In the
United States Court of Appeals
For the Seventh Circuit

No. 01-1226

Securities and Exchange Commission,

Plaintiff-Appellee,

v.

David E. Lipson,

Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97 C 2661--Ronald A. Guzman, Judge.

Argued November 5, 2001--Decided January 9, 2002



  Before Bauer, Posner, and Ripple, Circuit
Judges.

  Posner, Circuit Judge. David Lipson
appeals from a judgment in favor of the
plaintiff, the Securities and Exchange
Commission, that followed a jury’s
verdict that he had traded stock of a
publicly traded corporation on the basis
of inside information, in violation of
the SEC’s Rule 10b-5, 17 C.F.R. sec.
240.10b-5. 129 F. Supp. 2d 1148 (N.D.
Ill. 2001); see Securities Exchange Act
of 1934, sec. 10(b), 15 U.S.C. sec.
78j(b). The appeal challenges the
instructions that the judge gave the jury
on liability and the relief that he
ordered.

  Early in 1995, Lipson, at the time the
chief executive officer of Supercuts, a
chain of hair-cutting salons, learned
that Supercuts’ revenues were running
lower, and its expenses higher, than
expected. The company did not make this
information public until May, and
apparently it didn’t leak out. In March
and April Lipson sold 365,000 shares of
Supercuts stock owned by partnerships
that he controlled at prices in excess of
$9 per share. When the bad news was
finally announced, Supercuts’ stock price
plummeted from $9 a share, the price the
day before the announcement, to $6 the
next day, though by the end of the day it
had recovered to $75/8. By selling when he
did, Lipson averted a loss of hundreds of
thousand of dollars.

  The evidence presented at trial was
overwhelming that he had inside
information when he sold the shares. The
jury was not required to believe his
implausible testimony that he paid no
attention to the financial reports that
his subordinates gave him. His inside
information gave him an incentive to sell
his shares before the information became
public because it showed that Supercuts
was worth less than its market valuation.
Even skeptics about the prohibition of
insider trading tend to look askance at
an insider who profits from the poor
performance of his company-- poor
performance for which he may be
responsible. See Frank H. Easterbrook &
Daniel R. Fischel, The Economic Structure
of Corporate Law 274-75 (1991); Henry G.
Manne, Insider Trading and the Stock
Market 150-51 (1966); but cf. Dennis W.
Carlton & Daniel R. Fischel, "The
Regulation of Insider Trading," 35 Stan.
L. Rev. 857, 872, 873-75 (1983).

  Lipson claimed, however, that whatever
he may or may not have known about
Supercuts’ finances and whatever the
impropriety of trading on inside
information, his sole motive for selling
when and how many of his shares he did
was to comply with an estate plan that he
had set up two years earlier to transfer
wealth to his son free of gift or estate
tax. The plan required the son to borrow
at a specified interest rate $7.5 million
from a company controlled by his father
and use the borrowed money to buy
interests in partnerships, controlled by
his father, that owned Supercuts shares.
The shares owned by the partnership
interests that the son would be buying
were worth $10 million, but he was
permitted to buy them indirectly, by
buying the partnership interests, for
only $7.5 million because the interests
were not controlling interests and lacked
liquidity. (The analogy is to a closed-
end mutual fund, whose shares frequently
trade at a discount from the market price
of the securities owned by the fund.) For
him to exploit the difference between the
indirect cost of the shares to him and
their market value when "liberated" from
the partnerships, the partnerships had to
redeem his partnership interests by
giving him shares in exchange for those
interests, shares he could sell to pay
down the loan. Had the value of the
shares remained at $10 million, he would
have ended up paying off the $7.5 million
loan with $7.5 million worth of stock,
thus retaining stock worth $2.5 million;
and that would have been the amount of
the wealth transfer from his father, as
Lipson intended. Lipson and his tax
accountant claimed at trial that Lipson
had caused shares owned by the
partnerships to be sold in 1995 solely in
order to give his son cash that the son
could use to pay down the loan and by
doing so save some interest expense.

  Lipson does not argue that no rational
jury could have disbelieved his claim
that he was motivated by the estate plan
rather than by inside information in
deciding to sell the shares. But he
contends that the jury was improperly in
structed on the issue. Although the jury
was properly instructed that it could
find a violation only if Lipson’s trades
had been motivated by inside information,
another instruction, the one Lipson is
complaining about, said that

if you find that Defendant Lipson
possessed material, non-public
information at the time that he sold . .
. Supercuts stock, you may infer that
Defendant Lipson used such information in
selling . . . [it]. However, this
inference may be rebutted by evidence
that there was no connection between the
information that the defendant possessed
and the trading, in other words, that the
information was not used in trading . . .
. If you conclude that the trades . . .
would have occurred on the same dates and
involving the same amounts of stock
regardless of whether Mr. Lipson
possessed the inside information . . . ,
then you should find that Mr. Lipson did
not use the inside information in selling
. . . Supercuts stock.

Lipson contends that the instruction
improperly shifted the burden of
persuasion from the SEC to himself.

  That would indeed have been improper.
The weight of authority, scanty thought
it is, supports the position that the
Commission had the burden of persuading
the jury that Lipson’s trades had been
influenced by the inside information that
he possessed--the burden, in other words,
of proving that inside information had
played a causal role in Lipson’s decision
to sell the shares in the amount, and
when, he did. SEC v. Adler, 137 F.3d
1325, 1340 (11th Cir. 1998); United
States v. Smith, 155 F.3d 1051, 1066-69
(9th Cir. 1998). A considered dictum in
United States v. Teicher, 987 F.2d 112,
120-21 (2d Cir. 1993), argues to the
contrary that the knowing possession of
such information should be enough to base
guilt on: "one who trades while knowingly
possessing material inside information
has an informational advantage over other
traders. Because the advantage is in the
form of information, it exists in the
mind of the trader. Unlike a loaded
weapon which may stand ready but unused,
material information can not lay [sic]
idle in the human brain." Id. at 120.
However sensible the Second Circuit’s
position may seem, the Commission is not
pushing it in this case, and so we need
not wrestle the issue to the ground. We
note, however, that several months after
Lipson’s trial, the Commission
promulgated a regulation that is in the
spirit of the Teicher dictum and also
follows a suggestion in SEC v. Adler,
supra, 137 F.3d at 1337 n. 33. See 17 CFR
sec. 240.10b5-1(b); 65 Fed. Reg. 51716.
The regulation, however, as we’re about
to see, preserves a diminished
requirement of causality.

  The last sentence of the instruction we
quoted gave Lipson a safe harbor, and is
unobjectionable. The new SEC regulation
creates a similar safe harbor. See 17 CFR
sec. 240.10b5-1(c)(1). All the last
sentence of the instruction says is that
if Lipson would have sold the shares in
the same amounts and on the same dates
that he did sell them even if he had not
possessed any inside information, then he
would be home free, because then the
existence of a causal connection between
his inside information and the challenged
sales would be negated. Cf. Conn v. GATX
Terminals Corp., 18 F.3d 417, 420 (7th
Cir. 1994).

  Lipson can’t reasonably object to the
first sentence, either. It allows the
jury to infer that if he had inside
information, the trades were influenced
by it. To infer Y from X just means that,
if X happened, Y probably happened. If
Lipson possessed nonpublic information
which showed that Supercuts stock was
overpriced, and having this information
he sold a large quantity of that stock
shortly before the information became
public and the stock dropped sharply in
value, common sense tells us that it is
probable that his decision to sell when
he did and how much he did (rather than
sell later or sell less) was influenced
by the information. SEC v. Adler, supra,
137 F.3d at 1340; 2 Alan R. Bromberg &
Lewis D. Lowenfels, Securities Fraud &
Commodities Fraud, sec. 7.4(625), pp.
7:160.42-45 (2d ed. Supp. 1999). The
Ninth Circuit refused to allow such an
instruction in a criminal case, United
States v. Smith, supra, 155 F.3d at 1069,
mindful of the Supreme Court’s concern
with the use of prosecution-favoring
presumptions, see, e.g., Sandstrom v.
Montana, 442 U.S. 510, 524 (1979), but
did not challenge the presumption adopted
in Adler for civil insider-trading cases.
United States v. Smith, supra, 155 F.3d
at 1069 n. 27.

  The inference is sufficiently compelling
to shift to a defendant in Lipson’s
situation the burden of production, that
is, the burden of presenting some
rebuttal evidence, on pain of suffering
an adverse judgment as a matter of law if
he does not. Allan Horwich, "Possession
Versus Use: Is There a Causation Element
in the Prohibition on Insider Trading?"
52 Business Lawyer 1235, 1276-77 (1997).
And that is all the middle sentence in
the instruction did. Lipson did present
some evidence in rebuttal (the estate
plan), enough to satisfy his burden of
production and thus require the jury to
decide whether to infer from the inside
information and the timing of the trades
whether his decision on when and how much
to sell was indeed influenced by the
information. Cf. St. Mary’s Honor Center
v. Hicks, 509 U.S. 502, 506-07 (1993);
Texas Dept. of Community Affairs v.
Burdine, 450 U.S. 248, 254-56 (1981);
American Grain Trimmers, Inc. v. Office
of Workers’ Compensation Programs, 181
F.3d 810, 816 (7th Cir. 1999) (en banc).
And so the instruction did not harm him.

  Moreover, the instruction he offered to
take the place of the one to which he
objects was woefully inadequate and not
merely, as his lawyer said at argument,
"inelegant" or "inartful." It said that
if the jury found that Lipson "had a
legitimate, alternative purpose for
selling Supercuts securities" it would
have to find in his favor. That is
absurd. He might well have had two
purposes, one to transfer wealth to his
son and the other to avoid a loss that
his inside information told him was
coming. The existence of the legitimate
purpose would not sanitize the
illegitimate one. Sussman v. American
Broadcasting Companies, Inc., 186 F.3d
1200, 1202 (9th Cir. 1999). Only if the
illegitimate purpose had no causal
efficacy because the legitimate one would
have caused him to sell the shares when
he did and in the amount he did would the
existence of the legitimate purpose be a
defense--as the jury was told in the last
sentence of the instruction to which
Lipson objects.

  If the existence of an alternative
legitimate purpose were a defense to a
charge of insider trading, any insider
who wanted to be able to engage in such
trading with impunity would establish an
estate plan that required him to trade in
his company’s stock from time to time but
gave him discretion as to when and how
much to trade. He could then trade on the
basis of inside information yet defend on
the ground that he was also trading in
implementation of his estate plan. He
would be doing both. Yet even to regard
the good and the bad purpose as
alternatives is to sugarcoat the pill. In
the case just put, the insider would be
using inside information to implement his
estate plan more effectively. He would be
like someone who robbed a bank with the
intention of giving the money to charity.
The noble end would not immunize the
ignoble means of achieving that end from
legal punishment.

  We turn to remedy. Because the SEC was
seeking both legal and equitable relief
(the former under the Insider Trading
Sanctions Act, 15 U.S.C. sec. 78u-1,
which (in subsection (a)(1)) authorizes
the imposition of civil penalties for
insider trading at the suit of the SEC,
the latter under section 21(d) of the
Securities Exchange Act of 1934, 15
U.S.C. sec. 78u(d)), Lipson was entitled
to and received a jury trial. Tull v.
United States, 481 U.S. 412, 425 (1987);
Senn v. United Dominion Industries, Inc.,
951 F.2d 806, 813-14 (7th Cir. 1992);
Hohmann v. Packard Instrument Co., 471
F.2d 815, 819 (7th Cir. 1973). SEC v.
Clark, 915 F.2d 439, 442 (9th Cir. 1990),
assumed, but without discussion, and we
think erroneously, that civil penalties
in SEC cases are not a form of legal
relief.

  But it was for the judge to decide,
consistent with the jury’s finding of
liability, not only what equitable relief
to impose, but also the amount of the
civil penalty. The first point is
obvious, the second not. The statute does
not say that the judge is to decide the
amount of the penalty, but the parties
have so assumed, as did the court in
Clark, though it did so for the wrong
reason--that civil penalties are
equitable, which they are not. The
Seventh Amendment does not forbid
Congress to assign the determination of
liability and damages to jury and judge,
respectively, in a single case, Tull v.
United States, supra, 481 U.S. at 425-27,
at least where the suit is brought by,
and an award will be paid to, the
government, Feltner v. Columbia Pictures
Television, Inc., 523 U.S. 340, 354-55
(1998); and in view of the parties’
agreement that the Insider Trading
Sanctions Act does assign the
determination of the civil penalty under
the Act to the judge, see also Ralph C.
Ferrara et al., "Hardball! The SEC’s New
Arsenal of Enforcement Weapons," 47
Business Lawyer 33, 47 (1991); cf. Tull
v. United States, supra, 481 U.S. at 425-
27, we need not pursue the issue.

  The judge permanently enjoined Lipson
from violating the relevant provisions of
the securities laws, ordered him to
disgorge $621,875 (the court’s estimate
of the loss his insider trading had
avoided) plus prejudgment interest of
$348,097, and imposed punitive damages of
$1,865,625, which was equal to three
times the amount ordered disgorged and
was the maximum civil penalty permitted
by the Insider Trading Sanctions Act. 15
U.S.C. sec. 78u-1(a)(2).

  Disgorgement in SEC cases has been
assumed to be an equitable remedy. Dasho
v. Susquehanna Corp., 461 F.2d 11, 24
(7th Cir. 1972); SEC v. Rind, 991 F.2d
1486, 1493 (9th Cir. 1993); SEC v.
Commonwealth Chemical Securities, Inc.,
574 F.2d 90, 94-96 (2d Cir. 1978)
(Friendly, J.); SEC v. Manor Nursing
Centers, Inc., 458 F.2d 1082, 1104 (2d
Cir. 1972). Otherwise the SEC could not
seek it under section 21(d) of the ’34
Act, a provision limited to equitable
relief. Disgorgement is another name for
restitution, as Judge Friendly noted in
SEC v. Commonwealth Chemical Securities,
Inc., supra, 574 F.2d at 95, and
restitution, as we have noted in several
non-SEC cases, is both a legal and an
equitable remedy. Clair v. Harris Trust &
Savings Bank, 190 F.3d 495, 498 (7th Cir.
1999); Health Cost Controls of Illinois,
Inc. v. Washington, 187 F.3d 703, 710
(7th Cir. 1999); Reich v. Continental
Casualty Co., 33 F.3d 754, 756 (7th Cir.
1994). It is "a legal remedy when ordered
in a case at law and an equitable remedy
(rather than a legal remedy pressed into
service to provide complete relief in an
equity case--the rationale of the ’clean
up’ doctrine) when ordered in an equity
case." Id. Trading on insider knowledge
by a major shareholder who is also the
corporation’s chief executive officer is
a breach of fiduciary obligation,
Chiarella v. United States, 445 U.S. 222,
227-28, 232-33 (1980); Fry v. UAL Corp.,
84 F.3d 936, 938 (7th Cir. 1996); SEC v.
Maio, 51 F.3d 623, 631 (7th Cir. 1995);
SEC v. Clark, supra, 915 F.2d at 443; 3
Bromberg & Lowenfels, supra, sec.
7.5(300), pp. 7:205-06, and so the
disgorgement of the insider’s ill-gotten
gain (or averted loss, which is the
economic equivalent of profit) is indeed
equitable in character. Cf. Clair v.
Harris Trust & Savings Bank, supra, 190
F.3d at 498. The same is true,
incidentally, with regard to prejudgment
interest: it’s a legal remedy when the
award to which it is attached is legal,
and an equitable remedy when, as in this
case, the award to which it is attached
is equitable. Kerr v. Charles F.
Vatterott & Co., 184 F.3d 938, 946 (8th
Cir. 1999). For the interest was on the
amount disgorged--though, since the judge
determines the amount of the civil
penalty, we suppose that he also
determines the amount of any prejudgment
interest on that penalty.

  It may be worth noting that the district
court’s judgment required Lipson to pay
four times rather than three times the
amount of the loss that he avoided. The
Insider Trading Sanctions Act does not
create a conventional treble-damages
remedy; compare Clayton Act, sec. 4, 15
U.S.C. sec. 15. While measuring the
amount of the civil penalty by the loss
avoided (or profit gained, as the case
may be), the Act preserves the right of
the SEC to seek other remedies. 15 U.S.C.
sec. 78u-1(d)(3). The other remedies
include equitable remedies obtainable
under section 21(d) of the ’34 Act, such
as disgorgement. Because the other
remedies thus are additive to the civil
penalty, there was no double counting in
awarding the Commission the maximum civil
penalty of three times the loss avoided.
See H.R. Rep. No. 910, 100th Cong., 2d
Sess. 40 n. 16 (1988).

  The judge estimated the amount of that
avoided loss by subtracting from the
price at which Lipson had sold shares
during the period in which he had inside
information (March and April 1995) the
closing price of Supercuts’ stock on
Friday, May 12, the day the information
became public. Lipson argues that the
judge should have used the closing price
on the next trading day, May 15, in order
to allow the shock value of the
announcement to dissipate. The Insider
Trading Sanctions Act defines "loss
avoided" as the difference between the
sale price of a security and its value as
measured by its price "a reasonable
period after public dissemination of the
nonpublic information." 15 U.S.C. sec.
78u-1(f). But the price on May 15 was a
spike--$8. The closing price on the
twelfth, the price the court used, had
been $75/8. On May 16, the closing price
was $7, and on each of the following two
days it was $7. Lipson gives us no
reason to think that the closing price on
May 15 is a more accurate snapshot of the
market value of the stock than the price
on May 12, 16, 17, or 18. He does not
point to any circumstances unrelated to
the public disclosure of the (formerly)
inside information that might have
depressed the price on the twelfth or the
sixteenth.

  He next objects that in imposing the
maximum penalty, the district court was
influenced by the fact that he
steadfastly maintained his innocence and
claimed to be the victim of a government
vendetta. He says that to allow such
factors to influence punishment violates
due process of law and the First
Amendment to boot. He seems unaware that
acceptance of responsibility for illegal
conduct is a routine and unexceptionable
feature even of criminal, let alone of
civil, punishment. U.S.S.G. sec. 3E1.1;
United States v. Lopinski, 240 F.3d 574,
575-76 (7th Cir. 2001); United States v.
Wells, 154 F.3d 412, 413-14 (7th Cir.
1998). The criminal who in the teeth of
the evidence insists that he is innocent,
that indeed not the victims of his crime
but he himself is the injured party,
demonstrates by his obduracy the
likelihood that he will repeat his crime,
and this justifies the imposition of a
harsher penalty on him. E.g., United
States v. Lopinski, supra, 240 F.3d at
575; United States v. Stewart, 198 F.3d
984, 987 (7th Cir. 1999). It makes no
difference whether, as in this case, the
government is seeking only a civil
remedy. See SEC v. Holschuh, 694 F.2d
130, 144-45 (7th Cir. 1982); SEC v.
McNulty, 137 F.3d 732, 741 (2d Cir.
1998); SEC v. Lorin, 76 F.3d 458, 461 (2d
Cir. 1996) (per curiam). The evidence
against Lipson was overwhelming, and his
insistence in the face of it that he is
a shorn sheep argues for heavy punishment
to bring him to his senses.

  He complains that the judge failed to
consider the penalties meted out by other
district judges in other cases.
Comparison shopping of that sort is
doubtless a good practice in cases in
which there is no statutory limit on
punitive damages, see, e.g., Cooper
Industries, Inc. v. Leatherman Tool
Group, Inc., 121 S.Ct. 1678, 1684-85
(2001); BMW of North America, Inc. v.
Gore, 517 U.S. 559, 583-85 (1996); Cooper
v. Casey, 97 F.3d 914, 920 (7th Cir.
1996); DeRance, Inc. v. PaineWebber Inc.,
872 F.2d 1312, 1329 (7th Cir. 1989), just
as it is a good practice in cases
involving damages for pain and suffering,
when as is usually the case there is no
statutory ceiling. See, e.g., Jutzi-
Johnson v. United States, 263 F.3d 753,
760-61 (7th Cir. 2001); Seidman v.
American Airlines, Inc., 923 F.2d 1134,
1141 (5th Cir. 1991); Wulf v. City of
Wichita, 883 F.2d 842, 874-75 (10th Cir.
1989). For neither calculating punitive
damages nor calculating damages for pain
and suffering is formulaic, and so
comparison is a valuable and sometimes
(as we suggested in Jutzi-Johnson v.
United States, supra, 263 F.3d at 759) an
essential check on extravagance,
subjectivity, and abuse. It is much less
needful in a case such as this in which
the damages are capped. Caudle v. Bristow
Optical Co., 224 F.3d 1014, 1028 n. 10
(9th Cir. 2000); EEOC v. W&O, Inc., 213
F.3d 600, 617 (11th Cir. 2000). Even in
such a case, the obviously trivial
character of a violation might argue
compellingly for less than the maximum.
Hennessy v. Penril Datacomm Networks,
Inc., 69 F.3d 1344, 1355-56 (7th Cir.
1995) (as interpreted in EEOC v. Indiana
Bell Telephone Co., 214 F.3d 813, 822 n.
4 (7th Cir. 2000), vacated on other
grounds upon the grant of rehearing en
banc); Luciano v. Olsten Corp., 110 F.3d
210, 220-21 (2d Cir. 1997). But that
would not be an apt characterization of
Lipson’s violation. Given his wealth (we
were told without contradiction that he
has a net worth of some $100 million),
the flagrancy of his violation, and the
obduracy that we’ve mentioned, the judge
did not need any boost from other judges
to decide that the maximum penalty was
deserved.

Affirmed.
