Document: 445 U.S. 222 100 S.Ct. 1108 63 L.Ed.2d 348 Vincent F. CHIARELLA, Petitioner,v.UNITED STATES. No. 78-1202. Argued Nov. 5, 1979. Decided March 18, 1980. Syllabus Section 10(b) of the Securities Exchange Act 1934 prohibits use "in connection with purchase or sale any security . [of] manipulative deceptive device contrivance in contravention such rules and regulations as [Securities Exchange] Commission may prescribe." Rule 10b-5 (SEC), promulgated under § 10(b), makes it unlawful for person to "employ device, scheme, artifice defraud," "engage act, practice, course business which operates would operate a fraud deceit upon person, security." Petitioner, who was employed by financial printer that had been engaged certain corporations print corporate takeover bids, deduced names target companies from information contained documents delivered acquiring and, without disclosing his knowledge, purchased stock sold shares immediately after attempts were made public. After SEC began an investigation trading activities, petitioner entered into consent decree he agreed return profits sellers shares. Thereafter, indicted convicted violating 10b-5. The District Court's charge permitted jury convict if found willfully failed inform company securities knew forthcoming bid make their more valuable. Petitioner's conviction affirmed Court Appeals. Held: conduct did not constitute violation hence improper. Pp. 225-237. (a) Administrative judicial interpretations have established silence actionable despite absence statutory language legislative history specifically addressing legality nondisclosure. However, liability is premised duty disclose (such insider shareholders corporation) arising relationship trust confidence between parties transaction. 225-230. (b) Here, no affirmative plans companies. He insider, received confidential Nor could arise petitioner's companies' securities, prior dealings them, agent, fiduciary, whom placed confidence. A does mere possession nonpublic market information. 231-235. (c) This need decide whether can be supported on alternative theory breached corporation, since submitted jury. instructions demonstrate merely because failure material, bought corporations. cannot basis presented 235-237. 588 F.2d 1358, reversed. Stanley S. Arkin, New York City, petitioner. Stephen M. Shapiro, Washington, D. C., respondent. Mr. Justice POWELL opinion Court. 1 question this case learns one corporation planning attempt secure control second violates fails impending before company's securities. 2 * Petitioner trade. In 1975 1976, worked "markup man" composing room Pandick Press, printer. Among handled five announcements bids. When these printer, identities concealed blank spaces false names. true sent night final printing. 3 petitioner, however, able deduce printing other documents. Without public.1 By method, realized gain slightly than $30,000 14 months. Subsequently, (Commission SEC) activities. May 1977, shares.2 On same day, discharged Press. 4 January 1978, 17 counts (1934 Act) 10b-5.3 unsuccessfully moved dismiss indictment,4 brought trial all counts. 5 Appeals Second Circuit conviction. 1358 (1978). We granted certiorari, 441 942, 99 2158, 60 1043 (1979), we now reverse. II 6 Act, 48 Stat. 891, 15 U.S.C. 78j, Pursuant section, provides pertinent part:5 7 "It shall directly indirectly, means instrumentality interstate commerce, mails facility national exchange, "(a) To employ defraud, [or] 8 9 "(c) engage CFR 240.10b-5 (1979). 10 concerns legal effect silence. valuable.6 order circumstances necessary review statute well its interpretation federal courts. 11 Although starting point our inquiry statute, Ernst & v. Hochfelder, 425 185, 197, 96 1375, 1382, 47 668 (1976), state device. designed catch-all clause prevent fraudulent practices. U.S., at 202, 206. But neither nor itself affords specific guidance resolution case. 1942, discuss possibility provide might run afoul 10(b).7 12 took important step development when held broker-dealer firm violated section selling undisclosed obtained director issuer also registered representative brokerage firm. Cady, Roberts Co., 40 S.E.C. 907 (1961), decided must abstain unless has first disclosed material inside known him. obligation derives 13 "[a]n information[, which] traditionally imposed 'insiders,' particular officers, directors, controlling stockholders. We, courts consistently insiders facts are them virtue position but persons they deal which, known, affect investment judgment." Id., 911. emphasized arose (i) existence affording access intended available only purpose, (ii) unfairness allowing take advantage disclosure. 912, n. 15.8 That stockholders gives rise disclosure novel twist law. At common law, misrepresentation purpose inducing reliance statement fraudulent. consummation transaction commits do so. And arises party "that [party] entitled know fiduciary similar relation them."9 decision, recognized those reason corporation.10 "necessity preventing tak[ing] unfair uninformed minority stockholders." Speed Transamerica Corp., F.Supp. 808, 829 (D.Del.1951). 16 violations where used own benefit. E. g., Texas Gulf Sulphur 401 833 (CA2 1968), cert. denied, 404 1005, 92 561, 30 558 (1971). cases emphasized, accordance common-law rule, "[t]he charged failing it." Frigitemp Corp. Financial Dynamics Fund, Inc., 524 275, 282 1975). Accordingly, purchaser prospective seller reveal facts. See General Time Talley Industries, 403 159, 164 393 1026, 89 631, 21 570 (1969).11 followed approach Affiliated Ute Citizens United States, 406 128, 1456, 31 741 (1972). group American Indians formed manage joint assets derived tribal holdings. issued Indian designated local bank transfer agent. Because speculative nature difficulty ascertaining value share, requested stress importance retaining stock. 146, S.Ct., 1468. Two bank's assistant managers aided disposing traded two separate markets—a primary non-Indians through resale consisting entirely non-Indians. higher prices prevailing market. exist acted assumed act behalf shareholders, relied personnel 152, 1471. officers responsibility makers sell favorable non-Indian 152-153, 1471-1472. 18 Thus, administrative Application guarantees insiders, place shareholder's welfare own, will benefit personally information.12 III 19 case, although company. Moreover, "market information" concern earning power operations company, company.13 subject trading. specify duty. effect, court instructed owed everyone; sellers, indeed, whole. simply told time "he people information." Record 677. 20 holding "[a]nyone —corporate not—who regularly receives trade incurring disclose." F.2d, 1365 (emphasis original). said test include receive information, id., 1366, rationale limitation unrelated disclose.14 Appeals, like court, identify give Its decision thus rested solely belief laws "created system providing equal reasoned intelligent decisions." 1362. anyone generally fraudulent, suggests, buyers over less informed sellers. reasoning suffers defects. First every instance constitutes activity 10(b). Santa Fe Inc. Green, 430 462, 474-477, 97 1292, 1301-1303, 51 480 (1977). Second, element required fraudulent—a disclose—is absent No them. was, fact, complete stranger dealt impersonal transactions. 22 affirm recognizing general participants transactions forgo actions based Formulation broad duty, departs radically doctrine parties, see 9, supra, should undertaken some explicit evidence congressional intent. 23 As seen, emerges Congress ever adopted parity-of-information rule. Instead problems caused misuse addressed detailed sophisticated regulation recognizes harm operation markets. For example, Williams Act15 limits completely prohibit tender offeror's purchases public announcement offer. Congress' careful action areas16 contrasts, tension, rule asked adopt 24 Indeed, odds Commission's view applied purchases. "Warehousing" takes advance notice intention launch offer institutional investors then price rises.17 warehousing, buyer unknown seller. both situations, seller's behavior presumably altered Significantly, bar warehousing authority regulate offers18 rest "somewhat different theory" previously activity.19 25 applying new before, read " 'more broadly scheme reasonably permit.' Touche Ross Co. Redington, 442 560, 578, 2479, 2490, 61 82 quoting Sloan, 436 103, 116, 98 1702, 1711, 56 148 aptly described catchall provision, what catches fraud. allegation nondisclosure, there speak. hold contrary result support inconsistent plan enacted Cf. 479, 1304.20 IV 26 brief Court, States offers It argues employee corporation. breach perpetrated 27 merit told, 10b-5, concluded either defraud operated person. 681. judge stated "scheme defraud" obtain money trick "a Chiarella non-public deceit." 683. "did stock." 685-686. 28 Alternatively, "Chiarella's alleged having operating seller." 686. earlier "embraces human ingenuity devise resorted individual another misrepresentation, suggestions suppression truth." 29 elements criminal jury, Rewis 814, 91 1056, 1060, 493 (1971), Dunn 442U.S. 100, 106, 2190, 2194, 743 speculate exists, breached, 10(b).21 judgment Reversed. STEVENS, concurring. 32 Before liability, civil criminal, violation, defendant breached. Arguably, open market, I agree determination erroneous premise owe therefore 33 correctly address question: silence—a unquestionably employer employer's customers—could Respectable arguments position. hand, assume entrusted employers, legitimate argument constituted deceit" security."* inasmuch recover damages purchasers Blue Chip Stamps Manor Drug Stores, 421 723, 95 1917, 44 539, argued occurred. think wisely leaves issue day. 34 write emphasize fact necessarily stamp approval did, considered lawful future. Rather, owe. 35 join opinion. 36 BRENNAN, concurring judgment. 37 holds, my view, possession, 239 Ante, 235. Prior so holding, suggests out subscribe suggestion. contrary, seems me Part THE CHIEF JUSTICE'S dissent, post, 239-243, states applicable substantive law—a whenever improperly obtains converts uses 38 While am unable II. concur majority clear sketched JUSTICE jurors verdict guilty finding find instruction suggesting offense improper conversion misappropriation Ambiguous indictment prosecutor's opening closing remarks substitute proper instructions. reference harmless-error post hoc constructive stipulation cure defect. simple adequate tantamount directing guilty, plainly do. 39 Chief BURGER, dissenting. believe properly 41 arm's-length stand relation. W. Prosser, Law Torts 106 (2d ed. 1955). permits businessman capitalize experience skill securing evaluating relevant information; incentive hard work, analysis, astute forecasting. policies underlie limit scope. particular, way informational obtained, superior experience, foresight, industry, means. One commentator written: 42 "[T]he acquires conceals vendor circumstance. acquired bringing bear intelligence, technical judgment; chance; tortious part. Any illegal seem Keeton, Fraud—Concealment Non-Disclosure, L.Rev. 1, 25-26 (1936) added). 43 encompass build principle: mean misappropriated absolute refrain supports reading. terms, provisions reach scheme. negates suggestion limited "corporate insiders" practices related information."1 Just surely standard fair dealing "white collar" "blue level. very "by repeated word 'any' [was] obviously meant inclusive." 151, 1471, 45 antifraud large measure "to assure undue preferences advantages among investors." H.R.Conf.Rep.No.94-229, p. (1975), U.S.Code Cong. Admin.News 1975, 323. These "those demonstrated fulfill useful function." S.Rep.No.792, 73d Cong., 2d Sess., (1934). An investor possesses just "undue" advantage; quite clearly serves function except enrichment expense others. 46 sense novel. follows naturally principles enunciated seminal decision. (1961). There, factors impose insiders: (1) personal added); (2) inherent inaccessible dealing. Both present gains means.2 re Blyth 1037 (1969), context. Government Treasury Department Federal Reserve Bank employee. ruled "improper information," violative S.E.C., 1040. hesitate extend "tippee" insider.3 Finally, bears emphasis reading threaten So read, offeror acquisition during period "tests water" purchasing full 5% proscribe "warehousing." SEC, Institutional Investor Study Report, H.R.Doc.No. 92-64, pt. 4, 2273 Likewise, specialist disclose-or-refrain requirement performance everyday functions. each instances, accomplished unlawfully converted gain. opinion, it, information.4 Instead, apparently concludes given notion however acquired, practice. premise, advantage—by companies—was offense. ante, 236. 49 unduly restrictive. Fairly whole context trial, misappropriating property customers. "[i]n wrongfully Press secretly 677 parallels indictment, deliberations; "without employment." underscored clarity prosecutor exhibited juror possibly understand about said: "In sum charges misused knowledge wrong about. simple." 46. experienced defense counsel exception uttered complaint inadequate regard. 50 event, even assuming deficient charging sufficient precision, record error harmless beyond reasonable doubt. Chiarella, himself, testified decoding 474-475. admitted "confidential," use[d] gain." 496. light testimony, inconceivable shortcoming "possibly influenced adversely [the defendant]." Chapman California, 386 23, 87 824, 828, 705 (1967). Park, 658, 673-676, 1903, 1912-1914, 489 (1975). Even telling perhaps Chiarella's counsel's argument: "Let say right up front, too, got conceded, candidly, 'I clues while work. looked various deciphered decoded stock.' There that. don't go hullabaloo something concedes. mystery that." 621. 52 similarly conceded "[w]e dispute proposition agent profit." Reply Brief Restatement (Second) Agency 395 (1958). statements formal obtained. law essential crime regarded conclusively proved. J. Wigmore, Evidence 2590 (McNaughton rev. 1961); Houston, 547 104 (CA9 1976). 53 sum, shows doubt working literally shadows warning signs printshop misappropriated—stole put bluntly—valuable him utmost exploited ill-gotten 54 BLACKMUN, MARSHALL joins, 55 much dissenting JUSTICE, 239, separately because, unnecessary "misappropriation" theory. purloined, or, JUSTICE's word, 245, "stole," concerning pending certainly most dramatic wrong, co-workers warned kind forbidden. within meaning 1934, 78j(b), blessing principals embarking profiteering brand trading, approval, lies close heart prohibit. continues pursue course, charted recent decisions, transform intentionally elastic "catchall" provision relatively little misbehavior too often needlessly risky uninitiated investor. See, e. (1976); 539 Such confinement achieved imposition "special relationship" akin information.1 admits conclusion finds mandate history. 226. Yet justification ruling terms purposes laws, square long-standing abused principle construed flexibly rather narrow technicality. (1972); Superintendent Insurance Bankers Life Casualty 6, 12, 165, 169, 128 (1971); Capital Gains Research Bureau, 375 180, 186, 84 280, 237 (1963). 57 I, establish responsibilities minimizes honest matter how diligently tried, legally obtain. doing so, further advances stops short implications. draws precedent, fully consistent developments fraud, application "insider" 58 long treated facts" key ingredient disclose. Strong Repide, 213 419, 431-433, 521, 525-526, 853 (1909); Harper James, 7.14 (1956). Traditionally, factor prominent involving relations, party's inferiority dependence treatment definition, "acting mistaken respect fact." 283 1975); 551 (1938). trend away strict adherence harsh maxim caveat emptor toward flexible, formalistic understanding Keeton (1936). Steps taken broader array contexts renders inherently unfair. James Gray, Misrepresentation—Part II, Md.L.Rev. 488, 526-527 (1978); 551(e), Comment l (1977); 166-167 (Tent.Draft 10, 1964). alsoLingsch Savage, Cal.App.2d 729, 735-737, Cal.Rptr. 201, 204-206 (1963); Jenkins McCormick, 184 Kan. 842, 844-845, 339 P.2d 8, (1959); Jones Arnold, 359 Mo. 161, 169-170, 221 S.W.2d 187, 193-194 (1949); Simmons Evans, 185 Tenn. 282, 285-287, 206 295, 296-297 (1947). 59 construction places rearguard movement, opposite expectations enacted. H.R.Rep.No. 1383, limited. observed replicate relations. 474-476, 1301-1302, ensure functioning markets protections proved inadequate. Naftalin, 768, 775, 2077, 2082, 624 recognized, integral H.R.Conf.Rep.No. 94-229, recurrent theme stressed insider's secret gravamen conduct. think, aspect decisions. discusses length, illustration. defined category "insiders" disclose-or-abstain according factors: 62 "[F]irst, giving access, anyone, second, involved knowing unavailable dealing." 912 (footnote omitted). Commission, "relationship" primarily presence like. deemed keeping "the anti-fraud provisions" "circumscribed fine distinctions rigid classifications," prevailed Ibid. arose, incident responsibility, "inherent unfairness" turning account profit. reinforced Investors Management 633, 643 rejected contention violator source liability. 64 833, 848 1968) (en banc), denied sub nom. Coates 394 976, 1454, 756 mentioned "based policy justifiable expectation marketplace exchanges Lewelling California 564 1277, 1280 1977); addition, Myzel Fields, 718, 739 (CA8 1967), 390 951, 88 1043, 1143 (1968), A. T. Brod Perlow, 393, 397 apply concept flexible; wherever abused, prophylaxis followed. Zweig Hearst 594 1261 1979) (financial columnist); Shapiro Merrill Lynch, Pierce, Fenner Smith, 495 228 1974) (institutional investor); 494 1301 (merger negotiator); Chasins Barney 438 1167 1970) (market maker). Bromberg L. Lowenfels, Commodities Fraud 7.4(6)(b) 65 believe, thought, approved agents mixed-blood customers bring unaware. 150-153, 1470-1472. 'any,' "are strictures strategic marketplace. agents, contrast, intimate familiarity promoted actively, profited. circumstances, "possessed Rule" latter "had know" 153, 1472. 66 229-230, interpretation. lends strong structural disparity critical establishing Given factual posture resolve sustain transaction." 230. Nevertheless, definitely points answer question. sure accept insider" created others prohibited engaging schemes exploit affected otherwise, me, tolerate wide range deceitful behavior. (1969); Herbert Honohan, 754 (1943); Brudney, Insiders, Outsiders, Informational Advantages Laws, 93 Harv.L.Rev. 322 (1979).2 67 Whatever outer Rule, fits neatly near center analytical framework. occupied concededly sedulously guarded access. words "intended anyone." moreover, dealt. full, virtually riskless artificial gap stocks shortly announced. "inherent[ly] unfai[r]." conviction, therefore, upheld, dissent upsetting Of transactions, four concerned merger. 1363, 1978). 77 Civ. Action 2534 (GLG) (SDNY 24, 1977). 32(a) sanctions penalties against Act. 78ff(a) (1976 ed., Supp. II). letters confirming 450 Only Rules 10b-5(a) here. 10b-5(b) "[t]o untrue omit made, misleading." 240.10b-5(b) portion dismissed 682-683, Release 3230 (May 21, 1942), Fed.Reg. 3804 (1942). Roberts, liable issuer. Since partners associated. 913, 21. embraced Judge Learned Hand officer sale; sorry distinction allow induce beneficiary forbidden once become one." 914, Gratz Claughton, 187 46, (CA2), 341 920, 71 741, L.Ed. 1353 (1951). 551(2)(a) (1976). 523-527 regards Institute "silence speak act." ALI, Code 262(b) (Prop. Off. Draft Fletcher, Cyclopedia Private Corporations 838 (rev. 3A §§ 1168.2, 1171, 1174; Loss, Regulation 1446-1448 3557-3558 (1969 Supp.). Brophy Cities Service Del.Ch. 241, 70 A.2d (1949). Note, 10b-5: Elements Right Action, N.Y.U.L.Rev. 541, 552-553, (1968); 75 1449, 1450 (1962); Daum Phillips, Implications Bus.L. 939, 945 (1962). BLACKMUN another. Post, 247-248. never held. 431-434, 525, 526, (1909), special-facts conclude shareholder. shareholder revealing direction, greatly enhance Repide Pepper Litton, 308 307, 15, 238, 281 (1939). Great 407 453, 460 1770, Kohler 319 634, 637-638 (CA7 1963); N.Y.U.L.Rev., 554; Corporate Tender Offers Under Law: Challenge U.Chi.L.Rev. 359, 373-374 (1966). Civil Liability X-10b-5, Va.L.Rev. 537, 554-561 "Tippees" profit came 228, 237-238 1974). tippee's viewed role participant Subcommittees Bar Association Corporation, Banking, Business Law, Letter Material, Non-Public Information (Oct. 1973), reprinted BNA, Report 233, pp. D-1, D-2 (Jan. 2, Fleischer, Mundheim, Murphy, Initial Inquiry Responsibility Disclose Market Information, 121 U.Pa.L.Rev. 798, 799 (1973). "regular create workable embracing occupy mechanism." 1365. considerations insufficient nn. accompanying text, one's ability acquire suggested creates, receives, substantial economic risk unsuccessful. 1366-1367. Again, departed analysis appropriate recognition held, manner here, violate preannouncement precisely seller: "We stock, 'insider' seller, raise demands abort sale." (1969). Title 78m(d)(1) II) acquisition. forbids member exchange effecting account. 78k(a)(1). exempted specialists prohibition—broker-dealers execute orders corporation's buying behalf. 11(a)(1)(A), 78k(a)(1)(A); S.Rep.No. 94-75, 179; Special Markets, 95, 88th 1st 57-58, 76 Robbins, Markets 191-193 contribute orderly comes buy orders. 78-80. Similar prompted exempt makers, block positioners, odd-lot dealers, bona fide arbitrageurs, arbitrageurs 11's prohibition 78k(a)(1)(A)-(D); 99. 34-9950, 3902, 3918 supra 13, 811-812. Proposed 240.14e-3, 70352-70355, 70359 xxxii BLACKMUN's following imposing "[P]ersons securities." 251. substantially Appeals' "who disclose," 1365, reasons III. Additionally, undefined activities "generally prohibited" questions defendants activity. Grayned City Rockford, 408 104, 108-109, 2294, 2298-2299, worth noting sentenced year prison, suspended month, 5-year term probation. 1373, 1378 (Meskill, J., dissenting). relies single phrase instructions, "confidential position" argue trading." 240. few thesis explain scope employer, any, tort misappropriation. suggest charged. included reversed uphold impossible ascertain punished noncriminal Gallagher, 576 1028, 1046 (CA3 1978); Leary 31-32, 1532, 1545-1546, Stromberg 369-370, 532, 535-536, 1117 (1931). Eason Motors Acceptance 490 654 416 960, 94 1979, 312. 539. pecuniary private identified coextensive itself. Piper Chris-Craft 42, 28, 43, 30, 47, 33, 926, 949, 950, 952, 124. Academic writing years distinguished information"—information reflects expected earnings assets—and distinction. 322, 329-333 Analysts Rec., Oct. 7, 1968, 3, (interview Counsel Philip Loomis, Jr.) (the characteristic "received person's disadvantage investing market"). Insider Expanding Doctrine, S.Cal.L.Rev. 1491, 1498-1502 (1974). recently proposed prepared direction Professor Louis Loss. ALI construe cover class "quasi-insiders," including judge's clerk trades unpublished report. 1603, comment 3(d), 538-539 (Prop.Off.Draft quasi-insiders share society seeks encourage. [to disclose]." 232. limited, namely, advanced above, obligations special fall allegedly transaction, derivative "tippees," lower encompassed 230, 12; cf. Foremost-McKesson, Provident 423 232, 255, 29, 508, 464 observes several possess 233-234. asserts "neither rule." 233. judgment, observation assertion undermines endeavored briefly outline. cited betoken leave exploitation unregulated. Letting exceptions expanded circumvention completes Furthermore, significant conceptual parity free rein kinds former foreclose, differences diligence acumen. limiting opportunities manipulation connections resort stealth, helps reap reward.

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