Sam Goody store ()
A CEO who went to prison for insider trading has lost his appeal from a related $32 million civil judgment.
The U.S. Court of Appeals for the Third Circuit on Monday affirmed a jury’s finding that Alfred Teo Sr. and a trust he controlled violated securities law and rules regarding disclosure of stock holdings in Musicland Stores Corp.—the company that once operated Sam Goody music stores and Suncoast Motion Picture Co. video shops.
Teo, who has homes in Kinnelon and Fisher Island, Florida, is chairman and chief executive officer of Sigma Plastics Group in Lyndhurst, N.J.
In December 2001, U.S. District Judge Susan Wigenton ordered Teo to disgorge $17.4 million in profits he had made on Musicland stock plus $14.6 million in prejudgment interest. She also required him to pay the SEC civil penalties equal to the disgorgement, bringing the total to more than $49 million.
That sum was on top of $997,000 Teo paid earlier in the case and a $1 million payment imposed on him in 2007 after he pleaded guilty to insider trading in Musicland shares as well as those of Cirrus Logic, an Austin-based manufacturer of computer chips. U.S. District Judge Katharine Hayden also sentenced him to 30 months in prison.
The 2011 civil judgment, affirmed Monday in Securities and Exchange Commission v. Teo, was the culmination of a suit filed in 2004 that originally named Teo and 10 relatives, friends and colleagues who were accused of buying stock based on inside information he passed on.
In addition to insider trading, the SEC accused Teo and his trust of filing false reports with the SEC regarding the extent of their ownership of Musicland stock or not filing required reports.
Under the securities laws, investors who acquire more than a 5 percent interest in voting shares must file a Schedule 13D within 10 days.
The SEC claimed Teo concealed his purchase of millions of shares in Musicland that would have triggered the company’s poison pill protections against a hostile takeover.
Once a hostile buyer acquired 17.5 percent of the shares, the poison pill allowed prior shareholders to buy stock at a lower price to dilute that buyer’s holdings.
Teo and the trust acquired almost 36 percent of Musicland and had been trying to take the company private when Best Buy announced a cash tender offer for all the shares in December 2000, causing the price to rise.
Teo sold some of his shares on the market and the rest to Best Buy when it followed through on the tender offer in January 2001 for a total of about $155 million.
He later admitted that he had increased his Musicland shares by 45,000 after management tipped him off to the tender offer before it was made public, which was the basis of the insider trading charges brought in August 2004.
He pleaded guilty in June 2006, served time at a minimum security federal prison in Morgantown, W. Va., and was released in October 2008. His criminal defense lawyer was former N.J. Attorney General John Farmer Jr., now dean of Rutgers Law School-Newark
By the time the civil trial began in May 2011, all the other defendants had entered into consent judgments or were otherwise out of the case, leaving only Teo and the trust.
After the jury verdict, they unsuccessfully sought judgment as a matter of law or a new trial.
The appeals court rejected Teo’s arguments that his guilty plea allocution should not have been admitted, that an exhibit regarding an SEC filing confused the jury and that there was insufficient evidence of liability.
It split, however on his contention that he should not have had to disgorge all of his profits as tainted and that the district court should have had to show the entire disgorged amount was ill-gotten gains rather than the result of Best Buy’s tender offer.
Circuit Judges Richard Nygaard and Dolores Sloviter saw total disgorgement as proper.
They distinguished between civil enforcement actions brought by the SEC and by private parties saying SEC actions did not require the type of direct causation analysis urged by Teo although some causal connection was needed.
“While there is strong legal support for the application of tort-based proximate causation analysis in the context of private enforcement litigation, we have no such authority on which we can rely to impose any such requirement on SEC-initiated civil actions,” wrote Nygaard in a precedential opinion.
Circuit Judge Kent Jordan, dissenting in part, said the Best Buy offer was independent of the violations. He thought the case should be remanded to the district court to sort out what part of the profits was the result of wrongdoing and thus subject to disgorgement, which he noted was a remedy meant to prevent unjust enrichment and not punitive in nature.
The SEC declined comment through spokesman Kevin Callahan.
Teo’s lawyers, Cheryl Krause of Dechert in Philadelphia and Mary Mulligan of Friedman Kaplan Seiler & Adelman in New York, did not return calls.