breach of a fiduciary duty and trades on that information to
his own advantage violates Section 10(b) and Rule 10b-5."
Materia, 745 F.2d at 203. See also Carpenter, 791 F.2d at 1029.
The 10b-5 Counts charge that this is precisely what Willis did,
and the controlling precedents bring these charges within the
scope of the securities laws.
C. Post-Chestman Argument
Since the recent decision of the Second Circuit in
United States v. Chestman, 903 F.2d 75 (2d Cir. 1990), Willis
has renewed his motion to dismiss the Indictment. In Chestman,
the Second Circuit reversed the defendant's convictions for
securities fraud and mail fraud on the ground that there was no
proof that he knew that the information on which he traded was
confidential. "It is impossible to attribute knowledge of
confidentiality to Chestman in view of the attenuated passage
of the information and in the absence of any showing that the
information retained any kind of confidentiality in the hands
of Keith Loeb." Id., 903 F.2d at 79. Willis argues that the
Indictment in this case is defective because it does not allege
that Mrs. Weill told him "(i) that the information was
confidential, or (ii) that Willis should not disclose or
otherwise use the information." Letter from defendant's counsel
to the court (May 7, 1990).
Chestman does not require a holding in this case that it is
necessary for a patient to tell her treating psychiatrist that
he should not disclose information confided to him by her in
the course of her treatment. In Chestman, the Court of Appeals
held that "[e]vidence that Keith Loeb revealed the critical
information in breach of a duty of trust and confidence known
to Chestman is essential to the imposition of liability upon
Chestman as aider/abettor . . . or as tippee. . . ." Id. at 79
(citations omitted). Mrs. Weill is not in the position of Keith
Loeb and Dr. Willis is not in the position of Chestman. This is
not a case of aider/abettor or of tipper/tippee. The
information imparted to Mrs. Weill by her husband was, by
reason of the nature of that information, the nature of their
relationship, and the significance of that information to their
personal lives, obviously confidential. By revealing the
information to her psychiatrist in the course of treatment,
Mrs. Weill did not breach the duty of trust and confidence
which she owed to her husband. According to the allegations of
the Indictment, it was only the defendant Willis who breached a
duty of trust and confidence by misappropriating valuable
non-public confidential information acquired by him in the
psychiatrist-patient relationship. Dr. Willis' knowledge or
lack of knowledge about whether his patient's husband
characterized the information as "confidential" when Mr. Weill
discussed it with her is irrelevant. Similarly irrelevant is
whether Mrs. Weill labelled the information "confidential" when
she revealed it to Dr. Willis. What is relevant is that Dr.
Willis knew that he was receiving the information in
confidence, that it was valuable non-public information, and
that by disclosing and using the information for his personal
benefit, he was breaching the duty of trust and confidence that
he owed to his patient. That Dr. Willis is alleged to have sold
the BankAmerica shares on the very day following the public
announcement of Mr. Weill's effort to become CEO of BankAmerica
further supports this conclusion as to what can be drawn from
Furthermore, in this case, there is none of the attenuation
about which the Second Circuit was concerned in
Chestman. Willis is not in Chestman's position at the end of a
chain of recipients of confidential information. This
information which affected the marital home was confided
directly by the insider-husband to his wife and by the
insider's wife to her treating psychiatrist. It did not lose
its confidential character by "passing through several family
channels" or become nothing more than "family gossip." Id. at
Thus, the Indictment is sufficient. What the evidence will
show at trial awaits the event.
II. The Mail Fraud Counts
Willis' attack on the Mail Fraud Counts of the Indictment
also fails. As the
Second Circuit stated in Carpenter: "It is clear that
`confidential and nonpublic commercial information' may
constitute fraudulently misappropriated `property' under the
mail fraud statute." 791 F.2d at 1034. This principle was not
altered by the Supreme Court's decision in McNally v. United
States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987). In
McNally, the Supreme Court held that the mail fraud statute is
"limited in scope to the protection of property rights," Id. at
360, 107 S.Ct. at 2881, and "does not refer to the intangible
right of the citizenry to good government."*fn3 Id. at 356,
107 S.Ct. at 2879.
Confidential business information is property within the
meaning of the mail fraud statute. In United States v.
Grossman, 843 F.2d 78 (1988), cert. denied, ___ U.S. ___, 109
S.Ct. 864, 102 L.Ed.2d 988 (1989), the Second Circuit reviewed
the law after McNally and Carpenter and explained the
definition of property in Carpenter as follows: "Carpenter
actually holds generally that, even though `confidential
business information' is intangible, it `has long been
recognized as property.'". Id. at 86 (citation omitted). See
also Chestman, 903 F.2d 75, 80. The confidential information in
this case regarding Sanford Weill's interest in BankAmerica and
the commitment by Shearson to invest $1 billion in BankAmerica
falls within the definition of property adopted by this
circuit. As discussed above, Mrs. Weill had a pecuniary
interest in the non-disclosure of this information.
Willis' argument that the Mail Fraud Counts are deficient
because the mails were not used in furtherance of the scheme
is also unpersuasive. The mail fraud statute requires that
"the charged `mailings' must be `for the purpose of executing
the scheme.'" United States v. Lane, 474 U.S. 438, 451, 106
S.Ct. 725, 733, 88 L.Ed.2d 814 (1986), citing Kann v. United
States, 323 U.S. 88, 94, 65 S.Ct. 148, 150, 89 L.Ed. 88 (1944).
Willis argues that the confirmations, the mailings charged,
played no role in the scheme alleged in the indictment.
However, the scheme alleged in the indictment is not only a
scheme to misappropriate confidential business information. It
is also a scheme to exploit that information by trading in
securities on the basis of the improperly acquired information.
Trading in securities was an integral part of the scheme, and
the mailing of confirmations to verify Willis' purchases did
further and was in execution of this aspect of the scheme.
In United States v. Grossman, 843 F.2d 78, 86 (1988), cert.
denied, ___ U.S. ___, 109 S.Ct. 864, 102 L.Ed.2d 988 (1989),
the Second Circuit found mailings of broker's confirmation
slips a sufficient predicate for mail fraud because they did
further the purpose of executing the scheme. The reasoning in
Grossman controls the result here. In this case, as in
Grossman, the confirmations: (1) notified Willis of the
completion of the purchases; (2) provided an ongoing tally of
purchases so he could track them for his profit sharing plan,
his pension plan, and his gifts to his children; (3) concealed
the fraud by maintaining an appearance or normality; and (4)
provided the different recipients with evidence of ownership.
Finally, for the reasons discussed under the 10b-5 Counts
above, Chestman does not require dismissal of the Mail Fraud
In sum, Willis is charged with misappropriating from his
patient valuable, albeit intangible, property in the form of
commercial information, exploiting it for his own profit, and
using the mails to bring his scheme to fruition. This charged
conduct falls within the proscription of the mail fraud
III. Willis's Due Process Argument
Finally, Willis argues that prosecuting him for securities
fraud deprives him of due process of law in violation of the
Fifth Amendment of the Constitution because the law of insider
trading was too unclear in 1986 to provide him with fair
his conduct was illegal. The same argument has been raised and
rejected in similar contexts, and is rejected here.
The Second Circuit has repeatedly rebuffed attempts to
invalidate criminal prosecutions brought under Section 10(b)
and Rule 10b-5 on the ground that those anti-fraud provisions
give inadequate notice of the conduct that they proscribe.
See United States v. Persky, 520 F.2d 283, 287-88 (2d Cir.
1975); Carpenter, 791 F.2d at 1034; Newman, 664 F.2d at 19.
Although Willis argues that the misappropriation theory is
"largely undefined," Willis Mem. at 28, it has been the law of
this circuit for many years. Dr. Willis had fair notice from
Newman and Materia that the conduct charged might violate
Section 10(b). The fact that there is no reported precedent
with precisely the same facts is immaterial. As the Second
Circuit stated in United States v. Brown, 555 F.2d 336, 339-40
(2d Cir. 1977) (rejecting "fair notice" argument):
The fact that there is no litigated fact pattern
precisely in point may constitute a tribute to
the cupidity and ingenuity of the malefactors
involved but hardly provides an escape from the
penal sanctions of the securities fraud
provisions here involved.
Moreover, every physician is aware of the confidential nature
of communications by his patients. Accordingly, Dr. Willis had
adequate notice that it would be unlawful for him to disclose
his patient's information and use it to trade in securities
for his personal benefit.
For all of the foregoing reasons, defendant's motion to
dismiss the Indictment is denied.