Sec. & Exch. Comm'n v. Teo

• Decision Date: 10 February 2014
• Docket Number: No. 12–1168.,12–1168.
• Citation: 746 F.3d 90
• Parties: SECURITIES AND EXCHANGE COMMISSION v. Alfred S. TEO, Sr.; Teren Seto Handelman; Maaa Trust, FBO Mark, Andrew, Alan and Alfred Teo, Jr.; John D. Reier; Charles D. Fortune; Jerrold J. Johnston; Mark J. Lauzon; Philip Sacks; Mitchell L. Sacks; Richarda. Herron; Lawrence L. Rosen; David M. Ross; James M. Ruffolo Alfred S. Teo, Sr. and MAAA Trust, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

746 F.3d 90

SECURITIES AND EXCHANGE COMMISSION

v.Alfred S. TEO, Sr.; Teren Seto Handelman; Maaa Trust, FBO Mark, Andrew, Alan and Alfred Teo, Jr.; John D. Reier; Charles D. Fortune; Jerrold J. Johnston; Mark J. Lauzon; Philip Sacks; Mitchell L. Sacks; Richarda. Herron; Lawrence L. Rosen; David M. Ross; James M. Ruffolo

Alfred S. Teo, Sr. and MAAA Trust, Appellants.

No. 12–1168.

United States Court of Appeals,Third Circuit.

Argued April 23, 2013.

Filed: Feb. 10, 2014.

Eric O. Corngold, Esq., Mary E. Mulligan, Esq., Friedman Kaplan Seiler & Adelman, New York, NY, Cheryl A. Krause, Esq. [argued], Dechert, Philadelphia, PA, for Appellants Alfred S. Teo, Sr. and MAAA Trust.

David Lisitza, Esq. [argued], Securities & Exchange Commission, Washington, DC, for Appellee.

BEFORE: SLOVITER, JORDAN, and NYGAARD, Circuit Judges.

OPINION OF THE COURT

NYGAARD, Circuit Judge.

A jury concluded that defendants Alfred Teo and MAAA Trust were liable for violating (inter alia) the Securities Exchange Act of 1934, Sections 13(d) and 10(b) (15 U.S.C. § 78m(d) and § 78j(b)). The District Court subsequently denied the Defendants' motions for judgment as a matter of law and for a new trial. It also ordered (inter alia) the Defendants to disgorge over $17 million, plus prejudgment interest amounting to over $14 million. They now appeal alleging errors arising from the admission of certain evidence and the use of a general verdict form; and challenging the District Court's disgorgement and prejudgment interest award. We will affirm the District Court's order on all issues.

I.

Alfred Teo is a businessman and an investor. In 1992, he established the MAAA Trust. Teo was the beneficial owner of the Trust, which also held various securities, for the period relevant to this appeal. In February 1997 twenty-eight brokerage accounts controlled by Teo (including those of the Trust) held approximately 5.25 percent of the stock in Musicland. Musicland was a Delaware corporation that was a retailer of music, video, books, computer software and video games.

Musicland had a “shareholder rights plan” that could be activated when an individual or group reached 17.5 percent ownership of the company's stock. This plan, commonly known as a “poison pill,” was in place to protect the company from a hostile takeover. Once initiated, it enabled—among other things—shareholders to purchase stock at a lower price to dilute the holdings of the hostile buyer to a lower percentage.

Up to July 1998, in accord with Section 13(d), Teo properly disclosed his Musicland holdings on SEC Schedule 13D, and those holdings were under the poison pill threshold. On July 30, 1998, Teo filed “Amendment 7” to his Schedule 13D disclosure with the following statement: “Teo ceased to have investment powers with respect to the [MAAA] Trust.” ¹ After July 30, 1998 Teo consistently reported that his ownership percentage in Musicland remained below 17.5 percent. Nonetheless, he continuedto make investments in Musicland on behalf of the Trust. In all, Teo filed three false Schedule 13D disclosures, and he failed to file numerous 13Ds that were required when the change in the percentage of his ownership in Musicland exceeded the reporting threshold.

The Trust subsequently filed two Schedule 13Ds falsely stating that Teren Seto Handelman, Teo's sister-in-law, had sole power to buy and sell Trust shares. By failing to disclose his beneficial ownership of the Musicland stock held by the MAAA Trust, Teo under-reported his Musicland holdings, and failed to comply with his reporting obligations under Section 13(d). Moreover, since Teo's filings never disclosed his ownership of Musicland stock to be at or above the poison pill threshold, Musicland was kept in the dark about this fact and it never activated this plan. This was Teo's intent for filing the false reports.

Additionally, after March 10, 2000, the Trust stopped making amendments to its reports, even though changes in its Musicland ownership interest continually exceeded the reporting threshold. The District Court concluded that Teo and the Trust controlled 17.79 percent of Musicland shares on August 2, 1998, and 35.97 percent on December 6, 2000. Their combined holdings in Musicland did not fall below 17.79 percent through January 31, 2001.

Throughout this period, Teo made multiple requests to be placed on the Musicland Board of Directors (from December 1998 through September 2000), and during 2000 he also pushed, unsuccessfully, for the selection of a number of other Board candidates. Moreover, Teo repeatedly proposed that Musicland become privately held. Teo successively worked with Goldsmith–Agio–Helms, Trivest Capital, and Financo on plans to take Musicland private. He admitted that his motive for doing so was to open up the opportunity for him to cash out. He did not file any Schedule 13D disclosures on any of these activities.

In December 2000, Best Buy Co. announced its all-cash tender offer of all Musicland shares, and it acquired those shares in January 2001. The stock price rose after the tender offer announcement.² Teo sold a portion of his Musicland shares in the market, and all of the remaining shares to Best Buy as part of the tender offer. The District Court determined that Teo's original cost of acquiring his shares was $89,453,549 and that the gross proceeds from his sale of the stock amounted to $154,932,011. The District Court set Teo's profit from stock he held after July 30, 1998, (taking into account the date of his first SEC reporting violation) at $21,087,345, including shares held by the Trust, and those held by accounts that Teo directly controlled.

In April, 2004 the SEC filed a civil law enforcement action against Teo asserting violations of the Securities Exchange Act, Sections 13(d) and 10(b), and numerous SEC rules and regulations.³ The District Court granted summary judgment on a number of rule-violation claims that Teo does not challenge. At trial, a jury concluded that Teo violated Section 10(b) and Rule 10b–5, and that Teo and the Trust violated Section 13(d), Rule 12b–20, Rule 13d–l, and Rule 13d–2. Finally it held that the Trust violated Section 16(a) and Rule 16a–3.

After trial, the District Court denied motions by Teo and the Trust for a new trial and for judgment as a matter of law. It subsequently enjoined Teo and the Trust from future violations of securities law. Finally, upon the SEC's motion, the District Court held Teo and the Trust jointly and severally liable for paying the civil penalty and for the disgorgement of their illegally obtained profits.

Teo and the Trust now appeal the jury's verdict, but do not directly challenge the ruling on the injunction or their joint and several liability. Specifically, they appeal the District Court's admission of Teo's guilty plea allocution and an exhibit that they assert is false evidence. They also claim that there was insufficient evidence to prove a “plans and proposals” theory of liability, and that this entitles them to a new trial because the general verdict slip creates ambiguity on the theory of liability grounding the jury's verdict. Finally, the Appellants appeal the District Court's order disgorging over $17 million, plus prejudgment interest.⁴ We now turn to each of these issues.

II.

On June 7, 2006, Teo pleaded guilty to five counts of insider trading admitting that: he received advance information that Best Buy was going to make a tender offer to purchase Musicland stock; that he was aware that this was private information; he was aware of his duty to refrain from acting on or disclosing it to anyone; and finally, that he enabled eight people to take advantage of this information. He also admitted that he passed this information on to the eight willfully, knowingly and with an intent to defraud. The conduct underlying these admissions occurred contemporaneously with his Section 13(d) violations in the fall of 2000. The SEC's use of the admissions contained in the allocution was the subject of a motion in limine, and the District Court ruled that—presuming Teo testified—it was admissible.

During the SEC's questioning of Teo at trial, it introduced—over the Appellants' objections—Teo's convictions and the allocution from his guilty plea to Section 10(b) insider trading. The Appellants now take issue only with the admission of the allocution.⁵

The District Court grounded its decision to admit Teo's allocution on both Fed.R.Evid. 609 and Fed.R.Evid. 404(b).⁶ Under Rule 404(b), evidence of a crime may not be used to prove a person's character, but may be used to prove intent, knowledge, absence of mistake, or lack of accident. We have long regarded this rule as inclusionary, meaning that “evidence of other wrongful acts [is] admissible so long as it [is] not introduced solely to prove criminal propensity.” United States v. Green, 617 F.3d 233, 244 (3d Cir.2010). Moreover, we have adopted a four-prong test for admissibility under Rule 404(b): (1) the evidence must have a proper purpose under Rule 404(b); (2) it must be relevant under Rule 402; (3) its probative value must outweigh its prejudicial effect under Rule 403; and (4) the court must charge the jury to consider the evidence only for the limited purpose for which it was admitted. United States v. Davis, 726 F.3d 434, 441 (3d Cir.2013).

The District Court, after reviewing the proposed evidence, concluded that the allocution would be probative of virtually all of the permissible reasons provided under Rule 404(b): Teo's claimed absence of knowledge, his intent, and the absence of mistake. It noted that the criminal case was “an offshoot” of the civil case, and that this evidence was relevant to “what [Teo] knew, what [Teo] did, [and] when he did it.” We agree. The allocution was probative of Teo's willfulness and knowledge in evading SEC regulations as they related to his Musicland stock holdings.

The Appellants attempt to construe the insider trading conduct as irrelevant...