UNITED STATES of America, Appellee, v. Vincent F. CHIARELLA, Defendant-Appellant

America, Appellee, UNITED STATES CHIARELLA, F.

Vincent Defendant-Appellant. 137, Docket 78-1201. No. Appeals, United Court States Circuit. Second Argued Oct. D.C., also, F.Supp. 95. See Nov. Decided Fiske, Jr., Atty.,

(Robert B. U. S. Richard Atty., York Weinberg, D. Asst. U. S. New counsel), City, appellee. KAUFMAN, Judge, Chief Before MESKILL, Judges. Circuit SMITH KAUFMAN, Judge: Chief R. IRVING securities our nation’s The draftsmen of laws, caveat rejecting philosophy equal emptor, providing created system rea- necessary for access to the information decisions. investment intelligent soned and thing” on a betting It “sure apodictic of “fair and honest is anathema the ideal markets” established as foundation present case statutory this edifice.1 us to requires principles these apply prosecution context of a for trad- criminal ing knowledge of stock market on advance used events. Vincent confidential Chiarella through job his obtained anticipate im- printing financial house pending bought cheap tender He offers. and, after, For these activi- soon dear. sold ties, willfully of violat- he stands convicted Exchange of Act ing the Securities appeal, he of 1934 and Rule 10b-5. On ne- operations, however contends his statutory farious, the definition do fit and, moreover, that the of criminal conduct instructing jury on judge trial erred in He the crucial issue of intent. also chal- lenges aspects of numerous other charge his rulings on Owen’s and host evidentiary matters. We affirm.

I. high tender drama

Hostile offers are Street, tedious of Wall their they have but is the vast latter aspects. among Chief Arkin, City (Arkin, Stanley New York S. before generate even paper they amount of Arisohn, C., Cross, Arisohn & P. Mark S. Offering and transmit- the offer made. counsel), for Cross, City, Lee York New announcements, letters, and newspaper tal defendant-appellant. to be filed in Wash- disclosure statements Atty., before the offeror Siffert, ington John U. South- must be prepared S. Asst. S. are York, City documents ern District York invite tenders. These of New New Exchange Act of 1934 1. Securities U.S.C. 78b.

produced by specialized printing ledgeable firms stock spoke trader who with his that cluster around our centers of finance. broker as often as ten or fifteen times a cases, day. In each of the five he was able Appellant “markup was a man” in the target company deduce the name of the composing establishment, room of one such from in the other information documents— Pandick Press. Located downtown Man- histories, values, price and the par number hattan, readily Pandick was accessible to corporate letters in the mock names. banking law firms and houses. copy When Then, posted disregarding through- notices from a shop, customer arrived in the out Pandick customer that use of informa- went first to type Chiarella. He selected tion personal gain illegal for was both and fonts and page layouts passed and then against rules, company he would call his manuscript on to type. be set into broker buy target’s and shares stock. September Between 1975 and November course, Of when each tender offer was 1976, in addition to preparing more mun- announced, publicly price market dane documents such as annual reports and recently purchased Chiarella’s shares in- proxy statements, Chiarella handled the sharply. creased quickly sold out raw material for separate five takeover and profit. turned a handsome In the Em- preserve bids.2 To confidentiality for as offer, example, hart tender Emhart’s long possible and, most particularly, to — lawyers brought set documents the first avoid an anticipatory rise in the market Pandick September 1975. By Sep- price company’s stock should tember Chiarella had concluded that news of tender offer impending become “Arabia” was Emhart and “USA” was public type initially set with cer- —the day, bought USM. On that he 200 shares of tain vital information absent or in code. USM common his own stock for account Thus, Corp. sought pur- when Emhart Septem- On shares for his father’s. chase Corp., control of the documents USM ber after was an- tender offer originally to Pandiek read “Ara- delivered nounced, he all profit sold the stock at a bia Corp.” Corp.” until “USA Not Over the five $1019.11. takeover bids cov- final press night run on the before release by indictment, ered the Chiarella netted were the true names inserted. $30,000.3 more than The lawyers and investment bankers who documents, however, coded the reckoned Chiarella, Unfortunately for this without Appellant Chiarella. was not “sure early bet” did not forever. In last merely an ordinary printer, but a know- 1977, investigation the initiated an SEC 2. Four of the were in fact transactions tender “hostile” in the sense that were they opposed merger. offers and one was a The is record target’s management. the by The have parties unclear which, if of the takeover any, bids were significant. not treated either distinction as 3. Purchases Target Offeror Shares Date Date Sold Profit USM Emhart 9/ 5/75 9/ 9/75 1,019.11 $ Riviana Colgate- Foods 2/ 5/76 to 2/26/76 to (Merger) Palmolive 2/10/76 3/16/76 8,948.55 $ FoodTown Delhaize 10/21/76 to Stores Freres 10/11/76 12/ 1/76 2,990.30 $

Booth Times- Mirror Newspapers 10/21/76 10/22/76 914.56 $ Sprague General Electric Cable 11/10/76 11/15/76 $16,138.87 Total Profit: $30,011.39 investing or, if May, public, In he he is disabled from into activities. Chiarella’s corpo- protect disgorge disclosing his in order to to it agreed in a consent decree not do confidence, he to target or chooses sold him rate who had profits to those trading or rec- so, from and, discharged was must abstain day, the same stock4 concerned January 4,1978, ommending he securities Finally, by Pandick. on un- information remains while such inside counts of willful was on seventeen indicted Id. 848. nonpublic information disclosed. misuse of material5 and sale purchase in connection with the because he was an insider of But not securities, in violation purportedly he not corporations, argues, he did target moving After Rule 10b-5.6 fiduciary target owe a shareholders on unsuccessfully to dismiss the indictment an- who sold offer was before tender crime, charge ground did not Thus, claims, was sub- nounced. he he not every jury he was convicted rule of or abstain” ject “disclose appeal count.7 This followed. and, consequently, Sulphur, Texas Gulf a violation of charge indictment fails to disagree. Rule 10b-5. We II. the activities admits A. moreover, recognizes, outlined He above. appellant insider of That was not an Sulphur v. Texas Gulf since SEC he traded is companies securities whose banc), 1968) (en true, printer' financial but irrelevant. A the market such as Chiarella is inside (1969), letter it has been black be. itself as one could law that terms, of a practical finan-

anyone possession of material inside the services printing information must disclose it to the cial are a for the prerequisite either firm except person Chiarella, ex- (GLG) that when an such 4. SEC 77 Civ. 2534 No. $500,000may exceeding change, imposed; imprisonment be (S.D.N.Y. May a fine subject person but no shall under section the vio- this impending concerning the The information proves regulation lation of rule or if he stipulated material. to be tender offers was knowledge that he had no such rule regulation. 32(a), brought under § indictment separate purchases Chiarella made seventeen Act, 15U.S.C. penalty provision the 1934 , stock over the course of five 78ff(a): takeover bids. Each count of the indictment any pro- willfully Any person violates who represents appel slip a confirmation mailed to (other chapter than section vision of this buy following telephoned lant his broker a title), any regulation 78dd~l of this or rule or mailings order. These were in sufficient to made the violation of which is thereunder unlawful or jurisdiction voke federal under the securities is re- which observance States, laws. Little v. United any chapter, quired or of this under terms (8th 1964); Matthews, Cir. Criminal Prosecu makes, willfully knowingly person who and tion Under the Federal Securities Laws and any made, any in or to be statement causes Statutes, Related 39 G.W.L.Rev. application, report, required to document or any chapter or rule or be under filed this any undertaking regulation or thereunder to dis- decision on the motion Owen’s reported pro- registration statement as in a contained (S.D.N.Y. F.Supp. at 450 miss (d) of this in of section 78o vided subsection 1978). by any organization self-regulatory title or Appellant concurrent terms was sentenced to on counts one application member- connection with ship for an thirteen, year through of one participation or to become or therein suspended following imprison- month’s one thereof, which a associated with member Imposition remaining ment. of sentence on the misleading with re- statement was false or placed suspended, counts probation he was on and fact, spect upon convic- material shall years following his $10,000, for five release im- not than or tion be fined more prison. both, / years, from prisoned or more five than successful execution of a tender profits offer. sure than market insider Chiarella These auxiliaries industry of the securities had by virtue of the market information at central, though generally unheralded, are a disposal.8 Accordingly, his we believe that cog in the machinery disseminating vital the principle Gulf underlying Texas Sul- information to vantage phur investors. From his is not so narrow as Chiarella contends. point in the composing laws, room of Pandick In enacting Congress the securities Press, regular Chiarella had access on a protecting did not limit itself sharehold- basis to the most confidential peculations information ers from the of- their officers in the world of finance. Five times in major less A of the anti- purpose directors. than fifteen knowledge provisions months he obtained fraud “protect integri- was to that, released, ty of facts when would have an of securities marketplace in which immediate and dramatic “on the are Brown, effect traded.” United States Street.” 1977). Anyone— cor- porate regularly insider or not —who re- For the securities markets to func nonpublic ceives material information properly, tion it is essential that those who not use that information to trade in securi- occupy strategic such places the market incurring ties without an affirmative mechanism be forbidden to reap personal disclose,9 to disclose. And if he cannot he gains from information received virtue must abstain buying selling. from or Indeed, position. their pro Rule 10b-5 corporate hibits trading insiders from on The American Law Institute’s Fed nonpublic corporate only be suggested eral Code has catego Securities ready cause their ry access to the intimate “quasi-insiders” strong bears a companies’ problems details of concept resemblance to the of market their insid prospects gives advantage them an unfair er developed above. id. com See over persons they with whom deal. 3(d), ment (Proposed at 538-39 Official g., Sulphur, supra, Texas Gulf 401 F.2d at rejecting per Draft se disclose- (“[T]he policy Rule is based in on the or-abstain rule for quasi-insiders, the ALI justifiable expectation of the securities appeared primarily concerned with defining marketplace that trading all investors scope category. Id. It therefore impersonal exchanges relatively equal have chose not to these individuals in include information.”); Speed access to material trading” “insider section of the Code F.Supp. 808, Transamerica Corp., (§ 1603). specifically But the Institute indi Fleischer, (D.Del.1951); “egregious” Mundheim & Mur cated that cases would fall un phy, An Inquiry Responsibil Initial into the der proscription its recodifica Information, ity Code, to Disclose Market 121 tion of Rule supra, 10b-5. at 539. Fleischer, U.Pa.L.Rev. Yet Compare even the Murphy, Mundheim & unscrupulous most officer supra, or director could U.Pa.L.Rev. 819-24. A test of scarcely greater have a opportunity reap “regular access to ap- market information” strike, 8. “Market information” refers to information cause of the of an ore rise was news Sulphur, or, here, supra, see Texas price company’s Gulf affects the of a securities affecting announcement of a tender earning power without offer. See ALI Fed firm’s Fleischer, eral Securities 2(j), assets. See Code Murphy, comment Mundheim & at 531-32; supra, Oppenheimer Co., Examples 121 U.Pa.L.Rev. at 799. & in- Exch. Act Rel. 12319, clude information that an No. investment adviser [1975-1976 Transfer Fed. Binder] shortly “buy” Sec.L.Rep. (CCH) 80,551, 86,415 will issue a recommendation ¶ at & n.3 large seeking that a stockholder is to unload his shares —or that a tender offer will soon be course, Chiarella, from dis- company’s course, was disabled 9. of made for the stock. Of closing knowledge offers tender point his of the from the of view of a shareholder who duty day employer clients’ price to not to reveal sells his stock on the before the his his jumps sharply upward, it matters little whether confidences. 1366

pears provide to us to a workable rule. B. greater difficulty There should be no in to be understood as hold We are not resolving than is close cases inherent in ing may nonpublic that no one trade on determining “corporate insider” who is a incurring a market information without Code, Sulphur. under Texas Gulf su- See Indeed, has duty to disclose. as Chiarella 1603, pra, 3(e), any at 540. comment us, would-be tender persistently reminded event, we conduct believe Chiarella’s purchase 5% of the stock may up offeror fit sufficiently egregious to the most re- making of without prospective target its quasi-insider strictive definition of a who Corp. Time disclosure at all. General trading by gener- would be barred from Inc., 159, 164 (2d Talley Industries, 403 provisions al of 1968), denied, 1026, Cir. cert. 393 89 U.S. duty arising regular A out of to disclose 631, (1969); 21 see S.Ct. L.Ed.2d 570 access to market information not is a stran- 78m(d); Copper Corp. U.S.C. Kennecott ger to the world of 10b-5. In Affiliated 1195, Curtiss-Wright Corp., 584 F.2d 1205- States, Ute Citizens v. United (2d Cir. Because offerors (1972), L.Ed.2d trade, and he his informa because obtained Security First Bank of Utah acted as trans- them, appellant tion from would have us agent Develop- fer shares of the Ute .for he, too, purchase conclude that could Corporation, ment which was created announced, is stock before the tender offer government federal to hold assets for a subject only to limitation the 5% group of mixed-blood Indians. Ute There Act, 78m(d), 78n(d). Williams 15 U.S.C. §§ effectively separate were two markets for occupy en But the offerors and Chiarella the shares —a primary consisting market tirely respect with positions different Bank, selling through Indians to whites trading tender impending on news of an consisting entirely and a resale market offer. signifi- price per whites. The share was market, cantly higher but the in the resale outset, an clear, It at of the Indians did know of the existence as this offeror is not a “market insider” nor, course, price resale market term has It been defined above. does not Haslem, differential. Gale and two em- regularly nonpublic receive information ployees Bank, bought from Indians Indeed, concerning any stock but its own.11 whites, and sold to thereby realizing sub- offers, respect with to tender it does not profits. stantial The Supreme Court held receive information but creates it. employees’ position that the at the center of Moreover, gave making the two a Rule a tender offer at a markets rise to 10b-5 duty premium price, affirmative market pre-offer disclose. U.S. above the 153, 92 S.Ct. 1456.10 a substantial undertaking the offeror is eco- Specifically, applied agent our the Court decision access to mere transfer would have had Smith, Co., Barney price in Chasins v. 438 F.2d & the detailed and market (2d 1971), Cir. to hold that Gale and employees. Accordingly, available to the bank Haslem were de facto makers and agent market dictum that a Court’s transfer would obliged to reveal that fact to the Indians. Both disclose, 151-52, not incur a 406 U.S. at Supreme exclusively we and the Court relied interpreted 92 S.Ct. should not be as a duty, on Rule 10b-5 to establish did not Chiarella, holding precluding liability of who 15cl-4, regulates to Rule look which the con regular non-public did have access to informa- broker-dealers, duct of 406 U.S. at 154 n. of vital concern tion to investors. 1456; 92 S.Ct. 438 F.2d at 1172-73. Cf. SEC v. does, course, may 11. When it be liable as Ltd., Spectrum, (2d 489 F.2d 541 — 42 Cir. ordinary Westing an insider. Crane Co. v. 1973) (“unique pivotal legal pro role” house Air Brake justifies fession higher-than-usual distribution of securities 1969), conduct). standard of disagree We with Meskill’s narrow reading highly of Affiliated Ute Citizens. It is whether, case, doubtful under the facts of that target nomic risk Let us now tempting that his will consider Chiarella. In stark prove elephant.” Although to be a “white offerors, has contrast to the he taken no price target it knows that stock Indeed, whatsoever. his “in economic risk will rise when the takeover bid is an- speculative vestments” were less than those nounced, power the offeror has no alchemic Brod the defendants in A. T. & Co. v. knowledge to transform this into a certain Perlow, 375 F.2d 393 The profit. only The reason it can be confident Perlows ordered stock from their broker but purchases appreciate that its will soon pay price gone refused to when the had not value is that it will place soon a much Chiarella, up by however, settlement date. greater money sum of at risk. When the had virtually knowledge certain that he price goes up, the buying, offeror will be could sell out profit.12 at a substantial selling. not Moreover, Perlow, inas Chiarella’s market activity created an artificial demand for pre-offer offeror’s market pur target distorting stock that a had effect on chases thus represent willingness its to back the free play of by market forces envisioned judgment its is target that stock underval 397; the securities at laws. See id. Schot by ued the market. This course of action is land, Reply A Any Unsafe at Price: entirely consistent with the principles un Manne, Trading and the Insider Stock Mar derlying legisla the securities laws. The ket, (1967). 53 Va.L.Rev. 1448-52 tive history emphasizes of the 1934 Act open idea of public a free and mar [t]he light, Viewed in this Chiarella’s upon theory ket is built [that] upon Corp. Talley reliance General Time competing judgments buyers and sell Industries, Inc., supra, support is ironic. To ers as price security to the fair of a his assertion that General Time limits the brings about a situation where the mar affirmative duty disclose to outsiders of price ket nearly possible reflects as issuer, Chiarella misuses Friend just price. ly’s comment that: H.R.Rep.No. 1383, Cong., 73d 2d Sess. 11 law, We know of no applicable rule of at (1934); accord, S.Rep.No. Cong., 73d time, purchaser stock, that a who 2d Nor are these principles Sess. was not an “insider” and had no fiduciary in any way by diminished the 5% limit on seller, relation to prospective had pre-offer purchases market established obligation circumstances that to reveal Act, 78m(d), Williams 15 U.S.C. §§ might demands and thus raise a seller’s 78n(d). That legislation designed at 164 (emphasis abort the sale. 403 F.2d to interfere with an offeror’s exercise of its added).13 Rather, judgment. economic its principal in the Appellant place himself shoes would purpose prevent “stampede was to ef- offerors, fit. but the shoes do not publicity fect” that associated with of Pandick’s “tippee” Chiarella was not a tender offers has on shareholders. clients, liability only derivative with g., Mosinee Paper Rondeau v. through them. In clear of his n.8, violation & Aranow, agent, (2d) duties as (1975); Agency E. Restatement H. Einhorn Berlstein, Developments & G. he personal Tender converted to his use Corporate Offers for Control confidential information entrusted to him in Appellant’s suggested argu- change applicable counsel at oral 13. The allusion to a in the Act, ment that Chiarella bore the risk that tender law refers to enactment of the Williams plans collapse offer would which between the time he became effective after the transactions purchased target stock and the date set for the issue in General Time. As we indicated public earlier, reject any legislation announcement. We conten- the exist- does not affect possibility tion that this remote and nebulous ence of a market insider’s to disclose. comparable at all to the risk borne offeror. 1368 su 20; Fleischer, Murphy, Mundheim & may He not employment.

the course of his pra, 121 U.Pa.L.Rev. at 815.15 duty of his market insider’s relieve himself claiming protection of of disclosure conclude, therefore, that We persons he has' defrauded.14 10b-5, Rule and conduct violated Chiarella’s entering the Indeed market charges a accordingly indictment target for stock on the basis of advance Congress pro enacted to crime.16 offer, ex knowledge of a tender Chiarella in destroyed conduct that confidence hibit price of the pressure on the g., 15 upward erted the securities U.S.C. markets. Brown, manner, precise 78b; he achieved supra. United stock. In this The States Friendly assiduously Judge so ly designed prohibit the result to section was specifically Time. See E. General sought deceptive practices to avoid in “those manipulative supra, Berlstein, to fulfill Aranow, no H. G. which have been demonstrated Einhorn & dispose appellant’s purpose to to con is irrelevant Chiarella’s This suffices business culpability guilt Judge permitting defrauding His the offerors. tention the Owen erred property prosecutor argue con there arises from a conversion to that Chiarella’s is inti- —Pandick’s clients’ information—that duct defrauded the offerors as well as the sell mately purchase making legitimate prosecutor connected with and sale of a ers. The response principal pillar supra. of the defense See note to the securities. 14 event, case, any theory of the that Chiarella could trade In Santa Fe Industries arose on event, entirely could because the indictment offerors trade. facts bar. different from those the case at Fe, fairly Charges question violated In Santa Chiarella was whether by converting purpose liability Rule 10b-5 information to his offerors’ confidential lack of business would create only alleged It required own use. not under Rule 10b-5 even when all dis- appellant’s “operated 474-77, activities as a fraud closures were made. 430 U.S. at 97 upon Chiarella, course, and deceit the sellers of the aforemen S.Ct. made no dis- securities,” charged tioned it also to "scheme closure whatsoever. general Clearly, defraud” in an terms. Moreover, violation Chiarella’s contention that there duty confidences, agent’s respect client was no fraud because the sellers did not suffer 395, (2d) Agency transgresses Restatement injury by reason of his conduct is mer- without here, where, Rule 10b-5 as the converted infor that, suggests Appellant it. have abstained from even were he to mation both concerned securities and was used trading, share- Superin purchase and sell securities. Cf. placed would still have orders holders their tendent of Insurance Co., Life v. Bankers & Cas. 165, Consequently, sell. his failure to abstain was 6, 9-10, 7, 404 n. & 30 not a “but for” cause of the losses the’sellers Brown, (1971); United States v. by unloading incurred their shares before Perlow, supra; supra. A. T. Brod & Co. argument, tender offer This announcements. however, weightless. equally It would be not 15. We wish to make it clear that we are applicable to the shareholders in Texas Gulf relying any concept purpose” of “business Sulphur, who would have sold even had the distinguishing Chiarella from Pandick’s purchasing insiders not been on their ad- TGS clients, appel- whose confidential information knowledge company’s strike. vance ore respect, lant converted to his use. In this own Owen, unpersuaded by dissenting 16. We are our with we differ in who relied at least argument that brother’s Rule 10b-5 must be part “presumptively legiti- on the offerors’ narrowly prosecu construed more in criminal purpose promote mate business growth,” economic than in civil enforcement Sec tions tion provides actions. F.Supp. agree at 97. We with Act, 32(a) 78ff(a), of the 1934 15 U.S.C. § appellant purpose” that “business cannot be penalties criminal for willful viola dispositive liability under Rule 10b-5. Santa “any regulation tions of rule or . Industries, Green, 462, Fe Inc. v. 430 U.S. (empha violation of which is made unlawful.” S.Ct. 51 L.Ed.2d 480 added) that, except sis It is well-established presence But absence of business proof, for issues of intent and burden of crimi purpose bearing liability has no on Chiarella’s liability nal and civil laws under the securities defrauding solely for from the sellers. That arises Peltz, are coextensive. United States v. position appellant’s a market insider 1970) J.), (Friendly, F.2d cert. resulting his trade and on market breach his not to denied, 401 U.S. 28 L.Ed.2d S.Ct. without disclosure. (1971); Charnay, United States v. sellers, analy- respect With to the the economic (9th Cir.) (citing cases), only sis adumbrated in the text serves to dem- 50 L.Ed.2d 610 why the bene- onstrate claim Equally, fits of the General Time doctrine. Sorg publicized well Cong., 73d decree was S.Rep.No. useful function.” in the imagine widespread to aroused concern financial It is difficult 2d Sess. undertook to useful, printing industry. Pandick less or more destructive of conduct trading on the notify employees its that integrity of our public confidence in the in contained customers’ markets, basis of information than Chiarella’s. securities laws. It copy could violate the securities large, boldface prepared signs, x 10" in 8" C. type, reading: interpret that Appellant contends TO ALL EMPLOYEES: affirmative impose to an ing Rule 10b-5 type The information in all contained other than a person of disclosure on a Press, printing set and done Pandick would be so novel a con corporate insider Inc., private property personal is the as to violate the fair struction of the Rule of the customer. believe, process. notice element of due We any to use informa- You are forbidden however, holding logi is but a today’s that copy, proofs tion learned from customer’s congressional policies application cal of the jobs your anyone own or printed or Sulphur. underlying the rule of Texas Gulf benefits, family or talking else’s friend or case has involved the prior litigated That no receive instruc- except give about it to or at issue here is not precise pattern fact of this rule will re- Any tions. violation Brown, supra, dispositive. United v. States immediately and your being sult in fired 339-40; States v. Char United 555 F.2d warning. without Cir.), nay, 537 F.2d (9th addition, In to criminal you liable are S.Ct. U.S. $10,000 penalties jail and years of 5 necessary that is All fine for each offense. statement of the that “a clear and definite violating you If see or anybody hear of the actions al antedate proscribed” conduct this, your super- report immediately it v. Per leged to be criminal. United States Fertig. Fail- visor Mr. or to Mr. Green sky, your result in report ure to violations will being fired. principle, Chiarella Under this notice that his manifestly adequate had signs posted These were on bulletin boards subject him to trading target stock could throughout shop Sep- before the Pandick first liability. criminal He was not 5, 1975, made when Chiarella his tember printer have felt the wrath of the SEC. During stock. purchase first 12, 1974, August On the Commission filed covered period entire fifteen-month complaint alleging employees that various indictment, sign over the ti- prominent in activi Sorg Printing Co. had in and out punched meclock where Chiarella engaged cross-examination, employees ties identical to Chiarella’s. glared daily. at him On entry prelimi sign eventually at least appellant passing consented admitted SEC them. have nary injunctions against believed jury 640 times. The need read it.18 Sorg Printing Transfer never Few testimony his that he [1974-1975 warning of (CCH) 95,034 explicit Fed.Sec.L.Rep. malefactors receive such ¶ Binder] (S.D.N.Y. conduct. their 1975).17 consequences March (S.D. Healy, Litigation Sorg, No. 6589 consent SEC Rel. has obtained Since the SEC 18, 1974) (officers offeror). (not printers of tender against N.Y. Nov. decrees three additional Manderano, including Chiarella). SEC v. [Cur 1196,357 (D.N.J. Fed.Sec.L.Rep. (CCH) printed in the union rent] The notice was also timecard, 1978); Typographers, newspaper, Primar March Inc., SEC v. on the back of Chiarella’s separate Transfer Fed.Sec.L. Binder] to Pandick [1976-1977 and in cards distributed ¶ 95,734 (CCH) (S.D.N.Y.1976); Rep. employees. SEC v. testified that he never Ayoub, these, although Transfer Fed.Sec.L. Binder] [1975-1976 read he admitted know- (CCH) ¶ 95,567 (S.D.N.Y.1976). Rep. ing company Sorg SEC employees Cf. “violated 10b-5, provisions tive are and Rule III. the additional prove the Government must major issue We turn now to the second intent to defraud. specific element of level of intent appeal raised on this —the he cites the advancing proposition this for crimi- necessary support conviction Hochfelder, Ernst v. in Ernst & statement 10b-5. Chiarella’s nal violations of Rule 47 L.Ed.2d 668 only significant issue state mind was the , damages under (1976) action for that a civil at trial. 1934 Act provisions the antifraud “ charged jury Judge Owen fail ‘scienter’ —in- proof must absent could not convict Chiarella unless found deceive, defraud,” tent to id. manipulate, or “knowingly” that he had acted and “willful- 193, at 96 at 1381. S.Ct. ly,” and terms to mean that defined these no Courts and commentators alike have what he “the defendant must be aware of whole, ticed, however, that, read as a doing doing” was and what he was not and yield such a opinion Hochfelder does acting deliberately, he and not that must be explication of the clear and ineluctable mistakes, negli- as a result of “innocent Rolf v. g., meaning of “scienter.” other innocent gence, or inadvertence or 38, F.2d 570 Blyth, & Eastman Dillon conduct.” He concluded: filed, for cert. 1978), (2d petition 44-47 Cir. necessary All that is for this second ele- 2, 1978) (No. (U.S. Oct. 47 U.S.L.W. 3266 govern- ment to be satisfied is that 78-560); Charnay, supra, United v. States ment establish a realization on the de- 357-59; Bucklo, Supreme The at doing he was a part fendant’s that Attempts Court to Define Under Scienter act, assuming you that find wrongful 10b-5, 213, 216-17 Rule Stan.L.Rev. wrongful un- that Chiarella’s conduct (1977) primarily concerned . The Court was explained der the securities law as I have rejecting with that Hochfelder’s contention element, previous in the and that negligent mere omissions sufficed to estab signif- knowingly wrongful act involved a 10b-5, lish a claim under Rule and it did not icant effecting risk of the violation that points particu settle fine of definition. Jt.App. occurred. 778a. open lar it left whether reckless conduct is ap sufficient, 12, This language specifically has been at 193 n. S.Ct. proved brought, 1375, for like this prosecutions variously holding described its and Act, one, scienter,” 32(a) under of the 1934 U.S.C. id. at requiring “some element § 78ff(a), “knowing willful violations or inten punishes which and § S.Ct. 197, 96 misconduct,” or of at S.Ct. provisions the Act’s substantive tional id. that A indicates promulgated rules it. United fair Hochfelder reading under States Peltz, (2d 1970), only to v. Cir. 54-55 the term “scienter” Court used negligence contrast and not to establish Dixon, (1971); intent to defraud. specific United States standard of F.2d. Indeed, was not such fraudulent intent or commenta- dispute required by any does not that of the cases

Chiarella favor- Judge charge adequately Owen’s defines tors cited the Hochfelder Court as actions, 32(a) in 10b-5 required by ing requirement the level of intent itself. a scienter Rather, Bucklo, he contends that when the substan- see 219 & nn.30 & nor supra, at policies they discharged.” and point. were At Our Brother Meskill misreads us on this sentencing hearing, illegal by Owen found that Chiarella’s conduct was rendered testimony language Chiarella’s policy had not he read the of the and statute rule. perjury beyond

notices was sign merely appellant a reasonable doubt. informed today SEC’s view of the law —a view we hold course, suggest, We do not that the notices was correct. posted by expanded Pandick somehow scope liability Rule 10b-5. under law, generally required was it at common nation of the record convinces us that the And, Hochfelder, see id. at 228-30. since trial court acted properly respects. in all that, we have held under some circumstanc example, judge For the district es, disregard reckless of the truth will satis permit testify refused to Chiarella to fy requirement private the scienter in a he anyone being prose had never heard of damages. civil action for Blyth, Rolf v. cuted for what he had done. But under the Co., supra. Eastman Dillon Finally, & test, require Peltz-Dixon the willfulness only court to reach the issue has held the 32(a), general ment of is satisfied charge Peltz-Dixon to be consistent with conduct, Peltz, su wrongful awareness of Charnay, Hochfelder. United su States pra, even if a de which exist pra, (on petition 537 F.2d at 357-59 chicanery fendant in techni believes his Hochfelder). rehearing light Dixon, law, cal compliance supra, with the us, In the case before proffered testimony, at 1396. Chiarella’s therefore, charge requiring tangentially was convicted under a was at best relevant. jury beyond Considering prejudice to find a reasonable doubt that to the Govern wrongful” engaged “knowingly might suggestion he misc ment that arise from a unfairly singled onduct.19 We do not believe that Hoch was out for Chiarella requires According prosecution, than this. Owen did not abuse his felder more broad under Fed.R.Evid. ly, Judge correctly charge discretion 403 Owen refused barring testimony. g., the e. United jury prove that the Government must 122, King, (2d Cir.), States v. 560 F.2d 128 specific intent to defraud.20 denied, 925, 404, cert. 434 U.S. 98 S.Ct. 54 (1977). L.Ed.2d Similarly, 283 the trial IV. judge excluding, did not err in as irrelevant arguments Chiarella’s on the issues of prejudicial, appellant and evidence that dis intent, however, are not limited to his claim gorged of his profits his to the sellers under Hochfelder. He asserts that numer- securities. It is difficult to see how Chiar evidentiary ous errors in rul- Judge Owen’s operation during ella’s of of state mind instructions, individually and ings jury and by evi his scheme would be illuminated jury from fair- cumulatively, prevented agreed dence that afterwards he an SEC ly considering his contention that he not requiring did Post v. United decree restitution. States, 189, 196-98, culpable have a state of mind. Our exami- 407 U.S.App.D.C. 132 material, question adequacy nonpublic in connection 19. There is no as to the information purchase support the evidence to with the verdict. Chiarella his of stock would constitute knowing charge given part admitted company policy that his actions violated This deceit.” was as him liable to dis- and made definition 5(a). “scheme to defraud” in Rule 10b- charge. although And he testified that he Construction of the words of a statute thought legal (because course, (and, rule) his conduct was is the court’s function. right trade) 1130, offerors had the and that he did g., Santiago, E. United States v. “anything not believe that would come denied, 972, criminal (2d Cir.), 1135 cert. 425 U.S. 96 it,” he admitted on cross-examination that 2169, 48 United “wrong” “against he knew his conduct was Gypsum States v. United States Contrary suggestion, the SEC.” to Chiarella’s _U.S. _, 2864, (1978), 98 S.Ct. 57 L.Ed.2d 854 is violating company he was not convicted for policy. contrary. imper not to the That case it an held knowledge doing His that he was so jury’s missible encroachment on the fact-find however, culpable constituted a state of mind ing charge pre role to that defendants are satisfy sufficient to the Peltz-Dixon of will- test prices sumed have intended to fix if their 32(a). fulness under § Id. _U.S. conduct would have that effect. at _, 2872-77, 98 S.Ct. at 57 L.Ed.2d judge 20. We also that the did believe district Here, judge repeatedly 868-75. the trial told not, suggests, as direct a Chiarella verdict jury that it must state determine Chiarella’s guilty by charging jury that “in the context itself; indeed, portion quoted of mind for as case, assuming you requisite of this find the objectionable specifically so states. mind, state of a failure Chiarella to disclose 1372 denied, proceed- action or party to such cert. (1968), 393 is 319, bor]

F.2d ing.” 21 L.Ed.2d 784 U.S. 89 S.Ct.

(1969).21 correct Judge Owen We believe and admit motion suppression ly denied V. privilege ted the statement. State-created 22 controlling are in federal criminal s a series challenges Finally, Chiarella they reflect “the except cases to the extent below, which he claims rulings each of other they may law principles the common Only one of error. reversible constituted of the United courts by the interpreted discus- extended requires these contentions experi reason light of in the States sion. United g., E. ence,” Fed.R.Evid. discharged by Cir., he was 776 Craig, Shortly after States J., Pandick, unemployment concurring sought (Tone, appellant (majority), panel per curiam on Depart aff’d en banc from the New York State point), benefits concurrence, Cir.), with the (7th ment of Labor. In connection F.2d 957 a statement admit application, signed he 96 S.Ct. misusing discharged ting that he L.Ed.2d and that “the alle

confidential extent To the L.Ed.2d gation true.” When the Government York under New privilege does create a decide, file for Department is one subpoenaed law, the Labor it we need not an issue trial, to suppress moved use at view of to the common law. unknown was privi favoring admissi ground statement on the policy federal strong cases, see, (McKin g., United leged Labor Law under N.Y. bility in criminal Nixon, 683, that state provides 708-13 & n. States v. ney The statute 418 U.S. (1974), unemployment 3090, 1039 the 18, for 41 L.Ed.2d applying ments made in 94 S.Ct. . statement properly in held benefits “shall not . . used district court DiCarlo, v. United States pend See admissible. any any proceeding in or court action 1977), cert. de- 802, (1st la- 565 F.2d 806 Cir. the commissioner ing therein unless [of prejudicial error was held to be error to securities it was not other 21. We also conclude proof securities repeated in the absence of that the latter charge jury similar acts that “the short, In were themselves stolen. Id. at 658. in the indictment be considered or conduct attempt pledge intent.” “simi- of unlawful the second was not a circumstantial evidence pro frequently highly act,” clearly distinguishable evidence is Similar acts lar and Marcus is g., Fed.R. bative on issues of intent. from the case before us. id. at 658 n. 3. See Grady, 404(b); 544 F.2d Evid. United States v. 598, 1976); (2d v. 604-05 Cir. United States Unem Chiarella contends that the Federal 991, (5th 1973); Broadway, 477 F.2d 994 Cir. ployment Act, 3304(a)(16), Tax 26 § U.S.C. 114, Deaton, 117-18 United States v. 381 F.2d (17), providing approval for state federal (2d 1967) cases). Although (citing Chiarel Cir. unemployment laws, into an transforms 537 § inadvertently, or la did not contend he acted through Congress” purposes “Act of for of Fed.R.Evid. mistake, Semak, v. see United States We are not inclined to read § 3304 so 1142, 1976), (6th 536 F.2d 1144-15 the fact Cir. because, broadly point Government has engaged separate that he in five transactions out, Secretary approved ed unemployment of Labor has period permit over a of fifteen months would laws in at least two states— jury to infer that his mind was focused on Washington specifi Massachusetts and —that acts, the nature of his see United States v. cally permit prosecutors disclosure to of state Catalano, 268, (2d Cir.), 491 F.2d 275-76 cert. Laws such as Chiarella’s. Mass.Ann. ments denied, 825, 42, 42 419 95 S.Ct. L.Ed.2d 48 U.S. 151A, (Miehie/Law. 1976); Coop. ch. 46§ Marcus, (1974). 429 F.2d In United States v. 50.13.060, any Code .070. §§ Wash.Rev. event, 654, (3d 1970), relied Chiarel 657-58 Cir. on ground excluding the statement this la, knowingly charged with the defendant and is therefore waived. was not raised below attempting pledge in securities. An stolen 527, Fuentes, g., F.2d E. United States v. 563 jury permitting infer knowl struction edge denied, 959, Cir.), (2d 98 531 cert. 434 U.S. stolen from evi that the securities were 491, 320 S.Ct. 54 L.Ed.2d pledge sought later dence that defendant 1487, nonpublic L.Ed.2d material nied, disclose information. I U.S. Schoenheinz, sympathetic majority’s am to the view that (1978); United States or to abstain disclose 1977) curiam); imposition of (9th (per 548 F.2d 1389 Cir. strategic positions in (3d occupy on those who Jury, In re 541 F.2d Grand impor- further industry may the securities 1976); Craig, supra. Cir. acts, securities goals embodied in the tant carefully appellant’s considered We have in maintaining investor confidence such as find them to be remaining contentions and However, we of the market. integrity judgment The is affirmed. without merit. legis- temptation to redraft must resist the effect, lation, reading into it what we MESKILL, Judge, dissenting: Circuit there, especially would like to see written where a criminal conviction is at issue. Today’s respectfully I dissent. decision 10(b) drastically, it does so with- expands § 10(b) That is a today’s application § law that this is prior out clear indication in dispute departure from law cannot be prior logical step path judicial the next on the Corp. In General Time Talley d.1 Indus and, 10(b), alarmingly, development of § tries, Inc., (2d 1968), Cir. case. of a criminal does so in the context denied, 89 S.Ct. cert. rejected a (1969), this Court stock acquiring company claim 10(b) and Under Nondisclosure selling disclose to must corporation another Rule 10b-5. merger: an eventual plans for shareholders majority holds that com law, applicable at We know of no rule of by breaking the 10(b) mitted a violation stock, who time, purchaser that a rule of v. Texas “disclose or abstain” SEC fiduciary had was not “insider” and no an Sulphur, Gulf seller, had prospective relation to a 1968) (en banc), obligation to reveal circumstances that 22 L.Ed.2d 756 How might raise a seller’s demands and thus ever, have cited no case in which we been abort the sale. has liability even civil for nondisclosure Act, yet The Williams effective at the anyone under other imposed been at issue in General time of the transactions insider, insider, of an tippee than an Time, impose obligations on does disclosure relationship with standing special one in a stock, but large purchasers certain scale we have specifically, other traders. More trading was it is conceded that Chiarella’s liability criminal been cited no case in which 15 by provisions. not its See U.S.C. covered imposed 10(b) nondisclosure has been 78m(d), 78n(d). §§ stock, any purchaser on either insider or “irrelevant” majori- terms majority outsider. The by the As the cited commentators was neither an insid to disclose observed, duty the fact that Chiarella ty have “[t]he securities he has companies er of the whose material, information non-public tippee of an insider. purchased, possessing nor the imposed every person on been Traditionally, “inside the market it this Chiarella’s location type this of information. place special persons him in a been limited to today obligation self” is held has with company af- special relationship and sellers with a to the relationship buyers with all Fleischer, the relationship by which fected information.” might whom he deal —a Inquiry Murphy, or to Mundheim An Initial triggers duty either to abstain & Indeed, require sitting has stated most careful consideration.” this Court en banc and would Industries, Inc., placing 407 American that Rule an affirma- SEC Great “to read 10b-5 banc), (2d 1968) (en duty persons cert. tive of disclosure on who in con- Cir. denied, 23 L.Ed.2d or broker-dealers did not oc- 395 U.S. 89 S.Ct. trast to ‘insiders’ relationship buyer cupy special a or a seller securities, ground occupying new would be 10b-5, purpose to Disclose Market essential of Rule as we have Responsibility into Information, corpo again, prevent 121 U.Pa.L.Rev. is to stated time and added). (1973) (emphasis taking also Fleisch- from tippees See rate insiders and their er, Trading Corporate Infor- advantage Securities of the uninformed outsid unfair Implications The of the mation Practices: Inc. v. Dynamics, ers.” Radiation Gold Proceeding, 51 Sulphur Texas Gulf Va.L. muntz, (2d Cir. on Rev. Commentators majority’s The break with this § persons often discuss securities fraud law accomplished by tradition is the creation duty by covered the Rule 10b-5 disclosure insider,” into the new of “market category other than in- without mention of traders henceforth be which will former outsiders See, e. 1g., siders or of insiders. A. tippees placed. in this new cate majority sees Fraud, Law: Bromberg, Securities concept to the gory strong resemblance (1977). Bromberg 7.4(6)(b), at 179-83 in the com “quasi-insider” suggested generally have judicial notes that decisions In Law the American accompanying ments anyone adopted the own view that SEC’s (Proposed Code stitute’s Federal Securities subject obligations disclosure to Rule 10b-5 15, 1978). However, Draft, Official March information obtain- if he or she “has inside clearly imposes an proposed quite code Id. at by ed reason of access to issuer.” duty only insid affirmative of disclosure in terms of their rela (explicitly ers defined issuer) to the tionship with or access This access formula was first enunciated Reporter’s com tippees of insiders. The by leading itself in its decision of SEC ments indicate that the difficulties (1961): Cady, Roberts & S.E.C. by extending duty this to a posed would be is, Analytically, the obligation [that range wider deemed to traders were affirmative to disclose material in- outweigh the of such an ex “convenience” principal rests on two ele- formation] Thus, proposed tension. the drafters first, ments: the existence of a relation- rejected position tak respectfully Code access, directly indirectly, ship giving concurring judges en the three SEC available information intended Industries, Inc., 407 F.2d Great American only purpose and not for corporate for a banc), 1968) (en anyone, and personal benefit 23 L.Ed.2d second, involved the inherent unfairness willingness to catch (1969), expressed who advantage of such party where a takes net. 10(b) disclosure non-insiders in the § it is unavaila- knowing information law, code, proposed prior The ALI’s like dealing. ble to those with whom he is explicitly recognizes that some cases of non considering these elements under by non- disclosure of material language provi- broad of the anti-fraud insiders, do not egregious, no matter how sions we are not to be circumscribed involve and hence do not fall within fraud rigid fine classifications. distinctions and scope 10(b), majority’s the state § identify Thus our task here is to those contrary notwithstanding.2 ment to the persons relationship who special are a privy with a to its internal company apply Because and Rule 10b-5 to affairs, thereby suffer correlative tempting to view limita- “any person,” trading duties in in its securities. subject persons tions on the class of to an added). to abstain or to years duty Id. Eleven either (emphasis at 912 affirmative overly as ap- this information Cady, nonpublic after decision disclose Roberts of the firmly pursuit proach to had become so technical the full Rule 10b-5 barriers to But “The laws. goals remarked: securities entrenched that this Court of the federal notes, particu- (Proposed accompanying 2. See Official § 1603 and Federal Securities Code Institute, Draft, larly 3(d). comment March American Law concerning And it market information UDC stock 10(b) prohibits fraud not silence. undertaking act for the silence, but its to unlike active actions is hornbook law that equivalent that rendered its silence when sellers misrepresentation, only is fraudulent selling share- Prosser, to a scheme to defraud the duty speak.3 is a to Law of there certainly did not under- Loss, holders. Chiarella 1971); (4th ed. Securi- Torts § of the Loss, take to act for the sellers (1961); 6 Regulation, Chapter 9C ties type special stock, nor did he enter Chapter 9C Regulation, Securities which was determi- them relationship with test of that majority suggests The native in Affiliated Ute. is a information” “regular access to market must, majority concedes, The as it determining when such a one for workable (also outsid- offerors would-be tender Affili imposed to on outsiders. duty is be derived his infor- ers) from whom Chiarella States, 406 U.S. ated Ute Citizens v. United purchase up to 5 mation themselves (1972), a 31 L.Ed.2d S.Ct. target’s stock without mak- percent of the case, cited to only precedent is the civil ing disclosure. See U.S.C. a assertion that majority’s buttress 78n(d); Corp. v. 78m(d), General Time §§ ac arising regular to disclose out of “duty Industries, Inc., Talley supra, 403 F.2d 159. stranger is not a cess to market information by the majority distinguishes purchases The to the world of 10b-5.” Affiliated Ute purchases by offeror and on the Chiarella agreed which had with the involved a bank takes an economic ground that the offeror (UDC) to act Corporation Ute Distribution not. We have been risk and Chiarella does stock, agent as transfer for its which was degree that the of risk holding cited no case being sold its Indian owners non-Indi of non- possession assumed a trader in in a acknowledged had ans. bank itself public information is determinative representing the letter to an association or ren- liability trader’s for nondisclosure be the bank’s sellers that it would Indian “ ders his conduct fraudulent. were transfers ‘duty to see that these ” “ and that ‘the bank would properly made’ been shown to have has not ” stockholders.’ acting for the individual to the sellers of duty owed a of disclosure Despite at 1471. Id. at duty the offer- target stock. He owed employees to access of the bank and its misuse confidential corporation not to which was not known market information him. But entrusted to sellers, explained Supreme to the Court bring 10b-5 does not term “fraud” in Rule merely functioned if the bank “had breaches of within the ambit of the rule “all have been no agent, a transfer there would with a securi fiduciary duty in connection (emphasis Industries, duty of disclosure here.” Id. Inc. Fe ties transaction.” Santa added). the defendants had Green, 462, 472, It because holders of the plan devised a to induce the In most con “ developed something and encour texts, stock to sell and had requires ‘fraud’ still that defend of fiduci aged a market for their stock or breach more than ‘unfairness’ Institute, Feder an affirma ary duty.” ants were held to have assumed American Law Draft, Thus, Official (Proposed it was not al duty tive of disclosure. Securities Code (3)(b). regular 1978) access to Comment clearly superior, the bank’s March prosecution non-inside information. Failure make such This case does involve only g., atypical” type disclosure is fraudulent when a “novel or of fraud. Corp. Brown, Time disclose is violated. See General United States v. 555 F.2d 336 Industries, Inc., (2d Perlow, Talley 1977); 403 159 Cir. 375 F.2d A. T. Brod & Co. v. 1968), (2d 1967). involved U.S. and Periow Cir. Brown novel, company which, (1969) (permitting to ingenious were L.Ed.2d while schemes disclosing plans purchase clearly of the stock without fraudulent under definition Industries, contrast, merger); prose SEC v. Great American term fraud. In Chiarella Inc., supra, disclosing nonpublic, trading 407 F.2d at 460. cuted for without 195,734 Statute. Fed.Sec.L.Rep. (S.D.N.Y. 10(b) as a Criminal C.C.H. Section is government of the the Apparently were broad 10(b) 10b-5 If and Rule § where imprisonment will succeed view that every securities-related enough to cover may be. This have failed. other sanctions or un unfairness maneuver that entailed of an extension wisdom But whatever the there would confidence dermined investor 10(b) cover to § of the incarnation” “civil statutes and need for all the other be no here, our lawmak- presented the situation complex securities figure in the rules that in the severely restricted ing function is Congress has been that regulation scheme notes, we majority the criminal area. As When a new building since the 1930’s. “a clear uphold cannot conviction unless as abuse of point weak is identified —such pro- and definite the conduct statement of by regular access to market information alleged to be scribed” the actions antedates participants industry certain in the di —a United in Judge Kaufman criminal. Chief through congres-, problem rect attack on the (2d Persky, States v. 520 F.2d Cir. rulemaking would legislation sional or SEC the novel 1975), perceptively identified most response than the appropriate be a more proc- of due application by issue raised the existing stretching of law uncomfortable 10(b) principles to ess-vagueness-notice § engaged majority here to cover by in the prosecutions. criminal gap.4 the The SEC has been aware of the is the Perhaps interesting the most [issue] informa potential nonpublic for abuse of general the between apparent dissonance since at least by printers tion financial are to be statutes rule that criminal Co., Inc., Fed. Sorg Printing C.C.H. SEC in favor accused strictly construed ¶ 95,034 (S.D.N.Y.1975). The Sec.L.Rep. the civ- . the realization that sought and obtained several con SEC has provi- anti-fraud il incarnations of the same conduct enjoining sent the decrees have, legislation, been sions as remedial ordering disgorge engaged in and broadly. avowedly construed openly and transactions. profits ment of made such See, Ayoub, Persky, g., Sorg, supra; SEC this same (citations omitted).5 that, ¶ 95,567 (S.D.N.Y. applied Persky, Fed.Sec.L.Rep. panel concluded as to C.C.H. Inc., Typographers, SEC v. Primar 1976); expansive that “the civil could not be said by practice “warehousing” question I the tender 4. Because the is not before us ex- press opinion thought. no the SEC has offerors deserves for discussion as to whether Fleischer, warehousing, delegated power regulate printers Mur Mundheim & been the phy, Inquiry Responsibility congres- engaged An Initial into the in securities work or whether Information, required. U.Pa.L. sional action Disclose is Market Rev. legislative Either the or the administrative process possible imposition would make the Compare Supreme Court’s cautious and trading responsive restrictions to the different interpretation restrictive of the Sherman Act in possibilities nonpublic for abuse of price fixing light a recent criminal case by opposed Contrary outsiders as to insiders. interpreted that “the Act has not been the fact statement, majority’s advantage unfair primarily as if it were a criminal statute” but only evil over other traders is not great flexibility. has been construed with rather trading are intended to Gypsum insider restrictions States v. United States United _ corporate _, _, avoid. The subtle infection of deci- gain sion-making by personal considerations of (1978). The same accommodation to the and other conflicts of interests inimical necessi and remedial sanctions of criminal corporation pre- history insider’s to the are also the structure and of the securi tated requirements, Winston, disclosure vented acts. See also United States v. ties by provisions 1977), overturning like 16 of the 1934 Act well as Study (regulating swing profits). Railway short Labor Act: “The conviction under proceedings problem possible paucity cures under [45 “market insider” of criminal 152], might yield precisely a mechanism more tai- when contrasted with the active U.S.C. thereunder, strongly sup prevent perceived pursuit lored to evil without of civil relief appellants’ Congress opening ports in has door to those that Court contention only apply given opportunity to the consider. tended criminal sanctions to not been egregious Although example, impact, any, the fail- more violations. For if of our decision by particular of so a interpretations Rule 10b-5 have covered statute into conduct provided prohibited sys- stretched the Rule that he was statute. by that Under our legislature, warning only private fair that his conduct was fraudu- tem not the citizen, by power.6 lent the standard of strict construction has this Persky, due criminal statutes.” Id. a secu- majority has failed to uncover a suf lawyer rities and an officer of Microthermal ficiently prohibiting clear statement Chiar Inc., Applications, engaged in a series of imposition ella’s actions to warrant of a maneuvers, filing including false SEC re- criminal I wholeheartedly sanction.7 en ports, misleading press releases, issuing and of the de majority’s explanation dorse the making misrepresentations to Microther- sirability necessity curbing and of the abili shareholders, mal’s all calculated to cover ty of nonpublic those with access infor up president’s misappropriation com- making mation to trade without disclosure. pany only Persky funds. Not an insid- civil, recognize And I a that as remedial er law owing a clear common to the 10(b) statute has been and should be § company, shareholders of his but his ac- interpreted by in a flexible fashion tions, position of trust to designed to use his to recent courts. Yet we cannot be deaf shareholders’ further his own interest at the in Supreme Court caveats issued restric- expense, would fall within the most 10(b) lest slowing expansion down the tive specifically definition of “fraud.” We corporate it take over “the whole universe.” open possibility 10(b) might left that § Industries, Green, supra, Fe Inc. v. Santa unconstitutionally vague, in a criminal at 97 S.Ct. at We 430 U.S. have context, applied to other behavior when urged been language turn first to the Persky standing we noted that had no 10(b) ascertaining congressional intent. challenge the law “on behalf of those whose Hochfelder, Ernst & Ernst v. 425 U.S. ambiguous conduct would be more but who 197, 47 L.Ed.2d 668 are not before us.” Id. at 288. relying We have been chided for on “the I believe that the “clear and definite bring term ‘fraud’ in Rule 10b-5 to within proscribed” statement of the conduct to the ambit of the Rule all breaches of fiduci majority which the a concedes defendant is ary duty in with a securities connection entitled, language must emanate from the gloss transaction” lest we add a to the “ itself, prior judicial statute from different from its ‘quite commonly statute ” interpretation, or from established custom Industries, accepted meaning.’ Fe Santa and see the relevance usage. Thus I fail to Green, supra, Inc. v. 430 U.S. warning signs posted by

to this ap issue of the have been S.Ct. at 1300. The brakes they Pandick. While would be most rele- plied private in the context of causes questions willfulness, knowledge, vant to 10(b). Surely action under we should be intent, signs posted by private party even more fastidious in our construction of hardly can transform conduct otherwise not the statute when we are asked review a peri- by parties ure to enforce a statute over an extended who want to avoid further liti- repeal, reasons, gation od of time does not result in its . . . number of cannot trans- ‘gloss upon which it’ . . . life has written form behavior into crim- denounced the SEC indicates in this instance that strict construc- inal conduct. appropriate.” (footnotes tion of its terms is omitted). and citations observed, 7. As Chief Kaufman has scope” “exact nature the federal law subjective 6. Nor would Chiarella’s view that governing liability tippee “remain trader his conduct was violative of the securities laws Schein Chasen, stage.” formative 478 F.2d actions, worthy transform his no matter how (2d J., 1973) (Kaufman, Cir. dissent- condemnation, into conduct criminal under ing), grounds, vacated on other 32(a). §§ See United States v. Zach 1741, 40 L.Ed.2d er, For the reason, decrees, same civil consent entered into Here, Chiarella was criminal conviction. imprison- year term of Hunter,

sentenced to a one JOHNSON, A. E. Charles Charles month, and ment, except for one suspended Osborne, L. Rodger and Thomas W. probation. term of year a five individually Wells, and on behalf of all situated, Appellees, similarly others Conclusion. v. pur concerning Despite some dicta laws, g., see e. the securities pose behind Commissioner, LEVINE, Division Mark A. Co., supra, 401 Sulphur v. Texas Gulf SEC Maryland Department Correction, of of held that there 847-48, has “no case F.2d at Services; Safety Correctional Public information be parity of material must Williams, Warden, Maryland Ralph L. transac parties a securities tween Correction; Lally, Robert J. House of Murphy, su Fleischer, & tion.” Mundheim Safety Secretary, Department of Public The disclosure pra, 121 U.Pa.L.Rev. at 806. Services; and Marvin and Correctional insiders, broker- imposed has been duty Mandel, Mary of the State of Governor Smith, Barney dealers, & Chasins land, Appellants. 1970), and those under buyers relationship with taking special stock, Affiliated Ute Citizens v. Curreri,

sellers of NELSON, Carl Earl A. Warren C. States, supra, 406 United Maryland Pen Jackson, Prisoners problem L.Ed.2d 741. “The themselves itentiary, on behalf identify cases is to the circumstances silence situated, Appellants, similarly others all forward with trigger to come which Fleischer, Mundheim & Mur information.” at 803. To phy, supra, U.Pa.L.Rev. Warden, COLLINS, Maryland George H. triggering circum a new identify judicially Bartram, Su Mary Penitentiary; Lou market informa receipt of regular stance — tion —if Maryland Reception Diag all, appropri perintendent, is not appropriate Center; aspects of 10b-5 ate here. The criminal Mark nostic and Classification significant nor Commissioner, Maryland have been neither extensive Levine, Di A. Bromberg, supra, 10.3 today. 3 prior Lally, Correction; .to J. Robert vision of to function ability of the SEC at 241. Maryland Department Secretary, if it must severely hampered will not be Services; Safety and Correctional Public action or action its congressional await Chairman, Maryland Turner, Henry P. market to correct dis own rulemakers Mandel, Commission; Marvin Parole printers. As by wayward caused tortion Maryland; the State Governor like to any agency, would SEC would Warden, Hawkins, McLindsey Assistant weapons in its arsenal as keep many Fine, Sigmund Penitentiary; Maryland combat, rules of possible. But there are Warden, Maryland Penitentia Assistant are job see that the amenities and our is to Correction; Maryland ry; Division embarks on a new when the SEC observed Member, Goldstein, Board Pub Louis crusade. James, Member, Works; William S. lic of convic- judgment I would reverse the Works; Smith, D. J. Board Public to dis- tion and remand with instructions Sergeant, Maryland Penitentiary, sued miss indictment. individually capaci and in their official

ties, Appellees. JOHNSON, Hunter, Charles E. Charles A. Rodger Osborne, W. and Thomas L.

Case Details

Case Name: UNITED STATES of America, Appellee, v. Vincent F. CHIARELLA, Defendant-Appellant

Court Name: Court of Appeals for the Second Circuit

Date Published: Nov 29, 1978

Citation: 588 F.2d 1358

Docket Number: 137, Docket 78-1201

Court Abbreviation: 2d Cir.