Securities & Exchange Commission v. Bauer
2013 U.S. App. LEXIS 14767, 2013 WL 3779906, 723 F.3d 758 (2013)
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Rule of Law:
In an insider trading case involving novel circumstances, summary judgment is improper where there are genuine factual disputes regarding the materiality of non-public information in light of publicly available information, and where the defendant has provided credible evidence of a legitimate, non-fraudulent purpose for the trade.
Facts:
- Jilaine H. Bauer was the general counsel, chief compliance officer, and a senior vice president for Heartland Advisors, Inc. (HAI), the investment adviser for Heartland Group, Inc. (HGI) mutual funds.
- In 2000, HGI's municipal bond funds, including the Short Duration Fund in which Bauer was invested, experienced severe liquidity problems, credit issues, and high levels of net redemptions.
- As an officer of HAI and HGI, Bauer learned of non-public information, including internal discussions about liquidating the funds, the inability to sell portfolio bonds at their carrying values, a portfolio manager's impending resignation, and concerns that the funds' Net Asset Value (NAV) was too high.
- In September 2000, Bauer became aware of a deal with the State of Wisconsin Investment Board (SWIB) to purchase a package of the funds' non-performing bonds, and that potential buyers were offering to purchase other portfolio bonds at 30-50% markdowns from carrying value.
- On September 28, 2000, the funds' NAV declined significantly, though internal concerns about overvaluation persisted.
- On the morning of October 3, 2000, Bauer placed an order to redeem all of her shares in the Short Duration Fund, receiving proceeds of $44,627.15.
- Ten days later, on October 13, 2000, HGI's Pricing Committee applied across-the-board 'haircuts' to the funds' bond valuations, causing the Short Duration Fund's NAV to drop by 44%.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a civil enforcement action against Jilaine H. Bauer and other defendants in the U.S. District Court for the Eastern District of Wisconsin, alleging insider trading.
- All defendants except Bauer entered into settlement agreements with the SEC.
- The SEC and Bauer filed cross-motions for summary judgment on the insider trading claims.
- The district court granted summary judgment in favor of the SEC, finding as a matter of law that the information Bauer possessed was material and that she acted with scienter.
- The district court later dismissed the remaining, non-insider trading claims against Bauer.
- Bauer (appellant) appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Seventh Circuit, with the SEC as appellee.
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Issue:
Did the district court err in granting summary judgment to the SEC on an insider trading claim by finding as a matter of law that the non-public information possessed by Jilaine H. Bauer was material and that she acted with scienter, particularly where the application of insider trading theories to mutual fund redemptions is a novel legal question?
Opinions:
Majority - Zagel, District Judge
Yes. The district court erred in granting summary judgment because genuine issues of material fact exist and the case involves novel legal questions that must be addressed by the district court in the first instance. The court reversed and remanded on three grounds. First, the applicability of the misappropriation theory of insider trading to mutual fund redemptions is an uncharted legal question that the district court must consider before an appellate court rules on it; the SEC improperly raised this theory for the first time on appeal after arguing the classical theory below. Second, whether the non-public information Bauer possessed was material is a question for the jury, as significant negative information about the funds was already public, making the 'total mix' of information highly pessimistic; a reasonable jury could find her inside knowledge did not significantly alter that mix. Third, whether Bauer acted with scienter is also a jury question, as she presented credible evidence of legitimate reasons for her redemption, including the fund's public record of poor performance, price volatility, and her exploration of a job change that would require relocation.
Analysis:
This decision underscores judicial reluctance to expand established legal doctrines, such as insider trading, into novel factual contexts like mutual fund redemptions without a fully developed trial court record. It reinforces that summary judgment is inappropriate when key elements like materiality and scienter require weighing competing facts and inferences, a task reserved for the fact-finder. The ruling also serves as a strong procedural reminder that legal theories must be raised and argued at the trial level, preventing litigants from shifting their core legal arguments on appeal. This case complicates the SEC's ability to pursue insider trading in the mutual fund context, requiring it to articulate a clear theory of deception that fits the unique structure of fund transactions.
