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Securities and Exchange Commission v. Alfred S. Teo

September 12, 2011

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
ALFRED S. TEO, SR., ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: WIGENTON,District Judge.

NOT FOR PUBLICATION

OPINION

Before the Court is Plaintiff‟s (1) Motion for Disgorgement, Prejudgment Interest, Civil Monetary Penalties, and Injunctive Relief, ("Disgorgement Motion"), (2) Motion to Appoint a Tax Administrator, and (3) Motion for Judgment as a Matter of Law. Also before the Court is Defendant‟s Motion for Judgment as a Matter of Law and Defendant‟s Motion for a New Trial ("Defendant‟s Motions"). The Court, having considered the parties‟ submissions, decides this matter without oral argument, pursuant to Federal Rule of Civil Procedure 78. For the reasons discussed below, this Court GRANTS Plaintiff‟s Disgorgement Motion and Motion to appoint a tax administrator, Dismisses as Moot Plaintiff‟s Motion for Judgment as a Matter of Law, and DENIES Defendant‟s Motions.

PROCEDURAL HISTORY

The Securities and Exchange Commission ("SEC") filed a complaint against Defendants, Alfred Teo and the MAAA Trust, on April 22, 2004, listing several claims of insider trading and false filings. Teo reached an agreement with the SEC regarding the insider trading claims (Claims 1, 4, and 5) on March 15, 2010, leaving only claims for violations of sections 10(b) and 13(d) of the Securities Exchange Act ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78m(d), and Rules 10b-5, 12b-20, 13d-1, and 13d-2 , 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13d-1, and 240.13d-2; and a claim for violations of section 16(a) of the Exchange Act, 5 U.S.C. § 78p(a), and Rules 12b-20 and 16a-3, 17 C.F.R. §§ 240.12b-20 and 240.16a-3. In response to motions for summary judgment, this Court issued an opinion on August 10, 2010, declaring that Teo was the beneficial owner of shares of Musicland Stores Corporation ("Musicland") held by the MAAA Trust*fn1 ("Trust"). In the same opinion, this Court held that Teo had committed violations of section 16(a) by failing to include the Trust as a reporting entity in his filings between July 1998 and May 1999; not filing accurate statements of changes in beneficial ownership; and not filing annual statements between June 1999 and December 2000. The remaining claims were resolved during a trial concluding on May 25, 2011. The jury found that Teo and the Trust violated section 13(d); Teo violated section 10(b); and the Trust violated section 16(a).

FACTUAL HISTORY

A.Disgorgement Motion

Alfred Teo obtained business and accounting degrees from Queens College. (Pl.‟s Ex. 137.) Thereafter, he served as controller to the executive vice president and general manager of a plastics manufacturing company in Brooklyn, New York. Id. Teo then developed his own businesses leading to his overseeing "over 3,500 employees in 27 manufacturing plants." Id. Teo has also served as a member of the board of directors on a number of publicly held corporations. Id.

In February 1997, Teo controlled a total of twenty eight brokerage accounts, including accounts in the name of the Trust*fn2 , holding 5.25 percent of the issued and outstanding shares of Musicland, a publicly traded specialty retailer that sold "prerecorded music and video products in mall stores." (Trial Tr. vol. 3, 72, 77, May 12, 2011; Trial Tr. vol. 7, 17-32, May 18, 2011.) Teo reached 10 percent ownership on August 7, 1997. (Trial Tr. vol. 7, 30.) On August 2, 1998, Teo‟s ownership climbed to 17.79 percent and continued to increase, culminating in 35.97 percent on December 6, 2000. (Trial Tr. vol. 7, 30-33.) His ownership of Musicland‟s stock did not fall below the 17.5 percentile mark until January 2001, when Best Buy purchased all of the shares in a tender offer. (Trial Tr. vol. 7, 31-32.) During this time period, Teo reported a lower percentage of ownership of Musicland stock on his SEC filings than he actually owned and failed to disclose his beneficial ownership of shares held by the Trust. (Trial Tr. vol. 7, 64; see Pl.‟s Exs. 111, 113, 121.)

Musicland‟s legal department relied on filings, including those under section 16(a) and section 13(d)*fn3 , to keep track of shareholders owning over 5 percent of the company‟s stock. (Trial Tr. vol. 3, 81.) This information was used to prepare proxy statements and for purposes of the company‟s shareholder rights‟ plan, commonly referred to as a "poison pill." (Trial Tr. vol. 3, 81-83.) The purpose of the poison pill was to prevent the hostile takeover of Musicland by an individual or group whose intentions were not in the best interest of Musicland or would be unfair to other shareholders. (Trial Tr. vol. 3, 83.) The poison pill could be activated when an individual or group of people acquired 17.5 percent or more of the company‟s stock. Id. In the event of a shareholder activating the poison pill, the company had several courses of redress available, including diluting the acquiring party‟s stock value by allowing the remaining shareholders to buy large amounts of stock at a lower rate. (Trial Tr. vol. 4, 11-12, May 13, 2011.)

As a result of both market sales and the tender offer, Teo sold all of the Musicland shares he controlled. In total, the original cost to Teo of the Musicland shares was $89,453,549 and gross proceeds were $154,932,011, resulting in net profits from these sales of $65,478,462. (Pl.‟s Ex. at 387.) Teo‟s first inaccurate filing was on July 2, 1998, when he disclaimed beneficial ownership of stock held by the Trust, prompting the SEC to seek to disgorge profits for trades occurring shortly thereafter. (Pl.‟s Ex. at 111.) Of the profits realized after Teo‟s initial violation, $8,055,260 is attributable to trading in the Trust‟s accounts, and $13,032,085 is attributable to the other accounts controlled by Teo. (Yanez Decl., 2.) Therefore, the SEC seeks disgorgement of $21,087,345, the total profit gained after July 30, 1998; prejudgment interest; maximum penalties; and a permanent injunction against future violations of section 13(d) and 16(a), and Rules 13d-1, 13d-2, 12b-20 and 16a-3. (Pl.‟s Br.; Yanez Decl., 2.)

B. Defendants' Motion for Judgment as a Matter of Law

The parties underwent a seven-day jury trial culminating in an unfavorable verdict for Defendants. Defendants‟ Motion for Judgment as a Matter of Law concerns the theories supporting the SEC‟s claim that Teo violated section 13(d) of the Exchange Act. During trial, the SEC argued, inter alia, that Teo violated section 13(d) by failing to disclose (1) plans and proposals for an extraordinary corporate transaction relating to Musicland and (2) plans and proposals to change Musicland‟s Board of Directors. To prove its case, the SEC relied on Teo‟s conduct regarding the future of Musicland and his conduct regarding the Board of Directors.

Extraordinary Corporate Transaction

Teo had plans to take Musicland private. (Trial Tr. vol. 9, 117-20, May 20, 2011.) To execute his plan, Teo tried to engage the cooperation of other people and agencies. In late 1999, Teo reached out to Thomas Blaige, an investment banker at Goldsmith-Agio regarding Teo‟s interest to take Musicland private. (Trial Tr. vol. 5, 16-17, May 16, 2011.) After speaking to Teo, Mr. Blaige created a team that completed two weeks of financial analysis on the proposed Musicland transaction. (Id. at 22.) Teo subsequently arranged a formal meeting between himself, Mr. Blaige, Jack Eugster, Musicland‟s chairman and CEO, and Keith Benson, Musicland‟s CFO. (Id. at 23.) Ultimately, Mr. Eugster and Mr. Benson rejected the proposed plan. (Trial Tr. vol. 5, 38.) After the Goldsmith-Agio proposal was rejected, Teo asked Mr. Blaige to forward the Goldsmith-Agio analysis to Trivest Capital, another investment banking firm. (Id. at 50.)

After learning of Teo‟s desire to take Musicland private, Trivest Capital ("Trivest") sent Teo a term sheet on February 7, 2000. (Trial Tr. vol. 9, 128-30.) The term sheet outlined a plan for Teo and Trivest to work cooperatively on a management led buyout of Musicland. (Id. at 128.) On February 7, 2000, Teo signed the term sheet to indicate his approval of its contents. (Id. at 131.) On February 22, 2000, Trivest faxed Teo additional models for a corporate reorganization of Musicland. (Pl.‟s Tr. Ex. 213.) A few weeks after the term sheet was executed, in March 2000, Teo, Mr. Eugster, and Mr. Benson attended a meeting with Trivest to discuss the possibility of Musicland going private and the possibility of Trivest buying out Musicland. (Trial Tr. vol. 9, 141.) Ultimately, the plan did not go forward. (Id. at 141-42.)

Later, in the summer of 2000, Teo made another attempt to act upon his desire to take Musicland private. (Trial Tr. vol. 4, 149.) This time, Teo was assisted by Michael Messer, a New Jersey attorney whom Teo knew from previous business transactions. (Id. at 147-48.) In June 2000, while at a meeting on a matter unrelated to Musicland, Teo informed Mr. Messer of his stake in Musicland and his desire "to do something" with Musicland. (Id. at 151.) Sometime later, Mr. Messer introduced Teo to Edward Cooperman, a businessman and Mr. Messer‟s colleague. (Id. at 152.) The three had a meeting where Mr. Cooperman and Teo discussed, among other things, Teo‟s desire "to do something" with Musicland. (Id. at 154.)

On or around September 15, 2000, Mr. Cooperman arranged for Teo and Mr. Messer to meet with Financo, Inc. ("Financo"), an investment banking firm. (Id. at 157.) The purpose of the meeting was to discuss Musicland going private. (Trial Tr. vol. 4, 157.) During the meeting, Teo called off further discussions about a possible transaction because he was advised by Musicland management that the company was in negotiations to be sold. (Id. at 164.) The day after the meeting, the chairman of Financo sent a proposal to Teo seeking to be retained as Teo‟s investment banking advisor in the sale of Musicland to a third party. (Id. at 167.) In the same letter, the chairman also proposed that, in the event Musicland was not sold to a third party, Financo would assist Musicland‟s management in a transaction to take Musicland private. (Id. at 168-69.) In November 2000, Teo and Financo executed an agreement whereby Teo retained Financo to represent his interest in the event Musicland was sold. (Pl.‟s Ex. 272 at FIN-Sec 576.) In the event Musicland was not sold, Financo would seek other alternatives to maximize the value of Musicland shares, including the sale of Shareholder Group Shares and sale of the company. (Id.)

Board of Directors

Beginning in December 1998, Teo made multiple attempts to join Musicland‟s board of directors. In December 1998, Teo wrote to Mr. Eugster, requesting that his desire to be on the board be presented to the Board of Directors and voted upon. (Trial Tr. vol. 9, 154.) Mr. Eugster obliged Teo‟s request, but the Board rejected Teo‟s nomination. (Trial Tr. vol. 5, 94-96.) After this failed attempt, Teo continued to seek membership on the Board, making a request once a month during the year 2000. (Trial Tr. vol. 10, 14-15, May 23, 2011.) Teo also attempted to join the Board by expressing his desire to Mr. Benson. (Id. at 16.)

In addition to Teo‟s efforts to become a board member, he also sought to have other individuals outside of Musicland join the board. (Trial Tr. vol. 5, 98); (Trial Tr. vol. 9, 39); (Trial Tr. vol. 10, 15.) In February 2000, Teo proposed Robert Smith, Larry Rosen, and John Tugwell for membership on the Board by sending letters to Mr. Eugster and Mr. Benson with each candidate‟s resume enclosed. (Id.) All of Teo‟s nominees were businessmen with experience serving on other public boards of directors. (Pl.‟s Ex. 207, 207A.) Ultimately, the Board declined all of Teo‟s nominees. (Trial Tr. vol. 5, 98-100.)

Defendants seek a judgment as a matter of law that the SEC did not present sufficient evidence from which a jury could find Defendants liable for violating section 13(d) due to Teo‟s failure to disclose his plans for an extraordinary corporate transaction and changes to the board of directors.

C.Defendants' Motion for a New Trial

At trial, the SEC used Plaintiff‟s exhibit 103 ("PX103") to buttress its argument that Teo violated section 13(d). PX103 is an eighteen-page document containing bates numbers DAT 000041-000059, with page 000042 omitted. The document is a facsimile ("fax") dated July, 23 1998, from Mr. McKeon, Teo‟s longtime family attorney who represented Teo in a previous criminal matter brought by the SEC. The first page of PX 103, DAT 000041, is a fax cover page illustrating the fax should contain sixteen pages. The subject line of the fax cover page reads: "Re: Musicland Stores Corp. Amendment # 7 to 13D." The message from Mr. McKeon to Teo reads "Please review and approve before I file this. I also attach Form 4 for your approval before filing." DAT 000043-59 is a draft of Amendment 7 to a Schedule 13D, which Mr. McKeon created by marking up Amendment 6 to a Schedule 13D that Teo filed in November 1997. The SEC introduced PX103 as a document that Teo received from Mr. James McKeon to prove that Teo violated section 13(d). PX103 was produced by Mr. McKeon to the United States Attorney‟s Office during Teo‟s criminal trial. See United States v. Teo, et al., 04-cr-583 (KSH), Docket Entry 163-1, Exhibit B (June 7, 2006.)

During the resolution of pretrial issues in this case, the SEC used PX103 as an exhibit to support a motion to quash a subpoena brought by Teo against Mr. McKeon. The SEC also included PX103 in its First Set of Proposed Stipulations on Admissibility which was provided to Defendants on April 3, 2011. (Pl.‟s Br. Ex. 2.) Defendants objected to the use of PX103 as well as other documents on hearsay grounds. After oral argument, this Court ruled that PX103 and the other related documents were admissible as party admissions by an agent under Federal Rule of Evidence 801(d)(2)(D). (Trial Tr. vol. 2, 15-16 May 11, 2011.) Also, PX103 was included in the Joint Proposed Final Pretrial Order ("Final Pretrial Order"), dated January 18, 2011. In the Final Pretrial Order the parties agreed that any objections to authenticity not set forth in the order would be deemed waived. Defendants objected to use of PX103 for the first time on May 19, 2011, the seventh day of trial. This Court ruled in favor of the SEC. Defendants now seek a new trial on the bases that: (1) PX103 was false evidence, and (2) the SEC engaged in attorney misconduct by ...


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