We are asked to consider whether, in a civil enforcement lawsuit brought by the United States Securities and Exchange Commission (“SEC”) under Section 10(b) *44 of the Securities Exchange Act of 1934 (“Section 10(b)”), computer hacking may be “deceptive” where the hacker did not breach a fiduciary duty in fraudulently obtaining material, nonpublic information used in connection with the purchase or sale of securities. For the reasons stated herein, we answer the question in the affirmative.
BACKGROUND
In early October 2007, defendant Oleksandr Dorozhko, a Ukranian national and resident, opened an online trading account with Interactive Brokers LLC (“Interactive Brokers”) and deposited $42,500 into that account. At about the same time, IMS Health, Inc. (“IMS”) announced that it would release its third-quarter earnings during an analyst conference call scheduled for October 17, 2007 at 5 p.m. — that is, after the close of the securities markets in New York City. IMS had hired Thomson Financial, Inc. (“Thomson”) to provide investor relations and web-hosting services, which included managing the online release of IMS’s earnings reports.
Beginning at 8:06 a.m. on October 17, and continuing several times during the morning and early afternoon, an anonymous computer hacker attempted to gain access to the IMS earnings report by hacking into a secure server at Thomson prior to the report’s official release. At 2:15 p.m. — minutes after Thomson actually received the IMS data — that hacker successfully located and downloaded the IMS data from Thomson’s secure server.
Beginning at 2:52 p.m., defendant — who had not previously used his Interactive Brokers account to trade — purchased $41,670.90 worth of IMS “put” options that would expire on October 25 and 30, 2007. 1 These purchases represented approximately 90% of all purchases of “put” options for IMS stock for the six weeks prior to October 17. In purchasing these options, which the SEC describes as “extremely risky,” defendant was betting that IMS’s stock price would decline precipitously (within a two-day expiration period) and significantly (by greater than 20%). Appellant’s Br. 2.
At 4:33 p.m. — slightly ahead of the analyst call- — IMS announced that its earnings per share were 28% below “Street” expectations, ie., the expectations of many Wall Street analysts. When the market opened the next morning, October 18, at 9:30 a.m., IMS’s stock price sank approximately 28% almost immediately — from $29.56 to $21.20 per share. Within six minutes of the market opening, defendant had sold all of his IMS options, realizing a net profit of $286,456.59 overnight.
Interactive Brokers noticed the irregular trading activity and referred the matter to the SEC, which now alleges that defendant was the hacker.
See SEC v. Dorozhko,
On January 8, 2008, in a thoughtful and careful opinion, the District Court denied the SEC’s request for a preliminary injunction because the SEC had not shown a likelihood of success. Specifically, the District Court ruled that computer hacking was not “deceptive” within the meaning of Section 10(b) as defined by the Supreme Court. According to the District Court, “a breach of a fiduciary duty of disclosure is a required element of any ‘deceptive’ device under § 10b.”
Dorozhko,
This appeal followed. On appeal, the SEC maintains its theory that the fraud in this case consists of defendant’s alleged computer hacking, which involves various misrepresentations. The SEC does not argue that defendant breached any fiduciary duties as part of his scheme. In this critical regard, we recognize that the SEC’s claim against defendant — a corporate outsider who owed no fiduciary duties to the source of the information — is not based on either of the two generally accepted theories of insider trading.
See United States v. Cusimano,
DISCUSSION
Standard of Review
We review the grant or denial of a preliminary injunction for abuse of discretion.
E.g., Kickham Hanley P.C. v. Kodak Retirement Income Plan,
“Deceptive Device”
“Section 10(b) prohibits the use or employ, 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.” 15 U.S.C. § 78j(b) 2 The instant case requires us to *46 decide whether the “device” in this case— computer hacking — could be “deceptive.” 3
In construing the text of any federal statute, we first consider the precedents that bind us as an intermediate appellate court — namely, the holdings of the Supreme Court and those of prior panels of this Court, which provide definitive interpretations of otherwise ambiguous language. Insofar as those precedents fail to resolve an apparent ambiguity, we examine the text of the statute itself, interpreting provisions in light of their ordinary meaning and their contextual setting.
See United States v. Magassouba,
The District Court determined that the Supreme Court has interpreted the “deceptive” element of Section 10(b) to require a breach of a fiduciary duty.
See Dorozhko,
In
Chiarella,
the defendant was employed by a financial printer and used information passing through his office to trade securities offered by acquiring and target companies. In a criminal proseeu
*47
tion, the government alleged that the defendant committed fraud by not disclosing to the market that he was trading on the basis of material, nonpublic information. The Supreme Court held that defendant’s “silence,” or nondisclosure, was not fraud because he was under no obligation to disclose his knowledge of inside information. “When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak. We hold that a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.”
In
O’Hagan,
the defendant was an attorney who traded in securities based on material, nonpublic information regarding his firm’s clients. As in
Chiarella,
the government alleged that the defendant had committed fraud through “silence” because the defendant had a duty to disclose to the source of the information (his client) that he would trade on the information. The Supreme Court agreed, noting that “[deception through nondisclosure is central to the theory of liability for which the Government seeks recognition.”
In
Zandford,
the defendant was a securities broker who traded under a client’s account and transferred the proceeds to his own account. The Fourth Circuit held that the defendant’s fraud was not “in connection with” the purchase or sale of a security because it was mere theft that happened to involve securities, rather than true securities fraud. The Supreme Court reversed in a unanimous opinion, observing that Section 10(b) “should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes.”
The District Court concluded that in
Chiarella, O’Hagan,
and
Zandford,
the Supreme Court developed a requirement that any “deceptive device” requires a breach of a fiduciary duty. In applying that interpretation to the instant case, the District Court ruled that “[although [defendant] may have broken the law, he is not liable in a civil action under § 10(b) because he owed no fiduciary or similar duty either to the source of his information or to those he transacted with in the market.”
Dorozhko,
In our view, none of the Supreme Court opinions relied upon by the District Court — much less the sum of all three opinions — establishes a fiduciary-duty requirement as an element of every violation of Section 10(b). In
Chiarella, O’Hagan,
and
Zandford,
the theory of fraud was silence or nondisclosure, not an affirmative misrepresentation. The Supreme Court held that remaining silent was actionable only where there was a duty to speak, arising from a fiduciary relationship. In
Chiarella,
the Supreme Court held that there was no deception in an employee’s silence because he did not have duty to speak.
See
Chiarella, O’Hagan,
and
Zandford
all stand for the proposition that nondisclosure in breach of a fiduciary duty “satisfies § 10(b)’s requirement ... [of] a ‘deceptive device or contrivance,’ ”
O’Hagan,
In this case, the SEC has not alleged that defendant fraudulently remained silent in the face of a “duty to disclose or abstain” from trading. Rather, the SEC argues that defendant affirmatively misrepresented himself in order to gain access to material, nonpublic information, which he then used to trade. We are aware of no precedent of the Supreme Court or our Court that forecloses or prohibits the SEC’s straightforward theory of fraud.
6
Absent a controlling precedent that “deceptive” has a more limited meaning than its ordinary meaning, we see no reason to complicate the enforcement of Section 10(b) by divining new requirements. In reaching this conclusion, we are mindful of the Supreme Court’s oft-repeated instruction that Section 10(b) “should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes.”
Zandford,
535 U.S.
*50
at 819,
Having denied the SEC’s application for a preliminary injunction freezing defendant’s trading account on the basis of a perceived fiduciary duty requirement stemming from the Chiarella line of insider trading cases, the District Court did not decide whether the ordinary meaning of “deceptive” covers the computer hacking in this case — or, indeed, whether the computer hacking in this case involved any misrepresentation at all. Defendant invites us to remand both questions so that the District Court may decide in the first instance.
In its ordinary meaning, “deceptive” covers a wide spectrum of conduct involving cheating or trading in falsehoods.
See
Webster’s International Dictionary 679 (2d ed.1934) (defining “deceptive” as “tending to deceive,” and defining “deceive” as “[t]o cause to believe the false, or to disbelieve the true” or “[t]o impose upon; to deal treacherously with; cheat”).
Cf. Ernst & Ernst v. Hochfelder,
The District Court — summarizing the SEC’s allegations — described the computer hacking in this case as “employ[ing] electronic means to trick, circumvent, or bypass computer security in order to gain unauthorized access to computer systems, networks, and information ... and to steal such data.”
Dorozhko,
However, we are hesitant to move from this general principle to a particular application without the benefit of the District Court’s views as to whether the computer hacking in this case — as opposed to computer hacking in general — was “deceptive.” Our caution is counseled by the considerable and careful efforts the District Court has already devoted to this case, including hearing live testimony from witnesses at a preliminary injunction hearing that covered, among other topics, how Thomson’s secure servers were infiltrated. See, e.g., J.A. 848 Tr. of Preliminary Injunction Hearing at 40-41, Dorozkho, 606 F.Supp.2d. 321 (No. 07 civ 9606). Having established that the SEC need not demonstrate a breach of fiduciary duty, we now remand to the District Court to consider, in the first instance, whether the computer hacking in this case involved a fraudulent misrepresentation that was “deceptive” within the ordinary meaning of Section 10(b). The District Court may, in its informed discretion, enter a new order on the basis of the existing record or reopen the preliminary injunction hearing to consider such additional testimony regarding the nature of the hacking in this particular case as it deems appropriate in the circumstances.
CONCLUSION
For the foregoing reasons, the District Court’s January 8, 2008 order denying the SEC’s motion for a preliminary injunction is VACATED. The cause is REMANDED for further proceedings consistent with this opinion.
Notes
. A “pul” is “[a]n option that conveys to its holder the right, but not the obligation, to sell a specific asset at a predetermined price until a certain date.... Investors purchase puts in order to take advantage of a decline in the price of the asset.” David L. Scott, Wall Street Words 295 (2003).
. The regulation promulgated by the SEC pertinent to the instant case is Rule 10b-5, which provides, in relevant part:
It shall be unlawful for any person, directly or indirectly ...
(a) To employ any device, scheme, or artifice to defraud,
*46 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
. In the District Court’s view, "the alleged 'hacking and trading’ was a 'device or contrivance' within the meaning of the statute."
Dorozhko, 606
F.Supp.2d at 328. The District Court further observed that the scheme was "in connection with” the purchase or sale of securities because the close temporal proximity of the hacking to the trading (everything occurred in less than twenly-four hours) and the cohesiveness of the scheme (establishing the trading account, stealing the confidential information within minutes of its availability, and trading on it within minutes of the next day’s opening bell) suggest that hacking into the Thomson computers was part of a single scheme to commit securities fraud.
See id.
at 328-29;
see also SEC v. Zandford,
. Although the District Court construed Justice Blackmun's dissent to suggest that "no breach of fiduciary duty should be required to uphold a conviction under § 10(b),”
Dorozhko,
. Some commentators grudgingly have acknowledged that the District Court's conclusion would be compelled under a narrow-reading of Section 10(b) that covers only the "disclose or abstain” requirement for corporate insiders other than fiduciaries. See, e.g., Robert A. Prentice, The Internet and Its Challenges for the Future of Insider Trading Regulation, 12 Harv. J.L. & Tech. 263, 297-98 (1999) (acknowledging that, "[t]o the extent that misappropriation liability is based solely on a breach of fiduciary duty, thieves unrelated to the source of the information could steal the information without being in violation of existing federal securities laws”); but see id. at 300 (arguing that "to hold that hackers are misappropriators is consistent with the pre1934 common law upon which Section 10(b) was based [and] is consonant with the underlying policy of Section 10(b) — investor protection” (internal footnote omitted)).
. The District Court found it "noteworthy” that in the over seventy years since the enactment of the Securities Exchange Act of 1934, "no federal court has
ever
held that those who steal material nonpublic information and then trade on it violate § 10(b),” even though "traditional theft (e.g. breaking into an investment bank and stealing documents) is hardly a new phenomenon, and involves similar elements for purposes of our analysis here.”
Dorozhko,
. We are further counseled by the observations of Judge Augustus N. Hand, who reasoned over fifty years ago that had Congress intended to impose a fiduciary-duty requirement on Section 10(b) liability, it would have said so.
See Birnbaum v. Newport Steel Corp.,