No. 12-1168

Feb. 10, 2014 (Date Decided)

Judge Nygaard

For Appellants: Alfred S. Teo, Sr. and Maaa Trust, Eric O. Corngold, Mary E. Mulligan (Friedman Kaplan Seiler & Adelman); Cheryl A. Krause (argued) (Dechert)

For Appellee: David Lisitza (argued), Securities & Exchange Commission

In 1992, Alfred Teo, an investor, established the MAAA Trust. Teo was the beneficial owner of the Trust, which also held various securities. In 1997, brokerage accounts controlled by Teo held approximately 5.25 percent of the stock in Musicland, a corporation. In 2000, Best Buy Co. announced its all-cash tender offer of all Musicland shares; it acquired those shares in January 2001. The stock price rose after the tender offer announcement. Teo sold a portion of his Musicland shares in the market, and the remaining shares to Best Buy as part of the tender offer.

In 2004, the Securities and Exchange Commission (SEC) filed an action against Teo asserting violations of the Securities Exchange Act. A jury concluded that Teo and MAAA Trust were liable for violating Sections 13(d) and 10(b) of the Act. The District Court ordered Defendants to disgorge over $17 million, plus prejudgment interest amounting to over $14 million. Defendants appeal.

The SEC grounded its motion for disgorgement on Appellants’ Section 13(d) violations over the course of years, and on the jury’s conclusion that Teo’s conduct was motivated by fraud, in violation of Section 10(b). While Appellants were amassing Musicland shares, their misreporting and Teo’s fraud insulated the valuation of Appellants’ Musicland stock holdings from the effects of a poison pill that could have been activated if the extent of their holdings in the company had been known. These violations of Section 13(d) enabled Appellants to acquire a sizeable ownership interest in a publicly traded company without the awareness of company directors, fellow shareholders, the SEC, or the market-at-large. Moreover, this was done with conscious intent, violating Section 10(b). These fraudulent acts enabled Appellants to surreptitiously acquire and hold a large volume of stock that, in turn, netted huge profits when sold to Best Buy. The District Court rightly judged the enforcement objectives to weigh in favor of disgorgement. Moreover, by limiting the determination of unjust enrichment to only the shares acquired after the reporting violations began, the District Court guarded against an overreach that would have been punitive.

The District Court did not abuse its discretion by determining that the profit the Appellants realized from selling the stock they acquired while consciously violating the law unjustly enriched Appellants, and that the enforcement objectives of this cause of action warranted disgorgement.

Judge Jordan, dissenting in part, would vacate the District Court’s disgorgement order and remand the case.