MusiclandAlfred S. Teo, Sr., hid the fact that he owned a lot of stock in Musicland. He did so in reports he filed with the Securities and Exchange Commission. He also bought 45,000 shares of Musicland stock on the basis of a Musicland insider's tip that Best Buy wanted to make a best buy of Musicland.

Teo admitted all of that in a civil action by the SEC. Little wonder that a New Jersey jury found that he violated the Securities Exchange Act of 1934 and ordered him to disgorge $17 million of the $21 million profit that he made upon selling Musicland shares to Best Buy.

The main issue on appeal dealt with whether Teo's luck in holding a lot of Musicland shares at just the moment when Best Buy came calling cut the causal link between his Bad Deeds and his Huge Profits. The Third Circuit held that the SEC did enough to connect Teo's violations to his profits. Securities and Exchange Comm'n v. Teo, No. 12-1168 (3d Cir. Feb. 10, 2014).

Yes, the panel ruled by a 2-1 vote, Teo did get lucky, but that fact didn't preclude disgorgement of almost all of Teo's $21 million gain upon selling his Musicland shares to Best Buy. The SEC had to show only "but-for" causation, the panel pointed out, and once that happened Teo had the burden of proving how much of the $21 million rightly belonged to him. Because Teo didn't do enough to establish by how much his Good Fortune should reduce the amount of his Huge Profits, the panel concluded that the district court had rightly adjudged Teo liable for the $17 million.

Judge Jordan dissented. He wrote that Teo carried his burden by pointing to his Good Fortune.

Bonus:    Teo argued that the district court erred by letting the SEC tell the jury about what he said when pleading guilty to a criminal charge of insider trading. The panel noted that Teo's counsel hadn't objected to admission of the fact of his guilty plea into evidence. It also gave the back of its hand to Teo's complaint about the timing of the SEC's use of the things he confessed to in pleading guilty:

The Appellants complain, among other things, that the SEC’s use of the allocution at the end of its cross examination was particularly prejudicial because it was more likely to make an impression on the jury. However, so long as the evidence raised in the cross-examination was admitted and used for a permissible purpose, counsel is free to organize its examination of the witness in any manner it sees fit.

Id. at 11 n.7.