United States v. Carpenter
791 F.2d 1024 (1986)
Rule of Law:
An employee's misappropriation of confidential, pre-publication information from an employer, in breach of a duty of confidentiality, and the use of that information to trade in securities constitutes a fraudulent and deceptive practice in violation of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
Facts:
- R. Foster Winans was a reporter for the Wall Street Journal and a writer for its influential 'Heard on the Street' column.
- The Wall Street Journal's parent company, Dow Jones, had a conflicts of interest policy stating that all information acquired by an employee during their employment was company property and must be kept confidential.
- Winans entered into a scheme with stockbrokers Peter Brant and Kenneth Felis.
- Winans agreed to provide the stockbrokers with advance information about the timing and content of his upcoming columns.
- The brokers used this pre-publication information to buy or sell securities in the companies that were to be the subject of the columns.
- David Carpenter, who was in a personal relationship with Winans, served as a messenger between the conspirators.
- The scheme involved pre-publication trades based on approximately twenty-seven columns and generated net profits approaching $690,000.
Procedural Posture:
- The United States prosecuted Winans, Felis, and Carpenter in the U.S. District Court for the Southern District of New York.
- Following a non-jury trial, the district court judge found Winans and Felis guilty of securities fraud, mail and wire fraud, and conspiracy.
- The district court also found Carpenter guilty of aiding and abetting in the commission of securities fraud and mail and wire fraud.
- Winans, Felis, and Carpenter, as appellants, appealed their convictions to the United States Court of Appeals for the Second Circuit; the United States was the appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an employee's misappropriation of confidential, pre-publication information from their employer, in breach of a duty of confidentiality, and subsequent use of that information to trade securities, constitute a violation of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5?
Opinions:
Majority - Pierce, J.
Yes. An employee's misappropriation of confidential information from an employer to use for securities trading is a violation of §10(b) and Rule 10b-5 under the misappropriation theory. The court held that the antifraud provisions of the securities laws are to be construed broadly and are not limited to corporate insiders or those who owe a fiduciary duty to the shareholders of the traded company. The fraud is perpetrated on the source of the information—in this case, Winans's employer, the Wall Street Journal—by breaching a duty of confidentiality. The court reasoned that Winans's conduct constituted a 'fraud and deceit' upon the Journal, whose reputation was its most valuable asset. This fraud was 'in connection with' the purchase or sale of securities because the sole purpose of misappropriating the information was to profit from securities trading.
Dissenting - Miner, J.
No. The misappropriation theory should not be expanded to encompass the activities of these defendants. The dissent argued that §10(b) liability under the misappropriation theory should be limited to cases involving the theft of confidential, securities-related information, such as non-public data about takeovers or mergers. The Wall Street Journal's publication schedule was not this type of information. Furthermore, the securities laws were intended to protect investors and market integrity, not a newspaper's reputation or its internal conflict-of-interest policies. The harm here was to the newspaper, not to securities markets or participants, and such conduct is more appropriately addressed by mail and wire fraud statutes, for which the defendants were also convicted.
Analysis:
This decision significantly broadened the scope of the misappropriation theory of securities fraud liability. Prior to this case, the theory was primarily applied to corporate insiders or quasi-insiders who breached a duty to the corporation whose stock was traded. Winans established that the duty breached need not be to the issuer of the securities; a breach of a duty of confidentiality to any source of the information, such as an employer, is sufficient to trigger §10(b) liability if the information is then used for trading. This expanded the definition of an 'outsider' who could be liable for securities fraud, shifting the focus of the fraud from the counterparty in the trade to the source of the confidential information.
Gunnerbot
AI-powered case assistant
Loaded: United States v. Carpenter (1986)
Try: "What was the holding?" or "Explain the dissent"