Court Opinion

ID: 9482208
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:43:27.055251+00
Date Added: 2024-06-11T17:48:50.172924
License: Public Domain

WINTER, Circuit Judge
(joined by OAKES, Chief Judge, NEWMAN, KEARSE, and McLAUGHLIN, Circuit Judges), concurring in part and dissenting in part:
I concur in the decision to affirm Chest-man’s convictions under Section 14(e) of the *572Securities Exchange Act of 1934 (“ ’34 Act”), and under Rule 14e-3. I respectfully dissent, however, from the reversals of his convictions under Section 10(b) and under the mail fraud statute, 18 U.S.C. § 1341 (1988).
1) INSIDER TRADING
The difficulty this court finds in resolving the issues raised by this appeal stems largely from the history of the development of the law concerning insider trading. For that reason, I begin by tracing that history in somewhat tiresome fashion.
a) Statutory Law and Caselaw
The legal rules governing insider trading under Section 10(b) are based solely on administrative and judicial caselaw. This caselaw establishes that some trading on material nonpublic information is illegal and some is not. The line between the two is less than clear. Although Congress has enhanced the penalties for illegal insider trading, see Insider Trading Sanctions Act of 1984, Pub.L. No. 98-376, 98 Stat. 1264,1 it has not defined the criteria by which legal insider trading is separated from illegal trading. And, although the Securities and Exchange Commission (“SEC”) seems to take a somewhat more expansive view of what is illegal than the courts, see Complaint in SEC v. Phillip J. Stevens, No. 91 Civ. 1869 (S.D.N.Y. filed Mar. 19, 1991) (insider trading suit where sole allegation of benefit to insider was that selective leaking would enhance insider’s reputation); see also Coffee, The SEC and the Securities Analyst, N.Y.L.J. May 30, 1991, at 5, col. 1, the SEC has, apart from Rule 14e-3, forgone the opportunity to use its rulemak-ing power to define what insider trading is.
Federal regulation of insider trading began with the passage of Section 16(b) of the ’34 Act. 15 U.S.C. § 78p (1988). That provision regulates short-swing trading by insiders and requires that they disgorge any profits from such trading to the corporation. Until 1961, it constituted the sole federal regulation of insider trading. Section 16(b) regulates trading over a statutorily-defined six-month period without regard to the purpose of the trading or its basis in nonpublic information, id. § 78p(b) (“irrespective of any intention”), defines insider precisely as a holder of 10 percent of the corporation’s shares (“directly or indirectly the beneficial owner of more than 10 per centum”), or as a director or an officer, id. § 78p(a), and provides a mechanical method of determining “profits” under which disgorgement is required even when the trades as a whole have resulted in losses, id. § 78p(b) (“any sale and purchase ... within any period of less than six months”); see Gratz v. Claughton, 187 F.2d 46, 50-52 (2d Cir.), cert. denied, 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353 (1951). As a result, Section 16(b)’s enforcement by courts has led to no more, and perhaps fewer, problems of statutory interpretation than have resulted from any other provision of federal securities law.
The existence of Section 16(b), which indicates that Congress expressly addressed the issue, might well have led the SEC and the courts to conclude that Congress intended that Section 16(b) be the sole provision governing insider trading. No other provision explicitly addresses the problem, and Section 16(b) eliminates what is perhaps the most obvious danger inherent in insider trading, namely the creation of an incentive for directors or officers to make share price volatile in order to profit from short-swing trading.2 Moreover, one might *573have inferred from Section 16(b)’s mechanical approach, ignoring purpose and actual profit, that regulation of insider trading without legislative or regulatory guidelines would involve a mare’s nest of analytic and definitional problems.
Nevertheless, in 1961 the SEC held that insider trading might also violate Section 10(b) of the ’34 Act. See Cady, Roberts & Co., 40 SEC 907 (1961). Although Section 10(b) is familiar to any federal judge with a month of service, it is worth quoting its pertinent language:
It shall be unlawful for any person, directly or indirectly
* * * * * *
(b) To use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe....
15 U.S.C. § 78j (1988). The regulation promulgated by the SEC pertinent to the instant case is Rule 10b-5. That rule reads:
It shall be unlawful for any person, directly or indirectly ...
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, 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.
17 C.F.R. § 240.10b-5 (1990).
Even the most fervent opponents of insider trading must concede that the language of Section 10(b) and Rule 10b-5 is at best a general authorization to the SEC and to the courts to fashion rules founded largely on those tribunals’ judgments as to why insider trading is or is not fraudulent, deceptive or manipulative. That much was evident in Cady, Roberts & Co. itself, which was decided almost a generation after Section 10(b) had been passed and yet was without direct precedent. The grounds for the decision are also worth quoting in detail:
We have already noted that the anti-fraud provisions are phrased in terms of ‘any person’ and that a special obligation has been traditionally required of corporate insiders, e.g., officers, directors and controlling stockholders. These three groups, however, do not exhaust the classes of persons upon whom there is such an obligation. Analytically, the obligation 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 it is unavailable to those with whom he is dealing.... 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. Intimacy demands restraint lest the uninformed be exploited.
* * * * * *
We cannot accept respondents’ contention that an insider’s responsibility is limited to existing stockholders and that he has no special duties when sales of securities are made to non-stockholders. This approach is too narrow. It ignores the plight of the buying public — wholly unprotected from the misuse of special information.
... Whatever distinctions may have existed at common law based on the view that an officer or director may stand in a fiduciary relationship to existing stock*574holders from whom he purchases but not to members of the public to whom he sells, it is clearly not appropriate to introduce these into the broader anti-fraud concepts embodied in the securities acts.
Respondents further assert that they made no express representations and did not in any way manipulate the market, and urge that in a transaction on an exchange there is no further duty such as may be required in a ‘face-to-face’ transaction. We reject this suggestion. It would be anomalous indeed if the protection afforded by the antifraud provisions were withdrawn from transactions effected on exchanges, primary markets for securities transactions. If purchasers on an exchange had available material information known by a selling insider, we may assume that their investment judgment would be affected and their decision whether to buy might accordingly be modified. Consequently, any sales by the insider must await disclosure of the information.
(footnotes omitted). Cady, Roberts & Co. thus adopted a rule against insider trading with two elements: (i) a trader’s relationship giving special access to corporate information not intended for private use and (ii) the unfairness resulting from trading with those who lack the informational advantage afforded by that special access. Under the theory of Cady, Roberts & Co., the second element furnishes the fraud or deception that links the prohibition on insider trading to Section 10(b).
In SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969) (“TGS”), we adopted the dual element rule of Cady, Roberts & Co. We also noted, however, that Cady, Roberts & Co. — which involved a tippee who was a partner in a brokerage firm that employed a director, the tipper, of the corporation in question — had stated that Section 10(b)’s ban on insider trading applied to more than traditional insiders such as officers, directors and controlling stockholders. 401 F.2d at 848. We thus stated that “anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.” Id. We stressed that Congress wanted investors to “be subject to identical market risks.” Id. at 852. Section 10(b)’s ban on insider trading was thus designed to eliminate “inequities based upon unequal access to knowledge.” Id.
TGS thus emphasized the second element in Cady, Roberts & Co., the perceived unfairness to those who trade with the insider. Although each trader in TGS probably had a relationship to the corporation with regard to the information in question sufficient to satisfy the first element of Cady, Roberts & Co., TGS suggested that possession of material, nonpublic information, however acquired, was sufficient by itself to trigger an obligation to disclose or abstain from trading.
In a subsequent decision, United States v. Chiarella, 588 F.2d 1358 (2d Cir.1978), rev’d, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), we affirmed the conviction of an employee of a printer who determined from coded takeover documents the identity of target corporations and thereafter purchased stock in those corporations. The basis for our decision tracked TGS, namely, the perceived unfairness of trading on information that is not generally available. We thus stated, “[a]nyone — corporate insider or not — who regularly receives material nonpublic information may not use that information to trade in securities without incurring an affirmative duty to disclose. And if he cannot disclose, he must abstain from buying or selling.” 588 F.2d at 1365 (emphasis in original, footnote omitted). In a footnote to the quoted passage, we noted that Chiarella was legally disabled from disclosing because he owed a duty to his employer not to reveal confidential information belonging to the employer’s clients. Id. at 1365 n. 9. Chiarella thus extended the ban on insider trading to “anyone,” limited only by the phrase “regularly receives,” and relegated the role of Cady, Roberts & Co.’s first element — a *575relationship to the firm giving access to confidential corporate information — to eliminating the option of disclosure (and thus trading) by insiders.
Our rationale seemed overbroad, to many, including the Solicitor General, whose task it was to defend the judgment we had affirmed. The brief filed in the Supreme Court on behalf of the government thus downplayed the fact that Chiarella had traded on information unavailable to others and instead relied upon the first reason given in Cady, Roberts & Co., namely, that Chiarella’s trading was based on information that belonged to his employer’s clients. See Brief for Government at 70-71 n. 48, Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980); East-erbrook, supra, at 314-15.
The Supreme Court reversed Chiarella. However, rather than making an ab initio determination of whether Section 10(b) prohibited insider trading, the Court described the state of the caselaw in the SEC and lower federal courts, including Cady, Roberts & Co. and TGS, and impliedly adopted that caselaw. 445 U.S. at 225-30, 100 S.Ct. at 1113-16. Notwithstanding its seeming adoption of that caselaw, the Court’s opinion rejected the view that any trading on material nonpublic information triggered a duty to disclose. Id. at 231-35,100 S.Ct. at 1116-18. It reasoned that fraud must be shown under Section 10(b) and that silence cannot constitute a fraud absent a duty to speak owed to those who are injured. Id. at 232-33, 100 S.Ct. at 1116-17. Because Chiarella had no prior dealings with those from whom he bought the stock, was not their agent, fiduciary or someone in whom they placed trust — as is true of all buyers and sellers trading on impersonal exchanges — Chiarella owed those from whom he purchased stock no duty to disclose before trading. Id. The Court declined to decide whether his conviction might be affirmed on the theory advanced by the Solicitor General that he had breached a duty to his employer’s clients, the acquiring corporations, because the instructions to the jury did not include that theory. Id. at 235-36, 100 S.Ct. at 1118-19.
Although Chiarella’s description of prior caselaw appeared to adopt Cady, Roberts & Co. and TGS, it cannot be reconciled with those decisions. By explicitly holding that Chiarella’s access to material nonpublic information did not create a duty on Chiarella's part to those from whom he purchased stock of the target corporations, Chiarella is inconsistent with Cady, Roberts & Co., which explicitly found a duty to those with whom the trader dealt even when the trade was made on an impersonal exchange. 40 S.E.C. at 912-13. Moreover, Chiarella stated that even if the informational edge insiders have over those with whom they trade is unfair, that advantage was not fraud under Section 10(b). 445 U.S. at 232, 100 S.Ct. at 1116-17.
The Chiarella opinion is thus an enigma. It appears to state that Section 10(b) bars some kinds of insider trading. However, it rejects the element of Cady, Roberts & Co. that provided the fraud or deception linking the conduct to the provisions of Section 10(b).
Matters were clarified a tad in Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). Dirks had learned from employees of Equity Funding that the corporation had systematically and fraudulently overstated its assets. Id. at 649,103 S.Ct. at 3258-59. Dirks informed his clients and the Wall Street Journal as well. His clients, who could sell their Equity Funding shares without risking a libel action, acted on Dirks’ information while the Journal did not. Id. at 649-50, 103 S.Ct. at 3258-59. The SEC commenced a proceeding against Dirks on the ground that he had illegally aided and abetted insider trading by informing his clients of the material nonpublic information that Equity Funding was a fraud. The Supreme Court disagreed.
In the Court’s view, a tippee such as Dirks may be liable under Section 10(b) if the tipper breaches a fiduciary obligation by transmitting the material nonpublic information to the tippee. Id. at 661-64, 103 S.Ct. at 3265-66. Whether the tip breaches such a fiduciary obligation depends upon *576whether the tipper “receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputa-tional benefit that will translate into future earnings.” Id. at 663, 103 S.Ct. at 3266. “The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of profits to the recipient.” Id. at 664, 103 S.Ct. at 3266.
However, the Court concluded that Dirks owed no duty to Equity Funding, its shareholders, or, under Chiarella, to those who purchased stock from his clients. Id. at 665, 103 S.Ct. at 3267. Moreover, it also held that the employees of Equity Funding who had provided information to Dirks breached no duty to Equity Funding or its shareholders. Id. at 666, 103 S.Ct. at 3267. The Court noted that the employees neither had received a benefit from their disclosure to Dirks nor had intended to make a gift of such information to Dirks. Id. at 667, 103 S.Ct. at 3268. Instead, they were motivated soley by a desire to expose fraud. Id. It also noted that their action prevented the fraud from continuing and injuring yet new victims. Id. at 666, n. 27, 103 S.Ct. at 3267, n. 27.
Apart from the 4-4 vote in Carpenter v. United States, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987), regarding the so-called misappropriation theory, Supreme Court caselaw regarding insider trading under Section 10(b) stops with Dirks. Omitted from the Court’s opinions is a statement of the reasons why Section 10(b) prohibits the kind of trading the Court has declared to be illegal. Having rejected the Cady, Roberts & Co. theory of fraud or deception in the superiority of information available to the inside trader and a resultant duty in the trader to the persons with whom trading occurs, the Court’s decisions have severed the link to Section 10(b) perceived in prior caselaw. While Dirks has established a rule concerning the insider’s breach of an obligation to the corporation whose shares are traded, the Court’s rationale is obscure, and, as a result, so is the scope of the rule.
Notwithstanding the ambiguities surrounding Section 10(b)’s impact on insider trading — including its very definition — Congress has increased the penalties for violations of that prohibition. See Insider Trading Sanctions Act of 1984, Pub.L. No. 98-376, 98 Stat. 1264. The SEC in turn has failed to promulgate rules outside the area of tender offers but its decisions have continued to march, in the eyes of one commentator, to the beat of its own drummer. See Coffee, supra, at 5., col. 1 (“in Stevens ... the SEC has announced a theory that trivializes Dirks”).
It is hardly surprising that disagreement exists within an in banc court of appeals as to the import of present caselaw. Nor is it surprising that the lower courts have added to the Dirks breach of duty doctrine a misappropriation of information doctrine, which prohibits trading in securities based on material, nonpublic information acquired in violation of a duty to any owner of such information, whether or not the owner is the corporation whose shares are traded. See SEC v. Materia, 745 F.2d 197, 203 (2d Cir.1984) (“one who misappropriates [material] nonpublic information in breach of a fiduciary duty and trades on that information” violates Section 10(b) and Rule 10b-5); cert. denied, 471 U.S. 1053, 105 S.Ct. 2112, 85 L.Ed.2d 477 (1985); accord SEC v. Cherif, 933 F.2d 403, 408-10 (7th Cir.1991); SEC v. Clark, 915 F.2d 439, 443-49 (9th Cir.1990); Rothberg v. Rosenbloom, 771 F.2d 818, 822 (3d Cir.1985).
b) Property Rights in Inside Information
One commentator has attempted to explain the Supreme Court decisions in terms of the business-property rationale for banning insider trading mentioned in Cady, Roberts & Co. See Easterbrook, supra, at 309-39. That rationale may be summarized as follows. Information is perhaps the most precious commodity in commercial markets. It is expensive to produce, and, because it involves facts and ideas .that can be easily photocopied or carried in one’s head, there is a ubiquitous risk that those *577who pay to produce information will see others reap the profit from it. Where the profit from an activity is likely to be diverted, investment in that activity will decline. If the law fails to protect property rights in commercial information, therefore, less will be invested in generating such information. Id. at 313.
For example, mining companies whose investments in geological surveys have revealed valuable deposits do not want word of the strike to get out until they have secured rights to the land.3 If word does get out, the price of the land not only will go up, but other mining companies may also secure the rights. In either case, the mining company that invested in geological surveys (including the inevitably sizeable number of unsuccessful drillings) will see profits from that investment enjoyed by others. If mining companies are unable to keep the results of such surveys confidential, less will be invested in them.
Similarly, firms that invest money in generating information about other companies with a view to some form of combination will maintain secrecy about their efforts, and if secrecy cannot be maintained, less will be invested in acquiring such information. Hostile acquirers will want to keep such information secret lest the target mount defensive actions or speculators purchase the target’s stock. Even when friendly negotiations with the other company are undertaken, the acquirer will often require the target corporation to maintain secrecy about negotiations, lest the very fact of negotiation tip off others on the important fact that the two firms think a combination might be valuable. See, e.g., Staffin v. Greenberg, 672 F.2d 1196, 1207 n. 12 (3d Cir.1982) (“If, as is often the ease, a merger will benefit both the acquired company and its shareholders, an insider may be obliged to maintain strict confidentiality to avoid ruining the corporate opportunity through premature disclosure. Indeed, the record is clear in this case that [the buyer] very nearly withdrew from merger discussions upon hearing of [the seller’s] ... press release.”); Flamm v. Eberstadt, 814 F.2d 1169, 1174-79 (7th Cir.) (“[Potential acquirers ... may fear that premature disclosure may spark competition that will deprive them of part of the value of their effort, so that bids in a world of early disclosure will be lower than bids in a world of deferred disclosure.”), cert. denied, 484 U.S. 853, 108 S.Ct. 157, 98 L.Ed.2d 112 (1987). In the instant matter, A & P made secrecy a condition of its acquisition of Waldbaum’s.
Insider trading may reduce the return on information in two ways. First, it creates incentives for insiders to generate or disclose information that may disregard the welfare of the corporation. Easterbrook, supra, at 332-33. That risk is not implicated by the facts in the present case, and no further discussion is presently required.
Second, insider trading creates a risk that information will be prematurely disclosed by such trading, and the corporation will lose part or all of its property in that information. Id. at 331. Although trades by an insider may rarely affect market price, others who know of the insider’s trading may notice that a trader is unusually successful, or simply perceive unusual activity in a stock and guess the information and/or make piggyback trades.4 Id. at 336. A broker who executes a trade for a geologist or for a financial printer may well draw relevant conclusions. Or, as in the instant matter, the trader, Loeb, may tell his or her broker about the inside information, who may then trade on his or her account, on clients’ accounts, or may tell *578friends and relatives. One inside trader has publicly attributed his exposure in part to the fact that the bank through which he made trades piggybacked on the trades, as did the broker who made the trades for the bank. See Levine, The Inside Story of An Inside Trader, Fortune, May 21, 1990, at 80. Once activity in a stock reaches an unusual stage, others may guess the reason for the trading — the corporate secret. Insider trading thus increases the risk that confidential information acquired at a cost may be disclosed. If so, the owner of the information may lose its investment.
This analysis provides a policy rationale for prohibiting insider trading when the property rights of a corporation in information are violated by traders. However, the rationale stops well short of prohibiting all trading on material nonpublic information. Efficient capital markets depend on the protection of property rights in information. However, they also require that persons who acquire and act on information about companies be able to profit from the information they generate so long as the method by which the information is acquired does not amount to a form of theft. A rule commanding equal access would result in a securities market governed by relative degrees of ignorance because the profit motive for independently generating information about companies would be substantially diminished. Easterbrook, supra, at 313-14. Under such circumstances, the pricing of securities would be less accurate than in circumstances in which the production of information is encouraged by legal protection.
One may speculate that it was for these reasons that the Supreme Court declined in Chiarella to adopt a broad ban on trading on material nonpublic information5 and then imposed in Dirks a breach of fiduciary duty requirement — not running to those with whom the trader buys or sells. Under the Dirks rule, insider trading is illegal only where the trader has received the information as a result of the trader’s or tipper’s breach of a duty to keep information confidential.
The misappropriation theory adopted by several circuits fits within this rationale. Misappropriation also involves the misuse of confidential information in a way that risks making information public in a fashion similar to trading by corporate insiders. In U.S. v. Carpenter, 791 F.2d 1024 (2d Cir.1986), aff'd, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987), for example, where the information belonged to the Wall Street Journal rather than to the corporations whose shares were traded, the misuse of information created an incentive on the part of the traders to create false information that might affect the efficiency of the market’s pricing of the corporations’ stock. Moreover, the potential for piggybacking would add to that inefficiency.
It must be noted, however, that, although the rationale set out above provides a policy for prohibiting a specific kind of insider trading, any obvious relationship to Section 10(b) is presently missing because theft rather than fraud or deceit, seems the gravamen of the prohibition. Indeed, Carpenter analogized the conduct there to embezzlement. 791 F.2d at 1033 n. 11. Nevertheless, the law is far enough down this road — indeed, the Insider Trading Sanctions Act seems premised on Section 10(b)’s applicability — that a court of appeals has no option but to continue the route.
*579c) The Instant Case
When this analysis is applied to a family-controlled corporation such as that involved in the instant case, I believe that family members who have benefitted from the family’s control of the corporation are under a duty not to disclose confidential corporate information that comes to them in the ordinary course of family affairs. In the case of family-controlled corporations, family and business affairs are necessarily intertwined, and it is inevitable that from time to time normal familial interactions will lead to the revelation of confidential corporate matters to various family members. Indeed, the very nature of familial relationships may cause the disclosure of corporate matters to avoid misunderstandings among family members or suggestions that a family member is unworthy of trust.
Keith Loeb learned of the pending acquisition of Waldbaum’s by A & P through precisely such interactions. His wife Susan was asked one day by her sister to take carpool responsibilities for their children. When Susan inquired as to why this was necessary, the sister was vague and said that she had to take their mother somewhere. After further inquiry, the sister flatly declined to tell Susan what was going on. Susan did not say, “Gee, confidential corporate information must be involved, and I have no right to such information.” Instead, concerned about her mother’s ongoing health problems, Susan made direct inquiry of her mother, who revealed that Susan’s sister took her to get stock certificates to give to Ira Waldbaum for the initial phase of the A & P acquisition. The mother swore Susan to secrecy, telling Susan that the acquisition would be very profitable to the family and premature disclosure could ruin the deal. Susan then asked whether she could tell her husband Keith. Instead of saying, “No, Keith may be your husband but you are to button your lips in his presence,” her mother assented but warned against disclosure to anyone else.
Susan and Keith Loeb jointly owned a large number of Waldbaum shares at that time, all of which had been a gift from her mother. The Loebs’ children also owned shares received as a gift from their grandmother. Susan told Keith about the A & P acquisition in the course of discussing the financial benefits they and their children would receive as a result of that transaction. She stressed the need for absolute secrecy. Susan testified that she and her husband had shared confidences in the past and that on each such occasion they had indicated to each other that the confidences would be respected. Thereafter, Keith Loeb informed Chestman about the A & P acquisition in the hope of making a profit.
I have little difficulty in concluding that Chestman’s convictions can be affirmed on either the Dirks rule or on a misappropriation theory. The disclosure of information concerning the A & P acquisition among Ira Waldbaum’s extended family was the result of ordinary familial interactions that can be expected in the case of family-controlled corporations. Members of a family who receive such information are placed in a position in which their trading on the information risks financial injury to the corporation, its public shareholders and other family members. When members of a family have benefitted from the family’s control of a corporation and are in a position to acquire such information in the ordinary course of family interactions, that position carries with it a duty not to disclose. The family relationship gives such members access to confidential information, not so that they can trade on it but so that informal family relationships can be maintained. The purpose of allowing this access can hardly be fulfilled if there is no accompanying duty not to trade. Such a duty is of course based on mutual understandings among family members — quite explicit in this case — and owed to the family. However, the duty originates in the corporation and is ultimately intended to protect the corporation and its public shareholders. The duty is thus also owed to the corporation, to a degree sufficient in my view to trigger the Dirks rule. Because trading on inside information so acquired by family members amounts to theft, the misappropriation theory also applies.
*580Under my colleagues’ theory, the disclosure of family corporate information can be avoided only by family members extracting formal, express promises of confidentiality or by elderly mothers in poor health refusing to tell their daughters about mysterious travels. If disclosure is made, daughters may not disclose their mother’s doings or potential financial benefits to the daughters’ husbands without a formal, express promise of confidentiality. If, for example, Susan had earlier shared with Keith her concerns about her mother’s mysterious travels before learning of their purpose, she would not have been able to tell him what she later learned about those travels no matter how persistently he asked. For my colleagues in the majority, the critical gap in the government’s case was that Susan did not testify either that on this occasion Keith agreed not to disclose the pending acquisition by A & P or that prior confidential communications between her and her husband had involved the Wald-baum’s corporation.
I have no lack of sympathy with my colleagues’ concern about the difficulty of drawing lines in this area. Nevertheless, the line they draw seems very unrealistic in that it expects family members to behave like strangers toward each other. It also leads to the perverse and circular result that where family business interests are concerned, family members must act as if there are no mutual obligations of trust and confidence because the law does not recognize such obligations. Under such a regime, parents and children must conceal their comings and goings, family members must cease to speak when a son-in-law enters a room, and offended members of the family must understand that such conduct is always related only to business.
The law may have been reluctant to recognize obligations based solely on family relationships. However, the failure to recognize these commonly observed obligations as legal obligations is in large part derived from a concern that intra-family litigation would exacerbate strained relationships and weaken rather than strengthen the sense of mutual obligation underlying family relationships. See, e.g., Kilgrow v. Kilgrow, 268 Ala. 475, 107 So.2d 885 (1958) (judicial intervention in family affairs more likely to serve as “spark to a smoldering fire” than to prevent disruption); McGuire v. McGuire, 157 Neb. 226, 59 N.W.2d 336 (1953) (no action for maintenance and support where married couple living together).
This concern, however, is of no weight where insider trading is concerned. In such cases, the litigation is almost universally brought by the government or third party. Moreover, where the family connection to the corporation has benefitted the trader, the relationship is commercial as well as familial, and disclosure is potentially injurious to the corporation and public shareholders as well as other members of the family.
I thus believe that a family member (i) who has received or expects (e.g., through inheritance) benefits from family control of a corporation, here gifts of stock, (ii) who is in a position to learn confidential corporate information through ordinary family interactions, and (iii) who knows that under the circumstances both the corporation and the family desire confidentiality, has a duty not to use information so obtained for personal profit where the use risks disclosure. The receipt or expectation of benefits increases the interest of such family members in corporate affairs and thus increases the chance that they will learn confidential information. Disclosure in the present case occurred in the course of a discussion that included, inter alia, an examination of the benefits of the A & P acquisition to Susan, Keith and their children. Susan’s warning to Keith about secrecy was clearly intended to protect the corporation as well as the family and clearly had originated with Ira Waldbaum. In such circumstances, Susan’s saying “Don’t tell” is enough for me. Not to have such a rule means that a family-controlled corporation with public shareholders is subject to greater risk of disclosure of confidential information than is a corporation that is entirely publicly owned.
I see no room for argument over whether there was sufficient evidence for the *581jury to find that Chestman knew Keith Loeb was violating an obligation. The record fairly brims with Chestman’s consciousness that Keith Loeb was behaving improperly. Loeb’s initial message asked for a return call “asap.” When they spoke, Loeb told Chestman that he, Loeb, had some “definite, some accurate information” that Waldbaum’s was about to be sold at a price substantially greater than that at which it was trading. Chestman had been a broker for fourteen years, and the jury would have little trouble finding that he knew that, if word of the A & P acquisition had not already gotten out, profiting from purchases of Waldbaum’s stock was as close to a sure thing as there can be in the securities market. Instead of telling Loeb to buy, however, Chestman said that he could not tell him what to do “in a situation like this” and told Loeb to make up his own mind. Clearly, Chestman’s and Loeb’s concerns were not about the commercial wisdom, but rather about the propriety, of Loeb’s trading on the “definite” and “accurate” information. Indeed, Loeb did not give Chestman an order to buy Wald-baum’s shares, and their conversation ended on an inconclusive note.
The only explanation for Chestman’s and Loeb’s failing to agree upon the entirely obvious course of buying Waldbaum’s stock was their consciousness that Loeb’s trading would be improper. This conclusion is strengthened by Chestman’s conduct thereafter. Having failed to advise Loeb to buy, Chestman sought information as to whether there was unusual activity in Waldbaum’s stock, and, learning there was not, bought Waldbaum’s stock for his and his clients’ accounts, including Loeb’s. Chestman’s attempt at concealment when he recorded the purchases for all of his clients but Loeb further showed Chest-man’s knowledge that Loeb was acting improperly. The evidence was thus more than sufficient to show Chestman’s knowledge that Loeb was breaching an obligation of non-disclosure.
2) RULE 14e-3
I have little difficulty in concurring in the affirmance of Chestman’s conviction for violating Section 14(e) and Rule 14e-3. Although the rule lacks a specific reference to a duty not to disclose, the sources of information specified in that rule — “(1) The offering person, (2) The issuer ... or (3) Any officer, director, partner or employee or any other person acting on behalf of the offering person or such issuer” — all have such a duty under state law not to disclose nonpublic information concerning tender offers. Information relating to tender offers is always either notoriously public or a carefully guarded secret. The sources of information designated by the rule are necessarily under an obligation by reason of their very position not to disclose such nonpublic information. One who receives such information knowing the source can be held to know of a breach of duty. The rule is thus in the nature of a traditional prophylactic rule. Although the use of the word “indirectly” may lend itself to some extension down the line of tippees and tippers, it is sufficiently cabined to circumstances in which the defendant knows of the source. Chestman easily fits that definition.
3) MAIL FRAUD
With regard to appellant’s convictions for mail fraud, my view that they should be affirmed follows from my discussion of the conviction for violations of Sections 10(b) and Rule 10b-5.
I would add a brief observation, however. I am unclear as to whether the breach of duty and the tippee’s knowledge of that breach as required by Dirks is coextensive with the similar requirements in Carpenter. The Dirks rule is derived from securities law, and its limitation to information obtained through a breach of a fiduciary duty is, as noted, influenced by the need to allow persons to profit from generating information about firms so that the pricing of securities is efficient. The Carpenter rule, however, is derived from the law of theft or embezzlement, and a tippee’s liability may be governed by rules concerning the possession of stolen property. Logic is therefore certainly not a barrier to the growth of disparate rules concerning a tippee’s liability depending on wheth*582er Section 10(b) or mail fraud is the source of law. However, because under any such disparity in rules the Section 10(b) charge would be harder to prove than a mail fraud charge, I need not explore the issue further.

. Although the public appears to have a strongly negative view of insider trading, there are academics who believe it to be beneficial, see H. Manne, Insider Trading and the Stock Market (1966), and considerable diversity as to why insider trading should be regulated exists among its academic opponents, see, e.g., Kaplan, Wolf v. Weinstein: Another Chapter on Insider Trading, 1963 Sup.Ct.Rev. 273; Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L.Rev. 322 (1979); Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 Sup.Ct.Rev. 309.

. Some commentators have suggested that Section 16(b) is designed, or at least operates, to increase management’s autonomy from shareholder control because it limits the freedom of owners of large blocs of stock to trade and thus deters institutional investors from acquiring *573such blocs. Roe, A Political Theory of American Corporate Finance, 91 Colum.L.Rev. 10, 27 (1991).

. Although TGS stressed the unfairness of insider trading to those who deal with the trader, the reason for the nondisclosure that allowed insider trading in TGS stock was the company’s insider trading in real estate.

. Section 16(a) of the '34 Act requires insiders to report trades in a corporation’s stock (i) at the time of a new issue, (ii) when they become an insider, and (iii) each month thereafter in which trades occur. Where insiders are able to avoid "profits" as defined in Section 16(b) and trade heavily — e.g., a series of purchases that cannot be matched with sales during the six months at either end of the activity — other traders may well draw accurate inferences. In that respect, federal law causes the information on which insiders are trading to become known.

. Comprehensive protection of those who trade with insiders is unattainable because the most common form of insider trading by far is failing to trade. An insider possessing nonpublic information may purchase or sell other securities or borrow instead of trading in the corporation’s stock. Such trading seems virtually undiscoverable and unregulable, however, although it is functionally indistinguishable from insider trading so far as those who deal with the trader are concerned.
Under the business property rationale, not-trading because of inside information is not the functional equivalent of trading because not-trading creates at most a negligible risk of disclosure of corporate secrets. Unlike trading, not-trading does not involve persons other than the trader, such as brokers, and does not create an unusual volume. But see Easterbrook, supra, at 336-37 (discussing signals sent to such parties by not trading).