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United States v. Newman

decided: October 30, 1981.


Appeal from an order of the United States District Court for the Southern District of New York (Charles S. Haight, Jr., J .) dismissing an indictment charging James Mitchell Newman with violating the mail fraud statute, 18 U.S.C. § 1341, section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, and conspiring to commit mail and securities fraud, 18 U.S.C. § 371. Reversed and remanded.

Before Van Graafeiland and Newman, Circuit Judges, and Dumbauld, District Judge.*fn*

Author: Van Graafeiland

The United States appeals from an order of the United States District Court for the Southern District of New York which dismissed an indictment charging James Mitchell Newman with securities fraud, section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5), mail fraud, 18 U.S.C. § 1341, and conspiracy to commit securities and mail fraud, 18 U.S.C. § 371. The district court dismissed the securities fraud charge because it concluded that "there was no "clear and definite statement' in the federal securities laws which both antedated and proscribed the acts alleged in (the) indictment" so as to give the defendant a reasonable opportunity to know that his conduct was prohibited. The district court held that the allegations of mail fraud failed as a matter of law to charge a crime. The conspiracy count, the district court said, fell with the two substantive counts. We reverse.

Although the indictment names appellee Newman and E. Jacques Courtois, Jr., Franklin Carniol, and Constantine Spyropoulos as defendants, only Newman was within the jurisdiction of the district court and a party to the proceedings below. The allegations of the indictment refer to all defendants, however, and, for purposes of this opinion, we assume the following summary of facts to be true. See United States v. Von Barta, 635 F.2d 999, 1002 (2d Cir. 1980), cert. denied, 450 U.S. 998, 101 S. Ct. 1703, 68 L. Ed. 2d 199 (1981).

Morgan Stanley & Co. Inc. and Kuhn Loeb & Co., now known as Lehman Brothers Kuhn Loeb Inc., are investment banking firms which represent companies engaged in corporate mergers, acquisitions, tender offers, and other takeovers. From 1972 to 1975, Courtois and an alleged but unindicted co-conspirator, Adrian Antoniu, were employed by Morgan Stanley. In 1975, Antoniu left Morgan Stanley and went to work for Kuhn Loeb. Between January 1, 1973 and December 31, 1978, Courtois and Antoniu misappropriated confidential information concerning proposed mergers and acquisitions that was entrusted to their employers by corporate clients. This information was conveyed surreptitiously to Newman, a securities trader and manager of the over-the-counter trading department of a New York brokerage firm. Newman passed along the information to two confederates, Carniol, a resident of Belgium, and Spyropoulos, a Greek citizen who lived in both Greece and France. Using secret foreign bank and trust accounts and spreading their purchases among brokers, all for the purpose of avoiding detection, the three conspirators purchased stock in companies that were merger and takeover targets of clients of Morgan Stanley and Kuhn Loeb.*fn1 They then reaped substantial gains when the mergers or takeovers were announced and the market price of the stocks rose. These profits were shared with Courtois and Antoniu, the sources of the wrongfully-acquired information.

We believe that these allegations of wrongdoing were sufficient to withstand challenge in all three counts.


In preparing the indictment, the Government attempted to remedy a deficiency that led to the Supreme Court's reversal of a conviction in Chiarella v. United States, 445 U.S. 222, 100 S. Ct. 1108, 63 L. Ed. 2d 348 (1980). In that case, the defendant secured confidential information concerning proposed corporate takeovers through his position as a mark-up man in a financial printing establishment doing work for companies planning takeovers. He, too, prospered by purchasing stock in target companies. His conviction for section 10(b) and Rule 10b-5 violations was affirmed by this Court, United States v. Chiarella, 588 F.2d 1358 (2d Cir. 1978) but reversed by the Supreme Court because that Court found no fiduciary relationship between Chiarella and the sellers of stock which imposed upon him a duty to speak. 445 U.S. at 231-35, 100 S. Ct. at 1116-18.

The thrust of the Government's case in Chiarella was that the defendant violated section 10(b) and Rule 10b-5 by failing to disclose material, non-public information to the shareholders of target companies from whom he purchased stock. Id. at 236, 100 S. Ct. at 1119. As the Court observed, "(t) he jury was not instructed on the nature or elements of a duty owed by petitioner to anyone other than the sellers." Id. To remedy the deficiency in Chiarella, the Government here has pointed its charge of wrongdoing in a different direction. The indictment charges that Courtois and Antoniu breached the trust and confidence placed in them and their employers by the employers' corporate clients and the clients' shareholders, and the trust and confidence placed in Courtois and Antoniu by their employers. The indictment charges further that Newman, Carniol, and Spyropoulos "aided, participated in and facilitated Courtois and Antoniu in violating the fiduciary duties of honesty, loyalty and silence owed directly to Morgan Stanley, Kuhn Loeb, and clients of those investment banks." The indictment also charges that Courtois, Newman, and Carniol "did directly and indirectly, (a) employ devices, schemes, and artifices to defraud and (b) engage in acts, practices, and courses of business which operated as a fraud and deceit on Morgan Stanley, Kuhn Loeb, and those corporations and shareholders on whose behalf Morgan Stanley or Kuhn Loeb was acting, and to whom Morgan Stanley or Kuhn Loeb owed fiduciary duties, in connection with the purchase of securities ...."

Then Chief Judge Kaufman, writing for this Court in Chiarella, supra, stated that violation of an agent's duty to respect client confidences was a clear transgression of Rule 10b-5 "where, as here, the converted information both concerned securities and was used to purchase and sell securities." 588 F.2d at 1368 n.14.*fn2 The Supreme Court majority found it unnecessary to decide whether this theory had merit, because it was not presented to the jury. 445 U.S. at 236-37, 100 S. Ct. at 1119-20. Justice Stevens stated in his concurring opinion that a legitimate argument could be made that Chiarella's conduct constituted a fraud or deceit upon his employer's clients but that it could also be argued that there was no actionable violation of Rule 10b-5 because the clients were neither purchasers nor sellers of target company securities. Id. at 238, 100 S. Ct. at 1120. He added that the Court "wisely leaves the resolution of this issue for another day." For this Court, that day has now come.

We hold that appellee's conduct as alleged in the indictment could be found to constitute a criminal violation of section 10(b) and Rule 10b-5*fn3 despite the fact that neither Morgan Stanley, Kuhn Loeb nor their clients was at the time a purchaser or seller of the target company securities in any transaction with any of the defendants.

Because enforcement of section 10(b) and Rule 10b-5 has been largely by means of civil litigation, United States v. Chiarella, supra, 588 F.2d at 1378 (Meskill, J. dissenting) (citing 3 Bromberg Securities Law § 10.3 at 241), it is easy to forget that section 10(b) was written as both a regulatory and criminal piece of legislation. A. T. Brod & Co. v. Perlow, 375 F.2d 393, 396 (2d Cir. 1967). Looking at the language of the statute, the "starting point in every case involving construction," Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S. Ct. 1917, 1935, 44 L. Ed. 2d 539 (1975) (Powell, J. concurring), we find no express provision for a private civil remedy. Id. at 729, 95 S. Ct. at 1922; Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 24, 97 S. Ct. 926, 940, 51 L. Ed. 2d 124 (1977). Section 21 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78u, gives the SEC broad investigatory powers and access to the district court for injunctive and mandamus help in preventing illegal practices. Section 32, 15 U.S.C. § 78ff, provides criminal penalties for willful violation of the Act or rules thereunder, violation of which is made unlawful or the observance of which is required under the Act. There is nothing in the history of the Act to indicate that Congress intended any remedies other than these. Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 729, 95 S. Ct. at 1922.

Rule 10b-5 makes it unlawful for any person to engage in any act or practice which operates as a fraud or deceit upon any person "in connection with the purchase or sale of any security." When litigation under this Rule is instituted by the SEC under section 21 or by a United States Attorney under section 32, the court's concern must be with the scope of the Rule, not plaintiff's standing to sue. See SEC v. National Securities, Inc., 393 U.S. 453, 467 n.9, 89 S. Ct. 564, 572, n.9, 21 L. Ed. 2d 668 (1969); United States v. Naftalin, 441 U.S. 768, 774 n.6, 99 S. Ct. 2077, 2082 n.6, 60 L. Ed. 2d 624 (1979). It is only because the judiciary has created a private cause of action for damages the "contours" of which are not described in the statute, that standing in such cases has become a pivotal issue. Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 737, 749, 95 S. Ct. at 1926, 1931. The courts, not the Congress, have limited Rule 10b-5 suits for damages to the purchasers and sellers of securities. The district court's statement that fraud perpetrated upon purchasers or sellers of securities is a "requisite element under the securities laws" is, therefore, an overbroad and incorrect summary of the law.

Long before appellee undertook to participate in the fraudulent scheme alleged in the indictment, this Court, and other Courts of Appeals as well, had held that a plaintiff need not be a defrauded purchaser or seller in order to sue for injunctive relief under Rule 10b-5. See Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 798 (2d Cir. 1969); Mutual Shares Corp. v. Genesco Inc., 384 F.2d 540, 546-47 (2d Cir. 1967); Kahan v. Rosenstiel, 424 F.2d 161, 173 (3d Cir.), cert. denied, 398 U.S. 950, 90 S. Ct. 1870, 26 L. Ed. 2d 290 (1970); Britt v. Cyril Bath Co., 417 F.2d 433, 436 (6th Cir. 1969). These holdings were consistent with the language of Rule 10b-5, which contains no specific requirement that fraud ...

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