[834] [835] [836] [837] [838] [839] Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Sol., Roger S. Foster, Sp. Counsel, Ofc. of Policy Research, SEC, Frank E. Kennamer, Jr., Asst. Gen. Counsel, Donald M. Feuerstein, Atty., SEC, for Securities and Exchange Commission.

Orison S. Marden, White & Case, William D. Conwell, Edward C. Schmults, P. R. Konrad Knake, Thomas McGanney, Peter G. Eikenberry, New York City, for Texas Gulf Sulphur, Fogarty, Mollison, Holyk, Darke, Stephens, Murray, Huntington and Kline, for Crawford and Clayton.

Albert R. Connelly, Donald I. Strauber, Cravath, Swaine & Moore, New York City, for Coates.

Before LUMBARD, Chief Judge, and WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS, ANDERSON and FEINBERG, Circuit Judges.

Submitted to in Banc Court May 2, 1968.

WATERMAN, Circuit Judge:

This action was commenced in the United States District Court for the Southern District of New York by the Securities and Exchange Commission (the SEC) pursuant to Sec. 21(e) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78u(e), against Texas Gulf Sulphur Company (TGS) and several of its officers, directors and employees, to enjoin certain conduct by TGS and the individual defendants said to violate Section 10(b) of the Act, 15 U.S.C. Section 78j(b), and Rule 10b-5 (17 CFR 240.10b-5) (the Rule), promulgated thereunder, and to compel the rescission by the individual defendants of securities transactions assertedly conducted contrary to law.^[1] The complaint alleged (1) that defendants Fogarty, Mollison, Darke, Murray, Huntington, O'Neill, Clayton, Crawford, and Coates had either personally or through agents purchased TGS stock or calls thereon from November 12, 1963 through April 16, 1964 on the basis of material inside information concerning the results of [840] TGS drilling in Timmins, Ontario, while such information remained undisclosed to the investing public generally or to the particular sellers^[2]; (2) that defendants [841] Darke and Coates had divulged such information to others for use in purchasing TGS stock or calls^[3] or recommended its purchase while the information was undisclosed to the public or to the sellers;^[4] that defendants Stephens, Fogarty, [842] Mollison, Holyk, and Kline had accepted options to purchase TGS stock on Feb. 20, 1964 without disclosing the material information as to the drilling progress to either the Stock Option Committee or the TGS Board of Directors; and (4) that TGS issued a deceptive press release on April 12, 1964. The case was tried at length before Judge Bonsal of the Southern District of New York, sitting without a jury. Judge Bonsal in a detailed opinion^[5] decided, inter alia, that the insider activity prior to April 9, 1964 was not illegal because the drilling results were not "material" until then; that Clayton and Crawford had traded in violation of law because they traded after that date; that Coates had committed no violation as he did not trade before disclosure was made; and that the issuance of the press release was not unlawful because it was not issued for the purpose of benefiting the corporation, there was no evidence that any insider used the release to his personal advantage and it was not "misleading, or deceptive on the basis of the facts then known," 258 F.Supp. 262, at 292-296 (SDNY 1966). Defendants Clayton and Crawford appeal from that part of the decision below which held that they had violated Sec. 10(b) and Rule 10b-5 and the SEC appeals from the remainder of the decision which dismissed the complaint against defendants TGS, Fogarty, Mollison, Holyk, Darke, Stephens, Kline, Murray, and Coates.^[6]

For reasons which appear below, we decide the various issues presented as follows:

(1) As to Clayton and Crawford, as purchasers of stock on April 15 and 16, 1964, we affirm the finding that they violated 15 U.S.C. § 78j(b) and Rule 10b-5 and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(2) As to Murray, we affirm the dismissal of the complaint.

(3) As to Mollison and Holyk, as recipients of certain stock options, we affirm the dismissal of the complaint.

(4) As to Stephens and Fogarty, as recipients of stock options, we reverse the dismissal of the complaint and remand for a further determination as to whether an injunction, in the exercise of the trial court's discretion, should issue.

(5) As to Kline, as a recipient of a stock option, we reverse the dismissal of the complaint and remand with directions to issue an order rescinding the option and for a determination of any other appropriate remedy in connection therewith.

(6) As to Fogarty, Mollison, Holyk, Darke, and Huntington, as purchasers of stock or calls thereon between November 12, 1963, and April 9, 1964, we reverse the dismissal of the complaint and find that they violated 15 U.S.C. § 78j(b) and Rule 10b-5, and remand, pursuant to the agreement of all the parties, for a determination of the appropriate remedy.

(7) As to Clayton, although the district judge did not specify that the complaint be dismissed with respect to his purchases of TGS stock before April 9, [843] 1964, such a dismissal is implicit in his treatment of the individual appellees who acted similarly. Consequently, although Clayton is named only as an appellant our decision with respect to the materiality of K-55-1 renders it necessary to treat him also as an appellee. Thus, as to him, as one who purchased stock between November 12, 1963 and April 9, 1964, we reverse the implicit dismissal of the complaint, find that he violated § 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(8) As to Darke, as one who passed on information to tippees, we reverse the dismissal of the complaint and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(9) As to Coates, as one who on April 16th purchased stock and gave information on which his son-in-law broker and the broker's customers purchased shares, we reverse the dismissal of the complaint, find that he violated 15 U.S.C. § 78j(b) and Rule 10b-5, and remand, pursuant to the agreement by all the parties, for a determination of the appropriate remedy.

(10) As to Texas Gulf Sulphur, we reverse the dismissal of the complaint and remand for a further determination by the district judge in the light of the approach taken in this opinion.

The occurrences out of which this litigation arose are not set forth hereafter in as detailed a manner as they are set out in the published opinion of the court below, but are stated sufficiently, we believe, for the exposition of the issues raised by the several appeals to us.

THE FACTUAL SETTING

This action derives from the exploratory activities of TGS begun in 1957 on the Canadian Shield in eastern Canada. In March of 1959, aerial geophysical surveys were conducted over more than 15,000 square miles of this area by a group led by defendant Mollison, a mining engineer and a Vice President of TGS. The group included defendant Holyk, TGS's chief geologist, defendant Clayton, an electrical engineer and geophysicist, and defendant Darke, a geologist. These operations resulted in the detection of numerous anomalies, i. e., extraordinary variations in the conductivity of rocks, one of which was on the Kidd 55 segment of land located near Timmins, Ontario.

On October 29 and 30, 1963, Clayton conducted a ground geophysical survey on the northeast portion of the Kidd 55 segment which confirmed the presence of an anomaly and indicated the necessity of diamond core drilling for further evaluation. Drilling of the initial hole, K-55-1, at the strongest part of the anomaly was commenced on November 8 and terminated on November 12 at a depth of 655 feet. Visual estimates by Holyk of the core of K-55-1 indicated an average copper content of 1.15% and an average zinc content of 8.64% over a length of 599 feet. This visual estimate convinced TGS that it was desirable to acquire the remainder of the Kidd 55 segment, and in order to facilitate this acquisition TGS President Stephens instructed the exploration group to keep the results of K-55-1 confidential and undisclosed even as to other officers, directors, and employees of TGS. The hole was concealed and a barren core was intentionally drilled off the anomaly. Meanwhile, the core of K-55-1 had been shipped to Utah for chemical assay which, when received in early December, revealed an average mineral content of 1.18% copper, 8.26% zinc, and 3.94% ounces of silver per ton over a length of 602 feet. These results were so remarkable that neither Clayton, an experienced geophysicist, nor four other TGS expert witnesses, had ever seen or heard of a comparable initial exploratory drill hole in a base metal deposit. So, the trial court concluded, "There is no doubt that the drill core of K-55-1 was unusually [844] good and that it excited the interest and speculation of those who knew about it." Id. at 282. By March 27, 1964, TGS decided that the land acquisition program had advanced to such a point that the company might well resume drilling, and drilling was resumed on March 31.

During this period, from November 12, 1963 when K-55-1 was completed, to March 31, 1964 when drilling was resumed, certain of the individual defendants listed in fn. 2, supra, and persons listed in fn. 4, supra, said to have received "tips" from them, purchased TGS stock or calls thereon. Prior to these transactions these persons had owned 1135 shares of TGS stock and possessed no calls; thereafter they owned a total of 8235 shares and possessed 12,300 calls.

On February 20, 1964, also during this period, TGS issued stock options to 26 of its officers and employees whose salaries exceeded a specified amount, five of whom were the individual defendants Stephens, Fogarty, Mollison, Holyk, and Kline. Of these, only Kline was unaware of the detailed results of K-55-1, but he, too, knew that a hole containing favorable bodies of copper and zinc ore had been drilled in Timmins. At this time, neither the TGS Stock Option Committee nor its Board of Directors had been informed of the results of K-55-1, presumably because of the pending land acquisition program which required confidentiality. All of the foregoing defendants accepted the options granted them.

When drilling was resumed on March 31, hole K-55-3 was commenced 510 feet west of K-55-1 and was drilled easterly at a 45° angle so as to cross K-55-1 in a vertical plane. Daily progress reports of the drilling of this hole K-55-3 and of all subsequently drilled holes were sent to defendants Stephens and Fogarty (President and Executive Vice President of TGS) by Holyk and Mollison. Visual estimates of K-55-3 revealed an average mineral content of 1.12% copper and 7.93% zinc over 641 of the hole's 876-foot length. On April 7, drilling of a third hole, K-55-4, 200 feet south of and parallel to K-55-1 and westerly at a 45° angle, was commenced and mineralization was encountered over 366 of its 579-foot length. Visual estimates indicated an average content of 1.14% copper and 8.24% zinc. Like K-55-1, both K-55-3 and K-55-4 established substantial copper mineralization on the eastern edge of the anomaly. On the basis of these findings relative to the foregoing drilling results, the trial court concluded that the vertical plane created by the intersection of K-55-1 and K-55-3, which measured at least 350 feet wide by 500 feet deep extended southward 200 feet to its intersection with K-55-4, and that "There was real evidence that a body of commercially mineable ore might exist." Id. at 281-82.

On April 8 TGS began with a second drill rig to drill another hole, K-55-6, 300 feet easterly of K-55-1. This hole was drilled westerly at an angle of 60° and was intended to explore mineralization beneath K-55-1. While no visual estimates of its core were immediately available, it was readily apparent by the evening of April 10 that substantial copper mineralization had been encountered over the last 127 feet of the hole's 569-foot length. On April 10, a third drill rig commenced drilling yet another hole, K-55-5, 200 feet north of K-55-1, parallel to the prior holes, and slanted westerly at a 45° angle. By the evening of April 10 in this hole, too, substantial copper mineralization had been encountered over the last 42 feet of its 97-foot length.

Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. On the morning of Saturday, April 11, Stephens at his home in Greenwich, Conn. read in the New York Herald Tribune and in the New York Times unauthorized reports of the TGS drilling which seemed to infer a rich strike from the fact that the drill cores had been flown to the United States for chemical assay. Stephens immediately contacted Fogarty at his [845] home in Rye, N. Y., who in turn telephoned and later that day visited Mollison at Mollison's home in Greenwich to obtain a current report and evaluation of the drilling progress.^[7] The following morning, Sunday, Fogarty again telephoned Mollison, inquiring whether Mollison had any further information and told him to return to Timmins with Holyk, the TGS Chief Geologist, as soon as possible "to move things along." With the aid of one Carroll, a public relations consultant, Fogarty drafted a press release designed to quell the rumors, which release, after having been channeled through Stephens and Huntington, a TGS attorney, was issued at 3:00 P. M. on Sunday, April 12, and which appeared in the morning newspapers of general circulation on Monday, April 13. It read in pertinent part as follows:

NEW YORK, April 12 — The following statement was made today by Dr. Charles F. Fogarty, executive vice president of Texas Gulf Sulphur Company, in regard to the company's drilling operations near Timmins, Ontario, Canada. Dr. Fogarty said:

"During the past few days, the exploration activities of Texas Gulf Sulphur in the area of Timmins, Ontario, have been widely reported in the press, coupled with rumors of a substantial copper discovery there. These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS.

"The facts are as follows. TGS has been exploring in the Timmins area for six years as part of its overall search in Canada and elsewhere for various minerals — lead, copper, zinc, etc. During the course of this work, in Timmins as well as in Eastern Canada, TGS has conducted exploration entirely on its own, without the participation by others. Numerous prospects have been investigated by geophysical means and a large number of selected ones have been core-drilled. These cores are sent to the United States for assay and detailed examination as a matter of routine and on advice of expert Canadian legal counsel. No inferences as to grade can be drawn from this procedure.

"Most of the areas drilled in Eastern Canada have revealed either barren pyrite or graphite without value; a few have resulted in discoveries of small or marginal sulphide ore bodies.

"Recent drilling on one property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this prospect. The drilling done to date has not been conclusive, but the statements made by many outside quarters are unreliable and include information and figures that are not available to TGS.

"The work done to date has not been sufficient to reach definite conclusions and any statement as to size and grade of ore would be premature and possibly misleading. When we have progressed to the point where reasonable and logical conclusions can be made, TGS will issue a definite statement to its stockholders and to the public in order to clarify the Timmins project."

* * * * * *

The release purported to give the Timmins drilling results as of the release date, April 12. From Mollison Fogarty had been told of the developments through 7:00 P. M. on April 10, and of [846] the remarkable discoveries made up to that time, detailed supra, which discoveries, according to the calculations of the experts who testified for the SEC at the hearing, demonstrated that TGS had already discovered 6.2 to 8.3 million tons of proven ore having gross assay values from $26 to $29 per ton. TGS experts, on the other hand, denied at the hearing that proven or probable ore could have been calculated on April 11 or 12 because there was then no assurance of continuity in the mineralized zone.

The evidence as to the effect of this release on the investing public was equivocal and less than abundant. On April 13 the New York Herald Tribune in an article head-noted "Copper Rumor Deflated" quoted from the TGS release of April 12 and backtracked from its original April 11 report of a major strike but nevertheless inferred from the TGS release that "recent mineral exploratory activity near Timmins, Ontario, has provided preliminary favorable results, sufficient at least to require a step-up in drilling operations." Some witnesses who testified at the hearing stated that they found the release encouraging. On the other hand, a Canadian mining security specialist, Roche, stated that "earlier in the week [before April 16] we had a Dow Jones saying that they [TGS] didn't have anything basically" and a TGS stock specialist for the Midwest Stock Exchange became concerned about his long position in the stock after reading the release. The trial court stated only that "While, in retrospect, the press release may appear gloomy or incomplete, this does not make it misleading or deceptive on the basis of the facts then known." Id. at 296.

Meanwhile, drilling operations continued. By morning of April 13, in K-55-5, the fifth drill hole, substantial copper mineralization had been encountered to the 580 foot mark, and the hole was subsequently drilled to a length of 757 feet without further results. Visual estimates revealed an average content of 0.82% copper and 4.2% zinc over a 525-foot section. Also by 7:00 A. M. on April 13, K-55-6 had found mineralization to the 946-foot mark. On April 12 a fourth drill rig began to drill K-55-7, which was drilled westerly at a 45° angle, at the eastern edge of the anomaly. The next morning the 137 foot mark had been reached, fifty feet of which showed mineralization. By 7:00 P. M. on April 15, the hole had been completed to a length of 707 feet but had only encountered additional mineralization during a 26-foot length between the 425 and 451-foot marks. A mill test hole, K-55-8, had been drilled and was complete by the evening of April 13 but its mineralization had not been reported upon prior to April 16. K-55-10 was drilled westerly at a 45° angle commencing April 14 and had encountered mineralization over 231 of its 249-foot length by the evening of April 15. It, too, was drilled at the anomaly's eastern edge.

While drilling activity ensued to completion, TGC officials were taking steps toward ultimate disclosure of the discovery. On April 13, a previously-invited reporter for The Northern Miner, a Canadian mining industry journal, visited the drillsite, interviewed Mollison, Holyk and Darke, and prepared an article which confirmed a 10 million ton ore strike. This report, after having been submitted to Mollison and returned to the reporter unamended on April 15, was published in the April 16 issue. A statement relative to the extent of the discovery, in substantial part drafted by Mollison, was given to the Ontario Minister of Mines for release to the Canadian media. Mollison and Holyk expected it to be released over the airways at 11 P. M. on April 15th, but, for undisclosed reasons, it was not released until 9:40 A. M. on the 16th. An official detailed statement, announcing a strike of at least 25 million tons of ore, based on the drilling data set forth above, was read to representatives of American financial media from 10:00 A. M. to 10:10 or 10:15 A. M. on April 16, and appeared over Merrill Lynch's private wire at 10:29 A. M. and, somewhat later than [847] expected, over the Dow Jones ticker tape at 10:54 A. M.

Between the time the first press release was issued on April 12 and the dissemination of the TGS official announcement on the morning of April 16, the only defendants before us on appeal who engaged in market activity were Clayton and Crawford and TGS director Coates. Clayton ordered 200 shares of TGS stock through his Canadian broker on April 15 and the order was executed that day over the Midwest Stock Exchange. Crawford ordered 300 shares at midnight on the 15th and another 300 shares at 8:30 A. M. the next day, and these orders were executed over the Midwest Exchange in Chicago at its opening on April 16. Coates left the TGS press conference and called his broker son-in-law Haemisegger shortly before 10:20 A. M. on the 16th and ordered 2,000 shares of TGS for family trust accounts of which Coates was a trustee but not a beneficiary; Haemisegger executed this order over the New York and Midwest Exchanges, and he and his customers purchased 1500 additional shares.

During the period of drilling in Timmins, the market price of TGS stock fluctuated but steadily gained overall. On Friday, November 8, when the drilling began, the stock closed at 17 3/8 on Friday, November 15, after K-55-1 had been completed, it closed at 18. After a slight decline to 16 3/8 by Friday, November 22, the price rose to 20 7/8 by December 13, when the chemical assay results of K-55-1 were received, and closed at a high of 24 1/8 on February 21, the day after the stock options had been issued. It had reached a price of 26 by March 31, after the land acquisition program had been completed and drilling had been resumed, and continued to ascend to 30 1/8 by the close of trading on April 10, at which time the drilling progress up to then was evaluated for the April 12th press release. On April 13, the day on which the April 12 release was disseminated, TGS opened at 30 1/8, rose immediately to a high of 32 and gradually tapered off to close at 30 7/8. It closed at 30¼ the next day, and at 29 3/8 on April 15. On April 16, the day of the official announcement of the Timmins discovery, the price climbed to a high of 37 and closed at 36 3/8. By May 15, TGS stock was selling at 58¼.

I. THE INDIVIDUAL DEFENDANTS

A. Introductory

Rule 10b-5, 17 CFR 240.10b-5, on which this action is predicated, provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) 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.

Rule 10b-5 was promulgated pursuant to the grant of authority given the SEC by Congress in Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b).^[8] By that Act Congress [848] purposed to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges, see 3 Loss, Securities Regulation 1455-56 (2d ed. 1961). The Act and the Rule apply to the transactions here, all of which were consummated on exchanges. See List v. Fashion Park, Inc., 340 F.2d 457, 461-62 (2 Cir.), cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965); Cochran v. Channing Corp., 211 F.Supp. 239, 243 (SDNY 1962). Whether predicated on traditional fiduciary concepts, see, e. g., Hotchkiss v. Fisher, 136 Kan. 530, 16 P.2d 531 (Kan.1932), or on the "special facts" doctrine, see, e. g., Strong v. Repide, 213 U.S. 419, 29 S.Ct. 521, 53 L.Ed. 853 (1909), the Rule is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information, see Cary, Insider Trading in Stocks, 21 Bus.Law. 1009, 1010 (1966), Fleischer, Securities Trading and Corporation Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. 1271, 1278-80 (1965). The essence of the Rule is that anyone who, trading for his own account in the securities of a corporation has "access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone" may not take "advantage of such information knowing it is unavailable to those with whom he is dealing," i. e., the investing public. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). Insiders, as directors or management officers are, of course, by this Rule, precluded from so unfairly dealing, but the Rule is also applicable to one possessing the information who may not be strictly termed an "insider" within the meaning of Sec. 16(b) of the Act. Cady, Roberts, supra. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. So, it is here no justification for insider activity that disclosure was forbidden by the legitimate corporate objective of acquiring options to purchase the land surrounding the exploration site; if the information was, as the SEC contends, material,^[9] its possessors should have kept out of the market until disclosure was accomplished. Cady, Roberts, supra at 911.

B. Material Inside Information

An insider is not, of course, always foreclosed from investing in his own company merely because he may be more familiar with company operations than are outside investors. An insider's duty to disclose information or his duty to abstain from dealing in his company's securities arises only in "those situations which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if [the extraordinary situation is] disclosed." Fleischer, Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. 1271, 1289.

Nor is an insider obligated to confer upon outside investors the benefit of his superior financial or other expert analysis by disclosing his educated guesses or predictions. 3 Loss, op. cit. [849] supra at 1463. The only regulatory objective is that access to material information be enjoyed equally, but this objective requires nothing more than the disclosure of basic facts so that outsiders may draw upon their own evaluative expertise in reaching their own investment decisions with knowledge equal to that of the insiders.

This is not to suggest, however, as did the trial court, that "the test of materiality must necessarily be a conservative one, particularly since many actions under Section 10(b) are brought on the basis of hindsight," 258 F.Supp. 262 at 280, in the sense that the materiality of facts is to be assessed solely by measuring the effect the knowledge of the facts would have upon prudent or conservative investors. As we stated in List v. Fashion Park, Inc., 340 F.2d 457, 462, "The basic test of materiality * * * is whether a reasonable man would attach importance * * * in determining his choice of action in the transaction in question. Restatement, Torts § 538(2) (a); accord Prosser, Torts 554-55; I Harper & James, Torts 565-66." (Emphasis supplied.) This, of course, encompasses any fact "* * * which in reasonable and objective contemplation might affect the value of the corporation's stock or securities * * *." List v. Fashion Park, Inc., supra at 462, quoting from Kohler v. Kohler Co., 319 F.2d 634, 642, 7 A.L.R.3d 486 (7 Cir. 1963). (Emphasis supplied.) Such a fact is a material fact and must be effectively disclosed to the investing public prior to the commencement of insider trading in the corporation's securities. The speculators and chartists of Wall and Bay Streets are also "reasonable" investors entitled to the same legal protection afforded conservative traders.^[10] Thus, material facts include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company's securities.

In each case, then, whether facts are material within Rule 10b-5 when the facts relate to a particular event and are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. Here, notwithstanding the trial court's conclusion that the results of the first drill core, K-55-1, were "too `remote' * * * to have had any significant impact on the market, i. e., to be deemed material,"^[11] 258 F.Supp. at 283, knowledge of the possibility, which surely was more than marginal, of the existence of a mine of the vast magnitude indicated [850] by the remarkably rich drill core located rather close to the surface (suggesting mineability by the less expensive open-pit method) within the confines of a large anomaly (suggesting an extensive region of mineralization) might well have affected the price of TGS stock and would certainly have been an important fact to a reasonable, if speculative, investor in deciding whether he should buy, sell, or hold. After all, this first drill core was "unusually good and * * excited the interest and speculation of those who knew about it." 258 F.Supp. at 282.

Our disagreement with the district judge on the issue does not, then, go to his findings of basic fact, as to which the "clearly erroneous" rule would apply, but to his understanding of the legal standard applicable to them. See Baranow v. Gibralter Factors Corp., 366 F.2d 584, 587-589 (2 Cir. 1966), and cases cited in footnote 11 supra. Our survey of the facts found below conclusively establishes that knowledge of the results of the discovery hole, K-55-1, would have been important to a reasonable investor and might have affected the price of the stock.^[12] On April 16, The Northern Miner, a trade publication in wide circulation among mining stock specialists, called K-55-1, the discovery hole, "one of the most impressive drill holes completed in modern times."^[13] Roche, a Canadian broker whose firm specialized in mining securities, characterized the [851] importance to investors of the results of K-55-1. He stated that the completion of "the first drill hole" with "a 600 foot drill core is very very significant * * * anything over 200 feet is considered very significant and 600 feet is just beyond your wildest imagination." He added, however, that it "is a natural thing to buy more stock once they give you the first drill hole." Additional testimony revealed that the prices of stocks of other companies, albeit less diversified, smaller firms, had increased substantially solely on the basis of the discovery of good anomalies or even because of the proximity of their lands to the situs of a potentially major strike.

Finally, a major factor in determining whether the K-55-1 discovery was a material fact is the importance attached to the drilling results by those who knew about it. In view of other unrelated recent developments favorably affecting TGS, participation by an informed person in a regular stock-purchase program, or even sporadic trading by an informed person, might lend only nominal support to the inference of the materiality of the K-55-1 discovery; nevertheless, the timing by those who knew of it of their stock purchases and their purchases of short-term calls — purchases in some cases by individuals who had never before purchased calls or even TGS stock — virtually compels the inference that the insiders were influenced by the drilling results. This insider trading activity, which surely constitutes highly pertinent evidence and the only truly objective evidence of the materiality of the K-55-1 discovery, was apparently disregarded by the court below in favor of the testimony of defendants' expert witnesses, all of whom "agreed that one drill core does not establish an ore body, much less a mine," 258 F.Supp. at 282-283. Significantly, however, the court below, while relying upon what these defense experts said the defendant insiders ought to have thought about the worth to TGS of the K-55-1 discovery, and finding that from November 12, 1963 to April 6, 1964 Fogarty, Murray, Holyk and Darke spent more than $100,000 in purchasing TGS stock and calls on that stock, made no finding that the insiders were motivated by any factor other than the extraordinary K-55-1 discovery when they bought their stock and their calls. No reason appears why outside investors, perhaps better acquainted with speculative modes of investment and with, in many cases, perhaps more capital at their disposal for intelligent speculation, would have been less influenced, and would not have been similarly motivated to invest if they had known what the insider investors knew about the K-55-1 discovery.

Our decision to expand the limited protection afforded outside investors by the trial court's narrow definition of materiality is not at all shaken by fears that the elimination of insider trading benefits will deplete the ranks of capable corporate managers by taking away an incentive to accept such employment. Such benefits, in essence, are forms of secret corporate compensation, see Cary, Corporate Standards and Legal Rules, 50 Calif.L.Rev. 408, 409-10 (1962), derived at the expense of the uninformed investing public and not at the expense of the corporation which receives the sole benefit from insider incentives. Moreover, adequate incentives for corporate officers may be provided by properly administered stock options and employee purchase plans of which there are many in existence. In any event, the normal motivation induced by stock ownership, i. e., the identification of an individual with corporate progress, is ill-promoted by condoning the sort of speculative insider activity which occurred here; for example, some of the corporation's stock was sold at market in order to purchase short-term calls upon that stock, calls which would never be exercised to increase a stockholder equity in TGS unless the market price of that stock rose sharply.

The core of Rule 10b-5 is the implementation of the Congressional purpose that all investors should have equal access to the rewards of participation [852] in securities transactions. It was the intent of Congress that all members of the investing public should be subject to identical market risks, — which market risks include, of course the risk that one's evaluative capacity or one's capital available to put at risk may exceed another's capacity or capital. The insiders here were not trading on an equal footing with the outside investors. They alone were in a position to evaluate the probability and magnitude of what seemed from the outset to be a major ore strike; they alone could invest safely, secure in the expectation that the price of TGS stock would rise substantially in the event such a major strike should materialize, but would decline little, if at all, in the event of failure, for the public, ignorant at the outset of the favorable probabilities would likewise be unaware of the unproductive exploration, and the additional exploration costs would not significantly affect TGS market prices. Such inequities based upon unequal access to knowledge should not be shrugged off as inevitable in our way of life, or, in view of the congressional concern in the area, remain uncorrected.

We hold, therefore, that all transactions in TGS stock or calls by individuals apprised of the drilling results^[14] of K-55-1 were made in violation of Rule 10b-5.^[15] Inasmuch as the visual evaluation of that drill core (a generally reliable estimate though less accurate than a chemical assay) constituted material information, those advised of the results of the visual evaluation as well as those informed of the chemical assay traded in violation of law. The geologist Darke possessed undisclosed material information and traded in TGS securities. Therefore we reverse the dismissal of the action as to him and his personal transactions. The trial court also found, 258 F.Supp. at 284, that Darke, after the drilling of K-55-1 had been completed and with detailed knowledge of the results thereof, told certain outside individuals that TGS "was a good buy." These individuals thereafter acquired TGS stock and calls. The trial court also found that later, as of March 30, 1964, Darke not only used his material knowledge for his own purchases but that the substantial amounts of TGS stock and calls purchased by these outside individuals on that day, see footnote 4, supra, was "strong circumstantial evidence that Darke must have passed the word to one or more of his `tippees' that drilling on the Kidd 55 segment was about to be resumed." 258 F.Supp. at 284. Obviously if such a resumption were to have any meaning to such "tippees," they must have previously been told of K-55-1.

Unfortunately, however, there was no definitive resolution below of Darke's liability in these premises for the trial court held as to him, as it held as to all the other individual defendants, that this "undisclosed information" never became material until April 9. As it is our holding that the information acquired after the drilling of K-55-1 was material, we, on the basis of the findings of direct and circumstantial evidence on the issue that the trial court has already expressed, hold that Darke violated Rule 10b-5 (3) and Section 10(b) by "tipping" and we remand, pursuant to the agreement of the parties, for a determination of the appropriate remedy.^[16] As Darke's "tippees" are not [853] defendants in this action, we need not decide whether, if they acted with actual or constructive knowledge that the material information was undisclosed, their conduct is as equally violative of the Rule as the conduct of their insider source, though we note that it certainly could be equally reprehensible.

With reference to Huntington, the trial court found that he "had no detailed knowledge as to the work" on the Kidd-55 segment, 258 F.Supp. 281. Nevertheless, the evidence shows that he knew about and participated in TGS's land acquisition program which followed the receipt of the K-55-1 drilling results, and that on February 26, 1964 he purchased 50 shares of TGS stock. Later, on March 16, he helped prepare a letter for Dr. Holyk's signature in which TGS made a substantial offer for lands near K-55-1, and on the same day he, who had never before purchased calls on any stock, purchased a call on 100 shares of TGS stock. We are satisfied that these purchases in February and March, coupled with his readily inferable and probably reliable, understanding of the highly favorable nature of preliminary operations on the Kidd segment, demonstrate that Huntington possessed material inside information such as to make his purchase violative of the Rule and the Act.

C. When May Insiders Act?

Appellant Crawford, who ordered^[17] the purchase of TGS stock shortly before the TGS April 16 official announcement, and defendant Coates, who placed orders with and communicated the news to his broker immediately after the official announcement was read at the TGS-called press conference, concede that they were in possession of material information. They contend, however, that their purchases were not proscribed purchases for the news had already been effectively disclosed. We disagree.

Crawford telephoned his orders to his Chicago broker about midnight on April 15 and again at 8:30 in the morning of the 16th, with instructions to buy at the opening of the Midwest Stock Exchange that morning. The trial court's finding that "he sought to, and did, `beat the news,'" 258 F.Supp. at 287, is well documented by the record. The rumors of a major ore strike which had been circulated in Canada and, to a lesser extent, in New York, had been disclaimed by the TGS press release of April 12, which significantly promised the public an official detailed announcement when possibilities had ripened into actualities. The abbreviated announcement to the Canadian press at 9:40 A.M. on the 16th by the Ontario Minister of Mines and the report carried by The Northern Miner, parts of which had sporadically reached New York on the morning of the 16th through reports from Canadian affiliates to a few New York investment firms, are assuredly not the equivalent of the official 10-15 minute announcement which was not released to the American financial press until after 10:00 A.M. Crawford's orders had been [854] placed before that. Before insiders may act upon material information, such information must have been effectively disclosed in a manner sufficient to insure its availability to the investing public. Particularly here, where a formal announcement to the entire financial news media had been promised in a prior official release known to the media, all insider activity must await dissemination of the promised official announcement.

Coates was absolved by the court below because his telephone order was placed shortly before 10:20 A.M. on April 16, which was after the announcement had been made even though the news could not be considered already a matter of public information. 258 F. Supp. at 288. This result seems to have been predicated upon a misinterpretation of dicta in Cady, Roberts, where the SEC instructed insiders to "keep out of the market until the established procedures for public release of the information are carried out instead of hastening to execute transactions in advance of, and in frustration of, the objectives of the release," 40 SEC at 915 (emphasis supplied). The reading of a news release, which prompted Coates into action, is merely the first step in the process of dissemination required for compliance with the regulatory objective of providing all investors with an equal opportunity to make informed investment judgments. Assuming that the contents of the official release could instantaneously be acted upon,^[18] at the minimum Coates should have waited until the news could reasonably have been expected to appear over the media of widest circulation, the Dow Jones broad tape, rather than hastening to insure an advantage to himself and his broker son-in-law.^[19]

D. Is An Insider's Good Faith A Defense Under 10b-5?

Coates, Crawford and Clayton, who ordered purchases before the news could be deemed disclosed, claim, nevertheless, that they were justified in doing so because they honestly believed that the news of the strike had become public at the time they placed their orders. However, whether the case before us is treated solely as an SEC enforcement proceeding or as a private action,^[20] proof of a specific intent to defraud is unnecessary. In an enforcement proceeding for equitable or prophylactic relief, the common law standard of deceptive conduct has been modified in the interests of [855] broader protection for the investing public so that negligent insider conduct has become unlawful. See Berko v. SEC, 316 F.2d 137, 141-142 (2 Cir. 1963); SEC v. Capital Gains, etc., Bureau, 375 U.S. 180, 193, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). A similar standard has been adopted in private actions, see, e. g., Stevens v. Vowell, 343 F.2d 374 (10 Cir. 1965); Ellis v. Carter, 291 F.2d 270 (9 Cir. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9 Cir. 1962); Dack v. Shanman, 227 F.Supp. 26 (SD NY 1964); but see, e. g., Weber v. C. M. P. Corp., 242 F.Supp. 321 (SDNY 1965); Thiele v. Shields, 131 F.Supp. 416 (SDNY 1955), for policy reasons which seem perfectly consistent with the broad Congressional design "* * * to insure the maintenance of fair and honest markets in * * * [securities] transactions." Sec. 2 of SEC Act, 15 U.S.C. § 78b, see Kohler v. Kohler Co., 319 F.2d 634, 642 (7 Cir. 1963); Note, 32 U.Chi. L.Rev. 824, 839-44 (1965); Note, 63 Mich.L.Rev. 1070, 1079-81 (1965).

Absent any clear indication of a legislative intention to require a showing of specific fraudulent intent, see Note, 63 Mich.L.Rev. 1070, 1075, 1076 n.29 (1965), the securities laws should be interpreted as an expansion of the common law^[21] both to effectuate the broad remedial design of Congress, see SEC v. Capital Gains Research Bureau, supra, 375 U.S. at 195, 84 S.Ct. 275, and to insure uniformity of enforcement, see Note, 32 U.Chi.L.Rev. 824, 832 n. 36 (1965), citing McClure v. Borne Chemical Co., 292 F.2d 824, 834 (3 Cir. 1961). Moreover, a review of other sections of the Act from which Rule 10b-5 seems to have been drawn suggests that the implementation of a standard of conduct that encompasses negligence as well as active fraud comports with the administrative and the legislative purposes underlying the Rule.^[22] Finally, we note that this position is not, as asserted by defendants, irreconcilable with previous language in this circuit because "some form of the traditional scienter requirement," Barnes v. Osofsky, 373 F.2d 269, 272 (2 Cir. 1967), (emphasis supplied), sometimes defined as "fraud," Fischman v. Raytheon Mfg. Co., 9 F.R.D. 707 (SD NY 1949), rev'd on other grounds, 188 F.2d 783, 786 (2 Cir. 1951) is preserved. This requirement, whether it be termed lack of diligence, constructive fraud, or unreasonable or negligent conduct, remains implicit in this standard, a standard that promotes the deterrence objective of the Rule.

[856] Thus, the beliefs of Coates, Crawford and Clayton that the news of the ore strike was sufficiently public at the time of their purchase orders are to no avail if those beliefs were not reasonable under the circumstances. Crawford points to the scattered rumors of the discovery which had been circulating for some time before April 15, to the release of the information to The Northern Miner on April 15 to be published by it on the 16th, to the arrangement made by TGS with the Ontario Minister of Mines for the release of an abbreviated report on the evening of the 15th (which did not eventuate until 9:40 A.M., April 16), and to the corporation's official announcement at 10:00 A.M. on the 16th, all of which transpired prior to an anticipated execution of his purchase orders that had been placed by him after trading had closed on the Midwest Exchange on April 15. However, the rumors and casual disclosure through Canadian media, especially in view of the April 12 "gloomy" or incomplete release denying the rumors and promising official confirmation, hardly sufficed to inform traders on American exchanges affected by Crawford's purchases. Moreover, the formal announcement could not reasonably have been expected to be disseminated by the time of the opening of the exchanges on the morning of April 16, when Crawford must have expected his orders would be executed.

Clayton, who was unaware of the April 16 disclosure announcement TGS was to make can, in support of his claim that the favorable news was public, rely only on the rumors and on the phone calls received by TGS prior to the placing of his order from those who seemed to have heard some version or rumors of the news. His awareness of the contents of the April 12 release renders unreasonable any claim that he believed the news was truly public.

Finally, Coates, as we have already indicated in fn. 19, supra, could not reasonably have expected the official release to have been disseminated when he placed his order before 10:20 for immediate execution nor were the Canadian disclosures relied on by Crawford sufficient to render the conduct of Coates permissible under the circumstances.^[23]

E. May Insiders Accept Stock Options Without Disclosing Material Information To The Issuer?

On February 20, 1964, defendants Stephens, Fogarty, Mollison, Holyk and Kline accepted stock options issued to them and a number of other top officers of TGS, although not one of them had informed the Stock Option Committee of the Board of Directors or the Board of the results of K-55-1, which information we have held was then material. The SEC sought rescission of these options. The trial court, in addition to finding the knowledge of the results of the K-55 discovery to be immaterial, held that Kline had no detailed knowledge of the drilling progress and that Holyk and Mollison could reasonably assume that their superiors, Stephens and Fogarty, who were directors of the corporation, would report the results if that was advisable; indeed all employees had been instructed not to divulge this information pending completion of the land acquisition program, 258 F.Supp. at 291. Therefore, the court below concluded that only directors Stephens and Fogarty, of the top management, would have violated the Rule by accepting stock options without disclosure, but it also found that they had not acted improperly as the information in their possession was not material. 258 F.Supp. at 292. In view of our conclusion as to materiality we hold that Stephens and Fogarty violated the Rule by accepting them. However, as they have surrendered the options and the corporation has canceled them, supra at 292, n. 17, we find it unnecessary to order that the [857] injunctions prayed for be actually issued. We point out, nevertheless, that the surrender of these options after the SEC commenced the case is not a satisfaction of the SEC claim, and a determination as to whether the issuance of injunctions against Stephens and Fogarty is advisable in order to prevent or deter future violations of regulatory provisions is remanded for the exercise of discretion by the trial court.

Contrary to the belief of the trial court that Kline had no duty to disclose his knowledge of the Kidd project before accepting the stock option offered him, we believe that he, a vice president, who had become the general counsel of TGS in January 1964, but who had been secretary of the corporation since January 1961, and was present in that capacity when the options were granted, and who was in charge of the mechanics of issuance and acceptance of the options, was a member of top management and under a duty before accepting his option to disclose any material information he may have possessed, and, as he did not disclose such information to the Option Committee we direct rescission of the option he received.^[24] As to Holyk and Mollison, the SEC has not appealed the holding below that they, not being then members of top management (although Mollison was a vice president) had no duty to disclose their knowledge of the drilling before accepting their options. Therefore, the issue of whether, by accepting, they violated the Act, is not before us, and the holding below is undisturbed.

II. THE CORPORATE DEFENDANT

Introductory

At 3:00 P.M. on April 12, 1964, evidently believing it desirable to comment upon the rumors concerning the Timmins project, TGS issued the press release quoted in pertinent part in the text at page 845, supra. The SEC argued below and maintains on this appeal that this release painted a misleading and deceptive picture of the drilling progress at the time of its issuance, and hence violated Rule 10b-5(2).^[25] TGS relies [858] on the holding of the court below that "The issuance of the release produced no unusual market action" and "In the absence of a showing that the purpose of the April 12 press release was to affect the market price of TGS stock to the advantage of TGS or its insiders, the issuance of the press release did not constitute a violation of Section 10(b) or Rule 10b-5 since it was not issued `in connection with the purchase or sale of any security'" and, alternatively, "even if it had been established that the April 12 release was issued in connection with the purchase or sale of any security, the Commission has failed to demonstrate that it was false, misleading or deceptive." 258 F.Supp. at 294.

Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. The specific SEC allegation in its complaint is that this April 12 press release "* * * was materially false and misleading and was known by certain of defendant Texas Gulf's officers and employees, including defendants Fogarty, Mollison, Holyk, Darke and Clayton, to be materially false and misleading."

The specific relief the SEC seeks is, pursuant to Section 21(e) of Securities Exchange Act of 1934, 15 U.S.C. § 78u(e), a permanent injunction restraining the issuance of any further materially false and misleading publicly distributed informative items.^[26]

B. The "In Connection With * * *" Requirement.

In adjudicating upon the relationship of this phrase to the case before us it would appear that the court below used a standard that does not reflect the congressional purpose that prompted the passage of the Securities Exchange Act of 1934.

The dominant congressional purposes underlying the Securities Exchange Act of 1934 were to promote free and open public securities markets and to protect the investing public from suffering inequities in trading, including, specifically, inequities that follow from trading that has been stimulated by the publication of false or misleading corporate information releases. Commenting on the disclosure purposes of the House bill (H.R. 9323), the bill a Committee of Conference eventually integrated with a similar Senate bill (S. 3420) to make the bill passed by both Houses of Congress that became the Securities Exchange Act of 1934, the House Committee which reported out H.R. 9323 stated:

The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price. Just as artificial manipulation tends to upset the true function of an open market, so the hiding and secreting of important information obstructs the operation of the markets as indices of real value. There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy. The disclosure of information materially important to investors may not instantaneously be reflected in market [859] value, but despite the intricacies of security values truth does find relatively quick acceptance on the market. That is why in many cases it is so carefully guarded. Delayed, inaccurate, and misleading reports are the tools of the unconscionable market operator and the recreant corporate official who speculate on inside information. Despite the tug of conflicting interests and the influence of popular groups, responsible officials of the leading exchanges have unqualifiedly recognized in theory at least the vital importance of true and accurate corporate reporting as an essential cog in the proper functioning of the public exchanges. Their efforts to bring about more adequate and prompt publicity have been handicapped by the lack of legal power and by the failure of certain banking and business groups to appreciate that a business that gathers its capital from the investing public has not the same right to secrecy as a small privately owned and managed business. It is only a few decades since men believed that the disclosure of a balance sheet was a disclosure of a trade secret. Today few people would admit the right of any company to solicit public funds without the disclosure of a balance sheet. (Emphasis supplied.) H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 11 (1934).

Section 10(b) of the Act (see footnote 8, supra) was taken by the Conference Committee from Section 10(b) of the proposed Senate bill, S. 3420, and taken from it verbatim insofar as here pertinent. The only alteration made by the Conference Committee was to substitute the present closing language of Section 10(b), "* * * in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors" for the closing language of the original Section 10(b) of S. 3420, "* * * which the Commission may declare to be detrimental to the interests of investors." 78 Cong.Rec. 10261 (1934).

The Report of the Senate Committee which presented S. 3420 to the Senate summarized Section 10(b) as follows:

Subsection (b) authorizes the Commission by rules and regulations to prohibit or regulate the use of any other manipulative or deceptive practices which it finds detrimental to the interests of the investor. (Emphasis supplied.)

S.Rep.No. 792, 73rd Cong., 2d Sess. 18 (1934).

Indeed, from its very inception, Section 10(b), and the proposed sections in H.R. 1383 and S. 3420 from which it was derived, have always been acknowledged as catchalls. See Bromberg, Securities Law: SEC Rule 10b-5, p. 19 (1967). In the House Committee hearings on the proposed House bill, Thomas G. Corcoran, Counsel with the Reconstruction Finance Corporation and a spokesman for the Roosevelt Administration, described the broad prohibitions contained in § 9(c), the section which corresponded to Section 10(b) of S. 3420 and eventually to Section 10(b) of the Act, as follows: "Subsection (c) says, `Thou shalt not devise any other cunning devices' * * *. Of course subsection (c) is a catch-all clause to prevent manipulative devices. I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices." Stock Exchange Regulation, Hearings before the House Committee on Interstate and Foreign Commerce, 73rd Cong., 2d Sess. 115 (1934). Although several other witnesses objected to the breadth of the proposed prohibition that Corcoran was supporting, the section as enacted did not in any way limit the broad scope of the "in connection with" phrase. See 3 Loss, Securities Regulation, 1424 n. 7 (2d ed. 1961).

Thus, the legislative history of Section 10(b) does not support the proposition urged upon us by Texas Gulf Sulphur [860] that Congress intended the limited construction of the "in connection with" phrase applied by the trial court. Moreover, comparisons of Section 10(b) with the antifraud provisions of the Securities Act of 1933 (§ 12(2), 15 U.S.C. § 77l(2) "* * * [offers or] sells a security by means of * * *"; § 17(a), 15 U.S.C. § 77q(a) "* * * in the [offer or] sale of any securities to obtain money or property by means of * * *"; [language in brackets was added in 1954 amendments]), and with the 1936 antifraud amendment of Section 15 of the Securities Exchange Act of 1934 (§ 15(c) (1), 15 U.S.C. § 78o(c) (1) "* * * effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security * * *") demonstrate that when Congress intended that there be a participation in a securities transaction as a prerequisite of a violation, it knew how to make that intention clear. See Bromberg, op. cit. supra Table 1 at 16-17.

Therefore it seems clear from the legislative purpose Congress expressed in the Act, and the legislative history of Section 10(b) that Congress when it used the phrase "in connection with the purchase or sale of any security" intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities. There is no indication that Congress intended that the corporations or persons responsible for the issuance of a misleading statement would not violate the section unless they engaged in related securities transactions or otherwise acted with wrongful motives; indeed, the obvious purposes of the Act to protect the investing public and to secure fair dealing in the securities markets would be seriously undermined by applying such a gloss onto the legislative language. Absent a securities transaction by an insider it is almost impossible to prove that a wrongful purpose motivated the issuance of the misleading statement. The mere fact that an insider did not engage in securities transactions does not negate the possibility of wrongful purpose; perhaps the market did not react to the misleading statement as much as was anticipated or perhaps the wrongful purpose was something other than the desire to buy at a low price or sell at a high price. Of even greater relevance to the Congressional purpose of investor protection is the fact that the investing public may be injured as much by one's misleading statement containing inaccuracies caused by negligence as by a misleading statement published intentionally to further a wrongful purpose. We do not believe that Congress intended that the proscriptions of the Act would not be violated unless the makers of a misleading statement also participated in pertinent securities transactions in connection therewith, or unless it could be shown that the issuance of the statement was motivated by a plan to benefit the corporation or themselves at the expense of a duped investing public.

Nor is there anything about Rule 10b-5 which demonstrates that the SEC sought by the Rule not fully to implement the Congressional purpose and objectives underlying Section 10(b). See Securities Exchange Act of 1934, Release No. 3230 (May 21, 1942); 10 SEC Ann.Rep. 56-7 (1944); 8 SEC Ann.Rep. 10 (1942). To be sure, SEC official publicity accompanying the promulgation of the Rule emphasized the insider trading aspects of the Rule, particularly the prohibition against purchases by insiders, but this was emphasized because "the previously existing rules against fraud in the purchase of securities applied only to brokers and dealers," 8 SEC Ann.Rep. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole.

The foregoing discussion demonstrates that Congress intended to protect the investing public in connection with their purchases or sales on Exchanges from being misled by misleading statements promulgated for or on behalf of corporations irrespective of whether [861] the insiders contemporaneously trade in the securities of that corporation and irrespective of whether the corporation or its management have an ulterior purpose or purposes in making an official public release. Indeed, the Commission has been charged by Congress with the responsibility of policing all misleading corporate statements from those contained in an initial prospectus to those contained in a notice to stockholders relative to the need or desirability of terminating the existence of a corporation or of merging it with another. To render the Congressional purpose ineffective by inserting into the statutory words the need of proving, not only that the public may have been misled by the release, but also that those responsible were actuated by a wrongful purpose when they issued the release, is to handicap unreasonably the Commission in its work. We should have in mind the wise words of Judge Learned Hand in Cawley v. United States, 272 F.2d 443, 445 (2 Cir. 1959), relative to an interpretation of the words contained within a congressional statute, that "* * * unless they explicitly forbid it, the purpose of a statutory provision is the best test of the meaning of the words chosen. We are to put ourselves so far as we can in the position of the legislature that uttered them, and decide whether or not it would declare that the situation that has arisen is within what it wishes to cover. Indeed, at times the purpose may be so manifest as to override even the explicit words used. Markham v. Cabell, 326 U.S. 404, 66 S.Ct. 193, 90 L.Ed. 165."

As was pointed out by the trial court, 258 F.Supp. at 293, the intent of the Securities Exchange Act of 1934 is the protection of investors against fraud. Therefore, it would seem elementary that the Commission has a duty to police management so as to prevent corporate practices which are reasonably likely fraudulently to injure investors. And, of course, as we have already emphasized, a corporation's misleading material statement may injure an investor irrespective of whether the corporation itself, or those individuals managing it, are contemporaneously buying or selling the stock of the corporation. Therefore, when materially misleading corporate statements or deceptive insider activities have been uncovered, the courts, as they should, have broadly construed the statutory phrase "in connection with the purchase or sale of any security." Freed v. Szabo Food Serv., Inc., CCH Fed. SEC L.Rep. ¶ 91,317 (N.D.Ill.1964); Stockwell v. Reynolds & Co., 252 F.Supp. 215 (SDNY 1965); Cooper v. North Jersey Trust Co., 226 F.Supp. 972, 978 (SDNY 1964); Miller v. Bargain City, U. S. A., Inc., 229 F.Supp. 33, 37 (E.D.Pa.1964); see Ruder, Corporate Disclosures Required by the Federal Securities Laws: The Codification Implications of Texas Gulf Sulphur, 61 Nw.U.L.Rev. 872, 895 (1967). The court below found: "There is no evidence that TGS derived any direct benefit from the issuance of the press release or that any of the defendants who participated in its preparation used it to their personal advantage." 258 F.Supp. at 294. The requirement that a statement may not be found misleading unless its issuance is actuated by a "wrongful purpose" might well have the effect of permitting the issuers of misleading statements to seek an advantage but to escape liability if the advantage fails to materialize to the degree contemplated, or cannot be demonstrated.

More important, however, is the realization which we must again underscore at the risk of repetition, that the investing public is hurt by exposure to false or deceptive statements irrespective of the purpose underlying their issuance.^[27] It does not appear to be unfair to impose upon corporate management a duty to ascertain the truth of any statements the corporation releases to its shareholders or to the investing public at [862] large. Accordingly, we hold that Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public, e. g., by means of the financial media, Fleischer, supra, 51 Va.L.Rev. at 1294-95, if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes. It seems clear, however, that if corporate management demonstrates that it was diligent in ascertaining that the information it published was the whole truth and that such diligently obtained information was disseminated in good faith, Rule 10b-5 would not have been violated.

C. Did the Issuance of the April 12 Release Violate Rule 10b-5?

Turning first to the question of whether the release was misleading, i. e., whether it conveyed to the public a false impression of the drilling situation at the time of its issuance, we note initially that the trial court did not actually decide this question. Its conclusion that "the Commission has failed to demonstrate that it was false, misleading or deceptive," 258 F.Supp. at 294, seems to have derived from its views that "The defendants are to be judged on the facts known to them when the April 12 release was issued," 258 F.Supp. at 295 (emphasis supplied), that the draftsmen "exercised reasonable business judgment under the circumstances," 258 F.Supp. at 296, and that the release was not "misleading or deceptive on the basis of the facts then known," 258 F.Supp. at 296 (emphasis supplied) rather than from an appropriate primary inquiry into the meaning of the statement to the reasonable investor and its relationship to truth. While we certainly agree with the trial court that "in retrospect, the press release may appear gloomy or incomplete,"^[28] 258 F. [863] Supp. at 296, we cannot, from the present record, by applying the standard Congress intended, definitively conclude that it was deceptive or misleading to the reasonable investor, or that he would have been misled by it. Certain newspaper accounts of the release viewed the release as confirming the existence of preliminary favorable developments, and this optimistic view was held by some brokers, so it could be that the reasonable investor would have read between the lines of what appears to us to be an inconclusive and negative statement and would have envisioned the actual situation at the Kidd segment on April 12. On the other hand, in view of the decline of the market price of TGS stock from a high of 32 on the morning of April 13 when the release was disseminated to 29 3/8 by the close of trading on April 15, and the reaction to the release by other brokers, it is far from certain that the release was generally interpreted as a highly encouraging report or even encouraging at all. Accordingly, we remand this issue to the district court that took testimony and heard and saw the witnesses for a determination of the character of the release in the light of the facts existing at the time of the release, by applying the standard of whether the reasonable investor, in the exercise of due care, would have been misled by it.

In the event that it is found that the statement was misleading to the reasonable investor it will then become necessary to determine whether its issuance resulted from a lack of due diligence. The only remedy the Commission seeks against the corporation is an injunction, see footnote 26, supra, and therefore we do not find it necessary to decide whether just a lack of due diligence on the part of TGS, absent a showing of bad faith, would subject the corporation to any liability for damages. We have recently stated in a case involving a private suit under Rule 10b-5 in which damages and an injunction were sought, "`It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages.'" Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547, quoting from SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 193, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963)

We hold only that, in an action for injunctive relief, the district court has the discretionary power under Rule 10b-5 and Section 10(b) to issue an injunction, if the misleading statement resulted from a lack of due diligence on the part of TGS. The trial court did not find it necessary to decide whether TGS exercised such diligence and has not yet attempted to resolve this issue. While the trial court concluded that TGS had exercised "reasonable business judgment under the circumstances," 258 F.Supp. at 296 (emphasis supplied) it applied an incorrect legal standard in appraising whether TGS should have issued its April 12 release on the basis of the facts known to its draftsmen at the time of its preparation, 258 F.Supp. at 295, and in assuming that disclosure of the full underlying facts of the Timmins situation was not a viable alternative to the vague generalities which were asserted. 258 F. Supp. at 296.

It is not altogether certain from the present record that the draftsmen could, as the SEC suggests, have readily obtained current reports of the drilling progress over the weekend of April 10-12, but they certainly should have obtained them if at all possible for them to do so. However, even if it were not possible to evaluate and transmit current data in time to prepare the release on April 12, it would seem that TGS could have delayed the preparation a bit until an accurate report of a rapidly changing situation was possible. See 258 F.Supp. at 296. At the very least, if TGS felt compelled to respond to the [864] spreading rumors of a spectacular discovery, it would have been more accurate to have stated that the situation was in flux and that the release was prepared as of April 10 information rather than purporting to report the progress "to date." Moreover, it would have obviously been better to have specifically described the known drilling progress as of April 10 by stating the basic facts. Such an explicit disclosure would have permitted the investing public to evaluate the "prospect" of a mine at Timmins without having to read between the lines to understand that preliminary indications were favorable — in itself an understatement.

The choice of an ambiguous general statement rather than a summary of the specific facts cannot reasonably be justified by any claimed urgency. The avoidance of liability for misrepresentation in the event that the Timmins project failed, a highly unlikely event as of April 12 or April 13, did not forbid the accurate and truthful divulgence of detailed results which need not, of course, have been accompanied by conclusory assertions of success. Nor is it any justification that such an explicit disclosure of the truth might have "encouraged the rumor mill which they were seeking to allay." 258 F.Supp. at 296.

We conclude, then, that, having established that the release was issued in a manner reasonably calculated to affect the market price of TGS stock and to influence the investing public, we must remand to the district court to decide whether the release was misleading to the reasonable investor and if found to be misleading, whether the court in its discretion should issue the injunction the SEC seeks.

CONCLUSION

In summary, therefore, we affirm the finding of the court below that appellants Richard H. Clayton and David M. Crawford have violated 15 U.S.C. § 78j (b) and Rule 10b-5; we reverse the judgment order entered below dismissing the complaint against appellees Charles F. Fogarty, Richard H. Clayton, Richard D. Mollison, Walter Holyk, Kenneth H. Darke, Earl L. Huntington, and Francis G. Coates, as we find that they have violated 15 U.S.C. § 78j(b) and Rule 10b-5. As to these eight individuals we remand so that in accordance with the agreement between the parties the Commission may notice a hearing before the court below to determine the remedies to be applied against them. We reverse the judgment order dismissing the complaint against Claude O. Stephens, Charles F. Fogarty, and Harold B. Kline as recipients of stock options, direct the district court to consider in its discretion whether to issue injunction orders against Stephens and Fogarty, and direct that an order issue rescinding the option granted Kline and that such further remedy be applied against him as may be proper by way of an order of restitution; and we reverse the judgment dismissing the complaint against Texas Gulf Sulphur Company, remand the cause as to it for a further determination below, in the light of the approach explicated by us in the foregoing opinion, as to whether, in the exercise of its discretion, the injunction against it which the Commission seeks should be ordered.

FRIENDLY, Circuit Judge (concurring):

Agreeing with the result reached by the majority and with most of Judge Waterman's searching opinion, I take a rather different approach to two facets of the case.

I.

The first is a situation that will not often arise, involving as it does the acceptance of stock options during a period when inside information likely to produce a rapid and substantial increase in the price of the stock was known to some of the grantees but unknown to those in charge of the granting. I suppose it would be clear, under Ruckle v. Roto American Corp., 339 F.2d 24 (2 [865] Cir. 1964),^[29] that if a corporate officer having such knowledge persuaded an unknowing board of directors to grant him an option at a price approximating the current market, the option would be rescindable in an action under Rule 10b-5. It would seem, by the same token, that if, to make the pill easier to swallow, he urged the directors to include others lacking the knowledge he possessed, he would be liable for all the resulting damage. The novel problem in the instant case is to define the responsibility of officers when a directors' committee administering a stock option plan proposes of its own initiative to make options available to them and others at a time when they know that the option price, geared to the market value of the stock, did not reflect a substantial increment likely to be realized in short order and was therefore unfair to the corporation.

A rule requiring a minor officer to reject an option so tendered would not comport with the realities either of human nature or of corporate life. If the SEC had appealed the ruling dismissing this portion of the complaint as to Holyk and Mollison, I would have upheld the dismissal quite apart from the special circumstance that a refusal on their part could well have broken the wall of secrecy it was important for TGS to preserve. Whatever they knew or didn't know about Timmins, they were entitled to believe their superiors had reported the facts to the Option Committee unless they had information to the contrary. Stephens, Fogarty and Kline stand on an altogether different basis; as senior officers they had an obligation to inform the Committee that this was not the right time to grant options at 95% of the current price. Silence, when there is a duty to speak, can itself be a fraud. I am unimpressed with the argument that Stephens, Fogarty and Kline could not perform this duty on the peculiar facts of this case, because of the corporate need for secrecy during the land acquisition program. Non-management directors would not normally challenge a recommendation for postponement of an option plan from the President, the Executive Vice President, and the Vice President and General Counsel. Moreover, it should be possible for officers to communicate with directors, of all people, without fearing a breach of confidence. Hence, as one of the foregoing hypotheticals suggests, I am not at all sure that a company in the position of TGS might not have a claim against top officers who breached their duty of disclosure for the entire damage suffered as a result of the untimely issuance of options, rather than merely one for rescission of the options issued to them.^[30] [866] Since that issue is not before us, I merely make the reservation of my position clear.

II.

The second point, to me transcending in public importance all others in this important case, is the press release issued by TGS on April 12, 1964. This seems to me easier on the facts but harder on the law than it does to the majority.

No one has asserted, or reasonably could assert, that the purpose for issuing a release was anything but good. TGS felt it had a responsibility to protect would-by buyers of its shares from what it regarded as exaggerated rumors first in the Canadian and then in the New York City press, and none of the individual defendants sought to profit from the decline in the price of TGS stock caused by the release. I find it equally plain, as Judge Waterman's opinion convincingly demonstrates, that the release did not properly convey the information in the hands of the draftsmen on April 12, even granting, as I would, that in a case like this a court should not set the standard of care too high. To say that the drilling at Timmins had afforded only "preliminary indications that more drilling would be required for proper evaluation of this prospect," was a wholly insufficient statement of what TGS knew. Cf. Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 545 (2 Cir. 1962). Since the issue of negligence is open to full review, Mamiye Bros v. Barber SS. Lines, 360 F.2d 774 (2 Cir.), cert. denied, 385 U.S. 835, 87 S.Ct. 80, 17 L.Ed. 2d 80 (1965); Esso Standard Oil, S.A. v. S.S. Gasbras Sul, 387 F.2d 573 (2 Cir.), cert. denied, 391 U.S. 914, 88 S.Ct. 1808, 20 L.Ed.2d 653 (May 21, 1968), I see no need for a remand on that score. It is an equally needless exercise to require the district court to determine whether a reasonable investor would have been misled. The text of the release and the three point drop in the market price following its issuance in the face of press reports that would normally have led to a large and, as matters developed, justified increase, are sufficient proof of that.

The majority says that negligent misstatement by a corporation is enough for injunctive relief under Rule 10b-5 (2) in a proper case; it reserves the question, not here presented, whether the corporation is liable for damages. I think the remand should make crystal clear that the issue whether this is a proper case for an injunction remains open, and that with 49 private actions pending in the District Court for the Southern District of New York, see 258 F.Supp. 262, 267 n. 1 (1966), some of which may involve this issue, we should explicate more clearly why, despite the principle that a violation of the securities laws or regulations generally gives rise to a private claim for damages, see J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), violation of Rule 10b-5(2) may not do so under all circumstances, including those presented by the April 12 press release. The attention this case has received from the profession and our in banc consideration make it incumbent on us to give the district courts in our circuit as much guidance as we can.

A.

The consequences of holding that negligence in the drafting of a press release such as that of April 12, 1964, may impose civil liability on the corporation are frightening. As has been well said, of a situation where time pressures and consequent risks were less, "One source of perplexity as to the appropriate bounds of the civil remedy for misleading [867] filings is that any remedy imposed against the issuer itself is indirectly imposed on all holders of the common stock, usually the most important segment of the total category of investors intended to be protected." Milton Cohen, Truth in Securities Revisited, 79 Harv. L.Rev. 1340, 1370 (1967). Beyond this, a rule imposing civil liability in such cases would work directly counter to what the SEC has properly called "a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments." Securities Act Interpretation Release No. 3844 (Oct. 8, 1957). If the only choices open to a corporation are either to remain silent and let false rumors do their work, or to make a communication, not legally required, at the risk that a slip of the pen or failure properly to amass or weigh the facts — all judged in the bright gleam of hindsight — will lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers, most corporations would opt for the former.

The derivation of Rule 10b-5 is peculiar. Although the authority for the Rule comes from § 10(b) of the Securities and Exchange Act of 1934, the draftsmen turned their backs on the language of that section and borrowed the words of § 17 of the Securities Act of 1933, simply broadening these to include frauds on the seller as well as on the buyer. So far as concerns paragraphs (1) and (3), this is not very important since these are clearly within the ambit of § 10(b) and relate to frauds that would give rise to civil liability in any event. But the case stands differently as to paragraph (2). The only provision in either the 1933 or the 1934 Act that can be read to impose liability for damages for negligent misrepresentation without restrictions as to the kinds of plaintiffs, due diligence defenses, a short statute of limitations, or an undertaking for costs that were insisted on by the investment community, is § 17(a) (2) of the Act of 1933 — the source of Rule 10b-5(2).^[31] But there is unanimity among the commentators, including some who were in a peculiarly good position to know, that § 17(a) (2) of the 1933 Act — indeed the whole of § 17 — was intended only to afford a basis for injunctive relief and, on a proper showing, for criminal liability, and was never believed to supplement the actions for damages provided by §§ 11 and 12. See Landis, Liability Sections of Securities Act, 18 Am.Acct. 330, 331 (1933); Douglas and Bates, Federal Securities Act of 1933, 43 Yale L.J. 171, 181-82 (1933); 3 Loss, Securities Regulation 1785-86 (1961). When the House Committee Report listed the sections that "define the civil liabilities imposed by the Act" it pointed only to §§ 11 and 12 and stated that "[t]o impose a greater responsibility [than that provided by §§ 11 and 12] * * * would unnecessarily restrain the conscientious administration of honest business with no compensating advantage to the public." H.Rep.No.85, 73dCong., 1st Sess. 9-10 (1933). Once it had been established, however, that an aggrieved buyer has a private action under § 10(b) of the 1934 Act, there seemed little practical point in denying the existence of such an action under § 17 — with the important proviso that fraud, as distinct from mere negligence, must be alleged. See Fischman v. Raytheon Mfg. Corp., 188 F.2d 783, 787 n. 2 (2 Cir. 1951); Weber v. C. M. P. Corp., 242 F.Supp. 321, 322-325 (S.D.N.Y.1965) (Wyatt, J.); Thiele v. Shields, 131 F.Supp. 416, 419 (S.D N.Y.1955) (Kaufman, J.); but see Dack v. Shanman, 227 F.Supp. 26 (S.D. N.Y.1964). To go further than this, as [868] Professor Loss powerfully argues, Securities Regulation at 1785, would totally undermine the carefully framed limitations imposed on the buyer's right to recover granted by § 12(2) of the 1933 Act.

Even if, however, we were to disregard the teaching of Judge Frank in Fischman v. Raytheon Mfg. Corp., supra, 188 F.2d at 786, and follow the lead of those Circuits that seem to have discarded the scienter requirement in actions for damages under Rule 10b-5,^[32] Ellis v. Carter, 291 F.2d 270, 274 (9 Cir. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9 Cir. 1962); Kohler v. Kohler Co., 208 F.Supp. 808, 823 (E.D.Wisc.1962) (dictum), aff'd, 319 F.2d 634 (7 Cir. 1962); Stevens v. Vowell, 343 F.2d 374 (10 Cir. 1965); Myzel v. Fields, 386 F.2d 718 (8 Cir. 1967); we should not impose such expansive liability in a situation, markedly different from those considered in the cases just cited, where to do so would frustrate, not further, the larger goals of the securities laws. While I am not convinced that imposition of liability for damages under Rule 10b-5(2), absent a scienter requirement, even limited in the way just proposed, would not go beyond the authority vested in the Commission by § 10(b) to act against "any manipulative or deceptive device or contrivance" and be so inconsistent with the general structure of the statutes as to be impermissible, it is at least clear that the April 12 press release would be the worst possible case for the award of damages for merely negligent misstatement, as distinguished from the kind of recklessness that is equivalent to wilful fraud, see SEC v. Frank, 388 F.2d 486, 489 (2 Cir. 1968).

The issue here, however, is the different one of an injunction. Mr. Justice Goldberg noted in SEC v. Capital Gains Research Bureau, 375 U.S. 180, 193, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), that the elements of a cause of action for "fraud" vary "with the nature of the relief sought" and that "It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for money damages." See also Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2 Cir. 1968). It can, indeed, be argued that, even on this basis, Rule 10b-5(2), absent the reading in of a scienter requirement, goes beyond the authority granted by § 10(b) of the 1934 Act. However, it cannot be doubted that one of the most important purposes of the securities legislation was to prevent improper information being circulated by the issuer, and I therefore am not disposed to hold that Congress meant to deny a power whose use in appropriate cases can be of such great public benefit and do so little harm to legitimate activity.

B.

However, it does not necessarily follow that this is an appropriate case for granting an injunction as to future press releases. While we have often said that "a cessation of the alleged objectionable activities by the defendant in contemplation of an SEC suit will not defeat the district court's power to grant an injunction restraining continued activity," SEC v. Boren, 283 F.2d 312 (2 Cir. 1960), and cases there cited, it is likewise true that an isolated violation, especially in the absence of bad faith, does not require such relief. SEC v. Torr, 87 F.2d 446 (2 Cir. 1937). Absent much clearer language than is found in the 1934 Act, the entitlement of a plaintiff to an injunction thereunder remains subject to principles of equitable discretion. [869] The Supreme Court made this clear beyond peradventure in the leading case of Hecht Co. v. Bowles, 321 U.S. 321, 64 S.Ct. 587, 88 L.Ed. 754 (1944). See 3 Loss, Securities Regulation 1975-83 (1961). Here there is no danger of repetition of an unduly gloomy press release like that of April 12. The essence of the SEC's case is that Timmins was a once-in-a-lifetime affair; the company's motive in issuing the release was laudable; and the defect was solely a pardonable one of execution. If Judge Bonsal had denied a injunction on these grounds, I see no basis on which we could properly have reversed him. Instead he acted on the view, erroneous in the court's belief, that no violation of the Rule had occurred and he was thus without power to enjoin, 258 F.Supp. 296. Although I see no reason why we could not affirm nevertheless, I am content to leave it for him to consider whether, although he has power to issue an injunction, there is equity in this portion of the bill. My concurrence in the disposition of the press release issue assumes that such consideration is permitted.

IRVING R. KAUFMAN, Circuit Judge (concurring):

I concur in Judge Waterman's reasoned and thorough opinion and in the court's disposition of the instant appeal. I agree with Judge Friendly, however, that we should provide guidance to the District Courts with respect to pending private claims for damages based upon Rule 10(b) (5) arising out of the transactions now before us. And, I concur in as much as Part II of Judge Friendly's opinion as discusses the origins of the rule and the relevance of today's decision — involving only an application by the S.E.C. for an injunction — to private damage actions.

ANDERSON, Circuit Judge (concurring):

I concur in Judge Waterman's majority opinion and I concur in the discussion of law set forth in Part II of Judge Friendly's concurring opinion.

HAYS, Circuit Judge (concurring in part and dissenting in part):

I concur generally with Judge Waterman in his views as to the proper interpretation of Section 10(b) and Rule 10b-5 and as to the standards which are to be employed in the application of the statute and the rule.

With the exception of Stephens and Fogarty as recipients of stock options, I agree with the majority on the disposition of the cases involving individuals.

I do not agree on the remand of the issue with respect to Stephens and Fogarty as recipients of stock options. It seems to me clear that the injunction sought by the Commission should be granted.

The majority remand the case against the corporate defendant to the district court for a determination as to whether the April 12 press release was misleading and whether, if so, those responsible for the release used due diligence.

In my opinion the evidence establishes as a matter of law that the press release was misleading. Indeed, if the correct standard is applied, the finding of the trial court requires the conclusion that the press release was misleading:

"At 7:00 p. m. on April 9, those with knowledge of the drilling results had material information which it was reasonably certain, if disclosed, would have had a substantial impact on the market price of TGS stock."

The evidence in the record in support of this finding is overwhelming.

Assuming arguendo that the corporation cannot be enjoined except on a showing of lack of due diligence, since Fogarty and those who assisted him in the preparation of the press release were aware of the drilling results to which the district court's finding refers, they obviously did not use due diligence [870] in the preparation of the misleading press release.

I would grant the application for an injunction.

MOORE, Circuit Judge (dissenting) (with whom Chief Judge LUMBARD concurs):

In their opinion, the majority have become so involved in usurping the function of the trial court, in selecting the witnesses they (at variance with the trial court) choose to believe, in forming their own factual conclusions from the evidence (in disregard of Rule 52 (a)), in deciding with, of course, the benefit of the wisdom of hindsight, how they, had they been executives of Texas Gulf Sulphur Company (TGS), would have handled the publicity attendant to the exploration of the Timmins property, in determining (to their own satisfaction) the motives which prompted each of the individual defendants to buy TGS stock and in becoming mining engineering experts in their own right, that I find it desirable — in fact, essential — to state my opinion as to the fundamental jurisdiction of the Court of Appeals and the issues properly before us. Primarily, our task should be to review errors of law. Conversely, we are not a jury of nine with no requirement of a unanimous verdict.

If the facts are to be reappraised by an appellate court, they should be measured mutatis mutandis in accordance with the standard set for himself by an experienced and learned trial judge who stated his approach in a case charging directors with wrongdoing, as follows:

"The Court has endeavored * * to judge the transactions in issue in this case by the applicable legal standards but without the benefit of hindsight as to the facts." (Herlands, D. J., in Marco, etc. v. Bank of New York, 272 F.Supp. 636, 639 (S.D.N.Y., 1967).)

More, specifically, the Court in Marco said:

"The Court is asked by plaintiff, in effect, to substitute its judgment for that of the directors with respect to transactions affecting the internal affairs of the corporation in question. * * * As directors they were, of course, required to perform their duties in accordance with the high standards of fidelity, honesty and prudence applicable to fiduciaries." (p. 639)

The Securities and Exchange Commission (referred to as the "SEC" and "Commission"), as an agency of government, has the responsibility of prosecuting persons who, and corporations which, in its judgment have violated laws which the Congress has enacted for the praiseworthy purpose of protecting the public from securities frauds. However, as such an enforcement agency, where it assumes a plaintiff's role it must bear the evidentiary fair preponderance burden of all litigants and be subject to the rule that the determination of what evidence is "credible" is for the trial judge.

The Issues

The case logically and chronologically can be divided into two parts: (1) the purchase of TGS stock by individual defendants and stock options issued to them between November 12, 1963 and April 9, 1964, and (2) the TGS press release of April 12, 1964. The stock purchases by Clayton, Crawford and Coates on April 16, 1964, are considered later.

(1) In resolving the stock purchase issue, the primary factual inquiry must be concentrated on (a) the nature and extent of the knowledge possessed by, or available to, the purchaser on the date of purchase, and (b) the position of the purchaser in relation to TGS. The primary legal issue in substance is what duty, if any, rested upon the purchasers to disclose the knowledge they possessed at the time of purchase. The Commission argues that there was a failure to disclose material information. The trial court based its opinion largely [871] upon the lack of materiality of such exploration results as were known between November 12, 1963 and April 9, 1964.

(2) Was the TGS press release of April 12, 1964, false, misleading or deceptive within the meaning of Section 10(b) and Rule 10b-5 in the light of TGS' then knowledge and the then existing factual situation.

The Facts

By-passing momentarily the general knowledge possessed by the officers of TGS as to the far-flung nature of the company's operations, its heavy concentration in the sulphur field, its non-engagement in the field of copper mining, the adverse effect which low sulphur prices had had for many years on the company's earnings despite substantial sales and focusing attention solely upon the Timmins property, the participants in that exploration and the knowledge available to them, I find no factual disputes of importance.

On November 8, 1963, TGS, selecting the most promising area of the one-quarter section then controlled by it, referred to as Kidd 55, drilled an exploratory hole, 1 1/8 inches in diameter. All the information that was available upon the completion of the drilling, November 12, 1963, was contained in a core (denominated K-55-1) which was visually examined by Dr. Walter Holyk, Chief Geologist for TGS, and by Kenneth H. Darke, a TGS geologist. This core was unusually good in mineral content. The President, Claude O. Stephens, the Executive Vice-President, Charles F. Fogarty, and the Exploration Vice President, Richard D. Mollison, were notified, and Fogarty and Mollison flew to the drill site.

In order to acquire the other three-quarters of the K-55 segment, further drilling was discontinued except for one hole drilled to produce a barren core and the site was camouflaged. Thus, but for a chemicial assay made in December 1963 of contents of this same core, no other knowledge of the nature and possible extent of the area was available during the acquisition program.

Rule 52(a) should be given particular weight where expert testimony must of necessity play an important role. Here the trial court had an opportunity not only to hear the qualifications of the experts but also from their demeanor and responses to form its opinion as to their credibility. The importance of this opportunity to observe where technical or scientific problems are before the court, as here, has been succinctly stated by the Supreme Court in Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605, 70 S.Ct. 854, 94 L.Ed. 1097 (1950):

"Like any other issue of fact, final determination requires a balancing of credibility, persuasiveness and weight of evidence. It is to be decided by the trial court and that court's decision, under general principles of appellate review, should not be disturbed unless clearly erroneous. Particularly is this so in a field where so much depends upon familiarity with specific scientific problems and principles not usually contained in the general storehouse of knowledge and experience." (pp. 609-610, 70 S.Ct. p. 857)

* * * * * *

"It is not for this Court [the Supreme Court] to even essay an independent evaluation of this evidence. This is the function of the trial court. And, as we have heretofore observed, `To no type of case is this * * * more appropriately applicable than to the one before us, where the evidence is largely the testimony of experts as to which a trial court may be enlightened by scientific demonstrations. * * *' 336 U.S. 271, 274-5." (p. 611, 70 S.Ct. p. 857)

No more is it for this court to make an independent essay of the evidence or of the core. Wanting the knowledge requisite to making our own appraisal of the significance of the core, we must depend upon the experts. A correct decision in this case may well hang upon [872] their testimony and its credibility because what these observers knew or should have known between November 12, 1963 and April 9, 1964 is basic to a determination of what, if anything, should have been disclosed or whether it was "material."

For the defendants, Dean Forrester, Dean of the College of Mines of the University of Arizona and Director of the Arizona Bureau of Mines, said that "one hole is evidence of what you encounter only in that hole" and that even after K-55-3 was drilled in April 1964, it was "much more likely that the materials exposed in those two holes will extend for, let's say two feet outside the limits of the hole than it is likely that it will extend 25 feet or that it will extend 50 feet."

Dr. Park, former Dean of the School of Earth Sciences at Stanford, admitted that K-55-1 was "an interesting one, a good one" but that there was not "any evidence at all for any discussion of extent, from one drill hole." Dr. Lacy, head of the mining department of the University of Arizona, was of the opinion that "There is no basis for making any sort of prediction out from the hole."

Wiles, a consulting mining engineer, conceded that K-55-1 was a remarkable drill hole but that he could not estimate therefrom the probabilities of finding a commercially mineable body of ore, adding that he had had "the misfortune of having found a very attractive first hole and after drilling 52 around it got no more ore." Walkey, the manager of the Kamkotia, a mine some 12 miles distant from the Timmins property, testified that the geological composition of the Kamkotia and TGS areas was similar but that he could neither estimate nor say the chances were good of proving a substantial body of ore as a result of K-55-1.

Even the Commission's experts, Adelstein and Pennebaker, would not estimate what ore, if any, might lie beyond the 1 1/8 inch core.

Adelstein:

"I think assay value given for a drill hole, standing by itself without surrounding information, cannot be interpreted by itself as to what it really means."

Pennebaker:

Q. You certainly couldn't compute any tonnage from that single hole, could you? A. No sir.

Q. Nor could you compute any grade of ore beyond what was in the core itself? A. You are confined to what is in the core, sir.

[This witness did say that it was "inconceivable to expect the ore would quit immediately outside the drill hole, but you have no way of measuring how far it is going to go except the favorable implication of the anomaly."]

From this testimony, the trial court found:

"However, all the experts agreed that one drill core does not establish an ore body, much less a mine. Defendants' experts unanimously concluded that there is no way even to estimate the probabilities that one drill core will lead to the discovery of an ore body." 258 F.Supp. at 282.

Despite the experts' virtually uncontradicted testimony, despite Rule 52(a) and despite the Supreme Court's statement of the law, the majority choose to reject the trial court's findings as to the results of the first drill core, K-55-1, and to substitute their own expertise in the mining engineering field by holding that "knowledge of the possibility which surely was more than marginal of the existence of a mine of the vast magnitude indicated by the remarkably rich drill core located rather close to the surface (suggesting mineability by the less expensive open-pit method) within the confines of a large anomaly (suggesting an extensive region of mineralization) might well have affected the price of TGS stock and would certainly have been an important fact to a reasonable, [873] if speculative, investor in deciding whether he should buy, sell or hold."

Indeed, any such conclusions from a first drill core, if so announced by TGS, would undoubtedly have had a substantial effect on the market price of TGS stock and would have immediately brought forth both the wrath of, and injunction papers from, the Commission charging TGS with issuing false, misleading and unsupported statements to boost the price of the stock.

Factually, the premise posed by the majority is "clearly erroneous." There was no knowledge of the existence of a "mine." Even to the majority in their self-assumed fact-finding role, the "mine" was only a more than marginal "possibility." The testimony was unanimous that no estimate of "magnitude" could be made. The "large anomaly" did not suggest "an extensive region of mineralization" and furthermore TGS did not own or control it in any event. Its area was then limited to its one-quarter segment.

The majority read the record as conclusively establishing "that knowledge of the results of the discovery hole, K-55-1, would have been important to a reasonable investor and might have affected the price of the stock." But disclosure of the "results", namely, preliminary visual inspection of the contents, would have violated the Commission's own rules and standards. The Commission has specifically declared (Sch. I, Form 1-A, Reg. A offerings under the 1933 Act):

"No claim shall be made as to the existence of a body of ore unless it has been sufficiently tested to be properly classified as `proven' or `probable' ore, as defined below. If the work done has not established the existence of proven or probable ore, a statement shall be made that no body of commercial ore is known to exist on the property."

Item 8(A) (b), 1 CCH Fed.Sec.L.Rep. ¶ 7327.

The Commission has carefully defined the scope of sampling required to justify even estimates, as follows:

"The term `proven ore' means a body of ore so extensively sampled that the risk of failure in continuity of the ore in such body is reduced to a minimum. The term `probable ore' means ore as to which the risk of failure in continuity is greater than for proven ore, but as to which there is sufficient warrant for assuming continuity of the ore."

Id., Item 8(A) (c), 1 CCH Fed.Sec.L. Rep. ¶ 7327.

Thus under the Commission's own standards, TGS, if it revealed any information during the November 1963-April 1964 period, would have had to announce to the public in substance "TGS has drilled a 1 1/8" core on a one-quarter section owned by it in Timmins, Canada. Although the core appears to have excellent mineral content `no body of commercial ore is known to exist on the property.'" Contrast such a statement with the April 12, 1964 release so criticized by the Commission. Further contrast it with a hypothetical November 1963 press release implicitly suggested by the majority "TGS as a result of drilling on its property in Canada has knowledge of the more than marginal possibility of a mine of magnitude over an extensive region of remarkably rich mineralization." — a statement which under the circumstances and then known facts would have been the height of recklessness.

In fact, the Commission itself indulges in the very speculation it condemns for, after conceding that "the trial court correctly stated that one drill hole does not establish the existence of a commercially mineable mineral deposit," it straightway contends that the information which arose after the drilling of this first and only (for 4½ months) drill hole revealed such "chances of imminent success, viewed in the light of the magnitude of the potential economic benefit to Texas Gulf" as to require disclosure by insiders desiring to buy TGS securities.

[874] The Commission's position, consistent with its rules and regulations to protect the public from premature announcements which might well arouse speculative fervor are well expressed in its argument before this Court in its brief on appeal in Securities and Exchange Commission v. Great American Industries, Inc., et al., 259 F.Supp. 99, (S.D. N.Y.1966), where it said:

"Neither the Commission, the sellers nor anyone else knew or could establish the value of the [mining] properties since they had not been explored except in a very preliminary way. No one can prove the value of a largely unexplored mining prospect." (p. 19)

The conservative (and in my opinion proper) approach of the Commission in Great American is reflected in its statement that "The ore content of a property is never `known' until the ore has been completely removed and the minerals separated." This is probably an overstatement because by the time of the TGS April 16, 1964 press release, exploration had advanced to a point where an estimate of the extent of the tonnage might have been rather accurately made. The Commission in that case also stated two truisms (1) that "it is extremely important that all facts relevant to an estimate of the value of such property be disclosed," and (2) that "the judgment of the `value' of this property is dependent upon the results of exploratory work * * *." (Great American brief, pp. 22, 23)

On November 12, 1963 drilling of K-55-1 was terminated at 655 feet. The core of the drill hole contained relatively high percentages of copper and zinc and some silver, although the percentages at any given point fluctuated widely. This result undoubtedly "excited the interest" of the TGS exploration team. TGS decided to acquire the surrounding plots in the Kidd 55 area to enable it fully to investigate the anomaly. The attempt to acquire the adjoining properties at reasonable prices (ultimately $52,500) and the strictures on secrecy are customary in the mining industry, especially when dealing with land of a highly uncertain value. After all, TGS had prior experience in exploration where initially promising situations turned out to be "duds." For example, the company had spent some $7,000,000 to purchase an underwater dome off the coast of Texas and an additional $1,000,000 to drill 21 holes before concluding that there was not enough sulphur in the dome to be of commercial interest.

However, until drilling was resumed, nothing further was learned about the ore content of the property other than as revealed in November and December 1963 from the analysis of K-55-1. The trial court's finding as to this fact is unassailable:

"The most that can be said of the individual defendants' knowledge after the drilling of K-55-1 is that they had `hopes, perhaps with some reason,' that it would lead to a mine. James Blackstone Mem. Lib. Ass'n v. Gulf, M. & O. R. Co., 264 F.2d 445, 450 (7th Cir. 1959). The results of K-55-1 were too `remote' when considered in light of the size of TGS, the scope of its activities, and the number of its outstanding shares, to have had any significant impact on the market, i. e., to be deemed material." 258 F.Supp. at 283.

This conclusion is amply supported by the record. Kidd 55 was only one of several thousand anomalies (areas where there is unusual variation in the electrical conductivity of rocks) that TGS detected in its aerial exploration of the Canadian shield. Several hundred of these were considered worthy of further study and options on the land around them were acquired. The District Court found that "TGS had previously drilled 65 equally promising anomalies, but most of them had revealed either barren pyrite or graphite, while a few had shown marginal mineral deposits in insufficient quantities to be commercially mined." (258 F.Supp. at 271).

Against this factual background, what position should have been taken by those few officers and employees of TGS [875] after they knew of the core, K-55-1, and the reports thereon made after visual inspection and analysis? There were several choices. Knowing that the nature and extent of this prospect could not be measured until further exploration was conducted and that further exploration had to await additional land acquisition they could have made no announcement as was the case here.

Turning now to the hypothesis of disclosure: As previously stated, any announcement of the discovery of a remarkable mine would have been both false and misleading. The Commission, however, impliedly suggests for affirmative answer the question: "Whether the chances of imminent success, viewed in the light of the magnitude of the potential economic benefit to Texas Gulf" did not require disclosure by insiders of the status of the drilling [then only the first hole, K-55-1]? In the field of speculation, it would be interesting to know the position the Commission would have taken if TGS had announced that K-55-1 was "one of the most impressive drill holes completed in modern times" and that it "is just beyond your wildest imagination" (SEC Brief, p. 25). It requires no imagination to venture that such announcements might well have had the "wildest" impact on the market price of TGS stock.

Assuming the majority's and the Commission's full disclosure theory, would the facts as then developed have given the buying or selling public the so-called advantages possessed by the insiders? TGS could have announced by November 15, 1963 that it had completed a first exploratory hole, the core of which by visual examination revealed over a length of 599 of 655 feet drilled, an average copper content of 1.15%, zinc 8.64% or, had TGS waited until mid-December, by chemical analysis 1.18% copper, 8.26% zinc and 2.94% ounces of silver per ton; that TGS would try to acquire the other three-quarters of the segment unless the announcement boosted prices to unwarranted heights; that if the property could be acquired further exploratory holes would be drilled to ascertain the nature and extent, if any, of the ore body; that reports of developments would be made from time to time but that the SEC had indicated that TGS should advise its stockholders and the public that there was no proof as yet that a body of commercial ore exists on the property. Such an announcement would, of course, have been of no value to anyone except possibly a few graduates of Institutes of Technology and they, as the expert witnesses here, would have recognized that one drill hole does not reveal a commercially profitable mine.

The final question to be answered is: were these officers and employees disqualified as the result of possessing information gleaned by the first drill core from purchasing TGS stock? The number of possibilities for Congressional legislation and Commission rulings are legion. They extend over a gamut between definite extremes. At one extreme is a rule that no officer or employee or any member of their families shall own stock of the company for which they work or purchase stock if he possesses "material" inside information. This assumption raises the question of what is material and who is to make such a determination. Materiality must depend upon the facts and their resolution is for the fact-finder, court or jury. The majority state that the K-55-1 drilling results were material because they "might well have affected the price of TGS stock." But such a statement could be made of almost any fact related to TGS. If a labor strike had kept its plants idle for months, encouraging news of a possible settlement hoped for by the TGS labor negotiators might cause the negotiators to buy. Their belief that the strike would be protracted might cause them to sell. Either announcement might well have affected the market and would to those who bought or sold have seemed misleading and deceptive if the anticipated event did not come to pass. Yet the requirement of hourly bulletins to the press from the conference room would not be compatible with common [876] sense. Scores of day by day intra-company situations come to mind which in the individual opinions of company officers or employees might well affect the price of TGS stock, each individual reacting according to his own judgment. However, companies listed on a national exchange can scarcely broadcast to the nation on a daily basis their hopes and/or expectations from the developments in, for example, their research departments. An even more striking illustration would be found within the structure of a large pharmaceutical company where discoveries of panaceas to cure human disease occupies the workdays of thousands of scientists. Premature announcements of important discoveries would be branded as false and misleading if unfulfilled and all stock purchases made during the course of the research, if ultimately successful would be said to have been made with the advantage of inside information. At the other extreme is an equally easy-to-resolve Cady, Roberts^[33] situation where a definite fact (the reduction of the dividend) was known by an insider, who participated in the meeting where the decision had already been made, whose knowledge of the probable reaction of the market to such an announcement, namely, a substantial sell-off, caused him to leave the meeting ahead of everyone else and before the potential buyers learned of the bad news to foist his selling orders on the market and his stock on uninformed purchasers. Between these extremes there should be a rule of reason.

Faced with this problem, the trial court selected a period from November 12, 1963 (the first information) to some date after drilling was resumed when it might reasonably be said that a body of commercially mineable ore might exist. The trial court, accepting the Commission's experts' version, fixed 7:00 p.m. on April 9, 1964 as the time when TGS had material information which "if disclosed, would have had a substantial impact on the market price of TGS stock" but also found that "the drilling results up to 7:00 p.m. on April 9th did not provide such material information." These findings are clearly supported by the proof upon which the court relied.

Practically all TGS stock in question here was purchased between November 12, 1963 and April 8, 1964. What were the motives behind each of the purchases? Obviously, a subjective approach presents difficulties. A myriad of reasons would be given — hope that a commercially profitable mine would be found if further exploration proved the ore to be as promising as the core of K-55-1 (November 12, 1963); the development of a phosphate project and potash mine (November 15, 1963); the prediction of security analysts that there would be a turnabout in the price of sulphur stocks; the acquisition of Canadian oil properties (December 16, 1963); the new high level of free world sulphur use and output (December 30, 1963); the launching of the world's largest liquid sulphur tanker (December 30, 1963); the entry into service of a large liquid sulphur tanker for domestic shipments (January 18, 1964); the sulphur expansion program in Canada (February 8, 1964); the new four-year high in sales reached in 1963 (February 20, 1964); and the $2 per ton price increase for sulphur (April 1, 1964).

There can be little doubt but that those familiar with the results of K-55-1 were influenced thereby in making their purchases. The conclusion of the majority is based primarily on this assumption. They call it "a major factor in determining whether the K-55-1 discovery was a material fact" and say that this "virtually compels the inference that the insiders were influenced by the drilling results." To them, completely disregarding the trial court's findings and substituting themselves as a jury, these purchases are "the only truly objective evidence of the materiality of the K-55-1 discovery." In so holding, they confuse the inducing motive of the individual purchaser with knowledge of material [877] facts which ought to be revealed to the public at large. The inconsistency of the majority's position is immediately apparent. Those who purchased were apparently willing on the basis of the inconclusive first hole and other information to risk a certain amount of their funds in TGS stock, hopeful that future developments would be favorable. Their motive for purchase does not establish the materiality of the facts which influenced them. However, the importance of this case to the corporate and financial community centers around the news release, its timing and its content. It is unfortunate that the atmosphere surrounding this important issue has been so colored and in the collective mind of the majority so contaminated by the comparatively insignificant stock purchase issue.

The resolution, if such be possible, of the many problems presented in this field should be by rule, as definite as possible, formulated in the light of reality and not retroactive in effect as here. I understand that the Commission has conducted, or is conducting, hearings to enable it to learn the views of the many persons and corporations affected. Presumably the Commission will make recommendations to the Congress to give that body an opportunity to accept or reject after thoughtful debate such proposals as may be made. The companies, the securities of which are listed on exchanges, their employees and investing public alike should have some knowledge of the rules which will govern their actions. They should not be forced, despite an exercise of the best judgment, to act at their peril or refrain in terrorem from acting. As to a waiting period after the information regarded as "material" has been disclosed, any such time period should be specifically fixed by Congressional or Commission rule not retroactive in application. There is no proof here that the purchases of the defendants, even if motivated by hopes not then solidly grounded, raised or lowered the market or were manipulative, misleading, deceptive or were accomplished by false or fraudulent devices. The trial court after hearing and seeing the witnesses has resolved these factual issues and in my opinion its decision should be sustained.

Stock Options

On February 20, 1964 the stock option committee, which was not informed of the developments at Kidd 55, granted options to Stephens, Fogarty, Mollison, Holyk, Kline and a number of other top officers of TGS. Since only K-55-1 had been drilled at that point, the District Court correctly held that there was no duty of disclosure on the part of those receiving the options. Assuming arguendo that the information was material, those not in top management have no duty to disclose to the directors information already reported to their own superiors since they may reasonably assume that the information has been conveyed to the directors on the stock option committee. The District Court held that Holyk, Mollison and Kline were not in top management and that Kline was ignorant of the details of the drilling results, so as to them no violation of 10b-5 had been made out. The majority disagree as to Kline, placing him in top management along with Stephens and Fogarty, and holding that he had sufficient knowledge that his non-disclosure violated Rule 10b-5. Since the majority admit that Kline knew only that a hole containing favorable bodies of copper and zinc ore had been drilled in Timmins, it seems clear that he did not possess material information that had to be disclosed. That being the case, I find it unnecessary to decide whether or not Kline was in "top management."

As to Stephens and Fogarty, the majority decision places insider recipients of stock options in a difficult dilemma. Under the majority's decision, an insider must perform the uncommon act of refusing such an option, promoting speculation as to the reasons therefor, or accept the option and face possible 10b-5 liability. The objective of protecting a corporation from selling securities to insiders at a price below their true worth [878] is fully served by requiring nondisclosing insiders to abstain, not from accepting the stock options, but merely from exercising them — an event likely to occur after the inside information has become public. In any case, the failure to exercise an option is less likely to suggest that the insider possessed material information than the failure to accept such an option. Since the option granted to Kline had not been exercised prior to its ratification by the Texas Gulf directors on July 15, 1965, after full disclosure, there can be no 10b-5 violation as to him, and rescission of the option he received should not be ordered. As Stephens and Fogarty have surrendered the options and the corporation has canceled them, there has certainly been no violation of 10b-5 by them with respect to those options.

The April 12, 1964 Press Release

The majority suggest with, in my opinion, most remarkable business naivete that, instead of the April 12, 1964 press release which the trial court had found as a matter of fact had been issued in the exercise of "reasonable business judgment under the circumstances," in their 1968 judgment "it would have obviously been better to have specifically described the known drilling progress as of April 10th by stating the basic facts." They also suggest that "[s]uch an explicit disclosure would have permitted the investing public to evaluate the `prospect' of a mine at Timmins without having to read between the lines to understand that preliminary indications were favorable — in itself an understatement." Had TGS followed this ex post facto directive, it first would have had to find some news medium capable of reaching the nation's potential investing public and willing to publish a mass of metallurgical reports disclosing the "basic facts." Any such procedure would have invited the initial question on cross-examination of TGS officials: How could any such "explicit disclosure" have permitted the investing public to evaluate the prospect of a mine, without the necessity of transmitting it for expert opinion to some School of Mines? Of course there would be but one answer: It could not.

The facts as established between the date of the resumption of drilling and the drafting of the release are as follows:

On March 31, 1964 TGS moved four drill rigs onto the property, and by April 10th all were in operation. On Friday morning, April 10th, Mollison and Holyk visited the property and learned the results of the drilling up to that time. Mollison left for New York that evening, arriving on Saturday morning. Holyk left for New York Saturday morning and arrived that same day. Until Saturday morning TGS did not intend to issue a press release on the progress of the exploration.

Despite rumors in the Canadian press that TGS had made a major discovery, Lamont had advised Stephens "that TGS should take no action unless the rumors reached the New York press or until TGS had sufficient information available to issue an appropriate press release." 258 F.Supp. at 293. On Saturday morning, April 11th, both the New York Herald Tribune and the New York Times prominently reported a major ore discovery. In a front page article carrying the title "Canada's Copper Rush" the Herald Tribune stated "The biggest ore strike since gold was discovered more than 60 years ago in Canada has stampeded speculators to the snowbound old mining city of Timmins * * *." The article also stated that the richness of the copper was so great that the core was flown out of the country to be assayed and that four more drill rigs were scheduled to start working the following week. All of these statements were inaccurate and a matter of concern to Fogarty and Stephens.^[34] Stephens advised Fogarty [879] that TGS should issue a press release to clarify the rumors that Fogarty therefore contacted Mollison who had just returned from Timmins.

Mollison had been advised by Holyk as to the drilling results up to 7:00 p.m. on April 10th. On the basis of this information he, as an experienced mining engineer, did not feel that there was sufficient information to draw conclusions as to size and grade of ore, and he advised Fogarty accordingly.

The District Court held:

"In seeking the advice of Mollison, the head of TGS's exploration group, in consulting with TGS's public relations firm, and in clearing the release with one of TGS's lawyers, Stephens and Fogarty exercised reasonable business judgment under the circumstances." 258 F.Supp. at 296.

The press release was drawn up with the aid of the above-mentioned persons on Saturday and Sunday morning, and was delivered to the press on Sunday for publication in the Monday papers. It stated in part:

"Recent drilling on one ore property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this prospect. The drilling done to date has not been conclusive, but the statements made by many outside quarters are unreliable and include information and figures that are not available to TGS.

"The work done to date has not been sufficient to reach definite conclusions and any statement as to size and grade of ore would be premature and possibly misleading. When we have progressed to the point where reasonable and logical conclusions can be made, TGS will issue a definite statement to its stockholders and to the public in order to clarify the Timmins project."

The majority offer suggestions for improving the press release, but, as their editorial skills and present appraisal of the then mining situation were not available when it was drafted, the relevant issue is whether the District Court was in error in determining that the release was accurate and not misleading.

By 7:00 p.m., April 10, the following data was available:

1. geologists' logs of visual estimate and chemical assay of the results of K-55-1,

2. preliminary estimates of 757 feet of K-55-3 and unrecorded visual estimates of 569 feet of K-55-6, both drilled on the same line as K-55-1 (2400 S),

3. unrecorded visual appraisals of 476 feet of K-55-4, drilled 200 feet to the south of K-55-1, and

4. unrecorded visual appraisals of only 97 feet of K-55-5, drilled 200 feet to the north of K-55-1.

The Commission's experts testified that because copper and zinc had been found in these five holes (although in varying percentages) it could reasonably be concluded that the mineralization was continuous between holes 400 feet apart and also 100 feet byond in each direction and to a depth of 600 feet, one hundred feet below the deepest hole. However, the District Court found that:

"TGS's experts were unanimously of the opinion that at 7:00 p. m. on April 10 the Kidd 55 segment was still a prospect and that no estimates as to proven or probable ore could be made. They all agreed that the April 12 press release accurately set forth the situation as it was known at the time. None thought that TGS could have estimated proven ore, and the Commission's expert, Pennebaker, agreed that this was a matter on which there could be differences of opinion. Defendants' experts testified that on the basis of the drilling to that time there was no assurance of continuity in the mineralized zone and that, without further [880] drilling, the results of one hole could not be correlated with the results of others." 258 F.Supp. at 295.

The April 12 release therefore correctly described Kidd 55 as a "prospect." While that term is a word of art in the mining trade used to describe "a property where there is no assurance, from the information known, that a commercially mineable ore body exists" [Pennebaker], its technical definition is no different from the definition in common use. See Webster's New International Dictionary (2d ed. unabridged 1960). Nor is there any inconsistency between the release and the District Court finding that as of April 9, 1964, "there was real evidence that a body of commercially mineable ore might exist." 258 F.Supp. at 282 (emphasis added). The District Court characterized the press release as an accurate portrayal of the situation as it was known at that time. The inference is therefore inescapable that the Court felt that a reasonable investor would not be misled by it. The Commission's whole argument appears to be that the release should have been more optimistic (if conclusions were to be used at all), and that it should have referred to Kidd 55 as having "proven" or "probable" ore. But such a press release would have been highly misleading since the information necessary to draw such conclusions was not available on April 10 — according to the TGS witnesses whom the District Court chose to believe.

As evidence that the April 12 release was probably inaccurate, the majority point to the fact that only three days later TGS prepared the April 16 release which announced a major mineral discovery. However, this release was based on more information of significance than was available on April 10 at 7:00 p.m. Between April 12 and April 15 five additional holes had been drilled, K-55-5, 6, 7, 8 and 10 and by April 15 at 7:00 p. m. 5198 feet of core had been drilled compared with 2776 feet on April 10. Furthermore, the location of drilling holes is critical in determining continuity. Most of the footage drilled by April 10 had been in a single plane (2400 S), but by April 15 drilling had established mineralization in a number of additional planes. There is therefore no inconsistency in the statements made and the conclusions reached in the two releases.

The majority remand for a determination of the effect of the April 12 release on a reasonable investor because "they cannot `definitively conclude that it was deceptive or misleading to the reasonable investor, or that he would have been misled by it.'" The evidence of the actual effect of the release on investors was at best inconclusive. The Commission offered no proof that anyone was misled by the release — e. g. testimony tending to show that most investors thought the release meant that TGS had no hopes of making an ore discovery. Those that had been advised by the broker Roche to purchase stock did not sell upon reading the April 12 release. Several brokers testified that they interpreted the release as affirmative and encouraging. The market opened at 30 1/8 on the 13th (when the release became public) and closed at 30 7/8 — scarcely a sign of public pessimism. The next day the market closed at 30¼. The District Court correctly found that "the issuance of the release produced no unusual market action." 258 F.Supp. at 294. Nor did he find the release to be "gloomy." His statement was that: "While, in retrospect, the press release may appear gloomy or incomplete, this does not make it misleading or deceptive on the basis of the facts then known." 258 F.Supp. at 296. With the aid of hindsight the release may indeed seem gloomy, but that is because it is now known that a very substantial tonnage of ore exists. Hindsight, however, is not the test. Furthermore, even if some investors considered the release to be discouraging compared to the rumors afloat, if the facts and conclusions presented were accurate (as they were) and if they were not presented in a manner that would mislead a reasonable investor (which they were not) then there can be no violation of 10b-5.

[881] The District Court aptly pointed out that in quelling the rumors TGS had to proceed with caution:

"If they said too much, they would have been open to criticism and possible liability if it turned out that TGS had not discovered a commercial mine. If they said too little and later announced a mine, they subjected themselves to the charge that their press release was misleading or deceptive — and, indeed, this is what has happened." 258 F.Supp. at 296.

While it thus might have been "safer" for TGS to have issued a sheaf of drilling results and mineral analyses (which the press would probably have declined to print), "they would have [thereby] encouraged the rumor mill which they were seeking to allay." (Ibid.) Stephens and Fogarty decided that the best course was to give their evaluation of the situation — a reasonable business judgment that should not incur 10b-5 liability unless their evaluation was either false or misleading. The experts which the trial court credited were of the opinion that Kidd 55 was accurately portrayed as a prospect which required further exploration. The trial court found that the release was not "misleading or deceptive on the basis of the facts then known," and the majority state that from the record they cannot "definitively conclude that it was deceptive or misleading to the reasonable investor." It would therefore appear that the Commission has failed in its burden of proof, unless it can be said that TGS was negligent in not obtaining later data from Timmins before issuing the release.^[35]

Of necessity the April 12 press release had to be issued on the basis of the drilling results through 7:00 p. m., April 10, and it seems clear that the trial court determined that it would not be reasonable to charge TGS with knowledge of later information. While additional drilling was done on Saturday and Sunday, April 11 and 12, the cores had not been seen by the geologists advising management, and there was no way of communicating with the drill site even if someone had been available there to give a reliable appraisal. Mollison and Holyk were in New York for the weekend, and there was no telephone at the site — the only way to communicate with the site was to go there. The decision to issue a press release was not made until Saturday, at which point Fogarty testified it "would just be very difficult for us to try to find anyone in Timmins." The statement was released Sunday afternoon and Mollison and Holyk were asked "to return to Timmins as promptly as possible and to move things along." It therefore cannot be said that TGS was negligent in not obtaining more current data, and it is certainly not negligent simply because it decided to issue the statement when it did. A remand on this point is therefore not justified.

The "in connection with" Clause Precludes the Imposition of § 10(b) Liability on TGS.

In any event, the Commission still has the problem of showing that the other requirement of the statute and rule is met, namely that the release was issued "in connection with" a securities transaction on the part of TGS. This requirement is explicit in § 10(b) of the Act (15 U.S.C. § 78j) which provides:

It shall be unlawful for any person * * *

(b) To use, or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

[882] Pursuant to this authority the Commission in 1942 promulgated Rule 10b-5 (17 C.F.R. § 240.10b-5) which states:

Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person * * *

(a) to employ any device, scheme, or artifice to defraud,

(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) 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.

In determining whether the requisite "connection" to a securities transaction was present in this case, the District Court found:

"From the foregoing, it is apparent that the purpose of the April 12 press release was an attempt to meet the rumors which were circulating with respect to the Kidd 55 segment. There is no evidence that TGS derived any direct benefit from the issuance of the press release or that any of the defendants who participated in its preparation used it to their personal advantage. The issuance of the release produced no unusual market action. In the absence of a showing that the purpose of the April 12 press release was to affect the market price of TGS stock to the advantage of TGS or its insiders, the issuance of the press release did not constitute a violation of Section 10(b) or Rule 10b-5 since it was not issued `in connection with the purchase or sale of any security.'" 258 F.Supp. at 294.

The District Court held that if TGS or its insiders had purchased TGS stock after issuing the allegedly misleading press release, the inference could be drawn that it was issued to reduce the price of the stock to facilitate purchases at bargain prices. Such a deceptive or manipulative practice would be prohibited by 10(b) and Rule 10b-5. See Gann v. Bernz-Omatic, 262 F.Supp. 301 (SDNY 1966); Cochran v. Channing Corp., 211 F.Supp. 239 (SDNY 1962). Moreover, noting that the "in connection" clause has been broadly construed, the District Court did not require that stock purchases by TGS or insiders be shown. Instead, the court held that "the issuance of a false and misleading press release may constitute a violation of Section 10(b) and Rule 10b-5 if its purpose is to affect the market price of the company's stock to the advantage of the company or its insiders. Freed v. Szabo Food Serv., Inc., CCH FED.SEC.L.REP. ¶ 91,317 (N.D.Ill. 1964)." 258 F.Supp. at 293. Thus, even if TGS or its insiders had not engaged in securities transactions, if there were evidence from which it could be inferred that the press release was intentionally issued to depress the price of the stock as part of some fraudulent scheme, a 10b-5 violation would have been stated.^[36] But in this case the only purpose of the press release was to quell the extravagant rumors circulating about the Canadian exploration project. No facts whatsoever were adduced which would have justified a finding that the release was issued for a fraudulent or manipulative purpose. To hold that such a statement incurs 10b-5 liability is contrary to the intent of Congress in passing § 10(b) and settled judicial construction. Furthermore, such a holding might well have the unfortunate result of deterring the dissemination of corporate news despite the strong policy underlying all securities legislation of encouraging disclosure of information useful to present and potential investors. If press releases have to read like prospectuses to guard against possible 10b-5 liability, it is safe to predict that they will quickly fall out of favor with corporate management.

The Commission advances the argument (successful with the majority) that [883] the "in connection" requirement is satisfied by the mere fact that the public is purchasing and selling securities on the open market. Thus any statement issued by a publicly listed company is made "in connection" with the purchase or sale of securities. The majority approve of this interpretation because "the investing public may be injured as much by one's misleading statement containing inaccuracies caused by negligence as by a misleading statement published intentionally to further a wrongful purpose." However, the fact remains that § 10(b) of the Securities Exchange Act was not passed to protect investors from the former type of injury, but leaves liability for such misrepresentation up to state law, which is well equipped to handle any such situation. See, e. g., Note, Accountant's Liabilities for False and Misleading Statements, 67 Colum.L.Rev. 1437 (1967). Section 10(b) was certainly not intended to be a mandate to the Commission to erect a comprehensive regulatory system policing all corporate publicity, as the majority now contend. The legislative history clearly reveals that the statute was passed to prohibit deceptive and manipulative devices used in connection with securities transactions, and that the "connection" between the complained of conduct and the securities transactions must be a closer one than the majority now sanctions. See S.Rep.No.792, 73rd Cong., 2d Sess. (1934); H.R.Rep.No. 1383, 73rd Cong., 2d Sess. (1934); S. Rep.No.1455, 73rd Cong., 2d Sess. (1934); Comment, 74 Yale L.J. 658, 681-82 (1965).

The broad congressional purpose in passing the Securities Exchange Act of 1934 is set forth by Thomas G. Corcoran, one of the draftsmen of the bill that became the 1934 Act. He stated at a 1934 House hearing that "this bill has at bottom five ideas in it, and all 36 pages tie in around the five ideas." According to Corcoran these five ideas were (1) control on the amount of credit, (2) control of manipulations, (3) control of insider trading [§ 16(b)], (4) elimination of abuses in the market machinery, and (5) the establishment of the Securities Exchange Commission to administer the Act. As to manipulation, he testified that:

"As I will point out later, there are only a very few real battlegrounds in this act. Manipulation is not one of them. The provisons of this bill, as to manipulations upon stock exchanges, are agreed to practically everywhere, * * * Matched orders, washed sales, pools, options — all of the rest of them are out. So, control of manipulative practices is really not something your committee has to thrash out around this table."^[37]

It is therefore not surprising that there is little discussion in the legislative history as to the meaning of the language in the anti-manipulation provisions. It was obviously thought that sections outlawing devices that had been shown at great length to be deleterious did not require any lengthy explication. This is unfortunate because it has resulted in § 10(b) being given a construction and significance which, in my opinion, Congress did not foresee and did not intend.

This conclusion is fortified by the provisions of the Act dealing with manipulation since the more specific prohibitions make it clear what evils Congress intended to eradicate by § 10(b). Section 9, 15 U.S.C. § 78i provides that it shall be unlawful for any broker, dealer or other person to create a false or misleading appearance of activity in the market for a stock or to attempt to affect the price of a stock by certain specific manipulative devices.

Section 10(a), 15 U.S.C. § 78j provides:

Manipulative and Deceptive Devices

It shall be unlawful for any person * * *

(a) To effect a short sale, or to use or employ any stop-loss order in connection [884] with the purchase or sale, of any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Read in context it seems clear that § 10 (b) was only meant to be a supplement to the specific prohibitions contained in § 9 and § 10(a). Commenting on the section that became § 10(b), Corcoran stated:

"Subsection [b] says, `Thou shalt not devise any other cunning devices.' * * * Of course subsection [b] is a catch-all clause to prevent manipulative devices. I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices."

Since the manipulative devices outlawed by § 9 all involve fraudulent activities integrally related to securities transactions, the conclusion necessarily follows that the "other cunning devices" sought to be prohibited by § 10(b) and Rule 10b-5 are those which also involve securities transactions as an integral part of the fraud. The statute as enacted requires that the fraudulent scheme be "in connection with the purchase or sale of any security." The expression "in connection" is used elsewhere in the Act, including § 9(b), as a shorthand method of indicating that the activity sought to be made illegal is that having a direct relation to securities transactions. The majority read the phrase as merely requiring that the allegedly misleading statement be issued by a publicly traded corporation. They argue that the "connection" that has to exist between a corporate statement and a security transaction is supplied by the theoretical argument that every "material" corporate statement presumably affects the market price of the issuer's securities. In my opinion such a broad interpretation of the statute is unwarranted as a matter of statutory construction and unwise as a matter of policy.

Congress has made it clear in the other antifraud provisions of general application that its concern was not with allegedly misleading corporate publicity but rather with purposeful schemes to deceive and defraud the public by means of manipulative and deceptive devices which directly involve purchases or sales of securities. Thus § 12(a), 15 U.S.C. § 77l of the 1933 Act provides that any person who "offers or sells a security" by means of a prospectus or oral communication which includes a misstatement or omission of a material fact shall be civilly liable. Similarly § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), provides that it "shall be unlawful for any person in the offer or sale of any securities" to engage in fraudulent activity.

A further insight into the proper scope of 10b-5 can be gained by examining § 17 (a), 15 U.S.C. § 77q(a) which is almost word for word the same except for the explicit requirement that any alleged fraud be associated with "the offer or sale of * * * securities." The only difference of substance between § 17(a) and Rule 10b-5 is that the latter applies to purchasers as well as sellers. Ellis v. Carter, 291 F.2d 270, 272-274 (9th Cir. 1961); SEC Sec.Exch.Act Rel. No. 3230 (May 21, 1942) ("The new rule closes a loophole in the protection against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase."); Milton Cohen, "Truth in Securities Revisited," 79 Harv. L.Rev. 1340, 1364 (1966).

Finally, § 15(c) (1), (2), 15 U.S.C. § 78o(c) (1), (2) provides that no broker or dealer shall (1) induce the purchase or sale of any security by means of any manipulative, deceptive or other fraudulent contrivance or (2) attempt to induce the purchase or sale of any security "in connection with which such broker or dealer engages in any fraudulent, deceptive, or manipulative act or practice * * *."

The majority argue that when compared with the above provisions the slight change of wording in § 10(b) — the insertion of the phrase "in connection with [885] * * *" — indicates that Congress intended a revolutionary change in the whole thrust of the securities laws. That is too slim a basis to support a judicial excursion over such uncharted seas. It is most doubtful that Congress intended such a result, and the merits of such a change are so unexplored that Congress should certainly be consulted before making it.

The majority support their action in part by a long quotation from H.R.Rep. No.1383. It should be noted that the discussion at that point of the report is not addressed to § 10(b) but to the reporting and disclosure provisions of Securities Exchange Act of 1934, specifically §§ 12-14, 16. Section 12 of the Act, 15 U.S.C. § 78l, requires the registration of securities traded on a stock exchange and of certain other widely held securities. Detailed information similar to that required by the 1933 Act has to be filed with the Commission for such registered securities, and this information is required by § 13, 15 U.S.C. § 78m, to be kept "reasonably current" by periodic and other reports filed with the Commission and the stock exchanges. In addition § 16(a), 15 U.S.C. § 78p(a), requires certain officers, directors and major shareholders to file reports with the Commission and the stock exchanges as to their initial holdings of stock and subsequent changes. Finally, pursuant to § 14, 15 U.S.C. § 78n, the Commission has promulgated proxy rules setting forth information that must be sent to shareholders prior to their annual or other meetings. See Schedules 14A-14C, 17 C.F.R. § 240.14a-101-103.

To encourage compliance with these disclosure and reporting requirements, Congress enacted civil (§ 18, 15 U.S.C. § 78r) and criminal (§ 32, 15 U.S.C. § 78ff) provisions. A close reading of § 18 will demonstrate that a plaintiff proceeding under that section (as opposed to § 10(b)) does not have to show that the misleading statement was issued by a person [or corporation] who engaged or participated in a securities transaction or even that the misstatement was intended to influence securities transactions as part of some fraudulent scheme. Therefore, the statements in the legislative history applicable to the reporting and disclosure provisions have no bearing on the correct interpretation of § 10 (b). That section was not meant to be an auxiliary disclosure device or a provision to punish those who issue inaccurate statements in newspapers or documents filed with the Commission unless they are fraudulent acts integrally connected with securities transactions. If there is no such connection, investors are relegated to § 18 or state law to recover their losses and the Commission must use its other remedies, discussed infra.

In discussing Rule 10b-5 Cohen expressed concern which, as a result of the majority opinion, seems to have been well founded, that Rule 10b-5 would be given an "unwarranted" extension. In "Truth in Securities Revisited," op. cit. supra, at 1366, he said:

"Nor is it clear that Rule 10b-5 will not be read as providing an alternative remedy (alternative to the considerably more limited express remedy of section 18) for false or misleading statements in filing under sections 12 and 13. One might regard these as surprising and even unwarranted extensions of Congress's terse proscription of `any manipulative or deceptive device or contrivance' in section 10(b) and yet not care to predict confidently that the momentum of decisions will not carry this far."

* * * * * *

"* * * I firmly believe that whatever inadequacy is found in § 18, as the basic civil liability provision applicable to the continuous disclosure system, ought to be taken care of by direct amendment of the section itself, not by resorting to the broader, vaguer, but (in my view) otherwise directed provisions of Rule 10b-5. I believe that the problem of misrepresentation in a registrant's (issuer's) required filings is quite distinct from the problem of fraud or misrepresentation by a purchaser or seller of a security (even [886] though the two areas sometimes overlap), and that more mischief than good is likely to come from confusing them or treating them as interchangeable."

(Cohen, op. cit. supra at 1370, n. 89)

The majority opinion must also be considered in light of its overall impact before a decision can be reached as to its advisability (assuming that the power to interpret § 10(b) is as unlimited as the majority apparently believe). It should be realized that the construction given 10b-5 will turn it into a comprehensive regulatory provision applicable to all corporate and individual statements, but without any of the detailed standards necessary to implement such a program. The Commission is presently arguing that 10b-5 is applicable to all corporate statements disseminated to the public or filed with the Commission. See S. E. C. v. Great American Industries, Inc., 259 F. Supp. 99 (S.D.N.Y.1966), appeal pending; Heit v. Weitzen, 260 F.Supp. 598 (S.D.N.Y.1966), Howard v. Levine, 262 F.Supp. 643 (S.D.N.Y.1965), consolidated appeal pending sub nom. Heit v. Weitzen (amicus curiae). The majority opinion appears to approve of the Commission's position without reservation.

The Commission's arsenal of weapons for fighting misleading statements has certainly not been shown to be insufficient for it to carry out the tasks that Congress assigned to it. Rule 10b-5 remains a potent method of proceeding against fraudulent schemes which involve securities transactions for both the Commission and private investors. The Commission can also obtain injunctions to enforce compliance with the disclosure and other provisions of the Securities Exchange Act (§ 21, 15 U.S.C. § 78u), and stiff criminal penalties are provided for failure to comply with the statute or rules promulgated thereunder (§ 32, U.S.C. § 78ff). The Commission can suspend trading for successive periods of 10 days in any security which it feels is being affected by misleading press releases (§§ 15 (c) (5), 19(a) (4), 15 U.S.C. §§ 78o(c) (5), 78s(a) (4)). For an example of the effective use of this latter power see SEC Sec.Exch.Act Rel. No. 7741 (Nov. 4, 1965) relating to suspension in trading of Belock Instrument Corporation, a defendant in Heit v. Weitzen, supra. Finally, when faced with the repeated issuance of misleading press releases, the courts can without more proof draw the inference that they were purposefully distributed to affect the price of the issuer's securities, justifying injunctive relief under 10b-5 and possibly other remedies. See SEC v. Electrogen Industries, Inc., 68 Civ. 23 (E.D.N.Y. Feb. 26, 1968). In any event if the Commission feels that its arsenal should be augmented, Congress not the courts is the proper forum for its arguments.

Other Judicial Interpretation

The construction given the "in connection" clause by the District Court has been followed in the many cases that have considered the point. See SEC v. North American Research & Development Corp., 280 F.Supp. 106 (S.D.N.Y. Feb. 8, 1968); Puharich v. Borders Electronics Co., Inc., 1968 Fed.Sec.L.Rep. ¶ 92,141 (S.D.N.Y. Jan. 24, 1968); Howard v. Levine, 262 F.Supp. 643 (S.D.N.Y. 1965), appeal pending; Gann v. BernzOmatic, 262 F.Supp. 301 (S.D.N.Y. 1966) (dictum); Heit v. Weitzen, 260 F.Supp. 598 (S.D.N.Y. 1966), appeal pending.

It is of course true, as the Commission points out, that the "in connection" clause has been given a broad construction by the courts in line with the remedial nature of securities legislation (see SEC v. Capital Gains Bureau, 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1965); cf. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967)), but no case supports the Commission's position that it is in effect meaningless. The cases to date have involved defendants who if not actually purchasing or selling securities at least participated in a direct manner in a securities fraud.^[38] Thus one who conspires with or aids and abets another in the [887] fraudulent purchase or sale of securities may have the needed connection. See Pettit v. American Stock Exchange, 217 F.Supp. 21 (S.D.N.Y. 1963) (Defendant Exchange and its officers allegedly aided and abetted an illegal distribution of stock by its failure to take necessary disciplinary actions against abusive conduct and practices of its employees of which they knew or should have known. Held: sufficient allegation of fraud under 10b-5); Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673 (N.D.Indiana 1966) (Defendant corporation allegedly aided and abetted an alleged violation of 10b-5 by its brokerage firm because of its failure to report the improper activities of said firm to the proper authorities. Held: cause of action stated under 10b-5).

Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. See Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964) (Corporation allegedly defrauded into issuing securities to its President through the failure or refusal of some of its directors fully to disclose to the remaining directors material facts concerning the transactions or the financial condition of the company); Bredehoeft v. Cornell, 260 F. Supp. 557 (D.Ore.1966) (Plaintiff induced to sell his stock to the corporation for less than its true value because the defendants, stockholders and directors of the company fraudulently concealed material facts); New Park Mining Co. v. Cranmer, 225 F.Supp. 261 (S.D.N.Y. 1963) (Defendants caused plaintiff corporations, of which they were officers, to issue stock for property which was worth much less than the stock); cf. H. L. Green Co. v. Childree, 185 F.Supp. 95 (S.D.N.Y. 1960) (Accountants allegedly induced corporation to go through with a merger (a securities transaction) by preparing false financial statements and making other misrepresentations).

A corporation may itself violate Rule 10b-5 if it engages in fraudulent activities in connection with a merger or other transaction involving securities. See Freed v. Szabo Food Service, Inc., '61-'64 CCH Fed.Sec.L.Rep. ¶ 91,317 (N.D.Ill. 1964) (Corporation, as part of a campaign to boost the value of its stock to achieve stockholder approval of a merger, deliberately issued statements misrepresenting future combined earnings. The price went up and the shareholders were impressed with this indication of the opinion of the financial community as to the proposed merger. The plaintiffs were held to have stated a cause of action under 10b-5 because they allegedly bought stock in the combined company on the strength of those misrepresentations.); cf. Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. 1967) (Corporation fraudulently arranged a merger so that one class of shareholders would receive much less than the other class which was comprised of officers and directors. While the alleged fraudulent acts were committed before plaintiff sold his stock (he had not at the time of suit), he was about to be forced to sell his part of a single fraudulent scheme.).

Another series of decisions involve a broker, dealer or financial institution which fraudulently induced plaintiff's purchase or sale. See Stockwell v. Reynolds & Co., 252 F.Supp. 215 (S.D.N.Y. 1965) (Plaintiffs retained stock in a company solely because a broker misrepresented or failed to disclose certain material facts.); Glickman v. Schweickart & Co., 242 F.Supp. 670 (S.D.N.Y. 1965) (Broker induced plaintiff to purchase some stock and to finance the purchase through a factor without disclosing material facts concerning the risks of such a procedure.); Cooper v. North Jersey Trust Co., 226 F.Supp. 972 (S.D.N.Y. 1964) (Trust company alleged to be a participant in a fraudulent scheme whereby loans were made to plaintiff by [888] a factor who converted the stock when it was pledged as collateral for the loan.); Meisel v. North Jersey Trust Co., 218 F.Supp. 274 (S.D.N.Y. 1963) (same); Lorenz v. Watson, 258 F.Supp. 724 (E. D.Pa.1966) (Brokerage house liable to plaintiff if it failed to supervise adequately one of its employees who allegedly was guilty of "churning" or excessive turnover in plaintiff's account.). See also §§ 9(a) (4), 15(c) (1), (2), 15 U.S. C. §§ 78i(a) (4); 78o(c) (1), (2). In all of the above cases the defendants, unlike the defendant here, were clearly participants in a securities transaction and were guilty of or responsible for deceptive activities of which the securities transaction was an integral part.

The Injunction Remedy

The remedy of a permanent injunction against the company, its officers and agents, the issuance of which the majority leaves to the discretion of the trial court, would not only be inappropriate but would be destructive of fundamental rights — "inappropriate" because based upon one "too-gloomy" press release on April 12, 1964, with no proof of continuing gloominess thereafter. The issuance of any injunction over four years after the alleged violation would place a large company and its many executive employees under the possibility, without even a Miranda warning, that anything they say may be held against them and place them under the danger of criminal sanctions; "destructive of fundamental rights" because the restraint constitutes not "double" jeopardy but "perpetual" jeopardy. If, as the majority say, the test of the news release is its impact on the "reasonable" investor (although they indicate that the unreasonable speculator, too, comes under their solicitous wing) to avoid the danger of injunction violation it would be necessary to seek a declaratory judgment from the courts (both trial and appellate because following the majority, Rule 52(a) would no longer apply). As to the sufficiency of the news release, the first issue would be what constitutes a "reasonable" investor. After the court had made a preliminary finding of reasonableness, these investors could then testify as to the impact that the proposed release would have on them. Query, as to whether twelve witnesses (akin to a jury) should be required — and would a seven-to-five count be acceptable or would ten-to-two more accurately reflect public opinion? Other situations and problems of an equally reductio ad absurdum character can easily be conjured up. They would only point more directly to the conclusion that an injunction here would not only violate fundamental legal principles which for centuries have restricted the injunctive grant but would not be justified by any sufficient factual showing in this case. No clear and present danger, no continuing wrongful acts and no likelihood thereof are to be found in the record before this court.

Crawford, Clayton and Coates

Since I believe that the findings of the trial court are solidly founded and should be respected, I agree with its decision as to Crawford and Clayton. I agree with the majority as to Coates because for all practical purposes the information had not become public at the time of his purchase order.

Conclusion

In summary, the most disturbing aspect of the majority opinion is its utterly unrealistic approach to the problem of the corporate press release. If corporations were literally to follow its implications, every press release would have to have the same SEC clearance as a prospectus. Even this procedure would not suffice if future events should prove the facts to have been over or understated — or too gloomy or optimistic — because the courts will always be ready and available to substitute their judgment for that of the business executives responsible therefor. But vulnerable as the news release may be, what of the many daily developments in the Research and Development departments of giant corporations. When and how are promising results to be disclosed. If they are not disclosed, the corporation is concealing information; [889] if disclosed and hoped-for results do not materialize, there will always be those with the advantage of hindsight to brand them as false or misleading. Nor is it consonant with reality to suggest, as does the majority, that corporate executives may be motivated in accepting employment by the opportunity to make "secret corporate compensation * * * derived at the expense of the uninformed public." Such thoughts can only arise from unfounded speculative imagination. And finally there is the sardonic anomaly that the very members of society which Congress has charged the SEC with protecting, i. e., the stockholders, will be the real victims of its misdirected zeal. May the Future, the Congress or possibly the SEC itself be able to bring some semblance of order by means of workable rules and regulations in this field so that the corporations and their stockholders may not be subjected to countless lawsuits at the whim of every purchaser, seller or potential purchaser who may claim he would have acted or refrained from acting had a news release been more comprehensive, less comprehensive or had it been adequately published in the news media of the 50 States.

[1] Pursuant to a stipulation by all parties, the question of the appropriate remedies to be applied was deferred pending a final determination whether the defendants or any of them had violated Section 10(b) and Rule 10b-5 and therefore that question is not now before us.

[2]The purchases by the parties during this period were:

Purchase                                Shares                     Calls  Date       Purchaser               Number     Price         Number     PriceHole K-55-1 Completed November 12, 1963  1963Nov.  12     Fogarty                   300     17¾-18      15     Clayton                   200     17¾      15     Fogarty                   700     17 5/8-17 7/8      15     Mollison                  100     17 7/8      19     Fogarty                   500     18 1/8      26     Fogarty                   200     17¾      29     Holyk (Mrs.)               50     18Chemical Assays of Drill Core of K-55-1 Received December 9-13, 1963Dec.  10     Holyk (Mrs.)              100     20 3/8      12     Holyk (or wife)                                   200    21      13     Mollison                  100     21 1/8      30     Fogarty                   200     22      31     Fogarty                   100     23¼  1964Jan.   6     Holyk (or wife)                                   100    23 5/8       8     Murray                                            400    23¼      24     Holyk (or wife)                                   200    22¼-22 3/8Feb.  10     Fogarty                   300     22 1/8-22¼      20     Darke                     300     24 1/8      24     Clayton                   400     23 7/8      24     Holyk (or wife)                                   200    24 1/8      26     Holyk (or wife)                                   200    23 3/8      26     Huntington                 50     23¼      27     Darke (Moran as nominee)                         1000    22 5/8-22¾Mar.   2     Holyk (Mrs.)              200     22 3/8       3     Clayton                   100     22¼      16     Huntington                                        100    22 3/8      16     Holyk (or wife)                                   300    23¼      17     Holyk (Mrs.)              100     23 7/8      23     Darke                                            1000    24¾      26     Clayton                   200     25Land Acquisition Completed March 27, 1964Mar.  30     Darke                                            1000    25½      30     Holyk (Mrs.)              100     25 7/8Core Drilling of Kidd Segment Resumed March 31, 1964April  1     Clayton                    60     26½       1     Fogarty                   400     26½       2     Clayton                   100     26 7/8       6     Fogarty                   400     28 1/8-28 7/8       8     Mollison (Mrs.)           100     28 1/8First Press Release Issued April 12, 1964April 15     Clayton                   200     29 3/8      16     Crawford (and wife)       600     30 1/8-30¼Second Press Release Issued 10:00-10:10 or 10:15 A.M., April 16, 1964Purchase                                Shares                     Calls  Date       Purchaser               Number     Price         Number     Price  1963April 16 (app. 10:20 A.M.)            Coates (for family trusts) 2000   31  -31 5/8

[3] A "call" is a negotiable option contract by which the bearer has the right to buy from the writer of the contract a certain number of shares of a particular stock at a fixed price on or before a certain agreed-upon date.

[4]The purchases made by "tippees" during this period were:

Purchase                                 Shares                     Calls  Date        Purchaser               Number     Price         Number     PriceChemicals Assays of K-55-1 Received Dec. 9-13, 1963  1963Dec.  30     Caskey (Darke)                                      300     22¼  1964Jan.  16     Westreich (Darke)          2000     21¼-21¾Feb.  17     Atkinson (Darke)             50     23¼      200     23 1/8      17     Westreich (Darke)            50     23¼     1000     23¼-23 3/8      24     Miller (Darke)                                      200     23¾      25     Miller (Darke)                                      300     23 3/8-23½Mar.   3     E. W. Darke (Darke)                                 500     22½-22 5/8      17     E. W. Darke (Darke)                                 200     23 3/8Land Acquisition Completed Mar. 27, 1964  1964Mar. 30      Atkinson (Darke)                                    400     25¾-25 7/8             Caskey (Darke)              100     25 7/8             E. W. Darke (Darke)                                1000     25¾-25 7/8             Miller (Darke)                                      200     25½             Westreich (Darke)           500     25¾  30-31      Klotz (Darke)                                      2000     25½-26 1/8Second Press Release Issued April 16, 1964 (Reported over Dow Jones tape at10:54 A.M.)April 16 (from 10:31 A.M.)            Haemisegger (Coates)        1500     31¼-35

In this connection, we point out that, though several of the Holyk purchases of shares and calls made between November 29, 1963 and March 30, 1964 were in the name of Mrs. Holyk or were in the names of both spouses, we have treated these purchases as if made in the name of defendant Holyk alone.

Defendant Mollison purchased 100 shares on November 15 in his name only and on April 8 100 shares were purchased in the name of Mrs. Mollison. We have made no distinction between those purchases.

Defendant Crawford ordered 300 shares about midnight on April 15 and 300 more shares the following morning, to be purchased for himself, and his wife, and these purchases are treated as having been made by the defendant Crawford.

In these particulars we have followed the lead of the court below. See the table at 258 F. Supp. 273-275 and the special references to the Holyk purchases at 273, and the Crawford purchases at 287. It would be unrealistic to include any of these purchases as having been made by other than the defendants, and unrealistic to include them as having been made by members of the general public receiving "tips" from insiders.

[5] 258 F.Supp. 262 (SDNY 1966).

[6]Defendant O'Neill did not appear to answer the charge against him; the SEC motion to enter a default judgment against him was denied without prejudice to its renewal upon completion of this appeal.

Shortly after the appeal was argued defendant Lamont passed away, and by agreement of the parties an order was entered discontinuing his appeal and directing that the judgment below dismissing the action against him be severed from the judgment as to the other defendants.

The SEC does not contest the alternative holding below that Holyk and Mollison, not being members of TGS's top management, had no duty of disclosure prior to acceptance of stock options.

[7] Mollison had returned to the United States for the weekend. Friday morning, April 10, he had been on the Kidd tract "and had been advised by defendant Holyk as to the drilling results to 7:00 p.m. on April 10. At that time drill holes K-55-1, K-55-3 and K-55-4 had been completed; drilling of K-55-5 had started on Section 2200 S and had been drilled to 97 feet, encountering mineralization on the last 42 feet; and drilling of K-55-6 had been started on Section 2400 S and had been drilled to 569 feet, encountering mineralization over the last 127 feet." Id. at 294.

[8]15 U.S.C. § 78j reads in pertinent part as follows:

§ 78j. Manipulative and deceptive devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

* * * * *

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

[9] Congress intended by the Exchange Act to eliminate the idea that the use of inside information for personal advantage was a normal emolument of corporate office. See Sections 2 and 16 of the Act; H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 13 (1934); S.Rep.No. 792, 73rd Cong., 2d Sess. 9 (1934); S.E.C., Tenth Annual Report 50 (1944). See Cady, Roberts, supra at 912.

[10] The House of Representatives committee that reported out the bill which eventually became the Act did so with the observation that "no investor, no speculator,can safely buy and sell securities upon exchanges without having an intelligent basis for forming his judgment as to the value of the securities he buys or sells." H.R.Rep.No. 1383, 73d Cong., 2d Sess. (1934), p. 11. (Emphasis supplied.)

Dr. Bellemore, the Texas Gulf defendants' expert witness, has written: "The intelligent speculator assumes that facts are available for a thorough analysis. The speculator then examines the facts to discover and evaluate the risks that are present. He then balances these risks against the apparent opportunities for capital gains and makes his decision accordingly. He is, to the best of his ability, taking calculated risks." Bellemore, Investments: Principles, Practices and Analysis 4 (2d ed.1962).

[11] We are not, of course, bound by the trial court's determination as to materiality unless we find it "clearly erroneous" for that standard of appellate review is applicable only to issues of basic fact and not to issues of ultimate fact. See Baranow v. Gibraltar Factors Corp., 366 F.2d 584, 587 (2 Cir. 1966); Mamiye Bros. v. Barber S.S. Lines, Inc., 360 F. 2d 774, 776-778 (2 Cir.), cert. denied, 385 U.S. 835, 87 S.Ct. 80, 17 L.Ed.2d 70 (1966); see also SEC v. R. A. Holman & Co., 366 F.2d 456, 457-458 (2 Cir. 1966) (by implication).

[12] We do not suggest that material facts must be disclosed immediately; the timing of disclosure is a matter for the business judgment of the corporate officers entrusted with the management of the corporation within the affirmative disclosure requirements promulgated by the exchanges and by the SEC. Here, a valuable corporate purpose was served by delaying the publication of the K-55-1 discovery. We do intend to convey, however, that where a corporate purpose is thus served by withholding the news of a material fact, those persons who are thus quite properly true to their corporate trust must not during the period of non-disclosure deal personally in the corporation's securities or give to outsiders confidential information not generally available to all the corporations' stockholders and to the public at large.

[13]The April 16th article in The Northern Miner resulted from the reporter's April 13th visit to the drill site where he interviewed defendants Mollison, Holyk and Darke and looked at records of the drilling to that time. The text of the article was approved by Mollison in Timmins on April 15th. The first five paragraphs read as follows:

Should Make Substantial Open Pit Operation

TEXAS GULF SULPHUR COMES UP WITH A "MAJOR"

See Big Tonnages Of Base Metals, Plus Silver

Texas Gulf Sulphur has chalked up a brilliant exploration success in its field program north of the Porcupine area. Following a visit to the discovery property, The Northern Miner can say that a major new zinc-copper-silver mine is definitely in the making, one that has all the earmarks of shaping into a substantial open pit operation.

Only a relative handful of holes has been completed since the discovery hole but on the basis of seven tests either completed or drilling it can be stated that a strike length of 600 ft. minimum has been established, showing an ore width of roughly 300 ft. which has been traced so far to a maximum vertical depth of about 800 ft.

So recent has been the discovery, and so urgent the effort to accelerate the drill program (four machines have been moved in since the discovery hole was completed), that assays have been completed on only the discovery. But this must be recorded as one of the most impressive drill holes completed in modern times.

For a core length of a shade better than 600 ft., the hole averaged in excess of 1% copper, 8% zinc and nearly four ounces of silver.

And there are impressive, strong sections within this width which in themselves are quite spectacular. In the upper part of the hole, for example, a core length of 82 ft. ran 7.1% copper, 9.7% zinc and 2.4 ozs. silver. This was followed by continuous values of ore tenor — deeper down, a 100-ft. section runs 0.33% copper, 0.8% lead, 14.3% zinc and 4.2 ozs. silver. And still deeper, a strong zinc section of better than 100 ft. averaged out to in excess of seven ounces of silver in addition to ore-grade zinc values.

[14] The trial court found that defendant Murray "had no detailed knowledge as to the work" on the Kidd-55 segment. There is no evidence in the record suggesting that Murray purchased his stock on January 8, 1964, on the basis of material undisclosed information, and the disposition below is undisturbed as to him.

[15] Even if insiders were in fact ignorant of the broad scope of the Rule and acted pursuant to a mistaken belief as to the applicable law such an ignorance does not insulate them from the consequences of their acts. Tager v. SEC, 344 F.2d 5, 8 (2 Cir. 1965).

[16] Judges Waterman and Anderson, believing that there had been no definitive finding below as to whether Darke, expressly or by implication, transmitted to these outsiders any indication of the extremely favorable results of the drilling operation in which he was engaged, would remand for a determination on this issue, and if it should be determined that Darke did make such revelations, for a determination of the appropriate remedy.

[17] The effective protection of the public from insider exploitation of advance notice of material information requires that the time that an insider places an order, rather than the time of its ultimate execution, be determinative for Rule 10b-5 purposes. Otherwise, insiders would be able to "beat the news," cf. Fleischer, supra, 51 Va.L.Rev. at 1291, by requesting in advance that their orders be executed immediately after the dissemination of a major news release but before outsiders could act on the release. Thus it is immaterial whether Crawford's orders were executed before or after the announcement was made in Canada (9:40 A.M., April 16) or in the United States (10:00 A.M.) or whether Coates's order was executed before or after the news appeared over the Merrill Lynch (10:29 A.M.) or Dow Jones (10:54 A.M.) wires.

[18] Although the only insider who acted after the news appeared over the Dow Jones broad tape is not an appellant and therefore we need not discuss the necessity of considering the advisability of a "reasonable waiting period" during which outsiders may absorb and evaluate disclosures, we note in passing that, where the news is of a sort which is not readily translatable into investment action, insiders may not take advantage of their advance opportunity to evaluate the information by acting immediately upon dissemination. In any event, the permissible timing of insider transactions after disclosures of various sorts is one of the many areas of expertise for appropriate exercise of the SEC's rule-making power, which we hope will be utilized in the future to provide some predictability of certainty for the business community.

[19] The record reveals that news usually appears on the Dow Jones broad tape 2-3 minutes after the reporter completes dictation. Here, assuming that the Dow Jones reporter left the press conference as early as possible, 10:10 A.M., the 10-15 minute release (which took at least that long to dictate) could not have appeared on the wire before 10:22, and for other reasons unknown to us did not appear until 10:54. Indeed, even the abbreviated version of the release reported by Merrill Lynch over its private wire did not appear until 10:29. Coates, however, placed his call no later than 10:20.

[20] The SEC seeks permanent injunctions restraining future proscribed activity by all the individual defendants and the corporation. The Commission also seeks court orders upon certain of the individual defendants that are essentially remedies of a private, rather than of a regulatory nature, court orders designed to have those individual defendants disgorge any profits they enjoyed from TGS stock transactions they or their "tippees" engaged in from November 12, 1963 to April 17, 1964.

[21] Even at common law, the essentially private remedy of rescission which is sought here does not require more than a showing of negligence and frequently even less than that, see Restatement, Contracts, § 476, comm. b (1932); and the common law concept of constructive fraud still available to private plaintiffs, see Trussell v. United Underwriters, Ltd., 228 F.Supp. 757, 772 (D.Colo.1964), has been expanded from recklessness, see Prosser, Torts, § 102, pp. 715-17 (3d ed. 1964), to include non-reckless negligent misrepresentations or omissions, see Note, 63 Mich.L.Rev. 1070, 1079.

[22] Liability under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), the language of which is strikingly similar to that of 10b-5(2), attaches from the mere fact of misrepresentation or misleading omission unless defendant proves that "he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." The provisions of Sections 17(a) (2) and (3) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (2) and (3), which are virtually identical to the provisions of Rule 10b-5(2) and (3) and were, in fact, the model therefor, see Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (2 Cir.), cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L.Ed. 1356 (1952); Hooper v. Mountain States Sec. Corp., 282 F.2d 195, 201 n. 4 (5 Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961), apply criminal penalties to sellers only (Rule 10b-5 was promulgated to fill this gap in enforcement, SEC Ann.Rep. 10 (1942)), and have been read, upon close scrutiny of their legislative history, as not requiring specific fraudulent intent, SEC v. Van Horn, 371 F.2d 181, at 184-186 (7 Cir. 1966); United States v. Schaefer, 299 F.2d 625, 629 (7 Cir. 1962) (lack of diligence is all that is required for conviction in a criminal prosecution for violation of § 17(a) of the 1933 Act.)

[23] Coates's violations encompass not only his own purchases but also the purchases by his son-in-law and the customers of his son-in-law, to whom the material information was passed. See footnote 16, supra.

[24]The options granted on February 20, 1964 to Mollison, Holyk, and Kline were ratified by the Texas Gulf directors on July 15, 1965 after there had been, of course, a full disclosure and after this action had been commenced. However, the ratification is irrelevant here, for we would hold with the district court that a member of top management, as was Kline, is required, before accepting a stock option, to disclose material inside information which, if disclosed, might affect the price of the stock during the period when the accepted option could be exercised. Kline had known since November 1962 that K-55-1 had been drilled, that the drilling had intersected a sulphide body containing copper and zinc, and that TGS desired to acquire adjacent property.

Of course, if any of the five knowledgeable defendants had rejected his option there might well have been speculation as to the reason for the rejection. Therefore, in a case where disclosure to the grantors of an option would seriously jeopardize corporate security, it could well be desirable, in order to protect a corporation from selling securities to insiders who are in a position to appreciate their true worth at a price which may not accurately reflect the true value of the securities and at the same time to preserve when necessary the secrecy of corporate activity, not to require that an insider possessed of undisclosed material information reject the offer of a stock option, but only to require that he abstain from exercising it until such time as there shall have been a full disclosure and, after the full disclosure, a ratification such as was voted here. However, as this suggestion was not presented to us, we do not consider it or make any determination with reference to it.

[25]Rule 10b-5(2) provides in pertinent part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, * * *

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, * * *

in connection with the purchase or sale of any security.

[26]The prayer for relief reads:

WHEREFORE the plaintiff prays for:

* * * * *

(5) The issuance of a final judgment permanently enjoining the defendant Texas Gulf from directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities, making any untrue statement of material fact or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, namely, from issuing, publishing, distributing or otherwise disseminating materially false, misleading, inadequate or inaccurate press releases and other communications and reports concerning material facts about Texas Gulf's activities and operations.

[27] See the discussion in footnotes 20, 21, and 22, supra, and in the accompanying text, dispensing with a fraudulent intent requirement in actions based on clause (3) of Rule 10b-5.

[28]Examined in retrospect, the situation in Timmins at the time the release was prepared seems to offer good reason for optimism. The draftsmen of the release had full knowledge of the discoveries up to 7:00 P.M. on Friday, April 10. At that time approximately 2/3 of the ore ultimately found to exist by the time of the preparation of the April 16 "major strike" release had been discovered by 5 holes placed so as to indicate continuity of mineralization within the large anomaly. As of that time SEC experts estimated ore reserves of over 8 million tons at a gross assay value (excluding costs) of over $26 a ton. Accepting the conservative view of TGS's expert Wiles that 95.2% would be absorbed by costs, the ultimate profit could then have been estimated at more than $14,000,000. TGS experts could name very few base metal mines with a greater assay value and the court observed that bodies of much lower assay value were commercially mined, 258 F.Supp. at 282 n. 10. Roche, a mining stock specialist, added that mines with significantly lower percentages of copper and with no zinc or silver, as here, were profitably operated. On the basis of approximately one-third more data, and, for all the record shows, without any additional figures as to estimated costs, TGS announced on April 16 a major strike with over 25 million tons of ore. The trial court found that as of 7:00 P.M. on Thursday, April 9, "There was real evidence that a body of commercially mineable ore might exist." 252 F.Supp. at 282. And, by 7:00 A.M. on Sunday, April 10, eight hours before the release was issued to the press, 77.9% of the drilling in mineralization had been completed, 84.4% by 7:00 P.M. on the 12th, and 90.2% by 7 A.M. on April 13. The release did not appear in most newspapers of general circulation until later in the morning of Monday, the 13th.

The release, see p. 845, supra, began by referring to rumored reports that the company had made a substantial copper discovery and then continued: "These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS." It then stated, purporting to give the true facts in contradiction to the rumors: "The facts are as follows." However, the "facts" disclosed relative to the Kidd-55 segment were: "Recent drilling on one property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this prospect. The drilling done to date has not been conclusive but the statements made by many outside quarters are unreliable." It was then said that, as of April 12, the release date, "* * * any statement as to size and grade of ore would be premature and possibly misleading." A definite statement "to clarify" was promised in the future.

[29] Since none of the parties has raised the question, I assume the continuing vitality of Ruckle, despite what have been regarded as contrary intimations in O'Neill v. Maytag, 339 F.2d 764 (2 Cir. 1964), a decision that has not found favor with other circuits. Cf. Dasho v. Susquehanna Corp., 380 F.2d 262 (7 Cir.), cert. denied, Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470 (1967); Pappas v. Moss, 393 F.2d 865 (3 Cir. 1968); see Jennings, Insider Trading in Corporate Securities: A Survey of Hazards and Disclosure Obligations under Rule 10b-5, 62 Nw.U.L.Rev. 809, 830-33 (1968). If we were writing on a clean slate, I would have some doubt whether the framers of the Securities Exchange Act intended § 10b to provide a remedy for an evil that had long been effectively handled by derivative actions for waste of corporate assets under state law simply because in a particular case the waste took the form of a sale of securities. We will shortly be exploring this issue in the in banc consideration of Schoenbaum v. Firstbrook, 2 Cir., 405 F.2d 215.

[30] Though the Board of Directors of TGS ratified the issuance of the options after the Timmins discovery had been fully publicized, it obviously was of the belief that Kline had committed no serious wrong in remaining silent. Throughout this litigation TGS has supported the legality of the actions of all the defendants — the company's counsel having represented, among others, Stephens, Fogerty and Kline. Consequently, I agree with the majority in giving the Board's action no weight here. If a fraud of this kind may ever be cured by ratification, compare Continental Securities Co. v. Belmont, 206 N.Y. 7, 99 N.E. 138, 51 L.R.A., N.S., 112 (1912), with Claman v. Robertson, 164 Ohio St. 61, 128 N.E.2d 429 (1955); cf. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), that cannot be done without an appreciation of the illegality of the conduct proposed to be excused, cf. United Hotels Co. v. Mealey, 147 F.2d 816, 819 (2 Cir. 1945).

[31] Of course, § 12(1)'s imposition of a liability almost absolute upon the seller of a security that has not been registered in violation of § 5 of the 1933 Act is grounded on distinctive concerns. See 3 Loss, Securities Regulation 1692-96 (1961).

[32] The imposition of liability on Clayton, Crawford and Coates for "beating the gun" does not require any such metamorphosis of Judge Frank's concept of fraud as the majority opinion seeks to perform. The only one of these defendants who came close to a showing of good faith was Coates. But even he did not act on the belief that the second press release had in fact reached the market, see 258 F. Supp. at 288; his defense was rather a belief that the law required him only to await its issuance. While such an erroneous view of the law is pardonable, it is not "good faith" in a legal sense.

[33] In re Cady, Roberts & Co., 40 SEC 907 (1961).

[34]The New York Stock Exchange Company Manual provides:

"Dealing with Rumors Affecting the Market: Occasions may also arise when rumors have been circulated which have no basis in fact or which require clarification or interpretation and which also result in unusual activity or price changes in a particular security. Under such circumstances, the most effective procedure is the quick and speedy denial of such rumors through a release to the public Press * * *"

[35] Of course, even if TGS were negligent in not obtaining later data, a determination must still be made that the press release was misleading in light of this later information.

[36] Whether the release had any such effect would, of course, be irrelevant.

[37] Hearings before the House Committee on Interstate and Foreign Commerce on H.R. 7852 and H.R. 8720, 73rd Cong., 2d Sess. (1934).

[38] In two cases, on motions to dismiss, two courts have permitted 10b-5 actions to continue where defendants were not alleged to be intimately connected with a purchase or sale of securities. Miller v. Bargain City, U. S. A., 229 F.Supp. 33 (E.D.Pa.1964); Fischer v. Kletz, 266 F. Supp. 180 (S.D.N.Y. 1967). But in both cases the courts recognized that further factual and legal development was necessary for the proper resolution of the issue.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

[648] David Bonderman argued the cause for petitioner. With him on the briefs were Lawrence A. Schneider and Eric Summergrad.

Paul Gonson argued the cause for respondent. With him on the brief were Daniel L. Goelzer, Jacob H. Stillman, and Whitney Adams.^[*]

Edward H. Fleischman, Richard E. Nathan, Martin P. Unger, and William J. Fitzpatrick filed a brief for the Securities Industry Association as amicus curiae.

JUSTICE POWELL delivered the opinion of the Court.

Petitioner Raymond Dirks received material nonpublic information from "insiders" of a corporation with which he had no connection. He disclosed this information to investors who relied on it in trading in the shares of the corporation. The question is whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure.

I

In 1973, Dirks was an officer of a New York broker-dealer firm who specialized in providing investment analysis of insurance company securities to institutional investors.^[1] On [649] March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Secrist also stated that various regulatory agencies had failed to act on similar charges made by Equity Funding employees. He urged Dirks to verify the fraud and disclose it publicly.

Dirks decided to investigate the allegations. He visited Equity Funding's headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated holdings of more than $16 million.^[2]

While Dirks was in Los Angeles, he was in touch regularly with William Blundell, the Wall Street Journal's Los Angeles bureau chief. Dirks urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such a massive fraud could go undetected and declined to [650] write the story. He feared that publishing such damaging hearsay might be libelous.

During the 2-week period in which Dirks pursued his investigation and spread word of Secrist's charges, the price of Equity Funding stock fell from $26 per share to less than $15 per share. This led the New York Stock Exchange to halt trading on March 27. Shortly thereafter California insurance authorities impounded Equity Funding's records and uncovered evidence of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding^[3] and only then, on April 2, did the Wall Street Journal publish a front-page story based largely on information assembled by Dirks. Equity Funding immediately went into receivership.^[4]

The SEC began an investigation into Dirks' role in the exposure of the fraud. After a hearing by an Administrative Law Judge, the SEC found that Dirks had aided and abetted violations of § 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U. S. C. § 77q(a),^[5] § 10(b) of the Securities [651] Exchange Act of 1934, 48 Stat. 891, 15 U. S. C. § 78j(b),^[6] and SEC Rule 10b-5, 17 CFR § 240.10b-5 (1983),^[7] by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. The SEC concluded: "Where `tippees' — regardless of their motivation or occupation — come into possession of material `corporate information that they know is confidential and know or should know came from a corporate insider,' they must either publicly disclose that information or refrain from trading." 21 S. E. C. Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U. S. 222, 230, n. 12 (1980)). Recognizing, however, that Dirks "played an important role in bringing [Equity Funding's] massive fraud [652] to light," 21 S. E. C. Docket, at 1412,^[8] the SEC only censured him.^[9]

Dirks sought review in the Court of Appeals for the District of Columbia Circuit. The court entered judgment against Dirks "for the reasons stated by the Commission in its opinion." App. to Pet. for Cert. C-2. Judge Wright, a member of the panel, subsequently issued an opinion. Judge Robb concurred in the result and Judge Tamm dissented; neither filed a separate opinion. Judge Wright believed that "the obligations of corporate fiduciaries pass to all those to whom they disclose their information before it has been disseminated to the public at large." 220 U. S. App. D. C. 309, 324, 681 F. 2d 824, 839 (1982). Alternatively, Judge Wright concluded that, as an employee of a broker-dealer, Dirks had violated "obligations to the SEC and to the public completely independent of any obligations he acquired" as a result of receiving the information. Id., at 325, 681 F. 2d, at 840.

In view of the importance to the SEC and to the securities industry of the question presented by this case, we granted a writ of certiorari. 459 U. S. 1014 (1982). We now reverse.

[653] II

In the seminal case of In re Cady, Roberts & Co., 40 S. E. C. 907 (1961), the SEC recognized that the common law in some jurisdictions imposes on "corporate `insiders,' particularly officers, directors, or controlling stockholders" an "affirmative duty of disclosure . . . when dealing in securities." Id., at 911, and n. 13.^[10] The SEC found that not only did breach of this common-law duty also establish the elements of a Rule 10b-5 violation,^[11] but that individuals other than corporate insiders could be obligated either to disclose material nonpublic information^[12] before trading or to abstain from trading altogether. Id., at 912. In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a Rule 10b-5 violation: "(i) the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and (ii) the unfairness of allowing a corporate insider to take advantage of that information [654] by trading without disclosure." 445 U. S., at 227. In examining whether Chiarella had an obligation to disclose or abstain, the Court found that there is no general duty to disclose before trading on material nonpublic information,^[13] and held that "a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information." Id., at 235. Such a duty arises rather from the existence of a fiduciary relationship. See id., at 227-235.

Not "all breaches of fiduciary duty in connection with a securities transaction," however, come within the ambit of Rule 10b-5. Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 472 (1977). There must also be "manipulation or deception." Id., at 473. In an inside-trading case this fraud derives from the "inherent unfairness involved where one takes advantage" of "information intended to be available only for a corporate purpose and not for the personal benefit of anyone." In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 936 (1968). Thus, an insider will be liable under Rule 10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes "secret profits." Cady, Roberts, supra, at 916, n. 31.

III

We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information "was not [the corporation's] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence." 445 U. S., at 232. Not to require such a fiduciary relationship, we recognized, would "depar[t] radically from the established doctrine that duty arises from a specific relationship between [655] two parties" and would amount to "recognizing a general duty between all participants in market transactions to forgo actions based on material, nonpublic information." Id., at 232, 233. This requirement of a specific relationship between the shareholders and the individual trading on inside information has created analytical difficulties for the SEC and courts in policing tippees who trade on inside information. Unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such relationships.^[14] In view of this absence, it has been unclear how a tippee acquires the Cady, Roberts duty to refrain from trading on inside information.

A

The SEC's position, as stated in its opinion in this case, is that a tippee "inherits" the Cady, Roberts obligation to shareholders whenever he receives inside information from an insider:

"In tipping potential traders, Dirks breached a duty which he had assumed as a result of knowingly receiving [656] confidential information from [Equity Funding] insiders. Tippees such as Dirks who receive non-public, material information from insiders become `subject to the same duty as [the] insiders.' Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc. [495 F. 2d 228, 237 (CA2 1974) (quoting Ross v. Licht, 263 F. Supp. 395, 410 (SDNY 1967))]. Such a tippee breaches the fiduciary duty which he assumes from the insider when the tippee knowingly transmits the information to someone who will probably trade on the basis thereof. . . . Presumably, Dirks' informants were entitled to disclose the [Equity Funding] fraud in order to bring it to light and its perpetrators to justice. However, Dirks — standing in their shoes — committed a breach of the fiduciary duty which he had assumed in dealing with them, when he passed the information on to traders." 21 S. E. C. Docket, at 1410, n. 42.

This view differs little from the view that we rejected as inconsistent with congressional intent in Chiarella. In that case, the Court of Appeals agreed with the SEC and affirmed Chiarella's conviction, holding that "[a]nyone — corporate insider or not — who regularly receives material nonpublic information may not use that information to trade in securities without incurring an affirmative duty to disclose." United States v. Chiarella, 588 F. 2d 1358, 1365 (CA2 1978) (emphasis in original). Here, the SEC maintains that anyone who knowingly receives nonpublic material information from an insider has a fiduciary duty to disclose before trading.^[15]

[657] In effect, the SEC's theory of tippee liability in both cases appears rooted in the idea that the antifraud provisions require equal information among all traders. This conflicts with the principle set forth in Chiarella that only some persons, under some circumstances, will be barred from trading while in possession of material nonpublic information.^[16] Judge Wright correctly read our opinion in Chiarella as repudiating any notion that all traders must enjoy equal information before trading: "[T]he `information' theory is rejected. Because the disclose-or-refrain duty is extraordinary, it attaches only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws." 220 U. S. App. D. C., at 322, 681 F. 2d, at 837. See Chiarella, 445 U. S., at 235, n. 20. We reaffirm today that "[a] duty [to disclose] [658] arises from the relationship between parties . . . and not merely from one's ability to acquire information because of his position in the market." Id., at 231-232, n. 14.

Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.^[17] It is commonplace for analysts to "ferret out and analyze information," 21 S. E. C. Docket, at 1406,^[18] and this often is done by meeting with and questioning corporate officers and others who are insiders. And information that the analysts [659] obtain normally may be the basis for judgments as to the market worth of a corporation's securities. The analyst's judgment in this respect is made available in market letters or otherwise to clients of the firm. It is the nature of this type of information, and indeed of the markets themselves, that such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally.

B

The conclusion that recipients of inside information do not invariably acquire a duty to disclose or abstain does not mean that such tippees always are free to trade on the information. The need for a ban on some tippee trading is clear. Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they also may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain. See 15 U. S. C. § 78t(b) (making it unlawful to do indirectly "by means of any other person" any act made unlawful by the federal securities laws). Similarly, the transactions of those who knowingly participate with the fiduciary in such a breach are "as forbidden" as transactions "on behalf of the trustee himself." Mosser v. Darrow, 341 U. S. 267, 272 (1951). See Jackson v. Smith, 254 U. S. 586, 589 (1921); Jackson v. Ludeling, 21 Wall. 616, 631-632 (1874). As the Court explained in Mosser, a contrary rule "would open up opportunities for devious dealings in the name of others that the trustee could not conduct in his own." 341 U. S., at 271. See SEC v. Texas Gulf Sulphur Co., 446 F. 2d 1301, 1308 (CA2), cert. denied, 404 U. S. 1005 (1971). Thus, the tippee's duty to disclose or abstain is derivative from that of the insider's duty. See Tr. of Oral Arg. 38. Cf. Chiarella, 445 U. S., at 246, n. 1 (BLACKMUN, J., dissenting). As we noted in Chiarella, "[t]he tippee's obligation has been viewed as arising from his role as a participant after the fact in the insider's breach of a fiduciary duty." Id., at 230, n. 12.

[660] Thus, some tippees must assume an insider's duty to the shareholders not because they receive inside information, but rather because it has been made available to them improperly.^[19] And for Rule 10b-5 purposes, the insider's disclosure is improper only where it would violate his Cady, Roberts duty. Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.^[20] As Commissioner Smith perceptively observed [661] in In re Investors Management Co., 44 S. E. C. 633 (1971): "[T]ippee responsibility must be related back to insider responsibility by a necessary finding that the tippee knew the information was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose the information . . . ." Id., at 651 (concurring in result). Tipping thus properly is viewed only as a means of indirectly violating the Cady, Roberts disclose-or-abstain rule.^[21]

C

In determining whether a tippee is under an obligation to disclose or abstain, it thus is necessary to determine whether the insider's "tip" constituted a breach of the insider's fiduciary duty. All disclosures of confidential corporate information [662] are not inconsistent with the duty insiders owe to shareholders. In contrast to the extraordinary facts of this case, the more typical situation in which there will be a question whether disclosure violates the insider's Cady, Roberts duty is when insiders disclose information to analysts. See n. 16, supra. In some situations, the insider will act consistently with his fiduciary duty to shareholders, and yet release of the information may affect the market. For example, it may not be clear — either to the corporate insider or to the recipient analyst — whether the information will be viewed as material nonpublic information. Corporate officials may mistakenly think the information already has been disclosed or that it is not material enough to affect the market. Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure. This standard was identified by the SEC itself in Cady, Roberts: a purpose of the securities laws was to eliminate "use of inside information for personal advantage." 40 S. E. C., at 912, n. 15. See n. 10, supra. Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.^[22] As Commissioner Smith stated in Investors Management Co.: "It is important in this type of [663] case to focus on policing insiders and what they do . . . rather than on policing information per se and its possession. . . ." 44 S. E. C., at 648 (concurring in result).

The SEC argues that, if inside-trading liability does not exist when the information is transmitted for a proper purpose but is used for trading, it would be a rare situation when the parties could not fabricate some ostensibly legitimate business justification for transmitting the information. We think the SEC is unduly concerned. In determining whether the insider's purpose in making a particular disclosure is fraudulent, the SEC and the courts are not required to read the parties' minds. Scienter in some cases is relevant in determining whether the tipper has violated his Cady, Roberts duty.^[23] But to determine whether the disclosure itself "deceive[s], manipulate[s], or defraud[s]" shareholders, Aaron v. SEC, 446 U. S. 680, 686 (1980), the initial inquiry is whether there has been a breach of duty by the insider. This requires courts to focus on objective criteria, i. e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. Cf. 40 S. E. C., at 912, n. 15; Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities [664] Laws, 93 Harv. L. Rev. 322, 348 (1979) ("The theory . . . is that the insider, by giving the information out selectively, is in effect selling the information to its recipient for cash, reciprocal information, or other things of value for himself. . ."). There are objective facts and circumstances that often justify such an inference. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.

Determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts. But it is essential, we think, to have a guiding principle for those whose daily activities must be limited and instructed by the SEC's inside-trading rules, and we believe that there must be a breach of the insider's fiduciary duty before the tippee inherits the duty to disclose or abstain. In contrast, the rule adopted by the SEC in this case would have no limiting principle.^[24] 

[665] IV

Under the inside-trading and tipping rules set forth above, we find that there was no actionable violation by Dirks.^[25] It is undisputed that Dirks himself was a stranger to Equity Funding, with no pre-existing fiduciary duty to its shareholders.^[26] He took no action, directly or indirectly, that induced the shareholders or officers of Equity Funding to repose trust or confidence in him. There was no expectation by Dirks' sources that he would keep their information in confidence. Nor did Dirks misappropriate or illegally obtain the information about Equity Funding. Unless the insiders breached their Cady, Roberts duty to shareholders in disclosing the nonpublic information to Dirks, he breached no duty when he passed it on to investors as well as to the Wall Street Journal.

[666] It is clear that neither Secrist nor the other Equity Funding employees violated their Cady, Roberts duty to the corporation's shareholders by providing information to Dirks.^[27] [667] The tippers received no monetary or personal benefit for revealing Equity Funding's secrets, nor was their purpose to make a gift of valuable information to Dirks. As the facts of this case clearly indicate, the tippers were motivated by a desire to expose the fraud. See supra, at 648-649. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks. See n. 20, supra. Dirks therefore could not have been "a participant after the fact in [an] insider's breach of a fiduciary duty." Chiarella, 445 U. S., at 230, n. 12.

V

We conclude that Dirks, in the circumstances of this case, had no duty to abstain from use of the inside information that he obtained. The judgment of the Court of Appeals therefore is

Reversed.

JUSTICE BLACKMUN, with whom JUSTICE BRENNAN and JUSTICE MARSHALL join, dissenting.

The Court today takes still another step to limit the protections provided investors by § 10(b) of the Securities Exchange [668] Act of 1934.^[1] See Chiarella v. United States, 445 U. S. 222, 246 (1980) (dissenting opinion). The device employed in this case engrafts a special motivational requirement on the fiduciary duty doctrine. This innovation excuses a knowing and intentional violation of an insider's duty to shareholders if the insider does not act from a motive of personal gain. Even on the extraordinary facts of this case, such an innovation is not justified.

I

As the Court recognizes, ante, at 658, n. 18, the facts here are unusual. After a meeting with Ronald Secrist, a former Equity Funding employee, on March 7, 1973, App. 226, petitioner Raymond Dirks found himself in possession of material nonpublic information of massive fraud within the company.^[2] In the Court's words, "[h]e uncovered . . . startling information that required no analysis or exercise of judgment as to [669] its market relevance." Ibid. In disclosing that information to Dirks, Secrist intended that Dirks would disseminate the information to his clients, those clients would unload their Equity Funding securities on the market, and the price would fall precipitously, thereby triggering a reaction from the authorities. App. 16, 25, 27.

Dirks complied with his informant's wishes. Instead of reporting that information to the Securities and Exchange Commission (SEC or Commission) or to other regulatory agencies, Dirks began to disseminate the information to his clients and undertook his own investigation.^[3] One of his first steps was to direct his associates at Delafield Childs to draw up a list of Delafield clients holding Equity Funding securities. On March 12, eight days before Dirks flew to Los Angeles to investigate Secrist's story, he reported the full allegations to Boston Company Institutional Investors, Inc., which on March 15 and 16 sold approximately $1.2 million of Equity securities.^[4] See id., at 199. As he gathered more [670] information, he selectively disclosed it to his clients. To those holding Equity Funding securities he gave the "hard" story — all the allegations; others received the "soft" story — a recitation of vague factors that might reflect adversely on Equity Funding's management. See id., at 211, n. 24.

Dirks' attempts to disseminate the information to nonclients were feeble, at best. On March 12, he left a message for Herbert Lawson, the San Francisco bureau chief of The Wall Street Journal. Not until March 19 and 20 did he call Lawson again, and outline the situation. William Blundell, a Journal investigative reporter based in Los Angeles, got in touch with Dirks about his March 20 telephone call. On March 21, Dirks met with Blundell in Los Angeles. Blundell began his own investigation, relying in part on Dirks' contacts, and on March 23 telephoned Stanley Sporkin, the SEC's Deputy Director of Enforcement. On March 26, the next business day, Sporkin and his staff interviewed Blundell and asked to see Dirks the following morning. Trading was halted by the New York Stock Exchange at about the same time Dirks was talking to Los Angeles SEC personnel. The next day, March 28, the SEC suspended trading in Equity Funding securities. By that time, Dirks' clients had unloaded close to $15 million of Equity Funding stock and the price had plummeted from $26 to $15. The effect of Dirks' selective dissemination of Secrist's information was that Dirks' clients were able to shift the losses that were inevitable due to the Equity Funding fraud from themselves to uninformed market participants.

II

A

No one questions that Secrist himself could not trade on his inside information to the disadvantage of uninformed shareholders and purchasers of Equity Funding securities. See Brief for United States as Amicus Curiae 19, n. 12. Unlike the printer in Chiarella, Secrist stood in a fiduciary relationship [671] with these shareholders. As the Court states, ante, at 653, corporate insiders have an affirmative duty of disclosure when trading with shareholders of the corporation. See Chiarella, 445 U. S., at 227. This duty extends as well to purchasers of the corporation's securities. Id., at 227, n. 8, citing Gratz v. Claughton, 187 F. 2d 46, 49 (CA2), cert. denied, 341 U. S. 920 (1951).

The Court also acknowledges that Secrist could not do by proxy what he was prohibited from doing personally. Ante, at 659; Mosser v. Darrow, 341 U. S. 267, 272 (1951). But this is precisely what Secrist did. Secrist used Dirks to disseminate information to Dirks' clients, who in turn dumped stock on unknowing purchasers. Secrist thus intended Dirks to injure the purchasers of Equity Funding securities to whom Secrist had a duty to disclose. Accepting the Court's view of tippee liability,^[5] it appears that Dirks' knowledge of this breach makes him liable as a participant in the breach after the fact. Ante, at 659, 667; Chiarella, 445 U. S., at 230, n. 12.

B

The Court holds, however, that Dirks is not liable because Secrist did not violate his duty; according to the Court, this is so because Secrist did not have the improper purpose of personal gain. Ante, at 662-663, 666-667. In so doing, the Court imposes a new, subjective limitation on the scope of the duty owed by insiders to shareholders. The novelty of this limitation is reflected in the Court's lack of support for it.^[6]

[672] The insider's duty is owed directly to the corporation's shareholders.^[7] See Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1, 5 (1982); 3A W. Fletcher, Cyclopedia of the Law of Private Corporations § 1168.2, pp. 288-289 (rev. ed. 1975). As Chiarella recognized, it is based on the relationship of trust and confidence between the insider and the shareholder. 445 U. S., at 228. That relationship assures the shareholder that the insider may not take actions that will harm him unfairly.^[8] The affirmative duty of disclosure protects [673] against this injury. See Pepper v. Litton, 308 U. S. 295, 307, n. 15 (1939); Strong v. Repide, 213 U. S. 419, 431-434 (1909); see also Chiarella, 445 U. S., at 228, n. 10; cf. Pepper, 308 U. S., at 307 (fiduciary obligation to corporation exists for corporation's protection).

C

The fact that the insider himself does not benefit from the breach does not eradicate the shareholder's injury.^[9] Cf. Restatement (Second) of Trusts § 205, Comments c and d (1959) (trustee liable for acts causing diminution of value of trust); 3 [674] A. Scott, Law of Trusts § 205, p. 1665 (3d ed. 1967) (trustee liable for any losses to trust caused by his breach). It makes no difference to the shareholder whether the corporate insider gained or intended to gain personally from the transaction; the shareholder still has lost because of the insider's misuse of nonpublic information. The duty is addressed not to the insider's motives,^[10] but to his actions and their consequences on the shareholder. Personal gain is not an element of the breach of this duty.^[11]

[675] This conclusion is borne out by the Court's decision in Mosser v. Darrow, 341 U. S. 267 (1951). There, the Court faced an analogous situation: a reorganization trustee engaged two employee-promoters of subsidiaries of the companies being reorganized to provide services that the trustee considered to be essential to the successful operation of the trust. In order to secure their services, the trustee expressly agreed with the employees that they could continue to trade in the securities of the subsidiaries. The employees then turned their inside position into substantial profits at the expense both of the trust and of other holders of the companies' securities.

The Court acknowledged that the trustee neither intended to nor did in actual fact benefit from this arrangement; his motives were completely selfless and devoted to the companies. Id., at 275. The Court, nevertheless, found the trustee liable to the estate for the activities of the employees he authorized.^[12] The Court described the trustee's defalcation as "a willful and deliberate setting up of an interest in employees adverse to that of the trust." Id., at 272. The breach did not depend on the trustee's personal gain, and his motives in violating his duty were irrelevant; like Secrist, the trustee intended that others would abuse the inside information for their personal gain. Cf. Dodge v. Ford Motor Co., 204 Mich. 459, 506-509, 170 N. W. 668, 684-685 (1919) (Henry Ford's philanthropic motives did not permit him to [676] set Ford Motor Company dividend policies to benefit public at expense of shareholders).

As Mosser demonstrates, the breach consists in taking action disadvantageous to the person to whom one owes a duty. In this case, Secrist owed a duty to purchasers of Equity Funding shares. The Court's addition of the bad-purpose element to a breach-of-fiduciary-duty claim is flatly inconsistent with the principle of Mosser. I do not join this limitation of the scope of an insider's fiduciary duty to shareholders.^[13]

III

The improper-purpose requirement not only has no basis in law, but it also rests implicitly on a policy that I cannot accept. The Court justifies Secrist's and Dirks' action because the general benefit derived from the violation of Secrist's duty to shareholders outweighed the harm caused to those [677] shareholders, see Heller, Chiarella, SEC Rule 14e-3 and Dirks: "Fairness" versus Economic Theory, 37 Bus. Lawyer 517, 550 (1982); Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 S. Ct. Rev. 309, 338 — in other words, because the end justified the means. Under this view, the benefit conferred on society by Secrist's and Dirks' activities may be paid for with the losses caused to shareholders trading with Dirks' clients.^[14]

Although Secrist's general motive to expose the Equity Funding fraud was laudable, the means he chose were not. Moreover, even assuming that Dirks played a substantial role in exposing the fraud,^[15] he and his clients should not profit from the information they obtained from Secrist. Misprision of a felony long has been against public policy. Branzburg v. Hayes, 408 U. S. 665, 696-697 (1972); see 18 U. S. C. § 4. A person cannot condition his transmission of information of a crime on a financial award. As a citizen, Dirks had at least an ethical obligation to report the information to the proper authorities. See ante, at 661, n. 21. The Court's holding is deficient in policy terms not because it fails to create a legal [678] norm out of that ethical norm, see ibid., but because it actually rewards Dirks for his aiding and abetting.

Dirks and Secrist were under a duty to disclose the information or to refrain from trading on it.^[16] I agree that disclosure in this case would have been difficult. Ibid. I also recognize that the SEC seemingly has been less than helpful in its view of the nature of disclosure necessary to satisfy the disclose-or-refrain duty. The Commission tells persons with inside information that they cannot trade on that information unless they disclose; it refuses, however, to tell them how to disclose.^[17] See In re Faberge, Inc., 45 S. E. C. 249, 256 (1973) (disclosure requires public release through public media designed to reach investing public generally). This seems to be a less than sensible policy, which it is incumbent on the Commission to correct. The Court, however, has no authority to remedy the problem by opening a hole in the congressionally mandated prohibition on insider trading, thus rewarding such trading.

IV

In my view, Secrist violated his duty to Equity Funding shareholders by transmitting material nonpublic information [679] to Dirks with the intention that Dirks would cause his clients to trade on that information. Dirks, therefore, was under a duty to make the information publicly available or to refrain from actions that he knew would lead to trading. Because Dirks caused his clients to trade, he violated § 10(b) and Rule 10b-5. Any other result is a disservice to this country's attempt to provide fair and efficient capital markets. I dissent.

----------

[*] Solicitor General Lee, Assistant Attorney General Jensen, Stephen M. Shapiro, Deputy Assistant Attorney General Olsen, David A. Strauss, and Geoffrey S. Stewart filed a brief for the United States as amicus curiae urging reversal.

[1] The facts stated here are taken from more detailed statements set forth by the Administrative Law Judge, App. 176-180, 225-247; the opinion of the Securities and Exchange Commission, 21 S. E. C. Docket 1401, 1402-1406 (1981); and the opinion of Judge Wright in the Court of Appeals, 220 U. S. App. D. C. 309, 314-318, 681 F. 2d 824, 829-833 (1982).

[2] Dirks received from his firm a salary plus a commission for securities transactions above a certain amount that his clients directed through his firm. See 21 S. E. C. Docket, at 1402, n. 3. But "[i]t is not clear how many of those with whom Dirks spoke promised to direct some brokerage business through [Dirks' firm] to compensate Dirks, or how many actually did so." 220 U. S. App. D. C., at 316, 681 F. 2d, at 831. The Boston Company Institutional Investors, Inc., promised Dirks about $25,000 in commissions, but it is unclear whether Boston actually generated any brokerage business for his firm. See App. 199, 204-205; 21 S. E. C. Docket, at 1404, n. 10; 220 U. S. App. D. C., at 316, n. 5, 681 F. 2d, at 831, n. 5.

[3] As early as 1971, the SEC had received allegations of fraudulent accounting practices at Equity Funding. Moreover, on March 9, 1973, an official of the California Insurance Department informed the SEC's regional office in Los Angeles of Secrist's charges of fraud. Dirks himself voluntarily presented his information at the SEC's regional office beginning on March 27.

[4] A federal grand jury in Los Angeles subsequently returned a 105-count indictment against 22 persons, including many of Equity Funding's officers and directors. All defendants were found guilty of one or more counts, either by a plea of guilty or a conviction after trial. See Brief for Petitioner 15; App. 149-153.

[5] Section 17(a), as set forth in 15 U. S. C. § 77q(a), provides:

"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly —

"(1) to employ any device, scheme, or artifice to defraud, or

"(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

"(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

[6] Section 10(b) provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

.....

"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

[7] Rule 10b-5 provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

"(a) To employ any device, scheme, or artifice to defraud,

"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

"(c) 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."

[8] JUSTICE BLACKMUN's dissenting opinion minimizes the role Dirks played in making public the Equity Funding fraud. See post, at 670 and 677, n. 15. The dissent would rewrite the history of Dirks' extensive investigative efforts. See, e. g., 21 S. E. C. Docket, at 1412 ("It is clear that Dirks played an important role in bringing [Equity Funding's] massive fraud to light, and it is also true that he reported the fraud allegation to [Equity Funding's] auditors and sought to have the information published in the Wall Street Journal"); 220 U. S. App. D. C., at 314, 681 F. 2d, at 829 (Wright, J.) ("Largely thanks to Dirks one of the most infamous frauds in recent memory was uncovered and exposed, while the record shows that the SEC repeatedly missed opportunities to investigate Equity Funding").

[9] Section 15 of the Securities Exchange Act, 15 U. S. C. § 78o(b)(4)(E), provides that the SEC may impose certain sanctions, including censure, on any person associated with a registered broker-dealer who has "willfully aided [or] abetted" any violation of the federal securities laws. See 15 U. S. C. § 78ff(a) (1976 ed., Supp. V) (providing criminal penalties).

[10] The duty that insiders owe to the corporation's shareholders not to trade on inside information differs from the common-law duty that officers and directors also have to the corporation itself not to mismanage corporate assets, of which confidential information is one. See 3 W. Fletcher, Cyclopedia of the Law of Private Corporations §§ 848, 900 (rev. ed. 1975 and Supp. 1982); 3A id., §§ 1168.1, 1168.2 (rev. ed. 1975). In holding that breaches of this duty to shareholders violated the Securities Exchange Act, the Cady, Roberts Commission recognized, and we agree, that "[a] significant purpose of the Exchange Act was to eliminate the idea that use of inside information for personal advantage was a normal emolument of corporate office." See 40 S. E. C., at 912, n. 15.

[11] Rule 10b-5 is generally the most inclusive of the three provisions on which the SEC rested its decision in this case, and we will refer to it when we note the statutory basis for the SEC's inside-trading rules.

[12] The SEC views the disclosure duty as requiring more than disclosure to purchasers or sellers: "Proper and adequate disclosure of significant corporate developments can only be effected by a public release through the appropriate public media, designed to achieve a broad dissemination to the investing public generally and without favoring any special person or group." In re Faberge, Inc., 45 S. E. C. 249, 256 (1973).

[13] See 445 U. S., at 233; id., at 237 (STEVENS, J., concurring); id., at 238-239 (BRENNAN, J., concurring in judgment); id., at 239-240 (BURGER, C. J., dissenting). Cf. id., at 252, n. 2 (BLACKMUN, J., dissenting) (recognizing that there is no obligation to disclose material nonpublic information obtained through the exercise of "diligence or acumen" and "honest means," as opposed to "stealth").

[14] Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. See SEC v. Monarch Fund, 608 F. 2d 938, 942 (CA2 1979); In re Investors Management Co., 44 S. E. C. 633, 645 (1971); In re Van Alstyne, Noel & Co., 43 S. E. C. 1080, 1084-1085 (1969); In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 937 (1968); Cady, Roberts, 40 S. E. C., at 912. When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tippee. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F. 2d 228, 237 (CA2 1974) (investment banker had access to material information when working on a proposed public offering for the corporation). For such a duty to be imposed, however, the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.

[15] Apparently, the SEC believes this case differs from Chiarella in that Dirks' receipt of inside information from Secrist, an insider, carried Secrist's duties with it, while Chiarella received the information without the direct involvement of an insider and thus inherited no duty to disclose or abstain. The SEC fails to explain, however, why the receipt of nonpublic information from an insider automatically carries with it the fiduciary duty of the insider. As we emphasized in Chiarella, mere possession of nonpublic information does not give rise to a duty to disclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider creates such a special relationship between the tippee and the corporation's shareholders.

Apparently recognizing the weakness of its argument in light of Chiarella, the SEC attempts to distinguish that case factually as involving not "inside" information, but rather "market" information, i. e., "information originating outside the company and usually about the supply and demand for the company's securities." Brief for Respondent 22. This Court drew no such distinction in Chiarella and, as THE CHIEF JUSTICE noted, "[i]t is clear that § 10(b) and Rule 10b-5 by their terms and by their history make no such distinction." 445 U. S., at 241, n. 1 (dissenting opinion). See ALI, Federal Securities Code § 1603, Comment (2)(j) (Prop. Off. Draft 1978).

[16] In Chiarella, we noted that formulation of an absolute equal information rule "should not be undertaken absent some explicit evidence of congressional intent." 445 U. S., at 233. Rather than adopting such a radical view of securities trading, Congress has expressly exempted many market professionals from the general statutory prohibition set forth in § 11(a)(1) of the Securities Exchange Act, 15 U. S. C. § 78k(a)(1), against members of a national securities exchange trading for their own account. See id., at 233, n. 16. We observed in Chiarella that "[t]he exception is based upon Congress' recognition that [market professionals] contribute to a fair and orderly marketplace at the same time they exploit the informational advantage that comes from their possession of [nonpublic information]." Ibid.

[17] The SEC expressly recognized that "[t]he value to the entire market of [analysts'] efforts cannot be gainsaid; market efficiency in pricing is significantly enhanced by [their] initiatives to ferret out and analyze information, and thus the analyst's work redounds to the benefit of all investors." 21 S. E. C. Docket, at 1406. The SEC asserts that analysts remain free to obtain from management corporate information for purposes of "filling in the `interstices in analysis'. . . ." Brief for Respondent 42 (quoting Investors Management Co., 44 S. E. C., at 646). But this rule is inherently imprecise, and imprecision prevents parties from ordering their actions in accord with legal requirements. Unless the parties have some guidance as to where the line is between permissible and impermissible disclosures and uses, neither corporate insiders nor analysts can be sure when the line is crossed. Cf. Adler v. Klawans, 267 F. 2d 840, 845 (CA2 1959) (Burger, J., sitting by designation).

[18] On its facts, this case is the unusual one. Dirks is an analyst in a broker-dealer firm, and he did interview management in the course of his investigation. He uncovered, however, startling information that required no analysis or exercise of judgment as to its market relevance. Nonetheless, the principle at issue here extends beyond these facts. The SEC's rule — applicable without regard to any breach by an insider — could have serious ramifications on reporting by analysts of investment views.

Despite the unusualness of Dirks' "find," the central role that he played in uncovering the fraud at Equity Funding, and that analysts in general can play in revealing information that corporations may have reason to withhold from the public, is an important one. Dirks' careful investigation brought to light a massive fraud at the corporation. And until the Equity Funding fraud was exposed, the information in the trading market was grossly inaccurate. But for Dirks' efforts, the fraud might well have gone undetected longer. See n. 8, supra.

[19] The SEC itself has recognized that tippee liability properly is imposed only in circumstances where the tippee knows, or has reason to know, that the insider has disclosed improperly inside corporate information. In Investors Management Co., supra, the SEC stated that one element of tippee liability is that the tippee knew or had reason to know that the information "was non-public and had been obtained improperly by selective revelation or otherwise." 44 S. E. C., at 641 (emphasis added). Commissioner Smith read this test to mean that a tippee can be held liable only if he received information in breach of an insider's duty not to disclose it. Id., at 650 (concurring in result).

[20] Professor Loss has linked tippee liability to the concept in the law of restitution that " `[w]here a fiduciary in violation of his duty to the beneficiary communicates confidential information to a third person, the third person, if he had notice of the violation of duty, holds upon a constructive trust for the beneficiary any profit which he makes through the use of such information.' " 3 L. Loss, Securities Regulation 1451 (2d ed. 1961) (quoting Restatement of Restitution § 201(2) (1937)). Other authorities likewise have expressed the view that tippee liability exists only where there has been a breach of trust by an insider of which the tippee had knowledge. See, e. g., Ross v. Licht, 263 F. Supp. 395, 410 (SDNY 1967); A. Jacobs, The Impact of Rule 10b-5, § 167, p. 7-4 (rev. ed. 1980) ("[T]he better view is that a tipper must know or have reason to know the information is nonpublic and was improperly obtained"); Fleischer, Mundheim, & Murphy, An Initial Inquiry Into the Responsibility to Disclose Market Information, 121 U. Pa. L. Rev. 798, 818, n. 76 (1973) ("The extension of rule 10b-5 restrictions to tippees of corporate insiders can best be justified on the theory that they are participating in the insider's breach of his fiduciary duty"). Cf. Restatement (Second) of Agency § 312, Comment c (1958) ("A person who, with notice that an agent is thereby violating his duty to his principal, receives confidential information from the agent, may be [deemed] . . . a constructive trustee").

[21] We do not suggest that knowingly trading on inside information is ever "socially desirable or even that it is devoid of moral considerations." Dooley, Enforcement of Insider Trading Restrictions, 66 Va. L. Rev. 1, 55 (1980). Nor do we imply an absence of responsibility to disclose promptly indications of illegal actions by a corporation to the proper authorities — typically the SEC and exchange authorities in cases involving securities. Depending on the circumstances, and even where permitted by law, one's trading on material nonpublic information is behavior that may fall below ethical standards of conduct. But in a statutory area of the law such as securities regulation, where legal principles of general application must be applied, there may be "significant distinctions between actual legal obligations and ethical ideals." SEC, Report of Special Study of Securities Markets, H. R. Doc. No. 95, 88th Cong., 1st Sess., pt. 1, pp. 237-238 (1963). The SEC recognizes this. At oral argument, the following exchange took place:

"QUESTION: So, it would not have satisfied his obligation under the law to go to the SEC first?

"[SEC's counsel]: That is correct. That an insider has to observe what has come to be known as the abstain or disclosure rule. Either the information has to be disclosed to the market if it is inside information . . . or the insider must abstain." Tr. of Oral Arg. 27.

Thus, it is clear that Rule 10b-5 does not impose any obligation simply to tell the SEC about the fraud before trading.

[22] An example of a case turning on the court's determination that the disclosure did not impose any fiduciary duties on the recipient of the inside information is Walton v. Morgan Stanley & Co., 623 F. 2d 796 (CA2 1980). There, the defendant investment banking firm, representing one of its own corporate clients, investigated another corporation that was a possible target of a takeover bid by its client. In the course of negotiations the investment banking firm was given, on a confidential basis, unpublished material information. Subsequently, after the proposed takeover was abandoned, the firm was charged with relying on the information when it traded in the target corporation's stock. For purposes of the decision, it was assumed that the firm knew the information was confidential, but that it had been received in arm's-length negotiations. See id., at 798. In the absence of any fiduciary relationship, the Court of Appeals found no basis for imposing tippee liability on the investment firm. See id., at 799.

[23] Scienter — "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U. S. 185, 193-194, n. 12 (1976) — is an independent element of a Rule 10b-5 violation. See Aaron v. SEC, 446 U. S. 680, 695 (1980). Contrary to the dissent's suggestion, see post, at 674, n. 10, motivation is not irrelevant to the issue of scienter. It is not enough that an insider's conduct results in harm to investors; rather, a violation may be found only where there is "intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, supra, at 199. The issue in this case, however, is not whether Secrist or Dirks acted with scienter, but rather whether there was any deceptive or fraudulent conduct at all, i. e., whether Secrist's disclosure constituted a breach of his fiduciary duty and thereby caused injury to shareholders. See n. 27, infra. Only if there was such a breach did Dirks, a tippee, acquire a fiduciary duty to disclose or abstain.

[24] Without legal limitations, market participants are forced to rely on the reasonableness of the SEC's litigation strategy, but that can be hazardous, as the facts of this case make plain. Following the SEC's filing of the Texas Gulf Sulphur action, Commissioner (and later Chairman) Budge spoke of the various implications of applying Rule 10b-5 in inside-trading cases:

"Turning to the realm of possible defendants in the present and potential civil actions, the Commission certainly does not contemplate suing every person who may have come across inside information. In the Texas Gulf action neither tippees nor persons in the vast rank and file of employees have been named as defendants. In my view, the Commission in future cases normally should not join rank and file employees or persons outside the company such as an analyst or reporter who learns of inside information." Speech of Hamer Budge to the New York Regional Group of the American Society of Corporate Secretaries, Inc. (Nov. 18, 1965), reprinted in The Texas Gulf Sulphur Case — What It Is and What It Isn't, The Corporate Secretary, No. 127, p. 6 (Dec. 17, 1965) (emphasis added).

[25] Dirks contends that he was not a "tippee" because the information he received constituted unverified allegations of fraud that were denied by management and were not "material facts" under the securities laws that required disclosure before trading. He also argues that the information he received was not truly "inside" information, i. e., intended for a confidential corporate purpose, but was merely evidence of a crime. The Solicitor General agrees. See Brief for United States as Amicus Curiae 22. We need not decide, however, whether the information constituted "material facts," or whether information concerning corporate crime is properly characterized as "inside information." For purposes of deciding this case, we assume the correctness of the SEC's findings, accepted by the Court of Appeals, that petitioner was a tippee of material inside information.

[26] Judge Wright found that Dirks acquired a fiduciary duty by virtue of his position as an employee of a broker-dealer. See 220 U. S. App. D. C., at 325-327, 681 F. 2d, at 840-842. The SEC, however, did not consider Judge Wright's novel theory in its decision, nor did it present that theory to the Court of Appeals. The SEC also has not argued Judge Wright's theory in this Court. See Brief for Respondent 21, n. 27. The merits of such a duty are therefore not before the Court. See SEC v. Chenery Corp., 332 U. S. 194, 196-197 (1947).

[27] In this Court, the SEC appears to contend that an insider invariably violates a fiduciary duty to the corporation's shareholders by transmitting nonpublic corporate information to an outsider when he has reason to believe that the outsider may use it to the disadvantage of the shareholders. "Thus, regardless of any ultimate motive to bring to public attention the derelictions at Equity Funding, Secrist breached his duty to Equity Funding shareholders." Brief for Respondent 31. This perceived "duty" differs markedly from the one that the SEC identified in Cady, Roberts and that has been the basis for federal tippee-trading rules to date. In fact, the SEC did not charge Secrist with any wrongdoing, and we do not understand the SEC to have relied on any theory of a breach of duty by Secrist in finding that Dirks breached his duty to Equity Funding's shareholders. See App. 250 (decision of Administrative Law Judge) ("One who knows himself to be a beneficiary of non-public, selectively disclosed inside information must fully disclose or refrain from trading"); Record, SEC's Reply to Notice of Supplemental Authority before the SEC 4 ("If Secrist was acting properly, Dirks inherited a duty to [Equity Funding]'s shareholders to refrain from improper private use of the information"); Brief for SEC in No. 81-1243 (CADC), pp. 47-50; id., at 51 ("[K]nowing possession of inside information by any person imposes a duty to abstain or disclose"); id., at 52-54; id., at 55 ("[T]his obligation arises not from the manner in which such information is acquired . . ."); 220 U. S. App. D. C., at 322-323, 681 F. 2d, at 837-838 (Wright, J.).

The dissent argues that "Secrist violated his duty to Equity Funding shareholders by transmitting material nonpublic information to Dirks with the intention that Dirks would cause his clients to trade on that information. Post, at 678-679. By perceiving a breach of fiduciary duty whenever inside information is intentionally disclosed to securities traders, the dissenting opinion effectively would achieve the same result as the SEC's theory below, i. e., mere possession of inside information while trading would be viewed as a Rule 10b-5 violation. But Chiarella made it explicitly clear that there is no general duty to forgo market transactions "based on material, nonpublic information." 445 U. S., at 233. Such a duty would "depar[t] radically from the established doctrine that duty arises from a specific relationship between two parties." Ibid. See supra, at 654-655.

Moreover, to constitute a violation of Rule 10b-5, there must be fraud. See Ernst & Ernst v. Hochfelder, 425 U. S., at 199 (statutory words "manipulative," "device," and "contrivance . . . connot[e] intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities") (emphasis added). There is no evidence that Secrist's disclosure was intended to or did in fact "deceive or defraud" anyone. Secrist certainly intended to convey relevant information that management was unlawfully concealing, and — so far as the record shows — he believed that persuading Dirks to investigate was the best way to disclose the fraud. Other efforts had proved fruitless. Under any objective standard, Secrist received no direct or indirect personal benefit from the disclosure.

The dissenting opinion focuses on shareholder "losses," "injury," and "damages," but in many cases there may be no clear causal connection between inside trading and outsiders' losses. In one sense, as market values fluctuate and investors act on inevitably incomplete or incorrect information, there always are winners and losers; but those who have "lost" have not necessarily been defrauded. On the other hand, inside trading for personal gain is fraudulent, and is a violation of the federal securities laws. See Dooley, supra n. 21, at 39-41, 70. Thus, there is little legal significance to the dissent's argument that Secrist and Dirks created new "victims" by disclosing the information to persons who traded. In fact, they prevented the fraud from continuing and victimizing many more investors.

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[1] See, e. g., Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975); Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976); Piper v. ChrisCraft Industries, Inc., 430 U. S. 1 (1977); Chiarella v. United States, 445 U. S. 222 (1980); Aaron v. SEC, 446 U. S. 680 (1980). This trend frustrates the congressional intent that the securities laws be interpreted flexibly to protect investors, see Affiliated Ute Citizens v. United States, 406 U. S. 128, 151 (1972); SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180, 186 (1963), and to regulate deceptive practices "detrimental to the interests of the investor," S. Rep. No. 792, 73d Cong., 2d Sess., 18 (1934); see H. R. Rep. No. 1383, 73d Cong., 2d Sess., 10 (1934). Moreover, the Court continues to refuse to accord to SEC administrative decisions the deference it normally gives to an agency's interpretation of its own statute. See, e. g., Blum v. Bacon, 457 U. S. 132 (1982).

[2] Unknown to Dirks, Secrist also told story to New York insurance regulators the same day. App. 23. They immediately assured themselves that Equity Funding's New York subsidiary had sufficient assets to cover its outstanding policies and then passed on the information to California regulators who in turn informed Illinois regulators. Illinois investigators, later joined by California officials, conducted a surprise audit of Equity Funding's Illinois subsidiary, id., at 87-88, to find $22 million of the subsidiary's assets missing. On March 30, these authorities seized control of the Illinois subsidiary. Id., at 271.

[3] In the same administrative proceeding at issue here, the Administrative Law Judge (ALJ) found that Dirks' clients — five institutional investment advisers — violated § 17(a) of the Securities Act of 1933, 15 U. S. C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U. S. C. § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5 (1983), by trading on Dirks' tips. App. 297. All the clients were censured, except Dreyfus Corporation. The ALJ found that Dreyfus had made significant efforts to disclose the information to Goldman, Sachs, the purchaser of its securities. Id., at 299, 301. None of Dirks' clients appealed these determinations. App. to Pet. for Cert. B-2, n. 1.

[4] The Court's implicit suggestion that Dirks did not gain by this selective dissemination of advice, ante, at 649, n. 2, is inaccurate. The ALJ found that because of Dirks' information, Boston Company Institutional Investors, Inc., directed business to Delafield Childs that generated approximately $25,000 in commissions. App. 199, 204-205. While it is true that the exact economic benefit gained by Delafield Childs due to Dirks' activities is unknowable because of the structure of compensation in the securities market, there can be no doubt that Delafield and Dirks gained both monetary rewards and enhanced reputations for "looking after" their clients.

[5] I interpret the Court's opinion to impose liability on tippees like Dirks when the tippee knows or has reason to know that the information is material and nonpublic and was obtained through a breach of duty by selective revelation or otherwise. See In re Investors Management Co., 44 S. E. C. 633, 641 (1971).

[6] The Court cites only a footnote in an SEC decision and Professor Brudney to support its rule. Ante, at 663-664. The footnote, however, merely identifies one result the securities laws are intended to prevent. It does not define the nature of the duty itself. See n. 9, infra. Professor Brudney's quoted statement appears in the context of his assertion that the duty of insiders to disclose prior to trading with shareholders is in large part a mechanism to correct the information available to noninsiders. Professor Brudney simply recognizes that the most common motive for breaching this duty is personal gain; he does not state, however, that the duty prevents only personal aggrandizement. Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 345-348 (1979). Surely, the Court does not now adopt Professor Brudney's access-to-information theory, a close cousin to the equality-of-information theory it accuses the SEC of harboring. See ante, at 655-658.

[7] The Court correctly distinguishes this duty from the duty of an insider to the corporation not to mismanage corporate affairs or to misappropriate corporate assets. Ante, at 653, n. 10. That duty also can be breached when the insider trades in corporate securities on the basis of inside information. Although a shareholder suing in the name of the corporation can recover for the corporation damages for any injury the insider causes by the breach of this distinct duty, Diamond v. Oreamuno, 24 N. Y. 2d 494, 498, 248 N. E. 2d 910, 912 (1969); see Thomas v. Roblin Industries, Inc., 520 F. 2d 1393, 1397 (CA3 1975), insider trading generally does not injure the corporation itself. See Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1, 2, n. 5, 28, n. 111 (1982).

[8] As it did in Chiarella, 445 U. S., at 226-229, the Court adopts the Cady, Roberts formulation of the duty. Ante, at 653-654.

"Analytically, the obligation rests on two principal elements; first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing." In re Cady, Roberts & Co., 40 S. E. C. 907, 912 (1961) (footnote omitted).

The first element — on which Chiarella's holding rests — establishes the type of relationship that must exist between the parties before a duty to disclose is present. The second — not addressed by Chiarella — identifies the harm that the duty protects against: the inherent unfairness to the shareholder caused when an insider trades with him on the basis of undisclosed inside information.

[9] Without doubt, breaches of the insider's duty occur most often when an insider seeks personal aggrandizement at the expense of shareholders. Because of this, descriptions of the duty to disclose are often coupled with statements that the duty prevents unjust enrichment. See, e. g., In re Cady, Roberts & Co., 40 S. E. C., at 912, n. 15; Langevoort, 70 Calif. L. Rev., at 19. Private gain is certainly a strong motivation for breaching the duty.

It is, however, not an element of the breach of this duty. The reference to personal gain in Cady, Roberts for example, is appended to the first element underlying the duty which requires that an insider have a special relationship to corporate information that he cannot appropriate for his own benefit. See n. 8, supra. It does not limit the second element which addresses the injury to the shareholder and is at issue here. See ibid. In fact, Cady, Roberts describes the duty more precisely in a later footnote: "In the circumstances, [the insider's] relationship to his customers was such that he would have a duty not to take a position adverse to them, not to take secret profits at their expense, not to misrepresent facts to them, and in general to place their interests ahead of his own." 40 S. E. C., at 916, n. 31. This statement makes clear that enrichment of the insider himself is simply one of the results the duty attempts to prevent.

[10] Of course, an insider is not liable in a Rule 10b-5 administrative action unless he has the requisite scienter. Aaron v. SEC, 446 U. S., at 691. He must know that his conduct violates or intend that it violate his duty. Secrist obviously knew and intended that Dirks would cause trading on the inside information and that Equity Funding shareholders would be harmed. The scienter requirement addresses the intent necessary to support liability; it does not address the motives behind the intent.

[11] The Court seems concerned that this case bears on insiders' contacts with analysts for valid corporate reasons. Ante, at 658-659. It also fears that insiders may not be able to determine whether the information transmitted is material or nonpublic. Ante, at 661-662. When the disclosure is to an investment banker or some other adviser, however, there is normally no breach because the insider does not have scienter: he does not intend that the inside information be used for trading purposes to the disadvantage of shareholders. Moreover, if the insider in good faith does not believe that the information is material or nonpublic, he also lacks the necessary scienter. Ernst & Ernst v. Hochfelder, 425 U. S., at 197. In fact, the scienter requirement functions in part to protect good-faith errors of this type. Id., at 211, n. 31.

Should the adviser receiving the information use it to trade, it may breach a separate contractual or other duty to the corporation not to misuse the information. Absent such an arrangement, however, the adviser is not barred by Rule 10b-5 from trading on that information if it believes that the insider has not breached any duty to his shareholders. See Walton v. Morgan Stanley & Co., 623 F. 2d 796, 798-799 (CA2 1980).

The situation here, of course, is radically different. Ante, at 658, n. 18 (Dirks received information requiring no analysis "as to its market relevance"). Secrist divulged the information for the precise purpose of causing Dirks' clients to trade on it. I fail to understand how imposing liability on Dirks will affect legitimate insider-analyst contacts.

[12] The duty involved in Mosser was the duty to the corporation in trust not to misappropriate its assets. This duty, of course, differs from the duty to shareholders involved in this case. See n. 7, supra. Trustees are also subject to a higher standard of care than scienter. 3 A. Scott, Law of Trusts § 201, p. 1650 (3d ed. 1967). In addition, strict trustees are bound not to trade in securities at all. See Langevoort, 70 Calif. L. Rev., at 2, n. 5. These differences, however, are irrelevant to the principle of Mosser that the motive of personal gain is not essential to a trustee's liability. In Mosser, as here, personal gain accrued to the tippees. See 341 U. S., at 273.

[13] Although I disagree in principle with the Court's requirement of an improper motive, I also note that the requirement adds to the administrative and judicial burden in Rule 10b-5 cases. Assuming the validity of the requirement, the SEC's approach — a violation occurs when the insider knows that the tippee will trade with the information, Brief for Respondent 31 — can be seen as a presumption that the insider gains from the tipping. The Court now requires a case-by-case determination, thus prohibiting such a presumption.

The Court acknowledges the burdens and difficulties of this approach, but asserts that a principle is needed to guide market participants. Ante, at 664. I fail to see how the Court's rule has any practical advantage over the SEC's presumption. The Court's approach is particularly difficult to administer when the insider is not directly enriched monetarily by the trading he induces. For example, the Court does not explain why the benefit Secrist obtained — the good feeling of exposing a fraud and his enhanced reputation — is any different from the benefit to an insider who gives the information as a gift to a friend or relative. Under the Court's somewhat cynical view, gifts involve personal gain. See ibid. Secrist surely gave Dirks a gift of the commissions Dirks made on the deal in order to induce him to disseminate the information. The distinction between pure altruism and self-interest has puzzled philosophers for centuries; there is no reason to believe that courts and administrative law judges will have an easier time with it.

[14] This position seems little different from the theory that insider trading should be permitted because it brings relevant information to the market. See H. Manne, Insider Trading and the Stock Market 59-76, 111-146 (1966); Manne, Insider Trading and the Law Professors, 23 Vand. L. Rev. 547, 565-576 (1970). The Court also seems to embrace a variant of that extreme theory, which postulates that insider trading causes no harm at all to those who purchase from the insider. Ante, at 666-667, n. 27. Both the theory and its variant sit at the opposite end of the theoretical spectrum from the much maligned equality-of-information theory, and never have been adopted by Congress or ratified by this Court. See Langevoort, 70 Calif. L. Rev., at 1, and n. 1. The theory rejects the existence of any enforceable principle of fairness between market participants.

[15] The Court uncritically accepts Dirks' own view of his role in uncovering the Equity Funding fraud. See ante, at 658, n. 18. It ignores the fact that Secrist gave the same information at the same time to state insurance regulators, who proceeded to expose massive fraud in a major Equity Funding subsidiary. The fraud surfaced before Dirks ever spoke to the SEC.

[16] Secrist did pass on his information to regulatory authorities. His good but misguided motive may be the reason the SEC did not join him in the administrative proceedings against Dirks and his clients. The fact that the SEC, in an exercise of prosecutorial discretion, did not charge Secrist under Rule 10b-5 says nothing about the applicable law. Cf. ante, at 665, n. 25 (suggesting otherwise). Nor does the fact that the SEC took an unsupportable legal position in proceedings below indicate that neither Secrist nor Dirks is liable under any theory. Cf. ibid. (same).

[17] At oral argument, the SEC's view was that Dirks' obligation to disclose would not be satisfied by reporting the information to the SEC. Tr. of Oral Arg. 27, quoted ante, at 661, n. 21. This position is in apparent conflict with the statement in its brief that speaks favorably of a safe harbor rule under which an investor satisfies his obligation to disclose by reporting the information to the Commission and then waiting a set period before trading. Brief for Respondent 43-44. The SEC, however, has neither proposed nor adopted a rule to this effect, and thus persons such as Dirks have no real option other than to refrain from trading.

[757] T. Christopher Browne, Nancy E. McGinley, S.E.C., Fort Worth, Tex., for plaintiff.

Robert G. Grove, Grove & Grove, David Machanic, Michael Minnis, Pierson, Ball & Dowd, Harry A. Woods, Jr., Crowe & Dunlevy, Oklahoma City, Okl., Frederick T. Spindel, Washington, D.C., Daniel S. Greenfeld, Seyfarth, Shaw, Fairweather & Geraldson, New York City, for defendants.

MEMORANDUM AND ORDER

SAFFELS, District Judge, Sitting by Designation.

This action brought by the Securities and Exchange Commission [hereinafter SEC] was tried to the court on March 19-22, 1984. It involved allegations of violations of Section 10(b) of the Securities Exchange Act of 1934 and violations of Commission Rule 10b-5. On the basis of the following findings of fact and conclusions of law, the court shall enter judgment on behalf of the defendants.

Findings of Fact

The following findings of fact have been stipulated to by all parties and accepted by the court and are set forth as follows.

1. The SEC, pursuant to the authority granted to it by Sections 10(b), 16(a) and 23(a) of the Securities Exchange Act of 1934 [15 U.S.C. 78j(b), 78p(a) and 78w(a)] has promulgated Rules 10b-5, 16a-1 and [758] 16a-8 [17 C.F.R. 240.10b-5, 240.16a-1 and 240.16a-8], which have been in effect at all times mentioned in the complaint.

2. This court has jurisdiction over this action pursuant to Section 27 of the Securities Exchange Act [15 U.S.C. 78aa].

3. The SEC brings this action pursuant to Sections 21(d) and 21(e) of the Securities Exchange Act [15 U.S.C. 78u(d) and 78u(e)].

4. The defendants, directly or indirectly, made use of the means and instrumentalities of interstate commerce and of the mails in connection with the transactions, acts, practices and courses of business alleged in the complaint.

5. Certain of the transactions, acts, practices and courses of business alleged in the complaint as violations of, and aiding and abetting violations of, the Securities Exchange Act have occurred in the Western District of Oklahoma; and certain of the defendants can be found, inhabit or transact business in the Western District of Oklahoma.

6. Barry L. Switzer resides at 2811 Castlewood Drive, Norman, Oklahoma (73070). At all times mentioned in the complaint, Switzer was the head football coach at the University of Oklahoma in Norman, Oklahoma.

7. Lee Allan Smith resides at 6033 Riviera Drive, Oklahoma City, Oklahoma (73112). At all times mentioned in the complaint, Smith was General Manager of television station KTVY in Oklahoma City, Oklahoma.

8. Sedwyn T. Kennedy lives in the Oklahoma City, Oklahoma area. At all times mentioned in the complaint, Kennedy held an ownership interest in and operated restaurants located in the Oklahoma City, Oklahoma, area.

9. Harold D. Deem resides in Texas. Until 1975, he was involved in the restaurant business. At all times mentioned in the complaint, Deem managed his own investments, and he was a partner, along with Kennedy, in S & H Investments, an investment partnership.

10. Harold L. Hodges resides at 3215 Thornridge Road, Oklahoma City, Oklahoma (73120), and/or 2301 Grand Boulevard, Oklahoma City, Oklahoma (73116). At all times mentioned in the complaint, Hodges was the Owner and President of Core Oil and Gas, as well as the Owner and President of Bill Hodges Truck Company, both located in Oklahoma City, Oklahoma.

11. Robert E. Amyx resides at 3236 Rock Hollow, Oklahoma City, Oklahoma (74120). At all times mentioned in the complaint, Amyx was Vice President of Core Oil and Gas and Vice President of Bill Hodges Truck Company, and has been a partner, along with Hodges, in Hodges, Amyx, Cross and Hodges, an investment partnership.

12. Robert M. Hoover, Jr. resides at 7209 Waverly, Oklahoma City, Oklahoma (73120). At all times mentioned in the complaint, Hoover was Chairman of the Board of Directors of Oklahoma Energies Corporation, a publicly-traded company, located in Oklahoma City, Oklahoma.

13. Texas International Company [hereinafter TIC] is a Delaware corporation with principal offices located in Oklahoma City, Oklahoma. At all times mentioned in the complaint, TIC was engaged in, among other things, exploration for and development of oil and natural gas properties. At all times mentioned in the complaint, TIC's common stock was registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act [15 U.S.C. 78l (b)] and was traded on the New York Stock Exchange, as well as other exchanges. On or about June 18, 1982, a wholly-owned subsidiary of TIC merged with Phoenix Resources Company [hereinafter Phoenix] and Phoenix became a wholly-owned subsidiary of TIC. At all times mentioned in the complaint prior to the merger, TIC owned in excess of fifty percent (50%) of the common stock of Phoenix, and, by reason of such ownership position, controlled Phoenix through election of three of the five members of the Phoenix Board of Directors.

[759] 14. Prior to the merger, Phoenix, the successor to King Resources Company, was a Maine corporation with principal offices located in Oklahoma City, Oklahoma. At all times mentioned in the complaint prior to the merger, Phoenix engaged in, among other things, exploration for and development of oil and natural gas properties. At all times mentioned in the complaint prior to the merger, Phoenix's common stock was registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act [15 U.S.C. 78l (b)] and was traded in the Over-the-Counter securities market on the National Association of Securities Dealers Automated Quotation System.

15. On or about Monday, June 8, 1981, after discussions with defendant Deem, Kennedy purchased five thousand (5,000) shares of Phoenix at Forty-Two and 75/100 Dollars ($42.75) per share through the S & H Investments account; and on or about Tuesday, June 9, 1981, after further discussions with Deem, Kennedy purchased an additional one thousand (1,000) shares of Phoenix at Forty-Nine Dollars ($49) per share.

16. On or about Wednesday, June 10, and Friday, June 12, 1981, S & H Investments sold all six thousand (6,000) shares of Phoenix at prices between Sixty and 50/100 Dollars ($60.50) and Sixty-Eight and 50/100 Dollars ($68.50) per share; the pretax profits realized by and divided between Kennedy and Deem on the basis of this trading amounted to approximately One Hundred Eighteen Thousand Five Hundred Eighty-Seven Dollars ($118,587).

17. On or about Monday, June 8, and Tuesday, June 9, 1981, Hoover purchased sixteen thousand five hundred (16,500) shares of Phoenix at prices between Forty-Three Dollars ($43) and Forty-Eight and 50/100 Dollars ($48.50) per share.

18. On or about Wednesday, June 10, 1981, after the public announcement, Hoover sold all sixteen thousand five hundred (16,500) shares of Phoenix at prices between Fifty-Nine Dollars ($59) and Sixty-Three and 50/100 Dollars ($63.50) per share; the pre-tax profits realized on the basis of trading over this three-day period amounted to approximately Two Hundred Sixty-Seven Thousand Seven Hundred Twenty-Eight Dollars ($267,728); and the pre-tax profits paid to and divided by Switzer and Smith amounted to approximately One Hundred Ten Thousand Four Hundred Ninety-One Dollars ($110,491).

19. Hodges and Amyx agreed to purchase Phoenix stock through the Hodges, Amyx, Cross and Hodges investment partnership account.

20. On or about Monday, June 8, and Tuesday, June 9, 1981, Amyx, on behalf of the Hodges, Amyx, Cross and Hodges investment partnership, purchased thirteen thousand (13,000) shares of Phoenix at prices between Forty-Three and 50/100 Dollars ($43.50) and Forty-Eight and 50/100 Dollars ($48.50) per share.

21. On or about Wednesday, June 10, and Thursday, June 11, 1981, the Hodges, Amyx, Cross and Hodges investment partnership sold all thirteen thousand (13,000) shares of Phoenix at prices between Fifty-Nine Dollars ($59) and Sixty-Five Dollars ($65) per share; the pre-tax profits realized by the investment partnership on the basis of trading over a four-day period amounted to approximately Two Hundred Five Thousand Fifty-Five Dollars ($205,055); and the pre-tax profits from such trading paid to and divided by Switzer and Smith amounted to approximately Eighty-Five Thousand Three Hundred Ten Dollars ($85,310).

22. The volume and price at which Phoenix common stock traded during the period of June 1-12, 1981, were as follows:

   DATE            VOLUME         PRICE (Bid)

  June 1            8,800         $42-1/2
       2            2,000         $42
       3           10,600         $39-1/2
       4            2,500         $39-1/2
       5            6,800         $42
       6  (Sat.)   ______         _______
       7  (Sun.)   ______         _______
       8           43,100         $44-1/2
       9           31,800         $47-1/2
       10         101,200         $61
       11          63,800         $66-1/2
       12          57,100         $69-1/4

[760] 23. The volume and price at which Phoenix common stock traded on July 31, 1981, was three hundred seventy-nine thousand (379,000) shares at Seventy-Nine and 7/8 Dollars ($79-7/8) bid.

The following additional facts are found by the court:

24. In or about May of 1981, Scott C. Newquist [hereinafter Newquist], a principal at Morgan Stanley, an investment banking firm, contacted G. Platt to discuss the prospect of obtaining TIC as a client. A meeting eventually was arranged between personnel of Morgan Stanley and personnel of TIC for June 4 or 5, 1981, at the Morgan Stanley offices in New York.

25. On or about June 4 or 5, 1981, G. Platt and Robert Gist [hereinafter Gist] met with Newquist and other Morgan Stanley personnel at the Morgan Stanley offices in New York City, New York. Newquist thought the meeting was going to concern various means available to TIC to alter the relationship between itself and Phoenix. At the meeting, however, G. Platt, in addition to discussing TIC's options, discussed Phoenix and inquired whether Morgan Stanley would be willing to be retained by Phoenix to evaluate, among other alternatives, the disposition of Phoenix or its assets. Newquist advised G. Platt that prior to accepting Phoenix as a client, Morgan Stanley would require a unanimous vote of the Phoenix Board of Directors, and further would have to conduct a "due diligence" inquiry, i.e., a familiarization with the affairs of the company. By the time G. Platt and Gist returned to Oklahoma City on June 5, 1981, they had decided to recommend to the Phoenix Board that Morgan Stanley be retained to undertake a study of the company and evaluate the prompt disposition of Phoenix or its assets.

26. In June of 1981, G. Platt was Chairman of the Board and the Chief Executive Officer of TIC and served as a Director on the Phoenix Board of Directors. Gist, in June of 1981, was President of Phoenix. G. Platt, in essence, controlled the Phoenix Board of Directors because he could fire any member except Arthur Lipper.

27. Although Lipper, the only independent director on the Board, had opposed mergers of Phoenix in the past, he had never opposed liquidation of Phoenix, provided the liquidation was at fair market value.

28. The Board of Directors of Phoenix met on June 9, 1981, and agreed to formally request Morgan Stanley to be retained. A phone call was then made to Morgan Stanley on June 9, 1981, and Morgan Stanley formally agreed to be retained by Phoenix, subject only to completion of its "due diligence" inquiry.

29. On June 10, 1981, Phoenix made a public announcement that its Board of Directors had determined to consider the prompt disposition of the company or its assets (liquidation) and had retained an unidentified investment banking firm, later publicly identified as Morgan Stanley, to conduct an evaluation of Phoenix. At the time of the public announcement, Morgan Stanley had not completed its "due diligence" examination of Phoenix, and the actual acceptance by Morgan Stanley was contingent upon completion of the "due diligence" examination.

30. From at least the time of the Platt-Newquist meeting on or about June 4 or 5, 1981, when G. Platt and Gist determined to pursue a possible liquidation of Phoenix, to at least the time of the public announcement on or about June 10, 1981, the proposal to liquidate Phoenix and retain an investment banking firm to evaluate that proposal was non-public information. Furthermore, such information was likely to affect the investment decision of a reasonably prudent investor, i.e., it was information which a reasonable investor would consider important in making his decision how to act because the pro-rata value of Phoenix assets could reasonably be expected to exceed the market price of its stock at the time of the public announcement. This made the information material.

31. During the days which followed the June 10, 1981, announcement, there were [761] no other market events to which the rise in Phoenix stock price could be attributed.

32. Barry Switzer is a well-recognized "celebrity" in Oklahoma and elsewhere. He has an interest in the oil and gas industry, as he is personally involved in various ventures within the industry.

33. Over the past several years, defendants Switzer, Kennedy, Deem, Smith, Hodges, Amyx and Hoover have acted together in varying combinations of persons (or in various groups of persons) in making investments. They have formed partnerships such as S & H Investments, Waverly Ltd., and Hodges, Amyx, Cross and Hodges, to assist them in their investment ventures. Often times, they trade on rumors or gossip they hear within the investing community. Profits and losses occurring as a result of stock investments made through these partnerships are shared by the members of the partnerships.

34. TIC had been considering various options for either consolidating or separating TIC and Phoenix for some time prior to its approaching Morgan Stanley on June 4 or 5, 1981. Rumors concerning these various options were circulating within the investing oil and gas community prior to June 4 or 5, 1981.

35. On June 6, 1981, four days prior to the public announcement concerning Phoenix, a state invitational secondary school track meet was held at John Jacobs Field on the University of Oklahoma campus. The track meet was a day long event. Several hundred spectators attended, including Barry Switzer, who arrived at the meet between 10:00 and 10:30 a.m. to watch his son compete, and George and Linda Platt, who arrived between 9:00 and 10:00 a.m. to watch their son compete. Soon after Switzer's arrival at the track meet, he and G. Platt recognized and greeted each other. Neither Switzer nor G. Platt knew that the other would be attending the meet.

36. G. Platt was a supporter of Oklahoma University football and had met Switzer at a few social engagements prior to June of 1981. TIC was a sponsor of Switzer's football show, "Play Back." G. Platt had had season tickets to the OU football games for approximately five years. G. Platt had obtained autographs from Switzer for G. Platt's minor children, and had had his secretary telephone Switzer to request that his season tickets be upgraded. Upgrading of tickets was extended as a courtesy by Switzer to many season ticket holders. On at least two occasions Switzer had phoned G. Platt requesting continued sponsorship by TIC of Switzer's football television program. These calls were made at the urging of Tom Goodgame, General Manager of the television station which then produced "Play Back." As of June 5, 1981, Switzer knew that G. Platt was Chairman of the Board of TIC and further knew that TIC was a substantial shareholder of Phoenix because Switzer was a stockholder in TIC and thereby knew Phoenix was a subsidiary.

37. Neither G. Platt nor his wife Linda are particularly impressed by Switzer. They view him as "just a nice fellow."

38. Upon first greeting each other at the track meet, G. Platt and Switzer exchanged pleasantries. Switzer then departed and continued on through the bleachers.

39. Throughout the course of the day, G. Platt and Linda Platt generally remained in one place in the bleachers. Switzer, however, throughout the day moved around a great deal, at times speaking with his son or other participants and their families, signing autographs and watching the different events on the field. While moving about, Switzer joined the Platts to visit with them about three to five times. During these visits Switzer and the Platts talked about their sons' participation in the meet, the oil and gas business, the economy, football and their respective personal investments.

40. G. Platt and Switzer did not have any conversations regarding Phoenix or Morgan Stanley, nor did they have any conversations regarding any mergers, acquisitions, take-overs or possible liquidations of Phoenix in which Morgan Stanley would play a part. G. Platt did not make [762] any stock recommendations to Switzer, nor did he intentionally communicate material, non-public corporate information to Switzer about Phoenix during their conversations at the track meet. The information that Switzer heard at the track meet about Phoenix was overheard and was not the result of an intentional disclosure by G. Platt.

41. Sometime in the afternoon, after his last conversation with G. Platt, Switzer laid down on a row of bleachers behind the Platts to sunbathe while waiting for his son's next event. While Switzer was sunbathing, he overheard G. Platt talking to his wife about his trip to New York the prior day. In that conversation, G. Platt mentioned Morgan Stanley and his desire to dispose of or liquidate Phoenix. G. Platt further talked about several companies bidding on Phoenix. Switzer also overheard that an announcement of a "possible" liquidation of Phoenix might occur the following Thursday. Switzer remained on the bleachers behind the Platts for approximately twenty minutes then got up and continued to move about.

42. At this time Switzer had no knowledge as to whether the information he had overheard was confidential.

43. G. Platt was not conscious of Switzer's presence on the bleachers behind him that day, nor that Switzer had overheard any conversation.

44. G. Platt had returned home late the previous day from his meetings in New York, and his wife was to leave town for an entire week on the following day. Having minor children, it is the Platts' common practice to try to arrange for G. Platt to be at home when his wife is out of town. The day of the track meet provided the Platts with an opportunity to discuss their respective plans for the up-coming week. During this discussion, G. Platt's prior business activities in New York and its resultant obligations and appointments were mentioned. In addition, when G. Platt appears distracted, it is not uncommon for his wife to inquire of him what is on his mind. On these occasions, he will talk to her about his problems, even though she does not have an understanding of nor interest in business matters. On the day of the track meet, Phoenix was weighing upon the mind of G. Platt, as it had been for the past several years, prompting G. Platt to talk to his wife about it.

45. On June 6, 1981, after the track meet, Switzer returned home and looked up the price of Phoenix in the paper. He then had dinner with Sedwyn Kennedy, a close friend of both his and defendant Lee Allan Smith. In the past, they had all made investments through their partnership, SKS. Switzer told Kennedy he had overheard a conversation about the possible liquidation of Phoenix and that it would probably occur or be announced the next Thursday. Switzer told him the source was a gentlemen who was an executive with TIC. Switzer did not tell Kennedy the man was G. Platt. Switzer and Kennedy are close friends and have known each other since 1966.

46. By the end of the evening, Switzer and Kennedy had each expressed an intention to purchase Phoenix stock.

47. On Sunday, June 7, 1981, Kennedy telephoned Deem, his partner in S&H Investments, to discuss the possible purchase of Phoenix stock. Kennedy told Deem that Barry Switzer had talked to him about Phoenix, but did not give him any other details. As a result, Kennedy and Deem agreed to purchase shares of Phoenix through their partnership, S&H Investments.

48. On or about Monday, June 8, 1981, Kennedy purchased five thousand (5,000) shares of Phoenix stock at Forty-Two and 75/100 Dollars ($42.75) per share through the S&H Investments account; and on or about Tuesday, June 9, 1981, after further discussions with Deem, Kennedy purchased an additional one thousand (1,000) shares of Phoenix at Forty-Nine Dollars ($49) per share. (See stipulated fact No. 15, supra.)

49. On Sunday, June 7, 1981, Switzer called Lee Allan Smith, a close friend with whom he had previously entered joint investments. [763] Switzer told Smith that he had been at a track meet on Saturday and had overheard some information regarding the possible liquidation or buy-out of Phoenix. Switzer attributed the information to "someone who should know," and said that he had overheard that Morgan Stanley was involved and that something could happen by Thursday of the following week. Switzer and Smith decided to approach Harold Hodges and Robert Hoover about providing the capital for buying some Phoenix stock with them because Smith and Switzer had insufficient available cash at that time to purchase a significant number of shares on their own. Hodges, Smith and Switzer were personal friends through participation in community and charitable activities in Oklahoma City. Hoover has known Smith for thirty years and has been a personal friend of both Smith and Switzer.

50. On Sunday, June 7, 1981, Switzer and Smith met with Hodges at the latter's offices. At this meeting, Switzer told Hodges that he had overheard some information that Phoenix stock was going to go up. Switzer did not state the source of the information, and Hodges did not inquire, because Switzer and Smith are good friends of his, and he often invests on information of this nature. During most of this meeting, Smith was occupied in making telephone calls on other matters in another area of the room.

51. At the conclusion of the meeting, it was agreed that Hodges would supply the capital and purchase the stock, and that any profits or losses would be split, fifty percent (50%) to Hodges and fifty percent (50%) to be divided between Smith and Switzer.

52. On Monday, June 8, 1981, Hodges told Robert Amyx that he had visited with Smith and Switzer the previous day and that they had told him they had heard a rumor that something favorable was going to happen regarding TIC or Phoenix, and instructed him to make stock purchases in both companies.

53. On Monday, June 8, and Tuesday, June 9, 1981, Robert Amyx, on behalf of the Hodges, Amyx, Cross and Hodges investment partnership, purchased thirteen thousand (13,000) shares of Phoenix, at prices between Forty-Three and 50/100 Dollars ($43.50) and Forty-Eight and 50/100 Dollars ($48.50) per share. (See stipulated fact No. 20, supra.)

54. Because Hodges did not know which company was going to have a stock price rise, he requested Amyx not only to purchase Phoenix stock, but also stock of TIC, through the Hodges, Amyx, Cross and Hodges investment partnership account.

55. At the same time that he made the Phoenix purchases, Amyx purchased twenty thousand (20,000) shares of TIC stock at Twenty-Seven Dollars ($27) and Twenty-Seven and 1/8 Dollars ($27-1/8) per share.

56. On Sunday, June 7, 1981, after their meeting with Hodges, Switzer and Smith met with Robert Hoover at his home, where he was having a party. Switzer and Smith arrived separately. Smith first discussed the matter with Hoover and did not mention where he had received the information. Switzer also told Hoover something was going to happen with Phoenix, but did not say from whom he had heard the information.

57. Hoover agreed to purchase Phoenix stock jointly with Smith and Switzer. Hoover advanced the capital and purchased the stock for his account, based on an understanding that any losses or profits would be split, fifty percent (50%) to Hoover, and the remaining fifty percent (50%) to be divided between Smith and Switzer.

58. Hoover purchased sixteen thousand (16,000) shares of Phoenix stock on or about Monday, June 8, or Tuesday, June 9, 1981. (See stipulated fact No. 17, supra.)

59. G. Platt did not learn of Switzer's purchase or sale of Phoenix stock, or of the conversation Switzer had overheard, until on or about March 10 or 11, 1982. On or about March 10 or 11, 1982, Switzer called G. Platt at Platt's condominium in Snow Mass, Colorado, and asked to meet with him because Switzer said something he had inadvertently done would affect Platt. At [764] the time Switzer was also staying in Snow Mass, Colorado. During this meeting, Switzer told G. Platt, for the first time, that Switzer had been sitting behind G. Platt and his wife at the track meet on June 6, 1981, and had overheard G. Platt's conversation with his wife regarding Phoenix, and that as a result of that overheard conversation, Switzer and other friends of his had subsequently purchased and sold Phoenix stock. G. Platt had heard as early as February of 1982 that Phoenix was under investigation by the SEC. After hearing the facts from Switzer, G. Platt told Switzer it was essential that they meet with Robert Gist as soon as G. Platt returned to Oklahoma City.

60. On or about March 22, 1982, G. Platt, Switzer and Gist met at TIC's offices and Switzer again related the facts he had told G. Platt on or about March 10 or 11, 1982.

61. G. Platt did not share in the profits made through the transactions in Phoenix stock by Switzer, Kennedy, Deem, Smith, Hodges, Amyx and Hoover, nor did he receive any other financial benefit as a result of those transactions.

62. G. Platt did not receive any direct or indirect pecuniary gain nor any reputational benefit likely to translate into future earnings due to Switzer's inadvertent receipt of the information regarding Phoenix.

63. G. Platt did not make any gift to Switzer at this time, nor has he ever made a gift to Switzer.

64. Neither Switzer, Kennedy, Smith, Deem, Hodges, Amyx nor Hoover has ever been employed by or been an officer or director of Phoenix or TIC, nor have any of these defendants ever had any business relationship with Phoenix or with G. Platt personally. None of these defendants is a relative or personal friend of G. Platt.

65. None of the defendants had a relationship of trust and confidence with Phoenix, its shareholders or G. Platt.

66. In June, 1981, neither Switzer, Smith, Kennedy, Deem, Hodges, Amyx nor Hoover had any information from any source as to whether there was in fact any prospective purchaser of the stock or assets of Phoenix, nor whether a liquidation of the company would actually take place.

67. Smith, Hodges, Amyx, Kennedy, Deem and Hoover did not know nor did they act in reckless disregard of circumstances through which they could have had a reason to believe that the information received by Switzer came from other than an overheard conversation. None of these defendants knew or acted in reckless disregard of circumstances through which they could have had a reason to believe that the information they received was disclosed by an insider of Phoenix for an improper purpose.

Conclusions of Law

Based upon the foregoing findings of fact, the court makes the following conclusions of law.

1. The information that defendants Switzer, Smith, Hodges, Amyx, Hoover, Kennedy and Deem received concerning Phoenix was material as of June 6, 1981, the date of the track meet. On that date, there was a substantial likelihood that, given all the circumstances, and contingencies involved, the information as received by Switzer and communicated to Kennedy, Smith, Hodges, Amyx, Hoover and Deem would have assumed actual significance in the deliberations of a reasonable shareholder. See TSC Industries Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976).

2. To constitute material information, the information need not necessarily relate to a past or existing condition or event. It may refer to a prospective event, even though the event may not occur, provided there appears to be a reasonable likelihood of its future occurrence. In situations where the event, if it should occur, could influence the stockholders' investment decision, the chance that it might well occur constitutes information that should be disclosed to the investor. See Securities and Exchange Commission v. Texas [765] International Co., 498 F.Supp. 1231 (N.D. Ill.1980); Sonesta International Hotels Corp. v. Willington Associates, 483 F.2d 247 (2nd Cir.1973). In both Sonesta and Texas International, facts which referred to prospective and contingent events were deemed material because there appeared to be a reasonable likelihood of the occurrence of the future events. The existence of the decision to evaluate the liquidation of Phoenix, coupled with the affirmative steps of hiring Morgan Stanley as an investment banker, although based upon some contingencies, constituted material information as of June 6, 1981, the date of the track meet.

3. It is undisputed that G. Platt was an insider in regard to both TIC and Phoenix as of June 6, 1981.

4. Switzer, Kennedy, Deem, Smith, Hodges, Amyx and Hoover were not insiders of Phoenix. None of them had any fiduciary duty to the stockholders of TIC or Phoenix by virtue of their positions. None of them were employed by Phoenix, nor did they have any position of trust or confidence with Phoenix. These defendants were strangers to Phoenix and had no preexisting fiduciary duties to the shareholders of Phoenix. In its recent opinion of Dirks v. Securities Exchange Commission, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), the United States Supreme Court addressed tippee liability. The court pointed out that, unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such fiduciary relationship. In view of the absence of this fiduciary relationship, the court notes it has been unclear how a tippee acquires the Cady, Roberts duty to disclose or refrain from trading on inside information first stated in In re Cady, Roberts & Co., 40 S.E.C. 907 (1961). Although the SEC, in Dirks, urged the court to accept what has become known as the "information" theory, which in essence states that anyone knowingly receiving non-public, material information acquires an insider fiduciary duty to disclose or abstain from trading, the court rejected this theory as they had in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). The court in Dirks stated: "We reaffirm today that `[a] duty [to disclose] arises from the relationship between parties ... and not merely from one's ability to acquire information because of his position in the market.'" Dirks, 103 S.Ct. at 3263, quoting from Chiarella v. United States, 445 U.S. at 232-33, n. 14, 100 S.Ct. at 1116 n. 14. The court further stated in Dirks: "As we emphasized in Chiarella, mere possession of non-public information does not give rise to a duty to disclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider creates such a special relationship between the tippee and the corporation's shareholders." 103 S.Ct. at 3262, n. 15.

6. Essentially, in Dirks the court found that the Cady, Roberts duty of a tippee "to disclose or abstain" is derivative from that of the insider's duty. The court stated:

... [S]ome tippees must assume an insider's duty to the shareholders not because they receive inside information, but rather because it has been made available to them improperly. And for Rule 10b-5 purposes, the insider's disclosure is improper only where it would violate his Cady, Roberts duty. Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. As Commissioner Smith perceptively observed in Investors Management Co.: `[T]ippee responsibility must be related back to insider responsibility by a necessary finding that the tippee knew the information was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose the information .... `44 S.E.C., at 651 (concurring in the result). Tipping thus properly is viewed only as a means of indirectly violating [766] the Cady, Roberts disclose-or-abstain rule.

Dirks v. S.E.C., 103 S.Ct. at 3264. (Emphasis in original, footnotes omitted.)

7. Thus, only when a disclosure is made for an "improper purpose" will such a "tip" constitute a breach of an insider's duty, and only when there has been a breach of an insider's duty which the "tipee" knew or should have known constituted such a breach will there be "tippee" liability sufficient to constitute a violation of § 10(b) and Commission Rule 10b-5.

8. In Dirks, the court held that a disclosure is made for an "improper purpose" when an insider personally will benefit, directly or indirectly, from his disclosure. That court stated: "Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider [to his stockholders], there is no derivative breach [by the tippee]. Dirks, 103 S.Ct. at 3265.

9. G. Platt did not breach a fiduciary duty to stockholders of Phoenix for purposes of Rule 10b-5 liability nor § 10(b) liability, when he disclosed to his wife at the track meet of June 6, 1981, that there was going to be a possible liquidation of Phoenix.

10. This information was given to Mrs. Platt by G. Platt for the purpose of informing her of his up-coming business schedule so that arrangements for child care could be made.

11. The information was inadvertently overheard by Switzer at the track meet.

12. Rule 10b-5 does not bar trading on the basis of information inadvertently revealed by an insider.

13. The information was not intentionally imparted to Switzer by G. Platt, nor was the disclosure made for an improper purpose.

14. G. Platt did not personally benefit, directly or indirectly, monetarily or otherwise from the inadvertent disclosure.

15. As noted above, Dirks set forth a two-prong test for purposes of determining whether a tippee has acquired a fiduciary duty. First, it must be shown that an insider breached a fiduciary duty to the shareholders by disclosing inside information; and, second, it must be shown that the tippee knew or should have known that there had been a breach by the insider. Dirks, 103 S.Ct. at 3264.

16. G. Platt did not breach a duty to the shareholders of Phoenix, and thus plaintiff failed to meet its burden of proof as to the first prong established in Dirks. Since G. Platt did not breach a fiduciary duty to Phoenix shareholders, Switzer did not acquire nor assume a fiduciary duty to Phoenix's shareholders, and because Switzer did not acquire a fiduciary duty to Phoenix shareholders, any information he passed on to defendants Smith, Hodges, Amyx, Hoover, Kennedy and Deem was not in violation of Rule 10b-5.

17. Since plaintiff did not meet its burden of proof as to the first prong of the two-prong Dirks test, i.e., it was not proved that G. Platt breached a fiduciary duty to the shareholders of Phoenix, tippee liability cannot result from G. Platt's inadvertent disclosure to Switzer.

18. Even if, however, plaintiff had met the first prong of the two-part test, i.e., had proven that G. Platt did disclose material non-public information to Switzer at the track meet in an improper manner, the court would still find no resulting tippee liability to Switzer, Smith, Hodges, Amyx, Hoover, Kennedy and Deem because the court concludes plaintiff failed to prove the second prong of the Dirks test as well. These defendants did not know, nor did they have reason to know, that the information they received was material, nonpublic information disseminated by a corporate insider for an improper purpose, and, thus, under Dirks, are not liable as tippees under Rule 10b-5.

19. Defendants Switzer, Smith, Hodges, Amyx, Hoover, Kennedy and Deem have not been shown to have a propensity to engage in additional violations of Rule 10b-5 in the future. Hence, a permanent [767] injunction may not be entered against these defendants.

20. The SEC is not entitled to disgorgement of profits calculated on a pre-income tax basis in connection with transactions which occurred during previous tax years.

The foregoing shall constitute the findings of fact and conclusions of law of this court. Any findings of fact which may be construed as conclusions of law shall so be construed; in like manner, any conclusions of law which may be construed as findings of fact shall so be construed.

On the basis of the above findings of fact and conclusions of law, the court orders judgment in favor of defendants.

The court now turns to the motion for attorneys' fees pursuant to the Equal Access to Justice Act [hereinafter EAJA], 28 U.S.C. 2412 (1980). Defendants Switzer, Smith, Hoover, Kennedy and Hart have petitioned this court for an award of attorneys' fees and costs authorized pursuant to the EAJA. Defendants Hodges and Amyx have petitioned the court for a similar award, but have brought the petition on behalf of their investment partnership.

Section 2412(d)(1)(A) of the Act provides that a court "shall" award an eligible^[1] private prevailing party attorneys' fees and other litigation expenses unless some other statute specifically provides otherwise,^[2] or "the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust."^[3]

The EAJA permits the government, when it loses a case, to avoid liability for attorneys' fees if it can demonstrate that its litigation position was "substantially justified." See Spencer v. NLRB, 712 F.2d 539 (D.C.Cir.1983); United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481 (10th Cir.1984). The government bears the burden of demonstrating that its position was "substantially justified." Spencer, supra, 712 F.2d at 557; S & H Riggers & Erectors, Inc. v. OSHRC, 672 F.2d 426 (5th Cir.1982).

To meet the substantial justification standard, the government need only demonstrate its litigation position was reasonable. In 2,116 Boxes, supra, the court held that the government need not establish its decision to litigate was based on a substantial probability of prevailing, but only need "show that there is a reasonable basis in truth for the facts alleged in the pleadings; that there exists a reasonable basis in law for the theory it propounds; and that the facts alleged will reasonably support the legal theory advanced." 726 F.2d at 1487. See also Dougherty v. Lehman, 711 F.2d 555 (3rd Cir.1983).

The court believes plaintiff's theory or position taken at litigation had a reasonable basis in law. Plaintiff asserted that violations under 10b-5 resulted when inside information was made available or "tipped" [768] to outsiders who then traded on the improperly obtained inside information when the tip was made by an insider in breach of his fiduciary duty to the corporate shareholders, and the "tippee knew or should have known of the breach." Dirks, 103 S.Ct. 3264 (1983).

The court further finds plaintiff's litigation position had a reasonable basis in fact. At trial, the SEC proceeded to set forth its case, based on circumstantial evidence, that the material, non-public information regarding the possible liquidation of Phoenix made available to Switzer on June 6, 1981, at a track meet in Norman, Oklahoma, had been passed to him in an improper manner by G. Platt, an insider at Phoenix. Although Switzer claimed he had overheard the information, and neither G. Platt nor his wife, Linda, recalled discussing Phoenix at the track meet that day, the SEC presented strong circumstantial evidence in support of its theory.

Although the court found the testimony of G. Platt and Switzer to be more credible and probative than the circumstantial evidence presented by the government, the court does not find that the circumstantial evidence was so devoid of legal or factual support that a fee award would be appropriate. Simply because G. Platt and Switzer did not admit they had engaged in an improper exchange of inside information does not mean the SEC could have no reasonable basis in fact for believing there had been improper conduct and bringing an action so that a determination of that issue could be made.

In view of the considerable circumstantial evidence presented by the SEC that the tip was intentional and not merely inadvertent, as claimed by defendants, the court finds the SEC's position to have been substantially justified, and on that basis the court denies the application of defendants Switzer, Smith, Hoover, Deem and Kennedy, as well as Hodges and Amyx,^[4] for attorneys' fees pursuant to 28 U.S.C. 2412(d)(1)(A).

Defendant Hart has also filed an application for an award of attorneys' fees under the EAJA. Hart was dismissed from the case on a motion for summary judgment. Although he was dismissed at the summary judgment stage, the court finds the SEC's position in naming him in the lawsuit was substantially justified and had a reasonable basis in both law and fact, and therefore, the court denies defendant Hart's application for attorneys' fees under the EAJA as well.

JAMES HART'S MOTION FOR ENTRY OF JUDGMENT

Defendant Hart was granted summary judgment in an opinion and order filed on May 20, 1983. He has now moved the court for entry of judgment and further requests that the date of entry of judgment be the same as the date judgment is entered for the defendants who participated in the trial to the court. Defendant Hart's motion for entry of judgment is hereby granted. Further, the date of entry of judgment shall be the same as the date judgment is entered for defendants Switzer, Smith, Hoover, Amyx, Hodges, Kennedy and Deem.

IT IS BY THE COURT THEREFORE ORDERED, based on the earlier stated findings of fact and conclusions of law, that judgment is hereby entered in favor of defendants regarding the court trial which commenced March 19, 1984, and concluded March 22, 1984.

IT IS FURTHER ORDERED that the motions of defendants Switzer, Smith, Hoover and Hart for award of attorneys' fees and expenses are hereby denied.

IT IS FURTHER ORDERED that the motion for attorneys' fees brought on behalf of the Hodges, Amyx, Cross and Hodges partnership is hereby denied.

IT IS FURTHER ORDERED that the motion for attorneys' fees brought on behalf [769] of defendant Kennedy is hereby denied.

IT IS FURTHER ORDERED that defendant James Hart's motion for entry of judgment is hereby granted in accordance with the Memorandum and Order of May 20, 1983. IT IS FURTHER ORDERED that the date of entry of judgment shall be the same as the date judgment is entered for defendants Switzer, Smith, Hoover, Amyx, Hodges, Kennedy and Deem.

[1] The government claims Hodges and Amyx have not demonstrated their financial eligibility because they have brought their application on behalf of their investment partnership and not as individual defendants. Since the court finds that plaintiff's position was substantially justified, it is unnecessary to address the financial eligibility issue raised by the government as to defendants Hodges and Amyx.

[2] The EAJA provides that costs may be awarded "except as otherwise specifically provided by statute." 28 U.S.C. 2412(a). Section 27 of the Securities Exchange Act of 1934 specifically precludes any award of costs against the Commission. Section 27 states: "No costs shall be assessed for or against the Commission in any proceeding under this title brought by or against it...."

Accordingly, the court concludes that any request contained in these motions for costs must be denied because such award is specifically prohibited by Section 27 of the Securities Exchange Act of 1934.

[3] In relevant part, 28 U.S.C. 2412(d)(1)(A) provides:

[A] court shall award to a prevailing party other than the United States fees and other expenses ... incurred by that party in any civil action (other than cases sounding in tort) brought by or against the United States in any court having jurisdiction of that action, unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.

[4] Again, the court denies the application of defendants' Hodges and Amyx, brought by them through their investment partnership, for attorneys fees on the sole basis that the government's litigation position was substantially justified.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

[643] [644] [645] [646] Ginsburg, J., delivered the opinion of the Court, in which Stevens, O'Connor, Kennedy, Souter, and Breyer, JJ., joined, and in which Scalia, J., joined as to Parts I, III, and IV. Scalia, J., filed an opinion concurring in part and dissenting in part, post, p. 679. Thomas, J., filed an opinion concurring in the judgment in part and dissenting in part, in which Rehnquist, C. J., joined, post, p. 680.

Deputy Solicitor General Dreeben argued the cause for the United States. With him on the briefs were Acting Solicitor General Dellinger, Acting Assistant Attorney General Richard, Paul R. Q. Wolfson, Joseph C. Wyderko, Richard H. Walker, Paul Gonson, Jacob H. Stillman, Eric Summergrad, and Randall W. Quinn.

John D. French argued the cause for respondent. With him on the brief was Elizabeth L. Taylor.^[1]

Justice Ginsburg, delivered the opinion of the Court.

This case concerns the interpretation and enforcement of § 10(b) and § 14(e) of the Securities Exchange Act of 1934, and rules made by the Securities and Exchange Commission pursuant to these provisions, Rule 10b—5 and Rule 14e—3(a). [647] Two prime questions are presented. The first relates to the misappropriation of material, nonpublic information for securities trading; the second concerns fraudulent practices in the tender offer setting. In particular, we address and resolve these issues: (1) Is a person who trades in securities for personal profit, using confidential information misappropriated in breach of a fiduciary duty to the source of the information, guilty of violating § 10(b) and Rule 10b—5? (2) Did the Commission exceed its rulemaking authority by adopting Rule 14e—3(a), which proscribes trading on undisclosed information in the tender offer setting, even in the absence of a duty to disclose? Our answer to the first question is yes, and to the second question, viewed in the context of this case, no.

I

Respondent James Herman O'Hagan was a partner in the law firm of Dorsey & Whitney in Minneapolis, Minnesota. In July 1988, Grand Metropolitan PLC (Grand Met), a company based in London, England, retained Dorsey & Whitney as local counsel to represent Grand Met regarding a potential tender offer for the common stock of the Pillsbury Company, headquartered in Minneapolis. Both Grand Met and Dorsey & Whitney took precautions to protect the confidentiality of Grand Met's tender offer plans. O'Hagan did no work on the Grand Met representation. Dorsey & Whitney withdrew from representing Grand Met on September 9, 1988. Less than a month later, on October 4, 1988, Grand Met publicly announced its tender offer for Pillsbury stock.

On August 18, 1988, while Dorsey & Whitney was still representing Grand Met, O'Hagan began purchasing call options for Pillsbury stock. Each option gave him the right to purchase 100 shares of Pillsbury stock by a specified date in September 1988. Later in August and in September, O'Hagan made additional purchases of Pillsbury call options. By the end of September, he owned 2,500 unexpired Pillsbury options, apparently more than any other individual investor. [648] See App. 85, 148. O'Hagan also purchased, in September 1988, some 5,000 shares of Pillsbury common stock, at a price just under $39 per share. When Grand Met announced its tender offer in October, the price of Pillsbury stock rose to nearly $60 per share. O'Hagan then sold his Pillsbury call options and common stock, making a profit of more than $4.3 million.

The Securities and Exchange Commission (SEC or Commission) initiated an investigation into O'Hagan's transactions, culminating in a 57-count indictment. The indictment alleged that O'Hagan defrauded his law firm and its client, Grand Met, by using for his own trading purposes material, nonpublic information regarding Grand Met's planned tender offer. Id., at 8.^[2] According to the indictment, O'Hagan used the profits he gained through this trading to conceal his previous embezzlement and conversion of unrelated client trust funds. Id., at 10.^[3] O'Hagan was charged with 20 counts of mail fraud, in violation of 18 U. S. C. § 1341; 17 counts of securities fraud, in violation of § 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 48 Stat. 891, 15 U. S. C. § 78j(b), and SEC Rule 10b—5, 17 CFR § 240.10b—5 [649] (1996); 17 counts of fraudulent trading in connection with a tender offer, in violation of § 14(e) of the Exchange Act, 15 U. S. C. § 78n(e), and SEC Rule 14e—3(a), 17 CFR § 240.14e— 3(a) (1996); and 3 counts of violating federal money laundering statutes, 18 U. S. C. §§ 1956(a)(1)(B)(i), 1957. See App. 13-24. A jury convicted O'Hagan on all 57 counts, and he was sentenced to a 41-month term of imprisonment.

A divided panel of the Court of Appeals for the Eighth Circuit reversed all of O'Hagan's convictions. 92 F. 3d 612 (1996). Liability under § 10(b) and Rule 10b—5, the Eighth Circuit held, may not be grounded on the "misappropriation theory" of securities fraud on which the prosecution relied. Id., at 622. The Court of Appeals also held that Rule 14e— 3(a)—which prohibits trading while in possession of material, nonpublic information relating to a tender offer—exceeds the SEC's § 14(e) rulemaking authority because the Rule contains no breach of fiduciary duty requirement. Id., at 627. The Eighth Circuit further concluded that O'Hagan's mail fraud and money laundering convictions rested on violations of the securities laws, and therefore could not stand once the securities fraud convictions were reversed. Id., at 627-628. Judge Fagg, dissenting, stated that he would recognize and enforce the misappropriation theory, and would hold that the SEC did not exceed its rulemaking authority when it adopted Rule 14e—3(a) without requiring proof of a breach of fiduciary duty. Id., at 628.

Decisions of the Courts of Appeals are in conflict on the propriety of the misappropriation theory under § 10(b) and Rule 10b—5, see infra this page and 650, and n. 3, and on the legitimacy of Rule 14e—3(a) under § 14(e), see infra, at 669— 670. We granted certiorari, 519 U. S. 1087 (1997), and now reverse the Eighth Circuit's judgment.

II

We address first the Court of Appeals' reversal of O'Hagan's convictions under § 10(b) and Rule 10b—5. Following [650] the Fourth Circuit's lead, see United States v. Bryan, 58 F. 3d 933, 943-959 (1995), the Eighth Circuit rejected the misappropriation theory as a basis for § 10(b) liability. We hold, in accord with several other Courts of Appeals,^[4] that criminal liability under § 10(b) may be predicated on the misappropriation theory.^[5]

A

In pertinent part, § 10(b) of the Exchange Act provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—

. . . . .

"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U. S. C. § 78j(b). [651] The statute thus proscribes (1) using any deceptive device (2) in connection with the purchase or sale of securities, in contravention of rules prescribed by the Commission. The provision, as written, does not confine its coverage to deception of a purchaser or seller of securities, see United States v. Newman, 664 F. 2d 12, 17 (CA2 1981); rather, the statute reaches any deceptive device used "in connection with the purchase or sale of any security."

Pursuant to its § 10(b) rulemaking authority, the Commission has adopted Rule 10b—5, which, as relevant here, provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

"(a) To employ any device, scheme, or artifice to defraud, [or]

. . . . .

"(c) 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." 17 CFR § 240.10b—5 (1996).

Liability under Rule 10b—5, our precedent indicates, does not extend beyond conduct encompassed by § 10(b)'s prohibition. See Ernst & Ernst v. Hochfelder, 425 U. S. 185, 214 (1976) (scope of Rule 10b—5 cannot exceed power Congress granted Commission under § 10(b)); see also Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 173 (1994) ("We have refused to allow [private] 10b—5 challenges to conduct not prohibited by the text of the statute.").

Under the "traditional" or "classical theory" of insider trading liability, § 10(b) and Rule 10b—5 are violated when a corporate insider trades in the securities of his corporation [652] on the basis of material, nonpublic information. Trading on such information qualifies as a "deceptive device" under § 10(b), we have affirmed, because "a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." Chiarella v. United States, 445 U. S. 222, 228 (1980). That relationship, we recognized, "gives rise to a duty to disclose [or to abstain from trading] because of the `necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . . uninformed . . . stockholders.' " Id., at 228-229 (citation omitted). The classical theory applies not only to officers, directors, and other permanent insiders of a corporation, but also to attorneys, accountants, consultants, and others who temporarily become fiduciaries of a corporation. See Dirks v. SEC, 463 U. S. 646, 655, n. 14 (1983).

The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates § 10(b) and Rule 10b—5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. See Brief for United States 14. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information.

The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities. The classical theory targets a corporate insider's breach of duty to shareholders with whom the insider transacts; the misappropriation theory outlaws [653] trading on the basis of nonpublic information by a corporate "outsider" in breach of a duty owed not to a trading party, but to the source of the information. The misappropriation theory is thus designed to "protec[t] the integrity of the securities markets against abuses by `outsiders' to a corporation who have access to confidential information that will affect th[e] corporation's security price when revealed, but who owe no fiduciary or other duty to that corporation's shareholders." Ibid.

In this case, the indictment alleged that O'Hagan, in breach of a duty of trust and confidence he owed to his law firm, Dorsey & Whitney, and to its client, Grand Met, traded on the basis of nonpublic information regarding Grand Met's planned tender offer for Pillsbury common stock. App. 16. This conduct, the Government charged, constituted a fraudulent device in connection with the purchase and sale of securities.^[6]

B

We agree with the Government that misappropriation, as just defined, satisfies § 10(b)'s requirement that chargeable conduct involve a "deceptive device or contrivance" used "in connection with" the purchase or sale of securities. We observe, first, that misappropriators, as the Government describes them, deal in deception. A fiduciary who "[pretends] loyalty to the principal while secretly converting the principal's information for personal gain," Brief for United States [654] 17, "dupes" or defrauds the principal. See Aldave, Misappropriation: A General Theory of Liability for Trading on Nonpublic Information, 13 Hofstra L. Rev. 101, 119 (1984).

We addressed fraud of the same species in Carpenter v. United States, 484 U. S. 19 (1987), which involved the mail fraud statute's proscription of "any scheme or artifice to defraud," 18 U. S. C. § 1341. Affirming convictions under that statute, we said in Carpenter that an employee's undertaking not to reveal his employer's confidential information "became a sham" when the employee provided the information to his co-conspirators in a scheme to obtain trading profits. 484 U. S., at 27. A company's confidential information, we recognized in Carpenter, qualifies as property to which the company has a right of exclusive use. Id., at 25-27. The undisclosed misappropriation of such information, in violation of a fiduciary duty, the Court said in Carpenter, constitutes fraud akin to embezzlement—"`the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another.' " Id., at 27 (quoting Grin v. Shine, 187 U. S. 181, 189 (1902)); see Aldave, 13 Hofstra L. Rev., at 119. Carpenter `s discussion of the fraudulent misuse of confidential information, the Government notes, "is a particularly apt source of guidance here, because [the mail fraud statute] (like Section 10(b)) has long been held to require deception, not merely the breach of a fiduciary duty." Brief for United States 18, n. 9 (citation omitted).

Deception through nondisclosure is central to the theory of liability for which the Government seeks recognition. As counsel for the Government stated in explanation of the theory at oral argument: "To satisfy the common law rule that a trustee may not use the property that [has] been entrusted [to] him, there would have to be consent. To satisfy the requirement of the Securities Act that there be no deception, there would only have to be disclosure." Tr. of Oral Arg. 12; see generally Restatement (Second) of Agency §§ 390, 395 [655] (1958) (agent's disclosure obligation regarding use of confidential information).^[7]

The misappropriation theory advanced by the Government is consistent with Santa Fe Industries, Inc. v. Green, 430 U. S. 462 (1977), a decision underscoring that § 10(b) is not an all-purpose breach of fiduciary duty ban; rather, it trains on conduct involving manipulation or deception. See id., at 473-476. In contrast to the Government's allegations in this case, in Santa Fe Industries, all pertinent facts were disclosed by the persons charged with violating § 10(b) and Rule 10b—5, see id., at 474; therefore, there was no deception through nondisclosure to which liability under those provisions could attach, see id., at 476. Similarly, full disclosure forecloses liability under the misappropriation theory: Because the deception essential to the misappropriation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no "deceptive device" and thus no § 10(b) violation—although the fiduciary-turnedtrader may remain liable under state law for breach of a duty of loyalty.^[8]

We turn next to the § 10(b) requirement that the misappropriator's deceptive use of information be "in connection with [656] the purchase or sale of [a] security." This element is satisfied because the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information. See Aldave, 13 Hofstra L. Rev., at 120 ("a fraud or deceit can be practiced on one person, with resultant harm to another person or group of persons"). A misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public. See id., at 120-121, and n. 107.

The misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain norisk profits through the purchase or sale of securities. Should a misappropriator put such information to other use, the statute's prohibition would not be implicated. The theory does not catch all conceivable forms of fraud involving confidential information; rather, it catches fraudulent means of capitalizing on such information through securities transactions.

The Government notes another limitation on the forms of fraud § 10(b) reaches: "The misappropriation theory would not . . . apply to a case in which a person defrauded a bank into giving him a loan or embezzled cash from another, and then used the proceeds of the misdeed to purchase securities." Brief for United States 24, n. 13. In such a case, the Government states, "the proceeds would have value to the malefactor apart from their use in a securities transaction, and the fraud would be complete as soon as the money was obtained." Ibid. In other words, money can buy, if not anything, then at least many things; its misappropriation [657] may thus be viewed as sufficiently detached from a subsequent securities transaction that § 10(b)'s "in connection with" requirement would not be met. Ibid.

Justice Thomas' charge that the misappropriation theory is incoherent because information, like funds, can be put to multiple uses, see post, at 681-686 (opinion concurring in judgment in part and dissenting in part), misses the point. The Exchange Act was enacted in part "to insure the maintenance of fair and honest markets," 15 U. S. C. § 78b, and there is no question that fraudulent uses of confidential information fall within § 10(b)'s prohibition if the fraud is "in connection with" a securities transaction. It is hardly remarkable that a rule suitably applied to the fraudulent uses of certain kinds of information would be stretched beyond reason were it applied to the fraudulent use of money.

Justice Thomas does catch the Government in overstatement. Observing that money can be used for all manner of purposes and purchases, the Government urges that confidential information of the kind at issue derives its value only from its utility in securities trading. See Brief for United States 10, 21; post, at 683-684 (several times emphasizing the word "only"). Substitute "ordinarily" for "only," and the Government is on the mark.^[9]

[658] Our recognition that the Government's "only" is an overstatement has provoked the dissent to cry "new theory." See post, at 687-689. But the very case on which Justice Thomas relies, Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U. S. 29 (1983), shows the extremity of that charge. In State Farm, we reviewed an agency's rescission of a rule under the same "arbitrary and capricious" standard by which the promulgation of a rule under the relevant statute was to be judged, see id., at 41-42; in our decision concluding that the agency had not adequately explained its regulatory action, see id., at 57, we cautioned that a "reviewing court should not attempt itself to make up for such deficiencies," id., at 43. Here, by contrast, Rule 10b—5's promulgation has not been challenged; we consider only the Government's charge that O'Hagan's alleged fraudulent conduct falls within the prohibitions of the Rule and § 10(b). In this context, we acknowledge simply that, in defending the Government's interpretation of the Rule and statute in this Court, the Government's lawyers have pressed a solid point too far, something lawyers, occasionally even judges, are wont to do.

The misappropriation theory comports with § 10(b)'s language, which requires deception "in connection with the purchase or sale of any security," not deception of an identifiable purchaser or seller. The theory is also well tuned to an animating purpose of the Exchange Act: to insure honest securities markets and thereby promote investor confidence. See 45 Fed. Reg. 60412 (1980) (trading on misappropriated information "undermines the integrity of, and investor confidence in, the securities markets"). Although informational disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law. An investor's informational disadvantage vis-à-vis a misappropriator with material, nonpublic information [659] stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill. See Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 356 (1979) ("If the market is thought to be systematically populated with . . . transactors [trading on the basis of misappropriated information] some investors will refrain from dealing altogether, and others will incur costs to avoid dealing with such transactors or corruptly to overcome their unerodable informational advantages."); Aldave, 13 Hofstra L. Rev., at 122-123.

In sum, considering the inhibiting impact on market participation of trading on misappropriated information, and the congressional purposes underlying § 10(b), it makes scant sense to hold a lawyer like O'Hagan a § 10(b) violator if he works for a law firm representing the target of a tender offer, but not if he works for a law firm representing the bidder. The text of the statute requires no such result.^[10] The misappropriation at issue here was properly made the subject of a § 10(b) charge because it meets the statutory requirement that there be "deceptive" conduct "in connection with" securities transactions.

[660] C

The Court of Appeals rejected the misappropriation theory primarily on two grounds. First, as the Eighth Circuit comprehended the theory, it requires neither misrepresentation nor nondisclosure. See 92 F. 3d, at 618. As we just explained, however, see supra, at 654-655, deceptive nondisclosure is essential to the § 10(b) liability at issue. Concretely, in this case, "it [was O'Hagan's] failure to disclose his personal trading to Grand Met and Dorsey, in breach of his duty to do so, that ma[de] his conduct `deceptive' within the meaning of [§ ]10(b)." Reply Brief 7.

Second and "more obvious," the Court of Appeals said, the misappropriation theory is not moored to § 10(b)'s requirement that "the fraud be `in connection with the purchase or sale of any security.' " 92 F. 3d, at 618 (quoting 15 U. S. C. § 78j(b)). According to the Eighth Circuit, three of our decisions reveal that § 10(b) liability cannot be predicated on a duty owed to the source of nonpublic information: Chiarella v. United States, 445 U. S. 222 (1980); Dirks v. SEC, 463 U. S. 646 (1983); and Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164 (1994). "[O]nly a breach of a duty to parties to the securities transaction," the Court of Appeals concluded, "or, at the most, to other market participants such as investors, will be sufficient to give rise to § 10(b) liability." 92 F. 3d, at 618. We read the statute and our precedent differently, and note again that § 10(b) refers to "the purchase or sale of any security," not to identifiable purchasers or sellers of securities.

Chiarella involved securities trades by a printer employed at a shop that printed documents announcing corporate takeover bids. See 445 U. S., at 224. Deducing the names of target companies from documents he handled, the printer bought shares of the targets before takeover bids were announced, expecting (correctly) that the share prices would rise upon announcement. In these transactions, the printer did not disclose to the sellers of the securities (the target [661] companies' shareholders) the nonpublic information on which he traded. See ibid. For that trading, the printer was convicted of violating § 10(b) and Rule 10b—5. We reversed the Court of Appeals judgment that had affirmed the conviction. See id., at 225.

The jury in Chiarella had been instructed that it could convict the defendant if he willfully failed to inform sellers of target company securities that he knew of a takeover bid that would increase the value of their shares. See id., at 226. Emphasizing that the printer had no agency or other fiduciary relationship with the sellers, we held that liability could not be imposed on so broad a theory. See id., at 235. There is under § 10(b), we explained, no "general duty between all participants in market transactions to forgo actions based on material, nonpublic information." Id., at 233. Under established doctrine, we said, a duty to disclose or abstain from trading "arises from a specific relationship between two parties." Ibid.

The Court did not hold in Chiarella that the only relationship prompting liability for trading on undisclosed information is the relationship between a corporation's insiders and shareholders. That is evident from our response to the Government's argument before this Court that the printer's misappropriation of information from his employer for purposes of securities trading—in violation of a duty of confidentiality owed to the acquiring companies—constituted fraud in connection with the purchase or sale of a security, and thereby satisfied the terms of § 10(b). Id., at 235-236. The Court declined to reach that potential basis for the printer's liability, because the theory had not been submitted to the jury. See id., at 236-237. But four Justices found merit in it. See id., at 239 (Brennan, J., concurring in judgment); id., at 240-243 (Burger, C. J., dissenting); id., at 245 (Blackmun, J., joined by Marshall, J., dissenting). And a fifth Justice stated that the Court "wisely le[ft] the resolution of this issue for another day." Id., at 238 (Stevens, J., concurring).

[662] Chiarella thus expressly left open the misappropriation theory before us today. Certain statements in Chiarella, however, led the Eighth Circuit in the instant case to conclude that § 10(b) liability hinges exclusively on a breach of duty owed to a purchaser or seller of securities. See 92 F. 3d, at 618. The Court said in Chiarella that § 10(b) liability "is premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction, " 445 U. S., at 230 (emphasis added), and observed that the printshop employee defendant in that case "was not a person in whom the sellers had placed their trust and confidence," see id., at 232. These statements rejected the notion that § 10(b) stretches so far as to impose "a general duty between all participants in market transactions to forgo actions based on material, nonpublic information," id., at 233, and we confine them to that context. The statements highlighted by the Eighth Circuit, in short, appear in an opinion carefully leaving for future resolution the validity of the misappropriation theory, and therefore cannot be read to foreclose that theory.

Dirks, too, left room for application of the misappropriation theory in cases like the one we confront.^[11] Dirks involved an investment analyst who had received information from a former insider of a corporation with which the analyst had no connection. See 463 U. S., at 648-649. The information indicated that the corporation had engaged in a massive fraud. The analyst investigated the fraud, obtaining corroborating information from employees of the corporation. During his investigation, the analyst discussed his findings with clients and investors, some of whom sold their holdings in the company the analyst suspected of gross wrongdoing. See id., at 649.

[663] The SEC censured the analyst for, inter alia, aiding and abetting § 10(b) and Rule 10b—5 violations by clients and investors who sold their holdings based on the nonpublic information the analyst passed on. See id., at 650-652. In the SEC's view, the analyst, as a "tippee" of corporation insiders, had a duty under § 10(b) and Rule 10b—5 to refrain from communicating the nonpublic information to persons likely to trade on the basis of it. See id., at 651, 655-656. This Court found no such obligation, see id., at 665-667, and repeated the key point made in Chiarella: There is no "`general duty between all participants in market transactions to forgo actions based on material, nonpublic information.' " 463 U. S., at 655 (quoting Chiarella, 445 U. S., at 233); see Aldave, 13 Hofstra L. Rev., at 122 (misappropriation theory bars only "trading on the basis of information that the wrongdoer converted to his own use in violation of some fiduciary, contractual, or similar obligation to the owner or rightful possessor of the information").

No showing had been made in Dirks that the "tippers" had violated any duty by disclosing to the analyst nonpublic information about their former employer. The insiders had acted not for personal profit, but to expose a massive fraud within the corporation. See 463 U. S., at 666-667. Absent any violation by the tippers, there could be no derivative liability for the tippee. See id., at 667. Most important for purposes of the instant case, the Court observed in Dirks: "There was no expectation by [the analyst's] sources that he would keep their information in confidence. Nor did [the analyst] misappropriate or illegally obtain the information . . . ." Id., at 665. Dirks thus presents no suggestion that a person who gains nonpublic information through misappropriation in breach of a fiduciary duty escapes § 10(b) liability when, without alerting the source, he trades on the information.

Last of the three cases the Eighth Circuit regarded as warranting disapproval of the misappropriation theory, Cen- [664] tral Bank held that "a private plaintiff may not maintain an aiding and abetting suit under § 10(b)." 511 U. S., at 191. We immediately cautioned in Central Bank that secondary actors in the securities markets may sometimes be chargeable under the securities Acts: "Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b—5, assuming . . . the requirements for primary liability under Rule 10b—5 are met." Ibid. (emphasis added). The Eighth Circuit isolated the statement just quoted and drew from it the conclusion that § 10(b) covers only deceptive statements or omissions on which purchasers and sellers, and perhaps other market participants, rely. See 92 F. 3d, at 619. It is evident from the question presented in Central Bank, however, that this Court, in the quoted passage, sought only to clarify that secondary actors, although not subject to aiding and abetting liability, remain subject to primary liability under § 10(b) and Rule 10b—5 for certain conduct.

Furthermore, Central Bank`s discussion concerned only private civil litigation under § 10(b) and Rule 10b—5, not criminal liability. Central Bank`s reference to purchasers or sellers of securities must be read in light of a longstanding limitation on private § 10(b) suits. In Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975), we held that only actual purchasers or sellers of securities may maintain a private civil action under § 10(b) and Rule 10b—5. We so confined the § 10(b) private right of action because of "policy considerations." Id., at 737. In particular, Blue Chip Stamps recognized the abuse potential and proof problems inherent in suits by investors who neither bought nor sold, but asserted they would have traded absent fraudulent conduct by others. See id., at 739-747; see also Holmes v. Securities Investor Protection Corporation, 503 U. S. 258, 285 [665] (1992) (O'Connor, J., concurring in part and concurring in judgment); id., at 289-290 (Scalia, J., concurring in judgment). Criminal prosecutions do not present the dangers the Court addressed in Blue Chip Stamps, so that decision is "inapplicable" to indictments for violations of § 10(b) and Rule 10b—5. United States v. Naftalin, 441 U. S. 768, 774, n. 6 (1979); see also Holmes, 503 U. S., at 281 (O'Connor, J., concurring in part and concurring in judgment) ("[T]he purchaser/seller standing requirement for private civil actions under § 10(b) and Rule 10b—5 is of no import in criminal prosecutions for willful violations of those provisions.").

In sum, the misappropriation theory, as we have examined and explained it in this opinion, is both consistent with the statute and with our precedent.^[12] Vital to our decision that criminal liability may be sustained under the misappropriation theory, we emphasize, are two sturdy safeguards Congress has provided regarding scienter. To establish a criminal violation of Rule 10b—5, the Government must prove that a person "willfully" violated the provision. See 15 U. S. C. [666] § 78ff(a).^[13] Furthermore, a defendant may not be imprisoned for violating Rule 10b—5 if he proves that he had no knowledge of the Rule. See ibid.^[14] O'Hagan's charge that the misappropriation theory is too indefinite to permit the imposition of criminal liability, see Brief for Respondent 30— 33, thus fails not only because the theory is limited to those who breach a recognized duty. In addition, the statute's "requirement of the presence of culpable intent as a necessary element of the offense does much to destroy any force in the argument that application of the [statute]" in circumstances such as O'Hagan's is unjust. Boyce Motor Lines, Inc. v. United States, 342 U. S. 337, 342 (1952).

The Eighth Circuit erred in holding that the misappropriation theory is inconsistent with § 10(b). The Court of Appeals may address on remand O'Hagan's other challenges to his convictions under § 10(b) and Rule 10b—5.

III

We consider next the ground on which the Court of Appeals reversed O'Hagan's convictions for fraudulent trading in connection with a tender offer, in violation of § 14(e) of the Exchange Act and SEC Rule 14e—3(a). A sole question is before us as to these convictions: Did the Commission, as the Court of Appeals held, exceed its rulemaking authority under § 14(e) when it adopted Rule 14e—3(a) without requiring a showing that the trading at issue entailed a breach of [667] fiduciary duty? We hold that the Commission, in this regard and to the extent relevant to this case, did not exceed its authority.

The governing statutory provision, § 14(e) of the Exchange Act, reads in relevant part:

"It shall be unlawful for any person . . .to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer . . . . The [SEC] shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative." 15 U. S. C. § 78n(e).

Section 14(e)'s first sentence prohibits fraudulent acts in connection with a tender offer. This self-operating proscription was one of several provisions added to the Exchange Act in 1968 by the Williams Act, 82 Stat. 454. The section's second sentence delegates definitional and prophylactic rulemaking authority to the Commission. Congress added this rulemaking delegation to § 14(e) in 1970 amendments to the Williams Act. See § 5, 84 Stat. 1497.

Through § 14(e) and other provisions on disclosure in the Williams Act,^[15] Congress sought to ensure that shareholders "confronted by a cash tender offer for their stock [would] not be required to respond without adequate information." Rondeau v. Mosinee Paper Corp. , 422 U. S. 49, 58 (1975); see Lewis v. McGraw, 619 F. 2d 192, 195 (CA2 1980) (per curiam) [668] ("very purpose" of Williams Act was "informed decisionmaking by shareholders"). As we recognized in Schreiber v. Burlington Northern, Inc. , 472 U. S. 1 (1985), Congress designed the Williams Act to make "disclosure, rather than court-imposed principles of `fairness' or `artificiality,' . . . the preferred method of market regulation." Id., at 9, n. 8. Section 14(e), we explained, "supplements the more precise disclosure provisions found elsewhere in the Williams Act, while requiring disclosure more explicitly addressed to the tender offer context than that required by § 10(b)." Id., at 10-11.

Relying on § 14(e)'s rulemaking authorization, the Commission, in 1980, promulgated Rule 14e—3(a). That measure provides:

"(a) If any person has taken a substantial step or steps to commence, or has commenced, a tender offer (the `offering person'), it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the [Exchange] Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from:

"(1) The offering person,

"(2) The issuer of the securities sought or to be sought by such tender offer, or

"(3) Any officer, director, partner or employee or any other person acting on behalf of the offering person or such issuer, to purchase or sell or cause to be purchased or sold any of such securities or any securities convertible into or exchangeable for any such securities or any option or right to obtain or to dispose of any of the foregoing securities, unless within a reasonable time prior to any purchase or sale such information and its source [669] are publicly disclosed by press release or otherwise." 17 CFR § 240.14e—3(a) (1996).

As characterized by the Commission, Rule 14e—3(a) is a "disclose or abstain from trading" requirement. 45 Fed. Reg. 60410 (1980).^[16] The Second Circuit concisely described the Rule's thrust:

"One violates Rule 14e—3(a) if he trades on the basis of material nonpublic information concerning a pending tender offer that he knows or has reason to know has been acquired `directly or indirectly' from an insider of the offer or or issuer, or someone working on their behalf. Rule 14e—3(a) is a disclosure provision. It creates a duty in those traders who fall within its ambit to abstain or disclose, without regard to whether the trader owes a pre-existing fiduciary duty to respect the confidentiality of the information." United States v. Chestman, 947 F. 2d 551, 557 (1991) (en banc) (emphasis added), cert. denied, 503 U. S. 1004 (1992).

See also SEC v. Maio, 51 F. 3d 623, 635 (CA7 1995) ("Rule 14e—3 creates a duty to disclose material non-public information, or abstain from trading in stocks implicated by an impending tender offer, regardless of whether such information was obtained through a breach of fiduciary duty." (emphasis added)); SEC v. Peters, 978 F. 2d 1162, 1165 (CA10 1992) (as written, Rule 14e—3(a) has no fiduciary duty requirement).

In the Eighth Circuit's view, because Rule 14e—3(a) applies whether or not the trading in question breaches a fiduciary duty, the regulation exceeds the SEC's § 14(e) rulemaking authority. See 92 F. 3d, at 624, 627. Contra, Maio, 51 F. 3d, at 634-635 (CA7); Peters, 978 F. 2d, at 1165-1167 (CA10); [670] Chestman, 947 F. 2d, at 556-563 (CA2) (all holding Rule 14e— 3(a) a proper exercise of SEC's statutory authority). In support of its holding, the Eighth Circuit relied on the text of § 14(e) and our decisions in Schreiber and Chiarella. See 92 F. 3d, at 624-627.

The Eighth Circuit homed in on the essence of § 14(e)'s rulemaking authorization: "[T]he statute empowers the SEC to `define' and `prescribe means reasonably designed to prevent' `acts and practices' which are `fraudulent.' " Id., at 624. All that means, the Eighth Circuit found plain, is that the SEC may "identify and regulate," in the tender offer context, "acts and practices" the law already defines as "fraudulent"; but, the Eighth Circuit maintained, the SEC may not "create its own definition of fraud." Ibid. (internal quotation marks omitted).

This Court, the Eighth Circuit pointed out, held in Schreiber that the word "manipulative" in the § 14(e) phrase "fraudulent, deceptive, or manipulative acts or practices" means just what the word means in § 10(b): Absent misrepresentation or nondisclosure, an act cannot be indicted as manipulative. See 92 F. 3d, at 625 (citing Schreiber, 472 U. S., at 7-8, and n. 6). Section 10(b) interpretations guide construction of § 14(e), the Eighth Circuit added, see 92 F. 3d, at 625, citing this Court's acknowledgment in Schreiber that § 14(e)'s "`broad antifraud prohibition' . . . [is] modeled on the antifraud provisions of § 10(b) . . . and Rule 10b—5," 472 U. S., at 10 (citation omitted); see id., at 10-11, n. 10.

For the meaning of "fraudulent" under § 10(b), the Eighth Circuit looked to Chiarella. See 92 F. 3d, at 625. In that case, the Eighth Circuit recounted, this Court held that a failure to disclose information could be "fraudulent" under § 10(b) only when there was a duty to speak arising out of "`a fiduciary or other similar relation of trust and confidence.' " Chiarella, 445 U. S., at 228 (quoting Restatement (Second) of Torts § 551(2)(a) (1976)). Just as § 10(b) demands a showing [671] of a breach of fiduciary duty, so such a breach is necessary to make out a § 14(e) violation, the Eighth Circuit concluded.

As to the Commission's § 14(e) authority to "prescribe means reasonably designed to prevent" fraudulent acts, the Eighth Circuit stated: "Properly read, this provision means simply that the SEC has broad regulatory powers in the field of tender offers, but the statutory terms have a fixed meaning which the SEC cannot alter by way of an administrative rule." 92 F. 3d, at 627.

The United States urges that the Eighth Circuit's reading of § 14(e) misapprehends both the Commission's authority to define fraudulent acts and the Commission's power to prevent them. "The `defining' power," the United States submits, "would be a virtual nullity were the SEC not permitted to go beyond common law fraud (which is separately prohibited in the first [self-operative] sentence of Section 14(e))." Brief for United States 11; see id., at 37.

In maintaining that the Commission's power to define fraudulent acts under § 14(e) is broader than its rulemaking power under § 10(b), the United States questions the Court of Appeals' reading of Schreiber. See Brief for United States 38-40. Parenthetically, the United States notes that the word before the Schreiber Court was "manipulative"; unlike "fraudulent," the United States observes, "`manipulative' . . . is `virtually a term of art when used in connection with the securities markets.' " Brief for United States 38, n. 20 (quoting Schreiber, 472 U. S., at 6). Most tellingly, the United States submits, Schreiber involved acts alleged to violate the self-operative provision in § 14(e)'s first sentence, a sentence containing language similar to § 10(b). But § 14(e)'s second sentence, containing the rulemaking authorization, the United States points out, does not track § 10(b), which simply authorizes the SEC to proscribe "manipulative or deceptive device[s] or contrivance[s]." Brief for United States 38. Instead, § 14(e)'s rulemaking prescription tracks § 15(c)(2)(D) of the Exchange Act, 15 U. S. C. § 78o (c)(2)(D), [672] which concerns the conduct of broker-dealers in over-thecounter markets. See Brief for United States 38-39. Since 1938, see 52 Stat. 1075, § 15(c)(2) has given the Commission authority to "define, and prescribe means reasonably designed to prevent, such [broker-dealer] acts and practices as are fraudulent, deceptive, or manipulative." 15 U. S. C. § 78o (c)(2)(D). When Congress added this same rulemaking language to § 14(e) in 1970, the Government states, the Commission had already used its § 15(c)(2) authority to reach beyond common-law fraud. See Brief for United States 39, n. 22.^[17]

We need not resolve in this case whether the Commission's authority under § 14(e) to "define . . . such acts and practices as are fraudulent" is broader than the Commission's frauddefining authority under § 10(b), for we agree with the United States that Rule 14e—3(a), as applied to cases of this genre, qualifies under § 14(e) as a "means reasonably designed to prevent" fraudulent trading on material, nonpublic information in the tender offer context.^[18] A prophylactic [673] measure, because its mission is to prevent, typically encompasses more than the core activity prohibited. As we noted in Schreiber, § 14(e)'s rulemaking authorization gives the Commission "latitude," even in the context of a term of art like "manipulative," "to regulate nondeceptive activities as a `reasonably designed' means of preventing manipulative acts, without suggesting any change in the meaning of the term `manipulative' itself." 472 U. S., at 11, n. 11. We hold, accordingly, that under § 14(e), the Commission may prohibit acts not themselves fraudulent under the common law or § 10(b), if the prohibition is "reasonably designed to prevent. . . acts and practices [that] are fraudulent." 15 U. S. C. § 78n(e).^[19]

Because Congress has authorized the Commission, in § 14(e), to prescribe legislative rules, we owe the Commission's judgment "more than mere deference or weight." Batterton v. Francis, 432 U. S. 416, 424-426 (1977). Therefore, in determining whether Rule 14e—3(a)'s "disclose or abstain from trading" requirement is reasonably designed to prevent fraudulent acts, we must accord the Commission's assessment "controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute." Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc. , 467 U. S. 837, 844 (1984). In this case, we conclude, the Commission's assessment is none of these.^[20]

[674] In adopting the "disclose or abstain" rule, the SEC explained:

"The Commission has previously expressed and continues to have serious concerns about trading by persons in possession of material, nonpublic information relating to a tender offer. This practice results in unfair disparities in market information and market disruption. Security holders who purchase from or sell to such persons are effectively denied the benefits of disclosure and the substantive protections of the Williams Act. If furnished with the information, these security holders would be able to make an informed investment decision, which could involve deferring the purchase or sale of the securities until the material information had been disseminated or until the tender offer had been commenced or terminated." 45 Fed. Reg. 60412 (1980) (footnotes omitted).

The Commission thus justified Rule 14e—3(a) as a means necessary and proper to assure the efficacy of Williams Act protections.

The United States emphasizes that Rule 14e—3(a) reaches trading in which "a breach of duty is likely but difficult to prove." Reply Brief 16. "Particularly in the context of a tender offer," as the Tenth Circuit recognized, "there is a fairly wide circle of people with confidential information," Peters, 978 F. 2d, at 1167, notably, the attorneys, investment [675] bankers, and accountants involved in structuring the transaction. The availability of that information may lead to abuse, for "even a hint of an upcoming tender offer may send the price of the target company's stock soaring." SEC v. Materia, 745 F. 2d 197, 199 (CA2 1984). Individuals entrusted with nonpublic information, particularly if they have no long-term loyalty to the issuer, may find the temptation to trade on that information hard to resist in view of "the very large short-term profits potentially available [to them]." Peters, 978 F. 2d, at 1167.

"[I]t may be possible to prove circumstantially that a person [traded on the basis of material, nonpublic information], but almost impossible to prove that the trader obtained such information in breach of a fiduciary duty owed either by the trader or by the ultimate insider source of the information." Ibid. The example of a "tippee" who trades on information received from an insider illustrates the problem. Under Rule 10b—5, "a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach." Dirks , 463 U. S., at 660. To show that a tippee who traded on nonpublic information about a tender offer had breached a fiduciary duty would require proof not only that the insider source breached a fiduciary duty, but that the tippee knew or should have known of that breach. "Yet, in most cases, the only parties to the [information transfer] will be the insider and the alleged tippee." Peters, 978 F. 2d, at 1167.^[21]

[676] In sum, it is a fair assumption that trading on the basis of material, nonpublic information will often involve a breach of a duty of confidentiality to the bidder or target company or their representatives. The SEC, cognizant of the proof problem that could enable sophisticated traders to escape responsibility, placed in Rule 14e—3(a) a "disclose or abstain from trading" command that does not require specific proof of a breach of fiduciary duty. That prescription, we are satisfied, applied to this case, is a "means reasonably designed to prevent" fraudulent trading on material, nonpublic information in the tender offer context. See Chestman, 947 F. 2d, at 560 ("While dispensing with the subtle problems of proof associated with demonstrating fiduciary breach in the problematic area of tender offer insider trading, [Rule 14e— 3(a)] retains a close nexus between the prohibited conduct and the statutory aims."); accord, Maio, 51 F. 3d, at 635, and n. 14; Peters, 978 F. 2d, at 1167.^[22] Therefore, insofar as it serves to prevent the type of misappropriation charged against O'Hagan, Rule 14e—3(a) is a proper exercise of the Commission's prophylactic power under § 14(e).^[23]

As an alternate ground for affirming the Eighth Circuit's judgment, O'Hagan urges that Rule 14e—3(a) is invalid because [677] it prohibits trading in advance of a tender offer—when "a substantial step . . . to commence" such an offer has been taken—while § 14(e) prohibits fraudulent acts "in connection with any tender offer." See Brief for Respondent 41-42. O'Hagan further contends that, by covering pre-offer conduct, Rule 14e—3(a) "fails to comport with due process on two levels": The Rule does not "give fair notice as to when, in advance of a tender offer, a violation of § 14(e) occurs," id., at 42; and it"disposes of any scienter requirement," id., at 43. The Court of Appeals did not address these arguments, and O'Hagan did not raise the due process points in his briefs before that court. We decline to consider these contentions in the first instance.^[24] The Court of Appeals may address on remand any arguments O'Hagan has preserved.

IV

Based on its dispositions of the securities fraud convictions, the Court of Appeals also reversed O'Hagan's convictions, under 18 U. S. C. § 1341, for mail fraud. See 92 F. 3d, at 627-628. Reversal of the securities convictions, the Court of Appeals recognized, "d[id] not as a matter of law require that the mail fraud convictions likewise be reversed." Id., at 627 (citing Carpenter, 484 U. S., at 24, in which this Court unanimously affirmed mail and wire fraud convictions based on the same conduct that evenly divided the Court on the defendants' securities fraud convictions). But in this case, the Court of Appeals said, the indictment was so structured that the mail fraud charges could not be disassociated from the securities fraud charges, and absent any securities [678] fraud, "there was no fraud upon which to base the mail fraud charges." 92 F. 3d, at 627-628.^[25]

The United States urges that the Court of Appeals' position is irreconcilable with Carpenter: Just as in Carpenter, so here, the "mail fraud charges are independent of [the] securities fraud charges, even [though] both rest on the same set of facts." Brief for United States 46-47. We need not linger over this matter, for our rulings on the securities fraud issues require that we reverse the Court of Appeals judgment on the mail fraud counts as well.^[26]

O'Hagan, we note, attacked the mail fraud convictions in the Court of Appeals on alternate grounds; his other arguments, not yet addressed by the Eighth Circuit, remain open for consideration on remand.

* * *

The judgment of the Court of Appeals for the Eighth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

[679] Justice Scalia, concurring in part and dissenting in part.

I join Parts I, III, and IV of the Court's opinion. I do not agree, however, with Part II of the Court's opinion, containing its analysis of respondent's convictions under § 10(b) and Rule 10b—5.

I do not entirely agree with Justice Thomas's analysis of those convictions either, principally because it seems to me irrelevant whether the Government's theory of why respondent's acts were covered is "coherent and consistent," post, at 691. It is true that with respect to matters over which an agency has been accorded adjudicative authority or policymaking discretion, the agency's action must be supported by the reasons that the agency sets forth, SEC v. Chenery Corp., 318 U. S. 80, 94 (1943); see also SEC v. Chenery Corp., 332 U. S. 194, 196 (1947), but I do not think an agency's unadorned application of the law need be, at least where (as here) no Chevron deference is being given to the agency's interpretation, see Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). In point of fact, respondent's actions either violated § 10(b) and Rule 10b—5, or they did not—regardless of the reasons the Government gave. And it is for us to decide.

While the Court's explanation of the scope of § 10(b) and Rule 10b—5 would be entirely reasonable in some other context, it does not seem to accord with the principle of lenity we apply to criminal statutes (which cannot be mitigated here by the Rule, which is no less ambiguous than the statute). See Reno v. Koray, 515 U. S. 50, 64-65 (1995) (explaining circumstances in which rule of levity applies); United States v. Bass, 404 U. S. 336, 347-348 (1971) (discussing policies underlying rule of lenity). In light of that principle, it seems to me that the unelaborated statutory language: "[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance," § 10(b), must be construed to require the manipulation or deception of a party to a securities transaction.

[680] Justice Thomas, with whom The Chief Justice joins, concurring in the judgment in part and dissenting in part.

Today the majority upholds respondent's convictions for violating § 10(b) of the Securities Exchange Act of 1934, and Rule 10b—5 promulgated thereunder, based upon the Securities and Exchange Commission's "misappropriation theory." Central to the majority's holding is the need to interpret § 10(b)'s requirement that a deceptive device be "use[d] or employ[ed], in connection with the purchase or sale of any security." 15 U. S. C. § 78j(b). Because the Commission's misappropriation theory fails to provide a coherent and consistent interpretation of this essential requirement for liability under § 10(b), I dissent.

The majority also sustains respondent's convictions under § 14(e) of the Securities Exchange Act, and Rule 14e—3(a) promulgated thereunder, regardless of whether respondent violated a fiduciary duty to anybody. I dissent too from that holding because, while § 14(e) does allow regulations prohibiting nonfraudulent acts as a prophylactic against certain fraudulent acts, neither the majority nor the Commission identifies any relevant underlying fraud against which Rule 14e—3(a) reasonably provides prophylaxis. With regard to respondent's mail fraud convictions, however, I concur in the judgment of the Court.

I

I do not take issue with the majority's determination that the undisclosed misappropriation of confidential information by a fiduciary can constitute a "deceptive device" within the meaning of § 10(b). Nondisclosure where there is a preexisting duty to disclose satisfies our definitions of fraud and deceit for purposes of the securities laws. See Chiarella v. United States, 445 U. S. 222, 230 (1980).

Unlike the majority, however, I cannot accept the Commission's interpretation of when a deceptive device is "use[d] . . . in connection with" a securities transaction. Although the Commission and the majority at points seem to suggest that [681] any relation to a securities transaction satisfies the "in connection with" requirement of § 10(b), both ultimately reject such an overly expansive construction and require a more integral connection between the fraud and the securities transaction. The majority states, for example, that the misappropriation theory applies to undisclosed misappropriation of confidential information "for securities trading purposes," ante, at 652, thus seeming to require a particular intent by the misappropriator in order to satisfy the "in connection with" language. See also ante, at 656 (the "misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities" (emphasis added)); ante, at 656-657 (distinguishing embezzlement of money used to buy securities as lacking the requisite connection). The Commission goes further, and argues that the misappropriation theory satisfies the "in connection with" requirement because it "depends on an inherent connection between the deceptive conduct and the purchase or sale of a security." Brief for United States 21 (emphasis added); see also ibid. (the "misappropriated information had personal value to respondent only because of its utility in securities trading" (emphasis added)).

The Commission's construction of the relevant language in § 10(b), and the incoherence of that construction, become evident as the majority attempts to describe why the fraudulent theft of information falls under the Commission's misappropriation theory, but the fraudulent theft of money does not. The majority correctly notes that confidential information "qualifies as property to which the company has a right of exclusive use." Ante, at 654. It then observes that the "undisclosed misappropriation of such information, in violation of a fiduciary duty, . . . constitutes fraud akin to embezzlement—the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." [682] Ibid. (citations and internal quotation marks omitted).^[27] So far the majority's analogy to embezzlement is well taken, and adequately demonstrates that undisclosed misappropriation can be a fraud on the source of the information.

What the embezzlement analogy does not do, however, is explain how the relevant fraud is "use[d] or employ[ed], in connection with" a securities transaction. And when the majority seeks to distinguish the embezzlement of funds from the embezzlement of information, it becomes clear that neither the Commission nor the majority has a coherent theory regarding § 10(b)'s "in connection with" requirement.

Turning first to why embezzlement of information supposedly meets the "in connection with" requirement, the majority asserts that the requirement

"is satisfied because the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide." Ante, at 656.

The majority later notes, with apparent approval, the Government's contention that the embezzlement of funds used to purchase securities would not fall within the misappropriation theory. Ante, at 656-657 (citing Brief for United States 24, n. 13). The misappropriation of funds used for a securities transaction is not covered by its theory, the Government explains, because "the proceeds would have value to the malefactor apart from their use in a securities transaction, and the fraud would be complete as soon as the money was [683] obtained." Brief for United States 24, n. 13; see ante, at 656 (quoting Government's explanation).

Accepting the Government's description of the scope of its own theory, it becomes plain that the majority's explanation of how the misappropriation theory supposedly satisfies the "in connection with" requirement is incomplete. The touchstone required for an embezzlement to be "use[d] or employ[ed], in connection with" a securities transaction is not merely that it "coincide" with, or be consummated by, the transaction, but that it is necessarily and only consummated by the transaction. Where the property being embezzled has value "apart from [its] use in a securities transaction"— even though it is in fact being used in a securities transaction—the Government contends that there is no violation under the misappropriation theory.

My understanding of the Government's proffered theory of liability, and its construction of the "in connection with" requirement, is confirmed by the Government's explanation during oral argument:

"[Court]: What if I appropriate some of my client's money in order to buy stock?

. . . . .

"[Court]: Have I violated the securities laws?

"[Counsel]: I do not think that you have.

"[Court]: Why not? Isn't that in connection with the purchase of securit[ies] just as much as this one is?

"[Counsel]: It's not just as much as this one is, because in this case it is the use of the information that enables the profits, pure and simple. There would be no opportunity to engage in profit—

"[Court]: Same here. I didn't have the money. The only way I could buy this stock was to get the money.

. . . . .

"[Counsel]: The difference . . . is that once you have the money you can do anything you want with it. In a sense, the fraud is complete at that point, and then you [684] go on and you can use the money to finance any number of other activities, but the connection is far less close than in this case, where the only value of this informa- tion for personal profit for respondent was to take it and profit in the securities markets by trading on it.

. . . . .

"[Court]: So what you're saying is, is in this case the misappropriation can only be of relevance, or is of substantial relevance, is with reference to the purchase of securities.

"[Counsel]: Exactly.

"[Court]: When you take the money out of the accounts you can go to the racetrack, or whatever.

"[Counsel]: That's exactly right, and because of that difference, [there] can be no doubt that this kind of misappropriation of property is in connection with the purchase or sale of securities.

"Other kinds of misappropriation of property may or may not, but this is a unique form of fraud, unique to the securities markets, in fact, because the only way in which respondent could have profited through this in- formation is by either trading on it or by tipping somebody else to enable their trades." Tr. of Oral Arg. 16-19 (emphases added).

As the above exchange demonstrates, the relevant distinction is not that the misappropriated information was used for a securities transaction (the money example met that test), but rather that it could only be used for such a transaction. See also id., at 6-7 (Government contention that the misappropriation theory satisfies "the requisite connection between the fraud and the securities trading, because it is only in the trading that the fraud is consummated" (emphasis added)); id., at 8 (same).

The Government's construction of the "in connection with" requirement—and its claim that such requirement precludes coverage of financial embezzlement—also demonstrates how [685] the majority's described distinction of financial embezzlement is incomplete. Although the majority claims that the fraud in a financial embezzlement case is complete as soon as the money is obtained, and before the securities transaction is consummated, that is not uniformly true, and thus cannot be the Government's basis for claiming that such embezzlement does not violate the securities laws. It is not difficult to imagine an embezzlement of money that takes place via the mechanism of a securities transaction—for example where a broker is directed to purchase stock for a client and instead purchases such stock—using client funds—for his own account. The unauthorized (and presumably undisclosed) transaction is the very act that constitutes the embezzlement and the "securities transaction and the breach of duty thus coincide." What presumably distinguishes monetary embezzlement for the Government is thus that it is not necessarily coincident with a securities transaction, not that it never lacks such a "connection."

Once the Government's construction of the misappropriation theory is accurately described and accepted—along with its implied construction of § 10(b)'s "in connection with" language—that theory should no longer cover cases, such as this one, involving fraud on the source of information where the source has no connection with the other participant in a securities transaction. It seems obvious that the undisclosed misappropriation of confidential information is not necessarily consummated by a securities transaction. In this case, for example, upon learning of Grand Met's confidential takeover plans, O'Hagan could have done any number of things with the information: He could have sold it to a newspaper for publication, see id., at 36; he could have given or sold the information to Pillsbury itself, see id., at 37; or he could even have kept the information and used it solely for his personal amusement, perhaps in a fantasy stock trading game.

Any of these activities would have deprived Grand Met of its right to "exclusive use," ante, at 654, of the information [686] and, if undisclosed, would constitute "embezzlement" of Grand Met's informational property. Under any theory of liability, however, these activities would not violate § 10(b) and, according to the Commission's monetary embezzlement analogy, these possibilities are sufficient to preclude a violation under the misappropriation theory even where the informational property was used for securities trading. That O'Hagan actually did use the information to purchase securities is thus no more significant here than it is in the case of embezzling money used to purchase securities. In both cases the embezzler could have done something else with the property, and hence the Commission's necessary "connection" under the securities laws would not be met.^[28] If the relevant test under the "in connection with" language is whether the fraudulent act is necessarily tied to a securities transaction, then the misappropriation of confidential information used to trade no more violates § 10(b) than does the misappropriation of funds used to trade. As the Commission concedes that the latter is not covered under its theory, I am at a loss to see how the same theory can coherently be applied to the former.^[29]

[687] The majority makes no attempt to defend the misappropriation theory as set forth by the Commission. Indeed, the majority implicitly concedes the indefensibility of the Commission's theory by acknowledging that alternative uses of misappropriated information exist that do not violate the securities laws and then dismissing the Government's repeated explanations of its misappropriation theory as mere "overstatement." Ante, at 657. Having rejected the Government's description of its theory, the majority then engages in the "imaginative" exercise of constructing its own misappropriation theory from whole cloth. Thus, we are told, if we merely "[s]ubstitute `ordinarily' for `only' " when describing the degree of connecteness between a misappropriation and a securities transaction, the Government would have a winner. Ibid. Presumably, the majority would similarly edit the Government's brief to this Court to argue for only an "ordinary," rather than an "inherent connection between the deceptive conduct and the purchase or sale of a security." Brief for United States 21 (emphasis added).

I need not address the coherence, or lack thereof, of the majority's new theory, for it suffers from a far greater, and dispositive, flaw: It is not the theory offered by the Commission. Indeed, as far as we know from the majority's opinion, this new theory has never been proposed by the Commission, much less adopted by rule or otherwise. It is a fundamental proposition of law that this Court "may not supply a reasoned basis for the agency's action that the agency itself has not given." Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U. S. 29, 43 (1983). We do not even credit a "post hoc rationalizatio[n]" of counsel for the agency, id., at 50, so one is left to wonder how we could possibly rely on a post hoc rationalization [688] invented by this Court and never even presented by the Commission for our consideration.

Whether the majority's new theory has merit, we cannot possibly tell on the record before us. There are no findings regarding the "ordinary" use of misappropriated information, much less regarding the "ordinary" use of other forms of embezzled property. The Commission has not opined on the scope of the new requirement that property must "ordinarily" be used for securities trading in order for its misappropriation to be "in connection with" a securities transaction. We simply do not know what would or would not be covered by such a requirement, and hence cannot evaluate whether the requirement embodies a consistent and coherent interpretation of the statute.^[30] Moreover, persons subject to [689] this new theory, such as respondent here, surely could not and cannot regulate their behavior to comply with the new theory because, until today, the theory has never existed. In short, the majority's new theory is simply not presented by this case, and cannot form the basis for upholding respondent's convictions.

In upholding respondent's convictions under the new and improved misappropriation theory, the majority also points to various policy considerations underlying the securities laws, such as maintaining fair and honest markets, promoting investor confidence, and protecting the integrity of the securities markets. Ante, at 657, 658-659. But the repeated reliance on such broad-sweeping legislative purposes reaches too far and is misleading in the context of the misappropriation theory. It reaches too far in that, regardless of the overarching purpose of the securities laws, it is not illegal to run afoul of the "purpose" of a statute, only its letter. The majority's approach is misleading in this case because it glosses over the fact that the supposed threat to fair and honest markets, investor confidence, and market integrity comes not from the supposed fraud in this case, but from the mere fact that the information used by O'Hagan was nonpublic.

As the majority concedes, because "the deception essential to the misappropriation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no `deceptive device' and thus no § 10(b) violation." Ante, at 655 (emphasis added). Indeed, were the source expressly to authorize its agents to trade on the confidential information—as a perk or bonus, perhaps—there would likewise be no § 10(b) violation.^[31] Yet in either case—disclosed [690] misuse or authorized use—the hypothesized "inhibiting impact on market participation," ante, at 659, would be identical to that from behavior violating the misappropriation theory: "Outsiders" would still be trading based on nonpublic information that the average investor has no hope of obtaining through his own diligence.^[32]

The majority's statement that a "misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public, " ante, at 656 (emphasis added), thus focuses on the wrong point. Even if it is true that trading on nonpublic information hurts the public, it is true whether or not there is any deception of the source of the information.^[33] Moreover, as [691] we have repeatedly held, use of nonpublic information to trade is not itself a violation of § 10(b). E. g., Chiarella, 445 U. S., at 232-233. Rather, it is the use of fraud "in connection with" a securities transaction that is forbidden. Where the relevant element of fraud has no impact on the integrity of the subsequent transactions as distinct from the nonfraudulent element of using nonpublic information, one can reasonably question whether the fraud was used in connection with a securities transaction. And one can likewise question whether removing that aspect of fraud, though perhaps laudable, has anything to do with the confidence or integrity of the market.

The absence of a coherent and consistent misappropriation theory and, by necessary implication, a coherent and consistent application of the statutory "use or employ, in connection with" language, is particularly problematic in the context of this case. The Government claims a remarkable breadth to the delegation of authority in § 10(b), arguing that "the very aim of this section was to pick up unforeseen, cunning, deceptive devices that people might cleverly use in the securities markets." Tr. of Oral Arg. 7. As the Court aptly queried, "[t]hat's rather unusual, for a criminal statute to be that open-ended, isn't it?" Ibid. Unusual indeed. Putting aside the dubious validity of an open-ended delegation to an independent agency to go forth and create regulations criminalizing "fraud," in this case we do not even have a formal regulation embodying the agency's misappropriation theory. Certainly Rule 10b—5 cannot be said to embody the theory— although it deviates from the statutory language by the addition of the words "any person," it merely repeats, unchanged, § 10(b)'s "in connection with" language. Given that the validity of the misappropriation theory turns on the construction [692] of that language in § 10(b), the regulatory language is singularly uninformative.^[34]

Because we have no regulation squarely setting forth some version of the misappropriation theory as the Commission's interpretation of the statutory language, we are left with little more than the Commission's litigating position or the majority's completely novel theory that is not even acknowledged, much less adopted, by the Commission. As we have noted before, such positions are not entitled to deference and, at most, get such weight as their persuasiveness warrants. Metropolitan Stevedore Co. v. Rambo, ante, at 138, n. 9, 140, n. 10. Yet I find wholly unpersuasive a litigating position by the Commission that, at best, embodies an inconsistent and incoherent interpretation of the relevant statutory language and that does not provide any predictable guidance as to what behavior contravenes the statute. That position is no better than an ad hoc interpretation of statutory language and in my view can provide no basis for liability.

II

I am also of the view that O'Hagan's conviction for violating Rule 14e—3(a) cannot stand. Section 14(e) of the Exchange Act provides, in relevant part:

"It shall be unlawful for any person . . . to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer . . . . The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means [693] reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative." 15 U. S. C. § 78n(e).

Pursuant to the rulemaking authority conferred by this section, the Commission has promulgated Rule 14e—3(a), which provides, in relevant part:

"(a) If any person has taken a substantial step or steps to commence, or has commenced, a tender offer (the `offering person'), it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the [Securities Exchange] Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from:

"(1) The offering person,

"(2) The issuer of the securities sought or to be sought by such tender offer, or

"(3) [Any person acting on behalf of the offering person or such issuer], to purchase or sell [any such securities or various instruments related to such securities], unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed by press release or otherwise." 17 CFR § 240.14e—3(a) (1996).

As the majority acknowledges, Rule 14e—3(a) prohibits a broad range of behavior regardless of whether such behavior is fraudulent under our precedents. See ante, at 669 (Rule applies "`without regard to whether the trader owes a preexisting fiduciary duty to respect the confidentiality of the information' " (emphasis deleted)) (quoting United States v. Chestman, 947 F. 2d 551, 557 (CA2 1991) (en banc), cert. denied, 503 U. S. 1004 (1992)).

[694] The Commission offers two grounds in defense of Rule 14e—3(a). First, it argues that § 14(e) delegates to the Commission the authority to "define" fraud differently than that concept has been defined by this Court, and that Rule 14e— 3(a) is a valid exercise of that "defining" power. Second, it argues that § 14(e) authorizes the Commission to "prescribe means reasonably designed to prevent" fraudulent acts, and that Rule 14e—3(a) is a prophylactic rule that may prohibit nonfraudulent acts as a means of preventing fraudulent acts that are difficult to detect or prove.

The majority declines to reach the Commission's first justification, instead sustaining Rule 14e—3(a) on the ground that

"under § 14(e), the Commission may prohibit acts not themselves fraudulent under the common law or § 10(b), if the prohibition is `reasonably designed to prevent . . . acts and practices [that] are fraudulent.' " Ante, at 673 (quoting 15 U. S. C. § 78n(e)).

According to the majority, prohibiting trading on nonpublic information is necessary to prevent such supposedly hardto-prove fraudulent acts and practices as trading on information obtained from the buyer in breach of a fiduciary duty, ante, at 675, and possibly "warehousing," whereby the buyer tips allies prior to announcing the tender offer and encourages them to purchase the target company's stock, ante, at 672-673, n. 17.^[35]

I find neither of the Commission's justifications for Rule 14e—3(a) acceptable in misappropriation cases. With regard to the Commission's claim of authority to redefine the concept of fraud, I agree with the Eighth Circuit that the Commission misreads the relevant provision of § 14(e).

[695] "Simply put, the enabling provision of § 14(e) permits the SEC to identify and regulate those `acts and practices' which fall within the § 14(e) legal definition of `fraudulent,' but it does not grant the SEC a license to redefine the term." 92 F. 3d 612, 624 (1996).

This conclusion follows easily from our similar statement in Schreiber v. Burlington Northern, Inc., 472 U. S. 1, 11, n. 11 (1985), that § 14(e) gives the "Commission latitude to regulate nondeceptive activities as a `reasonably designed' means of preventing manipulative acts, without suggesting any change in the meaning of the term `manipulative' itself."

Insofar as the Rule 14e—3(a) purports to "define" acts and practices that "are fraudulent," it must be measured against our precedents interpreting the scope of fraud. The majority concedes, however, that Rule 14e—3(a) does not prohibit merely trading in connection with fraudulent nondisclosure, but rather it prohibits trading in connection with any nondisclosure, regardless of the presence of a pre-existing duty to disclose. Ante, at 669. The Rule thus exceeds the scope of the Commission's authority to define such acts and practices as "are fraudulent."^[36]

[696] Turning to the Commission's second justification for Rule 14e—3(a), although I can agree with the majority that § 14(e) authorizes the Commission to prohibit nonfraudulent acts as a means reasonably designed to prevent fraudulent ones, I cannot agree that Rule 14e—3(a) satisfies this standard. As an initial matter, the Rule, on its face, does not purport to be an exercise of the Commission's prophylactic power, but rather a redefinition of what "constitute[s] a fraudulent, deceptive, or manipulative act or practice within the meaning of § 14(e)." That Rule 14e—3(a) could have been "conceived and defended, alternatively, as definitional or preventive," ante, at 674, n. 19, misses the point. We evaluate regulations not based on the myriad of explanations that could have been given by the relevant agency, but on those explanations and justifications that were, in fact, given. See State Farm, 463 U. S., at 43, 50. Rule 14e—3(a) may not be "[s]ensibly read" as an exercise of "preventive" authority, ante, at 674, n. 19; it can only be differently so read, contrary to its own terms.

Having already concluded that the Commission lacks the power to redefine fraud, the regulation cannot be sustained on its own reasoning. This would seem a complete answer to whether the Rule is valid because, while we might give deference to the Commission's regulatory constructions of § 14(e), the reasoning used by the regulation itself is in this instance contrary to law and we need give no deference to the Commission's post hoc litigating justifications not reflected in the regulation.

Even on its own merits, the Commission's prophylactic justification fails. In order to be a valid prophylactic regulation, Rule 14e—3(a) must be reasonably designed not merely to prevent any fraud, but to prevent persons from engaging in "fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer." 15 U. S. C. § 78n(e) (emphasis added). Insofar as Rule 14e—3(a) is designed to prevent the type of misappropriation at issue in this case, such acts are not legitimate objects of prevention because [697] the Commission's misappropriation theory does not represent a coherent interpretation of the statutory "in connection with" requirement, as explained in Part I, supra. Even assuming that a person misappropriating information from the bidder commits fraud on the bidder, the Commission has provided no coherent or consistent explanation as to why such fraud is "in connection with" a tender offer, and thus the Commission may not seek to prevent indirectly conduct which it could not, under its current theory, prohibit directly.^[37]

Finally, even further assuming that the Commission's misappropriation theory is a valid basis for direct liability, I fail to see how Rule 14e—3(a)'s elimination of the requirement of a breach of fiduciary duty is "reasonably designed" to prevent the underlying "fraudulent" acts. The majority's primary argument on this score is that in many cases "`a breach of duty is likely but difficult to prove.' " Ante, at 674 (quoting Reply Brief for United States 16). Although the majority's hypothetical difficulties involved in a tipper-tippee situation might have some merit in the context of "classical" insider trading, there is no reason to suspect similar difficulties in "misappropriation" cases. In such cases, Rule 14e— 3(a) requires the Commission to prove that the defendant "knows or has reason to know" that the nonpublic information upon which trading occurred came from the bidder or an agent of the bidder. Once the source of the information has been identified, it should be a simple task to obtain proof of any breach of duty. After all, it is the bidder itself that was defrauded in misappropriation cases, and there is no reason [698] to suspect that the victim of the fraud would be reluctant to provide evidence against the perpetrator of the fraud.^[38] There being no particular difficulties in proving a breach of duty in such circumstances, a rule removing the requirement of such a breach cannot be said to be "reasonably designed" to prevent underlying violations of the misappropriation theory.

What Rule 14e—3(a) was in fact "designed" to do can be seen from the remainder of the majority's discussion of the Rule. Quoting at length from the Commission's explanation of the Rule in the Federal Register, the majority notes the Commission's concern with "`unfair disparities in market information and market disruption.' " Ante, at 674 (quoting 45 Fed. Reg. 60412 (1980)). In the Commission's further explanation of Rule 14e—3(a)'s purpose—continuing the paragraph partially quoted by the majority—an example of the problem to be addressed is the so-called "stampede effect" [699] based on leaks and rumors that may result from trading on material, nonpublic information. Id., at 60413. The majority also notes (but does not rely on) the Government's contention that it would not be able to prohibit the supposedly problematic practice of "warehousing"—a bidder intentionally tipping allies to buy stock in advance of a bid announcement—if a breach of fiduciary duty were required. Ante, at 672-673, n.17 (citing Reply Brief for United States 17). Given these policy concerns, the majority notes with seeming approval the Commission's justification of Rule 14e—3(a) "as a means necessary and proper to assure the efficacy of Williams Act protections." Ante, at 674.

Although this reasoning no doubt accurately reflects the Commission's purposes in adopting Rule 14e—3(a), it does little to support the validity of that Rule as a means designed to prevent such behavior: None of the above-described acts involve breaches of fiduciary duties, hence a Rule designed to prevent them does not satisfy § 14(e)'s requirement that the Commission's Rules promulgated under that section be "reasonably designed to prevent" acts and practices that "are fraudulent, deceptive, or manipulative." As the majority itself recognizes, there is no "`general duty between all participants in market transactions to forgo actions based on material, nonpublic information,' " and such duty only "`arises from a specific relationship between two parties.' " Ante, at 661 (quoting Chiarella, 445 U. S., at 233). Unfair disparities in market information, and the potential "stampede effect" of leaks, do not necessarily involve a breach of any duty to anyone, and thus are not proper objects for regulation in the name of "fraud" under § 14(e). Likewise (as the Government concedes, Reply Brief for United States 17), "warehousing" is not fraudulent given that the tippees are using the information with the express knowledge and approval of the source of the information. There simply would be no deception in violation of a duty to disclose under such circumstances. Cf. ante, at 654-655 (noting Government's concession [700] that use of bidder's information with bidder's knowledge is not fraudulent under misappropriation theory).

While enhancing the overall efficacy of the Williams Act may be a reasonable goal, it is not one that may be pursued through § 14(e), which limits its grant of rulemaking authority to the prevention of fraud, deceit, and manipulation. As we have held in the context of § 10(b), "not every instance of financial unfairness constitutes fraudulent activity." Chiarella, supra, at 232. Because, in the context of misappropriation cases, Rule 14e—3(a) is not a means "reasonably designed" to prevent persons from engaging in fraud "in connection with" a tender offer, it exceeds the Commission's authority under § 14(e), and respondent's conviction for violation of that Rule cannot be sustained.

III

With regard to respondent's convictions on the mail fraud counts, my view is that they may be sustained regardless of whether respondent may be convicted of the securities fraud counts. Although the issue is highly fact bound, and not independently worthy of plenary consideration by this Court, we have nonetheless accepted the issue for review and therefore I will endeavor to resolve it.

As I read the indictment, it does not materially differ from the indictment in Carpenter v. United States, 484 U. S. 19 (1987). There, the Court was unanimous in upholding the mail fraud conviction, id., at 28, despite being evenly divided on the securities fraud counts, id., at 24. I do not think the wording of the indictment in the current case requires a finding of securities fraud in order to find mail fraud. Certainly the jury instructions do not make the mail fraud count dependent on the securities fraud counts. Rather, the counts were simply predicated on the same factual basis, and just because those facts are legally insufficient to constitute securities fraud does not make them legally insufficient [701] to constitute mail fraud.^[39] I therefore concur in the judgment of the Court as it relates to respondent's mail fraud convictions.

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[1] Briefs of amici curiae urging reversal were filed for the American Institute of Certified Public Accountants by Louis A. Craco, Richard I. Miller, and David P. Murray; for the Association for Investment Management and Research by Stuart H. Singer; and for the North American Securities Administrators Association, Inc., et al. by Karen M. O'Brien, Meyer Eisenberg, Louis Loss, and Donald C. Langevoort.

Briefs of amici curiae urging affirmance were filed for Law Professors and Counsel by Richard W. Painter and Douglas W. Dunham; and for the National Association of Criminal Defense Lawyers by Arthur F. Mathews, David M. Becker, Andrew B. Weissman, Robert F. Hoyt, Lisa Kemler, Milton V. Freeman, and Elkan Abramowitz.

[2] As evidence that O'Hagan traded on the basis of nonpublic information misappropriated from his law firm, the Government relied on a conversation between O'Hagan and the Dorsey & Whitney partner heading the firm's Grand Met representation. That conversation allegedly took place shortly before August 26, 1988. See Brief for United States 4. O'Hagan urges that the Government's evidence does not show he traded on the basis of nonpublic information. O'Hagan points to news reports on August 18 and 22, 1988, that Grand Met was interested in acquiring Pillsbury, and to an earlier, August 12, 1988, news report that Grand Met had put up its hotel chain for auction to raise funds for an acquisition. See Brief for Respondent 4 (citing App. 73-74, 78-80). O'Hagan's challenge to the sufficiency of the evidence remains open for consideration on remand.

[3] O'Hagan was convicted of theft in state court, sentenced to 30 months' imprisonment, and fined. See State v. O'Hagan, 474 N. W. 2d 613, 615, 623 (Minn. App. 1991). The Supreme Court of Minnesota disbarred O'Hagan from the practice of law. See In re O'Hagan, 450 N. W. 2d 571 (1990).

[4] See, e. g., United States v. Chestman, 947 F. 2d 551, 566 (CA2 1991) (en banc), cert. denied, 503 U. S. 1004 (1992); SEC v. Cherif, 933 F. 2d 403, 410 (CA7 1991), cert. denied, 502 U. S. 1071 (1992); SEC v. Clark, 915 F. 2d 439, 453 (CA9 1990).

[5] Twice before we have been presented with the question whether criminal liability for violation of § 10(b) may be based on a misappropriation theory. In Chiarella v. United States, 445 U. S. 222, 235-237 (1980), the jury had received no misappropriation theory instructions, so we declined to address the question. See infra, at 661. In Carpenter v. United States, 484 U. S. 19, 24 (1987), the Court divided evenly on whether, under the circumstances of that case, convictions resting on the misappropriation theory should be affirmed. See Aldave, The Misappropriation Theory: Carpenter and Its Aftermath, 49 Ohio St. L. J. 373, 375 (1988) (observing that "Carpenter was, by any reckoning, an unusual case," for the information there misappropriated belonged not to a company preparing to engage in securities transactions, e. g., a bidder in a corporate acquisition, but to the Wall Street Journal).

[6] The Government could not have prosecuted O'Hagan under the classical theory, for O'Hagan was not an "insider" of Pillsbury, the corporation in whose stock he traded. Although an "outsider" with respect to Pillsbury, O'Hagan had an intimate association with, and was found to have traded on confidential information from, Dorsey & Whitney, counsel to tender offer or Grand Met. Under the misappropriation theory, O'Hagan's securities trading does not escape Exchange Act sanction, as it would under Justice Thomas' dissenting view, simply because he was associated with, and gained nonpublic information from, the bidder, rather than the target.

[7] Under the misappropriation theory urged in this case, the disclosure obligation runs to the source of the information, here, Dorsey & Whitney and Grand Met. Chief Justice Burger, dissenting in Chiarella, advanced a broader reading of § 10(b) and Rule 10b—5; the disclosure obligation, as he envisioned it, ran to those with whom the misappropriator trades. 445 U. S., at 240 ("a person who has misappropriated nonpublic information has an absolute duty to disclose that information or to refrain from trading"); see also id., at 243, n. 4. The Government does not propose that we adopt a misappropriation theory of that breadth.

[8] Where, however, a person trading on the basis of material, nonpublic information owes a duty of loyalty and confidentiality to two entities or persons—for example, a law firm and its client—but makes disclosure to only one, the trader may still be liable under the misappropriation theory.

[9] Justice Thomas' evident struggle to invent other uses to which O'Hagan plausibly might have put the nonpublic information, see post, at 685, is telling. It is imaginative to suggest that a trade journal would have paid O'Hagan dollars in the millions to publish his information. See Tr. of Oral Arg. 36-37. Counsel for O'Hagan hypothesized, as a nontrading use, that O'Hagan could have "misappropriat[ed] this information of [his] law firm and its client, deliver[ed] it to [Pillsbury], and suggest[ed] that [Pillsbury] in the future . . . might find it very desirable to use [O'Hagan] for legal work." Id., at 37. But Pillsbury might well have had large doubts about engaging for its legal work a lawyer who so stunningly displayed his readiness to betray a client's confidence. Nor is the Commission's theory "incoherent" or "inconsistent," post, at 680, 692, for failing to inhibit use of confidential information for "personal amusement . . . in a fantasy stock trading game," post, at 685.

[10] As noted earlier, however, see supra, at 654-655, the textual requirement of deception precludes § 10(b) liability when a person trading on the basis of nonpublic information has disclosed his trading plans to, or obtained authorization from, the principal—even though such conduct may affect the securities markets in the same manner as the conduct reached by the misappropriation theory. Contrary to Justice Thomas' suggestion, see post, at 689-691, the fact that § 10(b) is only a partial antidote to the problems it was designed to alleviate does not call into question its prohibition of conduct that falls within its textual proscription. Moreover, once a disloyal agent discloses his imminent breach of duty, his principal may seek appropriate equitable relief under state law. Furthermore, in the context of a tender offer, the principal who authorizes an agent's trading on confidential information may, in the Commission's view, incur liability for an Exchange Act violation under Rule 14e—3(a).

[11] The Eighth Circuit's conclusion to the contrary was based in large part on Dirks `s reiteration of the Chiarella language quoted and discussed above. See 92 F. 3d 612, 618-619 (1996).

[12] The United States additionally argues that Congress confirmed the validity of the misappropriation theory in the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), § 2(1), 102 Stat. 4677, note following 15 U. S. C. § 78u—1. See Brief for United States 32-35. ITSFEA declares that "the rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934 . . . governing trading while in possession of material, nonpublic information are, as required by such Act, necessary and appropriate in the public interest and for the protection of investors." Note following 15 U. S. C. § 78u—1. ITSFEA also includes a new § 20A(a) of the Exchange Act expressly providing a private cause of action against persons who violate the Exchange Act "by purchasing or selling a security while in possession of material, nonpublic information"; such an action may be brought by "any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased . . . or sold . . . securities of the same class." 15 U. S. C. § 78t—1(a). Because we uphold the misappropriation theory on the basis of § 10(b) itself, we do not address ITSFEA's significance for cases of this genre.

[13] In relevant part, § 32 of the Exchange Act, as set forth in 15 U. S. C. § 78ff(a), provides:

"Any person who willfully violates any provision of this chapter . . . or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter . . . shall upon conviction be fined not more than $1,000,000, or imprisoned not more than 10 years, or both . . . ; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation."

[14] The statute provides no such defense to imposition of monetary fines. See ibid.

[15] In addition to § 14(e), the Williams Act and the 1970 amendments added to the Exchange Act the following provisions concerning disclosure: § 13(d), 15 U. S. C. § 78m(d) (disclosure requirements for persons acquiring more than five percent of certain classes of securities); § 13(e), 15 U. S. C. § 78m(e) (authorizing Commission to adopt disclosure requirements for certain repurchases of securities by issuer); § 14(d), 15 U. S. C. § 78n(d) (disclosure requirements when tender offer results in offer or owning more than five percent of a class of securities); § 14(f),15 U. S. C. § 78n(f) (disclosure requirements when tender offer results in new corporate directors constituting a majority).

[16] The Rule thus adopts for the tender offer context a requirement resembling the one Chief Justice Burger would have adopted in Chiarella for misappropriators under § 10(b). See supra, at 655, n. 6.

[17] The Government draws our attention to the following measures: 17 CFR § 240.15c2-1 (1970) (prohibiting a broker-dealer's hypothecation of a customer's securities if hypothecated securities would be commingled with the securities of another customer, absent written consent); § 240.15c2-3 (prohibiting transactions by broker-dealers in unvalidated German securities); § 240.15c2-4 (prohibiting broker-dealers from accepting any part of the sale price of a security being distributed unless the money received is promptly transmitted to the persons entitled to it); § 240.15c2-5 (requiring broker-dealers to provide written disclosure of credit terms and commissions in connection with securities sales in which broker-dealers extend credit, or participate in arranging for loans, to the purchasers). See Brief for United States 39, n. 22.

[18] We leave for another day, when the issue requires decision, the legitimacy of Rule 14e—3(a) as applied to "warehousing," which the Government describes as "the practice by which bidders leak advance information of a tender offer to allies and encourage them to purchase the target company's stock before the bid is announced." Reply Brief 17. As we observed in Chiarella, one of the Commission's purposes in proposing Rule 14e—3(a) was "to bar warehousing under its authority to regulate tender offers." 445 U. S., at 234. The Government acknowledges that trading authorized by a principal breaches no fiduciary duty. See Reply Brief 17. The instant case, however, does not involve trading authorized by a principal; therefore, we need not here decide whether the Commission's proscription of warehousing falls within its § 14(e) authority to define or prevent fraud.

[19] The Commission's power under § 10(b) is more limited. See supra, at 651 (Rule 10b—5 may proscribe only conduct that § 10(b) prohibits).

[20] Justice Thomas' dissent urges that the Commission must be precise about the authority it is exercising—that it must say whether it is acting to "define" or to "prevent" fraud—and that in this instance it has purported only to define, not to prevent. See post, at 696. Justice Thomas sees this precision in Rule 14e—3(a)'s words: "it shall constitute a fraudulent . . . act . . . within the meaning of section 14(e) . . . ." We do not find the Commission's Rule vulnerable for failure to recite as a regulatory preamble: We hereby exercise our authority to "define, and prescribe means reasonably designed to prevent, . . . [fraudulent] acts." Sensibly read, the Rule is an exercise of the Commission's full authority. Logically and practically, such a rule may be conceived and defended, alternatively, as definitional or preventive.

[21] Justice Thomas opines that there is no reason to anticipate difficulties in proving breach of duty in "misappropriation" cases. "Once the source of the [purloined] information has been identified," he asserts, "it should be a simple task to obtain proof of any breach of duty." Post, at 697. To test that assertion, assume a misappropriating partner at Dorsey & Whitney told his daughter or son and a wealthy friend that a tender for Pillsbury was in the offing, and each tippee promptly purchased Pillsbury stock, the child borrowing the purchase price from the wealthy friend. Justice Thomas' confidence, post, at 698, n. 12, that "there is no reason to suspect that the tipper would gratuitously protect the tippee," seems misplaced.

[22] Justice Thomas insists that even if the misappropriation of information from the bidder about a tender offer is fraud, the Commission has not explained why such fraud is "in connection with" a tender offer. Post, at 697, 698. What else, one can only wonder, might such fraud be "in connection with"?

[23] Repeating the argument it made concerning the misappropriation theory, see supra, at 665, n. 11, the United States urges that Congress confirmed Rule 14e—3(a)'s validity in ITSFEA, 15 U. S. C. § 78u—1. See Brief for United States 44-45. We uphold Rule 14e—3(a) on the basis of § 14(e) itself and need not address ITSFEA's relevance to this case.

[24] As to O'Hagan's scienter argument, we reiterate that 15 U. S. C. § 78ff(a)requires the Government to prove "willful[l]violat[ion]" of the securities laws, and that lack of knowledge of the relevant rule is an affirmative defense to a sentence of imprisonment. See supra, at 665-666.

[25] The Court of Appeals reversed respondent's money laundering convictions on similar reasoning. See 92 F. 3d, at 628. Because the United States did not seek review of that ruling, we leave undisturbed that portion of the Court of Appeals' judgment.

[26] Justice Thomas finds O'Hagan's convictions on the mail fraud counts, but not on the securities fraud counts, sustainable. Post, at 700-701. Under his view, securities traders like O'Hagan would escape SEC civil actions and federal prosecutions under legislation targeting securities fraud, only to be caught for their trading activities in the broad mail fraud net. If misappropriation theory cases could proceed only under the federal mail and wire fraud statutes, practical consequences for individual defendants might not be large, see Aldave, 49 Ohio St. L. J., at 381, and n. 60; however, "proportionally more persons accused of insider trading [might] be pursued by a U. S. Attorney, and proportionally fewer by the SEC," id., at 382. Our decision, of course, does not rest on such enforcement policy considerations.

[27] Of course, the "use" to which one puts misappropriated property need not be one designed to bring profit to the misappropriator: Any "fraudulent appropriation to one's own use" constitutes embezzlement, regardless of what the embezzler chooses to do with the money. See, e. g., Logan v. State, 493 P. 2d 842, 846 (Okla. Crim. App. 1972) ("Any diversion of funds held in trust constitutes embezzlement whether there is direct personal benefit or not as long as the owner is deprived of his money").

[28] Indeed, even if O'Hagan or someone else thereafter used the information to trade, the misappropriation would have been complete before the trade and there should be no § 10(b) liability. The most obvious realworld example of this scenario would be if O'Hagan had simply tipped someone else to the information. The mere act of passing the information along would have violated O'Hagan's fiduciary duty and, if undisclosed, would be an "embezzlement" of the confidential information, regardless of whether the tippee later traded on the information.

[29] The majority is apparently unimpressed by the example of a misappropriator using embezzled information for personal amusement in a fantasy stock trading game, finding no need for the Commission to "inhibit" such recreational uses. Ante, at 657, n. 8. This argument, of course, misses the point of the example. It is not that such a use does or should violate the securities laws yet is not covered by the Commission's theory; rather, the example shows that the misappropriation of information is not "only" or "inherently" tied to securities trading, and hence the misappropriation of information, whatever its ultimate use, fails the Commission's own test under the "in connection with" requirement of § 10(b) and Rule 10b—5.

[30] Similarly, the majority's assertion that the alternative uses of misappropriated information are not as profitable as use in securities trading, ante, at 657, n. 8, is speculative at best. We have no idea what is the best or most profitable use of misappropriated information, either in this case or generally. We likewise have no idea what is the best use of other forms of misappropriated property, and it is at least conceivable that the best use of embezzled money, or securities themselves, is for securities trading. If the use of embezzled money to purchase securities is "sufficiently detached," ante, at 657, from a securities transaction, then I see no reason why the non-"inherent" use of information for securities trading is not also "sufficiently detached" under the Government's theory. In any event, I am at a loss to find in the statutory language any hint of a "best-use" requirement for setting the requisite connection between deception and the purchase or sale of securities.

The majority's further claim that it is unremarkable that "a rule suitably applied to the fraudulent uses of certain kinds of information would be stretched beyond reason were it applied to the fraudulent use of money," ibid., is itself remarkable given that the only existing "rule" is Rule 10b—5, which nowhere confines itself to information and, indeed, does not even contain the word. And given that the only "reason" offered by the Government in support of its misappropriation theory applies (or fails to apply) equally to money or to information, the application of the Government's theory in this case is no less "beyond reason" than it would be as applied to financial embezzlement.

[31] See Tr. of Oral Arg. 9 (Government conceding that, "just as in [Carpenter v. United States, 484 U. S. 19 (1987)], if [the defendant] had gone to the Wall Street Journal and said, look, you know, you're not paying me very much. I'd like to make a little bit more money by buying stock, the stocks that are going to appear in my Heard on the Street column, and the Wall Street Journal said, that's fine, there would have been no deception of the Wall Street Journal").

[32] That the dishonesty aspect of misappropriation might be eliminated via disclosure or authorization is wholly besides the point. The dishonesty in misappropriation is in the relationship between the fiduciary and the principal, not in any relationship between the misappropriator and the market. No market transaction is made more or less honest by disclosure to a third-party principal, rather than to the market as a whole. As far as the market is concerned, a trade based on confidential information is no more "honest" because some third party may know of it so long as those on the other side of the trade remain in the dark.

[33] The majority's statement, by arguing that market advantage is gained "through" deception, unfortunately seems to embrace an error in logic: Conflating causation and correlation. That the misappropriator may both deceive the source and "simultaneously" hurt the public no more shows a causal "connection" between the two than the fact that the sun both gives some people a tan and "simultaneously" nourishes plants demonstrates that melanin production in humans causes plants to grow. In this case, the only element common to the deception and the harm is that both are the result of the same antecedent cause—namely, using nonpublic information. But such use, even for securities trading, is not illegal, and the consequential deception of the source follows an entirely divergent branch of causation than does the harm to the public. The trader thus "gains his advantageous market position through " the use of nonpublic information, whether or not deception is involved; the deception has no effect on the existence or extent of his advantage.

[34] That the Commission may purport to be interpreting its own Rule, rather than the statute, cannot provide it any greater leeway where the Rule merely repeats verbatim the statutory language on which the entire question hinges. Furthermore, as even the majority recognizes, Rule 10b—5 may not reach beyond the scope of § 10(b), ante, at 651, and thus the Commission is obligated to explain how its theory fits within its interpretation of § 10(b) even if it purports to be interpreting its own derivative rule.

[35] Although the majority leaves open the possibility that Rule 14e—3(a) may be justified as a means of preventing "warehousing," it does not rely on that justification to support its conclusion in this case. Suffice it to say that the Commission itself concedes that warehousing does not involve fraud as defined by our cases, see Reply Brief for United States 17, and thus preventing warehousing cannot serve to justify Rule 14e—3(a).

[36] Even were § 14(e)'s defining authority subject to the construction given it by the Commission, there are strong constitutional reasons for not so construing it. A law that simply stated "it shall be unlawful to do 'X', however 'X' shall be defined by an independent agency," would seem to offer no "intelligible principle" to guide the agency's discretion and would thus raise very serious delegation concerns, even under our current jurisprudence, J. W. Hampton, Jr., & Co. v. United States, 276 U. S. 394, 409 (1928). See also Field v. Clark, 143 U. S. 649, 693-694 (1892) (distinguishing between making the law by determining what it shall be, and executing the law by determining facts on which the law's operation depends). The Commission's interpretation of § 14(e) would convert it into precisely the type of law just described. Thus, even if that were a plausible interpretation, our usual practice is to avoid unnecessary interpretations of statutory language that call the constitutionality of the statute into further serious doubt.

[37] I note that Rule 14e—3(a) also applies to persons trading upon information obtained from an insider of the target company. Insofar as the Rule seeks to prevent behavior that would be fraudulent under the "classical theory" of insider trading, this aspect of my analysis would not apply. As the majority notes, however, the Government "could not have prosecuted O'Hagan under the classical theory," ante, at 653, n. 5, hence this proviso has no application to the present case.

[38] Even where the information is obtained from an agent of the bidder, and the tippee claims not to have known that the tipper violated a duty, there is still no justification for Rule 14e—3(a). First, in such circumstances the tipper himself would have violated his fiduciary duty and would be liable under the misappropriation theory, assuming that theory were valid. Facing such liability, there is no reason to suspect that the tipper would gratuitously protect the tippee. And if the tipper accurately testifies that the tippee was (falsely) told that the information was passed on without violating the tipper's own duties, one can question whether the tippee has in fact done anything illegal, even under the Commission's misappropriation theory. Given that the fraudulent breach of fiduciary duty would have been complete at the moment of the tip, the subsequent trading on that information by the tippee might well fail even the Commission's own construction of the "in connection with" requirement. See supra, at 683-687. Thus, even if the tipper might, in some circumstances, be inclined to protect the tippee, see ante, at 675-676, n. 20, it is doubtful that the tippee would have violated the misappropriation theory in any event, and thus preventing such nonviolations cannot justify Rule 14e— 3(a). Second, even were this scenario a legitimate concern, it would at most justify eliminating the requirement that the tippee "know" about the breach of duty. It would not explain Rule 14e—3(a)'s elimination of the requirement that there be such a breach.

[39] While the majority may find it strange that the "mail fraud net" is broader reaching than the securities fraud net, ante, at 678, n. 25, any such supposed strangeness—and the resulting allocation of prosecutorial responsibility between the Commission and the various United States Attorneys—is no business of this Court, and can be adequately addressed by Congress if it too perceives a problem regarding jurisdictional boundaries among the Nation's prosecutors. That the majority believes that, upon shifting from securities fraud to mail fraud prosecutions, the "practical consequences for individual defendants might not be large," ibid., both undermines the supposed policy justifications for today's decision and makes more baffling the majority's willingness to go to such great lengths to save the Commission from itself.

[43] Mark Pennington, Assistant General Counsel (Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, and David Lisitza, Attorney, on the brief), Washington, D.C.

Charles A. Ross (Christopher L. Padurano and Stephanie M. Carvlin, on the brief) Charles A. Ross & Assoc., LLC, New York, NY.

Before: CABRANES, HALL, Circuit Judges, and SULLIVAN, District Judge.^[*]

JOSÉ A. CABRANES, Circuit Judge:

We are asked to consider whether, in a civil enforcement lawsuit brought by the United States Securities and Exchange Commission ("SEC") under Section 10(b) [44] of the Securities Exchange Act of 1934 ("Section 10(b)"), computer hacking may be "deceptive" where the hacker did not breach a fiduciary duty in fraudulently obtaining material, nonpublic information used in connection with the purchase or sale of securities. For the reasons stated herein, we answer the question in the affirmative.

BACKGROUND

In early October 2007, defendant Oleksandr Dorozhko, a Ukranian national and resident, opened an online trading account with Interactive Brokers LLC ("Interactive Brokers") and deposited $42,500 into that account. At about the same time, IMS Health, Inc. ("IMS") announced that it would release its third-quarter earnings during an analyst conference call scheduled for October 17, 2007 at 5 p.m.—that is, after the close of the securities markets in New York City. IMS had hired Thomson Financial, Inc. ("Thomson") to provide investor relations and web-hosting services, which included managing the online release of IMS's earnings reports.

Beginning at 8:06 a.m. on October 17, and continuing several times during the morning and early afternoon, an anonymous computer hacker attempted to gain access to the IMS earnings report by hacking into a secure server at Thomson prior to the report's official release. At 2:15 p.m.—minutes after Thomson actually received the IMS data—that hacker successfully located and downloaded the IMS data from Thomson's secure server.

Beginning at 2:52 p.m., defendant—who had not previously used his Interactive Brokers account to trade—purchased $41,670.90 worth of IMS "put" options that would expire on October 25 and 30, 2007.^[1] These purchases represented approximately 90% of all purchases of "put" options for IMS stock for the six weeks prior to October 17. In purchasing these options, which the SEC describes as "extremely risky," defendant was betting that IMS's stock price would decline precipitously (within a two-day expiration period) and significantly (by greater than 20%). Appellant's Br. 2.

At 4:33 p.m.—slightly ahead of the analyst call—IMS announced that its earnings per share were 28% below "Street" expectations, i.e., the expectations of many Wall Street analysts. When the market opened the next morning, October 18, at 9:30 a.m., IMS's stock price sank approximately 28% almost immediately—from $29.56 to $21.20 per share. Within six minutes of the market opening, defendant had sold all of his IMS options, realizing a net profit of $286,456.59 overnight.

Interactive Brokers noticed the irregular trading activity and referred the matter to the SEC, which now alleges that defendant was the hacker. See SEC v. Dorozhko, 606 F.Supp.2d 321, 323 (S.D.N.Y.2008) (explaining that the SEC's theory rests on "two undisputed events: (1) the fact of the hack, and (2) the proximity to the hack of the trades by [defendant,] who was the only individual to trade heavily in IMS Health put options subsequent to the hack"). On October 29, 2007, the SEC sought and received from the United States District Court for the Southern District of New York (Naomi Reice Buchwald, Judge) a temporary restraining order freezing the proceeds of the "put" option transactions in defendant's brokerage [45] account. The District Court held a preliminary injunction hearing on the matter on November 28, 2007, at which it heard testimony and considered various affidavits.

On January 8, 2008, in a thoughtful and careful opinion, the District Court denied the SEC's request for a preliminary injunction because the SEC had not shown a likelihood of success. Specifically, the District Court ruled that computer hacking was not "deceptive" within the meaning of Section 10(b) as defined by the Supreme Court. According to the District Court, "a breach of a fiduciary duty of disclosure is a required element of any `deceptive' device under § 10b." Dorozhko, 606 F.Supp.2d at 330. The District Court reasoned that since defendant was a corporate outsider with no special relationship to IMS or Thomson, he owed no fiduciary duty to either. Although computer hacking might be fraudulent and might violate a number of federal and state criminal statutes, the District Court concluded that this behavior did not violate Section 10(b) without an accompanying breach of a fiduciary duty.

This appeal followed. On appeal, the SEC maintains its theory that the fraud in this case consists of defendant's alleged computer hacking, which involves various misrepresentations. The SEC does not argue that defendant breached any fiduciary duties as part of his scheme. In this critical regard, we recognize that the SEC's claim against defendant—a corporate outsider who owed no fiduciary duties to the source of the information—is not based on either of the two generally accepted theories of insider trading. See United States v. Cusimano, 123 F.3d 83, 87 (2d Cir.1997) (distinguishing "the traditional theory of insider trading, under which a corporate insider trades in the securities of his own corporation on the basis of material, non-public information," from "the misappropriation theory, [under which] § 10(b) and Rule 10b-5 are violated whenever a person trades while in knowing possession of material, non-public information that has been gained in violation of a fiduciary duty to its source"). The SEC's claim is nonetheless based on a claim of fraud, and we turn our attention to whether this fraud is "deceptive" within the meaning of Section 10(b).

DISCUSSION

Standard of Review

We review the grant or denial of a preliminary injunction for abuse of discretion. E.g., Kickham Hanley P.C. v. Kodak Retirement Income Plan, 558 F.3d 204, 209 (2d Cir.2009) ("[A]buse of discretion. . . occurs when (1) its decision rests on an error of law or a clearly erroneous factual finding, or (2) its decision—though not necessarily the product of a legal error or a clearly erroneous factual finding—cannot be located within the range of permissible decisions." (internal citations, parentheticals, and quotation marks omitted)); Davis v. New York, 316 F.3d 93, 102 (2d Cir. 2002).

"Deceptive Device"

"Section 10(b) prohibits the use or employ, 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 [SEC] may prescribe." 15 U.S.C. § 78j(b)^[2] The instant case requires us to [46] decide whether the "device" in this case— computer hacking—could be "deceptive."^[3]

In construing the text of any federal statute, we first consider the precedents that bind us as an intermediate appellate court—namely, the holdings of the Supreme Court and those of prior panels of this Court, which provide definitive interpretations of otherwise ambiguous language. Insofar as those precedents fail to resolve an apparent ambiguity, we examine the text of the statute itself, interpreting provisions in light of their ordinary meaning and their contextual setting. See United States v. Magassouba, 544 F.3d 387, 404 (2d Cir.2008) ("In determining whether statutory language is ambiguous, we `reference . . . the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.'" (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997))). Where the statutory language remains ambiguous, "we resort to canons of construction and, if the meaning still remains ambiguous, to legislative history." Magassouba, 544 F.3d at 404 (internal alterations and quotation marks omitted).

The District Court determined that the Supreme Court has interpreted the "deceptive" element of Section 10(b) to require a breach of a fiduciary duty. See Dorozhko, 606 F.Supp.2d at 338 ("[T]he Supreme Court has in a number of opinions carefully established that the essential component of a § 10(b) violation is a breach of a fiduciary duty to disclose or abstain that coincides with a securities transaction."). The District Court reached this conclusion by relying principally on three Supreme Court opinions: Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), United States v. O'Hagan, 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997), and SEC v. Zandford, 535 U.S. 813, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). We consider each of these cases in turn.

In Chiarella, the defendant was employed by a financial printer and used information passing through his office to trade securities offered by acquiring and target companies. In a criminal prosecution, [47] the government alleged that the defendant committed fraud by not disclosing to the market that he was trading on the basis of material, nonpublic information. The Supreme Court held that defendant's "silence," or nondisclosure, was not fraud because he was under no obligation to disclose his knowledge of inside information. "When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak. We hold that a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information." 445 U.S. at 235, 100 S.Ct. 1108; see also United States v. Chestman, 947 F.2d 551, 575 (2d Cir. 1991) (Winter, J., concurring in part and dissenting in part) (stating that, after Chiarella, "silence cannot constitute a fraud absent a duty to speak owed to those who are injured"). Justice Blackmun, joined by Justice Marshall, dissented. In their view, stealing information from an employer was fraudulent within the meaning of Section 10(b) because the statute was designed as a "catchall" provision to protect investors from unknown risks. Id. at 246, 100 S.Ct. 1108 (Blackmun, J., dissenting). According to Justice Blackmun, the majority had "confine[d]" the meaning of fraud "by imposition of a requirement of a `special relationship' akin to fiduciary duty before the statute gives rise to a duty to disclose or to abstain from trading upon material, nonpublic information." Id.^[4]

In O'Hagan, the defendant was an attorney who traded in securities based on material, nonpublic information regarding his firm's clients. As in Chiarella, the government alleged that the defendant had committed fraud through "silence" because the defendant had a duty to disclose to the source of the information (his client) that he would trade on the information. The Supreme Court agreed, noting that "[d]eception through nondisclosure is central to the theory of liability for which the Government seeks recognition." 521 U.S. at 654, 117 S.Ct. 2199. "[I]f the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no `deceptive device' and thus no § 10(b) violation—although the fiduciary-turned-trader may remain liable under state law for breach of a duty of loyalty." Id. at 655, 117 S.Ct. 2199.

In Zandford, the defendant was a securities broker who traded under a client's account and transferred the proceeds to his own account. The Fourth Circuit held that the defendant's fraud was not "in connection with" the purchase or sale of a security because it was mere theft that happened to involve securities, rather than true securities fraud. The Supreme Court reversed in a unanimous opinion, observing that Section 10(b) "should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes." 535 U.S. at 819, 122 S.Ct. 1899. Although the Court warned that not "every common-law fraud that happens to involve securities [is] a violation of § 10(b)," id. at 820, 122 S.Ct. 1899, the defendant's scheme was a single plan to deceive, rather than a series of independent frauds, and was therefore "in connection with" the purchase or sale of a security, id. at 825, 122 S.Ct. 1899. In a final footnote, the Court offered the following observation: "[I]f the [48] broker told his client he was stealing the client's assets, that breach of fiduciary duty might be in connection with a sale of securities, but it would not involve a deceptive device or fraud." 535 U.S. at 825 n. 4, 122 S.Ct. 1899. In the instant case, the District Court interpreted the Zandford footnote as an "explicit[ ] acknowledg[ment] that Zandford would not be liable under § 10(b) if he had disclosed to Wood that he was planning to steal his money." Dorozhko, 606 F.Supp.2d at 338.

The District Court concluded that in Chiarella, O'Hagan, and Zandford, the Supreme Court developed a requirement that any "deceptive device" requires a breach of a fiduciary duty. In applying that interpretation to the instant case, the District Court ruled that "[a]lthough [defendant] may have broken the law, he is not liable in a civil action under § 10(b) because he owed no fiduciary or similar duty either to the source of his information or to those he transacted with in the market." Dorozhko, 606 F.Supp.2d at 324.^[5] At least one of our sister circuits has made the same observation relying on the same precedent. See Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 389 (5th Cir.2007) (discussing Chiarella and O'Hagan, and stating that "the [Supreme] Court . . . has established that a device, such as a scheme, is not `deceptive' unless it involves breach of some duty of candid disclosure").

In our view, none of the Supreme Court opinions relied upon by the District Court—much less the sum of all three opinions — establishes a fiduciary-duty requirement as an element of every violation of Section 10(b). In Chiarella, O'Hagan, and Zandford, the theory of fraud was silence or nondisclosure, not an affirmative misrepresentation. The Supreme Court held that remaining silent was actionable only where there was a duty to speak, arising from a fiduciary relationship. In Chiarella, the Supreme Court held that there was no deception in an employee's silence because he did not have duty to speak. See 445 U.S. at 226, 100 S.Ct. 1108 ("This case concerns the legal effect of the petitioner's silence." (emphasis added)); see also id. at 227-28, 100 S.Ct. 1108 ("At common law, misrepresentation made for the purpose of inducing reliance upon the false statement is fraudulent. But one who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so." (emphasis added)). In O'Hagan, an attorney who traded on client secrets had a fiduciary duty to inform his firm that he was trading on the basis of the confidential information. See 521 U.S. at 653, 117 S.Ct. 2199 (noting that a "breach of a duty of trust and confidence. . . to his law firm" was conduct that "satisfies § 10(b)'s requirement that chargeable conduct involve a `deceptive device or contrivance'"); see also id. at 654, 117 S.Ct. 2199 ("Deception through nondisclosure is central to the theory of liability [49] for which the Government seeks recognition." (emphasis added)). Even in Zandford, which dealt principally with the statutory requirement that a deceptive device be used "in connection with" the purchase or sale of a security, the defendant's fraud consisted of not telling his brokerage client—to whom he owed a fiduciary duty—that he was stealing assets from the account. See 535 U.S. at 822, 122 S.Ct. 1899 ("[Defendant's brokerage clients] were injured as investors through [defendant's] deceptions, which deprived them of any compensation for the sale of their valuable securities."); see also id. at 823, 122 S.Ct. 1899 ("[A]ny distinction between omissions and misrepresentations is illusory in the context of a broker who has a fiduciary duty to her clients.").

Chiarella, O'Hagan, and Zandford all stand for the proposition that nondisclosure in breach of a fiduciary duty "satisfies § 10(b)'s requirement . . . [of] a `deceptive device or contrivance,'" O'Hagan, 521 U.S. at 653, 117 S.Ct. 2199. However, what is sufficient is not always what is necessary, and none of the Supreme Court opinions considered by the District Court require a fiduciary relationship as an element of an actionable securities claim under Section 10(b). While Chiarella, O'Hagan, and Zandford all dealt with fraud qua silence, an affirmative misrepresentation is a distinct species of fraud. Even if a person does not have a fiduciary duty to "disclose or abstain from trading," there is nonetheless an affirmative obligation in commercial dealings not to mislead. See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 240 n. 18, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (distinguishing "situations where insiders have traded in abrogation of their duty to disclose or abstain," from "affirmative misrepresentations by those under no duty to disclose (but under the ever-present duty not to mislead)").

In this case, the SEC has not alleged that defendant fraudulently remained silent in the face of a "duty to disclose or abstain" from trading. Rather, the SEC argues that defendant affirmatively misrepresented himself in order to gain access to material, nonpublic information, which he then used to trade. We are aware of no precedent of the Supreme Court or our Court that forecloses or prohibits the SEC's straightforward theory of fraud.^[6] Absent a controlling precedent that "deceptive" has a more limited meaning than its ordinary meaning, we see no reason to complicate the enforcement of Section 10(b) by divining new requirements. In reaching this conclusion, we are mindful of the Supreme Court's oft-repeated instruction that Section 10(b) "should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes." Zandford, 535 U.S. [50] at 819, 122 S.Ct. 1899 (internal quotation marks omitted).^[7] Accordingly, we adopt the SEC's proposed interpretation of Chiarella and its progeny: "misrepresentations are fraudulent, but . . . silence is fraudulent only if there is a duty to disclose." Appellant's Br. 44.

Having denied the SEC's application for a preliminary injunction freezing defendant's trading account on the basis of a perceived fiduciary duty requirement stemming from the Chiarella line of insider trading cases, the District Court did not decide whether the ordinary meaning of "deceptive" covers the computer hacking in this case—or, indeed, whether the computer hacking in this case involved any misrepresentation at all. Defendant invites us to remand both questions so that the District Court may decide in the first instance.

In its ordinary meaning, "deceptive" covers a wide spectrum of conduct involving cheating or trading in falsehoods. See Webster's International Dictionary 679 (2d ed.1934) (defining "deceptive" as "tending to deceive," and defining "deceive" as "[t]o cause to believe the false, or to disbelieve the true" or "[t]o impose upon; to deal treacherously with; cheat"). Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 n. 20, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) (consulting the 1934 edition of Webster's International Dictionary to define other relevant terms in Section 10(b)); In re Parmalat Sec. Litig., 376 F.Supp.2d 472, 502 n. 152 (S.D.N.Y.2005) (consulting the 1934 edition of Webster's International Dictionary to define "deceptive"). In light of this ordinary meaning, it is not at all surprising that Rule 10b-5 equates "deceit" with "fraud." See 17 C.F.R. § 240.10b-5 (prohibiting "any untrue statement of a material fact . . . or . . . 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" (emphases added)). Indeed, we have previously observed that the conduct prohibited by Section 10(b) and Rule 10b-5 "irreducibly entails some act that gives the victim a false impression." United States v. Finnerty, 533 F.3d 143, 148 (2d Cir. 2008).

The District Court—summarizing the SEC's allegations—described the computer hacking in this case as "employ[ing] electronic means to trick, circumvent, or bypass computer security in order to gain unauthorized access to computer systems, networks, and information . . . and to steal such data." Dorozhko, 606 F.Supp.2d at 329. On appeal, the SEC adds a further gloss, arguing that, in general, "[computer [51] h]ackers either (1) `engage in false identification and masquerade as another user[']. . . or (2) `exploit a weakness in [an electronic] code within a program to cause the program to malfunction in a way that grants the user greater privileges.'" Appellant's Br. 22-23 (quoting Orin S. Kerr, Cybercrime Scope: Interpreting "Access" and "Authorization" in Computer Misuse Statutes, 78 N.Y.U. L.Rev. 1596, 1645 (2003)). In our view, misrepresenting one's identity in order to gain access to information that is otherwise off limits, and then stealing that information is plainly "deceptive" within the ordinary meaning of the word. It is unclear, however, that exploiting a weakness in an electronic code to gain unauthorized access is "deceptive," rather than being mere theft. Accordingly, depending on how the hacker gained access, it seems to us entirely possible that computer hacking could be, by definition, a "deceptive device or contrivance" that is prohibited by Section 10(b) and Rule 10b-5.

However, we are hesitant to move from this general principle to a particular application without the benefit of the District Court's views as to whether the computer hacking in this case—as opposed to computer hacking in general—was "deceptive." Our caution is counseled by the considerable and careful efforts the District Court has already devoted to this case, including hearing live testimony from witnesses at a preliminary injunction hearing that covered, among other topics, how Thomson's secure servers were infiltrated. See, e.g., J.A. 848 Tr. of Preliminary Injunction Hearing at 40-41, Dorozkho, 606 F.Supp.2d. 321 (No. 07 civ 9606). Having established that the SEC need not demonstrate a breach of fiduciary duty, we now remand to the District Court to consider, in the first instance, whether the computer hacking in this case involved a fraudulent misrepresentation that was "deceptive" within the ordinary meaning of Section 10(b). The District Court may, in its informed discretion, enter a new order on the basis of the existing record or reopen the preliminary injunction hearing to consider such additional testimony regarding the nature of the hacking in this particular case as it deems appropriate in the circumstances.

CONCLUSION

For the foregoing reasons, the District Court's January 8, 2008 order denying the SEC's motion for a preliminary injunction is VACATED. The cause is REMANDED for further proceedings consistent with this opinion.

[*] The Honorable Richard J. Sullivan, of the United States District Court for the Southern District of New York, sitting by designation.

[1] A "put" is "[a]n option that conveys to its holder the right, but not the obligation, to sell a specific asset at a predetermined price until a certain date. . . . Investors purchase puts in order to take advantage of a decline in the price of the asset." David L. Scott, Wall Street Words 295 (2003).

[2] The regulation promulgated by the SEC pertinent to the instant case is Rule 10b-5, which provides, in relevant part:

It shall be unlawful for any person, directly or indirectly . . .

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) 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.

17 C.F.R. § 240.10b-5.

[3] In the District Court's view, "the alleged `hacking and trading' was a `device or contrivance' within the meaning of the statute." Dorozhko, 606 F.Supp.2d at 328. The District Court further observed that the scheme was "in connection with" the purchase or sale of securities because the close temporal proximity of the hacking to the trading (everything occurred in less than twenty-four hours) and the cohesiveness of the scheme (establishing the trading account, stealing the confidential information within minutes of its availability, and trading on it within minutes of the next day's opening bell) suggest that hacking into the Thomson computers was part of a single scheme to commit securities fraud. See id. at 328-29; see also SEC v. Zandford, 535 U.S. 813, 822, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) (holding that "in connection with" means "to coincide"). The District Court also concluded that the alleged hacking was not "manipulative" because the Supreme Court has defined that word to cover exclusively practices "intended to mislead investors by artificially affecting market activity." See Dorozhko, 606 F.Supp.2d at 329 (quoting Santa Fe Indus. v. Green, 430 U.S. 462, 476, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977)). The parties do not challenge these conclusions in this appeal.

[4] Although the District Court construed Justice Blackmun's dissent to suggest that "no breach of fiduciary duty should be required to uphold a conviction under § 10(b)," Dorozhko, 606 F.Supp.2d at 333, we read this dissent in light of the circumstances of Chiarella, which only considered a fraud based on nondisclosure, not an affirmative misrepresentation. See 445 U.S. at 247, 100 S.Ct. 1108 (Blackmun, J., dissenting) ("I do not agree that a failure to disclose violates . . . Rule [10b-5] only when the responsibilities of a [fiduciary] relationship . . . have been breached." (emphasis added)).

[5] Some commentators grudgingly have acknowledged that the District Court's conclusion would be compelled under a narrow reading of Section 10(b) that covers only the "disclose or abstain" requirement for corporate insiders other than fiduciaries. See, e.g., Robert A. Prentice, The Internet and Its Challenges for the Future of Insider Trading Regulation, 12 Harv. J.L. & Tech. 263, 297-98 (1999) (acknowledging that, "[t]o the extent that misappropriation liability is based solely on a breach of fiduciary duty, thieves unrelated to the source of the information could steal the information without being in violation of existing federal securities laws"); but see id. at 300 (arguing that "to hold that hackers are misappropriators is consistent with the pre-1934 common law upon which Section 10(b) was based [and] is consonant with the underlying policy of Section 10(b)—investor protection" (internal footnote omitted)).

[6] The District Court found it "noteworthy" that in the over seventy years since the enactment of the Securities Exchange Act of 1934, "no federal court has ever held that those who steal material nonpublic information and then trade on it violate § 10(b)," even though "traditional theft (e.g. breaking into an investment bank and stealing documents) is hardly a new phenomenon, and involves similar elements for purposes of our analysis here." Dorozhko, 606 F.Supp.2d at 339. The District Court suggested that "hacking and trading" schemes have been and ought to be prosecuted under "any number of federal and/or state criminal statutes," rather than through civil enforcement actions. Id. at 323; see also id. at 324 (listing applicable federal criminal statutes). At the preliminary injunction hearing, the District Court stated that it was "very disturbing" that this case was not a federal prosecution, J.A. 889 Tr. of Preliminary Injunction Hearing at 129:20, SEC v. Dorozhko, 606 F.Supp.2d. 321 (S.D.N.Y. Nov. 28, 2007)(No. 07 civ 9606). We intimate no view on that question. It is enough to say that we deal with the facts presented, which in our view are sufficient to maintain a civil enforcement claim.

[7] We are further counseled by the observations of Judge Augustus N. Hand, who reasoned over fifty years ago that had Congress intended to impose a fiduciary-duty requirement on Section 10(b) liability, it would have said so. See Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (2d Cir.1952) (A. Hand, J.) ("When Congress intended to protect the stockholders of a corporation against a breach of fiduciary duty by corporate insiders, it left no doubt as to its meaning. Thus Section 16(b) of the Act of 1934 . . . expressly gave the corporate issuer or its stockholders a right of action against corporate insiders using their position to profit in the sale or exchange of corporate securities. The absence of a similar provision in Section 10(b) strengthens the conclusion that [Section 10(b)] was directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities rather than at fraudulent mismanagement of corporate affairs, and that Rule [10b-5] extended protection only to the defrauded purchaser or seller." (internal citation omitted)). We recognize that in the instant case, the SEC is neither a purchaser nor a seller, but brings this suit in its regulatory capacity in order to "ensure honest securities markets and . . . promote investor confidence," Zandford, 535 U.S. at 819, 122 S.Ct. 1899.