found that

Ginsburg acted with scienter. Though Ginsburg assured the district court he would

not in the future “engage in any actions that will raise suspicion of illegal conduct,”

such promises to toe the line are “by no means dispositive.” See Carriba Air, Inc.,

681 F.2d at 1322 (affirming district court’s injunction of defendant against future

violation of securities laws despite defendant’s assertions he would cease his

wrongful conduct). And they are of very little worth at all where, as here, the

defendant denies having done anything at all improper to begin with. Promising to

stop doing wrong while denying any wrongdoing is the wrong way to establish that

wrongdoing will not reoccur.

      Ginsburg is currently chairman of the board of a public company, and in this

position he has access to material nonpublic information, providing him with

future opportunities to violate the securities laws. See Blatt, 583 F.2d at 1335

(affirming injunction of a defendant guilty of only one “reprehensible fraud” where

his continuing investment opportunities strengthened the inference from his past

conduct that he was likely to commit future violations).

      In short, each Carriba factor cuts against Ginsburg, establishing a reasonable

likelihood he will violate securities laws again. Cf. Carriba Air, Inc., 681 F.2d at



                                          26
1322 (affirming district court’s injunction of defendant where virtually all factors

cut against defendant); Commodity Futures Trading Comm’n v. Sidoti, 178 F.3d

1132, 1137 (11th Cir. 1999) (affirming district court’s injunction against future

violation of Commodity Exchange Act given likelihood of future violation). If no

injunction is to be entered where every factor weighs in favor of an injunction, then

the factors would be meaningless. They are not, and it was a clear error of

judgment not to enjoin Ginsburg to refrain from violating the securities laws in the

future.

                                IV. CONCLUSION

      The district court’s grant of judgment as a matter of law is REVERSED and

the case is REMANDED with instructions that the court reinstate the civil penalty

of $1,000,000, and enjoin Scott Ginsburg from future violations of the securities

laws and regulations.




                                          27
EDMONDSON, Chief Judge, dissenting in part:

      I think it is useful from time to time to repeat something that Chief Justice

Marshall wrote:

              It is a maxim not to be disregarded, that general expressions, in every
      opinion, are to be taken in connection with the case in which those
      expressions are used. . . . The reason of this maxim is obvious. The
      question actually before the court is investigated with care, and considered
      in its full extent. Other principles which may serve to illustrate it, are
      considered in their relation to the case decided, but their possible bearing on
      all other cases is seldom completely investigated.

Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 399-400 (1821).

      A case is no precedent for a proposition that was not in the mind of the court

when the case was decided; given Burrell’s facts, no reason exists to believe the

court in Burrell had insider-trading in its mind when it decided Burrell. So, I agree

that the district court erred in extending what it read as the holding in Burrell (an

employment case) to a materially different kind of case (an insider-trading case)

and, then, in concluding that in some way Burrell trumped our Adler decision

which was an insider-trading precedent.

      I concur in today’s judgment, except for reversing the denial of the

injunction. For the injunction, the district court applied the correct legal standard

and had the important advantage over us of having seen the witnesses and parties

firsthand as they testified and made representations to the district court. The grant



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or denial of injunctive relief “rests within the sound discretion of the trial court and

will not be disturbed unless there has been a clear abuse of it.” SEC v. Blatt, 583

F.2d 1325, 1334 (5th Cir. 1978). * Especially considering that no finding was made

that Scott Ginsburg was personally enriched as a result of the occurrences

underlying this case and considering his assurance to the court that he would avoid

similar conduct in the future, I cannot say that the district court abused its

discretion in denying the injunction. Therefore, I would affirm the denial of the

injunction (although if the district court had granted an injunction, I would likely

have voted to affirm that decision).




       *
        In Blatt, the Court noted that “[e]xperience has shown that an injunction . . . often is
much more than [a] ‘mild prophylactic’ . . . .” Id. at 1334 n.28 (quoting SEC v. Commonwealth
Chem. Secs., Inc., 574 F.2d 90, 99 (2d Cir. 1978). The collateral consequences of these
injunctions can be severe. And Scott Ginsberg says the consequences will be severe for him,
causing him to lose his employment as an officer of a public company.

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