Citation. SEC v. Yun, 327 F.3d 1263, Fed. Sec. L. Rep. (CCH) P92,408, 14 A.L.R. Fed. 2d 819, 16 Fla. L. Weekly Fed. C 521 (11th Cir. Fla. Apr. 16, 2003)
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Brief Fact Summary.
Convicted for insider trading violations of § 10(b) of the Exchange Act and Rule 10b-5, Yun and Burch (Defendants) argued that the district court was erroneous in schooling the jury on the components of the misappropriation theory of liability for insider trading.
Synopsis of Rule of Law.
(1) A spouse is obliged to have a duty of fidelity and privacy not to disclose insider information where the spouse has arranged to keep the information private where there is an arrangement of sharing and keeping insider business confidences betwixt spouses, under a misappropriation theory of insider trading. (2) ) A spouse breaches the duty of fidelity and privacy owed to an insider spouse where the non-insider spouse discloses confidential insider information for a personal, non-financial, benefit, under a misappropriation theory of insider trading.
Facts.
David, Yun’s husband and president of a Scholastic Corporation (Scholastic) subsidiary, was informed prior to public release that Scholastic’s revenue were going to considerably lower than analysts’ projections. Yun was informed by David of this as part of their post-nuptial division of assets. David asked that Yun keep this information to herself and she agreed. Later, a co-worker and friend of Yun’s, Burch, overheard Yun speaking with her attorney regarding the expected price decline in Scholastic’s stock. As a result of what he heard Yun say, Burch was no longer comfortable trading Scholastic stock and apparently attained additional information from Yun at an awards banquet later on in the day. The following day, Burch traded in Scholastic stock, attaining a 1,300% return on his investment by procuring earnings in excess of$250,000. The SEC had begun an investigation within mere hours of Burch’s trades, and as a result of that investigation, filed suit against Yun and Burch for violating Rule 10b-5 and § 10(b) of the Exchange Act. After responding to special verdicts, the jury found both defendants guilty under a “misappropriation theory†of insider trading liability. Burch and Yun appealed, arguing that the district court was erroneous in educating the jury on the factors of misappropriation theory of liability for insider trading. The court of appeals granted review.
Issue.
(1) Is a spouse obliged to have a duty of fidelity and privacy not to disclose insider information where the spouse has arranged to keep the information private where there is an arrangement of sharing and keeping insider business confidences betwixt spouses, under a misappropriation theory of insider trading? (2) Does a spouse breach the duty of fidelity and privacy owed to an insider spouse where the non-insider spouse discloses confidential insider information for a personal, non-financial, benefit, undera misappropriation theory of insider trading?
Held.
(Tjoflat, J.) (1) Yes. A spouse is obliged to have a duty of fidelity and privacy not to disclose insider information where the spouse has arranged to keep the information private where there is an arrangement of sharing and keeping insider business confidences betwixt spouses, under a misappropriation theory of insider trading. To triumph under the misappropriation theory, a breach of duty of fidelity and secrecy owed to the private information’s source by the misappropriatormust be proven by the SEC. This produces the query of if a non-insider spouse owes a duty of fidelity and privacy to the insider spouse to not disclose the information. In United States v. Chestman, 947 F.2d 551 (2d Cir. 1991), a leading case regarding this issue, held that a duty is present only if there is a distinct fiduciary relationship betwixt the spouses or an express agreement of confidentiality. This view is too narrow though, seeing as it disregards the multiple occurrences where a spouse has a reasonable expectation of secrecy, with the more realistic view being that a spouse who trades in breach of a reasonable and legitimate expectation of privacy held by the other spouse adequately imperils the former to insider trading liability. If it can be demonstrated by the SEC that the spouses were habitually sharing business confidences, with those confidences usually maintained by the receiving spouse, then most of the time the conveying spouse would have a reasonable expectation of privacy so that the breach of the expectation would be adequate to yield inside trading liability. A breach of an arrangement to keep business confidences would also be adequate. The SEC applied these principles in this case, procuring ample proof both that an arrangement of privacy and a habit of maintaining and sharing of business confidences existed betwixt Yun and David so that David had a reasonable expectation that Yun would have kept the private information given her regarding Scholastic’s financial situation. So, the first component of the misappropriation theory claim is proven because a jury could find that a duty of loyalty and confidentiality was present betwixt the spouses. Affirmed as to this issue. (2) Yes. A spouse does breach the duty of fidelity and privacy owed to an insider spouse where the non-insider spouse discloses confidential insider information for a personal, non-financial, benefit, under a misappropriation theory of insider trading? The SEC originally claimed that Yun breached her duty by purposefully relaying the private information to Burch for her personal gain through her friendship and business relationship with him. On appeal, this position was abandoned with the SEC arguing that it merely had to demonstrate that Yun acted with “severe recklessness†and that the personal gain component is not needed for the misappropriation theory claim. Given that the position of a tippee is the same regardless of if they are insiders or outsiders, for the components the SEC must demonstrate to show a § 10(b) and Rule 10b-5 violation to rely on the theory under which the SEC chooses to litigate the case makes “scant sense.†The liability of the tippee should be decided based on the same principles. Per the Supreme Court precedent, tippee’s are only tainted when they find a co-venture, which is present only when a tipper plans on benefiting from the disclosure of the insider info. So, for both tippee positions to be equal under both theories of liability, an outsider who tips for his personal benefit is required. Not requiring intent to benefit imposes liability more readily for tipping than trading and would bring forth an outcome that is both ridiculous and that would undermine the Supreme Court’s reason for enforcing the benefit necessity in the first place: the want of making sure a tip rises to the trade level. It is significant to require an identical approach to tipper and tippee liability under the theories of insider trading seeing as most violations that fall under the classical theory can otherwise be categorized as misappropriations; to permit the SEC to elude establishing the personal gain component by merely continuing under the misappropriation theory in place of the classical theory would be contradictory to the Supreme Court precedent. In this case, Burch and Yun were friends and were engaged in a long term business relationship which is ample enough evidence for a jury to reasonably conclude that Yun anticipated benefiting from her tip to Burch by sustaining a solid relationship betwixt the two of them, as friends and as a partner in business deals. As a result, the SEC has adequatelyproven the second component of a misappropriation theory claim when Yun breached her duty of privacy and fidelity. Affirmed as to this issue.
Discussion.
After this case, the simplest way to look at possible insider trading liability is this, both insiders and outsiders that trade are liable and both insiders and outsiders that tip as opposed to trade are liable if their intention is to benefit from the disclosure.
