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Tipper/Tippee Liability

What about liability for insider trading in situations where the trading doesn't involve an insider? The knottiest of these problems involve situations where insiders have tipped outsiders who then trade.

Tipping is a direct challenge to the classical insider trading doctrine and requires some development of the law. Because the recipient of inside information does not have a fiduciary duty to the shareholders or the corporation, classical insider trading theory does not extend to recipients of inside information. Courts have responded to these situations by finding ways to extend liability to recipients of inside information, “tippees”. Because courts built tippee liability for insider trading on an ediface of fiduciary duty, the reach of liability can at times be limited.

  • 1 Dirks v. SEC

    Tipper/Tippee liability

    1
    463 U.S. 646 (1983)
    2
    DIRKS
    v.
    SECURITIES AND EXCHANGE COMMISSION
    3
    No. 82-276.
    Supreme Court of United States.
    4
    Argued March 21, 1983
    5
    Decided July 1, 1983
    6

    CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

    7

    [648] David Bonderman argued the cause for petitioner. With him on the briefs were Lawrence A. Schneider and Eric Summergrad.

    8

    Paul Gonson argued the cause for respondent. With him on the brief were Daniel L. Goelzer, Jacob H. Stillman, and Whitney Adams.[*]

    9

    Edward H. Fleischman, Richard E. Nathan, Martin P. Unger, and William J. Fitzpatrick filed a brief for the Securities Industry Association as amicus curiae.

    10
    JUSTICE POWELL delivered the opinion of the Court.
    11

    Petitioner Raymond Dirks received material nonpublic information from "insiders" of a corporation with which he had no connection. He disclosed this information to investors who relied on it in trading in the shares of the corporation. The question is whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure.

    12
    I
    13

    In 1973, Dirks was an officer of a New York broker-dealer firm who specialized in providing investment analysis of insurance company securities to institutional investors.[1] On [649] March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Secrist also stated that various regulatory agencies had failed to act on similar charges made by Equity Funding employees. He urged Dirks to verify the fraud and disclose it publicly.

    14

    Dirks decided to investigate the allegations. He visited Equity Funding's headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated holdings of more than $16 million.[2]

    15

    While Dirks was in Los Angeles, he was in touch regularly with William Blundell, the Wall Street Journal's Los Angeles bureau chief. Dirks urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such a massive fraud could go undetected and declined to [650] write the story. He feared that publishing such damaging hearsay might be libelous.

    16

    During the 2-week period in which Dirks pursued his investigation and spread word of Secrist's charges, the price of Equity Funding stock fell from $26 per share to less than $15 per share. This led the New York Stock Exchange to halt trading on March 27. Shortly thereafter California insurance authorities impounded Equity Funding's records and uncovered evidence of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding[3] and only then, on April 2, did the Wall Street Journal publish a front-page story based largely on information assembled by Dirks. Equity Funding immediately went into receivership.[4]

    17

    The SEC began an investigation into Dirks' role in the exposure of the fraud. After a hearing by an Administrative Law Judge, the SEC found that Dirks had aided and abetted violations of § 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U. S. C. § 77q(a),[5] § 10(b) of the Securities [651] Exchange Act of 1934, 48 Stat. 891, 15 U. S. C. § 78j(b),[6] and SEC Rule 10b-5, 17 CFR § 240.10b-5 (1983),[7] by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. The SEC concluded: "Where `tippees' — regardless of their motivation or occupation — come into possession of material `corporate information that they know is confidential and know or should know came from a corporate insider,' they must either publicly disclose that information or refrain from trading." 21 S. E. C. Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U. S. 222, 230, n. 12 (1980)). Recognizing, however, that Dirks "played an important role in bringing [Equity Funding's] massive fraud [652] to light," 21 S. E. C. Docket, at 1412,[8] the SEC only censured him.[9]

    18

    Dirks sought review in the Court of Appeals for the District of Columbia Circuit. The court entered judgment against Dirks "for the reasons stated by the Commission in its opinion." App. to Pet. for Cert. C-2. Judge Wright, a member of the panel, subsequently issued an opinion. Judge Robb concurred in the result and Judge Tamm dissented; neither filed a separate opinion. Judge Wright believed that "the obligations of corporate fiduciaries pass to all those to whom they disclose their information before it has been disseminated to the public at large." 220 U. S. App. D. C. 309, 324, 681 F. 2d 824, 839 (1982). Alternatively, Judge Wright concluded that, as an employee of a broker-dealer, Dirks had violated "obligations to the SEC and to the public completely independent of any obligations he acquired" as a result of receiving the information. Id., at 325, 681 F. 2d, at 840.

    19

    In view of the importance to the SEC and to the securities industry of the question presented by this case, we granted a writ of certiorari. 459 U. S. 1014 (1982). We now reverse.

    20
    [653] II
    21

    In the seminal case of In re Cady, Roberts & Co., 40 S. E. C. 907 (1961), the SEC recognized that the common law in some jurisdictions imposes on "corporate `insiders,' particularly officers, directors, or controlling stockholders" an "affirmative duty of disclosure . . . when dealing in securities." Id., at 911, and n. 13.[10] The SEC found that not only did breach of this common-law duty also establish the elements of a Rule 10b-5 violation,[11] but that individuals other than corporate insiders could be obligated either to disclose material nonpublic information[12] before trading or to abstain from trading altogether. Id., at 912. In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a Rule 10b-5 violation: "(i) the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and (ii) the unfairness of allowing a corporate insider to take advantage of that information [654] by trading without disclosure." 445 U. S., at 227. In examining whether Chiarella had an obligation to disclose or abstain, the Court found that there is no general duty to disclose before trading on material nonpublic information,[13] and held that "a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information." Id., at 235. Such a duty arises rather from the existence of a fiduciary relationship. See id., at 227-235.

    22

    Not "all breaches of fiduciary duty in connection with a securities transaction," however, come within the ambit of Rule 10b-5. Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 472 (1977). There must also be "manipulation or deception." Id., at 473. In an inside-trading case this fraud derives from the "inherent unfairness involved where one takes advantage" of "information intended to be available only for a corporate purpose and not for the personal benefit of anyone." In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 936 (1968). Thus, an insider will be liable under Rule 10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes "secret profits." Cady, Roberts, supra, at 916, n. 31.

    23
    III
    24

    We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information "was not [the corporation's] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence." 445 U. S., at 232. Not to require such a fiduciary relationship, we recognized, would "depar[t] radically from the established doctrine that duty arises from a specific relationship between [655] two parties" and would amount to "recognizing a general duty between all participants in market transactions to forgo actions based on material, nonpublic information." Id., at 232, 233. This requirement of a specific relationship between the shareholders and the individual trading on inside information has created analytical difficulties for the SEC and courts in policing tippees who trade on inside information. Unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such relationships.[14] In view of this absence, it has been unclear how a tippee acquires the Cady, Roberts duty to refrain from trading on inside information.

    25
    A
    26

    The SEC's position, as stated in its opinion in this case, is that a tippee "inherits" the Cady, Roberts obligation to shareholders whenever he receives inside information from an insider:

    27
    "In tipping potential traders, Dirks breached a duty which he had assumed as a result of knowingly receiving [656] confidential information from [Equity Funding] insiders. Tippees such as Dirks who receive non-public, material information from insiders become `subject to the same duty as [the] insiders.' Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc. [495 F. 2d 228, 237 (CA2 1974) (quoting Ross v. Licht, 263 F. Supp. 395, 410 (SDNY 1967))]. Such a tippee breaches the fiduciary duty which he assumes from the insider when the tippee knowingly transmits the information to someone who will probably trade on the basis thereof. . . . Presumably, Dirks' informants were entitled to disclose the [Equity Funding] fraud in order to bring it to light and its perpetrators to justice. However, Dirks — standing in their shoes — committed a breach of the fiduciary duty which he had assumed in dealing with them, when he passed the information on to traders." 21 S. E. C. Docket, at 1410, n. 42.
    28

    This view differs little from the view that we rejected as inconsistent with congressional intent in Chiarella. In that case, the Court of Appeals agreed with the SEC and affirmed Chiarella's conviction, holding that "[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." United States v. Chiarella, 588 F. 2d 1358, 1365 (CA2 1978) (emphasis in original). Here, the SEC maintains that anyone who knowingly receives nonpublic material information from an insider has a fiduciary duty to disclose before trading.[15]

    29

    [657] In effect, the SEC's theory of tippee liability in both cases appears rooted in the idea that the antifraud provisions require equal information among all traders. This conflicts with the principle set forth in Chiarella that only some persons, under some circumstances, will be barred from trading while in possession of material nonpublic information.[16] Judge Wright correctly read our opinion in Chiarella as repudiating any notion that all traders must enjoy equal information before trading: "[T]he `information' theory is rejected. Because the disclose-or-refrain duty is extraordinary, it attaches only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws." 220 U. S. App. D. C., at 322, 681 F. 2d, at 837. See Chiarella, 445 U. S., at 235, n. 20. We reaffirm today that "[a] duty [to disclose] [658] arises from the relationship between parties . . . and not merely from one's ability to acquire information because of his position in the market." Id., at 231-232, n. 14.

    30

    Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.[17] It is commonplace for analysts to "ferret out and analyze information," 21 S. E. C. Docket, at 1406,[18] and this often is done by meeting with and questioning corporate officers and others who are insiders. And information that the analysts [659] obtain normally may be the basis for judgments as to the market worth of a corporation's securities. The analyst's judgment in this respect is made available in market letters or otherwise to clients of the firm. It is the nature of this type of information, and indeed of the markets themselves, that such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally.

    31
    B
    32

    The conclusion that recipients of inside information do not invariably acquire a duty to disclose or abstain does not mean that such tippees always are free to trade on the information. The need for a ban on some tippee trading is clear. Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they also may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain. See 15 U. S. C. § 78t(b) (making it unlawful to do indirectly "by means of any other person" any act made unlawful by the federal securities laws). Similarly, the transactions of those who knowingly participate with the fiduciary in such a breach are "as forbidden" as transactions "on behalf of the trustee himself." Mosser v. Darrow, 341 U. S. 267, 272 (1951). See Jackson v. Smith, 254 U. S. 586, 589 (1921); Jackson v. Ludeling, 21 Wall. 616, 631-632 (1874). As the Court explained in Mosser, a contrary rule "would open up opportunities for devious dealings in the name of others that the trustee could not conduct in his own." 341 U. S., at 271. See SEC v. Texas Gulf Sulphur Co., 446 F. 2d 1301, 1308 (CA2), cert. denied, 404 U. S. 1005 (1971). Thus, the tippee's duty to disclose or abstain is derivative from that of the insider's duty. See Tr. of Oral Arg. 38. Cf. Chiarella, 445 U. S., at 246, n. 1 (BLACKMUN, J., dissenting). As we noted in Chiarella, "[t]he tippee's obligation has been viewed as arising from his role as a participant after the fact in the insider's breach of a fiduciary duty." Id., at 230, n. 12.

    33

    [660] Thus, some tippees must assume an insider's duty to the shareholders not because they receive inside information, but rather because it has been made available to them improperly.[19] And for Rule 10b-5 purposes, the insider's disclosure is improper only where it would violate his Cady, Roberts duty. Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.[20] As Commissioner Smith perceptively observed [661] in In re Investors Management Co., 44 S. E. C. 633 (1971): "[T]ippee responsibility must be related back to insider responsibility by a necessary finding that the tippee knew the information was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose the information . . . ." Id., at 651 (concurring in result). Tipping thus properly is viewed only as a means of indirectly violating the Cady, Roberts disclose-or-abstain rule.[21]

    34
    C
    35

    In determining whether a tippee is under an obligation to disclose or abstain, it thus is necessary to determine whether the insider's "tip" constituted a breach of the insider's fiduciary duty. All disclosures of confidential corporate information [662] are not inconsistent with the duty insiders owe to shareholders. In contrast to the extraordinary facts of this case, the more typical situation in which there will be a question whether disclosure violates the insider's Cady, Roberts duty is when insiders disclose information to analysts. See n. 16, supra. In some situations, the insider will act consistently with his fiduciary duty to shareholders, and yet release of the information may affect the market. For example, it may not be clear — either to the corporate insider or to the recipient analyst — whether the information will be viewed as material nonpublic information. Corporate officials may mistakenly think the information already has been disclosed or that it is not material enough to affect the market. Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure. This standard was identified by the SEC itself in Cady, Roberts: a purpose of the securities laws was to eliminate "use of inside information for personal advantage." 40 S. E. C., at 912, n. 15. See n. 10, supra. Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.[22] As Commissioner Smith stated in Investors Management Co.: "It is important in this type of [663] case to focus on policing insiders and what they do . . . rather than on policing information per se and its possession. . . ." 44 S. E. C., at 648 (concurring in result).

    36

    The SEC argues that, if inside-trading liability does not exist when the information is transmitted for a proper purpose but is used for trading, it would be a rare situation when the parties could not fabricate some ostensibly legitimate business justification for transmitting the information. We think the SEC is unduly concerned. In determining whether the insider's purpose in making a particular disclosure is fraudulent, the SEC and the courts are not required to read the parties' minds. Scienter in some cases is relevant in determining whether the tipper has violated his Cady, Roberts duty.[23] But to determine whether the disclosure itself "deceive[s], manipulate[s], or defraud[s]" shareholders, Aaron v. SEC, 446 U. S. 680, 686 (1980), the initial inquiry is whether there has been a breach of duty by the insider. This requires courts to focus on objective criteria, i. e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. Cf. 40 S. E. C., at 912, n. 15; Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities [664] Laws, 93 Harv. L. Rev. 322, 348 (1979) ("The theory . . . is that the insider, by giving the information out selectively, is in effect selling the information to its recipient for cash, reciprocal information, or other things of value for himself. . ."). There are objective facts and circumstances that often justify such an inference. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. 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 the profits to the recipient.

    37

    Determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts. But it is essential, we think, to have a guiding principle for those whose daily activities must be limited and instructed by the SEC's inside-trading rules, and we believe that there must be a breach of the insider's fiduciary duty before the tippee inherits the duty to disclose or abstain. In contrast, the rule adopted by the SEC in this case would have no limiting principle.[24] 

    38
    [665] IV
    39

    Under the inside-trading and tipping rules set forth above, we find that there was no actionable violation by Dirks.[25] It is undisputed that Dirks himself was a stranger to Equity Funding, with no pre-existing fiduciary duty to its shareholders.[26] He took no action, directly or indirectly, that induced the shareholders or officers of Equity Funding to repose trust or confidence in him. There was no expectation by Dirks' sources that he would keep their information in confidence. Nor did Dirks misappropriate or illegally obtain the information about Equity Funding. Unless the insiders breached their Cady, Roberts duty to shareholders in disclosing the nonpublic information to Dirks, he breached no duty when he passed it on to investors as well as to the Wall Street Journal.

    40

    [666] It is clear that neither Secrist nor the other Equity Funding employees violated their Cady, Roberts duty to the corporation's shareholders by providing information to Dirks.[27] [667] The tippers received no monetary or personal benefit for revealing Equity Funding's secrets, nor was their purpose to make a gift of valuable information to Dirks. As the facts of this case clearly indicate, the tippers were motivated by a desire to expose the fraud. See supra, at 648-649. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks. See n. 20, supra. Dirks therefore could not have been "a participant after the fact in [an] insider's breach of a fiduciary duty." Chiarella, 445 U. S., at 230, n. 12.

    41
    V
    42

    We conclude that Dirks, in the circumstances of this case, had no duty to abstain from use of the inside information that he obtained. The judgment of the Court of Appeals therefore is

    43

    Reversed.

    44
    JUSTICE BLACKMUN, with whom JUSTICE BRENNAN and JUSTICE MARSHALL join, dissenting.
    45

    The Court today takes still another step to limit the protections provided investors by § 10(b) of the Securities Exchange [668] Act of 1934.[1] See Chiarella v. United States, 445 U. S. 222, 246 (1980) (dissenting opinion). The device employed in this case engrafts a special motivational requirement on the fiduciary duty doctrine. This innovation excuses a knowing and intentional violation of an insider's duty to shareholders if the insider does not act from a motive of personal gain. Even on the extraordinary facts of this case, such an innovation is not justified.

    46
    I
    47

    As the Court recognizes, ante, at 658, n. 18, the facts here are unusual. After a meeting with Ronald Secrist, a former Equity Funding employee, on March 7, 1973, App. 226, petitioner Raymond Dirks found himself in possession of material nonpublic information of massive fraud within the company.[2] In the Court's words, "[h]e uncovered . . . startling information that required no analysis or exercise of judgment as to [669] its market relevance." Ibid. In disclosing that information to Dirks, Secrist intended that Dirks would disseminate the information to his clients, those clients would unload their Equity Funding securities on the market, and the price would fall precipitously, thereby triggering a reaction from the authorities. App. 16, 25, 27.

    48

    Dirks complied with his informant's wishes. Instead of reporting that information to the Securities and Exchange Commission (SEC or Commission) or to other regulatory agencies, Dirks began to disseminate the information to his clients and undertook his own investigation.[3] One of his first steps was to direct his associates at Delafield Childs to draw up a list of Delafield clients holding Equity Funding securities. On March 12, eight days before Dirks flew to Los Angeles to investigate Secrist's story, he reported the full allegations to Boston Company Institutional Investors, Inc., which on March 15 and 16 sold approximately $1.2 million of Equity securities.[4] See id., at 199. As he gathered more [670] information, he selectively disclosed it to his clients. To those holding Equity Funding securities he gave the "hard" story — all the allegations; others received the "soft" story — a recitation of vague factors that might reflect adversely on Equity Funding's management. See id., at 211, n. 24.

    49

    Dirks' attempts to disseminate the information to nonclients were feeble, at best. On March 12, he left a message for Herbert Lawson, the San Francisco bureau chief of The Wall Street Journal. Not until March 19 and 20 did he call Lawson again, and outline the situation. William Blundell, a Journal investigative reporter based in Los Angeles, got in touch with Dirks about his March 20 telephone call. On March 21, Dirks met with Blundell in Los Angeles. Blundell began his own investigation, relying in part on Dirks' contacts, and on March 23 telephoned Stanley Sporkin, the SEC's Deputy Director of Enforcement. On March 26, the next business day, Sporkin and his staff interviewed Blundell and asked to see Dirks the following morning. Trading was halted by the New York Stock Exchange at about the same time Dirks was talking to Los Angeles SEC personnel. The next day, March 28, the SEC suspended trading in Equity Funding securities. By that time, Dirks' clients had unloaded close to $15 million of Equity Funding stock and the price had plummeted from $26 to $15. The effect of Dirks' selective dissemination of Secrist's information was that Dirks' clients were able to shift the losses that were inevitable due to the Equity Funding fraud from themselves to uninformed market participants.

    50
    II
    51
    A
    52

    No one questions that Secrist himself could not trade on his inside information to the disadvantage of uninformed shareholders and purchasers of Equity Funding securities. See Brief for United States as Amicus Curiae 19, n. 12. Unlike the printer in Chiarella, Secrist stood in a fiduciary relationship [671] with these shareholders. As the Court states, ante, at 653, corporate insiders have an affirmative duty of disclosure when trading with shareholders of the corporation. See Chiarella, 445 U. S., at 227. This duty extends as well to purchasers of the corporation's securities. Id., at 227, n. 8, citing Gratz v. Claughton, 187 F. 2d 46, 49 (CA2), cert. denied, 341 U. S. 920 (1951).

    53

    The Court also acknowledges that Secrist could not do by proxy what he was prohibited from doing personally. Ante, at 659; Mosser v. Darrow, 341 U. S. 267, 272 (1951). But this is precisely what Secrist did. Secrist used Dirks to disseminate information to Dirks' clients, who in turn dumped stock on unknowing purchasers. Secrist thus intended Dirks to injure the purchasers of Equity Funding securities to whom Secrist had a duty to disclose. Accepting the Court's view of tippee liability,[5] it appears that Dirks' knowledge of this breach makes him liable as a participant in the breach after the fact. Ante, at 659, 667; Chiarella, 445 U. S., at 230, n. 12.

    54
    B
    55

    The Court holds, however, that Dirks is not liable because Secrist did not violate his duty; according to the Court, this is so because Secrist did not have the improper purpose of personal gain. Ante, at 662-663, 666-667. In so doing, the Court imposes a new, subjective limitation on the scope of the duty owed by insiders to shareholders. The novelty of this limitation is reflected in the Court's lack of support for it.[6]

    56

    [672] The insider's duty is owed directly to the corporation's shareholders.[7] See Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1, 5 (1982); 3A W. Fletcher, Cyclopedia of the Law of Private Corporations § 1168.2, pp. 288-289 (rev. ed. 1975). As Chiarella recognized, it is based on the relationship of trust and confidence between the insider and the shareholder. 445 U. S., at 228. That relationship assures the shareholder that the insider may not take actions that will harm him unfairly.[8] The affirmative duty of disclosure protects [673] against this injury. See Pepper v. Litton, 308 U. S. 295, 307, n. 15 (1939); Strong v. Repide, 213 U. S. 419, 431-434 (1909); see also Chiarella, 445 U. S., at 228, n. 10; cf. Pepper, 308 U. S., at 307 (fiduciary obligation to corporation exists for corporation's protection).

    57
    C
    58

    The fact that the insider himself does not benefit from the breach does not eradicate the shareholder's injury.[9] Cf. Restatement (Second) of Trusts § 205, Comments c and d (1959) (trustee liable for acts causing diminution of value of trust); 3 [674] A. Scott, Law of Trusts § 205, p. 1665 (3d ed. 1967) (trustee liable for any losses to trust caused by his breach). It makes no difference to the shareholder whether the corporate insider gained or intended to gain personally from the transaction; the shareholder still has lost because of the insider's misuse of nonpublic information. The duty is addressed not to the insider's motives,[10] but to his actions and their consequences on the shareholder. Personal gain is not an element of the breach of this duty.[11]

    59

    [675] This conclusion is borne out by the Court's decision in Mosser v. Darrow, 341 U. S. 267 (1951). There, the Court faced an analogous situation: a reorganization trustee engaged two employee-promoters of subsidiaries of the companies being reorganized to provide services that the trustee considered to be essential to the successful operation of the trust. In order to secure their services, the trustee expressly agreed with the employees that they could continue to trade in the securities of the subsidiaries. The employees then turned their inside position into substantial profits at the expense both of the trust and of other holders of the companies' securities.

    60

    The Court acknowledged that the trustee neither intended to nor did in actual fact benefit from this arrangement; his motives were completely selfless and devoted to the companies. Id., at 275. The Court, nevertheless, found the trustee liable to the estate for the activities of the employees he authorized.[12] The Court described the trustee's defalcation as "a willful and deliberate setting up of an interest in employees adverse to that of the trust." Id., at 272. The breach did not depend on the trustee's personal gain, and his motives in violating his duty were irrelevant; like Secrist, the trustee intended that others would abuse the inside information for their personal gain. Cf. Dodge v. Ford Motor Co., 204 Mich. 459, 506-509, 170 N. W. 668, 684-685 (1919) (Henry Ford's philanthropic motives did not permit him to [676] set Ford Motor Company dividend policies to benefit public at expense of shareholders).

    61

    As Mosser demonstrates, the breach consists in taking action disadvantageous to the person to whom one owes a duty. In this case, Secrist owed a duty to purchasers of Equity Funding shares. The Court's addition of the bad-purpose element to a breach-of-fiduciary-duty claim is flatly inconsistent with the principle of Mosser. I do not join this limitation of the scope of an insider's fiduciary duty to shareholders.[13]

    62
    III
    63

    The improper-purpose requirement not only has no basis in law, but it also rests implicitly on a policy that I cannot accept. The Court justifies Secrist's and Dirks' action because the general benefit derived from the violation of Secrist's duty to shareholders outweighed the harm caused to those [677] shareholders, see Heller, Chiarella, SEC Rule 14e-3 and Dirks: "Fairness" versus Economic Theory, 37 Bus. Lawyer 517, 550 (1982); Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 S. Ct. Rev. 309, 338 — in other words, because the end justified the means. Under this view, the benefit conferred on society by Secrist's and Dirks' activities may be paid for with the losses caused to shareholders trading with Dirks' clients.[14]

    64

    Although Secrist's general motive to expose the Equity Funding fraud was laudable, the means he chose were not. Moreover, even assuming that Dirks played a substantial role in exposing the fraud,[15] he and his clients should not profit from the information they obtained from Secrist. Misprision of a felony long has been against public policy. Branzburg v. Hayes, 408 U. S. 665, 696-697 (1972); see 18 U. S. C. § 4. A person cannot condition his transmission of information of a crime on a financial award. As a citizen, Dirks had at least an ethical obligation to report the information to the proper authorities. See ante, at 661, n. 21. The Court's holding is deficient in policy terms not because it fails to create a legal [678] norm out of that ethical norm, see ibid., but because it actually rewards Dirks for his aiding and abetting.

    65

    Dirks and Secrist were under a duty to disclose the information or to refrain from trading on it.[16] I agree that disclosure in this case would have been difficult. Ibid. I also recognize that the SEC seemingly has been less than helpful in its view of the nature of disclosure necessary to satisfy the disclose-or-refrain duty. The Commission tells persons with inside information that they cannot trade on that information unless they disclose; it refuses, however, to tell them how to disclose.[17] See In re Faberge, Inc., 45 S. E. C. 249, 256 (1973) (disclosure requires public release through public media designed to reach investing public generally). This seems to be a less than sensible policy, which it is incumbent on the Commission to correct. The Court, however, has no authority to remedy the problem by opening a hole in the congressionally mandated prohibition on insider trading, thus rewarding such trading.

    66
    IV
    67

    In my view, Secrist violated his duty to Equity Funding shareholders by transmitting material nonpublic information [679] to Dirks with the intention that Dirks would cause his clients to trade on that information. Dirks, therefore, was under a duty to make the information publicly available or to refrain from actions that he knew would lead to trading. Because Dirks caused his clients to trade, he violated § 10(b) and Rule 10b-5. Any other result is a disservice to this country's attempt to provide fair and efficient capital markets. I dissent.

    68

    ----------

    69

    [*] Solicitor General Lee, Assistant Attorney General Jensen, Stephen M. Shapiro, Deputy Assistant Attorney General Olsen, David A. Strauss, and Geoffrey S. Stewart filed a brief for the United States as amicus curiae urging reversal.

    70

    [1] The facts stated here are taken from more detailed statements set forth by the Administrative Law Judge, App. 176-180, 225-247; the opinion of the Securities and Exchange Commission, 21 S. E. C. Docket 1401, 1402-1406 (1981); and the opinion of Judge Wright in the Court of Appeals, 220 U. S. App. D. C. 309, 314-318, 681 F. 2d 824, 829-833 (1982).

    71

    [2] Dirks received from his firm a salary plus a commission for securities transactions above a certain amount that his clients directed through his firm. See 21 S. E. C. Docket, at 1402, n. 3. But "[i]t is not clear how many of those with whom Dirks spoke promised to direct some brokerage business through [Dirks' firm] to compensate Dirks, or how many actually did so." 220 U. S. App. D. C., at 316, 681 F. 2d, at 831. The Boston Company Institutional Investors, Inc., promised Dirks about $25,000 in commissions, but it is unclear whether Boston actually generated any brokerage business for his firm. See App. 199, 204-205; 21 S. E. C. Docket, at 1404, n. 10; 220 U. S. App. D. C., at 316, n. 5, 681 F. 2d, at 831, n. 5.

    72

    [3] As early as 1971, the SEC had received allegations of fraudulent accounting practices at Equity Funding. Moreover, on March 9, 1973, an official of the California Insurance Department informed the SEC's regional office in Los Angeles of Secrist's charges of fraud. Dirks himself voluntarily presented his information at the SEC's regional office beginning on March 27.

    73

    [4] A federal grand jury in Los Angeles subsequently returned a 105-count indictment against 22 persons, including many of Equity Funding's officers and directors. All defendants were found guilty of one or more counts, either by a plea of guilty or a conviction after trial. See Brief for Petitioner 15; App. 149-153.

    74

    [5] Section 17(a), as set forth in 15 U. S. C. § 77q(a), provides:

    75

    "It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly —

    "(1) to employ any device, scheme, or artifice to defraud, or

    "(2) to obtain money or property by means of any untrue statement of a material fact or any omission 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

    "(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

    76

    [6] Section 10(b) provides:

    77

    "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

    .....

    "(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

    78

    [7] Rule 10b-5 provides:

    79

    "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

    "(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."

    80

    [8] JUSTICE BLACKMUN's dissenting opinion minimizes the role Dirks played in making public the Equity Funding fraud. See post, at 670 and 677, n. 15. The dissent would rewrite the history of Dirks' extensive investigative efforts. See, e. g., 21 S. E. C. Docket, at 1412 ("It is clear that Dirks played an important role in bringing [Equity Funding's] massive fraud to light, and it is also true that he reported the fraud allegation to [Equity Funding's] auditors and sought to have the information published in the Wall Street Journal"); 220 U. S. App. D. C., at 314, 681 F. 2d, at 829 (Wright, J.) ("Largely thanks to Dirks one of the most infamous frauds in recent memory was uncovered and exposed, while the record shows that the SEC repeatedly missed opportunities to investigate Equity Funding").

    81

    [9] Section 15 of the Securities Exchange Act, 15 U. S. C. § 78o(b)(4)(E), provides that the SEC may impose certain sanctions, including censure, on any person associated with a registered broker-dealer who has "willfully aided [or] abetted" any violation of the federal securities laws. See 15 U. S. C. § 78ff(a) (1976 ed., Supp. V) (providing criminal penalties).

    82

    [10] The duty that insiders owe to the corporation's shareholders not to trade on inside information differs from the common-law duty that officers and directors also have to the corporation itself not to mismanage corporate assets, of which confidential information is one. See 3 W. Fletcher, Cyclopedia of the Law of Private Corporations §§ 848, 900 (rev. ed. 1975 and Supp. 1982); 3A id., §§ 1168.1, 1168.2 (rev. ed. 1975). In holding that breaches of this duty to shareholders violated the Securities Exchange Act, the Cady, Roberts Commission recognized, and we agree, that "[a] significant purpose of the Exchange Act was to eliminate the idea that use of inside information for personal advantage was a normal emolument of corporate office." See 40 S. E. C., at 912, n. 15.

    83

    [11] Rule 10b-5 is generally the most inclusive of the three provisions on which the SEC rested its decision in this case, and we will refer to it when we note the statutory basis for the SEC's inside-trading rules.

    84

    [12] The SEC views the disclosure duty as requiring more than disclosure to purchasers or sellers: "Proper and adequate disclosure of significant corporate developments can only be effected by a public release through the appropriate public media, designed to achieve a broad dissemination to the investing public generally and without favoring any special person or group." In re Faberge, Inc., 45 S. E. C. 249, 256 (1973).

    85

    [13] See 445 U. S., at 233; id., at 237 (STEVENS, J., concurring); id., at 238-239 (BRENNAN, J., concurring in judgment); id., at 239-240 (BURGER, C. J., dissenting). Cf. id., at 252, n. 2 (BLACKMUN, J., dissenting) (recognizing that there is no obligation to disclose material nonpublic information obtained through the exercise of "diligence or acumen" and "honest means," as opposed to "stealth").

    86

    [14] Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. See SEC v. Monarch Fund, 608 F. 2d 938, 942 (CA2 1979); In re Investors Management Co., 44 S. E. C. 633, 645 (1971); In re Van Alstyne, Noel & Co., 43 S. E. C. 1080, 1084-1085 (1969); In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 937 (1968); Cady, Roberts, 40 S. E. C., at 912. When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tippee. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F. 2d 228, 237 (CA2 1974) (investment banker had access to material information when working on a proposed public offering for the corporation). For such a duty to be imposed, however, the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.

    87

    [15] Apparently, the SEC believes this case differs from Chiarella in that Dirks' receipt of inside information from Secrist, an insider, carried Secrist's duties with it, while Chiarella received the information without the direct involvement of an insider and thus inherited no duty to disclose or abstain. The SEC fails to explain, however, why the receipt of nonpublic information from an insider automatically carries with it the fiduciary duty of the insider. As we emphasized in Chiarella, mere possession of nonpublic information does not give rise to a duty to disclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider creates such a special relationship between the tippee and the corporation's shareholders.

    88

    Apparently recognizing the weakness of its argument in light of Chiarella, the SEC attempts to distinguish that case factually as involving not "inside" information, but rather "market" information, i. e., "information originating outside the company and usually about the supply and demand for the company's securities." Brief for Respondent 22. This Court drew no such distinction in Chiarella and, as THE CHIEF JUSTICE noted, "[i]t is clear that § 10(b) and Rule 10b-5 by their terms and by their history make no such distinction." 445 U. S., at 241, n. 1 (dissenting opinion). See ALI, Federal Securities Code § 1603, Comment (2)(j) (Prop. Off. Draft 1978).

    89

    [16] In Chiarella, we noted that formulation of an absolute equal information rule "should not be undertaken absent some explicit evidence of congressional intent." 445 U. S., at 233. Rather than adopting such a radical view of securities trading, Congress has expressly exempted many market professionals from the general statutory prohibition set forth in § 11(a)(1) of the Securities Exchange Act, 15 U. S. C. § 78k(a)(1), against members of a national securities exchange trading for their own account. See id., at 233, n. 16. We observed in Chiarella that "[t]he exception is based upon Congress' recognition that [market professionals] contribute to a fair and orderly marketplace at the same time they exploit the informational advantage that comes from their possession of [nonpublic information]." Ibid.

    90

    [17] The SEC expressly recognized that "[t]he value to the entire market of [analysts'] efforts cannot be gainsaid; market efficiency in pricing is significantly enhanced by [their] initiatives to ferret out and analyze information, and thus the analyst's work redounds to the benefit of all investors." 21 S. E. C. Docket, at 1406. The SEC asserts that analysts remain free to obtain from management corporate information for purposes of "filling in the `interstices in analysis'. . . ." Brief for Respondent 42 (quoting Investors Management Co., 44 S. E. C., at 646). But this rule is inherently imprecise, and imprecision prevents parties from ordering their actions in accord with legal requirements. Unless the parties have some guidance as to where the line is between permissible and impermissible disclosures and uses, neither corporate insiders nor analysts can be sure when the line is crossed. Cf. Adler v. Klawans, 267 F. 2d 840, 845 (CA2 1959) (Burger, J., sitting by designation).

    91

    [18] On its facts, this case is the unusual one. Dirks is an analyst in a broker-dealer firm, and he did interview management in the course of his investigation. He uncovered, however, startling information that required no analysis or exercise of judgment as to its market relevance. Nonetheless, the principle at issue here extends beyond these facts. The SEC's rule — applicable without regard to any breach by an insider — could have serious ramifications on reporting by analysts of investment views.

    92

    Despite the unusualness of Dirks' "find," the central role that he played in uncovering the fraud at Equity Funding, and that analysts in general can play in revealing information that corporations may have reason to withhold from the public, is an important one. Dirks' careful investigation brought to light a massive fraud at the corporation. And until the Equity Funding fraud was exposed, the information in the trading market was grossly inaccurate. But for Dirks' efforts, the fraud might well have gone undetected longer. See n. 8, supra.

    93

    [19] The SEC itself has recognized that tippee liability properly is imposed only in circumstances where the tippee knows, or has reason to know, that the insider has disclosed improperly inside corporate information. In Investors Management Co., supra, the SEC stated that one element of tippee liability is that the tippee knew or had reason to know that the information "was non-public and had been obtained improperly by selective revelation or otherwise." 44 S. E. C., at 641 (emphasis added). Commissioner Smith read this test to mean that a tippee can be held liable only if he received information in breach of an insider's duty not to disclose it. Id., at 650 (concurring in result).

    94

    [20] Professor Loss has linked tippee liability to the concept in the law of restitution that " `[w]here a fiduciary in violation of his duty to the beneficiary communicates confidential information to a third person, the third person, if he had notice of the violation of duty, holds upon a constructive trust for the beneficiary any profit which he makes through the use of such information.' " 3 L. Loss, Securities Regulation 1451 (2d ed. 1961) (quoting Restatement of Restitution § 201(2) (1937)). Other authorities likewise have expressed the view that tippee liability exists only where there has been a breach of trust by an insider of which the tippee had knowledge. See, e. g., Ross v. Licht, 263 F. Supp. 395, 410 (SDNY 1967); A. Jacobs, The Impact of Rule 10b-5, § 167, p. 7-4 (rev. ed. 1980) ("[T]he better view is that a tipper must know or have reason to know the information is nonpublic and was improperly obtained"); Fleischer, Mundheim, & Murphy, An Initial Inquiry Into the Responsibility to Disclose Market Information, 121 U. Pa. L. Rev. 798, 818, n. 76 (1973) ("The extension of rule 10b-5 restrictions to tippees of corporate insiders can best be justified on the theory that they are participating in the insider's breach of his fiduciary duty"). Cf. Restatement (Second) of Agency § 312, Comment c (1958) ("A person who, with notice that an agent is thereby violating his duty to his principal, receives confidential information from the agent, may be [deemed] . . . a constructive trustee").

    95

    [21] We do not suggest that knowingly trading on inside information is ever "socially desirable or even that it is devoid of moral considerations." Dooley, Enforcement of Insider Trading Restrictions, 66 Va. L. Rev. 1, 55 (1980). Nor do we imply an absence of responsibility to disclose promptly indications of illegal actions by a corporation to the proper authorities — typically the SEC and exchange authorities in cases involving securities. Depending on the circumstances, and even where permitted by law, one's trading on material nonpublic information is behavior that may fall below ethical standards of conduct. But in a statutory area of the law such as securities regulation, where legal principles of general application must be applied, there may be "significant distinctions between actual legal obligations and ethical ideals." SEC, Report of Special Study of Securities Markets, H. R. Doc. No. 95, 88th Cong., 1st Sess., pt. 1, pp. 237-238 (1963). The SEC recognizes this. At oral argument, the following exchange took place:

    96

    "QUESTION: So, it would not have satisfied his obligation under the law to go to the SEC first?

    "[SEC's counsel]: That is correct. That an insider has to observe what has come to be known as the abstain or disclosure rule. Either the information has to be disclosed to the market if it is inside information . . . or the insider must abstain." Tr. of Oral Arg. 27.

    97

    Thus, it is clear that Rule 10b-5 does not impose any obligation simply to tell the SEC about the fraud before trading.

    98

    [22] An example of a case turning on the court's determination that the disclosure did not impose any fiduciary duties on the recipient of the inside information is Walton v. Morgan Stanley & Co., 623 F. 2d 796 (CA2 1980). There, the defendant investment banking firm, representing one of its own corporate clients, investigated another corporation that was a possible target of a takeover bid by its client. In the course of negotiations the investment banking firm was given, on a confidential basis, unpublished material information. Subsequently, after the proposed takeover was abandoned, the firm was charged with relying on the information when it traded in the target corporation's stock. For purposes of the decision, it was assumed that the firm knew the information was confidential, but that it had been received in arm's-length negotiations. See id., at 798. In the absence of any fiduciary relationship, the Court of Appeals found no basis for imposing tippee liability on the investment firm. See id., at 799.

    99

    [23] Scienter — "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U. S. 185, 193-194, n. 12 (1976) — is an independent element of a Rule 10b-5 violation. See Aaron v. SEC, 446 U. S. 680, 695 (1980). Contrary to the dissent's suggestion, see post, at 674, n. 10, motivation is not irrelevant to the issue of scienter. It is not enough that an insider's conduct results in harm to investors; rather, a violation may be found only where there is "intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, supra, at 199. The issue in this case, however, is not whether Secrist or Dirks acted with scienter, but rather whether there was any deceptive or fraudulent conduct at all, i. e., whether Secrist's disclosure constituted a breach of his fiduciary duty and thereby caused injury to shareholders. See n. 27, infra. Only if there was such a breach did Dirks, a tippee, acquire a fiduciary duty to disclose or abstain.

    100

    [24] Without legal limitations, market participants are forced to rely on the reasonableness of the SEC's litigation strategy, but that can be hazardous, as the facts of this case make plain. Following the SEC's filing of the Texas Gulf Sulphur action, Commissioner (and later Chairman) Budge spoke of the various implications of applying Rule 10b-5 in inside-trading cases:

    101

    "Turning to the realm of possible defendants in the present and potential civil actions, the Commission certainly does not contemplate suing every person who may have come across inside information. In the Texas Gulf action neither tippees nor persons in the vast rank and file of employees have been named as defendants. In my view, the Commission in future cases normally should not join rank and file employees or persons outside the company such as an analyst or reporter who learns of inside information." Speech of Hamer Budge to the New York Regional Group of the American Society of Corporate Secretaries, Inc. (Nov. 18, 1965), reprinted in The Texas Gulf Sulphur Case — What It Is and What It Isn't, The Corporate Secretary, No. 127, p. 6 (Dec. 17, 1965) (emphasis added).

    102

    [25] Dirks contends that he was not a "tippee" because the information he received constituted unverified allegations of fraud that were denied by management and were not "material facts" under the securities laws that required disclosure before trading. He also argues that the information he received was not truly "inside" information, i. e., intended for a confidential corporate purpose, but was merely evidence of a crime. The Solicitor General agrees. See Brief for United States as Amicus Curiae 22. We need not decide, however, whether the information constituted "material facts," or whether information concerning corporate crime is properly characterized as "inside information." For purposes of deciding this case, we assume the correctness of the SEC's findings, accepted by the Court of Appeals, that petitioner was a tippee of material inside information.

    103

    [26] Judge Wright found that Dirks acquired a fiduciary duty by virtue of his position as an employee of a broker-dealer. See 220 U. S. App. D. C., at 325-327, 681 F. 2d, at 840-842. The SEC, however, did not consider Judge Wright's novel theory in its decision, nor did it present that theory to the Court of Appeals. The SEC also has not argued Judge Wright's theory in this Court. See Brief for Respondent 21, n. 27. The merits of such a duty are therefore not before the Court. See SEC v. Chenery Corp., 332 U. S. 194, 196-197 (1947).

    104

    [27] In this Court, the SEC appears to contend that an insider invariably violates a fiduciary duty to the corporation's shareholders by transmitting nonpublic corporate information to an outsider when he has reason to believe that the outsider may use it to the disadvantage of the shareholders. "Thus, regardless of any ultimate motive to bring to public attention the derelictions at Equity Funding, Secrist breached his duty to Equity Funding shareholders." Brief for Respondent 31. This perceived "duty" differs markedly from the one that the SEC identified in Cady, Roberts and that has been the basis for federal tippee-trading rules to date. In fact, the SEC did not charge Secrist with any wrongdoing, and we do not understand the SEC to have relied on any theory of a breach of duty by Secrist in finding that Dirks breached his duty to Equity Funding's shareholders. See App. 250 (decision of Administrative Law Judge) ("One who knows himself to be a beneficiary of non-public, selectively disclosed inside information must fully disclose or refrain from trading"); Record, SEC's Reply to Notice of Supplemental Authority before the SEC 4 ("If Secrist was acting properly, Dirks inherited a duty to [Equity Funding]'s shareholders to refrain from improper private use of the information"); Brief for SEC in No. 81-1243 (CADC), pp. 47-50; id., at 51 ("[K]nowing possession of inside information by any person imposes a duty to abstain or disclose"); id., at 52-54; id., at 55 ("[T]his obligation arises not from the manner in which such information is acquired . . ."); 220 U. S. App. D. C., at 322-323, 681 F. 2d, at 837-838 (Wright, J.).

    105

    The dissent argues that "Secrist violated his duty to Equity Funding shareholders by transmitting material nonpublic information to Dirks with the intention that Dirks would cause his clients to trade on that information. Post, at 678-679. By perceiving a breach of fiduciary duty whenever inside information is intentionally disclosed to securities traders, the dissenting opinion effectively would achieve the same result as the SEC's theory below, i. e., mere possession of inside information while trading would be viewed as a Rule 10b-5 violation. But Chiarella made it explicitly clear that there is no general duty to forgo market transactions "based on material, nonpublic information." 445 U. S., at 233. Such a duty would "depar[t] radically from the established doctrine that duty arises from a specific relationship between two parties." Ibid. See supra, at 654-655.

    106

    Moreover, to constitute a violation of Rule 10b-5, there must be fraud. See Ernst & Ernst v. Hochfelder, 425 U. S., at 199 (statutory words "manipulative," "device," and "contrivance . . . connot[e] intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities") (emphasis added). There is no evidence that Secrist's disclosure was intended to or did in fact "deceive or defraud" anyone. Secrist certainly intended to convey relevant information that management was unlawfully concealing, and — so far as the record shows — he believed that persuading Dirks to investigate was the best way to disclose the fraud. Other efforts had proved fruitless. Under any objective standard, Secrist received no direct or indirect personal benefit from the disclosure.

    107

    The dissenting opinion focuses on shareholder "losses," "injury," and "damages," but in many cases there may be no clear causal connection between inside trading and outsiders' losses. In one sense, as market values fluctuate and investors act on inevitably incomplete or incorrect information, there always are winners and losers; but those who have "lost" have not necessarily been defrauded. On the other hand, inside trading for personal gain is fraudulent, and is a violation of the federal securities laws. See Dooley, supra n. 21, at 39-41, 70. Thus, there is little legal significance to the dissent's argument that Secrist and Dirks created new "victims" by disclosing the information to persons who traded. In fact, they prevented the fraud from continuing and victimizing many more investors.

    108

    ---------

    109

    [1] See, e. g., Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975); Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976); Piper v. ChrisCraft Industries, Inc., 430 U. S. 1 (1977); Chiarella v. United States, 445 U. S. 222 (1980); Aaron v. SEC, 446 U. S. 680 (1980). This trend frustrates the congressional intent that the securities laws be interpreted flexibly to protect investors, see Affiliated Ute Citizens v. United States, 406 U. S. 128, 151 (1972); SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180, 186 (1963), and to regulate deceptive practices "detrimental to the interests of the investor," S. Rep. No. 792, 73d Cong., 2d Sess., 18 (1934); see H. R. Rep. No. 1383, 73d Cong., 2d Sess., 10 (1934). Moreover, the Court continues to refuse to accord to SEC administrative decisions the deference it normally gives to an agency's interpretation of its own statute. See, e. g., Blum v. Bacon, 457 U. S. 132 (1982).

    110

    [2] Unknown to Dirks, Secrist also told story to New York insurance regulators the same day. App. 23. They immediately assured themselves that Equity Funding's New York subsidiary had sufficient assets to cover its outstanding policies and then passed on the information to California regulators who in turn informed Illinois regulators. Illinois investigators, later joined by California officials, conducted a surprise audit of Equity Funding's Illinois subsidiary, id., at 87-88, to find $22 million of the subsidiary's assets missing. On March 30, these authorities seized control of the Illinois subsidiary. Id., at 271.

    111

    [3] In the same administrative proceeding at issue here, the Administrative Law Judge (ALJ) found that Dirks' clients — five institutional investment advisers — violated § 17(a) of the Securities Act of 1933, 15 U. S. C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U. S. C. § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5 (1983), by trading on Dirks' tips. App. 297. All the clients were censured, except Dreyfus Corporation. The ALJ found that Dreyfus had made significant efforts to disclose the information to Goldman, Sachs, the purchaser of its securities. Id., at 299, 301. None of Dirks' clients appealed these determinations. App. to Pet. for Cert. B-2, n. 1.

    112

    [4] The Court's implicit suggestion that Dirks did not gain by this selective dissemination of advice, ante, at 649, n. 2, is inaccurate. The ALJ found that because of Dirks' information, Boston Company Institutional Investors, Inc., directed business to Delafield Childs that generated approximately $25,000 in commissions. App. 199, 204-205. While it is true that the exact economic benefit gained by Delafield Childs due to Dirks' activities is unknowable because of the structure of compensation in the securities market, there can be no doubt that Delafield and Dirks gained both monetary rewards and enhanced reputations for "looking after" their clients.

    113

    [5] I interpret the Court's opinion to impose liability on tippees like Dirks when the tippee knows or has reason to know that the information is material and nonpublic and was obtained through a breach of duty by selective revelation or otherwise. See In re Investors Management Co., 44 S. E. C. 633, 641 (1971).

    114

    [6] The Court cites only a footnote in an SEC decision and Professor Brudney to support its rule. Ante, at 663-664. The footnote, however, merely identifies one result the securities laws are intended to prevent. It does not define the nature of the duty itself. See n. 9, infra. Professor Brudney's quoted statement appears in the context of his assertion that the duty of insiders to disclose prior to trading with shareholders is in large part a mechanism to correct the information available to noninsiders. Professor Brudney simply recognizes that the most common motive for breaching this duty is personal gain; he does not state, however, that the duty prevents only personal aggrandizement. Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 345-348 (1979). Surely, the Court does not now adopt Professor Brudney's access-to-information theory, a close cousin to the equality-of-information theory it accuses the SEC of harboring. See ante, at 655-658.

    115

    [7] The Court correctly distinguishes this duty from the duty of an insider to the corporation not to mismanage corporate affairs or to misappropriate corporate assets. Ante, at 653, n. 10. That duty also can be breached when the insider trades in corporate securities on the basis of inside information. Although a shareholder suing in the name of the corporation can recover for the corporation damages for any injury the insider causes by the breach of this distinct duty, Diamond v. Oreamuno, 24 N. Y. 2d 494, 498, 248 N. E. 2d 910, 912 (1969); see Thomas v. Roblin Industries, Inc., 520 F. 2d 1393, 1397 (CA3 1975), insider trading generally does not injure the corporation itself. See Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1, 2, n. 5, 28, n. 111 (1982).

    116

    [8] As it did in Chiarella, 445 U. S., at 226-229, the Court adopts the Cady, Roberts formulation of the duty. Ante, at 653-654.

    117

    "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." In re Cady, Roberts & Co., 40 S. E. C. 907, 912 (1961) (footnote omitted).

    118

    The first element — on which Chiarella's holding rests — establishes the type of relationship that must exist between the parties before a duty to disclose is present. The second — not addressed by Chiarella — identifies the harm that the duty protects against: the inherent unfairness to the shareholder caused when an insider trades with him on the basis of undisclosed inside information.

    119

    [9] Without doubt, breaches of the insider's duty occur most often when an insider seeks personal aggrandizement at the expense of shareholders. Because of this, descriptions of the duty to disclose are often coupled with statements that the duty prevents unjust enrichment. See, e. g., In re Cady, Roberts & Co., 40 S. E. C., at 912, n. 15; Langevoort, 70 Calif. L. Rev., at 19. Private gain is certainly a strong motivation for breaching the duty.

    120

    It is, however, not an element of the breach of this duty. The reference to personal gain in Cady, Roberts for example, is appended to the first element underlying the duty which requires that an insider have a special relationship to corporate information that he cannot appropriate for his own benefit. See n. 8, supra. It does not limit the second element which addresses the injury to the shareholder and is at issue here. See ibid. In fact, Cady, Roberts describes the duty more precisely in a later footnote: "In the circumstances, [the insider's] relationship to his customers was such that he would have a duty not to take a position adverse to them, not to take secret profits at their expense, not to misrepresent facts to them, and in general to place their interests ahead of his own." 40 S. E. C., at 916, n. 31. This statement makes clear that enrichment of the insider himself is simply one of the results the duty attempts to prevent.

    121

    [10] Of course, an insider is not liable in a Rule 10b-5 administrative action unless he has the requisite scienter. Aaron v. SEC, 446 U. S., at 691. He must know that his conduct violates or intend that it violate his duty. Secrist obviously knew and intended that Dirks would cause trading on the inside information and that Equity Funding shareholders would be harmed. The scienter requirement addresses the intent necessary to support liability; it does not address the motives behind the intent.

    122

    [11] The Court seems concerned that this case bears on insiders' contacts with analysts for valid corporate reasons. Ante, at 658-659. It also fears that insiders may not be able to determine whether the information transmitted is material or nonpublic. Ante, at 661-662. When the disclosure is to an investment banker or some other adviser, however, there is normally no breach because the insider does not have scienter: he does not intend that the inside information be used for trading purposes to the disadvantage of shareholders. Moreover, if the insider in good faith does not believe that the information is material or nonpublic, he also lacks the necessary scienter. Ernst & Ernst v. Hochfelder, 425 U. S., at 197. In fact, the scienter requirement functions in part to protect good-faith errors of this type. Id., at 211, n. 31.

    123

    Should the adviser receiving the information use it to trade, it may breach a separate contractual or other duty to the corporation not to misuse the information. Absent such an arrangement, however, the adviser is not barred by Rule 10b-5 from trading on that information if it believes that the insider has not breached any duty to his shareholders. See Walton v. Morgan Stanley & Co., 623 F. 2d 796, 798-799 (CA2 1980).

    124

    The situation here, of course, is radically different. Ante, at 658, n. 18 (Dirks received information requiring no analysis "as to its market relevance"). Secrist divulged the information for the precise purpose of causing Dirks' clients to trade on it. I fail to understand how imposing liability on Dirks will affect legitimate insider-analyst contacts.

    125

    [12] The duty involved in Mosser was the duty to the corporation in trust not to misappropriate its assets. This duty, of course, differs from the duty to shareholders involved in this case. See n. 7, supra. Trustees are also subject to a higher standard of care than scienter. 3 A. Scott, Law of Trusts § 201, p. 1650 (3d ed. 1967). In addition, strict trustees are bound not to trade in securities at all. See Langevoort, 70 Calif. L. Rev., at 2, n. 5. These differences, however, are irrelevant to the principle of Mosser that the motive of personal gain is not essential to a trustee's liability. In Mosser, as here, personal gain accrued to the tippees. See 341 U. S., at 273.

    126

    [13] Although I disagree in principle with the Court's requirement of an improper motive, I also note that the requirement adds to the administrative and judicial burden in Rule 10b-5 cases. Assuming the validity of the requirement, the SEC's approach — a violation occurs when the insider knows that the tippee will trade with the information, Brief for Respondent 31 — can be seen as a presumption that the insider gains from the tipping. The Court now requires a case-by-case determination, thus prohibiting such a presumption.

    127

    The Court acknowledges the burdens and difficulties of this approach, but asserts that a principle is needed to guide market participants. Ante, at 664. I fail to see how the Court's rule has any practical advantage over the SEC's presumption. The Court's approach is particularly difficult to administer when the insider is not directly enriched monetarily by the trading he induces. For example, the Court does not explain why the benefit Secrist obtained — the good feeling of exposing a fraud and his enhanced reputation — is any different from the benefit to an insider who gives the information as a gift to a friend or relative. Under the Court's somewhat cynical view, gifts involve personal gain. See ibid. Secrist surely gave Dirks a gift of the commissions Dirks made on the deal in order to induce him to disseminate the information. The distinction between pure altruism and self-interest has puzzled philosophers for centuries; there is no reason to believe that courts and administrative law judges will have an easier time with it.

    128

    [14] This position seems little different from the theory that insider trading should be permitted because it brings relevant information to the market. See H. Manne, Insider Trading and the Stock Market 59-76, 111-146 (1966); Manne, Insider Trading and the Law Professors, 23 Vand. L. Rev. 547, 565-576 (1970). The Court also seems to embrace a variant of that extreme theory, which postulates that insider trading causes no harm at all to those who purchase from the insider. Ante, at 666-667, n. 27. Both the theory and its variant sit at the opposite end of the theoretical spectrum from the much maligned equality-of-information theory, and never have been adopted by Congress or ratified by this Court. See Langevoort, 70 Calif. L. Rev., at 1, and n. 1. The theory rejects the existence of any enforceable principle of fairness between market participants.

    129

    [15] The Court uncritically accepts Dirks' own view of his role in uncovering the Equity Funding fraud. See ante, at 658, n. 18. It ignores the fact that Secrist gave the same information at the same time to state insurance regulators, who proceeded to expose massive fraud in a major Equity Funding subsidiary. The fraud surfaced before Dirks ever spoke to the SEC.

    130

    [16] Secrist did pass on his information to regulatory authorities. His good but misguided motive may be the reason the SEC did not join him in the administrative proceedings against Dirks and his clients. The fact that the SEC, in an exercise of prosecutorial discretion, did not charge Secrist under Rule 10b-5 says nothing about the applicable law. Cf. ante, at 665, n. 25 (suggesting otherwise). Nor does the fact that the SEC took an unsupportable legal position in proceedings below indicate that neither Secrist nor Dirks is liable under any theory. Cf. ibid. (same).

    131

    [17] At oral argument, the SEC's view was that Dirks' obligation to disclose would not be satisfied by reporting the information to the SEC. Tr. of Oral Arg. 27, quoted ante, at 661, n. 21. This position is in apparent conflict with the statement in its brief that speaks favorably of a safe harbor rule under which an investor satisfies his obligation to disclose by reporting the information to the Commission and then waiting a set period before trading. Brief for Respondent 43-44. The SEC, however, has neither proposed nor adopted a rule to this effect, and thus persons such as Dirks have no real option other than to refrain from trading.

  • 2 SEC. v. Switzer

    Not all tippees will be subject to liability for trading on a corporation’s materail, confidential inside information. In the case that follows, the court tests the limits of liabilty for tippees.

    1
    590 F.Supp. 756 (1984)
    2
    SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
    v.
    Barry L. SWITZER; Lee Allan Smith; Sedwyn T. Kennedy; Harold D. Deem; Harold D. Hodges; Robert E. Amyx; and Robert M. Hoover, Jr., Defendants.
    3
    Civ. A. No. Civ-83-225-Sf.
    United States District Court, W.D. Oklahoma.
    4
    July 2, 1984.
    5

    [757] T. Christopher Browne, Nancy E. McGinley, S.E.C., Fort Worth, Tex., for plaintiff.

    6

    Robert G. Grove, Grove & Grove, David Machanic, Michael Minnis, Pierson, Ball & Dowd, Harry A. Woods, Jr., Crowe & Dunlevy, Oklahoma City, Okl., Frederick T. Spindel, Washington, D.C., Daniel S. Greenfeld, Seyfarth, Shaw, Fairweather & Geraldson, New York City, for defendants.

    7
    MEMORANDUM AND ORDER
    8
    SAFFELS, District Judge, Sitting by Designation.
    9

    This action brought by the Securities and Exchange Commission [hereinafter SEC] was tried to the court on March 19-22, 1984. It involved allegations of violations of Section 10(b) of the Securities Exchange Act of 1934 and violations of Commission Rule 10b-5. On the basis of the following findings of fact and conclusions of law, the court shall enter judgment on behalf of the defendants.

    10
    Findings of Fact
    11

    The following findings of fact have been stipulated to by all parties and accepted by the court and are set forth as follows.

    12

    1. The SEC, pursuant to the authority granted to it by Sections 10(b), 16(a) and 23(a) of the Securities Exchange Act of 1934 [15 U.S.C. 78j(b), 78p(a) and 78w(a)] has promulgated Rules 10b-5, 16a-1 and [758] 16a-8 [17 C.F.R. 240.10b-5, 240.16a-1 and 240.16a-8], which have been in effect at all times mentioned in the complaint.

    13

    2. This court has jurisdiction over this action pursuant to Section 27 of the Securities Exchange Act [15 U.S.C. 78aa].

    14

    3. The SEC brings this action pursuant to Sections 21(d) and 21(e) of the Securities Exchange Act [15 U.S.C. 78u(d) and 78u(e)].

    15

    4. The defendants, directly or indirectly, made use of the means and instrumentalities of interstate commerce and of the mails in connection with the transactions, acts, practices and courses of business alleged in the complaint.

    16

    5. Certain of the transactions, acts, practices and courses of business alleged in the complaint as violations of, and aiding and abetting violations of, the Securities Exchange Act have occurred in the Western District of Oklahoma; and certain of the defendants can be found, inhabit or transact business in the Western District of Oklahoma.

    17

    6. Barry L. Switzer resides at 2811 Castlewood Drive, Norman, Oklahoma (73070). At all times mentioned in the complaint, Switzer was the head football coach at the University of Oklahoma in Norman, Oklahoma.

    18

    7. Lee Allan Smith resides at 6033 Riviera Drive, Oklahoma City, Oklahoma (73112). At all times mentioned in the complaint, Smith was General Manager of television station KTVY in Oklahoma City, Oklahoma.

    19

    8. Sedwyn T. Kennedy lives in the Oklahoma City, Oklahoma area. At all times mentioned in the complaint, Kennedy held an ownership interest in and operated restaurants located in the Oklahoma City, Oklahoma, area.

    20

    9. Harold D. Deem resides in Texas. Until 1975, he was involved in the restaurant business. At all times mentioned in the complaint, Deem managed his own investments, and he was a partner, along with Kennedy, in S & H Investments, an investment partnership.

    21

    10. Harold L. Hodges resides at 3215 Thornridge Road, Oklahoma City, Oklahoma (73120), and/or 2301 Grand Boulevard, Oklahoma City, Oklahoma (73116). At all times mentioned in the complaint, Hodges was the Owner and President of Core Oil and Gas, as well as the Owner and President of Bill Hodges Truck Company, both located in Oklahoma City, Oklahoma.

    22

    11. Robert E. Amyx resides at 3236 Rock Hollow, Oklahoma City, Oklahoma (74120). At all times mentioned in the complaint, Amyx was Vice President of Core Oil and Gas and Vice President of Bill Hodges Truck Company, and has been a partner, along with Hodges, in Hodges, Amyx, Cross and Hodges, an investment partnership.

    23

    12. Robert M. Hoover, Jr. resides at 7209 Waverly, Oklahoma City, Oklahoma (73120). At all times mentioned in the complaint, Hoover was Chairman of the Board of Directors of Oklahoma Energies Corporation, a publicly-traded company, located in Oklahoma City, Oklahoma.

    24

    13. Texas International Company [hereinafter TIC] is a Delaware corporation with principal offices located in Oklahoma City, Oklahoma. At all times mentioned in the complaint, TIC was engaged in, among other things, exploration for and development of oil and natural gas properties. At all times mentioned in the complaint, TIC's common stock was registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act [15 U.S.C. 78l (b)] and was traded on the New York Stock Exchange, as well as other exchanges. On or about June 18, 1982, a wholly-owned subsidiary of TIC merged with Phoenix Resources Company [hereinafter Phoenix] and Phoenix became a wholly-owned subsidiary of TIC. At all times mentioned in the complaint prior to the merger, TIC owned in excess of fifty percent (50%) of the common stock of Phoenix, and, by reason of such ownership position, controlled Phoenix through election of three of the five members of the Phoenix Board of Directors.

    25

    [759] 14. Prior to the merger, Phoenix, the successor to King Resources Company, was a Maine corporation with principal offices located in Oklahoma City, Oklahoma. At all times mentioned in the complaint prior to the merger, Phoenix engaged in, among other things, exploration for and development of oil and natural gas properties. At all times mentioned in the complaint prior to the merger, Phoenix's common stock was registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act [15 U.S.C. 78l (b)] and was traded in the Over-the-Counter securities market on the National Association of Securities Dealers Automated Quotation System.

    26

    15. On or about Monday, June 8, 1981, after discussions with defendant Deem, Kennedy purchased five thousand (5,000) shares of Phoenix at Forty-Two and 75/100 Dollars ($42.75) per share through the S & H Investments account; and on or about Tuesday, June 9, 1981, after further discussions with Deem, Kennedy purchased an additional one thousand (1,000) shares of Phoenix at Forty-Nine Dollars ($49) per share.

    27

    16. On or about Wednesday, June 10, and Friday, June 12, 1981, S & H Investments sold all six thousand (6,000) shares of Phoenix at prices between Sixty and 50/100 Dollars ($60.50) and Sixty-Eight and 50/100 Dollars ($68.50) per share; the pretax profits realized by and divided between Kennedy and Deem on the basis of this trading amounted to approximately One Hundred Eighteen Thousand Five Hundred Eighty-Seven Dollars ($118,587).

    28

    17. On or about Monday, June 8, and Tuesday, June 9, 1981, Hoover purchased sixteen thousand five hundred (16,500) shares of Phoenix at prices between Forty-Three Dollars ($43) and Forty-Eight and 50/100 Dollars ($48.50) per share.

    29

    18. On or about Wednesday, June 10, 1981, after the public announcement, Hoover sold all sixteen thousand five hundred (16,500) shares of Phoenix at prices between Fifty-Nine Dollars ($59) and Sixty-Three and 50/100 Dollars ($63.50) per share; the pre-tax profits realized on the basis of trading over this three-day period amounted to approximately Two Hundred Sixty-Seven Thousand Seven Hundred Twenty-Eight Dollars ($267,728); and the pre-tax profits paid to and divided by Switzer and Smith amounted to approximately One Hundred Ten Thousand Four Hundred Ninety-One Dollars ($110,491).

    30

    19. Hodges and Amyx agreed to purchase Phoenix stock through the Hodges, Amyx, Cross and Hodges investment partnership account.

    31

    20. On or about Monday, June 8, and Tuesday, June 9, 1981, Amyx, on behalf of the Hodges, Amyx, Cross and Hodges investment partnership, purchased thirteen thousand (13,000) shares of Phoenix at prices between Forty-Three and 50/100 Dollars ($43.50) and Forty-Eight and 50/100 Dollars ($48.50) per share.

    32

    21. On or about Wednesday, June 10, and Thursday, June 11, 1981, the Hodges, Amyx, Cross and Hodges investment partnership sold all thirteen thousand (13,000) shares of Phoenix at prices between Fifty-Nine Dollars ($59) and Sixty-Five Dollars ($65) per share; the pre-tax profits realized by the investment partnership on the basis of trading over a four-day period amounted to approximately Two Hundred Five Thousand Fifty-Five Dollars ($205,055); and the pre-tax profits from such trading paid to and divided by Switzer and Smith amounted to approximately Eighty-Five Thousand Three Hundred Ten Dollars ($85,310).

    33

    22. The volume and price at which Phoenix common stock traded during the period of June 1-12, 1981, were as follows:

    34
       DATE            VOLUME         PRICE (Bid)  June 1            8,800         $42-1/2       2            2,000         $42       3           10,600         $39-1/2       4            2,500         $39-1/2       5            6,800         $42       6  (Sat.)   ______         _______       7  (Sun.)   ______         _______       8           43,100         $44-1/2       9           31,800         $47-1/2       10         101,200         $61       11          63,800         $66-1/2       12          57,100         $69-1/4
    35

    [760] 23. The volume and price at which Phoenix common stock traded on July 31, 1981, was three hundred seventy-nine thousand (379,000) shares at Seventy-Nine and 7/8 Dollars ($79-7/8) bid.

    36

    The following additional facts are found by the court:

    37

    24. In or about May of 1981, Scott C. Newquist [hereinafter Newquist], a principal at Morgan Stanley, an investment banking firm, contacted G. Platt to discuss the prospect of obtaining TIC as a client. A meeting eventually was arranged between personnel of Morgan Stanley and personnel of TIC for June 4 or 5, 1981, at the Morgan Stanley offices in New York.

    38

    25. On or about June 4 or 5, 1981, G. Platt and Robert Gist [hereinafter Gist] met with Newquist and other Morgan Stanley personnel at the Morgan Stanley offices in New York City, New York. Newquist thought the meeting was going to concern various means available to TIC to alter the relationship between itself and Phoenix. At the meeting, however, G. Platt, in addition to discussing TIC's options, discussed Phoenix and inquired whether Morgan Stanley would be willing to be retained by Phoenix to evaluate, among other alternatives, the disposition of Phoenix or its assets. Newquist advised G. Platt that prior to accepting Phoenix as a client, Morgan Stanley would require a unanimous vote of the Phoenix Board of Directors, and further would have to conduct a "due diligence" inquiry, i.e., a familiarization with the affairs of the company. By the time G. Platt and Gist returned to Oklahoma City on June 5, 1981, they had decided to recommend to the Phoenix Board that Morgan Stanley be retained to undertake a study of the company and evaluate the prompt disposition of Phoenix or its assets.

    39

    26. In June of 1981, G. Platt was Chairman of the Board and the Chief Executive Officer of TIC and served as a Director on the Phoenix Board of Directors. Gist, in June of 1981, was President of Phoenix. G. Platt, in essence, controlled the Phoenix Board of Directors because he could fire any member except Arthur Lipper.

    40

    27. Although Lipper, the only independent director on the Board, had opposed mergers of Phoenix in the past, he had never opposed liquidation of Phoenix, provided the liquidation was at fair market value.

    41

    28. The Board of Directors of Phoenix met on June 9, 1981, and agreed to formally request Morgan Stanley to be retained. A phone call was then made to Morgan Stanley on June 9, 1981, and Morgan Stanley formally agreed to be retained by Phoenix, subject only to completion of its "due diligence" inquiry.

    42

    29. On June 10, 1981, Phoenix made a public announcement that its Board of Directors had determined to consider the prompt disposition of the company or its assets (liquidation) and had retained an unidentified investment banking firm, later publicly identified as Morgan Stanley, to conduct an evaluation of Phoenix. At the time of the public announcement, Morgan Stanley had not completed its "due diligence" examination of Phoenix, and the actual acceptance by Morgan Stanley was contingent upon completion of the "due diligence" examination.

    43

    30. From at least the time of the Platt-Newquist meeting on or about June 4 or 5, 1981, when G. Platt and Gist determined to pursue a possible liquidation of Phoenix, to at least the time of the public announcement on or about June 10, 1981, the proposal to liquidate Phoenix and retain an investment banking firm to evaluate that proposal was non-public information. Furthermore, such information was likely to affect the investment decision of a reasonably prudent investor, i.e., it was information which a reasonable investor would consider important in making his decision how to act because the pro-rata value of Phoenix assets could reasonably be expected to exceed the market price of its stock at the time of the public announcement. This made the information material.

    44

    31. During the days which followed the June 10, 1981, announcement, there were [761] no other market events to which the rise in Phoenix stock price could be attributed.

    45

    32. Barry Switzer is a well-recognized "celebrity" in Oklahoma and elsewhere. He has an interest in the oil and gas industry, as he is personally involved in various ventures within the industry.

    46

    33. Over the past several years, defendants Switzer, Kennedy, Deem, Smith, Hodges, Amyx and Hoover have acted together in varying combinations of persons (or in various groups of persons) in making investments. They have formed partnerships such as S & H Investments, Waverly Ltd., and Hodges, Amyx, Cross and Hodges, to assist them in their investment ventures. Often times, they trade on rumors or gossip they hear within the investing community. Profits and losses occurring as a result of stock investments made through these partnerships are shared by the members of the partnerships.

    47

    34. TIC had been considering various options for either consolidating or separating TIC and Phoenix for some time prior to its approaching Morgan Stanley on June 4 or 5, 1981. Rumors concerning these various options were circulating within the investing oil and gas community prior to June 4 or 5, 1981.

    48

    35. On June 6, 1981, four days prior to the public announcement concerning Phoenix, a state invitational secondary school track meet was held at John Jacobs Field on the University of Oklahoma campus. The track meet was a day long event. Several hundred spectators attended, including Barry Switzer, who arrived at the meet between 10:00 and 10:30 a.m. to watch his son compete, and George and Linda Platt, who arrived between 9:00 and 10:00 a.m. to watch their son compete. Soon after Switzer's arrival at the track meet, he and G. Platt recognized and greeted each other. Neither Switzer nor G. Platt knew that the other would be attending the meet.

    49

    36. G. Platt was a supporter of Oklahoma University football and had met Switzer at a few social engagements prior to June of 1981. TIC was a sponsor of Switzer's football show, "Play Back." G. Platt had had season tickets to the OU football games for approximately five years. G. Platt had obtained autographs from Switzer for G. Platt's minor children, and had had his secretary telephone Switzer to request that his season tickets be upgraded. Upgrading of tickets was extended as a courtesy by Switzer to many season ticket holders. On at least two occasions Switzer had phoned G. Platt requesting continued sponsorship by TIC of Switzer's football television program. These calls were made at the urging of Tom Goodgame, General Manager of the television station which then produced "Play Back." As of June 5, 1981, Switzer knew that G. Platt was Chairman of the Board of TIC and further knew that TIC was a substantial shareholder of Phoenix because Switzer was a stockholder in TIC and thereby knew Phoenix was a subsidiary.

    50

    37. Neither G. Platt nor his wife Linda are particularly impressed by Switzer. They view him as "just a nice fellow."

    51

    38. Upon first greeting each other at the track meet, G. Platt and Switzer exchanged pleasantries. Switzer then departed and continued on through the bleachers.

    52

    39. Throughout the course of the day, G. Platt and Linda Platt generally remained in one place in the bleachers. Switzer, however, throughout the day moved around a great deal, at times speaking with his son or other participants and their families, signing autographs and watching the different events on the field. While moving about, Switzer joined the Platts to visit with them about three to five times. During these visits Switzer and the Platts talked about their sons' participation in the meet, the oil and gas business, the economy, football and their respective personal investments.

    53

    40. G. Platt and Switzer did not have any conversations regarding Phoenix or Morgan Stanley, nor did they have any conversations regarding any mergers, acquisitions, take-overs or possible liquidations of Phoenix in which Morgan Stanley would play a part. G. Platt did not make [762] any stock recommendations to Switzer, nor did he intentionally communicate material, non-public corporate information to Switzer about Phoenix during their conversations at the track meet. The information that Switzer heard at the track meet about Phoenix was overheard and was not the result of an intentional disclosure by G. Platt.

    54

    41. Sometime in the afternoon, after his last conversation with G. Platt, Switzer laid down on a row of bleachers behind the Platts to sunbathe while waiting for his son's next event. While Switzer was sunbathing, he overheard G. Platt talking to his wife about his trip to New York the prior day. In that conversation, G. Platt mentioned Morgan Stanley and his desire to dispose of or liquidate Phoenix. G. Platt further talked about several companies bidding on Phoenix. Switzer also overheard that an announcement of a "possible" liquidation of Phoenix might occur the following Thursday. Switzer remained on the bleachers behind the Platts for approximately twenty minutes then got up and continued to move about.

    55

    42. At this time Switzer had no knowledge as to whether the information he had overheard was confidential.

    56

    43. G. Platt was not conscious of Switzer's presence on the bleachers behind him that day, nor that Switzer had overheard any conversation.

    57

    44. G. Platt had returned home late the previous day from his meetings in New York, and his wife was to leave town for an entire week on the following day. Having minor children, it is the Platts' common practice to try to arrange for G. Platt to be at home when his wife is out of town. The day of the track meet provided the Platts with an opportunity to discuss their respective plans for the up-coming week. During this discussion, G. Platt's prior business activities in New York and its resultant obligations and appointments were mentioned. In addition, when G. Platt appears distracted, it is not uncommon for his wife to inquire of him what is on his mind. On these occasions, he will talk to her about his problems, even though she does not have an understanding of nor interest in business matters. On the day of the track meet, Phoenix was weighing upon the mind of G. Platt, as it had been for the past several years, prompting G. Platt to talk to his wife about it.

    58

    45. On June 6, 1981, after the track meet, Switzer returned home and looked up the price of Phoenix in the paper. He then had dinner with Sedwyn Kennedy, a close friend of both his and defendant Lee Allan Smith. In the past, they had all made investments through their partnership, SKS. Switzer told Kennedy he had overheard a conversation about the possible liquidation of Phoenix and that it would probably occur or be announced the next Thursday. Switzer told him the source was a gentlemen who was an executive with TIC. Switzer did not tell Kennedy the man was G. Platt. Switzer and Kennedy are close friends and have known each other since 1966.

    59

    46. By the end of the evening, Switzer and Kennedy had each expressed an intention to purchase Phoenix stock.

    60

    47. On Sunday, June 7, 1981, Kennedy telephoned Deem, his partner in S&H Investments, to discuss the possible purchase of Phoenix stock. Kennedy told Deem that Barry Switzer had talked to him about Phoenix, but did not give him any other details. As a result, Kennedy and Deem agreed to purchase shares of Phoenix through their partnership, S&H Investments.

    61

    48. On or about Monday, June 8, 1981, Kennedy purchased five thousand (5,000) shares of Phoenix stock at Forty-Two and 75/100 Dollars ($42.75) per share through the S&H Investments account; and on or about Tuesday, June 9, 1981, after further discussions with Deem, Kennedy purchased an additional one thousand (1,000) shares of Phoenix at Forty-Nine Dollars ($49) per share. (See stipulated fact No. 15, supra.)

    62

    49. On Sunday, June 7, 1981, Switzer called Lee Allan Smith, a close friend with whom he had previously entered joint investments. [763] Switzer told Smith that he had been at a track meet on Saturday and had overheard some information regarding the possible liquidation or buy-out of Phoenix. Switzer attributed the information to "someone who should know," and said that he had overheard that Morgan Stanley was involved and that something could happen by Thursday of the following week. Switzer and Smith decided to approach Harold Hodges and Robert Hoover about providing the capital for buying some Phoenix stock with them because Smith and Switzer had insufficient available cash at that time to purchase a significant number of shares on their own. Hodges, Smith and Switzer were personal friends through participation in community and charitable activities in Oklahoma City. Hoover has known Smith for thirty years and has been a personal friend of both Smith and Switzer.

    63

    50. On Sunday, June 7, 1981, Switzer and Smith met with Hodges at the latter's offices. At this meeting, Switzer told Hodges that he had overheard some information that Phoenix stock was going to go up. Switzer did not state the source of the information, and Hodges did not inquire, because Switzer and Smith are good friends of his, and he often invests on information of this nature. During most of this meeting, Smith was occupied in making telephone calls on other matters in another area of the room.

    64

    51. At the conclusion of the meeting, it was agreed that Hodges would supply the capital and purchase the stock, and that any profits or losses would be split, fifty percent (50%) to Hodges and fifty percent (50%) to be divided between Smith and Switzer.

    65

    52. On Monday, June 8, 1981, Hodges told Robert Amyx that he had visited with Smith and Switzer the previous day and that they had told him they had heard a rumor that something favorable was going to happen regarding TIC or Phoenix, and instructed him to make stock purchases in both companies.

    66

    53. On Monday, June 8, and Tuesday, June 9, 1981, Robert Amyx, on behalf of the Hodges, Amyx, Cross and Hodges investment partnership, purchased thirteen thousand (13,000) shares of Phoenix, at prices between Forty-Three and 50/100 Dollars ($43.50) and Forty-Eight and 50/100 Dollars ($48.50) per share. (See stipulated fact No. 20, supra.)

    67

    54. Because Hodges did not know which company was going to have a stock price rise, he requested Amyx not only to purchase Phoenix stock, but also stock of TIC, through the Hodges, Amyx, Cross and Hodges investment partnership account.

    68

    55. At the same time that he made the Phoenix purchases, Amyx purchased twenty thousand (20,000) shares of TIC stock at Twenty-Seven Dollars ($27) and Twenty-Seven and 1/8 Dollars ($27-1/8) per share.

    69

    56. On Sunday, June 7, 1981, after their meeting with Hodges, Switzer and Smith met with Robert Hoover at his home, where he was having a party. Switzer and Smith arrived separately. Smith first discussed the matter with Hoover and did not mention where he had received the information. Switzer also told Hoover something was going to happen with Phoenix, but did not say from whom he had heard the information.

    70

    57. Hoover agreed to purchase Phoenix stock jointly with Smith and Switzer. Hoover advanced the capital and purchased the stock for his account, based on an understanding that any losses or profits would be split, fifty percent (50%) to Hoover, and the remaining fifty percent (50%) to be divided between Smith and Switzer.

    71

    58. Hoover purchased sixteen thousand (16,000) shares of Phoenix stock on or about Monday, June 8, or Tuesday, June 9, 1981. (See stipulated fact No. 17, supra.)

    72

    59. G. Platt did not learn of Switzer's purchase or sale of Phoenix stock, or of the conversation Switzer had overheard, until on or about March 10 or 11, 1982. On or about March 10 or 11, 1982, Switzer called G. Platt at Platt's condominium in Snow Mass, Colorado, and asked to meet with him because Switzer said something he had inadvertently done would affect Platt. At [764] the time Switzer was also staying in Snow Mass, Colorado. During this meeting, Switzer told G. Platt, for the first time, that Switzer had been sitting behind G. Platt and his wife at the track meet on June 6, 1981, and had overheard G. Platt's conversation with his wife regarding Phoenix, and that as a result of that overheard conversation, Switzer and other friends of his had subsequently purchased and sold Phoenix stock. G. Platt had heard as early as February of 1982 that Phoenix was under investigation by the SEC. After hearing the facts from Switzer, G. Platt told Switzer it was essential that they meet with Robert Gist as soon as G. Platt returned to Oklahoma City.

    73

    60. On or about March 22, 1982, G. Platt, Switzer and Gist met at TIC's offices and Switzer again related the facts he had told G. Platt on or about March 10 or 11, 1982.

    74

    61. G. Platt did not share in the profits made through the transactions in Phoenix stock by Switzer, Kennedy, Deem, Smith, Hodges, Amyx and Hoover, nor did he receive any other financial benefit as a result of those transactions.

    75

    62. G. Platt did not receive any direct or indirect pecuniary gain nor any reputational benefit likely to translate into future earnings due to Switzer's inadvertent receipt of the information regarding Phoenix.

    76

    63. G. Platt did not make any gift to Switzer at this time, nor has he ever made a gift to Switzer.

    77

    64. Neither Switzer, Kennedy, Smith, Deem, Hodges, Amyx nor Hoover has ever been employed by or been an officer or director of Phoenix or TIC, nor have any of these defendants ever had any business relationship with Phoenix or with G. Platt personally. None of these defendants is a relative or personal friend of G. Platt.

    78

    65. None of the defendants had a relationship of trust and confidence with Phoenix, its shareholders or G. Platt.

    79

    66. In June, 1981, neither Switzer, Smith, Kennedy, Deem, Hodges, Amyx nor Hoover had any information from any source as to whether there was in fact any prospective purchaser of the stock or assets of Phoenix, nor whether a liquidation of the company would actually take place.

    80

    67. Smith, Hodges, Amyx, Kennedy, Deem and Hoover did not know nor did they act in reckless disregard of circumstances through which they could have had a reason to believe that the information received by Switzer came from other than an overheard conversation. None of these defendants knew or acted in reckless disregard of circumstances through which they could have had a reason to believe that the information they received was disclosed by an insider of Phoenix for an improper purpose.

    81
    Conclusions of Law
    82

    Based upon the foregoing findings of fact, the court makes the following conclusions of law.

    83

    1. The information that defendants Switzer, Smith, Hodges, Amyx, Hoover, Kennedy and Deem received concerning Phoenix was material as of June 6, 1981, the date of the track meet. On that date, there was a substantial likelihood that, given all the circumstances, and contingencies involved, the information as received by Switzer and communicated to Kennedy, Smith, Hodges, Amyx, Hoover and Deem would have assumed actual significance in the deliberations of a reasonable shareholder. See TSC Industries Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976).

    84

    2. To constitute material information, the information need not necessarily relate to a past or existing condition or event. It may refer to a prospective event, even though the event may not occur, provided there appears to be a reasonable likelihood of its future occurrence. In situations where the event, if it should occur, could influence the stockholders' investment decision, the chance that it might well occur constitutes information that should be disclosed to the investor. See Securities and Exchange Commission v. Texas [765] International Co., 498 F.Supp. 1231 (N.D. Ill.1980); Sonesta International Hotels Corp. v. Willington Associates, 483 F.2d 247 (2nd Cir.1973). In both Sonesta and Texas International, facts which referred to prospective and contingent events were deemed material because there appeared to be a reasonable likelihood of the occurrence of the future events. The existence of the decision to evaluate the liquidation of Phoenix, coupled with the affirmative steps of hiring Morgan Stanley as an investment banker, although based upon some contingencies, constituted material information as of June 6, 1981, the date of the track meet.

    85

    3. It is undisputed that G. Platt was an insider in regard to both TIC and Phoenix as of June 6, 1981.

    86

    4. Switzer, Kennedy, Deem, Smith, Hodges, Amyx and Hoover were not insiders of Phoenix. None of them had any fiduciary duty to the stockholders of TIC or Phoenix by virtue of their positions. None of them were employed by Phoenix, nor did they have any position of trust or confidence with Phoenix. These defendants were strangers to Phoenix and had no preexisting fiduciary duties to the shareholders of Phoenix. In its recent opinion of Dirks v. Securities Exchange Commission, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), the United States Supreme Court addressed tippee liability. The court pointed out that, unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such fiduciary relationship. In view of the absence of this fiduciary relationship, the court notes it has been unclear how a tippee acquires the Cady, Roberts duty to disclose or refrain from trading on inside information first stated in In re Cady, Roberts & Co., 40 S.E.C. 907 (1961). Although the SEC, in Dirks, urged the court to accept what has become known as the "information" theory, which in essence states that anyone knowingly receiving non-public, material information acquires an insider fiduciary duty to disclose or abstain from trading, the court rejected this theory as they had in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). The court in Dirks stated: "We reaffirm today that `[a] duty [to disclose] arises from the relationship between parties ... and not merely from one's ability to acquire information because of his position in the market.'" Dirks, 103 S.Ct. at 3263, quoting from Chiarella v. United States, 445 U.S. at 232-33, n. 14, 100 S.Ct. at 1116 n. 14. The court further stated in Dirks: "As we emphasized in Chiarella, mere possession of non-public information does not give rise to a duty to disclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider creates such a special relationship between the tippee and the corporation's shareholders." 103 S.Ct. at 3262, n. 15.

    87

    6. Essentially, in Dirks the court found that the Cady, Roberts duty of a tippee "to disclose or abstain" is derivative from that of the insider's duty. The court stated:

    88
    ... [S]ome tippees must assume an insider's duty to the shareholders not because they receive inside information, but rather because it has been made available to them improperly. And for Rule 10b-5 purposes, the insider's disclosure is improper only where it would violate his Cady, Roberts duty. Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. As Commissioner Smith perceptively observed in Investors Management Co.: `[T]ippee responsibility must be related back to insider responsibility by a necessary finding that the tippee knew the information was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose the information .... `44 S.E.C., at 651 (concurring in the result). Tipping thus properly is viewed only as a means of indirectly violating [766] the Cady, Roberts disclose-or-abstain rule.
    89

    Dirks v. S.E.C., 103 S.Ct. at 3264. (Emphasis in original, footnotes omitted.)

    90

    7. Thus, only when a disclosure is made for an "improper purpose" will such a "tip" constitute a breach of an insider's duty, and only when there has been a breach of an insider's duty which the "tipee" knew or should have known constituted such a breach will there be "tippee" liability sufficient to constitute a violation of § 10(b) and Commission Rule 10b-5.

    91

    8. In Dirks, the court held that a disclosure is made for an "improper purpose" when an insider personally will benefit, directly or indirectly, from his disclosure. That court stated: "Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider [to his stockholders], there is no derivative breach [by the tippee]. Dirks, 103 S.Ct. at 3265.

    92

    9. G. Platt did not breach a fiduciary duty to stockholders of Phoenix for purposes of Rule 10b-5 liability nor § 10(b) liability, when he disclosed to his wife at the track meet of June 6, 1981, that there was going to be a possible liquidation of Phoenix.

    93

    10. This information was given to Mrs. Platt by G. Platt for the purpose of informing her of his up-coming business schedule so that arrangements for child care could be made.

    94

    11. The information was inadvertently overheard by Switzer at the track meet.

    95

    12. Rule 10b-5 does not bar trading on the basis of information inadvertently revealed by an insider.

    96

    13. The information was not intentionally imparted to Switzer by G. Platt, nor was the disclosure made for an improper purpose.

    97

    14. G. Platt did not personally benefit, directly or indirectly, monetarily or otherwise from the inadvertent disclosure.

    98

    15. As noted above, Dirks set forth a two-prong test for purposes of determining whether a tippee has acquired a fiduciary duty. First, it must be shown that an insider breached a fiduciary duty to the shareholders by disclosing inside information; and, second, it must be shown that the tippee knew or should have known that there had been a breach by the insider. Dirks, 103 S.Ct. at 3264.

    99

    16. G. Platt did not breach a duty to the shareholders of Phoenix, and thus plaintiff failed to meet its burden of proof as to the first prong established in Dirks. Since G. Platt did not breach a fiduciary duty to Phoenix shareholders, Switzer did not acquire nor assume a fiduciary duty to Phoenix's shareholders, and because Switzer did not acquire a fiduciary duty to Phoenix shareholders, any information he passed on to defendants Smith, Hodges, Amyx, Hoover, Kennedy and Deem was not in violation of Rule 10b-5.

    100

    17. Since plaintiff did not meet its burden of proof as to the first prong of the two-prong Dirks test, i.e., it was not proved that G. Platt breached a fiduciary duty to the shareholders of Phoenix, tippee liability cannot result from G. Platt's inadvertent disclosure to Switzer.

    101

    18. Even if, however, plaintiff had met the first prong of the two-part test, i.e., had proven that G. Platt did disclose material non-public information to Switzer at the track meet in an improper manner, the court would still find no resulting tippee liability to Switzer, Smith, Hodges, Amyx, Hoover, Kennedy and Deem because the court concludes plaintiff failed to prove the second prong of the Dirks test as well. These defendants did not know, nor did they have reason to know, that the information they received was material, nonpublic information disseminated by a corporate insider for an improper purpose, and, thus, under Dirks, are not liable as tippees under Rule 10b-5.

    102

    19. Defendants Switzer, Smith, Hodges, Amyx, Hoover, Kennedy and Deem have not been shown to have a propensity to engage in additional violations of Rule 10b-5 in the future. Hence, a permanent [767] injunction may not be entered against these defendants.

    103

    20. The SEC is not entitled to disgorgement of profits calculated on a pre-income tax basis in connection with transactions which occurred during previous tax years.

    104

    The foregoing shall constitute the findings of fact and conclusions of law of this court. Any findings of fact which may be construed as conclusions of law shall so be construed; in like manner, any conclusions of law which may be construed as findings of fact shall so be construed.

    105

    On the basis of the above findings of fact and conclusions of law, the court orders judgment in favor of defendants.

    106

    The court now turns to the motion for attorneys' fees pursuant to the Equal Access to Justice Act [hereinafter EAJA], 28 U.S.C. 2412 (1980). Defendants Switzer, Smith, Hoover, Kennedy and Hart have petitioned this court for an award of attorneys' fees and costs authorized pursuant to the EAJA. Defendants Hodges and Amyx have petitioned the court for a similar award, but have brought the petition on behalf of their investment partnership.

    107

    Section 2412(d)(1)(A) of the Act provides that a court "shall" award an eligible[1] private prevailing party attorneys' fees and other litigation expenses unless some other statute specifically provides otherwise,[2] or "the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust."[3]

    108

    The EAJA permits the government, when it loses a case, to avoid liability for attorneys' fees if it can demonstrate that its litigation position was "substantially justified." See Spencer v. NLRB, 712 F.2d 539 (D.C.Cir.1983); United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481 (10th Cir.1984). The government bears the burden of demonstrating that its position was "substantially justified." Spencer, supra, 712 F.2d at 557; S & H Riggers & Erectors, Inc. v. OSHRC, 672 F.2d 426 (5th Cir.1982).

    109

    To meet the substantial justification standard, the government need only demonstrate its litigation position was reasonable. In 2,116 Boxes, supra, the court held that the government need not establish its decision to litigate was based on a substantial probability of prevailing, but only need "show that there is a reasonable basis in truth for the facts alleged in the pleadings; that there exists a reasonable basis in law for the theory it propounds; and that the facts alleged will reasonably support the legal theory advanced." 726 F.2d at 1487. See also Dougherty v. Lehman, 711 F.2d 555 (3rd Cir.1983).

    110

    The court believes plaintiff's theory or position taken at litigation had a reasonable basis in law. Plaintiff asserted that violations under 10b-5 resulted when inside information was made available or "tipped" [768] to outsiders who then traded on the improperly obtained inside information when the tip was made by an insider in breach of his fiduciary duty to the corporate shareholders, and the "tippee knew or should have known of the breach." Dirks, 103 S.Ct. 3264 (1983).

    111

    The court further finds plaintiff's litigation position had a reasonable basis in fact. At trial, the SEC proceeded to set forth its case, based on circumstantial evidence, that the material, non-public information regarding the possible liquidation of Phoenix made available to Switzer on June 6, 1981, at a track meet in Norman, Oklahoma, had been passed to him in an improper manner by G. Platt, an insider at Phoenix. Although Switzer claimed he had overheard the information, and neither G. Platt nor his wife, Linda, recalled discussing Phoenix at the track meet that day, the SEC presented strong circumstantial evidence in support of its theory.

    112

    Although the court found the testimony of G. Platt and Switzer to be more credible and probative than the circumstantial evidence presented by the government, the court does not find that the circumstantial evidence was so devoid of legal or factual support that a fee award would be appropriate. Simply because G. Platt and Switzer did not admit they had engaged in an improper exchange of inside information does not mean the SEC could have no reasonable basis in fact for believing there had been improper conduct and bringing an action so that a determination of that issue could be made.

    113

    In view of the considerable circumstantial evidence presented by the SEC that the tip was intentional and not merely inadvertent, as claimed by defendants, the court finds the SEC's position to have been substantially justified, and on that basis the court denies the application of defendants Switzer, Smith, Hoover, Deem and Kennedy, as well as Hodges and Amyx,[4] for attorneys' fees pursuant to 28 U.S.C. 2412(d)(1)(A).

    114

    Defendant Hart has also filed an application for an award of attorneys' fees under the EAJA. Hart was dismissed from the case on a motion for summary judgment. Although he was dismissed at the summary judgment stage, the court finds the SEC's position in naming him in the lawsuit was substantially justified and had a reasonable basis in both law and fact, and therefore, the court denies defendant Hart's application for attorneys' fees under the EAJA as well.

    115
    JAMES HART'S MOTION FOR ENTRY OF JUDGMENT
    116

    Defendant Hart was granted summary judgment in an opinion and order filed on May 20, 1983. He has now moved the court for entry of judgment and further requests that the date of entry of judgment be the same as the date judgment is entered for the defendants who participated in the trial to the court. Defendant Hart's motion for entry of judgment is hereby granted. Further, the date of entry of judgment shall be the same as the date judgment is entered for defendants Switzer, Smith, Hoover, Amyx, Hodges, Kennedy and Deem.

    117

    IT IS BY THE COURT THEREFORE ORDERED, based on the earlier stated findings of fact and conclusions of law, that judgment is hereby entered in favor of defendants regarding the court trial which commenced March 19, 1984, and concluded March 22, 1984.

    118

    IT IS FURTHER ORDERED that the motions of defendants Switzer, Smith, Hoover and Hart for award of attorneys' fees and expenses are hereby denied.

    119

    IT IS FURTHER ORDERED that the motion for attorneys' fees brought on behalf of the Hodges, Amyx, Cross and Hodges partnership is hereby denied.

    120

    IT IS FURTHER ORDERED that the motion for attorneys' fees brought on behalf [769] of defendant Kennedy is hereby denied.

    121

    IT IS FURTHER ORDERED that defendant James Hart's motion for entry of judgment is hereby granted in accordance with the Memorandum and Order of May 20, 1983. IT IS FURTHER ORDERED that the date of entry of judgment shall be the same as the date judgment is entered for defendants Switzer, Smith, Hoover, Amyx, Hodges, Kennedy and Deem.

    122

    [1] The government claims Hodges and Amyx have not demonstrated their financial eligibility because they have brought their application on behalf of their investment partnership and not as individual defendants. Since the court finds that plaintiff's position was substantially justified, it is unnecessary to address the financial eligibility issue raised by the government as to defendants Hodges and Amyx.

    123

    [2] The EAJA provides that costs may be awarded "except as otherwise specifically provided by statute." 28 U.S.C. 2412(a). Section 27 of the Securities Exchange Act of 1934 specifically precludes any award of costs against the Commission. Section 27 states: "No costs shall be assessed for or against the Commission in any proceeding under this title brought by or against it...."

    124

    Accordingly, the court concludes that any request contained in these motions for costs must be denied because such award is specifically prohibited by Section 27 of the Securities Exchange Act of 1934.

    125

    [3] In relevant part, 28 U.S.C. 2412(d)(1)(A) provides:

    126

    [A] court shall award to a prevailing party other than the United States fees and other expenses ... incurred by that party in any civil action (other than cases sounding in tort) brought by or against the United States in any court having jurisdiction of that action, unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.

    127

    [4] Again, the court denies the application of defendants' Hodges and Amyx, brought by them through their investment partnership, for attorneys fees on the sole basis that the government's litigation position was substantially justified.

  • 3 A note on US v Newman

    The classic tipper-tippee scenario in insider trading prosecutions involves a corporate insider who, in exchange for a personal benefit, discloses material nonpublic information to an outsider, who then later trades in reliance on this inside information. For many years, courts leaned on increasingly vague assertions of “personal benefit” received by tippers to assign liability to remote tippees. In some cases, courts have been willing to “daisy chain” to recipients of inside information who are extremely remote from the original source.

    In United States v. Newman the Second Circuit reduced the liability of remote tippees by holding that a tippee cannot be convicted unless the tippee “knows of the personal benefit received by the insider in exchange for the disclosure.” In addition, Newman held the “personal benefit” received by the tipper “must be of some consequence” and must be a true quid pro quo, rejecting the notion that mere friendship and association could meet this requirement.

    From the Newman opinion:

    [T]he Government presented evidence that a group of financial analysts exchanged information they obtained from company insiders, both directly and more often indirectly. Specifically, the Government alleged that these analysts received information from insiders at Dell and NVIDIA disclosing those companies' earnings numbers before they were publicly released in Dell's May 2008 and August 2008 earnings announcements and NVIDIA's May 2008 earnings announcement. These analysts then passed the inside information to their portfolio managers, including Newman and Chiasson, who, in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.

    Newman and Chiasson were several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information. With respect to the Dell tipping chain, the evidence established that Rob Ray of Dell's investor relations department tipped information regarding Dell's consolidated earnings numbers to Sandy Goyal, an analyst at Neuberger Berman. Goyal in turn gave the information to Diamondback analyst Jesse Tortora. Tortora in turn relayed the information to his manager Newman as well as to other analysts including Level Global analyst Spyridon "Sam" Adondakis. Adondakis then passed along the Dell information to Chiasson, making Newman and Chiasson three and four levels removed from the inside tipper, respectively. ...

    Newman and Chiasson moved for a judgment of acquittal pursuant to Federal Rule of Criminal Procedure 29. They argued that there was no evidence that the corporate insiders provided inside information in exchange for a personal benefit which is required to establish tipper liability under Dirks v. S.E.C.,463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). Because a tippee's liability derives from the liability of the tipper, Newman and Chiasson argued that they could not be found guilty of insider trading. Newman and Chiasson also argued that, even if the corporate insiders had received a personal benefit in exchange for the inside information, there was no evidence that they knew about any such benefit. Absent such knowledge, appellants argued, they were not aware of, or participants in, the tippers' fraudulent breaches of fiduciary duties to Dell or NVIDIA, and could not be convicted of insider trading under Dirks. ...

    In light of Dirks, we find no support for the Government's contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability. Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation's securities markets. The Supreme Court explicitly repudiated this premise not only inDirks, but in a predecessor case, Chiarella v. United States. In Chiarella, the Supreme Court rejected this Circuit's conclusion that "the federal securities laws have created a system providing equal access to information necessary for reasoned and intelligent investment decisions.... because [material non-public] information gives certain buyers or sellers an unfair advantage over less informed buyers and sellers." 445 U.S. at 232, 100 S.Ct. 1108. The Supreme Court emphasized that "[t]his reasoning suffers from [a] defect.... [because] not every instance of financial unfairness constitutes fraudulent activity under § 10(b)." Id. See also United States v. Chestman, 947 F.2d 551, 578 (2d Cir. 1991) (Winter, J., concurring) ("[The policy rationale [for prohibiting insider trading] 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....")]. Thus, in both Chiarella and Dirks, the Supreme Court affirmatively established that insider trading liability is based on breaches of fiduciary duty, not on informational asymmetries. This is a critical limitation on insider trading liability that protects a corporation's interests in confidentiality while promoting efficiency in the nation's securities markets.

    As noted above, Dirks clearly defines a breach of fiduciary duty as a breach of the duty of confidentiality in exchange for a personal benefit. ... Accordingly, we conclude that a tippee's knowledge of the insider's breach necessarily requires knowledge that the insider disclosed confidential information in exchange for personal benefit. In reaching this conclusion, we join every other district court to our knowledge—apart from Judge Sullivan—that has confronted this question. ...

    Our conclusion also comports with well-settled principles of substantive criminal law. As the Supreme Court explained in Staples v. United States, under the common law, mens rea, which requires that the defendant know the facts that make his conduct illegal, is a necessary element in every crime. Such a requirement is particularly appropriate in insider trading cases where we have acknowledged "it is easy to imagine a ... trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful." United States v. Kaiser. This is also a statutory requirement, because only "willful" violations are subject to criminal provision. See United States v. Temple ("`Willful' repeatedly has been defined in the criminal context as intentional, purposeful, and voluntary, as distinguished from accidental or negligent").

    In sum, we hold that to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: that (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper's breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.

     

  • 4 U.S. v. Chestman

    There are many situations in which it might be unreasonable for the court to seek evidence of a breach of fiduciary duty. For example, where a spouse learns inside information and trades on it. The courts and SEC have adapted in response to those situations.

    1
    947 F.2d 551 (1991)
    2
    UNITED STATES of America, Appellee,
    v.
    Robert CHESTMAN, Defendant-Appellant.
    3
    No. 309, Docket 89-1276.
    United States Court of Appeals, Second Circuit.
    4
    Argued November 9, 1990.
    5
    Decided October 7, 1991.
    6

    [554] Elkan Abramowitz, New York City (Alan J. Brudner, Barbara L. Hartung, Alan P. Williamson, Morvillo, Abramowitz & Grand, New York City, of counsel), for appellant.

    7

    David E. Brodsky, Asst. U.S. Atty., S.D.N.Y. (Roger S. Hayes, Acting U.S. Atty. for S.D.N.Y., Gerard E. Lynch, Asst. U.S. Atty., S.D.N.Y., New York City, of counsel), for appellee.

    8

    Paul Gonson, Sol., S.E.C., Washington, D.C. (James R. Doty, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Richard A. Kirby, Sr. Litigation Counsel, Brian Bellardo, Sr. Sp. Counsel, Randall W. Quinn, Rada L. Potts, S.E.C., Washington, D.C., of counsel), for amicus curiae S.E.C.

    9

    Before OAKES, Chief Judge, FEINBERG,[*] MESKILL, NEWMAN, KEARSE, CARDAMONE, WINTER, PRATT, MINER, ALTIMARI, MAHONEY and McLAUGHLIN, Circuit Judges.

    10
    ON REHEARING IN BANC
    11
    MESKILL, Circuit Judge, joined by CARDAMONE, PRATT, MINER and ALTIMARI, Circuit Judges:
    12

    In this rehearing in banc, we consider for the first time the validity of Rule 14e-3(a), 17 C.F.R. § 240.14e-3(a), which was promulgated by the Securities and Exchange Commission (SEC) under section 14(e) of the 1934 Act, 15 U.S.C. § 78n(e); we then reexamine two familiar landmarks of the securities fraud landscape, section 10(b) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78j(b), and the mail fraud statute, 18 U.S.C. § 1341. The issues spring from the alleged insider trading of defendant Robert Chestman. A jury found Chestman guilty of thirty-one counts of insider trading and perjury: (1) ten counts of fraudulent trading in connection with a tender offer in violation of section 14(e), 18 U.S.C. § 2, and Rule 14e-3(a),[1] (2) ten counts of securities fraud in violation of section 10(b), 18 U.S.C. § 2, and 17 C.F.R. § 240.10b-5 (1988) (Rule 10b-5), (3) ten counts of mail fraud in violation of the mail fraud statute and 18 U.S.C. § 2, and (4) one count of perjury in violation of 18 U.S.C. § 1621. A panel of this Court reversed Chestman's convictions in their entirety. 903 F.2d 75 (2d Cir.1990).

    13

    On in banc reconsideration, we conclude that the Rule 14e-3(a) convictions should be affirmed and that the Rule 10b-5 and mail fraud convictions should be reversed. We vacate the panel's decision on all three issues. We did not rehear the appeal from the perjury conviction and, as a result, the panel's reversal of that conviction stands.

    14
    [555] BACKGROUND
    15

    Robert Chestman is a stockbroker. Keith Loeb first sought Chestman's services in 1982, when Loeb decided to consolidate his and his wife's holdings in Waldbaum, Inc. (Waldbaum), a publicly traded company that owned a large supermarket chain. During their initial meeting, Loeb told Chestman that his wife was a grand-daughter of Julia Waldbaum, a member of the board of directors of Waldbaum and the wife of its founder. Julia Waldbaum also was the mother of Ira Waldbaum, the president and controlling shareholder of Waldbaum. From 1982 to 1986, Chestman executed several transactions involving Waldbaum restricted and common stock for Keith Loeb. To facilitate some of these trades, Loeb sent Chestman a copy of his wife's birth certificate, which indicated that his wife's mother was Shirley Waldbaum Witkin.

    16

    On November 21, 1986, Ira Waldbaum agreed to sell Waldbaum to the Great Atlantic and Pacific Tea Company (A & P). The resulting stock purchase agreement required Ira to tender a controlling block of Waldbaum shares to A & P at a price of $50 per share. Ira told three of his children, all employees of Waldbaum, about the pending sale two days later, admonishing them to keep the news quiet until a public announcement. He also told his sister, Shirley Witkin, and nephew, Robert Karin, about the sale, and offered to tender their shares along with his controlling block of shares to enable them to avoid the administrative difficulty of tendering after the public announcement. He cautioned them "that [the sale was] not to be discussed," that it was to remain confidential.

    17

    In spite of Ira's counsel, Shirley told her daughter, Susan Loeb, on November 24 that Ira was selling the company. Shirley warned Susan not to tell anyone except her husband, Keith Loeb, because disclosure could ruin the sale. The next day, Susan told her husband about the pending tender offer and cautioned him not to tell anyone because "it could possibly ruin the sale."

    18

    The following day, November 26, Keith Loeb telephoned Robert Chestman at 8:59 a.m. Unable to reach Chestman, Loeb left a message asking Chestman to call him "ASAP." According to Loeb, he later spoke with Chestman between 9:00 a.m. and 10:30 a.m. that morning and told Chestman that he had "some definite, some accurate information" that Waldbaum was about to be sold at a "substantially higher" price than its market value. Loeb asked Chestman several times what he thought Loeb should do. Chestman responded that he could not advise Loeb what to do "in a situation like this" and that Loeb would have to make up his own mind.

    19

    That morning Chestman executed several purchases of Waldbaum stock. At 9:49 a.m., he bought 3,000 shares for his own account at $24.65 per share. Between 11:31 a.m. and 12:35 p.m., he purchased an additional 8,000 shares for his clients' discretionary accounts at prices ranging from $25.75 to $26.00 per share. One of the discretionary accounts was the Loeb account, for which Chestman bought 1,000 shares.

    20

    Before the market closed at 4:00 p.m., Loeb claims that he telephoned Chestman a second time. During their conversation Loeb again pressed Chestman for advice. Chestman repeated that he could not advise Loeb "in a situation like this," but then said that, based on his research, Waldbaum was a "buy." Loeb subsequently ordered 1,000 shares of Waldbaum stock.

    21

    Chestman presented a different version of the day's events. Before the SEC and at trial, he claimed that he had purchased Waldbaum stock based on his own research. He stated that his purchases were consistent with previous purchases of Waldbaum stock and other retail food stocks and were supported by reports in trade publications as well as the unusually high trading volume of the stock on November 25. He denied having spoken to Loeb about Waldbaum stock on the day of the trades.

    22

    At the close of trading on November 26, the tender offer was publicly announced. Waldbaum stock rose to $49 per share the next business day. In December 1986 Loeb learned that the National Association [556] of Securities Dealers had started an investigation concerning transactions in Waldbaum stock. Loeb contacted Chestman who, according to Loeb, "reassured" him that Chestman had bought the stock for Loeb's account based on his research. Loeb called Chestman again in April 1987 after learning of an SEC investigation into the trading of Waldbaum stock. Chestman again stated that he bought the stock based on research. Similar conversations ensued. After one of these conversations, Chestman asked Loeb what his "position" was, Loeb replied, "I guess it's the same thing." Loeb subsequently agreed, however, to cooperate with the government. The terms of his cooperation agreement required that he disgorge the $25,000 profit from his purchase and sale of Waldbaum stock and pay a $25,000 fine.

    23

    A grand jury returned an indictment on July 20, 1988, charging Chestman with the following counts of insider trading and perjury: ten counts of fraudulent trading in connection with a tender offer in violation of Rule 14e-3(a), ten counts of securities fraud in violation of Rule 10b-5, ten counts of mail fraud, and one count of perjury in connection with his testimony before the SEC. The district court thereafter denied Chestman's motion to dismiss the indictment. 704 F.Supp. 451 (S.D.N.Y.1989). After a jury trial, Chestman was found guilty on all counts.

    24

    Chestman appealed. He claimed that Rule 14e-3(a) was invalid because the SEC had exceeded its statutory authority in promulgating a rule that dispensed with one of the common law elements of fraud. He also argued that there was insufficient evidence to sustain his Rule 10b-5, mail fraud and perjury convictions.

    25

    A panel of this Court reversed Chestman's convictions on all counts, issuing three separate opinions on the Rule 14e-3(a) charges. 903 F.2d 75 (2d Cir.1990). Familiarity with the panel's opinions is assumed.

    26

    A majority of the active judges of the Court voted to rehear in banc the panel's decision with respect to the Rule 14e-3(a), Rule 10b-5, and mail fraud convictions. We directed the parties to file additional briefs on these issues and heard oral argument on November 9, 1990.

    27
    DISCUSSION
    28
    A. Rule 14e-3(a)
    29

    Chestman challenges his Rule 14e-3(a) convictions on three grounds. He first contends that the SEC exceeded its rulemaking authority when it promulgated Rule 14e-3(a). He then argues that the government presented insufficient evidence to support these convictions. Finally, he contends that his convictions should be over-turned on due process notice grounds. We begin with his facial attack on the validity of Rule 14e-3(a).

    30
    1. Validity of Rule 14e-3(a)
    31

    Chestman's first challenge concerns the validity of a rule prescribed by the SEC pursuant to a congressional delegation of rulemaking authority. The question presented is whether Rule 14e-3(a) represents a proper exercise of the SEC's statutory authority. While we have not heretofore addressed this question, several district court judges in this Circuit have concluded that Rule 14e-3(a) represents a valid exercise of rulemaking authority. See United States v. Marcus Schloss & Co., Inc., 710 F.Supp. 944, 955-57 (S.D.N.Y.1989) (Haight, J.); U.S. v. Chestman, 704 F.Supp. 451, 454-58 (S.D.N.Y.1989) (Walker, J.). See also O'Connor & Assoc. v. Dean Witter Reynolds, Inc., 529 F.Supp. 1179, 1190-91 (S.D.N.Y.1981) (Lasker, J.) (rejecting contention that Rule 14e-3 exceeds the scope of section 14(e) because the rule covers transactions on the open market, and not just transactions between the tender offeror and a shareholder of a target company).

    32

    The enabling statutes for Rule 14e-3(a) are section 14(e) and section 23(a)(1) of the 1934 Act. Section 14(e) provides:

    33
    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 [557] 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.
    34

    15 U.S.C. § 78n(e). The first sentence of section 14(e) is a self-operative provision, which Congress enacted as part of the Williams Act, Pub.L. No. 90-439, 82 Stat. 454 (1968). Congress added the second sentence, a rulemaking provision, in 1970. Section 23(a)(1), in turn, authorizes the SEC "to make such rules and regulations as may be necessary or appropriate to implement the provisions of this chapter for which [it is] responsible or for the execution of the functions vested in [it] by this chapter." 15 U.S.C. § 78w(a)(1).

    35

    Acting pursuant to the authority granted by sections 14(e) and 23(a)(1), the SEC promulgated Rule 14e-3 in 1980. Rule 14e-3(a), the subsection under which Chestman was convicted, provides:

    36

    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,
    37
    (2) The issuer of the securities sought or to be sought by such tender offer, or
    38
    (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.
    39

    17 C.F.R. § 240.14e-3(a).

    40

    One violates Rule 14e-3(a) if he trades on the basis of material nonpublic information concerning a pending tender offer that he knows or has reason to know has been acquired "directly or indirectly" from an insider of the offeror or issuer, or someone working on their behalf. Rule 14e-3(a) is a disclosure provision. It creates a duty in those traders who fall within its ambit to abstain or disclose, without regard to whether the trader owes a pre-existing fiduciary duty to respect the confidentiality of the information. Chestman claims that the SEC exceeded its authority in drafting Rule 14e-3(a) — more specifically, in drafting a rule that dispenses with one of the common law elements of fraud, breach of a fiduciary duty.

    41

    In reviewing this claim, our scope of review is limited. "If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-44, 104 S.Ct. 2778, 2781-83, 81 L.Ed.2d 694 (1984) (upholding the EPA's construction of the Clean Air Act term "stationary source"). When Congress delegates to an agency the power to promulgate rules,

    42
    the [agency] adopts regulations with legislative effect. A reviewing court is not free to set aside those regulations simply because it would have interpreted the statute in a different manner....
    43
    The [rule] is therefore entitled to more than mere deference or weight. It can be set aside only if the [agency] exceeded [558] [its] statutory authority or if the regulation is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."
    44

    Batterton v. Francis, 432 U.S. 416, 425-26, 97 S.Ct. 2399, 2405-06, 53 L.Ed.2d 448 (1977) (internal citations omitted) (quoting 5 U.S.C. § 706(2)(A), (C)) (upholding the power of the Secretary of Health, Education and Welfare to prescribe "standards" for determining what constitutes "unemployment" for purposes of benefit eligibility). We thus will reject only those rules that are "`inconsistent with the statutory mandate or that frustrate the policy that Congress sought to implement.'" Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 143, 104 S.Ct. 2979, 2982, 82 L.Ed.2d 107 (1984) (quoting Federal Election Comm'n v. Democratic Senatorial Campaign Comm., 454 U.S. 27, 32, 102 S.Ct. 38, 42, 70 L.Ed.2d 23 (1981)). See also 2 K. Davis, Administrative Law Treatise § 7:8, at 37 (2d ed. 1979) (noting the deferential standard of review for "legislative rules"). Furthermore, we remain mindful that, in construing legislation, we must "`give effect, if possible, to every clause and word of a statute.'" United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 520, 99 L.Ed. 615 (1955) (quoting Montclair v. Ramsdell, 107 U.S. 147, 152, 2 S.Ct. 391, 395, 27 L.Ed. 431 (1882)). Keeping these principles in mind, we consider whether Congress authorized the SEC to enact Rule 14e-3(a).

    45

    The plain language of section 14(e) represents a broad delegation of rulemaking authority. The statute explicitly directs the SEC to "define" fraudulent practices and to "prescribe means reasonably designed to prevent" such practices. It is difficult to see how the power to "define" fraud could mean anything less than the power to "set forth the meaning of" fraud in the tender offer context. See Webster's Third New International Dictionary 592 (1971). This delegation of rulemaking responsibility becomes a hollow gesture if we cabin the SEC's rulemaking authority, as Chestman urges we should, by common law definitions of fraud. Under Chestman's construction of the statute, the separate grant of rulemaking power would be rendered superfluous because the SEC could never define as fraud anything not already prohibited by the self-operative provision. Such a narrow construction of the congressional grant of authority would cramp the SEC's ability to define fraud flexibly in the context of the discrete and highly sensitive area of tender offers. And such a delegation of "power," paradoxically, would allow the SEC to limit, but not extend, a trader's duty to disclose.

    46

    Even if we were to accept the argument that the SEC's definitional authority is circumscribed by common law fraud, which we do not, the SEC's power to "prescribe means reasonably designed to prevent" fraud extends the agency's rulemaking authority further. The language of this portion of section 14(e) is clear. The verb "prevent" has a plain meaning: "[T]o keep from happening or existing esp[ecially] by precautionary measures." Webster's New Third International Dictionary 1798 (1971). A delegation of authority to enact rules "reasonably designed to prevent" fraud, then, necessarily encompasses the power to proscribe conduct outside the purview of fraud, be it common law or SEC-defined fraud. Because the operative words of the statute, "define" and "prevent," have clear connotations, the language of the statute is sufficiently clear to be dispositive here. Chevron, 467 U.S. at 842-43, 104 S.Ct. at 2781-82. We note, however, other factors that bolster our interpretation.

    47

    Nothing in the legislative history of section 14(e) indicates that the SEC frustrated congressional intent by enacting Rule 14e-3(a). To the contrary, what legislative history there is suggests that Congress intended to grant broad rulemaking authority to the SEC in this instance.

    48

    As originally enacted, section 14(e) was part of the Williams Act. The Williams Act, the Supreme Court has concluded, was "a disclosure provision," Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 27, 97 S.Ct. 926, 942, 51 L.Ed.2d 124 (1977), whose "sole purpose ... was the protection of investors who are confronted with a tender [559] offer." Id. at 35, 97 S.Ct. at 946. Although the legislative history "specifically concerning § 14(e) is sparse," Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 11, 105 S.Ct. 2458, 2464, 86 L.Ed.2d 1 (1985), the congressional reports indicate that section 14(e) was directed at ensuring "full disclosure" in connection with the trading of the securities of a tender offer target. Id. (quoting H.R.Rep. No. 1711, 90th Cong., 2nd Sess. 11 (1968); S.Rep. No. 550, 90th Cong., 1st Sess. 11 (1967) U.S.Code Cong. & Admin.News 1968, 2811) (emphasis supplied by Supreme Court). Analyzing the legislative history of section 14(e), the Schreiber Court explained:

    49
    Section 14(e) adds a "broad antifraud prohibition" modeled on the antifraud provisions of § 10(b) of the Act and Rule 10b-5.... It supplements the more precise disclosure provisions found elsewhere in the Williams Act, while requiring disclosure more explicitly addressed to the tender offer context than that required by § 10(b).
    50

    Id. at 10-11, 105 S.Ct. at 2463-64 (quoting Piper, 430 U.S. at 24, 97 S.Ct. at 940) (footnote omitted). The "very purpose of the [Williams] Act," we have said, was "informed decisionmaking by shareholders." Lewis v. McGraw, 619 F.2d 192, 195 (2d Cir.) (per curiam), cert. denied, 449 U.S. 951, 101 S.Ct. 354, 66 L.Ed.2d 214 (1980).

    51

    The legislative history of the 1970 amendment to section 14(e), the rulemaking provision, likewise suggests a broad grant of congressional authority. Senator Williams, the bill's sponsor, asserted the "utmost necessity" of granting "full rulemaking powers" to the SEC in the area of tender offers. 116 Cong.Rec. 3024 (Feb. 10, 1970). The amendment "would add to the Commission's rulemaking power," Senator Williams explained, "and enable it to deal promptly and ... flexib[ly]" with problems in that area. Hearings on S.3431 before the Subcom. on Securities of the Senate Comm. on Banking and Currency, 91st Cong., 2nd Sess. 2 (1970) [hereinafter S.3431 Hearings]; see also H.R.Rep. No. 1655, 91st Cong., 2nd Sess. 4, reprinted in 1970 U.S.Code Cong. & Admin.News 5025, 5028. During hearings on the 1970 Amendment, moreover, Senator Williams asked the SEC chairman for "examples of the fraudulent, deceptive, or manipulative practices used in tender offers which the proposed [SEC] rulemaking powers would prevent," noting that the information "would be most helpful to the committee as we continue developing this legislation." S. 3431 Hearings, at 11. Responding to the Senator's request, the SEC identified one such "problem" that the SEC's proposed rulemaking authority would be used to prevent:

    52
    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.
    53

    Id. at 12. Notably, this hypothetical does not contain any requirement that the trader breach a fiduciary duty. All told, the legislative history indicates that Congress intended to grant broad rulemaking power to the SEC under section 14(e). This delegation of authority was aimed at promoting full disclosure in the tender offer context and, in so doing, contributing to informed decisionmaking by shareholders.

    54

    In promulgating Rule 14e-3(a), the SEC acted well within the letter and spirit of section 14(e). Recognizing the highly sensitive nature of tender offer information, its susceptibility to misuse, and the often difficult task of ferreting out and proving fraud, Congress sensibly delegated to the SEC broad authority to delineate a penumbra around the fuzzy subject of tender offer fraud. See generally Loewenstein, Section 14(e) of the Williams Act and the Rule 10b-5 Comparisons, 71 Geo.L.J. 1311, 1356 (1983) ("It is difficult to see why Congress would grant such broad powers to the SEC if the SEC was not expected to have some leeway in utilizing its powers."). To be certain, the SEC's rulemaking power under this broad grant of authority is not unlimited. The rule must still be "reasonably related to the purposes of the enabling legislation." Mourning v. Family Publications Service, Inc., 411 U.S. 356, 369, 93 [560] S.Ct. 1652, 1661, 36 L.Ed.2d 318 (1973) (quoting Thorpe v. Housing Authority of the City of Durham, 393 U.S. 268, 280-81, 89 S.Ct. 518, 525-26, 21 L.Ed.2d 474 (1969)). The SEC, however, in adopting Rule 14e-3(a), acted consistently with this authority. While dispensing with the subtle problems of proof associated with demonstrating fiduciary breach in the problematic area of tender offer insider trading, the Rule retains a close nexus between the prohibited conduct and the statutory aims.

    55

    Legislative activity since the SEC promulgated Rule 14e-3(a) further supports the Rule's validity. Congress acknowledged and left untouched the force of Rule 14e-3(a) when it enacted the Insider Trading Sanctions Act of 1984 (ITSA), 15 U.S.C. § 78u-1. ITSA imposes treble civil penalties on those who violate SEC rules "by purchasing or selling a security while in possession of material, nonpublic information," id. § 78u-1(a)(1), an activity covered by Rule 14e-3(a). Congress, in fact, was advised that a Rule 14e-3 violation would trigger treble damages under ITSA. See H.R.Rep. No. 355, 98th Cong., 1st Sess. 4, 11, 13 n. 20, reprinted in 1984 U.S.Code Cong. & Admin.News 2274, 2277, 2284, 2286 n. 20; see also H.R.Rep. No. 910, 100th Cong., 2nd Sess. 14, reprinted in 1988 U.S.Code Cong. & Admin.News 6043, 6051 (in enacting the Insider Trading and Securities Fraud Enforcement Act of 1988, Congress noted that Rule 14e-3 had triggered efforts by private securities firms "to detect insider trading and other market abuses by their employees").

    56

    These references to Rule 14e-3 during debates on proposed insider trading legislation may not amount to congressional ratification of the Rule, see Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381-82, 89 S.Ct. 1794, 1801-03, 23 L.Ed.2d 371 (1969), but they do support the Rule's validity. Congressional silence in the face of administrative construction of a statute lends support to the validity of that interpretation. See United States v. Rutherford, 442 U.S. 544, 554 n. 10, 99 S.Ct. 2470, 2476 n. 10, 61 L.Ed.2d 68 (1979) ("once an agency's statutory construction has been `fully brought to the attention of the public and the Congress,' and the latter has not sought to alter that interpretation although it has amended the statute in other respects, then presumably the legislative intent has been correctly discerned") (citations omitted); Red Lion Broadcasting Co., 395 U.S. at 381, 89 S.Ct. at 1802; Zemel v. Rusk, 381 U.S. 1, 11, 85 S.Ct. 1271, 1278, 14 L.Ed.2d 179 (1965) ("Congress' failure to repeal or revise in the face of ... administrative interpretation has been held to constitute persuasive evidence that that interpretation is the one intended by Congress.").

    57

    In sum, the language and legislative history of section 14(e), as well as congressional inactivity toward it since the SEC promulgated Rule 14e-3(a), all support the view that Congress empowered the SEC to prescribe a rule that extends beyond the common law.

    58

    Chestman points to nothing in the language or legislative history of section 14(e) to refute our construction of the statute. Instead he relies principally on Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), and Schreiber, 472 U.S. 1, 105 S.Ct. 2458, to advance his argument that section 14(e) parallels common law fraud. That reliance is misplaced.

    59

    Chiarella considered whether trading stock on the basis of material nonpublic information in the absence of a fiduciary breach constitutes fraud under section 10(b). Confronted with both congressional and SEC silence on the issue, see section 10(b) and Rule 10b-5, the Court applied common law principles of fraud. It concluded, based on those principles, that liability under section 10(b) requires a fiduciary breach.

    60

    Several factors limit Chiarella's precedential value in this case. First, Chiarella of course concerns section 10(b), not section 14(e). Section 10(b) is a general antifraud statute, while section 14(e) is an antifraud provision specifically tailored to the field of tender offers, an area of the securities industry that, the Williams Act makes clear, deserves special regulation.

    61

    [561] Second, section 14(e) evinces a clear indication of congressional intent, while section 10(b) does not. See Chiarella, 445 U.S. at 226, 100 S.Ct. at 1113 ("neither the legislative history nor the statute itself affords specific guidance for the resolution of this case"). Section 10(b) speaks in terms of the use "in connection with the purchase or sale of any security" of "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Section 14(e) directly proscribes, in self-operative fashion, "any fraudulent, deceptive, or manipulative acts or practices" in connection with a tender offer. Then, in a separate sentence, the statute directs the SEC to draft rules to define these practices and to prevent them: "The [SEC] 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." The contrast in statutory language is telling. It underscores, first of all, the dubious premise of Chestman's argument — that section 14(e) was modeled after section 10(b). The two provisions are hardly identical in scope. The language of section 14(e)'s rulemaking provision, instead of tracking section 10(b), in fact mirrors section 15(c)(2), 15 U.S.C. § 78o(c)(2), which concerns broker-dealer relations. "The language of the addition to section 14(e) is identical to that contained in section 15(c)(2) of the Securities Exchange Act concerning practices of brokers and dealers in securities transactions in the over-the-counter markets." H.R.Rep. No. 1655, 91st Cong., 2nd Sess. 4, reprinted in 1970 U.S.Code Cong. & Admin.News 5025, 5028. The contrast also illustrates that section 14(e) provides a more compelling legislative delegation to the SEC to prescribe rules than does section 10(b). While section 10(b) refers to such rules as the SEC "may prescribe as necessary or appropriate," section 14(e) commands the SEC to prescribe rules that will "define" and "prevent" fraud. See Loewenstein, supra, 71 Geo.L.J. at 1356 ("By comparison, the Commission's rulemaking authority under section 10(b) does not include the power to define manipulative or deceptive" acts or to adopt prophylatic measures.).

    62

    Indeed, in Chiarella, the Court even distinguished sections 10(b) and 14(e). The Court acknowledged that the SEC had recently acted pursuant to its rulemaking authority under section 14(e) to bar warehousing, a form of insider trading involving tender offers:

    63
    In this case, as in warehousing, a buyer of securities purchases stock in a target corporation on the basis of market information which is unknown to the seller. In both of these situations, the seller's behavior presumably would be altered if he had the nonpublic information. Significantly, however, the Commission has acted to bar warehousing under its authority to regulate tender offers [citing proposed Rule 14e-3] after recognizing that action under § 10(b) would rest on a "somewhat different theory" than that previously used to regulate insider trading as fraudulent activity.
    64

    Chiarella, 445 U.S. at 234, 100 S.Ct. at 1117-18 (footnotes omitted). That "somewhat different theory" is one that does not embrace "any fiduciary duty to [the target] company or its shareholders." 1 SEC Institutional Investor Study Report, H.R.Doc. No. 64, 92nd Cong. 1st Sess., pt. 1, at xxxii (1971) (cited in Chiarella, 445 U.S. at 234 n. 19, 100 S.Ct. at 1118 n. 19). Significantly, the Chiarella Court did not disapprove of this exercise of the SEC's rulemaking power under section 14(e).

    65

    Finally, Chiarella faced not only statutory silence on the issue before it but also administrative reticence. Neither the language of Rule 10b-5, SEC discussions of the rule, nor administrative interpretations of the rule offered any evidence that the SEC, in drafting Rule 10b-5, intended the rule to go beyond common law fraud. See Rule 10b-5 (referring to "artifice to defraud" and to "fraud ... upon any person"); see also Chiarella, 445 U.S. at 226, 100 S.Ct. at 1113 ("When Rule 10b-5 was promulgated in 1942, the SEC did not discuss [562] the possibility that failure to provide information might run afoul of § 10(b).") (footnote omitted); id. at 230, 100 S.Ct. at 1115; id. 445 U.S. at 233, 100 S.Ct. at 1117 ("neither the Congress nor the Commission ever has adopted a parity-of-information rule"). The language of Rule 14e-3(a), on the other hand, reveals express SEC intent to proscribe conduct not covered by common law fraud. And "[p]resumably the SEC perceived Rule 14e-3 as a valid exercise of its statutory authority." United States v. Marcus Schloss & Co., Inc., 710 F.Supp. 944, 956 (S.D.N.Y.1989).

    66

    Thus, the question presented here differs markedly from that presented in Chiarella. It is not whether section 14(e), standing alone, prohibits insider trading in the absence of a fiduciary breach. It is whether section 14(e)'s broad rulemaking provision, together with SEC action under that authority in the form of Rule 14e-3(a), represent a valid exercise of administrative rulemaking. In Chiarella, the Court refused to recognize "a general duty between all participants in market transactions to forgo actions based on material nonpublic information ... absent some explicit evidence of congressional intent." 445 U.S. at 233, 100 S.Ct. at 1117. Our task is easier. Rule 14e-3(a) creates a narrower duty than that once proposed for Rule 10b-5 — a parity of information rule — and, as the language and legislative history of section 14(e) make clear, the rule has Congress' blessing.

    67

    Equally unavailing is Chestman's reliance on Schreiber. The Schreiber case arose from a hostile tender offer initiated by Burlington Northern, Inc. for El Paso Gas Co. stock. After a majority of El Paso's shareholders subscribed to the tender offer, Burlington rescinded its offer, deciding to enter into a friendly takeover agreement with El Paso. Pursuant to its agreement with El Paso, Burlington substituted a new tender offer, which was soon oversubscribed. Several shareholders who had tendered their shares during the first tender offer received a diminished payment due to the oversubscription of the second tender offer. They claimed that Burlington's conduct violated section 14(e) as a "manipulative" distortion of the market for El Paso stock. Absent congressional guidance concerning the meaning of the term "manipulative," it fell to the Court to determine whether misrepresentation or nondisclosure is a necessary element of a violation of section 14(e). Schreiber, 472 U.S. at 6-8, 105 S.Ct. at 2461-62. The Court looked to the ordinary and common law meaning of the term, as well as the legislative history of section 14(e), with its focus on nondisclosure. Relying on these sources, the Court held that misrepresentation or nondisclosure was an indispensable element of a section 14(e) violation. Id. at 8, 105 S.Ct. at 2462.

    68

    Chestman claims that Schreiber demonstrates that section 14(e), like section 10(b), projects no further than common law fraud. To support this argument, he points to a statement in Schreiber indicating that section 14(e) is "modeled on the antifraud provisions of § 10(b)." Id. at 10, 105 S.Ct. at 2463. What Chestman ignores, however, is that Schreiber contrasted as well as compared the two statutes. Following the language Chestman quotes, the Court stated that section 14(e) "supplements" the other disclosure provisions in the Williams Act and requires "disclosure more explicitly addressed to the tender offer context than that required by § 10(b)." Id. at 10-11, 105 S.Ct. at 2464. In addition, the Court's reference to the similarity between sections 10(b) and 14(e) only refers to section 14(e)'s substantive provision. Section 10(b), as we have emphasized, lacks a separate rulemaking grant akin to section 14(e). Moreover, even to the extent section 10(b) may be accurately described as the father of section 14(e), as well as all later antifraud provisions under the 1934 Act, we cannot agree that section 10(b) therefore confines section 14(e), and its other antifraud progeny, to an identical reach.

    69

    Chestman also attempts to draw support from footnote 11 in Schreiber. There, in rejecting petitioner's argument that the 1970 amendment to section 14(e), the rulemaking provision, would be meaningless if section 14(e) concerned disclosure only, the Court observed:

    70
    [563] In adding the 1970 amendment, Congress simply provided a mechanism for defining and guarding against those acts and practices which involve material misrepresentation or nondisclosure. The amendment gives the [SEC] latitude to regulate nondeceptive activities as a "reasonably designed" means of preventing manipulative acts, without suggesting any change in the meaning of the term "manipulative" itself.
    71

    Id. at 11 n. 11, 105 S.Ct. at 2464 n. 11. Whatever may be gleaned from the footnote on the SEC's definitional authority under section 14(e), the footnote plainly endorses the SEC's authority to draft prophylactic rules under section 14(e). It states that the rulemaking provision "gives the [SEC] latitude to regulate nondeceptive activities as a `reasonably designed' means of preventing manipulative acts." Id. (emphasis added). Chestman offers no persuasive explanation why the authority "to regulate nondeceptive activities" would not also allow the SEC to regulate nonfraudulent conduct.

    72

    As for the SEC's authority to define the operative words of section 14(e), Schreiber seems to be saying only that section 14(e)'s rulemaking provision does not itself change the common law meaning of "manipulative." The Court was not confronted with the question raised here — whether SEC action pursuant to the rulemaking delegation exceeds statutory authority — because the petitioner did not point to any SEC rules drafted under section 14(e) that covered Burlington's activities. Moreover, even if we were to agree with Chestman that, under Schreiber, the common law confines the SEC in defining "manipulative," we would still uphold the validity of Rule 14e-3(a). In Schreiber, the definition of "manipulative" proffered by the plaintiff would have eliminated a requirement that there be a nondisclosure or material misrepresentation, the primary evils at which section 14(e) took aim. Rule 14e-3(a), in contrast, does not stray from congressional intent; it remains a disclosure provision.

    73

    Therefore, based on the plain language of section 14(e), and congressional activity both before section 14(e) was enacted and after Rule 14e-3(a) was promulgated, we hold that the SEC did not exceed its statutory authority in drafting Rule 14e-3(a).

    74
    2. Sufficiency of the Evidence
    75

    Chestman also argues that the evidence was insufficient to sustain his Rule 14e-3(a) convictions. In an argument raised for the first time in his in banc brief, Chestman contends that the government failed to present sufficient evidence to show that he knew that the information had been acquired "directly or indirectly" from the Waldbaum company, a Waldbaum company insider, or a person acting on the company's behalf. This argument merits only brief consideration.

    76

    The jury heard the following evidence. Chestman knew that Keith Loeb was a member of the Waldbaum family. Chestman knew that the information concerned the Waldbaum family business. He also knew that the information was not publicly available. Furthermore, he had heard Loeb describe the information as "definite" and "accurate." While more than one inference could be drawn from this evidence, the jury's conclusion was far from an irrational one. A jury could reasonably infer that Chestman knew that the information originated from a Waldbaum insider. We disagree with Chestman's intimation that Loeb had to describe the information to Chestman as "confidential." A description of the information as "definite" and "accurate," together with Chestman's knowledge that Loeb was a Waldbaum relative, provided the crucial basis from which to infer confidentiality. It was not necessary that Chestman be told the family channels through which the information had travelled. In sum, Chestman's knowledge of Loeb's status as a Waldbaum family member and the nature of the information conveyed provided sufficient evidence from which a rational trier of fact could infer that the information originated, "directly or indirectly," from a Waldbaum insider.

    77
    3. Due Process
    78

    Chestman next argues that his Rule 14e-3(a) convictions violate due process because [564] he did not have fair notice that his conduct was criminal. Given the explicit language of Rule 14e-3(a), we also reject this claim.

    79

    The purpose of the "fair notice" requirement of due process is "to give a person of ordinary intelligence fair notice that his contemplated conduct is forbidden by the statute." United States v. Harriss, 347 U.S. 612, 617, 74 S.Ct. 808, 812, 98 L.Ed. 989 (1954). That requirement was met here. As we have seen, Rule 14e-3(a) explicitly proscribes trading on the basis of material nonpublic information derived from insider sources. Unlike Rule 10b-5, Rule 14e-3(a) is not a general, catchall provision. It targets specific conduct arising in a unique context — tender offers. The language of the rule gave Chestman, a sophisticated stockbroker, fair notice that the conduct in which he engaged was criminal.

    80

    That leaves Chestman with the dubious argument that, while he had notice that Rule 14e-3(a) prohibited his activity, he could not have known whether a court would find the rule valid. Due process does not extend this far. When statutory language provides notice that conduct is illegal, the notice requirements of due process have been met. The government need not await every conceivable challenge to a law's validity before it prosecutes conduct covered by a statute. Chestman "treaded closely enough along proscribed lines ... to find that [he] had adequate notice of the illegality of [his] acts." United States v. Carpenter, 791 F.2d 1024, 1034 (2d Cir. 1986), aff'd, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987).

    81
    B. Rule 10b-5
    82

    Chestman's Rule 10b-5 convictions were based on the misappropriation theory, which provides that "one who misappropriates nonpublic information in breach of a fiduciary duty and trades on that information to his own advantage violates Section 10(b) and Rule 10b-5." SEC v. Materia, 745 F.2d 197, 203 (2d Cir.1984), cert. denied, 471 U.S. 1053, 105 S.Ct. 2112, 85 L.Ed.2d 477 (1985). With respect to the shares Chestman purchased on behalf of Keith Loeb, Chestman was convicted of aiding and abetting Loeb's misappropriation of nonpublic information in breach of a duty Loeb owed to the Waldbaum family and to his wife Susan. As to the shares Chestman purchased for himself and his other clients, Chestman was convicted as a "tippee" of that same misappropriated information. Thus, while Chestman is the defendant in this case, the alleged misappropriator was Keith Loeb. The government agrees that Chestman's convictions cannot be sustained unless there was sufficient evidence to show that (1) Keith Loeb breached a duty owed to the Waldbaum family or Susan Loeb based on a fiduciary or similar relationship of trust and confidence, and (2) Chestman knew that Loeb had done so. We have heretofore never applied the misappropriation theory — and its predicate requirement of a fiduciary breach — in the context of family relationships. As a prologue to that analysis, we canvass past Rule 10b-5 jurisprudence.

    83

    Section 10(b) prohibits the use "in connection with the purchase or sale of any security ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Pursuant to that mandate, the SEC promulgated Rule 10b-5, which, in pertinent part, makes it unlawful "[t]o employ any device, scheme, or artifice to defraud" or "[t]o engage in any act ... which operates ... 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 (1988). While more than one interpretation has been given to this expansive language, fraud has remained the centerpiece of a Rule 10b-5 criminal violation. At this juncture, two general theories of Rule 10b-5 fraud have emerged to fill the interstitial gaps of the rule.

    84
    1. Traditional Theory of Rule 10b-5 Liability
    85

    The traditional theory of insider trader liability derives principally from the Supreme Court's holdings in Chiarella, 445 [565] U.S. 222, 100 S.Ct. 1108, and Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). A securities trader commits Rule 10b-5 fraud, the Chiarella Court held, only if he "fails to disclose material information prior to the consummation of a transaction ... when he is under a duty to do so." Chiarella, 445 U.S. at 228, 100 S.Ct. at 1114. The Chiarella Court then delineated when a person possessing material nonpublic information owes such a duty — what it called "[t]he obligation to disclose or abstain" from trading. Id. at 227, 100 S.Ct. at 1114. It held that this duty "does not arise from the mere possession of nonpublic market information." Id. at 235, 100 S.Ct. at 1118. That is, the duty inquiry does not turn on whether the parties to the transaction have "equal information." Dirks, 463 U.S. at 657, 103 S.Ct. at 3263 (construing Chiarella). Rather, a duty to disclose or abstain arises only from "`a fiduciary or other similar relation of trust and confidence between [the parties to the transaction].'" Chiarella, 445 U.S. at 228, 100 S.Ct. at 1114 (quoting Restatement (Second) of Torts § 551(2)(a) (1976)).

    86

    In Dirks, an action concerning the liability of a tippee of material nonpublic information, the Court built on its holding in Chiarella. Dirks again rejected a parity of information theory of Rule 10b-5 liability, reiterating the "requirement of a specific relationship between the shareholders and the individual trading on inside information." Dirks, 463 U.S. at 655, 103 S.Ct. at 3261. It then examined when a tippee inherits a fiduciary duty to the corporation's shareholders to disclose or refrain from trading. Noting the "derivative" nature of tippee liability, id. at 659, 103 S.Ct. at 3264, the Court held that tippee liability attaches only when an "insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach." Id. at 660, 103 S.Ct. at 3264.

    87

    Dirks established, in dictum, an additional means by which erstwhile outsiders become fiduciaries of a corporation's shareholders. Justice Powell explained:

    88
    Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes.... For such a duty to be imposed, however, the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.
    89

    Id. at 655 n. 14, 103 S.Ct. at 3262 n. 14 (citations omitted). This theory clothes an outsider with temporary insider status when the outsider obtains access to confidential information solely for corporate purposes in the context of "a special confidential relationship." The temporary insider thereby acquires a correlative fiduciary duty to the corporation's shareholders.

    90

    Binding these strands of Rule 10b-5 liability are two principles — one, the predicate act of fraud must be traceable to a breach of duty to the purchasers or sellers of securities,[2] two, a fiduciary duty does [566] not run to the purchasers or sellers solely as a result of one's possession of material nonpublic information.

    91
    2. Misappropriation Theory
    92

    The second general theory of Rule 10b-5 liability, the misappropriation theory, has not yet been the subject of a Supreme Court holding,[3] but has been adopted in the Second, Third, Seventh and Ninth Circuits. See, e.g., SEC v. Cherif, 933 F.2d 403 (7th Cir.1991); SEC v. Clark, 915 F.2d 439 (9th Cir.1990); Rothberg v. Rosenbloom, 771 F.2d 818 (3d Cir.1985), rev'd on other grounds after remand, 808 F.2d 252 (3d Cir.1986), cert. denied, 481 U.S. 1017, 107 S.Ct. 1895, 95 L.Ed.2d 501 (1987); United States v. Newman, 664 F.2d 12 (2d Cir. 1981), aff'd after remand, 722 F.2d 729 (2d Cir.1983), cert. denied, 464 U.S. 863, 104 S.Ct. 193, 78 L.Ed.2d 170 (1983). Under this theory, a person violates Rule 10b-5 when he misappropriates material nonpublic information in breach of a fiduciary duty or similar relationship of trust and confidence and uses that information in a securities transaction. See, e.g., Carpenter, 791 F.2d at 1028-29; Materia, 745 F.2d at 201; Newman, 664 F.2d at 17-18. In contrast to Chiarella and Dirks, the misappropriation theory does not require that the buyer or seller of securities be defrauded. Newman, 664 F.2d at 17. Focusing on the language "fraud or deceit upon any person" (emphasis added), we have held that the predicate act of fraud may be perpetrated on the source of the nonpublic information, even though the source may be unaffiliated with the buyer or seller of securities. See Carpenter, 791 F.2d at 1032. To date we have applied the theory only in the context of employment relationships. See Carpenter, 791 F.2d at 1032 (financial columnist breached duty to his newspaper); Materia, 745 F.2d at 202 (copyholder breached duty to his printing company); Newman, 664 F.2d at 17 (investment banker breached duty to his firm). District courts in this Circuit have applied the theory in other settings as well as in the employment context. See, e.g., United States v. Willis, 737 F.Supp. 269 (S.D.N.Y.1990) (denying motion to dismiss indictment of psychiatrist who traded on the basis of information obtained from patient, in breach of duty arising from relationship of trust and confidence); United States v. Reed, 601 F.Supp. 685 (S.D.N.Y.), rev'd on other grounds, 773 F.2d 477 (2d Cir.1985) (allegation that son breached fiduciary duty to father, a corporate director, withstood motion to dismiss indictment); SEC v. Musella, 578 F.Supp. 425 (S.D.N.Y.1984) (office services manager of law firm breached duty to law firm and its clients by trading on the basis of material nonpublic information acquired in the course of his employment).

    93

    One point at which the misappropriation theory and the traditional theory of insider trading merge warrants brief consideration. Our first applications of the misappropriation theory, in Newman and Materia, concerned conduct that occurred before the Supreme Court's holding in Dirks. Dirks noted that an outsider could obtain temporary insider status by gaining access to confidential information through certain relationships with a corporation — as, for example, an underwriter, lawyer or consultant. 463 U.S. at 655 n. 14, 103 S.Ct. at 3262 n. 14. A temporary insider theory of prosecution might well have covered the activities of the investment banker in Newman and the printer in Materia. In Newman and Materia, the defendants appeared to have "entered into a special confidential relationship in the conduct of the business of the enterprise and [were] given access to information solely for corporate purposes." Dirks, 463 U.S. at 655 n. 14, 103 S.Ct. at 3262 n. 14. In view of the [567] overlap between Newman and Materia on the one hand and the Dirks concept of temporary insiders on the other, we arguably did not break ranks with the traditional theory of insider trading until our holding in Carpenter. In Carpenter none of the prongs of liability under the traditional theory applied. That is, the defendants did not owe the people with whom they traded a duty to disclose or abstain from trading — absent resurrection of the twice-rejected parity of information theory. Carpenter, then, represents the first fact pattern we have considered that is clearly beyond the pale of the traditional theory of insider trading.

    94

    After Carpenter, the fiduciary relationship question takes on special importance. This is because a fraud-on-the-source theory of liability extends the focus of Rule 10b-5 beyond the confined sphere of fiduciary/shareholder relations to fiduciary breaches of any sort, a particularly broad expansion of 10b-5 liability if the add-on, a "similar relationship of trust and confidence," is construed liberally. One concern triggered by this broadened inquiry is that fiduciary duties are circumscribed with some clarity in the context of shareholder relations but lack definition in other contexts. See generally Reed, 601 F.Supp. 685 (and authorities cited therein). Tethered to the field of shareholder relations, fiduciary obligations arise within a narrow, principled sphere. The existence of fiduciary duties in other common law settings, however, is anything but clear. Our Rule 10b-5 precedents under the misappropriation theory, moreover, provide little guidance with respect to the question of fiduciary breach, because they involved egregious fiduciary breaches arising solely in the context of employer/employee associations. See Carpenter, 791 F.2d at 1028 ("It is clear that defendant Winans ... breached a duty of confidentiality to his employer"); Newman, 664 F.2d at 17 ("we need spend little time on the issue of fraud and deceit"); Materia, 745 F.2d at 201 (same). For these reasons we tread cautiously in extending the misappropriation theory to new relationships, lest our efforts to construe Rule 10b-5 lose method and predictability, taking over "the whole corporate universe." United States v. Chiarella, 588 F.2d 1358, 1377 (2d Cir.1978) (Meskill, J., dissenting) (quoting Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 480, 97 S.Ct. 1292, 1304, 51 L.Ed.2d 480 (1977)), rev'd, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980).

    95
    3. Fiduciary Duties and Their Functional Equivalent
    96

    Against this backdrop, we turn to our central inquiry — what constitutes a fiduciary or similar relationship of trust and confidence in the context of Rule 10b-5 criminal liability? We begin by noting two factors that do not themselves create the necessary relationship.

    97

    First, a fiduciary duty cannot be imposed unilaterally by entrusting a person with confidential information. Walton v. Morgan Stanley & Co., 623 F.2d 796, 799 (2d Cir.1980) (applying Delaware law). Walton concerned the conduct of an investment bank, Morgan Stanley. While investigating possible takeover targets for one of its clients, Morgan Stanley obtained unpublished material information (internal earnings reports) on a confidential basis from a prospective target, Olinkraft. After its client abandoned the planned takeover, Morgan Stanley was charged with trading in Olinkraft's stock on the basis of the confidential information. Observing that the parties had bargained at "arm's length" and that there had not been a preexisting agreement of confidentiality between Morgan Stanley and Olinkraft, we rejected the argument that

    98
    Morgan Stanley became a fiduciary of Olinkraft by virtue of the receipt of the confidential information.... [T]he fact that the information was confidential did nothing, in and of itself, to change the relationship between Morgan Stanley and Olinkraft's management. Put bluntly, although, according to the complaint, Olinkraft's management placed its confidence in Morgan Stanley not to disclose the information, Morgan Stanley owed no duty to observe that confidence.
    99

    Walton, 623 F.2d at 799. See also Dirks, 463 U.S. at 662 n. 22, 103 S.Ct. at 3265 n. 22 (citing Walton approvingly as "a case [568] turning on the court's determination that the disclosure did not impose any fiduciary duties on the recipient of the inside information"). Reposing confidential information in another, then, does not by itself create a fiduciary relationship.

    100

    Second, marriage does not, without more, create a fiduciary relationship. "`[M]ere kinship does not of itself establish a confidential relation.' ... Rather, the existence of a confidential relationship must be determined independently of a preexisting family relationship." Reed, 601 F.Supp. at 706 (quoting G.G. Bogert, The Law of Trusts and Trustees § 482, at 300-11 (Rev. 2d ed. 1978)) (other citations omitted). Although spouses certainly may by their conduct become fiduciaries, the marriage relationship alone does not impose fiduciary status. In sum, more than the gratuitous reposal of a secret to another who happens to be a family member is required to establish a fiduciary or similar relationship of trust and confidence.

    101

    We take our cues as to what is required to create the requisite relationship from the securities fraud precedents and the common law. See Chiarella, 445 U.S. at 227-30, 100 S.Ct. at 1114-16. The common law has recognized that some associations are inherently fiduciary. Counted among these hornbook fiduciary relations are those existing between attorney and client, executor and heir, guardian and ward, principal and agent, trustee and trust beneficiary, and senior corporate official and shareholder. Reed, 601 F.Supp. at 704 (citing Coffee, From Tort to Crime: Some Reflections on the Criminalization of Fiduciary Breaches and the Problematic Line Between Law and Ethics, 19 Am.Crim. L.Rev. 117, 150 (1981); and Scott, The Fiduciary Principle, 37 Cal.L.Rev. 539, 541 (1949)); Black's Law Dictionary 564 (5th ed. 1979). While this list is by no means exhaustive, it is clear that the relationships involved in this case — those between Keith and Susan Loeb and between Keith Loeb and the Waldbaum family — were not traditional fiduciary relationships.

    102

    That does not end our inquiry, however. The misappropriation theory requires us to consider not only whether there exists a fiduciary relationship but also whether there exists a "similar relationship of trust and confidence." As the term "similar" implies, a "relationship of trust and confidence" must share the essential characteristics of a fiduciary association. Absent reference to the adjective "similar," interpretation of a "relationship of trust and confidence" becomes an exercise in question begging. Consider: when one entrusts a secret (read confidence) to another, there then exists a relationship of trust and confidence. Walton, however, instructs that entrusting confidential information to another does not, without more, create the necessary relationship and its correlative duty to maintain the confidence. A "similar relationship of trust and confidence," therefore, must be the functional equivalent of a fiduciary relationship. To determine whether such a relationship exists, we must ascertain the characteristics of a fiduciary relationship.

    103

    "[A]t the heart of the fiduciary relationship" lies "reliance, and de facto control and dominance." United States v. Margiotta, 688 F.2d 108, 125 (2d Cir.1982) (citations omitted) (nonpublic office holder found to owe a fiduciary duty to general citizenry, breach of which created predicate for violation of mail fraud statute) (construing New York law), cert. denied, 461 U.S. 913, 103 S.Ct. 1891, 77 L.Ed.2d 282 (1983). The relation "exists when confidence is reposed on one side and there is resulting superiority and influence on the other." Mobil Oil Corp. v. Rubenfeld, 72 Misc.2d 392, 400, 339 N.Y.S.2d 623, 632 (Civ.Ct.1972) (discussing fiduciary duty in the franchisee context), aff'd, 77 Misc.2d 962, 357 N.Y.S.2d 589 (Sup.Ct.App.1974), rev'd on other grounds, 48 A.D.2d 428, 370 N.Y.S.2d 943 (2d Dep't 1975), aff'd, 40 N.Y.2d 936, 390 N.Y.S.2d 57, 358 N.E.2d 882 (1976)). One acts in a "fiduciary capacity" when

    104
    the business which he transacts, or the money or property which he handles, is not his own or for his own benefit, but for the benefit of another person, as to whom he stands in a relation implying [569] and necessitating great confidence and trust on the one part and a high degree of good faith on the other part.
    105

    Black's Law Dictionary 564 (5th ed. 1979). See also 29 U.S.C. § 1002(21)(A) (defining a fiduciary for purposes of ERISA as one "who exercises any discretionary authority or discretionary control").

    106

    A fiduciary relationship involves discretionary authority and dependency: One person depends on another — the fiduciary — to serve his interests. In relying on a fiduciary to act for his benefit, the beneficiary of the relation may entrust the fiduciary with custody over property of one sort or another. Because the fiduciary obtains access to this property to serve the ends of the fiduciary relationship, he becomes duty-bound not to appropriate the property for his own use. What has been said of an agent's duty of confidentiality applies with equal force to other fiduciary relations: "an agent is subject to a duty to the principal not to use or to communicate information confidentially given him by the principal or acquired by him during the course of or on account of his agency." Restatement (Second) of Agency § 395 (1958). These characteristics represent the measure of the paradigmatic fiduciary relationship. A similar relationship of trust and confidence consequently must share these qualities.

    107

    In Reed, 601 F.Supp. 685, the district court confronted the question whether these principal characteristics of a fiduciary relationship — dependency and influence — were necessary factual prerequisites to a similar relationship of trust and confidence. There a member of the board of directors of Amax, Gordon Reed, disclosed to his son on several occasions confidential information concerning a proposed tender offer for Amax. Allegedly relying on this information, the son purchased Amax stock call options. The son was subsequently indicted for violating, among other things, Rule 10b-5 based on breach of a fiduciary duty arising between the father and son. The son then moved to dismiss the indictment, contending that he did not breach a fiduciary duty to his father. The district court sustained the indictment.

    108

    Both the government and Chestman rely on Reed. The government draws on Reed's application of the misappropriation theory in the family context and its expansive construction of relationships of trust and confidence. Chestman, without challenging the holding in Reed, argues that Reed cannot sustain his Rule 10b-5 convictions because, unlike Reed senior and junior, Keith and Susan Loeb did not customarily repose confidential business information in one another. Neither party challenges the holding of Reed. And we decline to do so sua sponte. To remain consistent with our interpretation of a "similar relationship of trust and confidence," however, we limit Reed to its essential holding: the repeated disclosure of business secrets between family members may substitute for a factual finding of dependence and influence and thereby sustain a finding of the functional equivalent of a fiduciary relationship. We note, in this regard, that Reed repeatedly emphasized that the father and son "frequently discussed business affairs." Id. at 690; see also id. at 705, 709, 717-18.

    109

    We recognize, as Reed did, that equity has occasionally established a less rigorous threshold for a fiduciary-like relationship in order to right civil wrongs arising from non-compliance with the statute of frauds, statute of wills and parol evidence rule. See Bogert, supra § 482, at 286 (explaining that equity's flexible treatment of confidential relationships has been particularly useful in evading the harsh consequences of the statute of frauds). Commenting on the boundless nature of relations of trust and confidence, one scholar observed:

    110
    Equity has never bound itself by any hard and fast definition of the phrase "confidential relation" and has not listed all the necessary elements of such a relation, but has reserved discretion to apply the doctrine whenever it believes that a suitable occasion has arisen.
    111

    Reed, 601 F.Supp. at 712 n. 38 (quoting G.G. Bogert, The Law of Trusts and Trustees § 482, at 284-86 (Rev. 2d ed. 1978)). [570] Useful as such an elastic and expedient definition of confidential relations, i.e., relations of trust and confidence, may be in the civil context, it has no place in the criminal law. A "suitable occasion" test for determining the presence of criminal fraud would offend not only the rule of lenity but due process as well. See Chiarella, 445 U.S. at 235 n. 20, 100 S.Ct. at 1118 n. 20 ("a judicial holding that certain undefined activities `generally are prohibited' by § 10(b) would raise questions whether either criminal or civil defendants would be given fair notice that they have engaged in illegal activity"). See also Dirks, 463 U.S. at 658 n. 17, 103 S.Ct. at 3263 n. 17 (In rejecting an SEC variation on the parity of information theory, the Court wrote: "[T]his rule is inherently imprecise, and imprecision prevents parties from ordering their actions in accord with legal requirements."). More than a perfunctory nod at the rule of lenity, then, is required. We will not apply outer permutations of chancery relief in addressing what is frequently the core inquiry in a Rule 10b-5 criminal conviction — whether a fiduciary duty has been breached.

    112
    4. Application of the Law of Fiduciary Duties
    113

    The alleged misappropriator in this case was Keith Loeb. According to the government's theory of prosecution, Loeb breached a fiduciary duty to his wife Susan and the Waldbaum family when he disclosed to Robert Chestman information concerning a pending tender offer for Waldbaum stock. Chestman was convicted as an aider and abettor of the misappropriation and as a tippee of the misappropriated information. Convictions under both theories, the government concedes, required the government to establish two critical elements — Loeb breached a fiduciary duty to Susan Loeb or to the Waldbaum family and Chestman knew that Loeb had done so.

    114

    Chestman challenges the sufficiency of the evidence to establish each of these elements of the convictions. Although such a challenge carries a "heavy burden," United States v. Chang An-Lo, 851 F.2d 547, 553 (2d Cir.), cert. denied, 488 U.S. 966, 109 S.Ct. 493, 102 L.Ed.2d 530 (1988), that burden was carried here.

    115

    We have little trouble finding the evidence insufficient to establish a fiduciary relationship or its functional equivalent between Keith Loeb and the Waldbaum family. The government presented only two pieces of evidence on this point. The first was that Keith was an extended member of the Waldbaum family, specifically the family patriarch's (Ira Waldbaum's) "nephew-in-law." The second piece of evidence concerned Ira's discussions of the business with family members. "My children," Ira Waldbaum testified, "have always been involved with me and my family and they know we never speak about business outside of the family." His earlier testimony indicates that the "family" to which he referred were his "three children who were involved in the business."

    116

    Lending this evidence the reasonable inferences to which it is entitled, United States v. Zabare, 871 F.2d 282, 286 (2d Cir.), cert. denied, 493 U.S. 856, 110 S.Ct. 161, 107 L.Ed.2d 119 (1989), it falls short of establishing the relationship necessary for fiduciary obligations. Kinship alone does not create the necessary relationship. The government proffered nothing more to establish a fiduciary-like association. It did not show that Keith Loeb had been brought into the family's inner circle, whose members, it appears, discussed confidential business information either because they were kin or because they worked together with Ira Waldbaum. Keith was not an employee of Waldbaum and there was no showing that he participated in confidential communications regarding the business. The critical information was gratuitously communicated to him. The disclosure did not serve the interests of Ira Waldbaum, his children or the Waldbaum company. Nor was there any evidence that the alleged relationship was characterized by influence or reliance of any sort. Measured against the principles of fiduciary relations, the evidence does not support a finding that Keith Loeb and the [571] Waldbaum family shared either a fiduciary relation or its functional equivalent.

    117

    The government's theory that Keith breached a fiduciary duty of confidentiality to Susan suffers from similar defects. The evidence showed: Keith and Susan were married; Susan admonished Keith not to disclose that Waldbaum was the target of a tender offer; and the two had shared and maintained confidences in the past.

    118

    Keith's status as Susan's husband could not itself establish fiduciary status. Nor, absent a pre-existing fiduciary relation or an express agreement of confidentiality, could the coda — "Don't tell." That leaves the unremarkable testimony that Keith and Susan had shared and maintained generic confidences before. The jury was not told the nature of these past disclosures and therefore it could not reasonably find a relationship that inspired fiduciary, rather than normal marital, obligations.

    119

    In the absence of evidence of an explicit acceptance by Keith of a duty of confidentiality, the context of the disclosure takes on special import. While acceptance may be implied, it must be implied from a pre-existing fiduciary-like relationship between the parties. Here the government presented the jury with insufficient evidence from which to draw a rational inference of implied acceptance. Susan's disclosure of the information to Keith served no purpose, business or otherwise. The disclosure also was unprompted. Keith did not induce her to convey the information through misrepresentation or subterfuge. Superiority and reliance, moreover, did not mark this relationship either before or after the disclosure of the confidential information. Nor did Susan's dependence on Keith to act in her interests for some purpose inspire the disclosure. The government failed even to establish a pattern of sharing business confidences between the couple. The government, therefore, failed to offer sufficient evidence to establish the functional equivalent of a fiduciary relation.

    120

    In sum, because Keith owed neither Susan nor the Waldbaum family a fiduciary duty or its functional equivalent, he did not defraud them by disclosing news of the pending tender offer to Chestman. Absent a predicate act of fraud by Keith Loeb, the alleged misappropriator, Chestman could not be derivatively liable as Loeb's tippee or as an aider and abettor. Therefore, Chestman's Rule 10b-5 convictions must be reversed.

    121
    C. Mail Fraud
    122

    The fortunes of Chestman's mail fraud convictions are tied closely to his securities fraud convictions. "Chestman's mail fraud convictions," the government concedes, "were based on the same theory as his Rule 10b-5 convictions." The same fraudulent scheme that underlay the Rule 10b-5 convictions also was the basis for the mail fraud convictions. A scheme to misappropriate material nonpublic information in breach of a fiduciary duty of confidentiality may indeed constitute a fraudulent scheme sufficient to sustain a mail fraud conviction. See Carpenter, 484 U.S. at 27-28, 108 S.Ct. at 321-22; Newman, 664 F.2d at 19. However, whatever ethical obligation Loeb may have owed the Waldbaum family or Susan Loeb, it was too ethereal to be protected by either the securities or mail fraud statutes.

    123
    CONCLUSION
    124

    Accordingly, we affirm the Rule 14e-3(a) convictions and reverse the Rule 10b-5 and mail fraud convictions. The reversal of these convictions does not warrant reconsideration of the sentence since the sentences on the Rule 10b-5 and mail fraud convictions are concurrent with the sentences in the Rule 14(e)-3(a) counts. The panel's reversal of the perjury conviction remains intact.

    125
    WINTER, Circuit Judge (joined by OAKES, Chief Judge, NEWMAN, KEARSE, and McLAUGHLIN, Circuit Judges), concurring in part and dissenting in part:
    126

    I concur in the decision to affirm Chestman's convictions under Section 14(e) of the [572] Securities 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).

    127
    1) INSIDER TRADING
    128

    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.

    129
    a) Statutory Law and Caselaw
    130

    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 rulemaking power to define what insider trading is.

    131

    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.

    132

    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 [573] have 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.

    133

    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:

    134
    It shall be unlawful for any person, directly or indirectly
    135
    * * * * * *
    136
    (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....
    137

    15 U.S.C. § 78j (1988). The regulation promulgated by the SEC pertinent to the instant case is Rule 10b-5. That rule reads:

    138
    It shall be unlawful for any person, directly or indirectly ...
    139
    (a) To employ any device, scheme, or artifice to defraud,
    140
    (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
    141
    (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
    142
    in connection with the purchase or sale of any security.
    143

    17 C.F.R. § 240.10b-5 (1990).

    144

    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:

    145
    We have already noted that the antifraud 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.
    146
    * * * * * *
    147
    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.
    148
    ... 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 stockholders [574] 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.
    149
    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.
    150

    (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).

    151

    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.

    152

    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.

    153

    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 [575] relationship to the firm giving access to confidential corporate information — to eliminating the option of disclosure (and thus trading) by insiders.

    154

    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); Easterbrook, supra, at 314-15.

    155

    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.

    156

    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.

    157

    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).

    158

    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.

    159

    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 [576] whether the tipper "receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational 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.

    160

    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.

    161

    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.

    162

    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").

    163

    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).

    164
    b) Property Rights in Inside Information
    165

    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 [577] who 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.

    166

    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.

    167

    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 case, 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.) ("[P]otential acquires ... 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.

    168

    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.

    169

    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 [578] friends 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.

    170

    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.

    171

    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 information[5] 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.

    172

    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.

    173

    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.

    174
    [579] c) The Instant Case
    175

    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.

    176

    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.

    177

    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.

    178

    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.

    179

    [580] Under 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 Waldbaum's corporation.

    180

    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.

    181

    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).

    182

    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.

    183

    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.

    184

    I see no room for argument over whether there was sufficient evidence for the [581] jury 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 Waldbaum's shares, and their conversation ended on an inconclusive note.

    185

    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 Chestman'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.

    186
    2) RULE 14e-3
    187

    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.

    188
    3) MAIL FRAUD
    189

    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.

    190

    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 whether [582] 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.

    191
    MINER, Circuit Judge, concurring:
    192

    I concur in the comprehensive opinion of Judge Meskill, which I take to be wholly in accordance with the views I expressed in the original panel opinion as to all the issues before us. See United States v. Chestman, 903 F.2d 75 (2d Cir.1990). I write only to comment upon the "familial relationship" rule of insider trading proposed by Judge Winter in his partially dissenting opinion.

    193

    The rule urged upon us would impose a duty of nondisclosure upon "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." At 580. The duty is said to consist of an obligation "not to use information so obtained for personal profit where the use risks disclosure." Id.

    194

    The rationale for the proposed rule apparently is rooted in the notion that family members would be encouraged to speak freely on all matters pertaining to the family, knowing that the lips of those who receive confidential corporate information in the course of ongoing family interchanges would be sealed. Thus, in this case, so the argument goes, Ira Waldbaum could reveal the pending stock sale to his sister, Shirley Witkin, who could reveal it to her daughter, Susan Loeb, who could reveal it to her husband, Keith Loeb, all with the understanding that a duty imposed by law on each family member would protect against use of the confidential information for profit. Without the rule, it is maintained, family members in this case would have been inhibited from discussing such matters as the reason for Shirley Witkin's unusual absence from her home, because such a discussion inevitably would lead to disclosure of the confidential information regarding the sale of Waldbaum stock to A & P.

    195

    It seems to me, however, that family discourse would be inhibited, rather than promoted, by a rule that would automatically assure confidentiality on the part of a family member receiving non-public corporate information. What speaker, secure in the knowledge that a relative could be prosecuted for insider trading, would reveal to that relative anything remotely connected with corporate dealings? Given the uncertainties surrounding the definition of insider trading, a term as yet unclarified by Congress, what family members would want to receive any information whatsoever that might bear on the family business? How could family news be disseminated freely in an atmosphere where the members must be ultra-sensitive to whether "both the corporation and the family" are seeking some measure of confidentiality "under the circumstances."

    196

    The difficulty of identifying those who would be covered by the proposed familial rule adds an additional element of uncertainty to what already are uncertain crimes. It is not clear just who would be subject to the duty of confidentiality: family members "who ha[ve] received or expect[] ... benefits from family control of a corporation" belong to a very broad category indeed. Here, those who have received gifts of stock are included. But does the category include those who have received only small amounts of stock? Does it matter what proportion the stock bears to the total issued and outstanding shares? Does the category include one who expects to receive stock through inheritance but never receives any? Does it include grandchildren who expect ultimately to inherit assets purchased with the proceeds of the sale of the family-controlled corporation? The net would be spread wider than appropriate in a criminal context. Cf. Cantwell v. Connecticut, 310 U.S. 296, 308, 60 S.Ct. 900, 905, 84 L.Ed. 1213 (1940) ("Here we have a situation analogous to a conviction under a statute sweeping in a great variety [583] of conduct under a general and indefinite characterization, and leaving to the executive and judicial branches too wide a discretion in its application").

    197

    In the same vein, it is conceivable that minor children could find themselves "in a position to learn confidential corporate information through ordinary family interactions." If they came into the possession of such information and somehow acquired the knowledge "that under the circumstances both the corporation and the family desire[d] confidentiality," would they become tippers who would expose other family members to criminal liability as tippees when they passed the information along?

    198

    It is important to note that in the case at bar we deal with an attenuated trail of family confidences in which information was received without any assurance of confidentiality by the receiver and without any prior sharing of business information within the family. Neither Shirley Witkin nor her daughter nor her son-in-law were involved in any way in the operation of the Waldbaum business or privy to any of its past secrets. Family relationships being what they are, it makes little sense under the circumstances to imply assurances that confidentiality would be maintained. Of course, a different situation obtains where the giver of business confidences, in addition to having a family relationship with the receiver, also has a history of reposing such confidences in the receiver. See United States v. Reed, 601 F.Supp. 685, 712, 717 (S.D.N.Y.), rev'd on other grounds, 773 F.2d 477 (2d Cir.1985) (son of corporate director as receiver of non-public corporate information). Under those circumstances, the duty of confidentiality is implied from the business relationship coupled with the family one.

    199

    Finally, to further extend the concept of confidential duty would be to take the courts into an area of securities regulation not yet entered by Congress. It would give the wrong signal to prosecutors in their continuing efforts to push against existing boundaries in the prosecution of securities fraud cases. "[P]rosecutors can often claim that some confidential relationship was abused — whether between lovers, family members, longtime friends, or simply that well-known confidential relationship between bartender and drunk. Such a test inherently creates legal uncertainty and invites selective prosecutions." Coffee, Outsider Trading, That New Crime, Wall St.J., Nov. 14, 1990, at 16, col. 4. I would await further instructions from Congress before sailing into this unchartered area.

    200
    MAHONEY, Circuit Judge, concurring in part and dissenting in part:
    201

    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.

    202

    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.

    203

    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 designed [584] to prevent, such acts and practices as are fraudulent, deceptive, or manipulative."

    204

    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.

    205

    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.

    206

    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).

    207

    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."

    208

    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."

    209

    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 Protection [585] 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).

    210

    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 source 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."

    211

    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:

    212
    [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.
    213
    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.
    214

    United States v. Chestman, 903 F.2d 75, 86 (2d Cir.1990) (MAHONEY, J., concurring in part and dissenting in part).

    215

    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).

    216

    [586] As 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:

    217
    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].
    218

    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).

    219

    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. § 240.10b-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).

    220

    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, [587] but none where section 14(e) and rule 14e-3(a) are concerned.

    221

    Furthermore, both the Supreme Court and this court have explicitly recognized that section 14(e) is modeled upon the antifraud 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)).

    222

    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.

    223

    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.

    224

    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.

    225

    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. [588] 20, 58 L.Ed.2d 808 (1979). As the Court made clear in Daniel, however:

    226
    [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).
    227

    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).

    228

    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.".

    229

    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.

    230

    --------

    231

    [*] Judge Feinberg participated in the decision to rehear the appeal in banc and heard oral argument. He subsequently retired from regular active service, however, and thus did not vote in the in banc decision. See 28 U.S.C. § 46(c); United States v. American-Foreign S.S. Corp., 363 U.S. 685, 80 S.Ct. 1336, 4 L.Ed.2d 1491 (1960).

    232

    [1]The indictment and judgment of conviction charge Chestman with violating Rule 14e-3(a) as well as Rule 14e-3(d). The record provides no other indications, however, that Rule 14e-3(d) was involved in this case. In fact, in the government's Memorandum of Law in Opposition to Defendant's Pretrial Motions, the government states:

    233

    The rule [Rule 14e-3] also contains limited exceptions pertaining to multi-service financial institutions and brokerage transactions and establishes an "anti-tipping" rule with respect to material, nonpublic information concerning a tender offer. Rule 14e-3(b), (c), and (d). These provisions are not at issue here. The indictment invokes only subsection (a) of Rule 14e-3.

    234

    Thus, like the district court, 704 F.Supp. 451, 456 n. 4 (S.D.N.Y.1989), and the panel, 903 F.2d 75, 85 (2d Cir.1990), we assume that Chestman was convicted only under subsection (a) of Rule 14e-3.

    235

    [2] The insider's fiduciary duties, it should be noted, run to a buyer (a shareholder-to-be) and to a seller (a pre-existing shareholder) of securities, even though the buyer technically does not have a fiduciary relationship with the insider prior to the trade. As the Court explained in Chiarella:

    236

    The transaction in Cady, Roberts involved sale of stock to persons who previously may not have been shareholders in the corporation. The Commission embraced the reasoning of Judge Learned Hand that "the director or officer assumed a fiduciary relation to the buyer by the very sale; for it would be a sorry distinction to allow him to use the advantage of his position to induce the buyer into the position of a beneficiary although he was forbidden to do so once the buyer had become one."

    237

    445 U.S. at 227 n. 8, 100 S.Ct. at 1114 n. 8 (quoting Cady, Roberts & Co., 40 S.E.C. 907, 914 n. 23 (1961) (quoting Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir.), cert. denied, 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353 (1951))) (internal citation omitted).

    238

    [3] In Carpenter v. United States, 484 U.S. 19, 24, 108 S.Ct. 316, 320, 98 L.Ed.2d 275 (1987), an "evenly divided" Court affirmed the securities fraud convictions brought pursuant to the misappropriation theory. An affirmance by an evenly divided court is "not entitled to precedential weight." See Neil v. Biggers, 409 U.S. 188, 192, 93 S.Ct. 375, 379, 34 L.Ed.2d 401 (1972). Thus, Supreme Court support for the misappropriation theory is still unclear.

    239

    --------

    240

    [1] 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.

    241

    [2] 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 such blocs. Roe, A Political Theory of American Corporate Finance, 91 Colum.L.Rev. 10, 27 (1991).

    242

    [3] 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.

    243

    [4] 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.

    244

    [5] 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.

    245

    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). 

  • 5 Rule 10b5-2 Duties of trust or confidence

    Preliminary Note to § 240.10b5-2:

    This section provides a non-exclusive definition of circumstances in which a person has a duty of trust or confidence for purposes of the “misappropriation” theory of insider trading under Section 10(b) of the Act and Rule 10b-5. The law of insider trading is otherwise defined by judicial opinions construing Rule 10b-5, and Rule 10b5-2 does not modify the scope of insider trading law in any other respect.
     
    (a) Scope of Rule. This section shall apply to any violation of Section 10(b) of the Act (15 U.S.C. 78j(b)) and § 240.10b-5 thereunder that is based on the purchase or sale of securities on the basis of, or the communication of, material nonpublic information misappropriated in breach of a duty of trust or confidence.
    (b) Enumerated “duties of trust or confidence.” For purposes of this section, a “duty of trust or confidence” exists in the following circumstances, among others:
    (1) Whenever a person agrees to maintain information in confidence;
    (2) Whenever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality; or
    (3) Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling; provided, however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence existed with respect to the information, by establishing that he or she neither knew nor reasonably should have known that the person who was the source of the information expected that the person would keep the information confidential, because of the parties' history, pattern, or practice of sharing and maintaining confidences, and because there was no agreement or understanding to maintain the confidentiality of the information.
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