SEC v. Teo, PICS Case No. 14-0245 (3d Cir. Feb. 10, 2014) Nygaard, J. (55 pages).


The Legal Intelligencer


Securities Fraud • Beneficial Ownership • Schedule 13D • "Plans and Proposals" • Admissibility of Allocution

SEC v. Teo, PICS Case No. 14-0245 (3d Cir. Feb. 10, 2014) Nygaard, J. (55 pages).

Where allocution to insider trading demonstrated knowledge or intent to evade securities regulations, admission of such allocution was permissible; and where evidence illustrated numerous attempts at privatization, it established "plans and proposals" for a course of action for an extraordinary corporate transaction; and where the SEC seeks disgorgement of profits, it did not need to prove reliance on misstatements or omissions or that investors lost money as a result of the violation, although a defendant could raise an intervening act between the wrongdoing and the profits. Denied.

A jury found appellants Alfred Teo and MAAA Trust liable for violating §§13(d) and 10(b) of the Securities Act of 1934. Teo was the beneficial owner of the Trust, which held securities in Musicland, a Delaware corporation, during the period relevant to this action. Musicland had a poison pill plan set to take effect when an individual or group reached 17.5% ownership. Teo filed an amendment to his SEC Schedule 13D, disclosing that he ceased to have investment powers with respect to the Trust, and after July 1998 consistently reported that his ownership remained below 17.5%, although it never fell below 17.79%. Teo continued to file false Schedule 13D disclosures.

Teo made several attempts to take Musicland private, until Best Buy made an all-cash tender offer for all of Musicland's shares. Teo made a profit of over $20 million selling shares. The SEC subsequently filed a civil law enforcement action, asserting Teo violated §§13(d) and 10(b). After trial and jury verdict, the district court denied motions for a judgment as a matter of law and a new trial, and, among other things, ordered the disgorgement of illegally obtained profits.

On appeal, appellants asserted that the district court erred in admitting Teo's guilty plea allocution for insider trading, erred in ruling against the motion for judgment as a matter of law and new trial on the basis that there was insufficient evidence to prove a "plans and proposals" theory of liability, and also appealed the order for disgorgement on the basis that the SEC failed to establish causation between wrongdoing and the disgorged profits.

The court ruled that the district court properly admitted Teo's allocution into evidence, noting that the admission met all four prongs of Fed.R.Evid. 404(b). Although appellants argued that the insider trading to which Teo allocuted was irrelevant to this 10(b) action, the court instead found that his intent in the criminal matter was probative of his intent in the civil case. Finally, the court noted that the district court provided an appropriate limiting instruction.

The court also rejected appellants' claims for judgment as a matter of law and new trial on the basis of insufficient evidence as to the "plans and proposals" theory of liability. The court noted that while a general verdict cannot be sustained where one theory of liability is insufficient, the district court's analysis was not erroneous. The court found that Teo had made multiple affirmative efforts to enact a leveraged buyout of Musicland, which triggered his Schedule 13D reporting duties. There was sufficient evidence to find §13(d) violations regardless of the theory of liability.

Finally, the court ruled that the SEC need not prove reliance on appellants' misstatements or omissions or that investors lost money. It contrasted private civil enforcement actions, which required those elements, with SEC enforcement actions, noting that the purpose of SEC enforcement was to deter violators by making violations unprofitable. Although the court also noted that a defendant could make a case by pointing to intervening events from the time of the violation, it found that appellants had profited from the sale of shares amassed by violating §§13(d) and 10(b) and avoiding the shifts in market price and triggering of Musicland's poison pill plan.