Court Opinion

ID: 9482210
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:43:27.063517+00
Date Added: 2024-06-11T17:48:50.180784
License: Public Domain

MAHONEY, Circuit Judge,
concurring in part and dissenting in part:
I concur in Judge Meskill’s opinion for the majority except as to its ruling that the SEC did not exceed its rulemaking authority when it promulgated rule 14e-3(a), from which I respectfully dissent. Accordingly, I am also in disagreement with the brief discussion of this issue in Judge Winter’s separate opinion, which concurs in Judge Meskill’s resolution of the question.
The majority concludes that: “based on the plain language of section 14(e), and congressional activity both before section 14(e) was enacted and after Rule 14-3(a) was promulgated, we hold that the SEC did not exceed its statutory authority in drafting Rule 14e-3(a),” adding that neither Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), nor Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 105 S.Ct. 2458, 86 L.Ed.2d 1 (1985), poses any barrier to this ruling. I will therefore address: (1) the pertinent language of section 14(e), (2) its pre- and post-enactment legislative history, and (3) the impact of Chiarella and Schreiber upon this issue.
As the majority notes, rule 14e-3 “creates a duty in those traders who fall within its ambit to abstain or disclose, without regard to whether the trader owes a preexisting fiduciary duty to respect the confidentiality of the information.” The question presented is whether, in doing so, rule 14e-3(a) properly derives from the second sentence of section 14(e), which states: “The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably de*584signed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.”
The majority opinion swiftly collapses this language into an authorization for the SEC to “define fraud.” If this is a legitimate construction of the statutory language, of course, the issue is decided and does not warrant extended discussion. It is clear, however, that the statute says something significantly different.
The second sentence of section 14(e) authorizes the SEC to define, and prescribe preventive measures for, “such acts and practices as are fraudulent, deceptive, or manipulative.” This statutory mandate became law in 1970, two years after the Williams Act was originally enacted and in the early years of the tender offer phenomenon and its attendant regulation.
Especially in view of this context, the plain meaning of the dispositive language is that the SEC is empowered to identify and regulate, in this (then) novel context, the “acts and practices” that fit within the existing legal categories of the “fraudulent, deceptive, or manipulative,” but not to redefine the categories themselves. Furthermore, these venerable terms are used in section 14(e) in their normal, accepted legal definitions. The Supreme Court has made clear that in adding the 1970 amendment, Congress did not “suggest[] any change in the meaning of the term ‘manipulative’ itself.” Schreiber, 472 U.S. at 11 n. 11, 105 S.Ct. at 2464 n. 11. There is no reason to reach a different conclusion as to the term “fraudulent.” Finally, the focus upon novel and emerging “acts and practices” rebuts the majority’s view that unless the 1970 amendment is deemed to authorize the SEC to engage in creative redefinitions of the terms “fraudulent, deceptive or manipulative,” the amendment will become a meaningless repetition of the preexisting self-operative provisions of section 14(e).
In the majority’s view, moreover, even the meaning of the term “fraudulent” as used in the second sentence of section 14(e) is irrelevant. Because the statute empowers the SEC to “prescribe means reasonably designed to prevent ... such acts and practices as are fraudulent,” the majority concludes that the statutory authorization “necessarily encompasses the power to proscribe conduct outside the purview of fraud, be it common law or SEC-defined fraud.”
This is a truly breathtaking construction of a delegation to the SEC, we must bear in mind, of the authority to prescribe a federal felony. See 15 U.S.C. § 78ff(a) (1988) (defining any willful violation of the Securities Exchange Act of 1934, “or any rule or regulation thereunder,” as a felony subject to ten years imprisonment and a $1,000,000 fine); Touby v. United States, — U.S. —, 111 S.Ct. 1752, 1756, 114 L.Ed.2d 219 (1991) (reserving for future consideration question whether enhanced guidance must be provided “when Congress authorizes another Branch to promulgate regulations that contemplate criminal sanctions”). In any event, the majority’s gloss on the statutory language is transparently implausible. While the SEC was authorized to utilize flexible regulatory means in this emerging area, those means had to be directed at “such acts and practices as are fraudulent” within the meaning of the statute. It is thus clearly unacceptable to conclude that Chestman can be validly convicted of a felony violation of section 14(e) and rule 14e-3(a) for, in the words of the majority, “conduct outside the purview of fraud, be it common law or SEC-defined fraud.”
The legislative history of the 1970 amendment similarly lends little support to the majority’s position. Aside from some amiable generalities by Senator Williams, the majority points only to a memorandum by the SEC Division of Corporation Finance that, in response to an inquiry by Senator Williams, listed the following as one of the seven “problem areas which may be dealt with by [the] rule-making authority” provided by the 1970 amendment to section 14(e): “5. The person who has become aware that a tender bid is to be made, or has reason to believe that such bid will be made, may fail to disclose material facts with respect thereto to persons who sell to him securities for which the tender bid is to be made.” Additional Consumer Protec*585tion in Corporate Takeovers and Increasing the Securities Act Exemptions for Small Businessmen, Hearings on S. 336 and S. 3431 before the Subcomm. on Securities of the Senate Comm, on Banking and Currency, 91st Cong., 2d Sess. 12 (1970).
It is plainly inappropriate to suggest that this rough outline of a regulatory “problem area” should be read to provide a precise delineation of the scope and purpose of the 1970 amendment. I note, for example, that this scenario does not suggest the souree of the hypothetical buyer’s knowledge, or “reason to believe,” that a tender offer is imminent. Are we therefore to conclude that the derivation of the information is irrelevant? For example, would the buyer be guilty of a federal felony if his information as to the likelihood of a tender offer was derived from his observation of heavy trading in the target company’s stock,, without any direct or indirect input from the target company or the offeror? I am not aware of any responsible authority that reads the 1970 amendment of section 14(e) as authorizing so sweeping a revision of federal securities law, and the SEC made no such assertion in promulgating rule 14e-3(a), but such a purchaser would clearly fall within the “problem area” outlined in the SEC memorandum. Similarly, I suggest, this thumbnail sketch of a “problem area” should not be accorded significance in determining whether the 1970 amendment empowered the SEC to disregard existing legal concepts of fraud in devising regulations addressed to the definition and prevention of “such acts and practices as are fraudulent.”
The post-enactment history is even less supportive of the majority’s position. The majority points to legislative reports accompanying Congress’ enactment of the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 as somehow indicating Congressional support of the SEC’s 1980 departure from prior law in promulgating rule 14e-3(a). As I stated in my concurring opinion during the panel consideration of this appeal, in addressing the identical legislative history:
[T]he 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 ease 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.
United States v. Chestman, 903 F.2d 75, 86 (2d Cir.1990) (MAHONEY, J„ concurring in part and dissenting in part).
The cases cited by the majority on this issue are easily distinguished. In United States v. Rutherford, 442 U.S. 544, 99 S.Ct. 2470, 61 L.Ed.2d 68 (1979), the committee reports accompanying amendatory legislation subsequent to the agency ruling at issue explicitly approved the challenged agency position. See id. at 553, 99 S.Ct. at 2475-76. In Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 89 S.Ct. 1794; 23 L.Ed.2d 371 (1969), Congress had adopted explicit statutory language that “vindicated” the agency position on the issue in litigation. See id. at 380, 89 S.Ct. at 1801. Zemel v. Rusk, 381 U.S. 1, 85 S.Ct. 1271, 14 L.Ed.2d 179 (1965), noted that “[u]nder some circumstances,” Congressional silence in the face of an administrative position has been deemed acquiescent in that position, but stated that “[i]n this case ... the inference is supported by more than mere congressional inaction.” Id. at 11, 85 S.Ct. at 1278 (emphasis added).
*586As indicated above, the circumstances presented here provide no support for a finding of Congressional acquiescence in the novel legal theory embodied in rule 14e-3(a). Congress’ subsequent consideration of enhanced penalties for insider trading violations, explicitly eschewing any intention to address the pertinent issues of substantive law, does nothing to validate rule 14e-3. Furthermore, the majority opinion surprisingly disregards the most germane Supreme Court authority on this issue. In Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), the Court rejected a similar argument for Congressional ratification of an SEC position, stating:
The Commission finds further support for its interpretation of § 10(b) as not requiring proof of scienter in injunctive proceedings in the fact that Congress was expressly informed of the Commission’s interpretation on two occasions when significant amendments to the securities laws were enacted — The Securities Act Amendments of 1975, Pub.L. 94-29, 89 Stat. 97, and the Foreign Corrupt Practices Act of 1977, Pub.L. 95-213, 91 Stat. 1494 — and on each occasion Congress left the administrative interpretation undisturbed. See S.Rep. No. 94-75, p. 76 (1975), U.S.Code Cong. & Admin.News 1975, p. 179; H.R.Rep. No. 95-640, p. 10 (1977). But, since the legislative consideration of those statutes was addressed principally to matters other than that at issue here, it is our view that the failure of Congress to overturn the Commission’s interpretation falls far short of providing a basis to support a construction of § 10(b) so clearly at odds with its plain meaning and legislative history. See SEC v. Sloan, 436 U.S. 103, 119-121, 98 S.Ct. 1702, 1712-1713, 56 L.Ed.2d 148 [1978].
Id. at 694 n. 11, 100 S.Ct. at 1954 n. 11 (emphasis added). In Sloan, the Court rejected the SEC’s interpretation of a statute despite subsequent reenactment of that statute coupled with an endorsement of the SEC’s view in a committee report addressing the issue. See 436 U.S. at 119-20 & n. 10, 98 S.Ct. at 1712-13 & n. 10. A fortiori, no ratification has occurred as to rule 14e-3(a).
Rule 14e-3(a) was enacted in the immediate aftermath of the Supreme Court’s ruling in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). Addressing section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1988), and rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.1Ob-5 (1991), the Court ruled in Chiarella that “[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.” 445 U.S. at 235, 100 S.Ct. at 1118. If that rule applies in the area of tender offers and section 14(e), of course, rule 14e-3(a) is clearly illegal. See American Bar Association Committee on Federal Regulation of Securities, Report of the Task Force on Regulation of Insider Trading, 41 Bus.Law. 223, 252 (1985) (“Rule 14e-3 squarely raises the issue whether the [SEC] has the authority to impose a limited equal-access rule in the aftermath of Chiarella, Dirks [v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983)], and Schreiber.”); id. at 251 & n. 109 (collecting commentaries expressing doubt as to validity of rule).
The majority would confine Chiarella’s authority to section 10(b) and rule 10b-5, deeming it entirely without precedential value as to section 14(e) and rule 14e-3(a). Chiarella drew heavily, however, upon common law concepts of fraud. Its key ruling is that “the duty to disclose arises when one party has information 'that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.’ ” 445 U.S. at 228, 100 S.Ct. at 1114. The internal quotation is from the Restatement (Second) of Torts § 551(2)(a) (1976), with an added notation that the American Law Institute regards the rule as applicable to “securities transactions.” See id. at 228 n. 9,100 S.Ct. at 1114 n. 9. No reason appears why this generally applicable rule of law, not derived in any way from the language or history of section 10(b) and rule 10b-5, should have definitive force in the construction and interpretation of those provisions, *587but none where section 14(e) and rule 14e-3(a) are concerned.
Furthermore, both the Supreme Court and this court have explicitly recognized that section 14(e) is modeled upon the anti-fraud provisions of § 10(b) and Rule 10b-5. See Schreiber, 472 U.S. at 10 & n. 10, 105 S.Ct. at 2463 & n. 10; 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, 232, 38 L.Ed.2d 148 (1973)).
Against this background, the majority’s efforts to distinguish Chiarella are less than convincing. It is true that section 14(e), unlike section 10(b), directly proscribes “fraudulent” acts and practices, but this is a barely discernible departure from section 10(b)’s prohibition of “deceptive device[s] or contrivance[s],” see Restatement (Second) of Torts at 55 (1977) (equating “fraudulent representation” and “deceit”), and both sections envision implementation by SEC regulations. In any event, this proscription hardly heralds an intention to change the meaning of the term “fraud” as previously understood in both the general law and securities law. Nor does the slight difference in language between the two provisions’ delegation of rulemaking authority to the SEC plausibly signify that Congress vested the SEC with the power to make such a change. Further, while the language of rule 14e-3(a) concededly “reveals express SEC intent to proscribe conduct not covered by common law fraud,” as the majority states, that revelation poses, rather than decides, the question that we must resolve.
The majority opinion notes a passage in Chiarella that alludes to (then) proposed rule 14e-3 as a bar to warehousing of target stock in a tender offer “on a ‘somewhat different theory’ than that previously used to regulate insider trading as fraudulent activity.” Chiarella, 445 U.S. at 234, 100 S.Ct. at 1118 (quoting 1 SEC Institutional Investor Study Report, H.R.Doc. No. 64, 92nd Cong., 1st Sess., pt. 1 (the “Report”), at xxxii (1971)). The majority then identifies the “theory” as “one that does not embrace ‘any fiduciary duty to the [target] company or its shareholders,’ ” quoting the Report at xxxii. In fact, the Report only states that people who plan takeovers do not “usually have any fiduciary duty to [the target] company or its shareholders.” Further, the majority vests significance in the fact that “the Chiarella Court did not disapprove of this exercise of the SEC’s rulemaking power under section 14(e).” Such a disapproval would have been wholly gratuitous in the circumstances. In sum, this passage cannot fairly be read as obviating the fact that Chiarella establishes a general rule linking securities fraud to a breach of fiduciary duty, and that rule 14e-3(a) represents an obvious effort by the SEC to circumvent that rule by exercising an authority that has not been entrusted to that body.
Schreiber, as I have noted, establishes that section 14(e) was modeled upon section 10(b) and rule 10b-5, see 472 U.S. at 10 n. 10, 105 S.Ct. at 2463 n. 10, thus reinforcing the precedential value of Chiarella for the present case; and discountenances any notion that the 1970 amendment to section 14(e) intended any change in the meaning of the fundamental term “manipulative,” see 472 U.S. at 12 n. 11, 105 S.Ct. at 2464 n. 11, undercutting the notion that the term “fraudulent” was invested by the same amendment with the novel content for which the SEC contends. Dirks v. SEC, 463 U.S. 646, 653, 103 S.Ct. 3255, 3260-61, 77 L.Ed.2d 911 (1983), explicitly rejected, in the section 10(b)/rule 10b-5 context, the SEC’s view “that anyone who knowingly receives nonpublic material information from an insider has a fiduciary duty to disclose before trading.” Rule 14e-3(a) purports to avoid the impact of Dirks by simply discarding the concept of fiduciary duty in the tender offer context.
I am aware, of course, that we ordinarily defer to the interpretation of a statute provided by an agency charged with its enforcement. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-45, 104 S.Ct. 2778, 2781-83, 81 L.Ed.2d 694 (1984); IBT v. Daniel, 439 U.S. 551, 566 n. 20, 99 S.Ct. 790, 800 n. *58820, 58 L.Ed.2d 808 (1979). As the Court made clear in Daniel, however:
[T]his deference is constrained by our obligation to honor the clear meaning of a statute, as revealed by its language, purpose, and history. On a number of occasions in recent years this Court has found it necessary to reject the SEC’s interpretation of various provisions of the Securities Acts. See SEC v. Sloan, 436 U.S. 103, 117-119, 98 S.Ct. 1702, 1711-1712, 56 L.Ed.2d 148 (1978); Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 41 n. 27, 97 S.Ct. 926, 949 [n. 27], 51 L.Ed.2d 124 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 212-214, 96 S.Ct. 1375, 1390-1391, 47 L.Ed.2d 668 (1976); [United Hous. Found., Inc. v.] Forman, 421 U.S. [837, 858 n. 25, 95 S.Ct. 2051, 2063 n. 25, 44 L.Ed.2d 621 (1975)]; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 759 n. 4, 95 S.Ct. 1917, 1936 [n. 4], 44 L.Ed.2d 539 (1975) (POWELL, J., concurring); Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 425-427, 92 S.Ct. 596, 600-602, 30 L.Ed.2d 575 (1972).
439 U.S. at 566 n. 20, 99 S.Ct. at 800 n. 20; see also Aaron, 446 U.S. at 694 n. 11, 100 S.Ct. at 1954 n. 11 (rejecting SEC view that scienter not required in § 10(b) injunctive proceedings); Business Roundtable v. SEC, 905 F.2d 406, 407 (D.C.Cir.1990) (holding that SEC exceeded its statutory authority in promulgating rule 19c-4 to bar national securities exchanges and associations from listing stocks violative of one share/ one vote principle).
In promulgating rule 14e-3(a), the SEC has once again, in my view, acted in excess of its statutory authority. This is especially so because its action implicates serious criminal penalties. See Touby, 111 S.Ct. at 1756. Thus, to the extent that there is any ambiguity as to the authority vested in the SEC by the 1970 amendment of section 14(e), it should be resolved in Chestman’s favor. As the Supreme Court said in Crandon v. United States, 494 U.S. 152, 110 S.Ct. 997, 1001, 108 L.Ed.2d 132 (1990), “because the governing standard is set forth in a criminal statute [here, 15 U.S.C. § 78ff(a) 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.”.
Accordingly, I would reverse all of Chestman’s convictions, in accordance with the panel disposition. See Chestman, 903 F.2d at 84. I therefore dissent from the majority’s affirmance of Chestman’s convictions under section 14(e) and rule 14e-3, while joining in the balance of the majority opinion.