Chiarella v. United States,
445 U.S. 222 (1980)

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U.S. Supreme Court

Chiarella v. United States, 445 U.S. 222 (1980)

Chiarella v. United States

No. 78-1202

Argued November 5, 1979

Decided March 18, 1980

445 U.S. 222


Section 10(b) of the Securities Exchange Act of 1934 prohibits the use

"in connection with the purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe."

Rule 10b-5 of the Securities and Exchange Commission (SEC), promulgated under § 10(b), makes it unlawful for any person to "employ any device, scheme, or artifice to defraud," or to

"engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

Petitioner, who was employed by a financial printer that had been engaged by certain corporations to print corporate takeover bids, deduced the names of the target companies from information contained in documents delivered to the printer by the acquiring companies and, without disclosing his knowledge, purchased stock in the target companies and sold the shares immediately after the takeover attempts were made public. After the SEC began an investigation of his trading activities, petitioner entered into a consent decree with the SEC in which he agreed to return his profits to the sellers of the shares. Thereafter, petitioner was indicted and convicted for violating § 10(b) of the Act and SEC Rule 10b-5. The District Court's charge permitted the jury to convict the petitioner if it found that he willfully failed to inform sellers of target company securities that he knew of a forthcoming takeover bid that would make their shares more valuable. Petitioner's conviction was affirmed by the Court of Appeals.

Held: Petitioner's conduct did not constitute a violation of § 10(b), and hence his conviction was improper. Pp. 445 U. S. 225-237.

(a) Administrative and judicial interpretations have established that silence in connection with the purchase or sale of securities may operate as a fraud actionable under § 10(b) despite the absence of statutory language or legislative history specifically addressing the legality of nondisclosure. However, such liability is premised upon a duty to disclose (such as that of a corporate insider to shareholders of his corporation)

Page 445 U. S. 223

arising from a relationship of trust and confidence between parties to a transaction. Pp. 445 U. S. 225-230.

(b) Here, petitioner had no affirmative duty to disclose the information as to the plans of the acquiring companies. He was not a corporate insider, and he received no confidential information from the target companies. Nor could any duty arise from petitioner's relationship with the sellers of the target companies' securities, for he had no prior dealings with them, was not their agent, was not a fiduciary, and was not a person in whom the sellers had placed their trust and confidence. A duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information. Pp. 445 U. S. 231-235.

(c) This Court need not decide whether petitioner's conviction can be supported on the alternative theory that he breached a duty to the acquiring corporation, since such theory was not submitted to the jury. The jury instructions demonstrate that petitioner was convicted merely because of his failure to disclose material, nonpublic information to sellers from whom he bought the stock of target corporations. The conviction cannot be affirmed on the basis of a theory not presented to the jury. Pp. 445 U. S. 235-237.

588 F.2d 1358, reversed.

POWELL, J., delivered the opinion of the Court, in which STEWART, WHITE, REHNQUIST, and STEVENS, JJ., joined. STEVENS, J., filed a concurring opinion, post, p. 445 U. S. 237. BRENNAN, J., filed an opinion concurring in the judgment, post, p. 445 U. S. 238. BURGER, C.J., filed a dissenting opinion, post, p. 445 U. S. 239. BLACKMUN, J., filed a dissenting opinion, in which MARSHALL, J., joined, post, p. 445 U. S. 245.

Page 445 U. S. 224

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