Source: http://openjurist.org/print/31226
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445 US 222 Chiarella v. United States
Home > 445 US 222 Chiarella v. United States
We see no basis for applying such a new and different theory of liability in this case. As we have emphasized before, the 1934 Act cannot be read " 'more broadly than its language and the statutory scheme reasonably permit.' " Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S.Ct. 2479, 2490, 61 L.Ed.2d 82 (1979), quoting SEC v. Sloan, 436 U.S. 103, 116, 98 S.Ct. 1702, 1711, 56 L.Ed.2d 148 (1978). Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud. When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak. We hold that a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information. The contrary result is without support in the legislative history of § 10(b) and would be inconsistent with the careful plan that Congress has enacted for regulation of the securities markets. Cf. Santa Fe Industries, Inc. v. Green, 430 U.S., at 479, 97 S.Ct., at 1304.20
The jury instructions demonstrate that petitioner was convicted merely because of his failure to disclose material, nonpublic information to sellers from whom he bought the stock of target corporations. The jury was not instructed on the nature or elements of a duty owed by petitioner to anyone other than the sellers. Because we cannot affirm a criminal conviction on the basis of a theory not presented to the jury, Rewis v. United States, 401 U.S. 808, 814, 91 S.Ct. 1056, 1060, 28 L.Ed.2d 493 (1971), see Dunn v. United States, 442U.S. 100, 106, 99 S.Ct. 2190, 2194, 60 L.Ed.2d 743 (1979), we will not speculate upon whether such a duty exists, whether it has been breached, or whether such a breach constitutes a violation of § 10(b).21
The Court correctly does not address the second question: whether the petitioner's breach of his duty of silence—a duty he unquestionably owed to his employer and to his employer's customers—could give rise to criminal liability under Rule 10b-5. Respectable arguments could be made in support of either position. On the one hand, if we assume that petitioner breached a duty to the acquiring companies that had entrusted confidential information to his employers, a legitimate argument could be made that his actions constituted "a fraud or a deceit" upon those companies "in connection with the purchase or sale of any security."* On the other hand, inasmuch as those companies would not be able to recover damages from petitioner for violating Rule 10b-5 because they were neither purchasers nor sellers of target company securities, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539, it could also be argued that no actionable violation of Rule 10b-5 had occurred. I think the Court wisely leaves the resolution of this issue for another day.
The Court holds, correctly in my view, that "a duty to disclose under § 10(b) does not arise from the mere possession, 445 U.S. 239 of nonpublic market information." Ante, at 235. Prior to so holding, however, it suggests that no violation of § 10(b) could be made out absent a breach of some duty arising out of a fiduciary relationship between buyer and seller. I cannot subscribe to that suggestion. On the contrary, it seems to me that Part I of THE CHIEF JUSTICE'S dissent, post, at 239-243, correctly states the applicable substantive law—a person violates § 10(b) whenever he improperly obtains or converts to his own benefit nonpublic information which he then uses in connection with the purchase or sale of securities.
"[T]he way in which the buyer acquires the information which he conceals from the vendor should be a material circumstance. The information might have been acquired as the result of his bringing to bear a superior knowledge, intelligence, skill or technical judgment; it might have been acquired by mere chance; or it might have been acquired by means of some tortious action on his part. . . . Any time information is acquired by mere an illegal act it would seem that there should be a duty to disclose that information." Keeton, Fraud—Concealment and Non-Disclosure, 15 Texas L.Rev. 1, 25-26 (1936) (emphasis added).
The language of § 10(b) and of Rule 10b-5 plainly supports such a reading. By their terms, these provisions reach any person engaged in any fraudulent scheme. This broad language negates the suggestion that congressional concern was limited to trading by "corporate insiders" or to deceptive practices related to "corporate information."1 Just as surely Congress cannot have intended one standard of fair dealing for "white collar" insiders and another for the "blue collar" level. The very language of § 10(b) and Rule 10b-5 "by repeated use of the word 'any' [was] obviously meant to be inclusive." Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972).
This interpretation of § 10(b) and Rule 10b-5 is in no sense novel. It follows naturally from legal principles enunciated by the Securities and Exchange Commission in its seminal Cady, Roberts decision. 40 S.E.C. 907 (1961). There, the Commission relied upon two factors to impose a duty to disclose on corporate insiders: (1) " . . . access . . . to information intended to be available only for a corporate purpose and not for the personal benefit of anyone " (emphasis added); and (2) the unfairness inherent in trading on such information when it is inaccessible to those with whom one is dealing. Both of these factors are present whenever a party gains an informational advantage by unlawful means.2 Indeed, in In re Blyth & Co., 43 S.E.C. 1037 (1969), the Commission applied its Cady, Roberts decision in just such a context. In that case a broker-dealer had traded in Government securities on the basis of confidential Treasury Department information which it received from a Federal Reserve Bank employee. The Commission ruled that the trading was "improper use of inside information," violative of § 10(b) and Rule 10b-5. 43 S.E.C., at 1040. It did not hesitate to extend Cady, Roberts to reach a "tippee" of a Government insider.3
The Court's opinion, as I read it, leaves open the question whether § 10(b) and Rule 10b-5 prohibit trading on misappropriated nonpublic information.4 Instead, the Court apparently concludes that this theory of the case was not submitted to the jury. In the Court's view, the instructions given the jury were premised on the erroneous notion that the mere failure to disclose nonpublic information, however acquired, is a deceptive practice. And because of this premise, the jury was not instructed that the means by which Chiarella acquired his informational advantage—by violating a duty owed to the acquiring companies—was an element of the offense. See ante, at 236.
The Court's reading of the District Court's charge is unduly restrictive. Fairly read as a whole and in the context of the trial, the instructions required the jury to find that Chiarella obtained his trading advantage by misappropriating the property of his employer's customers. The jury was charged that "[i]n simple terms, the charge is that Chiarella wrongfully took advantage of information he acquired in the course of his confidential position at Pandick Press and secretly used that information when he knew other people trading in the securities market did not have access to the same information that he had at a time when he knew that that information was material to the value of the stock." Record 677 (emphasis added). The language parallels that in the indictment, and the jury had that indictment during its deliberations; it charged that Chiarella had traded "without disclosing the material nonpublic information he had obtained in connection with his employment." It is underscored by the clarity which the prosecutor exhibited in his opening statement to the jury. No juror could possibly have failed to understand what the case was about after the prosecutor said: "In sum what the indictment charges is that Chiarella misused material non-public information for personal gain and that he took unfair advantage of his position of trust with the full knowledge that it was wrong to do so. That is what the case is about. It is that simple." Id., at 46. Moreover, experienced defense counsel took no exception and uttered no complaint that the instructions were inadequate in this regard.
In any event, even assuming the instructions were deficient in not charging misappropriation with sufficient precision, on this record any error was harmless beyond a reasonable doubt. Here, Chiarella, himself, testified that he obtained his informational advantage by decoding confidential material entrusted to his employer by its customers. Id., at 474-475. He admitted that the information he traded on was "confidential," not "to be use[d] . . . for personal gain." Id., at 496. In light of this testimony, it is simply inconceivable to me that any shortcoming in the instructions could have "possibly influenced the jury adversely to [the defendant]." Chapman v. California, 386 U.S. 18, 23, 87 S.Ct. 824, 828, 17 L.Ed.2d 705 (1967). See also United States v. Park, 421 U.S. 658, 673-676, 95 S.Ct. 1903, 1912-1914, 44 L.Ed.2d 489 (1975). Even more telling perhaps is Chiarella's counsel's statement in closing argument:
In this Court, counsel similarly conceded that "[w]e do not dispute the proposition that Chiarella violated his duty as an agent of the offeror corporations not to use their confidential information for personal profit." Reply Brief for Petitioner 4 (emphasis added). See Restatement (Second) of Agency § 395 (1958). These statements are tantamount to a formal stipulation that Chiarella's informational advantage was unlawfully obtained. And it is established law that a stipulation related to an essential element of a crime must be regarded by the jury as a fact conclusively proved. See 8 J. Wigmore, Evidence § 2590 (McNaughton rev. 1961); United States v. Houston, 547 F.2d 104 (CA9 1976).
In sum, the evidence shows beyond all doubt that Chiarella, working literally in the shadows of the warning signs in the printshop misappropriated—stole to put it bluntly—valuable nonpublic information entrusted to him in the utmost confidence. He then exploited his ill-gotten informational advantage by purchasing securities in the market. In my view, such conduct plainly violates § 10(b) and Rule 10b-5. Accordingly, I would affirm the judgment of the Court of Appeals.
Although I agree with much of what is said in Part I of the dissenting opinion of THE CHIEF JUSTICE, ante, p. 239, I write separately because, in my view, it is unnecessary to rest petitioner's conviction on a "misappropriation" theory. The fact that petitioner Chiarella purloined, or, to use THE CHIEF JUSTICE's word, ante, at 245, "stole," information concerning pending tender offers certainly is the most dramatic evidence that petitioner was guilty of fraud. He has conceded that he knew it was wrong, and he and his co-workers in the printshop were specifically warned by their employer that actions of this kind were improper and forbidden. But I also would find petitioner's conduct fraudulent within the meaning of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240.10b-5 (1979), even if he had obtained the blessing of his employer's principals before embarking on his profiteering scheme. Indeed, I think petitioner's brand of manipulative trading, with or without such approval, lies close to the heart of what the securities laws are intended to prohibit.
The Court continues to pursue a course, charted in certain recent decisions, designed to transform § 10(b) from an intentionally elastic "catchall" provision to one that catches relatively little of the misbehavior that all too often makes investment in securities a needlessly risky business for the uninitiated investor. See, e. g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Such confinement in this case is now achieved by imposition of a requirement of a "special relationship" akin to fiduciary duty before the statute gives rise to a duty to disclose or to abstain from trading upon material, nonpublic information.1 The Court admits that this conclusion finds no mandate in the language of the statute or its legislative history. Ante, at 226. Yet the Court fails even to attempt a justification of its ruling in terms of the purposes of the securities laws, or to square that ruling with the long-standing but now much abused principle that the federal securities laws are to be construed flexibly rather than with narrow technicality. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972); Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971); SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S.Ct. 275, 280, 11 L.Ed.2d 237 (1963).
The common law of actionable misrepresentation long has treated the possession of "special facts" as a key ingredient in the duty to disclose. See Strong v. Repide, 213 U.S. 419, 431-433, 29 S.Ct. 521, 525-526, 53 L.Ed.2d 853 (1909); 1 F. Harper & F. James, Law of Torts § 7.14 (1956). Traditionally, this factor has been prominent in cases involving confidential or fiduciary relations, where one party's inferiority of knowledge and dependence upon fair treatment is a matter of legal definition, as well as in cases where one party is on notice that the other is "acting under a mistaken belief with respect to a material fact." Frigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F.2d 275, 283 (CA2 1975); see also Restatement of Torts § 551 (1938). Even at common law, however, there has been a trend away from strict adherence to the harsh maxim caveat emptor and toward a more flexible, less formalistic understanding of the duty to disclose. See, e. g., Keeton Fraud—Concealment and Non-Disclosure, 15 Texas L.Rev. 1, 31 (1936). Steps have been taken toward application of the "special facts" doctrine in a broader array of contexts where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair. See James & Gray, Misrepresentation—Part II, 37 Md.L.Rev. 488, 526-527 (1978); 3 Restatement (Second) of Torts § 551(e), Comment l (1977); id., at 166-167 (Tent.Draft No. 10, 1964). See alsoLingsch v. Savage, 213 Cal.App.2d 729, 735-737, 29 Cal.Rptr. 201, 204-206 (1963); Jenkins v. McCormick, 184 Kan. 842, 844-845, 339 P.2d 8, 11 (1959); Jones v. Arnold, 359 Mo. 161, 169-170, 221 S.W.2d 187, 193-194 (1949); Simmons v. Evans, 185 Tenn. 282, 285-287, 206 S.W.2d 295, 296-297 (1947).
It seems to me that the Court, ante, at 229-230, gives Affiliated Ute Citizens an unduly narrow interpretation. As I now read my opinion there for the Court, it lends strong support to the principle that a structural disparity in access to material information is a critical factor under Rule 10b-5 in establishing a duty either to disclose the information or to abstain from trading. Given the factual posture of the case, it was unnecessary to resolve the question whether such a structural disparity could sustain a duty to disclose even absent "a relationship of trust and confidence between parties to a transaction." Ante, at 230. Nevertheless, I think the rationale of Affiliated Ute Citizens definitely points toward an affirmative answer to that question. Although I am not sure I fully accept the "market insider" category created by the Court of Appeals, I would hold that persons having access to confidential material information that is not legally available to others generally are prohibited by Rule 10b-5 from engaging in schemes to exploit their structural informational advantage through trading in affected securities. To hold otherwise, it seems to me, is to tolerate a wide range of manipulative and deceitful behavior. See Blyth & Co., 43 S.E.C. 1037 (1969); Herbert L. Honohan, 13 S.E.C. 754 (1943); see generally Brudney, Insiders, Outsiders, and Informational Advantages under the Federal Securities Laws, 93 Harv.L.Rev. 322 (1979).2
Whatever the outer limits of the Rule, petitioner Chiarella's case fits neatly near the center of its analytical framework. He occupied a relationship to the takeover companies giving him intimate access to concededly material information that was sedulously guarded from public access. The information, in the words of Cady, Roberts & Co., 40 S.E.C., at 912, was "intended to be available only for a corporate purpose and not for the personal benefit of anyone." Petitioner, moreover, knew that the information was unavailable to those with whom he dealt. And he took full, virtually riskless advantage of this artificial information gap by selling the stocks shortly after each takeover bid was announced. By any reasonable definition, his trading was "inherent[ly] unfai[r]." Ibid. This misuse of confidential information was clearly placed before the jury. Petitioner's conviction, therefore, should be upheld, and I dissent from the Court's upsetting that conviction.
Restatement (Second) of Torts § 551(2)(a) (1976). See James & Gray, Misrepresentation—Part II, 37 Md.L.Rev. 488, 523-527 (1978). As regards securities transactions, the American Law Institute recognizes that "silence when there is a duty to . . . speak may be a fraudulent act." ALI, Federal Securities Code § 262(b) (Prop. Off. Draft 1978).
Title 15 U.S.C. § 78m(d)(1) (1976 ed., Supp. II) permits a tender offeror to purchase 5% of the target company's stock prior to disclosure of its plans for acquisition.
Section 11 of the 1934 Act generally forbids a member of a national securities exchange from effecting any transaction on the exchange for its own account. 15 U.S.C. § 78k(a)(1). But Congress has specifically exempted specialists from this prohibition—broker-dealers who execute orders for customers trading in a specific corporation's stock, while at the same time buying and selling that corporation's stock on their own behalf. § 11(a)(1)(A), 15 U.S.C. § 78k(a)(1)(A); see S.Rep.No. 94-75, p. 99 (1975), U.S.Code Cong. & Admin.News 1975, p. 179; Securities and Exchange Commission, Report of Special Study of Securities Markets, H.R.Doc.No. 95, 88th Cong., 1st Sess., pt. 2, pp. 57-58, 76 (1963). See generally S. Robbins, The Securities Markets 191-193 (1966). The exception is based upon Congress' recognition that specialists contribute to a fair and orderly marketplace at the same time they exploit the informational advantage that comes from their possession of buy and sell orders. H.R.Doc.No. 95, supra, at 78-80. Similar concerns with the functioning of the market prompted Congress to exempt market makers, block positioners, registered odd-lot dealers, bona fide arbitrageurs, and risk arbitrageurs from § 11's general prohibition on member trading. 15 U.S.C. §§ 78k(a)(1)(A)-(D); see S.Rep.No. 94-75, supra, at 99. See also Securities Exchange Act Release No. 34-9950, 38 Fed.Reg. 3902, 3918 (1973).
Academic writing in recent years has distinguished between "corporate information"—information which comes from within the corporation and reflects on expected earnings or assets—and "market information." See, e. g., Fleischer, Mundheim, & Murphy, An Initial Inquiry into the Responsibility to Disclose Market Information, 121 U.Pa.L.Rev. 798, 799 (1973). It is clear that § 10(b) and Rule 10b-5 by their terms and by their history make no such distinction. See Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv.L.Rev. 322, 329-333 (1979).
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