Securities and Exchange Commission v. Donna Yun, Jerry Burch
2003 U.S. App. LEXIS 7155, 327 F.3d 1263, 14 A.L.R. Fed. 2d 819 (2003)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Tipper liability under the misappropriation theory of insider trading requires proof that the tipper, in breaching a duty of loyalty and confidentiality (which can arise between spouses from an express agreement or a history of shared confidences), intended to personally benefit from disclosing material nonpublic information to a tippee.
Facts:
- On January 27, 1997, David Yun, president of Scholastic Book Fairs, Inc., learned at a senior management retreat that Scholastic Corporation would post a loss for the current quarter and would announce a downward earnings forecast, being cautioned to keep this information confidential.
- On February 13, 1997, David Yun was informed that the negative earnings announcement for Scholastic Corporation would be made on February 20.
- Over the weekend of February 15-16, 1997, David Yun discussed a post-nuptial division of assets statement with his wife, Donna Yun, and explained that he assigned a lower value to his Scholastic stock options because he expected the price to drop after the February 20 announcement, asking her to keep this information confidential, to which she agreed.
- On Tuesday, February 18, 1997, while Donna Yun was on the phone in her shared real estate office discussing David's asset statement with her attorney, co-worker Jerry Burch, standing three to four feet away, overheard her tell the attorney about Scholastic’s impending earnings announcement and expected stock price decline.
- Between the afternoon of February 19 and midday on February 20, 1997, Jerry Burch, despite warnings from his broker about risks and insider trading prohibitions, purchased $19,750 in Scholastic put options, an amount equal to two-thirds of his previous year's income.
- After the stock market closed on February 20, 1997, Scholastic announced that its earnings would be well below analysts’ expectations, causing its stock price to drop approximately 40% the next day.
- Jerry Burch then sold his Scholastic put options, realizing a profit of $269,000.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a one-count amended complaint against Donna Yun and Jerry Burch in the United States District Court for the Middle District of Florida, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 under the misappropriation theory.
- Donna Yun and Jerry Burch filed separate answers denying any violations and asserting defenses, including that no fiduciary relationship existed between the Yuns, or if it did, Donna did not breach it by disclosing information for her benefit.
- The case was tried to a jury, which returned special verdicts finding that Donna Yun and Jerry Burch had 'violated Section 10(b)' under the 'misappropriation theory' of liability.
- The district court entered judgment against Donna Yun and Jerry Burch, holding them jointly liable for $269,000 in profits plus prejudgment interest, and individually liable for a $1,000 penalty.
- At the close of evidence and after the jury's verdicts, Donna Yun and Jerry Burch moved for judgment as a matter of law, arguing insufficient evidence for a fiduciary relationship or a breach for personal benefit, which the district court denied.
- Donna Yun and Jerry Burch (Defendants-Appellants) appealed the district court's denial of their motions for judgment as a matter of law and alleged errors in jury instructions to the United States Court of Appeals for the Eleventh Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does tipper liability under the misappropriation theory of insider trading require proof that the tipper intended to personally benefit from the disclosure of material nonpublic information to a tippee, even when the tipper is an 'outsider' to the company whose stock is traded?
Opinions:
Majority - Tjoflat, Circuit Judge
Yes, tipper liability under the misappropriation theory requires proof that the tipper intended to personally benefit from the disclosure of material nonpublic information. The court held that the 'personal benefit' requirement established in Dirks v. SEC for classical insider trading cases applies equally to misappropriation theory cases to maintain consistency in insider trading law, as indicated by the Supreme Court in United States v. O’Hagan. There is no logical reason to distinguish between tippees or tippers based on whether the information originated from an insider or an outsider, as the harm to the securities market and the underlying fraud principles remain the same. To hold otherwise would create an arbitrary distinction that would effectively render Dirks a 'dead letter' by allowing the SEC to circumvent the benefit requirement simply by prosecuting under the misappropriation theory. Section 10(b) targets fraudulent means of capitalizing on information through securities transactions, not merely any breach of fiduciary duty. The court clarified that a duty of loyalty and confidentiality between spouses can be established by an express agreement of confidentiality or by a history or pattern of sharing and maintaining business confidences, reflecting a 'reasonable and legitimate expectation of confidentiality.' In this case, there was sufficient evidence for a jury to find both an agreement of confidentiality and a history of sharing business confidences between David and Donna Yun. Furthermore, the evidence of Donna Yun's 'friendly' relationship with Jerry Burch and their history of splitting real estate commissions was sufficient for a jury to reasonably conclude that Donna expected to benefit from her tip by maintaining this important personal and business relationship. However, the district court's jury instructions, which allowed for liability based on 'severe recklessness' without requiring an intent to benefit, were erroneous and prejudicial, warranting a new trial.
Analysis:
This case significantly unifies the 'personal benefit' requirement for tipper liability across both classical and misappropriation theories of insider trading, preventing the SEC from sidestepping Dirks v. SEC by strategically choosing a theory of prosecution. It provides crucial guidance on how a duty of trust and confidence can be established in non-business relationships, particularly between spouses, by focusing on express agreements or a demonstrated history of shared confidences. The Eleventh Circuit's expansive definition of 'personal benefit'—encompassing reputational gain, quid pro quo, or a gift to a friend or relative—reinforces that the threshold for proving intent to benefit is not high but remains a necessary element of fraud under Section 10(b). The ruling underscores the importance of precise jury instructions in insider trading cases, emphasizing that the absence of a correct 'intent to benefit' instruction constitutes prejudicial error requiring a new trial.
