Securities And Exchange Commission v. Yu

327 F.3d 1263 (11th Cir. 2003)

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Nature of the Case

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Facts

Donna Yun (D) is married to David Yun, the president of Scholastic Book Fairs, Inc., a subsidiary of Scholastic Corporation (Scholastic), a publisher and distributor of children's books whose stock is quoted on the NASDAQ National Market System and whose option contracts are traded on the Chicago Board Options Exchange. David attended a senior management retreat where he was told that the company would post a loss for the current quarter and that before the quarter ended, the company would make a public announcement revising its earnings forecast downward. All were warned not to sell any of their Scholastic holdings until after the announcement, which would likely result in a decline in the market price of Scholastic shares. All were warned to keep the matter confidential. Two weeks later, David was told that the negative earnings announcement would be made on February 20. Over the weekend of February 15-16, David and D discussed a statement of assets that he had provided her in connection with their negotiation of a post-nuptial division of assets. David assigned a $55 value to his Scholastic options, even though the stock was then trading at $65 per share. David told D about the upcoming February 20 earnings announcement. He also told her not to disclose this information to anyone else, and she agreed to keep the information confidential. On Tuesday, February 18, D went to her place of work - a real estate office and telephoned Sam Weiss - the attorney assisting her in negotiating the post-nuptial division of assets. While she was speaking to Weiss, Burch (D) entered the office to gather materials for a real estate client. Burch (D) heard her tell Weiss what David had said about Scholastic's impending earnings announcement and that David expected the price of the company's shares to fall. That evening, D and Burch (D) carpooled and attended a real estate awards banquet. The next morning Burch (D) purchased put options telling his broker it was from information received at a cocktail party. Burch (D) purchased $19,750 in Scholastic put options, which was equal to two-thirds of his total income for the previous year and nearly half the value of his entire investment portfolio. Scholastic announced that its earnings would be well below the analysts' expectations. Scholastic shares dropped approximately 40 percent to $36 per share. Burch (D) sold his Scholastic puts, realizing a profit of $ 269,000 - a 1,300 percent return on his investment. Within hours, the SEC (P) commenced an investigation. P alleged that D and Burch (D) had violated section 10(b) of the Exchange Act and Rule 10b-5. The court found for P and Ds appealed.