Securities & Exchange Commission v. Bauer
2013 U.S. App. LEXIS 14767
7th Cir.2013Background
- SEC sued Bauer for insider trading tied to a mutual fund redemption in Oct 2000; Bauer was Heartland’s GC/CCO and a key fund adviser executive with access to nonpublic fund and pricing information.
- Funds (Short Duration and High Yield) faced liquidity and valuation problems in 1999–2000 due to net redemptions and illiquid holdings; illiquid assets rose, fund NAVs declined, and pricing disputes emerged between Muller valuations and other sources.
- HAI used Muller as primary pricing source; Pricing Committee could override Muller valuations only via a discretionary process based on predetermined factors.
- Sept 28, 2000 NAV declines triggered internal reviews and a plan to potentially fair-value or adjust prices; Bauer participated in pricing decisions and later lifted employee trading restrictions.
- On Oct 3, 2000 Bauer redeemed roughly 5,000 shares of the Short Duration Fund just before significant NAV drops; she later prepared materials for investor Q&As and discussed public communications about the funds.
- District court granted summary judgment to SEC on insider trading under the misappropriation theory?; appellate court remanded to address theory applicability and potential factual issues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether misappropriation theory applies to mutual fund redemptions | SEC argues Bauer breached a duty to the funds/source by trading on confidential info. | Bauer contends misappropriation theory may apply but requires development below; the district court did not address it. | Remanded to decide misappropriation theory applicability in the district court. |
| Whether the district court should have considered classical insider trading theory | SEC urged classical theory based on insider-trading in own fund. | Bauer argues mutual fund redemptions cannot fit classical theory; SEC did not adequately defend. | SEC abandoned/forfeited classical theory; not decided on appeal. |
| Materiality of nonpublic information held by Bauer | Information about liquidity risk and NAV distress was material. | Public information and market conditions may dilute materiality of nonpublic data. | Materiality must be weighed against public information; text indicates factual disputes to go to trial. |
| Scienter and motive for Bauer’s trade | Bauer acted with intent to deceive or recklessly disregard truth. | Credible nonculpable explanations (poor fund performance, job-change) exist; Lipson framework applies. | Issues of scienter for trial; genuine disputes about motive/remedies. |
| Procedural posture and remand scope | Court should affirm on existing record where applicable. | Remand necessary to develop misappropriation theory and record. | Remand to district court for threshold misappropriation and related issues. |
Key Cases Cited
- O'Hagan v. United States, 517 U.S. 609 (1997) (establishes misappropriation theory as facet of §10(b))
- Chiarella v. United States, 445 U.S. 222 (1980) (classic insider trading duty to disclose or abstain)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard for nonpublic information)
- Jones v. Harris Associates L.P., 130 S. Ct. 1418 (2010) (discusses openness of fiduciary duties and fund advisory relationships)
- Lipson v. United States, 278 F.3d 656 (2002) (possession vs. use of information and causation framework)