Court Opinion

ID: 9465339
Source: CourtListenerOpinion
Date Created: 2023-08-05 00:43:39.333525+00
Date Added: 2024-06-11T17:39:07.738957
License: Public Domain

MESKILL, Circuit Judge,
dissenting:
I respectfully dissent. Today’s decision expands § 10(b) drastically, it does so without clear indication in prior law that this is the next logical step on the path of judicial development of § 10(b), and, alarmingly, it does so in the context of a criminal case.

Nondisclosure Under § 10(b) and Rule 10b-5.

The majority holds that Chiarella committed a § 10(b) violation by breaking the “disclose or abstain” rule of SEC v. Texas Gulf Sulphur, 401 F.2d 833, 848 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). However, we have been cited no case in which even civil liability for nondisclosure has been imposed under § 10(b) on anyone other than an insider, the tippee of an insider, or one standing in a special relationship with other traders. More specifically, we have been cited no case in which criminal liability for § 10(b) nondisclosure has been imposed on any purchaser of stock, either insider or outsider. The majority terms “irrelevant” the fact that Chiarella was neither an insider of the companies whose securities he purchased, nor the tippee of an insider. Chiarella’s location “inside the market itself” is today held to place him in a special relationship with all buyers and sellers with whom he might deal — a relationship which triggers the duty either to abstain or to disclose material nonpublic information. I am sympathetic to the majority’s view that imposition of the duty to abstain or disclose on those who occupy strategic positions in the securities industry may further important goals embodied in the securities acts, such as maintaining investor confidence in the integrity of the market. However, we must resist the temptation to redraft legislation, in effect, by reading into it what we would like to see written there, especially where a criminal conviction is at issue.
That today’s application of § 10(b) is a departure from prior law cannot be disputed.1 In General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 164 (2d Cir. 1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969), this Court rejected a claim that a company acquiring stock in another corporation must disclose to selling shareholders plans for an eventual merger:
We know of no rule of law, applicable at the time, that a purchaser of stock, who was not an “insider” and had no fiduciary relation to a prospective seller, had any obligation to reveal circumstances that might raise a seller’s demands and thus abort the sale.
The Williams Act, not yet effective at the time of the transactions at issue in General Time, does impose disclosure obligations on certain large scale purchasers of stock, but it is conceded that Chiarella’s trading was not covered by its provisions. See 15 U.S.C. §§ 78m(d), 78n(d).
As the commentators cited by the majority have observed, “[t]he duty to disclose material, non-public information has not been imposed on every person possessing this type of information. Traditionally, this obligation has been limited to persons with a special relationship to the company affected by the information.” Fleischer, Mundheim & Murphy, An Initial Inquiry *1374into the Responsibility to Disclose Market Information, 121 U.Pa.L.Rev. 798, 804 (1973) (emphasis added). See also Fleischer, Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L. Rev. 1271, 1280 (1965). Commentators on securities fraud law often discuss persons covered by the Rule 10b-5 disclosure duty without mention of traders other than insiders or tippees of insiders. See, e. g., 1 A. Bromberg, Securities Law: Fraud, § 7.4(6)(b), at 179-83 (1977). Bromberg notes that judicial decisions have generally adopted the SEC’s own view that anyone is subject to Rule 10b-5 disclosure obligations if he or she “has inside information obtained by reason of access to the issuer.” Id. at 179.
This access formula was first enunciated by the SEC itself in its leading decision of Cady, Roberts & Co., 40 S.E.C. 907 (1961):
Analytically, the obligation [that is, the affirmative duty to disclose material information] rests on two principal elements: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing that it is unavailable to those with whom he is dealing. In considering these elements under the broad language of the anti-fraud provisions we are not to be circumscribed by fine distinctions and rigid classifications. Thus our task here is to identify those persons who are in a special relationship with a company and privy to its internal affairs, and thereby suffer correlative duties in trading in its securities.
Id. at 912 (emphasis added). Eleven years after the Cady, Roberts decision this approach to Rule 10b-5 had become so firmly entrenched that this Court remarked: “The essential purpose of Rule 10b-5, as we have stated time and again, is to prevent corporate insiders and their tippees from taking unfair advantage of the uninformed outsiders.” Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890 (2d Cir. 1972).
The majority’s break with this § 10(b) tradition is accomplished by the creation of the new category of “market insider,” into which former outsiders will henceforth be placed. The majority sees in this new category a strong resemblance to the concept of the “quasi-insider” suggested in the comments accompanying the American Law Institute’s Federal Securities Code (Proposed Official Draft, March 15, 1978). However, the proposed code quite clearly imposes an affirmative duty of disclosure only on insiders (explicitly defined in terms of their relationship with or access to the issuer) and tippees of insiders. The Reporter’s comments indicate that the difficulties that would be posed by extending this duty to a wider range of traders were deemed to outweigh the “convenience” of such an extension. Thus, the drafters of the proposed Code respectfully rejected the position taken by the three concurring judges in SEC v. Great American Industries, Inc., 407 F.2d 453 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 920, 89 S.Ct. 1770, 23 L.Ed.2d 237 (1969), who expressed a willingness to catch non-insiders in the § 10(b) disclosure net. The ALI’s proposed code, like prior law, explicitly recognizes that some cases of nondisclosure of material information by non-insiders, no matter how egregious, do not involve fraud and hence do not fall within the scope of § 10(b), the majority’s statement to the contrary notwithstanding.2
Because § 10(b) and Rule 10b-5 apply to “any person,” it is tempting to view limitations on the class of persons subject to an affirmative duty either to abstain or to disclose nonpublic information as overly technical barriers to the full pursuit of the goals of the federal securities laws. But *1375§ 10(b) prohibits fraud not silence. And it is hornbook law that silence, unlike active misrepresentation, is fraudulent only when there is a duty to speak.3 Prosser, Law of Torts § 106 (4th ed. 1971); 3 Loss, Securities Regulation, Chapter 9C (1961); 6 Loss, Securities Regulation, Chapter 9C (1969).
The majority suggests that the test of “regular access to market information” is a workable one for determining when such a duty is to be imposed on outsiders. Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), a civil case, is the only precedent cited to buttress the majority’s assertion that a “duty to disclose arising out of regular access to market information is not a stranger to the world of 10b-5.” Affiliated Ute involved a bank which had agreed with the Ute Distribution Corporation (UDC) to act as transfer agent for its stock, which was being sold by its Indian owners to non-Indians. The bank itself had acknowledged in a letter to an association representing the Indian sellers that it would be the bank’s “ ‘duty to see that these transfers were properly made’ ” and that “ ‘the bank would be acting for the individual stockholders.’ ” Id. at 152, 92 S.Ct. at 1471. Despite the access of the bank and its employees to market information which was not known to the sellers, the Supreme Court explained that if the bank “had functioned merely as a transfer agent, there would have been no duty of disclosure here.” Id. (emphasis added). It was because the defendants had devised a plan to induce the holders of the stock to sell and had developed and encouraged a market for their stock that defendants were held to have assumed an affirmative duty of disclosure. Thus, it was not the bank’s clearly superior, regular access to market information concerning UDC stock but its actions in undertaking to act for the sellers that rendered its silence equivalent to a scheme to defraud the selling shareholders. Chiarella certainly did not undertake to act for the sellers of the target stock, nor did he enter the type of special relationship with them which was determinative in Affiliated Ute.
The majority concedes, as it must, that the would-be tender offerors (also outsiders) from whom Chiarella derived his information may themselves purchase up to 5 percent of the target’s stock without making any disclosure. See 15 U.S.C. §§ 78m(d), 78n(d); General Time Corp. v. Talley Industries, Inc., supra, 403 F.2d 159. The majority distinguishes purchases by the offeror and purchases by Chiarella on the ground that the offeror takes an economic risk and Chiarella does not. We have been cited no case holding that the degree of risk assumed by a trader in possession of nonpublic information is determinative of the trader’s liability for nondisclosure or renders his conduct fraudulent.
Chiarella has not been shown to have owed a duty of disclosure to the sellers of target stock. He owed a duty to the offer- or corporation not to misuse confidential information entrusted to him. But the term “fraud” in Rule 10b-5 does not bring within the ambit of the rule “all breaches of fiduciary duty in connection with a securities transaction.” Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 472, 97 S.Ct. 1292, 1300, 51 L.Ed.2d 480 (1977). In most contexts, “ ‘fraud’ still requires something more than ‘unfairness’ or breach of fiduciary duty.” American Law Institute, Federal Securities Code (Proposed Official Draft, March 15, 1978) § 1603, Comment (3)(b).

*1376
Section 10(b) as a Criminal Statute.

If § 10(b) and Rule 10b-5 were broad enough to cover every securities-related maneuver that entailed unfairness or undermined investor confidence there would be no need for all the other statutes and rules that figure in the complex securities regulation scheme that Congress has been building since the 1930’s. When a new weak point is identified — such as abuse of regular access to market information by certain participants in the industry — a direct attack on the problem through congres-, sional legislation or SEC rulemaking would be a more appropriate response than the uncomfortable stretching of existing law engaged in by the majority here to cover the gap.4 The SEC has been aware of the potential for abuse of nonpublic information by financial printers since at least 1971. SEC v. Sorg Printing Co., Inc., C.C.H. Fed. Sec.L.Rep. ¶ 95,034 (S.D.N.Y.1975). The SEC has sought and obtained several consent decrees enjoining the same conduct Chiarella engaged in and ordering disgorgement of profits made in such transactions. See, e. g., Sorg, supra; SEC v. Ayoub, C.C.H. Fed.Sec.L.Rep. ¶ 95,567 (S.D.N.Y. 1976); SEC v. Primar Typographers, Inc., C.C.H. Fed.Sec.L.Rep. 195,734 (S.D.N.Y. 1976). Apparently the government is of the view that imprisonment will succeed where other sanctions have failed. This may be. But whatever the wisdom of an extension of the “civil incarnation” of § 10(b) to cover the situation presented here, our lawmaking function is severely restricted in the criminal area. As the majority notes, we cannot uphold a conviction unless “a clear and definite statement of the conduct proscribed” antedates the actions alleged to be criminal. Chief Judge Kaufman in United States v. Persky, 520 F.2d 283, 287 (2d Cir. 1975), most perceptively identified the novel issue raised by the application of due process-vagueness-notice principles to § 10(b) criminal prosecutions.
Perhaps the most interesting [issue] is the apparent dissonance between the general rule that criminal statutes are to be strictly construed in favor of the accused . and the realization that the civil incarnations of the anti-fraud provisions have, as remedial legislation, been openly and avowedly construed broadly.
(citations omitted).5 In Persky, this same panel concluded that, as applied to Persky, it could not be said that “the expansive civil *1377interpretations of Rule 10b-5 have so stretched the Rule that he was not provided fair warning that his conduct was fraudulent by the standard of strict construction due criminal statutes.” Id. Persky, a securities lawyer and an officer of Microthermal Applications, Inc., engaged in a series of maneuvers, including filing false SEC reports, issuing misleading press releases, and making misrepresentations to Microthermal’s shareholders, all calculated to cover up the president’s misappropriation of company funds. Not only was Persky an insider owing a clear common law duty to the shareholders of his company, but his actions, designed to use his position of trust to further his own interest at the shareholders’ expense, would fall within the most restrictive definition of “fraud.” We specifically left open the possibility that § 10(b) might be unconstitutionally vague, in a criminal context, as applied to other behavior when we noted that Persky had no standing to challenge the law “on behalf of those whose conduct would be more ambiguous but who are not before us.” Id. at 288.
I believe that the “clear and definite statement of the conduct proscribed” to which the majority concedes a defendant is entitled, must emanate from the language of the statute itself, from prior judicial interpretation, or from established custom and usage. Thus I fail to see the relevance to this issue of the warning signs posted by Pandick. While they would be most relevant to questions of willfulness, knowledge, or intent, signs posted by a private party can hardly transform conduct otherwise not covered by a particular statute into conduct prohibited by that statute. Under our system only the legislature, not the private citizen, has this power.6
The majority has failed to uncover a sufficiently clear statement prohibiting Chiarella’s actions to warrant imposition of a criminal sanction.7 I wholeheartedly endorse the majority’s explanation of the desirability and necessity of curbing the ability of those with access to nonpublic information to trade without making disclosure. And I recognize that as a civil, remedial statute § 10(b) has been and should be interpreted in a flexible fashion by the courts. Yet we cannot be deaf to recent caveats issued by the Supreme Court in slowing down the expansion of § 10(b) lest it take over “the whole corporate universe.” Santa Fe Industries, Inc. v. Green, supra, 430 U.S. at 480, 97 S.Ct. at 1304. We have been urged to turn first to the language of § 10(b) in ascertaining congressional intent. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). We have been chided for relying on “the term ‘fraud’ in Rule 10b-5 to bring within the ambit of the Rule all breaches of fiduciary duty in connection with a securities transaction” lest we add a gloss to the statute “ ‘quite different from its commonly accepted meaning.’ ” Santa Fe Industries, Inc. v. Green, supra, 430 U.S. at 472, 97 S.Ct. at 1300. The brakes have been applied in the context of private causes of action under § 10(b). Surely we should be even more fastidious in our construction of the statute when we are asked to review a *1378criminal conviction. Here, Chiarella was sentenced to a one year term of imprisonment, suspended except for one month, and a five year term of probation.

Conclusion.

Despite some dicta concerning the purpose behind the securities laws, see e. g., SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 847-48, “no case has held that there must be parity of material information between the parties to a securities transaction.” Fleischer, Mundheim & Murphy, supra, 121 U.Pa.L.Rev. at 806. The disclosure duty has been imposed on insiders, broker-dealers, Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir. 1970), and those undertaking a special relationship with buyers or sellers of stock, Affiliated Ute Citizens v. United States, supra, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741. “The problem in the silence cases is to identify the circumstances which trigger a duty to come forward with information.” Fleischer, Mundheim & Murphy, supra, 121 U.Pa.L.Rev. at 803. To identify judicially a new triggering circumstance — regular receipt of market information — if appropriate at all, is not appropriate here. The criminal aspects of 10b-5 have been neither extensive nor significant prior .to today. 3 Bromberg, supra, § 10.3 at 241. The ability of the SEC to function will not be severely hampered if it must await congressional action or action by its own rulemakers to correct any market distortion caused by wayward printers. As would any agency, the SEC would like to keep as many weapons in its arsenal as possible. But there are rules of combat, and our job is to see that the amenities are observed when the SEC embarks on a new crusade.
I would reverse the judgment of conviction and remand with instructions to dismiss the indictment.

. Indeed, this Court sitting en banc has stated that “to read Rule 10b-5 as placing an affirmative duty of disclosure on persons who in contrast to ‘insiders’ or broker-dealers did not occupy a special relationship to a seller or buyer of securities, would be occupying new ground and would require most careful consideration.” SEC v. Great American Industries, Inc., 407 F.2d 453, 460 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 920, 89 S.Ct. 1770, 23 L.Ed.2d 237 (1969).

. See § 1603 and accompanying notes, particularly comment 3(d). American Law Institute, Federal Securities Code (Proposed Official Draft, March 15, 1978).

. This case does not involve the prosecution of a “novel or atypical” type of fraud. See, e. g., United States v. Brown, 555 F.2d 336 (2d Cir. 1977); A. T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 1967). Brown and Periow involved ingenious schemes which, while novel, were clearly fraudulent under any definition of the term fraud. In contrast, Chiarella was prosecuted for trading without disclosing nonpublic, non-inside information. Failure to make such disclosure is fraudulent only when a duty to disclose is violated. See General Time Corp. v. Talley Industries, Inc., 403 F.2d 159 (2d Cir. 1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969) (permitting company to purchase target stock without disclosing plans for merger); SEC v. Great American Industries, Inc., supra, 407 F.2d at 460.

. Because the question is not before us I express no opinion as to whether the SEC has been delegated the power to regulate printers engaged in securities work or whether congressional action is required.
Either the legislative or the administrative process would make possible the imposition of trading restrictions responsive to the different possibilities for abuse of nonpublic information by outsiders as opposed to insiders. Contrary to the majority’s statement, unfair advantage over other traders is not the only evil that insider trading restrictions are intended to avoid. The subtle infection of corporate decision-making by considerations of personal gain and other conflicts of interests inimical to the insider’s duty to the corporation are also prevented by § 10(b) disclosure requirements, as well as by provisions like § 16 of the 1934 Act (regulating short swing profits). Study of the “market insider” problem and possible cures might yield a mechanism more precisely tailored to prevent the perceived evil without opening the door to those that the Court has not been given the opportunity to consider. For example, the impact, if any, of our decision on the practice of “warehousing” by tender offerors deserves thought. See, for discussion of warehousing, Fleischer, Mundheim & Murphy, An Initial Inquiry into the Responsibility to Disclose Market Information, 121 U.Pa.L. Rev. 798, 811-15 (1973).

. Compare the Supreme Court’s cautious and restrictive interpretation of the Sherman Act in a recent criminal price fixing case in light of the fact that “the Act has not been interpreted as if it were primarily a criminal statute” but rather has been construed with great flexibility. United States v. United States Gypsum Co., _ U.S. _, _, 98 S.Ct. 2864, 2874, 57 L.Ed.2d 854 (1978). The same accommodation of criminal and remedial sanctions is necessitated by the structure and history of the securities acts. See also United States v. Winston, 558 F.2d 105, 108 (2d Cir. 1977), overturning a conviction under the Railway Labor Act: “The paucity of criminal proceedings under [45 U.S.C. § 152], when contrasted with the active pursuit of civil relief thereunder, strongly supports appellants’ contention that Congress intended criminal sanctions to apply only to the more egregious violations. Although the fail*1377ure to enforce a statute over an extended period of time does not result in its repeal, . . . the ‘gloss which life has written upon it’ . . . indicates in this instance that strict construction of its terms is appropriate.” (footnotes and citations omitted).

. Nor would Chiarella’s subjective view that his conduct was violative of the securities laws transform his actions, no matter how worthy of condemnation, into conduct criminal under §§ 10(b) and 32(a). See United States v. Zacher, 586 F.2d 912, 916-17 (2d Cir. 1978). For the same reason, civil consent decrees, entered into by parties who may want to avoid further litigation for any number of reasons, cannot transform behavior denounced by the SEC into criminal conduct.

. As Chief Judge Kaufman has observed, the “exact nature and scope” of the federal law governing tippee trader liability “remain in a formative stage.” Schein v. Chasen, 478 F.2d 817, 828 (2d Cir. 1973) (Kaufman, J., dissenting), vacated on other grounds, 416 U.S. 386, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974).