Court Opinion

ID: 9480322
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:44:45.154886+00
Date Added: 2024-06-11T17:47:36.851303
License: Public Domain

MAHONEY, Circuit Judge,
concurring in part and dissenting in part:
I agree with Parts I, II and III of Judge Miner’s opinion for the court, reversing Chestman’s securities fraud, mail fraud and perjury convictions. As to Part IV, however, while I agree that the district court’s charge required a finding that Chestman acted “knowingly and wilfully,” negating Chestman’s contention that the jury might have convicted him for merely negligent violations of rule 14e-3, I conclude that the Securities and Exchange Commission (the “Commission”) exceeded its statutorily granted authority by promulgating rule 14e-3 without including any requirement of a breach of fiduciary duty.
It is clear that the district court determined that the rule as promulgated was properly authorized by section 14(e) of the Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78n(e) (1988), see United States v. Chestman, 704 F.Supp. 451, 454-58 (S.D.N.Y.1989), and instructed the jury in accordance with that determination. Chestman’s convictions on all counts, in my view, must accordingly be reversed.
Section 14(e) provides:
It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.
15 U.S.C. § 78n(e) (1988).
The second sentence of this section was added by amendment in 1970, and is the *85purported authorization for the Commission’s promulgation of rule 14e-3 in a form which includes no requirement that a fiduciary duty be breached. Knowing violations of rule 14e-8 are rendered criminal by 15 U.S.C. § 78ff(a) (1988).
Rule 14e-3 provides in pertinent part:
(a) If any person has taken a substantial step or steps to commence, or has commenced, a tender offer (the “offering person”), it shall constitute a fraudulent, deceptive or manipulative act or practice 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:
(1) The offering person,
(2) The issuer of the securities sought or to be sought by such tender offer, or
(3) Any officer, director, partner or employee or any other person acting on behalf of the offering person or such issuer, to purchase or sell or cause to be purchased or sold any of such securities or any securities convertible into or exchangeable for any such securities or any option or right to obtain or to dispose of any of the foregoing securities, unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed by press release or otherwise.
17 C.F.R. § 240.14e-3(a) (1989).
The rule plainly states that “it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e)” to trade on insider information in the tender offer context, absent prior public disclosure of the inside information and its source, without more. Specifically, there is no requirement that any fiduciary duty exist or be violated. I note in this connection that rule 14e-3 was promulgated by the Commission on September 12, 1980, see 45 Fed.Reg. 60,418 (1980), in the immediate aftermath of the Supreme Court’s ruling on March 18, 1980 in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), that a breach of fiduciary duty is essential to establish a violation of section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1988), and rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1989), see Chiarella, 445 U.S. at 229, 100 S.Ct. at 1115; and that “a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.” Id. at 235, 100 S.Ct. at 1118.1
As a general matter, principles developed under rule 10b-5 are applicable in determining whether section 14(e) violations have been committed. Connecticut Nat’l Bank v. Fluor Corp., 808 F.2d 957, 961 (2d Cir.1987) (citing Chris-Craft Indus. v. Piper Aircraft Corp., 480 F.2d 341, 362 (2d Cir.), cert, denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973)). As has been seen, Section 14(e) authorizes the Commission to prescribe rules which will “define ... such acts and practices as are fraudulent, deceptive or manipulative” in the tender offer context. This authorization, however, seems directed at the application of these legal concepts in a relatively novel area (especially in 1970, when section 14(e) was amended to add this language), see Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 11, 105 S.Ct. 2458, 2464, 86 L.Ed.2d 1 (1985) (section 14(e) requires disclosure “more explicitly addressed to the tender offer context than that required by § 10(b)”), rather than to constitute an authorization for the Commission to redefine *86the meaning of the terms “fraudulent, deceptive or manipulative” as established by authoritative Supreme Court interpretations of section 10(b) and rule 10b-5, upon which section 14(e) is concededly modeled. See Schreiber, 472 U.S. at 104 n. 10, 105 S.Ct. at 2462-63 n. 10. In this connection, Schreiber explicitly states that the 1970 amendment to section 14(e) did not effect any change, or authorize the Commission to effect any change, in the basic meaning of the statutory term “manipulative.” Id. at 11 n. 11, 105 S.Ct. at 2464 n. 11. I doubt that greater authority was provided to the Commission to redefine the statutory term “fraudulent.”
I understand that courts defer to administrative agencies in the area of their expertise. See, e.g., Butterton v. Francis, 432 U.S. 416, 425-26, 97 S.Ct. 2399, 2405, 53 L.Ed.2d 448 (1977). However, as the Supreme Court said in rejecting a similar effort by the government (as an amicus curiae) to fashion an excessive breadth for rule 10b-5, “[t]he rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 213, 96 S.Ct. 1375, 1391, 47 L.Ed.2d 668 (1976). Furthermore, “because the governing standard is set forth in a criminal statute [here, 15 U.S.C. § 78ff(a) (1988) in tandem with rule 14e-3], it is appropriate to apply the rule of lenity in resolving any ambiguity in the ambit of the statute’s coverage.” Crandon v. United States, — U.S.-, -, 110 S.Ct. 997, 1001, 108 L.Ed.2d 132 (1990); see also id. at -, 110 S.Ct. at 1006; id. at-, 110 S.Ct. at 1001 (Scalia, J., concurring in the judgment).
I am not persuaded by the government’s contention that subsequent statutory enactments evidence Congressional adoption of the Commission’s view of rule 14e-3. In my view, the very casual references to rule 14e-3 in H.R.Rep. No. 910, 100th Cong., 2d Sess. 14 (1988), reprinted in 1988 U.S.Code Cong. & Admin.News 6043, 6051, and H.R. Rep. No. 355, 98th Cong., 1st Sess. 13 n. 20 (1983), reprinted in 1984 U.S.Code Cong. & Admin.News 2286 n. 20, provide no basis for concluding that later statutory enactments have recognized not only the promulgation and existence of rule 14e-3, but also the Commission’s claim that rule 14e-3 effects an implied repeal of any fiduciary duty requirement in the area of tender offer fraud.
In particular, H.R.Rep. No. 98-355 explicitly states that the legislation on which it reports, the Insider Trading Sanctions Act of 1984, “does not change the underlying substantive case law of insider trading as reflected in judicial and administrative holdings.” Id. at 13. Similarly, H.R. No. 100-910 makes clear that the Insider Trading and Securities Fraud Enforcement Act of 1988 does not address the substantive law of insider trading. Id. at 7.
In view of the foregoing, I conclude that Chestman’s convictions on all counts must be reversed.

. For these reasons, I am unable to agree with the separate concurring opinion of Judge Car-man that rule 14e~3 as promulgated by the Commission, aided by a presumption of regularity, should be read to imply a requirement that a fiduciary duty exist and be breached. I note also that the government brief, signed by the general counsel of the Commission and two other Commission attorneys, implicitly repudiates this view of the Commission's handiwork by vigorously contending that the Commission was authorized to promulgate rule 14e-3 without including any such requirement. In any event, I agree with Judge Carman that section 14(e) of the 1934 Act requires the existence and breach of a fiduciary duty, whether or not rule 14e-3 does, and that Chestman’s convictions for violation of rule 14e-3 (and thus, by necessary implication, section 14(e)) must accordingly be reversed.