Opinion ID: 199122
Heading Depth: 4
Heading Rank: 1

Heading: If any person has taken a substantial step

Text: or steps to commence . . . a tender offer . . . it shall constitute a fraudulent . . . act . . . within the meaning of section 14(e) of the Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from [an inside source]. . . to purchase or sell . . . any of such securities . . . unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed . . . . . . . . -21- (d)(1) . . . it shall be unlawful for any person . . . to communicate nonpublic information relating to a tender offer to any other person under circumstances in which it is reasonably foreseeable that such communication is likely to result in a violation of this section . . . . 17 C.F.R. § 240.14e-3. There is simply no language in the Rule indicating that a defendant must know that the nonpublic information in his possession relates to a tender offer. The Eighth Circuit reached a similar conclusion when faced with the issue of whether Rule 14e-3 requires that a defendant know that substantial steps toward a tender offer have been taken. United States v. O’Hagan, 139 F.3d 641, 650 (8th Cir. 1998), holds: Rule 14e-3(a) requires that any person must have taken a substantial step or steps towards the tender offer. The rule does not require the defendant to have knowledge of these acts. Instead, the defendant need only know[] or have reason to know that the material information is nonpublic and has been acquired directly or indirectly from the tender offeror in some way. Id. Further, when the Commission promulgated Rule 14e-3, it explained in the accompanying release that the Rule did not require the trader to know that the nonpublic information related to a tender offer: As adopted, the information which will trigger the operation of the Rule (1) must be material, (2) must relate to a tender offer, (3) must be nonpublic and (4) must have been acquired -22- directly or indirectly from the offering person, from the issuer or from another specified person. For the last two requisites, there is a knows or has reason to know standard by the person who has possession of the information. For the first two requisites, i.e., materiality and relation to a tender offer, there is no knows or has reason to know standard. Tender Offers, Exchange Act Release No. 17120, 1980 WL 20869, at  (Sept. 4, 1980). The Supreme Court has observed that [b]ecause Congress has authorized the Commission, in § 14(e), to prescribe legislative rules, we owe the Commission's judgment 'more than mere deference or weight.'  O’Hagan, 521 U.S. at 673, quoting Batterton v. Francis, 432 U.S. 416, 424-26 (1977); see also Cohen v. Brown University, 101 F.3d 155, 173 (1st Cir. 1996) (explaining that it is well settled that if Congress has expressly delegated to an agency the power to prescribe regulations, the resulting regulations must be accorded controlling weight if they are not arbitrary or capricious). We must defer to the Commission's interpretation unless [it is] arbitrary, capricious, or manifestly contrary to the statute. Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984); see also Beaver Plant Operations, Inc. v. Herman, 2000 WL 1239950, at  (1st Cir. Sept 7, 2000) (stating that an agency's interpretation [of its own regulation] should be given full effect if it is reasonable). Since the plain language of the rule leads us to the same interpretation the Commission reached, the Commission's -23- approach is manifestly reasonable. We hold that Rule 14e-3 does not require that a person charged with violating the rule have knowledge that the nonpublic information in his possession relates to a tender offer. Therefore, appellees' contention is rejected. Thus, neither the basis upon which the district court made its ruling nor the reasons suggested by appellees to save the directed verdict can be sustained. A new trial is required.