Court Opinion

ID: 2709528
Source: CourtListenerOpinion
Date Created: 2014-08-05 15:16:59.851328+00
Date Added: 2024-06-11T10:01:27.170945
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 12-2860

S ECURITIES AND E XCHANGE C OMMISSION,

                                                 Plaintiff-Appellee,

                                v.

JILAINE H. B AUER,
                                             Defendant-Appellant.

           Appeal from the United States District Court
                for the Eastern District of Wisconsin.
          No. 2:03-cv-01427—Charles N. Clevert, Jr., Judge

      A RGUED F EBRUARY 12, 2013—D ECIDED JULY 22, 2013

 Before R IPPLE and T INDER, Circuit Judges, and Z AGEL,
District Judge.
 Z AGEL, District Judge. The Securities and Exchange
Commission (“SEC” or the “Commission”) charged Jilaine


  The Honorable James B. Zagel, United States District Court
for the Northern District of Illinois, Eastern Division, sitting
by designation.
2                                             No. 12-2860

H. Bauer (“Bauer”) with insider trading in connection with
a mutual fund redemption she made in October of 2000.
The district court for the Eastern District of Wisconsin
(the “district court”) granted summary judgment to the
SEC and Bauer appealed. This case is unusual—it is one
of few instances in which the SEC has brought insider
trading claims in connection with a mutual fund redemp-
tion. No federal court has opined on the applicability
of insider trading prohibitions to the trade of mutual
fund shares. The parties did not adequately alert the
district court to the novelty of the claims involved in
this case, and as such the district court did not consider
several of the threshold legal questions that are now
before us. We decline to rule on these issues in the first
instance absent a ruling from the district court. We
reverse the order entering summary judgment and
remand so that the district court can 1) rule on whether
Bauer’s alleged conduct properly fits under the misap-
propriation theory of insider trading; 2) dismiss the
insider trading claims against Bauer if it determines
the answer to this question is “no,” and hold a trial if
it determines the answer is “yes.”

                            I.
  There is a long story that underlies this result.
Heartland Advisors, Inc. (“HAI”) is an investment
adviser and a broker-dealer. In 2000, HAI managed the
mutual fund portfolio series of Heartland Group, Inc.
(“HGI”), an open-end management investment company.
HAI acted as the principal underwriter and distributor
No. 12-2860                                                 3

of shares of HGI’s mutual funds, which included the
Short Duration Fund and the High Yield Fund (collec-
tively, the “municipal bond funds” or the “Funds”). Bauer
was the general counsel and chief compliance officer of
HAI from 1998 to 2002. From March through the end of
2000, Bauer served as a senior vice president and
secretary of HAI, and as a vice president of HGI. She was
elected secretary of HGI in August 2000. Bauer also
served as chairperson of HAI’s Pricing Committee in 2000.
As chief compliance officer, Bauer implemented HAI’s
policy against insider trading, which prohibited HAI
employees from trading on nonpublic information re-
garding the securities held in the Funds’ portfolios, as
well as nonpublic information about the Funds them-
selves. HAI and HGI were both based in Milwaukee,
Wisconsin.
  “A mutual fund is a pool of assets, consisting primarily
of a portfolio of securities, and belonging to the
individual investors holding shares in the fund.” Jones v.
Harris Associates L.P., 130 S.Ct. 1418, 1422 (2012). Mutual
funds are typically managed by an investment adviser, a
separate entity that “selects the fund’s directors, manages
the fund’s investments, and provides other services.” Id.
Mutual funds that allow their investors to purchase or
redeem shares at any time are called “open-end” funds.
Open-end funds are subject to a series of federal regula-
tions designed to ensure that redeeming, purchasing,
and existing investors are all treated alike. 15 U.S.C. § 80a-
5(a)(1). Important to this end are pricing requirements
for mutual fund shares. 15 U.S.C. § 80a-22(a) provides
that mutual fund shares must be sold and redeemed at
a price that:
4                                               No. 12-2860

    will bear such relation to the current net asset value
    of such security computed as of such time as the rules
    may prescribe . . . for the purpose of eliminating or
    reducing . . . any dilution of the value of other out-
    standing securities of such company or other result
    of such purchase, redemption or sale which is unfair
    to holders of such other outstanding securities.
  A mutual fund’s net asset value (“NAV”) is calculated
by valuing each asset owned by the fund, adding the
asset values together, subtracting any liabilities, and then
dividing the net value of the portfolio by the number of
shares outstanding. The value of securities in the fund’s
portfolio is defined as follows:
    (i) with respect to securities for which market quota-
    tions are readily available, the market value of such
    securities; and (ii) with respect to other securities
    and assets, fair value as determined in good faith
    by the board of directors.
15 U.S.C. § 80a-2(a)(41)(B). Mutual funds must calculate
their NAV at least once daily and sell and redeem all
shares at a price based on the NAV next computed after
receipt of an order. 17 C.F.R. § 270.22c-1(a), (b). Redemp-
tion prices must be paid to investors within seven days
after tender. 15 U.S.C. § 80a-22(e).
  The Funds were opened on January 2, 1997. Both
the Short Duration and the High Yield Funds invested
primarily in medium and lower quality municipal bonds,
sought to produce a “high level of federally tax-exempt
current income,” and shared the same portfolio manag-
ers. The Short Duration Fund’s average portfolio duration
No. 12-2860                                             5

was “three years or less,” while the High Yield Fund’s
average duration was “greater than five years.”
  Municipal bonds are difficult to price. They are traded
less frequently than most securities, and the issuers of
municipal bonds are not subject to the same federal
registration and disclosure requirements as corpora-
tions, which makes it difficult for investors to assess
risk. HGI’s board established a set of pricing procedures
to deal with the challenge of accurately pricing
municipal bonds. The pricing procedures relied heavily
on valuations published by an independent pricing
service that specialized in evaluating U.S. municipal
bonds, Muller Financial Corporation (“Muller”). If an HAI
portfolio manager believed that prices furnished by
Muller did not represent fair value, the manager was
required to challenge the valuation and submit the
security to HAI’s Pricing Committee. The Pricing Com-
mittee would then make its own fair value determina-
tion based on a predetermined list of pricing factors. The
pricing factors were based entirely on characteristics of
the Fund’s underlying portfolio securities and did not
relate to information about the Fund itself, such as loan
balances or projected redemption activity.
  HAI encouraged its senior management to personally
invest in HGI mutual funds. On June 18, 1998, Bauer
invested in the Fund as a “back up” to savings in a money
market fund. On December 22, 1998, Bauer redeemed
$10,932.67 worth of shares in the Fund. She made no
further redemptions until October 3, 2000.
  It is important for mutual funds to maintain a high
degree of liquidity in order to meet redemption demands
6                                               No. 12-2860

within seven days and manage other exigencies that
may arise. See Restricted Securities, Investment Company
Act Release No. 5847, 35 Fed. Reg. 19,989, 19,991 (Dec. 31,
1970). To achieve this, mutual funds must limit the
number of illiquid securities contained in their portfolios.
Id. The SEC has advised that a prudent limit on mutual
fund holdings of illiquid securities is no more than
15 percent of net assets. See Revisions of Guidelines to Form
N-1A, Investment Company Act Release No. 18612, 57
Fed. Reg. 9828 (Mar. 20, 1992). The Funds’ prospectus
stated that “[n]o fund will invest more than 15% of its
net assets in illiquid securities,” which was defined as
a security “that may not be sold or disposed of in the
ordinary course of business within seven days at a price
approximating the value at which the security is carried.”
   Beginning in 1999 and continuing through August 2000,
the Funds experienced substantial net redemptions,
meaning investors were redeeming more shares than they
were purchasing. Consequently, net assets shrank by
approximately $21.5 million in the Short Duration
Fund during the first six months of 2000, and illiquid
security levels rose from 5.75% to 7.22% of net assets.
During the same period, the High Yield Fund suffered a
$7.6 million decrease in net assets, and an increase in
illiquid securities from 17.98% to 21.93% of net assets. This
created a liquidity problem. In addition to net redemp-
tions, HAI had difficulty selling off the Funds’ portfolio
securities at carrying prices because a growing percentage
consisted of bonds that had defaulted or were placed on
a “watch list” for potential default. To generate the cash
required to meet redemption demands, HGI began
selling off securities at discounted prices.
No. 12-2860                                              7

   On August 10, 2000, Bauer attended a meeting of HGI’s
board of directors, in which several problems with the
municipal bond funds were discussed, including credit
issues, liquidity risks, and other challenges posed by
ongoing net redemptions. Over the next several days,
Bauer exchanged emails with senior HGI personnel that
highlight the scope of the problems with the municipal
bond funds, particularly the High Yield Fund. On
August 16, 2000, Bauer emailed William Nasgovitz,
president of HAI and HGI, and others to discuss “contin-
gency plans” for the municipal bond funds “in the
event redemptions continue to be a problem.” In the
email, Bauer opined that the Funds “may be left with a
liquidation as [the] only option” because it was “extremely
[unlikely] that our problems will be solved thru sales
efforts alone.” On August 18, 2000, Thomas Conlin, who
co-managed the municipal bond funds, tendered his
resignation. Bauer, Nasgovitz, and Paul Beste, a vice
president and chief operating officer of HAI, convinced
Conlin to defer his resignation until mid-September so
that HAI could develop a transition plan. Bauer then
imposed trading restrictions on HAI personnel aware
of Conlin’s plans to leave HAI. By August 31, 2000,
illiquid securities made up 7.99% of Short Duration Fund
net assets and 23.12% of High Yield Fund net assets.
Between June 30 and August 30, 2000, the Short Duration
Fund’s NAV declined from $9.27 to $9.18.
  In order to generate emergency liquidity and reduce
the percentage of non-performing bonds in the Funds,
HAI contacted the State of Wisconsin Investment Board
(“SWIB”) to negotiate a deal. SWIB agreed to purchase
8                                               No. 12-2860

a package of non-performing bonds from the municipal
bond funds on the terms that HGI could choose any
bonds it wished to include in the package. However, SWIB
would obtain a “put” that would allow it to sell the
bonds back to HAI after two years at a guaranteed
20% annual return. Bauer was not involved with negoti-
ating the SWIB transaction. The deal was formally ap-
proved at an HGI board of directors meeting on Septem-
ber 11, 2000, which Bauer attended.
  The Funds’ liquidity and redemption problems contin-
ued into September 2000. The Funds remained unsuccess-
ful in finding purchasers willing to buy securities at
carrying prices, which led to internal speculation that
valuations furnished by Muller were inaccurate. Attempts
were made to compare Muller valuations to other
pricing sources, which revealed “a wide difference of
opinion” as to bond prices. On September 11, 2000,
Beste wrote to Bauer and others that they had raised
$4.2 million in bonds from the Short Duration Fund but
nothing in the High Yield Fund, and would “continue to
adjust prices” downward. On September 18, 2000, Kevin
Clark, HAI’s senior vice president of trading, sent an
email to Bauer and others that stated: “as we dig deeper
into the situation the prospects for liquidity are not good,”
and that the only “firm indications of interest” were
coming from “vulture types” looking to purchase
portfolio bonds at 30-50% markdowns.
  On September 20, 2000, Bauer called a special meeting
of the Pricing Committee to review the Muller valuations.
The committee “concluded that they did not have
No. 12-2860                                              9

sufficient information to justify an override of any
specific security, absent a recommendation from the
portfolio managers.” Also discussed at the meeting was
“the possibility of a reduction in portfolio security valu-
ations across the board.” It was also noted that Muller
“was working down their list [of bonds], but it was
too early to tell if [Muller] would make any adjustments
that would impact the overall market.” On September 21,
2000, the Short Duration Fund NAV dropped by 4 cents,
and the High Yield Fund NAV dropped by 11 cents. On
September 27, 2000, illiquid securities in the SDF topped
out at 10.89% of net assets.
   On September 27, 2000, Bauer sent HAI customer
service representatives her comments on proposed re-
sponses to questions that HAI expected to receive from
its investors regarding the recent NAV declines. One
such question was “What are you doing to fix the port-
folio?” The proposed answer stated that “mitigating
the price volatility and . . . improv[ing] investment
returns are our most pressing priority.” Bauer inserted
comments on this answer: “Not sure I like this but you
can think about it—its difficult to take proactive steps
to restructure portfolio if all cash raised is used to pay
out redemptions but we cant say that.”
  On the morning of September 28, 2000, Nasgovitz sent
an internal email to HAI employees, announcing the
closing of the SWIB transaction. The email stated: “The
trade will be done and we need to communicate to all
when and what it means for our balanced accounts.
This should remove a big cloud over these accounts but
10                                              No. 12-2860

it does entail lower prices for the securities and will
result in losses for the accounts and Funds.” Later that
day HAI issued a press release announcing Conlin’s
departure and the hiring of a replacement portfolio
manager, Phil Fiskow. That afternoon, Bauer attended
a special meeting of the Pricing Committee. The minutes
of the meeting provide:
     On 9/28, Muller advised Heartland that they expected
     to adjust valuations of certain portfolio securities
     downward. Discussions ensued in which P. Beste
     asked Muller if the markdowns were representative of
     markdowns of other securities Muller valued with
     similar characteristics, and Muller said they ex-
     pected they would be . . . After further discussion, J.
     Bauer asked the members of the Committee if they
     had reason to believe that any of the Muller valua-
     tions did not represent fair value, and should be
     overridden by the Committee . . . but no one took
     exception to the Muller valuations.
Shortly after the Pricing Committee meeting, Bauer sent
an email to other HAI executives advising them to “only
keep those records that you are required to maintain,
and eliminate on a regular basis any other material in
your files.” After the close of business, Bauer lifted the
trading restrictions that she had placed on HAI
employees in August 2000 who had knowledge of
Conlin’s impending resignation. She informed the
HGI’s board, HGI’s independent counsel, as well as
Mr. Nasgovitz and Mr. Beste of her decision to lift the
restrictions. The same day, the Short Duration Fund’s
No. 12-2860                                                 11

NAV declined by roughly 2% from $9.10 to $8.91, while
the High Yield Fund’s NAV declined by about 8%, from
$8.75 to $8.03.1 On September 29, 2000, SEC personnel
contacted Bauer with questions regarding the Funds’
previous day’s markdowns. That same day, the Short
Duration Fund’s NAV dropped from $8.91 to $8.88.
  At 7:00 am on October 3, 2000, Bauer placed an order
by phone to redeem all of her shares (roughly 5,000) in
the Short Duration Fund. She received $44,627.15 in
proceeds. The written record of this call identifies Bauer
by name and notes that she is an HAI employee.
  On October 4, 2000, Bauer sent an email to HAI per-
sonnel regarding an “updated Q&A” that HAI planned
to release to investors to explain the September 28 NAV
decline. In the email Bauer states:
    We need to do this because this info is non-public,
    could be material and can be shared but not selectively.
    Knowing all [shareholders] would be interested,

1
  The record is unclear on what exactly caused the September 28
NAV markdown. The First Amended Complaint alleges it
was due to an arbitrary price reduction that HAI made to the
non-performing bonds sold to SWIB in order to complete the
transaction, but the district court made no such finding. We
are therefore uncertain of the extent to which the SWIB sale
impacted Muller’s valuations that day. Bauer’s knowledge
on this point is potentially relevant to both materiality and
scienter because it goes to whether she could have, in good
faith, believed that the valuations provided by Muller on
and after September 28 reflected fair market valuation.
12                                               No. 12-2860

     we think the best way to make it public is thru a
     mailing—we believe we should do more than post
     this info on our web site.
On October 10, 2000, HAI sent a letter to its shareholders
that included an explanation for the September 28,
2000, devaluation as well as a list of the Fund’s portfolio
as of September 30, 2000.
  The Funds problems continued for the next few days
until a special board meeting was called on October 12,
2000. We quote from the district court’s opinion to
describe the events of that day, as well as the critical
events of the following day, October 13, 2000:
     During the special Board meeting [on October 12,
     2000], Fiskow described the events of the week, in-
     cluding the sale of a High-Yield Fund bond on
     October 11, changes to the Watch List and changes to
     the list of illiquid securities. Fiskow characterized
     the Funds’ securities market as illiquid . . . Bauer
     informed the Board that the Pricing Committee
     was concerned that the NAV might be too high, but
     was confronted with difficulties in determining a fair
     value for the Funds’ securities. Additionally, Fiskow
     informed the Board that the Funds’ securities may
     be worth in a range of 70% of their carrying value.
     The Board requested that the SEC be contacted and
     directed the Pricing Committee to establish a fair
     value for the Funds’ portfolio securities.
     That afternoon . . . the Pricing Committee met with the
     portfolio managers to consider whether the Muller
     valuations . . . represented fair values in light of the
No. 12-2860                                          13

   developments discussed with the Board of
   Directors . . . the Pricing Committee determined
   unanimously that there was not enough information
   to conclude that Muller’s valuations did not
   represent fair values, and that Muller’s valuations
   should be used that day.
   The next day, October 13, 2000, the Board convened
   at 7:30 am. It authorized Fund management to fair
   value the bonds based on the Pricing Committee’s
   determination under the Pricing Procedures or to
   suspend redemptions and call a special meeting for
   the purpose of liquidating the Funds.
   The Pricing Committee met without Bauer on
   October 13, 2000, although she entered momentarily
   to review the Pricing Procedures – the definition of
   “fair value” and the factors that should be con-
   sidered in determining fair value. First, the Com-
   mittee set “fair values” for each security using
   Muller values and other criteria consistent with the
   Pricing Procedures and the advice of the portfolio
   managers. Additional, across-the-board “haircuts” of
   approximately 50% (High-Yield Fund) and approxi-
   mately 33% (Short Duration Fund) were applied to
   all the bonds of the Funds. The portfolio managers
   asked whether the “haircut” was consistent with
   Bauer’s instructions and the Committee responded
   by making upward adjustments to the fair value
   determinations using the haircut for some securities.
   The haircut was adopted notwithstanding the con-
   cerns that were expressed by portfolio managers.
14                                             No. 12-2860

     To Bauer’s knowledge, this approach had never
     been used by these Funds or any other mutual fund.
The across-the-board “haircuts” instituted on October 13,
2000, caused the Short Duration Fund’s NAV to drop
by 44.02%, from $8.70 to $4.87, and also caused the High
Yield Fund’s NAV to drop by 69.41%, from $8.01 to $2.45.
Five months later, both funds entered receivership.
  On December 11, 2003, the SEC filed suit against HAI,
Bauer, Nasgovitz, Beste, Conlin and several other senior
HAI personnel, alleging insider trading as well as
several violations of the Investment Company Act and
the Investment Advisers Act. All defendants except
Bauer ultimately entered into settlement agreements
with the SEC. On May 25, 2011, the district court granted
summary judgment to the SEC on the insider trading
charges against Bauer. The entry of summary judgment
was premised on: (1) the parties’ stipulation that Bauer
was an insider who possessed nonpublic information at
the time she sold her Short Duration Fund shares, and
(2) the district court’s findings that there were no
genuine issues of material fact that the information
Bauer possessed was material and that she acted with
scienter. On September 20, 2011, the district court dis-
missed the remaining, non-insider trading claims
against Bauer. This appeal followed.

                            II.
  The insider trading claims in this case were brought
under Section 17(a) of the Securities Act, Section 10(b) of
the Exchange Act, and SEC Rule 10b-5. Section 17(a)
No. 12-2860                                                 15

prohibits fraud in the offer or sale of a security. In perti-
nent part, Section 17(a) provides:
    “It shall be unlawful for any person in the offer or sale
    of any securities . . . by the use of any means or instru-
    ments of transportation or communication in inter-
    state commerce or by use of the mails, directly or
    indirectly—
        (1) to employ any device, scheme, or artifice to
        defraud, or
        (2) to obtain money or property by means of
        any untrue statement of a material fact or any
        omission to state a material fact necessary in
        order to make the statements made, in light of
        the circumstances under which they were made,
        not misleading; or
        (3) to engage in any transaction, practice, or course
        of business which operates or would operate as
        a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a). Subsection (a)(1) of the statute thus
proscribes (1) the employment of any device, scheme, or
artifice to defraud (2) in the offer or sale of any securities.
  Section 10(b) prohibits fraud in connection with the
purchase or sale of a security. The statute, in relevant
part, provides:
    “It shall be unlawful for any person, directly or indi-
    rectly, by the use of any means or instrumentality
    of interstate commerce, or of the mails or of any facility
    of any national securities exchange—
16                                               No. 12-2860

                             ....
         “(b) To use or employ, in connection with the
         purchase or sale of any security registered on a
         national securities exchange or any security not
         so registered, any manipulative or deceptive
         device or contrivance in contravention of such
         rules and regulations as the [Securities and Ex-
         change] Commission may prescribe as necessary
         or appropriate in the public interest or for the
         protection of investors.”
15 U.S.C. § 78j(b). Section 10(b) thus prohibits (1) using
any manipulative or deceptive device in contravention
of rules prescribed by the SEC (2) in connection with
the purchase or sale of securities. See U.S. v. O’Hagan,
117 S.Ct. 2199, 2206–2207 (1997).
  Pursuant to its § 10(b) rulemaking authority, the SEC
adopted Rule 10b-5, which provides in relevant part:
     “It shall be unlawful for any person, directly or indi-
     rectly, by the use of any means or instrumentality of
     interstate commerce, or of the mails or of any facility
     of any national securities exchange,
     “(a) To employ any device, scheme, or artifice to
     defraud, [or]
                             ....
     (c) To engage in any act, practice, or course of business
     which operates or would operate as a fraud or deceit
     upon any person,
 in connection with the purchase or sale of any security.”
No. 12-2860                                                        17

17 C.F.R. § 240.10-5 (2013). Liability under Rule 10b-5 “does
not extend beyond conduct encompassed by § 10(b)’s
prohibition.” O’Hagan, 117 S.Ct. at 2207.
  The primary distinction between these laws is that
“§ 10(b) and Rule 10b-5 applies to acts committed in
connection with a purchase or sale of securities while § 17(a)
applies to acts committed in connection with an offer or
sale of securities.” SEC v. Maio, 51 F.3d 623, 631 (7th Cir.
1995). Because the insider trading charges against
Bauer relate solely to the redemption, or sale, of her
Short Duration Fund shares, the district court properly
treated the proscriptions contained in § 17(a), § 10(b) and
Rule 10b-5 as “substantially the same.” 2 Id. We do the
same, and for the sake of simplicity use “§ 10(b)” through-
out this opinion as a reference to all three laws.
  To prove a violation of § 10(b) the SEC must establish
that Bauer: “(1) made a material misrepresentation or a
material omission as to which [s]he had a duty to speak,
or used a fraudulent device; (2) with scienter; (3) in con-
nection with the purchase or sale of securities.” S.E.C. v.
Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999).
There are two general theories to explain how insider
trading violates § 10(b). Under the “traditional” or “classi-
cal theory,” § 10(b) is violated “when a corporate
insider trades in the securities of his corporation on the

2
  The exception to this, as the district court noted, is that § 10(b),
Rule 10b-5 and § 17(a)(1) have a scienter requirement, while
§ 17(a)(2) and (a)(3) (Count II in this case) do not. Aaron v.
SEC, 100 S.Ct. 1945, 1955–56 (1980).
18                                            No. 12-2860

basis of material, nonpublic information.” O’Hagan, 117
S.Ct. at 2207. Trading on such information qualifies as
a “deceptive device” because it breaches the “relationship
of trust and confidence between the shareholders of
a corporation and those insiders who have obtained
confidential information by reason of their position
within that corporation.” Chiarella v. United States, 100
S.Ct. 1108, 1115 (1980). This relationship gives rise to
an affirmative duty to disclose to the trading counter-
party or abstain from trading, which ensures that
corporate insiders do not gain an unfair advantage
over uninformed purchasers or sellers of the company’s
stock. Id. The classical theory “targets a corporate
insider’s breach of duty to shareholders with whom the
insider transacts.” O’Hagan, 117 S.Ct. at 2207.
  Under the “misappropriation theory” of insider trading
§ 10(b) is violated when a corporate outsider “misappro-
priates confidential information for securities trading
purposes in breach of a duty owed to the source of the
information.” O’Hagan, 117 S.Ct. at 2208. This qualifies
as a “deceptive device” because the outsider trades on
confidential information entrusted to him for non-
trading purposes, and thereby “defrauds the principal of
the exclusive use of that information.” Id. Under the
misappropriation theory, the disclosure obligation “runs
to the source of the information” rather than the
trading counterparty—an outsider entrusted with confi-
dential information must either refrain from trading or
disclose to the principal that he plans to trade on the
information. Id. at 2208-09 n. 6. The misappropria-
tion theory is “designed to protect the integrity of
No. 12-2860                                                   19

the security markets against abuses by ‘outsiders’ to a
corporation who have access to confidential informa-
tion that will affect the corporation’s security price
when revealed, but who owe no fiduciary or other duty
to the corporation’s shareholders.” Id. at 2207-08.
  The threshold issue in this case is whether, and to
what extent, the insider trading theories apply to mutual
fund redemptions. No federal court has directly opined
on this question, largely because the SEC has never
brought a § 10(b) claim in the mutual fund context.3

3
   This is not surprising—mutual fund shares are traded very
differently than other securities, with less opportunity for
unfair gain based on nonpublic information. First, open-end
mutual fund shares are not traded on an open market. Instead,
they are issued and redeemed by the fund itself. There is no
secondary market for mutual fund shares, so in all instances
the fund is the only allowable counterparty. Because of this,
there is less reason for concern about unfair informational
disparity between trading parties. If a mutual fund insider
has gained access to material, nonpublic information as a
result of his position, presumably the fund itself is also in
possession of that information and cannot be “deceived” by
nondisclosure. Second, a mutual fund’s net asset valuation
is derived from the value of the underlying securities held in
the fund’s portfolio, not information about the fund itself.
Thus, nonpublic information about the internal operations of a
mutual fund is less likely to be ‘material’ to investors because
it does not affect how the NAV is calculated. Cf. S.E.C. v.
Jakubowski, 150 F.3d 675, 681 (7th Cir. 1998) (“Usually price
(or facts that influence price) is all that matters to securities
                                                   (continued...)
20                                                 No. 12-2860

The SEC argues on appeal that Bauer’s alleged conduct
properly fits under the misappropriation theory of
insider trading. Specifically, the SEC contends that as
an officer of HGI, Bauer stood in a fiduciary relation-
ship both to the Funds and to the Funds’ shareholders,
which prevented her from using material nonpublic
information to promote her personal interests at the
expense of HGI shareholders. The SEC also argues that
as an officer and employee of HAI, Bauer stood in an
independent fiduciary relationship to HGI as its client.
According to the SEC, both relationships imposed upon
Bauer an affirmative duty to disclose to the princi-
pal—HGI—her intentions to trade based on confidential
information with which she had been entrusted. Her
failure to do so, the SEC urges, operated as a fraud
upon HGI.
  The problem with the SEC’s argument is that it
never presented the misappropriation theory to the
district court. Rather, the Commission argued below that
Bauer was a “traditional insider” trading in the shares

3
  (...continued)
transactions”). Finally, NAV price is set daily in accordance
with strict federal pricing and sales rules and is therefore not
subject to the same information-sensitive price fluctuations
as securities traded on open markets. If these pricing and sales
rules are adhered to, it is very difficult for anyone to exploit
nonpublic information to his or her advantage by purchasing
or redeeming mutual fund shares. See Mercer E. Bullard,
Insider Trading in Mutual Funds, 84 Ore. L. Rev. 821, 823-25
(2005).
No. 12-2860                                                    21

of her own fund—an obvious invocation of the classical
theory.4 The district court also appears to have relied

4
  At oral argument the SEC claimed that it “did not decide
definitively between one theory or the other” in the district
court, and that it adequately put Bauer on notice that she
could be held liable under either the classical or misappro-
priation theory of insider trading. We disagree. Although the
First Amended Complaint alleges fraud generally without
choosing between theories, the SEC’s brief in support of its
cross motion for summary judgment on the insider trading
charges contains the following passage:
    Under the classical theory of insider trading, traditional
    insiders of an issuer, such as officers, directors and employ-
    ees, in possession of material, non-public information
    have a fiduciary duty to the issuer and its shareholders
    to publicly disclose such information to abstain from
    trading in the issuer’s securities . . . Under the misappro-
    priation theory of insider trading, a person violates the
    antifraud provisions of the federal securities laws when he
    misappropriates confidential information for securities
    trading purposes, in breach of a duty owed to the source
    of the information . . . Ms. Bauer was a traditional insider.
    As an officer of Heartland Group, Ms. Bauer had a fiduciary
    duty not to use material, non-public information for im-
    proper purposes. (emphasis added).
The only fair interpretation of the SEC’s description of Bauer
as a “traditional insider” is that it sought summary judgment
under the classical theory of insider trading. As we explained
in SEC v. Maio:
    The relationship between the corporation whose stock is
    traded and the person who breaches a fiduciary duty by
                                              (continued...)
22                                                   No. 12-2860

on the classical theory, as it noted that “the parties
agree that Bauer was an insider at the time of her
trade.” The district court did not, however, weigh the
novelty of the SEC’s claims in the mutual fund context.
As such, it did not explain how, exactly, a mutual fund
redemption could fit under the classical theory of insider
trading. The district court’s omission is perhaps under-
standable in light of the fact that Bauer did not argue
below that mutual fund redemptions cannot, as a
matter of law, entail deception under the classical the-
ory. Rather, she conceded that insider trading
liability could attach to mutual fund redemptions if it
could be shown that she knew the NAV was priced
incorrectly. Thus, the district court was not directly
called upon to explain how Bauer’s alleged conduct
may fit under either theory of insider trading.

4
    (...continued)
       trading or tipping determines which theory is applied.
       Classical theory applies to trading by insiders (or their
       tippees) in the stocks of their own corporations. Misappro-
       priation theory extends the reach of Rule 10b-5 to
       outsiders [or their tippees] who would not ordinarily be
       deemed fiduciaries of the corporate entities in whose stock
       they trade.
51 F.3d 623, 631 (7th Cir. 1995) (emphasis in original) (quoting
SEC v. Cherif, 933 F.2d 403, 408-09 (7th Cir. 1991). Even if the
SEC did not intend to limit its case to the classical theory by
describing Bauer as a “traditional insider,” we reject the
SEC’s argument that Bauer had fair notice of her potential
liability under the misappropriation theory.
No. 12-2860                                               23

  On appeal, Bauer argues that mutual fund redemptions
cannot entail the type of deception targeted by the
classical theory because the counterparty to the trans-
action, the mutual fund itself, is always fully informed
and cannot be duped through nondisclosure. The SEC,
apparently recognizing some merit to this argument, has
declined to defend the classical theory on appeal and
advances only the misappropriation theory as a basis
for sustaining the insider trading claims. The upshot is
that we are asked to affirm summary judgment based on
a theory of deception that was not adequately raised in
the district court, and an opinion that does not consider
that a mutual fund redemption has never been recog-
nized to fit under either theory.
  The SEC points out that we may affirm summary judg-
ment on any ground that finds support in the record.
See Omnicare, Inc. v. UnitedHealth Group, Inc., 629 F.3d 697,
723 (7th Cir. 2011). But to affirm on alternative legal
grounds we generally require that the argument “[be]
adequately presented in the trial court so that the non-
moving party had an opportunity to submit affidavits
or other evidence and contest the issue,” Smurfit
Newsprint Corp. v. Southeast Paper Manuf. Co., 368 F.3d 944,
954 (7th Cir. 2004) (quoting Box v. A&P Tea Co., 772 F.2d
1372, 1376 (7th Cir. 1985). That did not occur here.
Bauer did not challenge the element of deception
because (1) she was not on notice of her potential liability
under the misappropriation theory; and (2) the parties
glossed over the element of deception under the
classical theory (or conflated deception with materiality).
24                                                No. 12-2860

  The question now is whether we should determine the
extent to which Bauer’s alleged conduct constitutes
deception under the insider trading theories or remand
the question for the district court to consider. To begin,
we decline to consider the applicability of the classical
theory given the SEC’s failure to brief the issue to this
Court. We deem the SEC to have abandoned and
forfeited the classical theory as a basis for liability in this
case. As for the misappropriation theory, Bauer has put
forth two arguments in her reply briefing as to why
her October 3, 2000 redemption cannot be fairly
viewed as a deceptive breach of her duty of loyalty and
confidentiality to HGI: (1) the HGI board approved the
September 28, 2000, opening of the trade window for
HAI employees, which constituted authorization to
trade; and (2) Bauer identified herself as an HAI
employee when placing the call to redeem her shares,
which constituted disclosure to the principal. Cf. O’Hagan,
117 S.Ct. at 2211 n. 9.
  We do not comment on the merits of these arguments.
It would be fundamentally unfair to limit Bauer’s
defense against the misappropriation theory to a few
pages of reply briefing in this Court, rather than allow
her a full opportunity to develop these arguments before
the district court. Brokaw v. Weaver, 305 F.3d 660, 671 n.8
(7th Cir. 2002). The district court is fully familiar with
the facts of this case, and it is at least possible that
Bauer will seek to introduce new evidence to rebut
the misappropriation theory. Even if no new evidence
is offered the opinion of the district judge ought to
be known and considered before we determine the ap-
plicability of the misappropriation theory.
No. 12-2860                                                       25

  Remand is also warranted because we think the
SEC’s briefing to this court on the applicability of the
misappropriation theory may overlook certain structural
realities of a mutual fund. For example, the Commission
might unravel for the district court how an officer at a
mutual fund investment adviser can be fairly considered
a corporate “outsider” given the investment adviser’s
deeply entwined role as sponsor and external manager
of the fund. See generally Jones v. Harris Associates L.P.,
130 S.Ct. 1418, 1422 (2008).
  The application of insider trading theories to mutual
fund redemptions is uncharted territory, and the ap-
proaches fashioned in other areas may not be
appropriate analytical models in the mutual fund context.
We certainly do not rule out the applicability of § 10(b)
to the mutual fund industry; we simply emphasize the
need for conceptual clarity to explain how the core ele-
ments of insider trading might arise in the trade of
mutual fund shares. It is the SEC’s task to develop a
sound application of the misappropriation theory to the
facts of this case.5

5
  The Supreme Court has emphasized the need to construe
§ 10(b)’s antifraud provision “not technically and restrictively,
but flexibly to effectuate its remedial purposes.” Affilate Ute
Citizens of Utah v. United States, 92 S.Ct. 1456, 1471 (1972). If the
SEC’s position is that the misappropriation theory needs to
be adjusted or expanded to “effectuate” § 10(b)’s remedial
purposes in the mutual fund context, it should present that
argument to the district court.
26                                              No. 12-2860

  We remand to the district court to consider these
issues in the first instance.

                             III.
  Next, we examine the district court’s findings as to
materiality. For purposes of § 10(b), nonpublic informa-
tion is considered ‘material’ if there is a “substantial
likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made
available.” Basic Inc. v. Levinson, 108 S.Ct. 978, 983 (1988)
(quoting TSC Industries, Inc. v. Northway, Inc., 96 S.Ct.
2126, 2132 (1976)). This determination “requires delicate
assessments of the inferences a ‘reasonable shareholder’
would draw from a given set of facts and the significance
of those inferences to him, and these assessments are
peculiarly ones for the trier of fact.” TSC Industries, 96
S.Ct. at 2133. “Only if the established omissions are so
obviously important to an investor that reasonable
minds cannot differ on the question of materiality is the
ultimate issue of materiality appropriately resolved as
a matter of law.” Id. (internal quotations omitted).
  The district court found that Bauer was in possession
of seven “categories” of nonpublic information on
October 3, 2000 when she redeemed her Short Duration
Fund shares:
     1) the Fund was experiencing liquidity problems;
     2) HGI and HAI had concerns regarding credit; 3) there
     was concern/dispute over whether HAI should sell
No. 12-2860                                                 27

    securities in the Funds at distressed prices; 4) redemp-
    tions were worrisome; 5) she knew details of the
    SWIB transaction; 6) she was aware of the securities
    on the defaulted and watch list securities lists for the
    Short Duration Fund; 7) she knew that sale or
    merger of the Funds was contemplated.
Bauer does not challenge the finding that she possessed
this nonpublic information on October 3, 2000. Bauer
claims that she is entitled to a trial because a reasonable
jury could find that the information does not meet the
§ 10(b) standard of materiality.
  The seven categories of nonpublic information that
the district court identified are different facets of one
underlying problem that HGI faced in the fall of 2001: the
Short Duration Fund was at risk of insolvency due to
net redemptions and an inability to generate liquidity.
While the Pricing Committee continued to set the NAV
according to valuations provided by Muller, Bauer knew
that HGI could not find buyers for the underlying bonds
at those prices. Thus, Bauer understood that HGI essen-
tially had three options to deal with its net redemption
problem: (1) freeze redemptions; (2) sell off portfolio
securities at discounted prices to generate cash; or
(3) sell or merge the Funds.6
  We agree with the district court that much of this
information, standing alone, would be “so obviously

6
  This understanding is reflected in the letter that Bauer sent
to a colleague on October 2, 2000, the day before she
redeemed her shares (discussed on pages 28-29 of the district
court’s opinion).
28                                              No. 12-2860

important to an investor that reasonable minds cannot
differ on the question of materiality.” TSC Indus., Inc., 96
S.Ct. at 2133. Bauer’s knowledge, for example, that portfo-
lio securities could not be sold at carrying values does, in
this case, relate directly to the value of the Short Duration
Fund. In the highly illiquid municipal bond market, the
fact that a carrying-price purchaser cannot be found at any
given moment typically is not proof of wrongful valua-
tion and not automatically material. But Bauer also
knew that portfolio securities would likely have to be
sold despite the lack of carrying-price purchasers in
order to generate emergency liquidity to meet redemp-
tion demands. That would mean selling off portfolio
securities at significant markdowns, which would
translate directly into an NAV decline. We think it safe
to say that this information, in isolation, is material
as a matter of law. Further, while the possibility of a
redemption freeze would not factor into the Short
Duration Fund’s NAV, it would obviously change the
perceived value of the fund to a reasonable investor.
One of the primary appeals of an open end mutual fund
is its liquid nature—investors can convert their shares
to cash anytime they wish. Because a redemption
freeze would subvert this core feature of the open end
investment, we think, as a general matter, the district
court was correct in determining that information
pointing to a substantial risk of an impending redemp-
tion freeze qualifies as material as a matter of law.
  The primary difficulty we have with the district court’s
analysis is that it did not weigh the significance of the
No. 12-2860                                            29

nonpublic information that Bauer possessed against
the considerable publicly available information re-
garding the Funds’ poor performance. This was error—it
is impossible to determine the extent to which
nonpublic information may alter the ‘total mix’ without
first examining the information that was already in the
market. The record reflects that the September 28, 2000
NAV decline attracted fairly substantial negative news
coverage that touched upon many of the categories of
information that the district court found to be material
as a matter of law. For example, on September 29, 2000,
Bloomberg News published an article entitled “Heartland
Muni Funds Serve as Reminder: High Yield = High Risk,”
which contained the following passage:
   Heartland, a Milwaukee-based manager of stocks
   and bond funds, said yesterday it’s reviewing bonds
   in two of its high-yield funds, concerned the prices of
   the bonds may be overstated . . . Heartland became
   aware of the sinking bond values for at least the
   past three months and has been try to sell some of
   them, at times having to mark down prices . . . “No one
   can say for sure that there’s not going to be a further
   net asset value declines” in the funds, [Heartland
   spokesman Doug] Lucas said.
The report goes on to explain the substantial risks
of investing in mutual funds specializing in high-yield
municipal bonds, and the difficulty of accurately pricing
such bonds.
  Also on September 29, 2000, Morningstar—an independ-
ent provider of investment news and research—published
30                                            No. 12-2860

an article entitled “Heartland Manager Leaves, Muni
Fund Tanks.” The item stated that the Funds had been
hurt “by the overall poor performance of municipal high-
yield debt in 2000” and that “[n]onrated securities, which
make up a large portion of both Heartland high-
yield funds, have been hammered this year.” The piece
closes by stating, “[n]ot surprisingly, after [the Septem-
ber 28 NAV decline], both of [the high-yield] funds
rank dead last in their respective categories for the year
to date through September 28.”
  Added to this negative press coverage are the Funds’
June 2000 prospectus and semi-annual report, which
contained information concerning the net redemption
problem. Specifically, these reports revealed that during
the first six months of 2000: (1) the Short Duration
Fund’s assets had shrunk as redemptions exceeded pur-
chases; (2) the Fund’s net assets declined by roughly
$22 million, or 8.2%; (c) investors redeemed over
5.1 million shares and purchased only 2.9 million.
While these reports did not cover the three months
leading up to Bauer’s redemption, we think a reasonable
investor on October 3, 2000, would have reason to know
that these trends had continued given the press coverage
described above.
  The SEC agrees that a great deal of negative informa-
tion regarding the Funds’ performance and prospects
was publicly available on October 3, 2000, but maintains
that “none of these articles reflected the breadth of
nonpublic information known to Bauer as to . . . the
liquidity crisis.” That may be, but we are less concerned
No. 12-2860                                                 31

with the “breadth” of nonpublic information available
to Bauer than its relative significance in light of informa-
tion that was publicly available on October 3, 2000. It is
a close question, but we think an assessment of the mar-
ginal impact that negative nonpublic information
would have on an already highly pessimistic public
forecast is “peculiarly” one for the trier of fact. TSC Indus-
tries, 96 S.Ct. at 2133.
   The second difficulty we have with the district court’s
materiality findings is that it did not distinguish
between the Short Duration Fund, in which Bauer was
invested, and the High Yield Fund, in which she held
no shares. This is troubling because the record suggests
that the High Yield Fund was in considerably worse
shape than the Short Duration Fund throughout the
relevant time period. Prior to Bauer’s redemption it is
apparent that illiquid securities in the Short Duration
Fund never rose above 10.89% of net assets. By contrast,
illiquid securities comprised as much as 23.12% of net
assets in the High Yield Fund in late August 2000. Inves-
tors were on notice that either fund could invest up to
15% of its net assets in illiquid securities, so we think it is
wrong to say that Bauer’s insider knowledge of defaulted
and watchlist securities in the Short Duration Fund is
material as a matter of law. It also calls into question the
materiality of the SWIB transaction. Even if SWIB had
exercised its “put” option, it is not clear that illiquid
security amounts would have ever risen above 15% in
the Short Duration Fund. Finally, there is record evidence
that the Short Duration Fund’s liquidity problems
were less severe than the High Yield Fund’s. Beste’s
32                                              No. 12-2860

September 11, 2000 email, for example, reports that HAI
was able to generate $4.2 million in Short Duration
Fund bond sales, but none from the sale of High Yield
Fund bonds. The SEC has not adequately explained
how information concerning the High Yield Fund would
be directly material to investors trading in the Short
Duration Fund alone. We think a fact finder needs to
sort through that question.

                             IV
  The district court also concluded as a matter of law that
Bauer acted with scienter. Scienter is the § 10(b) mental
state requirement, and it embraces an “intent to deceive,
manipulate, or defraud” Aaron v. SEC, 100 S.Ct. 1945
(1980); Ernst & Ernst v. Hochfelder, 96 S.Ct. 1375 (1976); as
well as reckless disregard of the truth. SEC v. Lyttle,
538 F.3d 601, 603-04 (7th Cir. 2008); Sunstrand Corp. v.
Sun Chemical Corp., 553 F.2d 1033, 1044-45 (7th Cir. 1977).
  The district court found, on the summary judgment
record, that in redeeming her Short Fund Duration
shares Bauer acted with a level of recklessness amounting
to scienter. The district court’s determination was based
on the following evidence: (1) Bauer was an attorney
with over 20 years of experience in securities law; (2) Bauer
gave deposition testimony in which she stated that her
primary motivation for redeeming her shares was “price
volatility”; (3) Bauer’s redemption was suspicious in
terms of scope and timing in that it did not match past
trading practices and occurred ten days before a sub-
stantial NAV decline; and (4) on September 28, 2000,
No. 12-2860                                              33

Bauer sent an email to HAI executives advising them to
“eliminate on a regular basis” any materials in their
files that they were not required to maintain.
  Bauer’s extensive experience in securities law does
tend to undercut any inference of simple negligence. See
generally SEC v. Jakubowski, 150 F.3d 676, 681–82 (7th Cir.
1998). And even more so than the September 28, 2000
email, we think the comments Bauer provided in response
to proposed talking points to expected shareholder ques-
tions evidences guilty knowledge. Nevertheless, the
district court failed to grant Bauer several favorable
inferences to which she was entitled at the summary
judgment stage. These inferences give rise to genuine
issues of material fact as to scienter that will have to
be resolved by trial.
  First, we fundamentally disagree that Bauer’s testimony
regarding her concern over price volatility necessarily
gives rise to an inference of scienter. The relevant passage
from Bauer’s December 2001 deposition is as follows:
    The primary reason I redeemed the shares is I was
    no longer comfortable with the volatility of that
    fund. The price volatility. And these were assets that
    were, in my mind, assets that I wanted to have rela-
    tively liquid and available to me to meet certain
    types of expenses. And I was concerned that they
    might not be available to me if I got locked up again
    and needed access to them . . . And I was concerned
    about protecting these assets. The volatility in the
    month of September had been, the price, the NAV
    had dropped by as much as half of what it had done
34                                              No. 12-2860

     for the entire year. And this had been a fund, over
     the longer term, the volatility had been relatively
     stable with a penny here, two pennies there, nothing
     of the magnitude that we saw in the month of Septem-
     ber . . . And again, this was short term assets for me.
  The district court also noted the following exchange
between Bauer and an SEC attorney:
     Q: You didn’t have any, you didn’t think, you didn’t
     have any feeling one way or another when you sold
     your shares if you thought it was going to go up
     or down?
     A: Well, the feeling I had was there was lots of uncer-
     tainty. And it wasn’t performing the way that I had
     expected it to.
     Q: When you say there was lots of uncertainty, what
     do you mean by that?
     A: I mean there was, I had a lot uncertainty as to
     whether it would go up or down. But what I did note
     was it had, it had been more volatile that what I was
     comfortable with. And particularly in the last month.
The district court apparently believed that no reasonable
jury could determine that Bauer’s concern over price
volatility was based entirely on NAV declines that oc-
curred prior to her October 3, 2000 redemption, as well
as publicly understood risks of future uncertainty. We
think that conclusion was wrong. This case is seems
unusual in that Bauer is charged with insider trading for
a sale that took place after a series of price declines.
This muddies the scienter analysis because insiders are
No. 12-2860                                             35

permitted to make rational investment choices based on
information available in the market; § 10(b) certainly
does not require an insider to go down with the
company ship when the public knows just as well that it is
sinking. The relevant question is whether Bauer acted
with scienter in abandoning ship—whether she knew or
recklessly disregarded the fact that she was unfairly
avoiding losses based on her access to nonpublic informa-
tion. That is a permissible inference, but not a mandatory
one. The price volatility and general poor performance
of the fund alone raises a triable issue of fact as to
Bauer’s state of mind.
  Second, and closely related, our ruling in the insider
trading case of SEC v. Lipson, 278 F.3d 656 (7th Cir. 2002)
regarding the distinction between “possession” versus
“use” of material nonpublic information is misapplied. In
Lipson we considered a challenge to a jury instruction
that stated if the jury found the defendant to have been
in possession of material, nonpublic information, it
could infer that the defendant traded on the basis of
that information. 278 F.3d at 660. The instruction further
stated that the inference could be rebutted by evidence
that the material nonpublic information was not a causal
factor in the trade. In other words, the defendant could
avoid liability if he could show that he would have
made the exact same trade whether or not he possessed
material nonpublic information. Id. We upheld the in-
struction as in line with the general weight of authority
that the SEC has the burden to prove that inside informa-
36                                                 No. 12-2860

tion played a causal role in the trade.7 Id. (citing SEC v.
Adler, 137 F.3d 1325, 1340 (11th Cir. 1998); United States
v. Smith, 155 F.3d 1051, 1066-69 (9th Cir. 1998)). In so
doing, we rejected an alternative instruction offered by
the defendant, which provided that if the jury found
that the defendant had a legitimate, alternative purpose
for trading, the jury would have to find in his favor. Id.
661. We characterized this proposed instruction as “ab-
surd” because it would effectively allow a defendant
to avoid insider trading liability if he could show that
he was motivated both by a legitimate and an illegitimate
purpose, or that his unlawful activity served a
legitimate end. Id.
  The district court interpreted Lipson to mean that Bauer
had to prove at the summary judgment stage that material
nonpublic information played no causal role in her trade.
That was incorrect. Lipson makes clear that a defendant
can avoid judgment as a matter of law on insider
trading charges by presenting some credible rebuttal
evidence of a legitimate purpose for the trade. Id. If the
defendant can satisfy her burden of production, the
issue must go to the jury “to decide whether to infer

7
  In 2000 the SEC promulgated rule 10b5-1, which formally
equates possession (or “awareness”) of material nonpublic
information with use (save for limited exceptions), which, as
written, effectively renders the trader’s motivation irrelevant.
17 C.F.R. 240.10b5-(1). We need not comment on the validity
of that rule at this time because it does not apply to this
case—the rule took effect October 23, 2000, nearly three
weeks after Bauer’s redemption.
No. 12-2860                                               37

from the insider information and the timing of the
trades whether [the insider’s] decision on when and
how much to sell was indeed influenced by the infor-
mation.” Id.
  We find that Bauer has met her burden of production
by advancing credible evidence of two legitimate
purposes for her trade. The first, as mentioned above, is
the poor performance of the fund itself. The “bailing out”
inference has been sufficiently rebutted because the
September 28th NAV decline, as well as the general un-
certainty surrounding the fund’s performance, “might
reasonably [and legitimately] account” for the sale.
See Freeman v. Decio, 584 F.2d 186, 197 n.44 (7th Cir. 1978).
To prove scienter in this case the SEC must control for
the poor performance of the Short Duration Fund by
demonstrating that Bauer (1) knew or recklessly disre-
garded the possibility that Short Duration Fund shares
remained overpriced despite the September 28 mark-
down, or (2) knew or recklessly disregarded that she
possessed other nonpublic information that remained
material despite the September 28th markdown and
the information that became public in its wake.
  Bauer has also presented sufficient evidence for a jury
to hear her claim that she cashed out in anticipation of a
job change and relocation to San Francisco. Bauer was
well along in the interview process with a mutual fund
company in San Francisco, and had even traveled to
San Francisco to meet with a real estate agent and in-
terview with the fund’s CEO. The fact that Bauer did
not have “a firm offer of employment” is not enough to
keep this alternative explanation from going to a jury.
38                                            No. 12-2860

  Finally, we do not perceive how it is possible to grant
summary judgment on scienter given the nature of the
October 13, 2000 NAV decline. The losses that Bauer is
charged with unlawfully avoiding stem from a com-
pletely unorthodox shift in the manner in which the
pricing committee set the NAV. The district court found
that Bauer “did not participate in devising the haircut,
nor vote on its use,” and there is no evidence that she
possessed specific information regarding impending
across-the-board devaluations at the time she redeemed
her shares. Further, the Short Duration Fund’s NAV is
a derivative valuation of a portfolio of municipal
bonds that are notoriously difficult to price. The NAV
at which Bauer redeemed was based on valuations fur-
nished by an independent pricing agency that, nine days
after her redemption, the Pricing Committee still could
not definitively override. To take the scienter determina-
tion away from a jury under these circumstances was,
we think, improper.
  The judgment of the district court is reversed and the
case is remanded for proceedings consistent with this
opinion.
                                R EVERSED AND R EMANDED.

                          7-22-13