United States of America, Plaintiff-Appellee/cross-Appellant v. James Herman O'hagan, Defendant-Appellant/cross-Appellee

day practice occur on a when something in the accident requires cause Proximate control over tournament had no for” causation test be- defendants a “but addition to contestants, Dunlap undisputed it was that causation test serves “but for” cause the already practicing and was re- finished that are not causal had only items to exclude oc- turning at the time the accident causal in home fact; items that are it will include that, undisputed It at the curred. was also be unreasonable would fact but that occurred, racing he was not they time the accident are too far liability upon because base timing himself and thus was not injury his boat or ultimate or dam- from the removed long it “timing in a run” to see how engaged age. ... fishing spot from a would take to travel injury be a reasonable ... must [T]he point, which was tournament check-in consequence of the act or probable and away from the accident located several miles gener- This is the defendant. omission of site. but, ally test to the extent a “look back” injury “natural requires that judgment affirm of the Accordingly, we sprinkling probably includes a probable,” it district court. foreseeability. dam- To the extent the unexpected, surprising, or freak- ages are

ish, may prob- natural and they not be the consequences of a defendant’s actions.

able involved an extended scenario If the facts involving multiple persons and events with causes, intervening then the re-

potential quirement damages that result be America, consequence Plaintiff- probable of UNITED STATES the natural Appellee/Cross-Appellant, play into conduct comes defendant’s liability. cut off (citations omitted); see, e.g., Ash- Id. at 865 O’HAGAN, Defendant- James Herman Assocs., ley R.D. Columbia Appellant/Cross-Appellee. law). (8th Cir.1995) (applying Missouri 94-3714, 94-3856. Nos. plaintiff not

We hold could establish that defendants’ conduct as a matter of law Appeals, Court of United States emphasis organizing the tournament —the Eighth Circuit. speed and the lack of tourna on “breakneck” 17, 1995. Submitted Oct. safety precautions actually caused the ment — assuming purposes Even fatal accident. Aug. Decided defendants, analysis organizers as the tournament, protect had a hazards, public from tournament-related

particular, operation high- the reckless

speed fishing boats tournament contest

ants,3 that defendants breached that any

duty, plaintiff not establish causal could acci connection between that breach and the Rather, undisputed facts. dent under the Dunlap’s the accident was con the cause of duct, is, keep proper his failure to undisputed Dunlap

lookout. It was engaged tournament-related activ ity when occurred. Not did the accident danger injury Corp., present 3. But Archer v. Outboard Marine an unreasonable cf. (Mo.Ct.App.1995) (rejecting public operation high-speed due to reckless S.W.2d ’ boats). public fishing claim that tournaments on lakes bass French, Dwyer MN, Minneapolis, John ar- (Charles gued Lee Hawkins and Elizabeth L. brief), Taylor, appellant. on the Bebel, Christopher Atty., J. Asst. ar- MN, gued, Minneapolis, for appellee. FAGG, LAY, HANSEN, Before Judges. Circuit HANSEN, Judge. Circuit O’Hagan appeals James Herman his con- victions of all counts a 57-count indictment fraud, fraud, money for mail securities laundering. government cross-appeals, contending erroneously that the district court O’Hagan’s Although calculated sentence. issues, raises whole host of First, particular find merit two claims. statutory language neither of section Exchange Act of of the Securities 78j(b), pre- nor 15 U.S.C. it, interpreting support cedent will the use of “misappropriation theory,” O’Hagan’s § which formed the basis for Second, Pillsbury option contracts.2 He also held call the Se- convictions. (SEC) Pillsbury com- 5000 shares of approximately Exchange Commission curities and purchased Sep- authority which he had rulemaking under sec- mon stock exceeded its 10,1988. Exchange Act of tember of the Securities 78n(e), promulgat- when 15 U.S.C. 1988, 4, publicly Met October Grand On 240.14e-3(a), 14e-3(a), 17 C.F.R. ed Rule Pillsbury its tender offer for announced requirement omitted therefrom and immediately Pillsbury rose stock stock. must be shown a breach of a per share.3 per share to almost $60 from $39 mail fraud rule. The in to violate the order thereafter, O’Hagan op- his Shortly exercised in the indictment to counts are structured tions, Pillsbury at the purchasing the stock validity the securities fraud hinge of on the option price, liquidating the and then lower laundering in counts, money counts and stock, along previously purchased with the mail fraud or upon dependent are turn stock, higher of common for 5000 shares Accordingly, va-we fraud counts. securities by price generated the tender offer. market gov- O’Hagan’s convictions. The cate all of $4,000,000 profit a of over from He realized moot. cross-appeal is dismissed as ernment’s transactions. these securities

I. Exchange Commission Securities (SEC) subsequently commenced an investi- partner O’Hagan was a in Herman James gation O’Hagan of and others who had Whitney firm in Minne- Dorsey law & heavily Pillsbury in short- invested securities July approximately apolis, Minnesota. by ly its takeover Grand Met. This before (Grand Met), 1988, large Met PLC Grand joined by oth- investigation, which was later London, Eng- company diversified based authorities, law cul- er federal enforcement land, Whitney as local Dorsey & retained charged in O’Hagan being minated Met was interested counsel because Grand 1-20 instant 57-count indictment. Counts Pillsbury Company (Pillsbury), acquiring the charged him with mail fraud violation of Minnesota, company. Minneapolis, charged 18 U.S.C. 1341. Counts 21-37 Throughout remainder of the summer him with securities fraud violation main- fall of Grand Met and into the 10b-5, and Rule 17 C.F.R. acquiring interest Pills- tained a continued 240.10b-5, promulgated thereunder. an bury, moving forward with but before charged O’Hagan with Counts 38-54 securi- offer, it first had to sell a actual tender and Rule ties fraud violation of subsidiary company in order to have suffi- 240.14e-3(a), 14e-3, promulgat- 17 C.F.R. purchase of Pills- capital to finance the cient alleged Counts 55-57 vari- ed thereunder. bury. money ous of the federal launder- violations 18, 1988, O’Hagan began pur- August On 1956(a)(1)(B)(i) statutes, §§ ing 18 U.S.C. Pillsbury chasing options call stock and 1957. 17, 1988, expiration September date.1 had a trial, proceeded jury subsequently purchased options call The case He 22, 1988, O’Hagan convicted on all 57 counts. The had October and November By Sep- O’Hagan expiration dates. the end of district court sentenced 2,500 O’Hagan imprisonment. appeals. months of tember had amassed 3,000 O'Hagan purchased Pillsbury option option gives right 2. call call the holder the 1.A purchase specified during August September number of shares of stock contracts specific price. date at a If the a certain September At the end of he held date, option purchased shares are not expires 2,500 of those contracts because 500 contracts right purchase along with it the 17, 1988, September expiration had a date. instance, specified of shares. For on number August O'Hagan purchased 100 Pills- announced, usually 3. "When a tender offer is option gave bury options. call Each call him price target company price rises and the right Pillsbury stock. 100 shares SEC v. the offeror falls or remains same.” option expired September call on Each Maio, (7th Cir.1995). n. option if the was not exercised. 10b-5, gated provides II. Rule in relevant part: the issues in this case Because we resolve any person, It shall be unlawful for di- solely legal grounds, our standard of re rectly indirectly, by any or the use of Hang, is de novo. United States view instrumentality means or of interstate (8th Cir.1996). 1275, 1279 F.3d commerce, any facility or of the mails or of any national exchange, A. (a) device, scheme, employ any [t]o defraud, artifice to [or] O’Hagan challenges his secu convictions, arguing that the the rities ory liability under which the (c) act, engage practice, [t]o him,

prosecuted “misappropria known as the operates course of business which or would is, law, theory,” imper tion as a matter of an operate upon any as a fraud or deceit 10(b) impose § missible basis which to person, liability. outlining misappropria Before purchase in connection with the or sale however, theory, we first turn to the any security. of 10(b) language § and its of SEC-created § 17 C.F.R. 240.10b-5. The SEC thus en counterpart, Rule 10b-5. prohibition acted Rule 10b-5 to include a defining scope “fraud” as a means of Exchange of of the Securities

Section proscribed by deception conduct the term provides: Act of 1934 10(b). however, Significantly, § under any person, It shall be unlawful for di- under Rule 10b-5 cannot be construed more rectly indirectly, by any or the use of enabler, broadly statutory deception; than its instrumentality means or of interstate words, in other Rule 10b-5 fraud cannot mails, any facility commerce or of the or of prohibit conduct that does not amount to any exchange— of national securities 10(b) deception. § See Central Bank Den of Denver, ver v. First Interstate Bank 511 of 164, -, 1439, 1446, U.S. 114 S.Ct. 128 (b) employ, To use or in connection with (“We L.Ed.2d 119 have refused to purchase any security ... or sale of challenges prohib allow 10b-5 to conduct not any manipulative deceptive or device or statute.”); ited the text of the Santa Fe contrivance in contravention of such rules Green, 462, 472, Indus. v. 430 97 S.Ct. regulations Ex- as the [Securities (1977) (“in 1292, 1300, 51 L.Ed.2d 480 decid change] may prescribe Commission as nec- ing [challenged whether conduct constitutes] essary appropriate public interest 10b-5, under Rule “weturn ‘fraud’ first to protection or for the of investors. 10(b),’”) § language of Ernst & 78j(b). § The touchstones of U.S.C. 185, 197, Hochfelder, Ernst v. then, liability § “manipulation” are 1375, 1383, (1976)). L.Ed.2d “deception” “in connection with the Thus, although as has been described any security.” or sale of Id. Our focus in provision, a broad catchall the fraud that deception this ease is on the element caught decep must be must also constitute 10(b).4 meaning of tion within the the statute. States, 222, Acting pursuant authority Chiarella v. United 445 U.S. 10(b), 234-35, 1108, 1117-18, granted promul- to it under the SEC 100 S.Ct. 63 L.Ed.2d 1375, (1976)). prong liability, "manipu- 4. The other 96 S.Ct. 47 L.Ed.2d 668 " contend, 'virtually lation” is a term of art when used in does not and the rec- " referring show, connection with markets' O'Hagan's ord does not conduct con- sales, orders, practices "such as wash matched any prohibited acts. In stituted of these rigged prices, that are intended to mislead event, misappropriation theoiy thus far has by artificially affecting activity.” investors market prosecute used as a vehicle to acts that been Indus, Green, Santa Fe v. 430 U.S. deception that was constitute under (1977) (quoting 51 L.Ed.2d 480 government’s approach in this case. Hochfelder, & Ernst Ernst v. 425 U.S. bear”). (1980) (“Section reasonably against It is aptly the Act will described backdrop it catches that we now turn to the two provision, but what as a catchall fraud.”). liability theories of which have been created must be 10(b)’sproscription deception. scope conduct that construing 10(b), regulated under the Su- may be theory is what has been termed The first definitively has ruled preme Court Clark, theory.” the “classical See SEC dispositive. See Central text of the statute Cir.1990). (9th F.2d It was outlined -, Bank, 114 S.Ct. at 1446 germinal case (“With scope ... of con- respect ... Chiarella, 226-35, 445 U.S. at prohibited by the text duct SEC, and later refined Dirks decision.”); our see statute controls 646, 653-67, 103 3255, 3260-68, Chiarella, (1983). the classical “Under (“As before, emphasized the 1934 we have theory, person when [Rule 10b-5] violates ‘ broadly “more than its Act cannot be read buys or on the basis he or she sells securities language scheme reason- and the material, non-public and at the information ’ ” (citation omitted)). This ably permit.” corporation same time is an insider of the made in clearer point could not have been Cherif, whose securities are traded.” SEC v. Bank, the Court’s terms than Central (7th Cir.1991), denied, cert. exposition of the reach of most recent 1071, 112 966, 117 L.Ed.2d 131 10(b) 10(b). There, concluding § § that a (1992). gravamen theory of the classical abetting not aiding and cause of action was fiduciary duty that the “insider owes a viable, the stated: corporation’s not to the shareholders trade conclusion, reach the uncontroversial personal on inside information for his bene recognizing accepted even those courts sum, theory fit.” Id. at 409. In the classical 10(b) aiding abetting § of ac- cause “insiders,” i.e., corporate deals with those tion, Act that the text of the 1934 does fiduciary obligation who owe a to the share and abet a itself reach those who aid corporation holders of the whose shares are 10(b) courts, § those violation. Unlike however, theory, traded. This does not however, think that conclusion resolves we reach those individuals who trade securities It the case. is inconsistent with settled material, nonpublic based on information and 10(b) § methodology in cases to extend fiduciary duty who owe no to the sharehold liability beyond scope pro- conduct the company ers of the whose securities are trad hibited text. ed; persons these are the so-called “outsid

Clark,

ers.” See 915 F.2d at 443. Because this case concerns the conduct misappropriation theory addresses 10(b), prohibited by § the statute itself those not within the reach of the classical resolves the case.... theory. Specifically, it: Bank, at -, Central extends the reach of Rule 10b-5 to outsid- language 1448. This is because “[t]he ordinarily ers who would not be deemed 10(b) gives Congress § that no indication corporate fiduciaries of entities any prohibit involving

meant to conduct not they whose stock trade. focuses not [It] Fe, manipulation deception.” Santa fiduciary duty on the insider’s to the issu- sum, U.S. at at 1301. In ing company or its shareholders but on determining whether conduct falls within fiduciary whether the insider breached a fraud, § deception and Rule 10b-5 any possessor lawful of material deception un are confined to what the term non-public information. § reasonably der bear. will See United (4th Cherif, misappropria- States v. Cir. 933 F.2d at 409. The 1995) (“For decades, however, theory impose at least two has been held to Supreme repeatedly liability Court has warned and Rule 10b-5 for fraud on an “ ‘(1) against expanding concept misappropriates of fraud individual who material (2) beyond nonpublic by breaching securities context what the information words 10(b) liability. relationship Specifically, argues of trust and he duty arising out (3) in a theory that information squared uses cannot be with either the confidence transaction, regardless of plain Supreme securities text of or the Court’s any to the sharehold- he owed duties teachings regarding whether scope of conduct that ” Bryan, F.3d at traded stock.’ ers of the regulated be under that statute. 443). Clark, 915 F.2d at Under Supreme Neither the Court nor this court theory, requirement misappropriation yet misappropri- has determined whether the “in connection that the information be used theory permissible ation is a basis any security” purchase and sale of with the impose § liability.6 which to After misappropriated because the satisfied carefully studying Supreme Court’s subsequent securities information is used teachings scope on the of conduct reachable misap- transaction. See id. at 944-45. The however, coupled with the theory propriation focuses on whether thus ruling recent plain Central Bank trader breached a the securities issue, text of the statute controls this we hold obligation party from whom the mate- 10(b) liability cannot be based on the obtained, information was not- nonpublic rial misappropriation theory. We reach this con- any withstanding party had whether 10(b)’s because, contrary explicit clusion in, to, or even an interest connection requirements, misappropriation theory transaction, and without con- and, require “deception,” does not even as- party who care cern as to whether a did does, suming nugatory that it it renders was defraud- about the securities transaction requirement “deception” “in con- Id. ed. nection with the or sale of case, government proceeded In this security.” and Rule against on the turn our We first attention counts under the the- 10b-5 10(b) by ascribed to Court. ory, although the has never been rec- repeatedly That Court has held that the de ognized government in this circuit. The con- 10(b) § ception prohibited of under consists fiduciary O’Hagan that breached a tended making misrepresentation of a material duty Dorsey Whitney & and Grand Met information, or the nondisclosure of material when, Dorsey through employment his at & See, duty e.g., in violation of a to disclose. confidential, material, Whitney, obtained he Bank, at -, Central 511 U.S. concerning nonpublic information Grand Fe, 1446-48; at at S.Ct. Santa U.S. Pillsbury, acquiring Met’s interest at Fe 97 S.Ct. 1302. Santa subsequently used that information as basis fact, Court, rejected explicitly the lower trading Pillsbury for securities.5 10(b) misappropriation theory reading required court’s no contends that the upon impose misrepresentation nondisclosure. impermissible an basis which to or Santa Thus, solely government prosecute O’Hagan on 5. The did not at 3271. our attention focused it, misappropriation theory. theory, nor could because under the classical Pillsbury, O’Hagan was not an "insider" of States, Carpenter 484 U.S. v. United corporation whose shares he traded. The 316, 319-20, (1987), an 108 S.Ct. magistrate conceded before 10(b) evenly §a criminal divided Court affirmed judge O'Hagan prosecuted could not be un- premised 10(b) conviction on to disclose the inside der Rule failure —5 theory, expressing any views on the va- without Pillsbury he information to stockholders because Chiarella, Further, lidity theory. of the preexisting fiduciary duty to had no them 1118-19, 235-36, at 100 S.Ct. at the Court U.S. nothing had done to induce the officers and government's argument declined to consider the Pillsbury place their trust or confi- directors of permissi- misappropriation theory was a Report dence in him. and Recommendation upon which to affirm the defendant's ble basis 10, 1993), (Sept. App. Magistrate Judge at Cudd theory had not conviction because such magistrate judge’s report 672-73. The ommendation, and rec- jury. been submitted to the court, adopted by the district con- court, tell, Pillsbury respect ”[a]s cluded that far as stockholders as far as we can With concerned, misappropria- only were Defendant was free under this is the case in which 10(b) liability presented alleged has been Chiarella and Dirks to use inside information as he saw .fit.” Id. at 103 S.Ct. us. (breach fiduciary obligation Fe, F.3d at 949 at 1299-1302. 58 at misrepresentation or nondisclosure without confirmed that mis- Bank Court The Central deception and thus con- does not constitute require- are representation or nondisclosure Fe). Bank and Santa flicts with Central liability. See Central ments for Bank, -, at tarry long point, need not on this (“As considering pro- conduct in earlier cases however, misappropriation theo- because the again conclude that hibited obvious, another, ry basis. The fails on more only making of a prohibits statute language requires §of that the fraud omission) (or or the material misstatement “in connection with the or sale of be act.”). manipulative commission of any security.” misappropriation theory, however, liability permits for a breach of Additionally, left no doubt the Court has duty are owed to individuals who unconnect- premised deception cannot be in a perhaps ed to and uninterested securi- fiduciary duty, without the mere breach transaction, rendering meaningless thus ties accompanying misrepresentation or lack an “in ...” lan- connection with at -, at id. of disclosure. See Circuit, guage. As the Fourth “The noted (“deception” does not en “ [Supreme] Court has left no doubt that the fiduciary duty ... compass ‘breaches of pro- principal concern of section is the misrepresentation any charge of without ” purchasers tection of and sellers securi- Fe, lack of disclosure.’ Santa agree. 58 F.3d at 946-47. We ties.” 1299)). at See also reading A careful of the Court’s Fe, 97 S.Ct. at 1300 Santa Chiarella, Dirks, decisions and Central (to interpret “fraud” under Rule 10b-5 to duty breach of a Bank reveals fiduciary duty all extend to breaches or, parties to the securities transaction at the transaction are linked to a securities would most, participants to other market such as language gloss operative “add a investors, give will be sufficient to rise to quite commonly statute different from its 10(b) liability. (internal accepted meaning.”) quotations Dirks, 654, 103 omitted); principle explicitly This stated in (“Not all breaches There, relying Chiarella. common law ... connection with a securities transaction fiduciary principles, the Court held that one come within the ambit of Rule 10b-5. There by failing commits Rule 10b-5 fraud to dis- manipulation deception.”) must also non-public information in close material viola- omitted). (internal quotations Chiarella, duty tion of a to disclose. 445 duty at at 1114-15. U.S. 100 S.Ct. This reject theory, in misappropriation disclose, however, only arises “from a rela- part, permits imposition because it of tionship 'par- of trust and confidence between 10(b) liability upon based the mere breach ties to a transaction.” Id. at 100 S.Ct. fiduciary duty particularized of a without a added). (emphasis at 1115 The Court reiter- showing misrepresentation or nondisclo- point opinion, stating in ated this later stated, previously misappropri- sure. As liability only could be founded on the theory liability upon ation bases the mere fiduciary duty by person “a in breach of a misappropriation nonpublic of material infor- placed their trust and whom sellers had fiduciary obligation mation in breach of a at at 1117. confidence.” Id. S.Ct. subsequent use of that information in a secu- Clark, principle, rities transaction. 915 F.2d at 443. The Dirks reaffirmed this Court then, By very stating duty its definition it does not re- “that arises ‘[a] [to disclose] quire parties ... misrepresentation relationship either a material or from the between Thus, misappropriation merely ability acquire not nondisclosure. from one’s theory position runs counter to the Santa Fe and information because of his Dirks, 657-58, holdings Bank that the breach at Central mere market.’” Chiarella, fiduciary obligation, misrepre- (quoting without at 3263 at U.S. 1116-17). nondisclosure, deception Although sentation or is not 100 S.Ct. at 10(b). only “parties,” within the rather than Court referred Chiarella, law, transaction,” body Against this venerable as “parties to a misappropriation theory, which that it intended to allows the gave no indication 10(b) liability holding. imposition though To the even no from retreat Chiarella’s participant early in its market was deceived or defraud- contrary, the Dirks Court stated ed, By evading cannot be defended. duty to disclose crafted opinion statutorily required corpora- to the nexus that the fraud be applicable was Chiarella purchase “in with the or being were traded. See connection sale of tion whose securities (“We any security,” misappropriation theory at were at id. head, saying essentially turns on its “trans- that there can explicit Chiarella govern person forming it from rule intended to no to disclose where the who be protect among partici- relations market on inside information “was has traded pants” expansive “general ... into an corporation’s] agent, was not a fidu- fraud-on- [the theory” seemingly ciary, person not a whom the the-source which would [or] apply placed had their to an infinite number of trust relation- securities] sellers [of ” Chiarella, 950; ships. Bryan, (quoting 58 F.3d at see also id. at trust and confidence.’ 1117)). (observing applied that courts have at 100 S.Ct. at indicate, however, variety §if to a wide Court did beyond parties relationships logical trust and if taken to its to reach was to be construed transaction, very apply simple would to case of at the most conclusion theft to the securities participants, namely employee). ranging appli- an a wide to market Such it extended liability n. at cation of cannot be id. at 664 investors. See (“a may holding be reconciled with the Central Bank [of ] n. 23 violation governs scope or will- that the text of only where there is ‘intentional found may regulated be under that designed ful conduct to deceive or defraud conduct ” Ernst, provision, coupled with the focus Chiarel- investors.’ Ernst & 1384)). la, Dirks, parties on at and Central Bank at or, most, mar- securities transaction other clearly Finally, Bank Court the Central (the participants. ket See also id. purchasers placed the focus of “artificially misappropriation theory divides “Any entity, person or sellers of securities: requirements into two discrete —a bank, accountant, lawyer, who including a purchase breach and a or sale of securities— manipulative device or makes a employs single requirement decep- indivisible (or omission) on which material misstatement purchaser or seller of securi- upon purchaser securities relies or seller of ties, intimately person some other 10b-5, primary liable as a violator under with or affected a securities trans- linked requirements primary assuming all of the action.”). liability are met.” 511 under Rule 10b-5 -, government contends that (emphasis “[t]he added). is met whenever a prin- also reaffirmed the connection with element The Court that, if or sale of a secu ciple it had forth in Dirks con- touches set rity, beyond purchasers and a standard which has been described as strued to reach the transactions, being very tenuous indeed.” Gov. Br. at 48 to a securities sellers omitted). (inner only quotations This very to reach n 37 the broadest can be read . -, passage Super from a participants. id. at 114 “touch” test stems market See Casualty v. & (stating 1446 that “the broad con- intendent Ins. Bankers S.Ct. at Life Co., 6, 12-13, 30 404 U.S. 92 S.Ct. gressional purposes [Securities] behind the (1971), stated, where the court protect investors from false and L.Ed.2d 128 Act” is “to injure present case is that misleading might [the “The crux of the practices them.”). 948, injury an as a result of de Bryan, F.3d at 950 suffered victim] See also 58 (if ceptive touching its sale of securi beyond purchasers practices and construed to reach added). securities, (emphasis Ac boundary an investor.” outer ties as sellers government, the Court’s use of cording than market to the reaches no further other that the need “touch” demonstrates participants). 620 Dirks, Central Bank cases es- recently in a party interested securities

be a 10(b) liability engaged caped transaction. because each that “touched” the securities transac- acts to ascribe such broad We decline tion.7 Bankers Life. from single passage to this interpretation appears to be sweeping Such of our sister circuits have conclud- Several statement inconsistent with the Court’s 10(b) liability may predicated ed that immediately previous paragraph theory, misappropriation while Bankers to mean that “we read Life recently opposite Fourth Circuit reached the deceptive to bar devices Congress meant conclusion, outright misappro- rejecting purchase or and contrivances sale of imposing priation as a basis Life, 12, securities.” Bankers 92 10(b) liability. Bryan, F.3d at 58 933. added). impor- (emphasis More Bryan persuasive analysis find the from We Bankers tantly, victim of the fraud heavily arriving and have borrowed from it “in- of securities who was seller Life Therefore, adopt at our conclusion. 10, Id. jured 92 as an investor.” analysis entirety our court’s its as own.8 168; see also F.3d at 950 n. 17 (same). in which We have read care the cases Finally, passage if this held the all- Second,9 circuits, namely our sister encompassing meaning government at- Seventh,10 Ninth,11 and, it, arguably, tributes to then we cannot fathom how the Chiarella, Third,12 subsequent adopted defendants have argument government pointed provisions, purposes 7. The out in oral these nor the of these secu- employed provisions, support that we cited its have Bankers rities fraud will convictions Life resting particular theory misappropria- "touch” in several cases. See Harris v. Union on the Co., 355, (8th Cir.), not, circuits.”). 787 F.2d adopted by Elec. cert. our sister It did denied, 823, 94, contention, contrary 479 U.S. 107 S.Ct. 93 L.Ed.2d 45 government's make a 971, (1986); Gruenberg, v. United States F.2d partici- distinction between market v. nonmarket Cir.) Harris), denied, (8th fact, so, pants. In cert. had done there would have 873, 204, (1993). 114 S.Ct. 126 L.Ed.2d 161 explicitly disagree been no need to with the hold- this, government contends that we From ings adopted from other courts which have have held that need be tenuous connection misappropriation theory because overwhelm- the fraud established between ing majority of those cases has involved market transaction, reasoning applying to this participants. case, O'Hagan's § uphold we must convic held, however, tions. have not nor could we See, Libera, 596, e.g., 9. United States v. 989 F.2d authority in the face of the above, cited (2d Cir.), 599-600 cert. denied sub nom. Sablone person defrauded need not be an States, 976, 467, v. United 510 U.S. 114 S.Ct. individual who an has interest or stake in (1993); Chestman, L.Ed.2d 419 United v. States securities transaction. We held in these (2d Cir.1991) (en banc), 947 F.2d cert. easily cases that the “touch” test is satisfied as denied, long party partici as the defrauded ais market (1992); Newman, L.Ed.2d 422 v. United States pant. (2d 1981) (subsequent 664 F.2d 16-19 Cir. omitted). history case Bryan briefing 8. was decided after the had been completed prior argu- in this case but to oral Maio, (7th 10. See Sec v. 51 F.3d Cir. parties applicability ment. The addressed the 1995); Cherif, 933 F.2d at 410. Bryan argument. at oral con- Bryan tends that holds that when information is Clark, See SEC 915 F.2d at 453. misappropriated participant, from a nonmarket 10(b); conversely no fraud occurs under when Rosenbloom, misappropriated Rothberg information is from a market 12. See 771 F.2d (3d 1985), remand, participant, purposes fraud for the has Cir. rev'd after (1986), denied, making argument, govern- occurred. cert. (1987). Bryan really depart ment contends that did not Courts that have holdings misappropriation theory posit from the of circuits and that no other discussed the split present. We Rothberg. circuits is decline to the Third Circuit embraced it in We Bryan however, urged by fairly read in the narrow fashion believe this is debatable because government. Bryan holding rejected paragraph prin The court’s the court devoted a mere to the misappropriation theory sweeping ciples underlying theory, coupled in terms. with a cita ("We event, See at F.3d conclude that tion to Id. at Newman. 822. In 10(b), language neither the purposes of section Rule lob- will assume for the of this case that the Supreme authority interpreting Rothberg adopted theory. court courts, Newman); Cherif, respect to these 933 F.2d at 410 n. 5 theory. all due With they adopt the part, (relying stating seem to for the most on Newman and more “[t]he theory conducting without misappropriation precise issues of construction and analysis of text of and rigorous legislative history have been treated exhaus precedent. genesis of Supreme Court elsewhere, tively we decline revisit theory, Cir misappropriation the Second Clark, them.”); (relying 915 F.2d at 443-53 Newman, holding in United States cuit’s part utilizing in on Newman and also Cir.1981) (2d (subsequent 16-19 664 F.2d contexts). meaning of other There, omitted), history is emblematic. case nor note that neither Clark acknowl Cherif misappropria court held that “deceitful edge conducting analysis. Santa Fe in their information a fiducia tion of confidential essence, recognize which the courts ry” fraudulent under Rule 10b-5 and misappropriation theory seem to have vali purchase with the or sale was “in connection dated it on the basis of the assumed unfair any security” purpose his “sole because allowing ness of an individual to trade securi misappropriation confi participating in the ties on the basis of information which is not information was to dential takeover available to other traders. See United States target companies.” Id. at 18. shares of the (2d Carpenter, F.2d Cir. However, quote did not the Newman court 1986) (misappropriation theory permissible to 10(b), language of did not or discuss the give “legal to the effect eommonsensieal view Fe, passing mentioned in cite Santa trading improperly on the basis of ob majority opinion in The court Chiarella. fundamentally tained information is un theory misappropriation validated the on fair....”) (citation quotations omitted), 10b-5, Burg language of Rule Chief Justice part by evenly divided Court and aff'd Chiarella, and other areas of er’s dissent part, rev’d in misappropriation proper law in which the (1987). 319-20, However, take ty has been held to be criminal. We Supreme repeatedly Court has held that the language pause to note that the possession nonpublic mere of material infor 10b-5, scope Rule determines the of con automatically duty mation does not create a Additionally, reaches. Chief duct the statute Chiarella, to disclose. See Burger’s position Chiarella was Justice (“not every at 1116-17 instance of majority espoused in a dissent and not the financial unfairness constitutes fraudulent ac opinion.13 Finally, the Fe Court made Santa 10(b)”); 235, 100 tivity under id. at S.Ct. at construing § clear that in resort could (“We duty hold that a to disclose under analogous federal statutes. not be had posses does not arise from the mere Fe, 97 S.Ct. at See Santa information.”); nonpublic market sion (court relying appeals erred 1299-1300 Dirks, of fraud from other contexts in on definition context); (“Imposing a to disclose or abstain sole defining term see 24, 108 ly person knowingly receives mate because Carpenter, 484 U.S. at S.Ct. at 319-20 (unanimously affirming mail from an insider nonpublic defendant’s rial information inhibiting wire fraud convictions based on fraud and on it could have an and trades on same facts which divided the Court analysts, on the role of market influence misappropriation conviction based on recognizes necessary itself SEC theory). market.”). preservation healthy Bryan an exhaustive court undertook recognized that have the mis Other courts opinions from these courts and review of appropriation theory either relied heavi have given had concluded that these courts interpretational ly on Newman or utilized weight insufficient to the text Supreme conflict methods which improperly construed the Court’s teachings interpreting scope Court’s 10(b). provi pronouncements on the reach of that by § encompassed of conduct folly solely agree with that observation Rothberg, (relying on sion. We above, was not was valid because such basis we noted the Chiarella Court de- 13. As jury. submitted to the clined to address whether 622 acorn.”); Chestman, therefore, 947 and, respectfully decline to fol United States we (en banc) (2d Cir.1991) 551, (Winter, holdings of our sister circuits which F.2d 564 the

low theory. J., adopted concurring part dissenting part) have misappropriation 10(b) (describing liability for insider under said, has the securi Supreme As the trading stating that “caselaw establishes 10(b) specifi industry generally, and ties trading nonpublic in that some on material certainty cally, “‘an area that demands is ” illegal and some is not. The line formation is ‘made on predictability’ and “decisions clear.”), the two is less than cert. between basis, predictive val offering little an ad hoc denied, 1759, 503 112 S.Ct. 118 U.S. partici provide who services ue’ to those ” (1992).14 light, 422 In think L.Ed.2d we are to be pants in securities business’ theory misappropriation cannot be count Bank, -, avoided. Central enanced.15 Dahl, (quoting Pinter v. 486 114 2063, 2081, 100 U.S. 108 Accordingly, misappropri- hold (1988)). misappropriation L.Ed.2d 658 theory a ation is not valid basis which by permit theory this interest undermines 10(b). impose liability criminal variety liability imposed in a wide ting to be Thus, O’Hagan’s convictions for se- because involving a breach of fidu of circumstances curities fraud under Rule 10b-5 duty, including simple a ciary presumably solely premised in Counts 21-37 were on the at employee theft. 951- See misappropriation theory, these convictions fiduciary (outlining myriad of situations in 52 must be vacated. theory misappropriation has been which the “ essence, theory ‘a applied). In creates B. highly disposition fact-oriented shifting and may [be for] of the issue of who hable a ” challenges his securities of Rule 10b-5.’ damages claim for violation fraud convictions under of the Securi Bank, at -, 114 511 S.Ct. at Central U.S. Exchange Act ties and Rule 14e-3. Section Chip Stamps v. Blue Manor 14(e) provides: Stores, Drug (1975)). any person It shall be unlawful for See also Blue any make untrue statement of a material Chip Stamps, 421 (Court burgeoning liability fact or omit to state material fact described judicial necessary in §in area as “a oak which has order to make the statements made, legislative light than a of the grown from little more circumstances Perhaps paradigmatic example Misappropriation Theory of the at- Universe: The Section 14. (1995); Bayne, §a con- tenuated circumstances in which 59 Alb.L.Rev. 139 David C. misappropriation theory Duty: viction based on has The Insider's Natural Law Chestman and Willis, Theoty", "Misappropriation been obtained United States 43 U.Kan.L.Rev. dismissed, (S.D.N.Y.), (1994). Beeson, Comment, F.Supp. appeal See also John R. There, (S.D.N.Y.1991). F.Supp. govern- Rounding Peg Proposed Fit the Hole: A defendant, charged psychiatrist, ment Regulatory Misappropriation Theo- Reform of duty physician-patient (1996). breached a of confiden- ry, 144 U.Pa.L.Rev. The Bee- tiality when he traded securities based on materi- gives perfect example article son of the ad-hoc al, nonpublic supplied by patient information employed, offering basis on which the becoming that her husband interested by way example two individuals who obtain F.Supp. material, information, CEO of BankAmerica. 737 at 270-72. nonpublic they on which conviction, sustaining the defendant's subsequently prose- trade securities. One can be cannot, court held that under the theo- cuted under while the other ry, liability was not limited to situa- based on the fact that the individual who tions in rela- breach prosecuted traded on the information tionship implicates markets. fiduciary duty violation of breach of a while the F.Supp. at 208-09. other received the information fortui- individual Beeson, tously. See 144 U.Pa.L.Rev. at 1078-79. These two call to mind the misappropriation theory individuals 15. has also been commentators, primarily Court’s statement in that "a criticized for the Chiarella very reject theory today. disclose under does not reasons we arise from the Thebaut, Kenny possession nonpublic Misguid- P. mere Michael & Teresa D. market informa- Statutory Corporate ed Constmction to Cover tion.” 445 U.S. at made, nonpublic to they are not mislead- know is and which he knows which fraudulent, acquired or has to any decep- reason know has been engage to ing, or directly indirectly or from: tive, manipulative practices, acts or or (1) any offer.... tender offering person, connection shall, purposes of this sub- for the (2) [SEC] sought The issuer of the securities or define, section, by regulations rules and offer, sought by to be such tender or reasonably designed prescribe means (3) officer, director, Any partner, or em- practices acts and as are prevent, to such any ployee person acting or other fraudulent, deceptive, manipulative. or offering person behalf of the or such issuer, 78n(e). The first sentence 15 U.S.C. 14(e) part pur- or sell or cause to be was enacted in 1968 as Chestman, any chased or sold of such securities or Act. 947 F.2d

Williams “ any securities convertible into or ex- Act is to purpose of the Williams ‘The any any changeable for such securities or con public shareholders who are insure right dispose option or to obtain or to offer for their stock fronted a cash tender securities, any foregoing of the unless respond without ade required not be will prior any pur- a within reasonable time Burling v. quate information.’” Schreiber chase or sale such information and its Northern, Inc., 1, 8, 105 ton publicly by press sources are disclosed re- 2462, (quoting 86 L.Ed.2d Ron or otherwise. lease Paper Corp., 422 v. Mosinee deau 45 L.Ed.2d 240.14e-3(a). 17 C.F.R. (1975)). Piper v. In See also Chris-Craft 14e-3(a) provision.” a “Rule disclosure dus., 1, 35, 97 Chestman, 947 F.2d at 557. An individual (1977) (“The history legislative L.Ed.2d violates the rule when “he trades on the basis purpose the sole of the thus shows concerning nonpublic of material information protection Act was the of investors Williams pending offer that knows or has tender he offer.”). with a tender who are confronted acquired ‘directly has or reason to know been 14(e) Thus, the focus of is on the share indirectly’ from an insider of the offeror or company of the who are or will be holders issuer, working on their behalf.” or someone purpose a tender offer. The confronted with 14e-3(a)). Thus, Id. Rule the rule 14(e) a broad antifraud “add[] is to information, creates a to disclose this or provi modeled on the antifraud prohibition “regardless of trading, to abstain from Exchange sions of Securities [the whether such information was obtained 10b-5_” Schreiber, 1934] Act of and Rule fiduciary duty.” through a breach of SEC (inner 105 S.Ct. at 2463 (7th Maio, Cir.1995); F.3d see omitted). quotations citations Peters, 1162, 1166-67 978 F.2d SEC (10th Cir.1992) (holding breach of 14(e) §of is a rule- The second sentence required to viola- relationship not establish making provision that was enacted 14e-3); Chestman, tion of Rule years original Williams act. two after the 14e-3(a) (Rule duty in “creates a those Chestman, Accordingly, F.2d at 564. or traders who fall within its ambit to abstain 14e-3(a) promulgated Rule SEC disclose, regard to whether the trad- without provides: fiduciary duty re- pre-existing er owes (a) any person If taken a substantial has information.”). confidentiality of spect the commence, steps step or or has com- (the menced, O’Hagan that his securities fraud “offering per- offer contends tender 14e-3(a) 14(e) fraudulent, son”), and Rule de- convictions under shall constitute because the exceeded manipulative practice act must be vacated SEC ceptive, promulgat- rulemaking authority when it its within the of section 14e-3(a). Specifically, Exchange] Act other ed Rule [Securities impermissibly redefined person possession of material claims the SEC who is 14e-3(a) by omitting the re- fraud in Rule relating to such tender offer information fiduciary duty a breach of a quirement that which information he knows or has reason provision, enabling pro- the fraud under sentence of that the term must be shown because 14(e) fiduciary duty. pertinent part: requires provides § of It in “The breach vision. shall, purposes of this for the Commission rule exceeds its An administrative subsection, define, by regulations rules and if it “inconsistent with statutory mandate is reasonably prescribe designed means to and ... statutory frústratele] mandate or the the practices fraud- prevent, acts and as are such Congress sought implement.” to policy that having Eliminating ...” those words ulent. Indus. A’ssn v. Board Gover Securities bearing inquiry, empow- our the statute no to nors, 137, 143, 104 S.Ct. “prescribe to “define” and ers SEC (inner quotations and reasonably designed prevent” to “acts means omitted). date, courts have citation To three Thus, practices” and which are “fraudulent.” exceeded its considered whether the SEC language dissecting the and structure rulemaking authority promulgated it when statute, it becomes clear that the terms requirement of a 14e-3 without Rule “prescribe” and relate to “acts and “define” Maio, fiduciary duty. See breach statutory practices” meeting the definition of Peters, 1165-67; 634-35; F.2d at F.3d at “fraudulent.” Chestman, These courts 947 F.2d at 556-63. did not have all concluded that the SEC straightforward A exercise authority. carefully exceed its After review then affords no basis for con- construction considering them in ing these decisions and 14(e) § cluding that authorizes the to SEC 14(e) light § text of and the of the imple- create its own definition of fraud Schreiber, holdings in and Court’s Chiarella Simply menting put, the statute. the en- depart from we conclude that we must 14(e) § abling provision permits the SEC holdings of our circuits and hold that sister identify regulate prac- and to and those “acts rulemaking authority exceeded its SEC 14(e) § legal tices” which fall within the defi- 14e-3(a) by enacting including, without Rule “fraudulent,” grant it nition of but does not requirement of a breach of a the SEC a license to redefine the term. See duty. Chestman, J., (Mahoney, 947 F.2d at 584 scope Because issue turns on the concurring part dissenting part) 14(e), by § regulated conduct that (“the. plain meaning dispositive of the lan- language again plain once of the statute guage empowered is that the SEC is to Bank, controlling. is See Central (then) identify regulate, in this novel (with -, 114 S.Ct. at 1446-48 re context, practices’ offer] the ‘acts and [tender spect determining scope of conduct existing legal categories that fit within the 10(b), § prohibited by “the text of the statute ‘fraudulent, deceptive, manipulative,’ decision”). Although controls our the Cen categories but not to redefine the them- scope tral Bank Court dealt with of conduct selves.”). 10(b), prohibited by § the Court stated un equivocally analysis applied that its textual government takes issue with this provisions all Act. the Securities See id. 14(e), reading claiming plain §of (“Adherence at-, language delegation is a broad to the SEC of defining the text in the conduct covered and, read, rulemaking powers properly when § is consistent with our decisions inter empowers “pre- to “define” SEC preting provisions other of the securities reasonably designed pre- scribe means Acts.”). methodology This line vent” “fraudulent conduct” the tender of- where, employed by Schreiber essence, fer context. interpreting in the context of the term “ma language conflates the of the statute into a 14(e), nipulative” under the Court turned empowerment broad to the SEC to “define” language to the of the statute. “prescribe” point As we out “fraud.” (“[t]he 6, 105 starting point above, however, plain this is not what statute.”). language SEC; language delegates enabling provisions simply permit

We thus turn our attention to the text of 14(e). Specifically, “prescribe” we focus on the second SEC “define” and “acts and 14(e)’s 8, 105 meaning of directed at failures to disclose.” Id. at practices” which meet Accordingly, at 2462. the definition “fraudulent.” given that fraudulent has been under meaning of ascertain the We thus must guides interpretation and Rule 10b-5 our 14(e). Congress gave “fraudulent” in 14(e). the term to have a the term was no indication that during legal common def- As we observed our discussion of from its different (“Furthermore, these vener- the Chiarella Court drew com id. inition. See normal, defining law in accepted concepts in mon fraud under are used their able terms definitions.”). 10(b), § holding encompassed to that the term a Court looked The Schreiber dictionary in failure to disclose information but if definitions the common law Schreiber, duty speak. was a at manipulation. there U.S. defining See (court 235, 100 1111-12, 1118. duty con- at This at 2461-62 S.Ct. at 105 S.Ct. U.S. “ turn, ‘fiduciary speak, in arises out of a or “manipulative” in manner consistent strued dictionary other similar relation of trust and confi law and defini- with its common ” tion). (quot at Dictionary provides cer- dence.’ Id. 100 S.Ct. at Black’s Law (Second) entirely ing which are Restatement of Torts of “fraud” tain definitions 551(2)(a) (1976)). § fiduciary the breach of a consistent with impose would no duty, while other definitions Reading together Schreiber Chiarella requirement. Compare Black’s Law such leads to the conclusion that “fraudulent” un 1990) (“concealment (6th Dictionary 660 ed. 14(e) fiduciary § der includes the breach of a disclosed,” that which should have been 10(b) obligation. Initially, § we note that “acts, omission, involv- and concealments 14(e) § in the are contained same statu duty”) legal equitable or ing a breach of enactment, tory Exchange the Securities Act (“An perversion of truth id. intentional strong that the evidence terms are 1934— inducing another in reli- purpose for the meaning. given the same Gustaf it,” representation “A false ance — Co., Inc., U.S. -, -, Alloyd son v. fact,” term, generic em- and “A matter of 115 S.Ct. 131 L.Edüd bracing means which human all multifarious (term “prospectus” construed to have the devise”). Thus, dictionary ingenuity can meaning §in same 10 of the 1933 Securities in provide little assistance resolv- definitions Act); § id. Act as in 12 of that same see also However, analytic ing problem. this (in holding that “identical words used dif Supreme hold- created Court’s model part act are intended to ferent of the same Chiarella, ings in cases draw- Schreiber and meaning,” “[t]he have same Court stated Se heavily principles, leads ing on common law every Act of like Act of Con curities that fraudulent inescapable to the conclusion gress, as a series of should not be read 14(e) § must be read to include under § provisions.”). That does unrelated duty. breach specifically the term fraud is of include Schreiber, beyond cavil that explicitly that because it is held no moment Court 14(e) powerful provi provision § antifraud is a antifraud is modeled after the broad 234-35, Chiarella, provisions §of and Rule 10b-5. sion. Further, the Schreiber at n. 10. at 1117-18. at 10 & n. 2463 & § Moreover, directly to define interpreting ma- turned in the course of Court 14(e), § held that meaning and Chiarella nipulation, the turned to the terms Court 10(b), requires § under the breach given under fraudulent term had been import, fiduciary obligation. Of added noting “Congress phrase used the ‘ma- of a well, held that “fraudulent” nipulative deceptive’ as the Schreiber Court at nondisclosure interpreted ‘manipulative’ in under was directed and we have information, de while the Chiarella Court require misrepresentation.” that context to which nondis the circumstances under n. at 2462 & n. 6. tailed Id. at 7-8 & 10(b). Addi three closure is fraudulent “[a]ll went on to note that The Court i.e., ‘fraudulent, significant that the misconduct, tionally, think it decep- we also species of to common law eon- tive, Congress turned manipulative,’ listed are Chiarella Court prac- preventive scribe measures for acts and to fraudulent under cepts giving Moreover, tices which are fraudulent. this the Schreiber Court inter- as did SEC, 14(e). authority grant of even without manipulative under preting fraud, very power remains a to define that, telling Finally, we also find powerful tool because the SEC has broad paragraph, in the above quote from Chiarella regulating practices acts and latitude quoted Court the Restatement ranging and diverse field of tender the wide (Second) of Torts and then stated Finally, importantly, and most offers. Institute views this rule as Law American strong think Schreiber is a rebuttal to “securities transactions.” See applicable argument looked because there Chiarella, at n. at directly manipulative un- to define (“As regards transac- 1114 n. 9 14(e). der tions, recognizes American Law Institute 2461-62. to ... ‘silence when there is points out that the act.’”)(quoting speak be fraudulent 14(e), language granting §in the SEC rule- ALI, (Prop. § Code Off. Securities making authority, from that in is different 1978)). why inexplicable It is to us Draft 14(e) 10(b), § § arguing language that the rule, should have definitive this Restatement grants rulemaking the much broader SEC § in context but not in the force the 10(b). believe, powers § than under 14(e) context, especially light § in of the fact however, government the makes too much of part two sections are of the same that the reality discrepan- what in are minor Chestman, statutory 947 F.2d scheme. See language provisions. cies in between the two J., (Mahoney, concurring part in at 586-87 10(b) permits the to cre- Section Commission dissenting part). Accordingly, in and regulations” ate “rules and which are “neces- and mandate hold Schreiber Chiarella sary appropriate public in interest or 14(e) § in- that “fraudulent” under must be 14(e) investors,” § protection for the while require terpreted to the breach of empowers the to Commission enact “rules relationship.16 obligation or similar trust “pre- regulations” and which “define” and government explicitly does not ad- reasonably designed pre- scribe means to dress the force of Chiarella and Schreiber on practices” vent” “acts and which are “fraudu- issue, arguing instead that if the authori- 14(e) this end, although perhaps § lent.” ty granted to the to define fraud is SEC legislative product is the of clearer drafts- simply applying circumscribed to the mean- manship, authority granted to the SEC 10(b) context, ing given § in that term is provisions fundamentally under both is (Ma- really authority Chestman, has no at all the SEC under same. 947 F.2d at 587 disagree. J., honey, concurring the statute. We As we noted part dissenting in and above, authority part) (positing discrepancies the SEC does not have the in in minor fraud; rather, 14(e) plain language statutory language to define are 14(e) permits pre- significance).17 the SEC to define and of no 14(e), Additionally, quent Congress interpreting § some commentators have indi- in such a 16. interpretation by cated that the rationale from 58 F.3d at method of was condemned There, respect the- in Central Bank. ory using under also calls into doubt the valid- court made clear that statements of a later 14e-3(a). ity Phillips Congress interpret by of Rule Richard M. & a statute enacted an Miller, avoided, Litigation Congress Gilbert C. in the Courts: earlier is to be at least in the Reform 12(2) Bank, Limiting Liability, Bespeaks Section area of securities law. See Central at -, (“[T]he Misappropriation interpre Caution Doctrine and Theo- 114 S.Ct. at 1452 16, 1996) (or ry, (February given by Congress CA28ALI-ABA tation one committee thereof) ("Indeed, rationale, [Bryan] under the it court's Member to an earlier statute is of little discerning meaning no means clear that SEC Rule 14—3 would assistance in of that stat observes, ute.”). upheld preclude government correctly transactions in the securi- As the however, target companies by majority ties of offerors."). insiders of tender the Chestman first relied on conclusion, the text of the reach statute to its weight majority thus it is unclear how much Chestman, gave 17. We also note that to the extent that the Chest- to this evidence. See 947 F.2d at majority man relied statements of subse- statute, meaning clear as revealed its Finally, government contends 14(e) language, purpose, history. ir- On a num- under meaning of “fraudulent” years ber of occasions recent this Court deciding issue because of the this relevant reject necessary authorizing the “to has found SEC’s statutory language SEC reasonably designed pre- interpretation provisions of various prescribe means SEC, fraud- Securities See also Aaron v. practices which are Acts.” vent” the acts n. argues that under ulent. The (rejecting may regulate conduct n. SEC’s language, the SEC required prevent view that scienter is not not fraudulent order which is injunctive proceedings); act. The Business Roundta- commission of a fraudulent (D.C.Cir.1990) SEC, passage from a foot- ble v. government points to a Schreiber, (holding statutory au- the Court stated SEC exceeded its note in where 14(e) thority promulgating to bar enabling provision empow- Rule 19c-4 exchange national “regulate nondeeeptive ac- and associations the SEC to ered ‘reasonably designed’ listing from stocks of one means of violative tivities as a share/one ” that, principle). in this manipulative acts.... 472 U.S. vote We conclude preventing instance, again at 2464 n. 11. Howev- the SEC has once acted at 11 n. er, authority. of its government fails to include the re- excess Schreiber, this sentence from mainder of We hold that the exceeded its rule- SEC states, suggesting any change “without making authority pro- when it ‘manipulative’ term in the 14e-3(a) mulgated including Rule without read, provision Properly Id. itself.” requirement aof breach of a obli- regu- has simply that the SEC broad means gation. Accordingly, must vacate we O’Ha- offers, latory powers in the field tender gan’s fraud convictions under these securities statutory terms have fixed but the provisions. by way of an the SEC cannot alter rule. administrative C. observe, govern- pause take as convicted on a was also “[bjecause out, Congress points

ment money of mail fraud and number of counts authority to expressly granted the SEC has laundering. The essential elements implement which will sec- promulgate rules (1) fraud are: a scheme to crime of mail 14(e), promulgated under that sec- rules defraud, money property or to obtain ‘legislative and are ‘entitled tion have effect’ of the mails to pretenses, false use deference(Gov’t’s to more than mere v. Wick further the scheme. United States Francis, (quoting Batterton v. 432 Br. at 53 (8th Cir.1996). er, 263, 80 F.3d 267 416, 425-26, 2399, 2405-06, 97 53 convic O’Hagan’s securities mere fact (1977)).) Thus, 448 L.Ed.2d not as a mat tions have been reversed does continues, these rules not set aside mail fraud convic require law ter of interpreted would have because we Carpenter, tions likewise be reversed. See 14(e) SEC, from the a manner different (unani 24, at 319-20 only if is inconsistent with the but the rule mously affirming mañ and wire fraud convic Congres- frustrates the mandate or evenly facts that tions based on the same policy sought implemented. to be sional on securi divided the Court the defendant’s convictions); made, Bryan, 58 F.3d point ties fraud government’s While the is well wire fraud nonetheless, (affirming mail fraud and agency’s inter- 936 an administrative reversing counts but securities pretation of a under which it has been statute counts). case, However, wholly present rulemaking authority be- given vein, a manner indictment was structured such yond reproach. In this Daniel, mail fraud premise the fraud for the 439 U.S. as observed IBT constituting the 790, 20, allegedly 551, 20, charges on the acts n. 800 n. 58 566 697-706.) Be (1979), fraud. R. at {See “[T]his 808 deference L.Ed.2d O’Hagan’s conduct did not constitute cause obligation our to honor the constrained 628 Libera, 596,

securities fraud for the reasons we have not- 5. United States v. 989 F.2d (2d above, Cir.), ed there was no fraud which to 599-600 cert. denied sub nom. upon Sa States, 976, charges. Accordingly, base the mail fraud blone v. United 467, (1993); O’Hagan’s we reverse mail fraud convictions. S.Ct. 126 L.Ed.2d 419 SEC v. Maio, (7th 623, Cir.1995); 51 F.3d SEC money regard laundering With (9th Clark, Cir.1990); 915 F.2d counts, they predicated were on the securi- Rosenbloom, Rothberg v. 771 F.2d fraud or mail fraud counts. Because we ties (3d Cir.1985), remand, rev’d 808 F.2d after have vacated all of the securities fraud and denied, (1986), cert. counts, longer mail fraud there no remain (1987). Also, like predicate convictions to serve as the Second, Seventh, Circuits, and Tenth see money conduct which to base the laun- 623-24, I ante at would hold the Securities dering counts. We therefore must reverse Exchange Commission did not exceed its these convictions as well. See 18 U.S.C. rulemaking authority when it Rule enacted (requiring §§ property 1956-1957 in- 14e-3(a) requirement without the of a breach volved in the transaction be derived from fiduciary duty, uphold and thus O’Ha- activities). proceeds or the of unlawful gan’s securities fraud convictions under 14e-3(a). and Rule United States v. III. (2d Chestman, Cir.1991) 556-63 ruling today Our should in no manner be (en banc), denied, cert. condoning O’Hagan’s understood as conduct. (1992); Maio, 118 L.Ed.2d record, appears though From the as O’Ha- Peters, 634-35; F.3d SEC v. F.2d law, gan, attorney engaged then an in at (10th Cir.1992). Having 1165-67 Pillsbury least some transactions securi- views, adopted these I find no basis re learning privileged, ties after in- confidential O’Hagan’s verse convictions for mail fraud firm representing formation that his law money laundering. See ante at 627-28. intending Pillsbury. a client a takeover of O’Hagan’s Because I would affirm all of con certainly Such conduct is unethical and im- victions, I would also consider the merits of condemned, moral and must be which we government’s appeal O’Hagan’s from sen make haste to do. We note tences. Minnesota, was disbarred in and served a 30- being month sentence after convicted invading

Minnesota state court for clients’ However, trust funds. ais fundamental principle every of the criminal law that not transgression

ethical or moral falls within its prime example realm. This case is a of that principle. Accordingly, for the reasons enu- Henry LOVEJOY, Sr., Appellant, above, merated O’Hagan’s we reverse securi- fraud, fraud, money ties mail laundering convictions and remand this case to the dis- America, Appellee. UNITED STATES trict court for dismissal of the indictment. No. 96-1294.

FAGG, Judge, dissenting. Circuit Appeals, United States Court of My colleagues carefully Eighth analyzed have Circuit. both legal sides of the relevant coins and selected Submitted June 1996. nullify O’Hagan’s the sides that convictions. Aug. Decided Contrary views, 1996. to their well-reasoned I recognize adopt would misappropria- Rehearing Sept. Denied Second, Seventh, Ninth, like the Circuits, and Third see ante at 620 nn.& 9-

12, uphold O’Hagan’s thus convictions for securities fraud under and Rule 10b-

Case Details

Case Name: United States of America, Plaintiff-Appellee/cross-Appellant v. James Herman O'hagan, Defendant-Appellant/cross-Appellee

Court Name: Court of Appeals for the Eighth Circuit

Date Published: Nov 13, 1996

Citation: 92 F.3d 612

Docket Number: 94-3714, 94-3856

Court Abbreviation: 8th Cir.