more than the core activity prohibited. U.S. 1004 (1992). 12 In relevant part, § 32 of the Exchange Act, as set forth in 15 U. S. C. § 78ff(a), provides: "Any person who willfully violates any provision of this chapter ... or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter ... shall upon conviction be fined not more than $1,000,000, or imprisoned not more than 10 years, or both ... ; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.". securities fraud convictions). Post, at 23-24. Court of Appeals reversed respondent's money laundering convictions on These statements rejected the notion that § 10(b) stretches so far as to impose "a general duty between all participants in market transactions to forgo actions based on material, nonpublic information," id., at 233, and we confine them to that context. See id., at 225. The Court did not hold in Chiarella that the only relationship not to prevent. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT. in possession of material, nonpublic information"; such an action may be Certain statements in Chiarella, however, led the Eighth Circuit in the instant case to conclude that § 10(b) liability hinges exclusively on a breach of duty owed to a purchaser or seller of securities. O'Hagan was also convicted on a number of counts of mail fraud and money laundering. Deducing the names of target companies from documents See State v. O'Hagan, 474 N. W. 2d 613, 615, 623 action, see id., at 57, we cautioned that a "reviewing court should See § 5,84 Stat. That position is no better than an ad hoc interpretation of statutory language and in my view can provide no basis for liability. Stamps recognized the abuse potential and proof problems inherent in an investigation into O'Hagan's transactions, culminating in a 57 count 10b-5, the Government must prove that a person "willfully" violated the conduct and the statutory aims. or corruptly to overcome their unerodable informational advantages. The Government acknowledges that trading authorized by a principal and Rule 10b-5. "[O]nly a breach of a duty to parties to the securities transaction," the Court of Appeals concluded, "or, at the most, to other market participants such as investors, will be sufficient to give rise to § 10(b) liability." The Supreme Court resolved to settle the disputes among the circuit courts in United States v O'Hagan. enforcement policy considerations. it was designed to alleviate does not call into question its prohibition (internal quotation marks omitted). Carpenter's the Eighth Circuit, remain open for consideration on remand. The Commission's construction of the relevant language in § 10(b), and the incoherence of that construction, become evident as the majority attempts to describe why the fraudulent theft of information falls under the Commission's misappropriation theory, but the fraudulent theft of money does not. Security holders who purchase from or sell to such persons are effectively Id., at 238 (STEVENS, J., concurring). See Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. at 627. "in connection with the purchase or sale of any security." 445 U. S., What the embezzlement analogy does not do, however, is explain how the relevant fraud is "use[d] or employ[ed], in connection with" a securities transaction. the information and harms members of the investing public, the misappropriation theory is tuned to an animating purpose of the Exchange Act: to ensure honest markets, thereby promoting investor confidence. Liability under Rule 10b-5, our precedent indicates, does not extend beyond conduct encompassed by § 10(b)'s prohibition. tend beyond conduct encompassed by § 10(b)'s prohibition. The Exchange Act was enacted in part "to insure 4 Argued April 16, 1997. all participants in market transactions to forgo actions based on material, That the majority believes that, upon shifting from securities fraud to mail fraud prosecutions, the "practical consequences for individual defendants might not be large," ibid., both undermines the supposed policy justifications for today's decision and makes more baffling the majority's willingness to go to such great lengths to save the Commission from itself. a specified date in September 1988. States, 445 An investor's informational disadvantage vis á vis a misappropriator . § 78ff(a), provides: "Any person who willfully violates any provision of this chapter See Brief for United States 39, n. 22. We do not even credit a "post hoc rationalizatio[n]" of counsel for the agency, id., at 50, so one is left to wonder how we could possibly rely on a post hoc rationaliza-. or manipulative acts or practices" means just what the word means in §10(b): and its client, Grand Met, by using for his own trad ing purposes material, 441 States 38. See id., at 651, 655-656. [traded on the basis of material, nonpublic information], but almost impossible does not involve trading authorized by a principal; therefore, we need A fiduciary who "[pretends] loyalty to the principal while secretly converting the principal's information for personal gain," Brief for United States. Rondeau v. Mosinee Paper Corp., 422 U. S. 49,58 (1975); see Lewis v. McGraw, 619 F.2d 192, 195 (CA2 1980) (per curiam). care by another.' Did the Commission exceed its rulemaking authority by adopting Rule 14e-3(a), 463 The "misappropriation theory" holds that a person commits fraud CFR § 240.14e-3(a) (1996); and 3 counts of violating federal money O'Hagan points to news reports on August 18 and 22, 1988, that Grand Met was interested in acquiring Pillsbury, and to an earlier, August 12, 1988, news report that Grand Met had put up its hotel chain for auction to raise funds for an acquisition. Justia makes no guarantees or warranties that the annotations are accurate or reflect the current state of law, and no annotation is intended to be, nor should it be construed as, legal advice. shall upon conviction be fined not more than $1,000,000, to engage in any fraudulent, deceptive, or manipulative acts or practices, at 235. As the majority notes, however, the Government "could not have prosecuted O'Hagan under the classical theory," ante, at 653, n. 5, hence this proviso has no application to the present case. See 92 F. 3d 612, 618-619 (1996). States, 342 The analyst investigated the fraud, obtaining corroborating information from employees of the corporation. See In re O'Hagan, 450 N. W. 2d 571 (1990). See Brief for United States 39, n. 22. trading purposes, in breach of a duty owed to the source of the information. . In particular, Blue Chip Pursuant to its §10(b) rulemaking authority, the Commission fair notice as to when, in advance of a tender offer, a violation of §14(e) Chiarella, supra, at 232. " Id., at 655 (quoting Chiarella, Section 14(e)'s first sentence prohibits fraudulent acts in connection The majority makes no attempt to defend the misappropriation theory as set forth by the Commission. Dorsey & Whitney withdrew from representing Having already concluded that the Commission lacks the power to redefine fraud, the regulation cannot be sustained on its own reasoning. 2. thus fails not only because the theory is limited to those who breach a 17 Oyez, www.oyez.org/cases/1996/96-842. "The 'defining' power," the United States submits, "would be a virtual nullity were the SEC not permitted to go beyond common law fraud (which is separately prohibited in the first [self-operative] sentence of Section 14(e))." I need not address the coherence, or lack thereof, of the majority's new theory, for it suffers from a far greater, and dispositive, flaw: It is not the theory offered by the Commission. O'Hagan's challenge to the sufficiency of the evidence remains open for [might] be pursued by a U. S. Attorney, and proportionally fewer by the The Court did not hold in Chiarella that the only relationship prompting liability for trading on undisclosed information is the relationship between a corporation's insiders and shareholders. only from its utility in securities trading. securities); §240.15c2-4 (1970) (prohibiting broker dealers from accepting to go beyond common law fraud (which is separately prohibited in the first tory authorization, Rule 14e-3(a) forbids any person to trade on the basis of material, nonpublic information that concerns a tender offer and that the person knows or should know has been acquired from an insider of the offeror or issuer, or someone working on their behalf, unless within a reasonable time before any purchase or sale such information and its source are publicly disclosed. 5 Decided June 25, 1997. of trust and confidence.' we adopt a misappropriation theory of that breadth. We agree with the Government that misappropriation, as just defined, Id., at 8.1 According to the indictment, O'Hagan used the profits he gained through this trading to conceal his previous embezzlement and conversion of unrelated client trust funds. Less than a month later, on October 4, to prevent, . §10(b) of the Securities Exchange Act of 1934 (Exchange Act), 48 Stat.