U NITED S TATES C OURT OF A PPEALS FOR THE S ECOND C IRCUIT
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08-0201-CV
U NITED S TATES C OURT OF A PPEALS FOR THE S ECOND C IRCUIT
______________________________________________
S ECURITIES AND E XCHANGE C OMMISSION,
Plaintiff-Appellant
v.
O LEKSANDR D OROZHKO,
Defendant-Appellee.
______________________________________________
On Appeal from the United States District Court
for the Southern District of New York
_____________________________________________
R EPLY B RIEF OF THE
S ECURITIES AND E XCHANGE C OMMISSION ,
A PPELLANT
______________________________________________
B RIAN G. C ARTWRIGHT
General Counsel
A NDREW N. V OLLMER
Deputy General Counsel
JACOB H. S TILLMAN
Solicitor
M ARK P ENNINGTON
Assistant General Counsel
D AVID L ISITZA
Attorney
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-8010
(202) 551-5015 (Lisitza)
T ABLE OF C ONTENTS
Page
T ABLE OF A UTHORITIES
iii
INTRODUCTION
1
A RGUMENT
1
I. Because the Commission urges that the district court made an error of
law, the issue on appeal is reviewed de novo, not with deference to the
district court.
3
II. For purposes of this appeal, defendant expressly disavows reliance on
the argument that hacking is not deceptive, and urges as a basis for
affirmance only that lies, deceptive conduct, and half-truths do not
violate Section 10(b) absent a breach of fiduciary duty.
4
III. Lies, deceptive conduct and half-truths are deceptive devices
or contrivances whether they involve a breach of fiduciary duty
or not.
6
A. The language and legislative history of Section 10(b) establish
that it is designed to reach all sorts of fraud.
6
B. Precedent makes clear that false statements, deceptive conduct,
and half-truths violate Section 10(b) and Rule 10b-5 regardless
of the existence of fiduciary duties.
9
1. The Supreme Court’s insider trading cases rest on the
understanding that affirmative misrepresentations, which
includes deceptive conduct, are deceptive regardless of the
breach of a fiduciary duty.
10
2. Supreme Court decisions not involving trading on non-public
information also demonstrate that fraud may be based either
on a misrepresentation or on a failure to speak in violation
of a duty.
17
i
T ABLE OF C ONTENTS (CONTINUED)
Page
3. Contrary to Dorozhko’s assertion, circuit court decisions,
including the two examples cited in the Commission’s opening
brief, hold that affirmative misrepresentations can violate
Section 10(b) and Rule 10b-5 regardless of the absence of a
21
fiduciary duty.
a. Our opening brief cited two examples from this Court of
deceptive conduct that violates Section 10(b) without a
breach of fiduciary duty – pump-and-dump schemes and
manipulations.
23
b. Other decisions, including those from four other circuits,
also hold that breach of fiduciary duty is not required
when a defendant engages in active deception.
25
C. The fact that Rule 14e-3, which prohibits certain trading in
connection with tender offers, does not require a breach of
fiduciary duty has no bearing on whether Section 10(b) imposes
a fiduciary requirement in cases of affirmative misstatement.
27
C ONCLUSION
31
C ERTIFICATE OF C OMPLIANCE
33
C ERTIFICATE OF S ERVICE
34
ii
T ABLE OF A UTHORITIES
Page
C ASES
Ackerman v. Schwartz, 947 F.2d 841 (7th Cir. 1991) ....................................... 25
ATSI Comm., Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) .................. 24
Backman v. Polaroid Corp., 893 F.2d 1405 (1st Cir. 1990) ................................ 27
Basic Inc. v. Levinson, 485 U.S. 224 (1988) ............................................ 18, 19, 26
Billard v. Rockwell Intern. Corp., 683 F.2d 51 (2d Cir. 1982) ........................... 31
Caiola v. Citibank, 295 F.3d 312 (2d Cir. 2002) ................................................. 25
Chertkova v. Connecticut. Gen. Life Ins. Co., 92 F.3d 81, (2d Cir. 1996) ............ 5
Chiarella v. United States, 445 U.S. 222 (1980) ......................... 11, 12, 13, passim
County of Nassau, N.Y. v. Leavitt, 524 F.3d 408, 414 (2d Cir. 2008) ................. 4
Deutschman v. Beneficial Corp., 841 F.2d 502 (3d Cir. 1988), cert. denied,
490 U.S. 1114 (1989) ................................................................................. 27
Dirks v. SEC, 463 U.S. 646 (1983) ................................................................ 12, 24
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ...................................... 2, 7, 24
Fry v. UAL Corp., 84 F.3d 936 (7th Cir. 1996) ............................................ 19, 26
In re Edelman, 295 F.3d 171, 177 (2d Cir. 2002) ................................................. 7
In re NYSE Specialists Sec. Litig., 503 F.3d 89 (2d Cir. 2007) .......................... 22
iii
T ABLE OF A UTHORITIES (CONTINUED)
Page
In re Refco Capital Markets, Ltd. Brokerage Customer Sec. Litig., 2007 WL
2694469 (S.D.N.Y. Sept. 13, 2007) ........................................................... 15
Levitt v. Bear Stearns & Co., 340 F.3d 94 (2d Cir. 2003) .................................. 22
Manufacturers Hanover Trust Co. v. Drysdale Securities Corp., 801 F.2d 13
(2d Cir. 1986) ............................................................................................ 22
New York Magazine v. Metro. Transp. Auth., 136 F.3d 123 (2d Cir. 1998),
cert. denied, 525 U.S. 824 (1998) ................................................................. 4
Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263 (6th Cir. Cir. 1998) ......... 25
SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) .................................................. 31
SEC v. Cherif, 933 F.2d 403 (7th Cir. 1991) ....................................................... 13
SEC v. George, 426 F.3d 786 (6th Cir. 2005) ..................................................... 22
SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) .......................... 10
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) ........................... 19
SEC v. Zandford, 535 U.S. 813 (2002) .......................................................... 19, 20
Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000) ................................ 26
Stoneridge Investment Partners v. Scientific-Atlanta, Inc.,
128 S. Ct. 761 (2008) ....................................................................... 5, 17, 18
Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971) ............ 2, 22
iv
T ABLE OF A UTHORITIES (CONTINUED)
Page
United States v. Andrews, 146 F.3d 933 (D.C. Cir. 1998) ................................ 22
United States v. Chestman, 947 F.2d 551 (2d Cir. 1991) (en banc),
cert. denied, 503 U.S. 1004 (1992) ....................................................... 29, 30
United States v. Finnerty, No. 07-1104, 2008 WL 2778830
(2d Cir. July 18, 2008) ......................................................... 5, 9, 10, passim
United States v. Skelly, 442 F.3d 94 (2d Cir. 2006) .......................................... 23
United States v. O’Hagan, 521 U.S. 642 (1997) ........................ 12, 13, 14, passim
United States v. O’Hagan, 139 F.3d 641 (8th Cir. 1998) ................................... 14
S TATUTES AND R ULES
Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq.
Section 10(b), 15 U.S.C. 78j(b) ............................................. 1, 2, 7, passim
Section 14(e), 15 U.S.C. 78n(e) ............................................................ 27-31
Rules under the Securities Exchange Act of 1934, 17 C.F.R. 240.01, et seq.
Rule 10b-5, 17 C.F.R. 240.10b-5 ............................................ 2, 5, 9, passim
Rule 14e-3, 17 C.F.R. 240.14e-3 ........................................................... 27-31
18 U.S.C. 1341 ........................................................................................................ 7
18 U.S.C. 1343 ........................................................................................................ 7
v
T ABLE OF A UTHORITIES (CONTINUED)
Page
M ISCELLANEOUS
Tender Offers, Exchange Act Rel. 33-6239 & 34-17120,
45 Fed. Reg. 60410 (1980)
30
S. Rep. No. 792, 73d Cong., 2d Sess. (1934)
8
Hearings on H.R. 7852 and H.R. 8720 before the House Committee
on Interstate and Foreign Commerce, 73d Cong.,
2d Sess. (1934)
2, 8
Kathleen Coles, The Dilemma of the Remote Tippee,
41 Gonz. L. Rev. 181 (2005-06)
30
Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement and
Prevention, Section 6:14, “Deception without breach of
fiduciary duty” (April 2008)
16, 17
Donald C. Langevoort, 18 Insider Trading: Regulation, Enforcement, and
Prevention, Section 6:14 (2007)
16
Joel Seligman, The Transformation of Wall Street (Rev. ed. 1995)
1
vi
INTRODUCTION
The sole argument offered by defendant Oleksandr Dorozhko in
support of the district court’s denial of a preliminary injunction and
dissolution of the asset freeze is that every violation of the Section 10(b), the
general antifraud provision of the Securities Exchange Act of 1934, requires
proof of a breach of fiduciary duty. This argument is contrary to the plain
language of the statute, the legislative history, relevant Supreme Court
precedent, and the decisions of this Court and at least four other Courts of
Appeals.
A RGUMENT
Congress enacted the federal securities laws after the stock market crash
of 1929, and after half of the new securities sold during the post-World
War I period turned out to be worthless. See generally, Joel Seligman, The
Transformation of Wall Street, at 1-2 (Rev. ed. 1995). One main feature of the
laws was broad anti-fraud protection designed to ensure market integrity,
protect investors, and foster the investor confidence that is essential to
capital formation. In the Securities Exchange Act of 1934, the general anti
fraud provision is Section 10(b), which outlaws, in connection with the
1
purchase or sale of securities, “any deceptive device or contrivance” in
contravention of Commission regulations. Rule 10b-5, adopted by the
Commission, prohibits, among other things, “any device, scheme, or
artifice to defraud,” and “any act, practice, or course of business which
operates . . . as a fraud or deceit upon any person.”
These provisions reach all sorts of fraudulent schemes. The Supreme
Court has explained that Section 10(b) and Rule 10b-5 “prohibit all
fraudulent schemes in connection with the purchase or sale of securities,”
Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 11 n.7 (1971),
while the principal drafter famously paraphrased the statute as “Thou shalt
not devise any other cunning devices.” Ernst & Ernst v. Hochfelder, 425 U.S.
185, 202 (1976), quoting Hearings on H.R. 7852 and H.R. 8720 before the
House Committee on Interstate and Foreign Commerce, 73d Cong., 2d
Sess., 115 (1934) (Thomas Corcoran).
Now, nearly 75 years after passage of the Exchange Act, defendant
offers a startling new reading of the law: what Congress actually meant is
“Thou shalt not breach any fiduciary duty; absent such a duty, thou mayest
lie as much as thou wishes.” In Dorozhko’s view, Section 10(b) was
2
enacted to impose federal disclosure duties solely on fiduciaries, people
who were already subject to heightened disclosure and other obligations,
and was not concerned at all with run-of-the-mill fraudsters who would
deceive a stranger in a securities transaction.
As many circuits have held, this reading is insupportable, yet it is the
only ground on which Dorozhko now defends the district court’s denial of
a preliminary injunction and dissolution of the asset freeze in this case.
The district court’s decision should be reversed.
I.
Because the Commission urges that the district court made an error
of law, the issue on appeal is reviewed de novo, not with deference
to the district court.
Dorozhko incorrectly proposes that because review of the denial of a
preliminary injunction is for abuse of discretion, this Court owes deference
to the district court’s legal conclusions, and that the Commission must
make a “strong showing” that the district court made an error of law. Br.
8-9.1 To the contrary, because the Commission does not challenge the
district court’s exercise of judgment, but rather its legal conclusion (that
1
“Br. __” is Dorozhko’s brief in this Court. “SEC Br. __” is the
Commission’s opening brief.
3
breach of fiduciary duty is a necessary element of every claim brought
under Section 10(b), even those involving affirmative misstatements,
deceptive conduct, or half truths), this Court reviews the district court’s
“determination of law de novo. If the District Court has based its decision
on an error of law, it has ipso facto abused its discretion.” New York
Magazine v. Metro. Transp. Auth., 136 F.3d 123, 126 (2d Cir. 1998) (citations
omitted); see also, County of Nassau, N.Y. v. Leavitt, 524 F.3d 408, 414 (2d Cir.
2008).
II.
For purposes of this appeal, defendant expressly disavows reliance
on the argument that hacking is not deceptive, and urges as a basis
for affirmance only that lies, deceptive conduct, and half-truths do
not violate Section 10(b) absent a breach of fiduciary duty.
The Commission’s opening brief demonstrated that hacking is a
deceptive device or contrivance under Section 10(b). SEC Br. 18-40.
Dorozhko, however, renounces reliance on the argument that his conduct
was not deceptive as a ground for affirming the district court in this appeal.
Br. 36-37. Instead, his sole defense of the district court’s decision in this
Court is the argument that “violations of Section 10(b) must be predicated
on a breach of fiduciary (or similar) duty.” Br. 10-11; see also, Br. 18 (the
4
Supreme Court “equates a violation of Section 10(b) with breach of a
fiduciary or similar duty”). 2
The district court held an evidentiary hearing with testimony by various
witnesses and reviewed extensive briefing by both parties regarding
whether hacking is deceptive, and we have fully briefed the issue here. We
believe that it would be appropriate for this Court to decide this issue, in
addition to the breach of fiduciary duty issue, and if it agrees with us on
both, it should direct the district court to grant a preliminary injunction and
continue the asset freeze. See Chertkova v. Connecticut. Gen. Life Ins. Co., 92
F.3d 81, 88 (2d Cir. 1996) (exercising discretion to review an issue the
district court did not decide). Alternatively, based upon our argument
2
We note that this Court’s recent decision in United States v. Finnerty
provides additional support for the Commission’s argument that hacking is
a “deceptive device or contrivance” within the meaning of Section 10(b).
This Court reiterated the Supreme Court’s statements that “[c]onduct itself
can be deceptive,” so that liability under Section 10(b) and Rule 10b-5 does
not require “a specific oral or written statement.” Finnerty, No. 07-1104,
2008 WL 2778830, at *4 (2d Cir. July 18, 2008), quoting Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761, 769 (2008). And it
explained that “deception” is a “broad” concept that “irreducibly entails
some act that gives the victim a false impression.” Id. This understanding
of the meaning of deception is the basis for the Commission’s argument, see
SEC Br. 21-22.
5
concerning breach of fiduciary duty, this Court should reverse the district
court’s denial of a preliminary injunction, remand for the district court to
consider the deception issue in the first instance, and keep the asset freeze
in effect pending the district court’s consideration of that issue.
III.
Lies, deceptive conduct and half-truths are deceptive devices or
contrivances whether they involve a breach of fiduciary duty or
not.
A false statement, deceptive action, or half-truth is a paradigmatic
example of deception under both the common law and the federal
securities laws. It has been clear at least since the Supreme Court’s insider
trading cases that silence can also be deceptive under the securities laws, as
under the common law, when a fiduciary or a similar duty of trust and
confidence imposes a duty to speak. Dorozhko purports to find that the
special case of the fiduciary who does not speak is in fact the entire law of
securities fraud. His contentions are erroneous.
A.
The language and legislative history of Section 10(b)
establish that it is designed to reach all sorts of fraud.
Statutory language and legislative history are the usual tools for
construing statutes, of course, but both contradict Dorozhko’s fiduciary
6
duty theory. As we have seen (SEC Br. 19-22, 43), the ordinary meaning of
the language of the statute – “any deceptive device or contrivance” – covers
all sorts of fraud, and does not remotely suggest that only fiduciaries can
be violators. See In re Edelman, 295 F.3d 171, 177 (2d Cir. 2002) (“Where the
statutory terms are clear, our inquiry is at an end”). The language of the
Rule is similarly broad: “any device, scheme, or artifice to defraud,” and
“any act, practice, or course of business which operates as a fraud or deceit
upon any person.” Indeed, Dorozhko’s concession (Br. 17) that breach of
fiduciary duty is not required under the mail and wire fraud statutes is
telling, since Section 10(b)’s language provides no more basis for such a
requirement than does the mail or wire fraud language. See 18 U.S.C. 1341
(mail fraud), 18 U.S.C. 1343 (wire fraud).3
The legislative history is also inconsistent with the idea that the statute
reaches only breaches of fiduciary duties. The principal drafter described
the provision as a “catchall” intended to permit the Commission to “deal
with new manipulative or cunning devices.” Hochfelder, 425 U.S. at 202
3
The mail fraud and wire fraud statutes contain identical language
prohibiting “any scheme or artifice to defraud.”
7
(quoting Hearings on H.R. 7852 and H.R. 8720 before the House Committee
on Interstate and Foreign Commerce, 73d Cong., 2d Sess., 115 (1934))
(Thomas Corcoran) (internal brackets omitted). And the Senate Report
explained that the section authorized the Commission “to prohibit or
regulate the use of any other manipulative or deceptive practices which it
finds detrimental to the interests of the investor.” S. Rep. No. 792, 73d
Cong., 2d Sess., 1-5 (1934). It is inconceivable that Congress intended
Section 10(b) to be a “catchall” only for fiduciaries, or that “any deceptive
practice” means “any breach of fiduciary duty.”
Perhaps because the task is manifestly impossible, Dorozhko does not
even try to base his argument on the statutory language or legislative
history. Rather he relies principally on a misreading of case law, which he
contends establishes a fiduciary duty requirement that is not based on
statutory language or legislative history. We next turn to these errors of his
analysis.
8
B.
Precedent makes clear that false statements, deceptive
conduct, and half-truths violate Section 10(b) and Rule 10b-5
regardless of the existence of fiduciary duties.
The fundamental principle that fraud means either affirmative deceptive
conduct, regardless of the existence of a fiduciary duty, or silence when a
duty requires disclosure, is interwoven into the very fabric of decisions
construing Section 10(b).
For example, in this Court’s recent decision in United States v. Finnerty,
the issue was whether a specialist on the New York Stock Exchange
engaged in deception within the meaning of Section 10(b) and Rule 10b-5
when he interposed himself between customer orders that were sent to him
to be executed on the floor of the exchange. Finnerty, No. 07-1104, 2008 WL
2778830, at *1-2. This Court noted that the government “did not try to
prove that Finnerty owed a fiduciary duty to public customers.” Id. at *3.
Under Dorozhko’s view, that should have been the end of the Court’s
analysis. But it was only a prefatory observation before the Court turned to
the question of whether, in the absence of an allegation of manipulation,
there was proof of “a false statement, breach of a duty to disclose, or
deceptive communicative conduct.” Id. at *6 (emphasis added); see also, id.
9
at *7 (finding that there was “no material misrepresentation, no omission,
no breach of a duty to disclose, and no creation of a false appearance of fact
by any means”).
The Court ruled that the defendant had not made an actionable
misrepresentation, but it was clear that despite the absence of a claim of
breach of fiduciary duty, the government would have established “a
primary violation of § 10(b)” if it had shown that false customer
expectations were based “on a statement or conduct by Finnerty.” Id. at *6.
See also, SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999)
(holding that a defendant violates Section 10(b) and Rule 10b-5 when he
makes either “a material misrepresentation or a material omission as to
which he had a duty to speak.”) (emphasis added).
1.
The Supreme Court’s insider trading cases rest on the
understanding that affirmative misrepresentations,
which includes deceptive conduct, are deceptive
regardless of the breach of a fiduciary duty.
The Commission’s opening brief explained that according to the
Supreme Court’s insider trading cases, a breach of duty is a basis for
finding fraud under Section 10(b) in the specialized situation where the
10
deception arises, not from an affirmative misrepresentation, but through
silence where there is a duty of disclosure. SEC Br. 44-49. These cases
articulate what is generally referred to as the “disclose or abstain from
trading” rule: a fiduciary in possession of material, nonpublic information
must either abstain from trading on it or make appropriate disclosure, and
the failure to do so is a form of fraud.
The case now before the Court is different from the insider trading cases
addressed by prior decisions of the Supreme Court because the fraud here
is alleged to be the deceptive manner in which the information was
obtained rather than in the fact that the defendant traded in breach of a
duty. Nevertheless, these cases provide compelling support for the
proposition that an affirmative misrepresentation (which, as we have seen,
includes deceptive conduct) is fraudulent.
In the first of these decisions, Chiarella, the Court explained that “[a]t
common law, misrepresentation made for the purpose of inducing reliance
upon the false statement is fraudulent,” but one who fails to disclose
material information “commits fraud only when he is under a duty to do
so” because he has a “fiduciary or other similar relation of trust and
11
confidence . . .” Chiarella v. United States, 445 U.S. 222, 227-28 (1980). The
Court then applied these common law principles to Section 10(b), holding
that silence is not fraudulent unless a duty requires disclosure.4
Dorozhko, however, claims that the Court created a different rule in
Chiarella. According to him, from the premise that at common law an
affirmative misrepresentation is fraudulent, while a failure to disclose is
only fraudulent if there is a duty to make disclosure, the Court drew the
conclusion that not only is silence fraudulent if there is a breach of duty,
but also that misrepresentations can never be fraudulent unless there is a
breach of fiduciary duty. As we just saw, and as further explained in our
opening brief, this conclusion is unsupported by Chiarella or any other
decision of the Supreme Court.5
Dorozhko incorrectly argues that this case is “virtually
indistinguishable” from Chiarella and O’Hagan because, he says, like the
4
Subsequent insider trading cases apply the same rule. See Dirks v. SEC,
463 U.S. 646, 659-60 (1983) (liability of those who are tipped confidential
information); United States v. O’Hagan, 521 U.S. 642 (1997) (liability of those
who misappropriate confidential information).
5
As we discuss below, infra at 21-27, it is also inconsistent with decisions of
this Court and other circuit courts.
12
defendants in those cases, he is alleged to have “stolen” nonpublic
information, and therefore, like the defendants in those cases, he is only
liable for securities fraud if he had a fiduciary duty. Br. 11-17, 23-26. This
assertion is incorrect. The focus in Chiarella and O’Hagan was not on how
the information was obtained, but on whether, once the information had
been obtained, the defendant thereafter committed fraud by trading in
breach of a fiduciary duty.6
The Court in O’Hagan was explicit on this point: the fraud in a
misappropriation case 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.” 521 U.S. at 656
6
Dorozhko similarly argues that the deception in SEC v. Cherif, 933 F.2d
403 (7th Cir. 1991) was in how the defendant accessed the nonpublic
information. Br. 24-25. Although Cherif used an identification card to
falsely represent that he was authorized to enter the bank, and the court
characterized this as fraudulent, the court’s decision ultimately turned on
the conclusion that he continued to owe a fiduciary duty to his employer
even after his employment terminated. 933 F.2d at 411. The court did not
reach the question of whether fraudulent entry absent a duty violated
Section 10(b). See SEC Br. 31 n.12, id. at 29-32.
13
(emphasis added).7 Chiarella likewise identified the controlling legal issue
as “whether silence may constitute a manipulative or deceptive device,”
not whether it is fraud to obtain information through deception. 445 U.S. at
226 (this case “concerns the legal effect of the [defendant]’s silence”). In
contrast, the Commission here alleges that the means by which Dorozhko
obtained the information was deceptive.8
Nor does the fact that some of Dorozhko’s conduct might be
characterized as stealing mean that a fiduciary duty must be shown. As
the Commission explained in its opening brief, merely because conduct
might qualify as theft does not mean that it is not also deceptive within the
meaning of Section 10(b). SEC Br. 37 n.16. This Court recently touched on
this point in Finnerty when it noted that “[t]heft not accomplished by deception
7
Contrary to Dorozhko’s suggestion (Br. 24), O’Hagan’s mail fraud
conviction was not based on some deceptive device he used to obtain the
information, but on “the mailing of securities trading confirmation slips to
him by his brokers.” United States v. O’Hagan, 139 F.3d 641, 652 (8th Cir.
1998) (on remand).
8
By claiming that he merely “stole” information (Br. 14, 21), Dorozhko
may intend to suggest that he did not engage in any deceptive conduct to
obtain it, but for this appeal he has expressly disclaimed reliance on the
argument that he did not engage in deceptive conduct as a ground for
affirming the district court (Br. 36-37).
14
(e.g., physically taking and carrying away another’s property) is not fraud
absent a fiduciary duty.” Finnerty, No. 07-1104, 2008 WL 2778830, at *4
(quoting In re Refco Capital Markets, Ltd. Brokerage Customer Sec. Litig., 2007
WL 2694469, at *8 (S.D.N.Y. Sept. 13, 2007) (emphasis added). Assuming
that some of Dorozhko’s conduct might also be characterized as theft, it
was accomplished through deception, and was therefore within the
proscriptions of Section 10(b) and Rule 10b-5 regardless of the absence of a
breach of fiduciary duty.
Dorozhko also incorrectly suggests that the Commission is seeking to
revive Justice Blackmun’s dissent in Chiarella in an effort to prohibit any
“informational advantage” that arises from “mere possession” of
nonpublic information. Br. 13-15 (citing 445 U.S. at 251). The fraud here is
not that Dorozhko merely possessed nonpublic information but that he
engaged in a deceptive device of hacking to obtain and immediately trade on
that nonpublic information.
He cites to several scholarly works that suggest that hacking does not
violate Section 10(b). Br. 19-20. These scholars, however, were not
suggesting that Section 10(b) can only be violated where there is a breach of
15
fiduciary duty, even if the defendant engages in deceptive conduct.
Rather, they were speculating, with little discussion or analysis, that
hacking could be deemed similar to theft-without-deception, an argument
that Dorozhko is expressly not making in this appeal.
We note that Dorozhko incorrectly describes the views expressed in a
leading securities law treatise. Br. 20-21 n.7. As explained in our opening
brief, the author of the treatise is of the view that deceptively hacking into a
computer system to obtain nonpublic information is securities fraud
irrespective of a fiduciary duty. SEC. Br. 23 (citing Donald C. Langevoort,
18 Insider Trading: Regulation, Enforcement, and Prevention, Section 6:14
(2007)). His treatise was updated after the Commission’s opening brief was
filed, but the author still concludes that a hacker who “engages in some
trickery to gain access to a company’s e-mail system” has engaged in
deceptive acts or practices in violation of Rule 10b-5, “fiduciary breach or
not.” Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement and
Prevention, Section 6:14, “Deception without breach of fiduciary duty”
(April 2008). He continues to be of that view after the district court’s
decision in this case, and he does not say, as Dorozhko suggests (Br. 20-21
16
n.7), that the district court’s ultimate decision was correct. Rather, he says
that the district court is correct that Dorozhko is not liable under the
theories adopted in the Supreme Court’s insider trading cases, which, as
noted, require a breach of a fiduciary duty. What Langevoort thinks was
“restrictive” (Br. 21 n.7) was not the district court’s application of the
theories from the Supreme Court decisions, but its failure to find that a
defendant can also commit fraud based on his use of deception in obtaining
the information.
2.
Supreme Court decisions not involving trading on nonpublic information also demonstrate that fraud may be
based either on a misrepresentation or on a failure to
speak in violation of a duty.
The Commission’s opening brief explained that Stoneridge, 128 S. Ct. 761,
distinguished between a fraud involving the failure to disclose in breach of
a duty and a fraud where the defendant made an affirmative misstatement.
SEC Br. 47-49. After the Court found that in a private action under Section
10(b) there was no presumption of reliance because the defendant “had no
duty to disclose,” the case did not end there – which it would have if a
breach of duty was the beginning and end of Section 10(b). Rather, after
17
deciding the fiduciary duty issue the Court went on to decide that there
was no reliance on affirmative misstatements because the “deceptive acts
were not communicated to the public.” 128 S. Ct. at 769.
Dorozhko agrees that in Stoneridge the Court analyzed reliance “in two
circumstances” – first, “where there is an omission of material fact by one
with a duty to disclose,” and second where “deceptive statements become
public.” Br. 29 (emphasis added). This concession contradicts Dorozhko’s
entire theory, because Dorozhko’s premise is that Section 10(b) only
involves one circumstance (the omission of material fact by one with a duty
to disclose) and that the second circumstance (deception without breach of
duty) does not violate the statute.
The Commission similarly explained that Basic Inc. v. Levinson, 485 U.S.
224, 240 n.18 (1988) demonstrates that breach of fiduciary duty cases are
distinct from affirmative misrepresentation cases because the Supreme
Court refused to recognize one standard of materiality for situations where
a fiduciary fails to disclose or abstain from trading, and another covering
affirmative misrepresentations by those “under no duty to disclose (but
under the ever-present duty not to mislead).” SEC Br. 49. There would
18
have been no reason for the Court to consider this issue if, as Dorozhko
claims, only fiduciaries have the “ever-present duty not to mislead.”
Dorozhko does not come to grips with this argument about Basic, and
can only muster that this statement is “dicta” because it was made “in
passing in a footnote” (Br. 27-28). Basic’s statement was not dicta; it was a
basis for not adopting two separate standards for materiality. It has been
relied upon in holding that misrepresentations alone are actionable under
Section 10(b). See Fry v. UAL Corp., 84 F.3d 936, 937-38 (7th Cir. 1996) (“The
duty not to make misrepresentations does not depend on the existence of a
fiduciary relationship.”) (citing Basic, 485 U.S. at 240 n.18). In an additional
statement, Basic reaffirmed that “Rule 10b-5 is violated whenever assertions
are made . . . if such assertions are false or misleading or are so incomplete
as to mislead.” Basic, 485 U.S. at 235 n.13 (quoting SEC v. Texas Gulf
Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (en banc)).9
Dorozhko argues that SEC v. Zandford, 535 U.S. 813 (2002) supports his
reading of Section 10(b) because “the Section 10(b) violation was predicated
9
Dorozhko also argues that Basic preceded O’Hagan (Br. 27-28), but Basic
was decided eight years after Chiarella’s recognition that fraud includes
both misrepresentations and silence in breach of duty.
19
on Zandford’s breach of a fiduciary duty owed to his client.” Br. 18. But
the fact that some fraud is perpetrated by the silence of fiduciaries provides
no support for the notion that fraud can only be perpetrated by fiduciaries.
One statement by the Court makes clear that it was fully aware that fraud
may be committed either through affirmative deception or through
omissions to disclose in breach of a duty. In response to Zandford’s
argument that he should escape liability because he did not make an
affirmative misrepresentation, but rather “simply failed to inform [his
client] of his intent to misappropriate their securities, ” the Supreme Court
explained that “any distinction between omissions and misrepresentations
is illusory in the context of a broker who has a fiduciary duty to her clients.” Id.
at 822-23 (citing Chiarella, 445 U.S. at 230) (emphasis added). If Dorozhko’s
view of the law were correct, there would never be a distinction between
omissions and misrepresentations because only fiduciaries could breach
the statute in the first place.
20
3.
Contrary to Dorozhko’s assertion, circuit court
decisions, including the two examples cited in the
Commission’s opening brief, hold that affirmative
misrepresentations can violate Section 10(b) and Rule
10b-5 regardless of the absence of a fiduciary duty.
Dorozhko asserts that the Commission “can not cite any case where
Section 10(b) liability has been imposed in the absence of a breach of a
fiduciary duty.” Br. 21, id. at 31. This claim is a bold one for Dorozhko to
make, as he cites no appellate case in the history of the Exchange Act in
which a defendant who made a material misrepresentation escaped
liability on the ground that he did not breach a fiduciary duty, and he cites
no appellate decision (or commentator, for that matter) supporting the
view that lies are only deceptive if the liar is a fiduciary. Perhaps almost as
telling are the many, many decisions holding defendants liable for
violating Section 10(b) without any discussion at all of whether the
21
defendant was a fiduciary.10
The Commission’s opening brief cited two examples from this Court in
which Section 10(b) and Rule 10b-5 violations were found despite the
absence of a fiduciary duty (SEC Br. 49-53), and, as we show below,
Dorozhko’s efforts to distinguish those cases are wide of the mark. We also
offer additional cases that expressly distinguish Chiarella and the “disclose
or abstain from trading” rule, and do not require a breach of duty where
the securities frauds are carried out by non-fiduciaries who make
affirmative misrepresentations.11
10
See, e.g., Superintendent v. Bankers Life, 404 U.S. at 9 (fraudulent acts by
bond issuer); Manufacturers Hanover Trust Co. v. Drysdale Securities Corp.,
801 F.2d 13, 20-22 (2d Cir. 1986) (accountants’ misrepresentations made to
client’s counterparty); In re NYSE Specialists Sec. Litig., 503 F.3d 89, 102 (2d
Cir. 2007) (fraud by “bankers and non-issuer sellers”); Levitt v. Bear Stearns
& Co., 340 F.3d 94 (2d Cir. 2003) (clearing agent’s misrepresentations); SEC
v. George, 426 F.3d 786 (6th Cir. 2005) (“Ponzi” scheme); United States v.
Andrews, 146 F.3d 933 (D.C. Cir. 1998) (“prime bank” securities scheme).
11
As noted in the discussion of the Finnerty decision, misrepresentations
under the securities laws include not only untrue statements but also
deceptive conduct. Supra at 5 n.2.
22
a.
Our opening brief cited two examples from this
Court of deceptive conduct that violates Section
10(b) without a breach of fiduciary duty –
pump-and-dump schemes and manipulations.
Pump-and-dump schemes. In United States v. Skelly, 442 F.3d 94, 97-98
(2d Cir. 2006), this Court affirmed a jury verdict that defendants violated
Section 10(b) and Rule 10b-5 in perpetrating a pump-and-dump scheme in
which they made misleading statements to boost the price of the securities.
See SEC Br. 50-51. The case had been submitted on two theories: that the
misleading statements were deceptive, and that the defendants had
breached the fiduciary duty they owed to the investors. The court found
that the fiduciary duty instruction was defective, so that the verdict could
not be affirmed on that basis, but nonetheless upheld the conviction on the
basis of the misstatement theory. It is difficult to imagine a better
illustration of the Commission’s contention that a violation of Section 10(b)
can occur even without a breach of fiduciary duty. In response, Dorozhko
describes the course of proceedings but never comes to terms with the
case’s holding, and then asserts that the case is not relevant because it does
23
not cite Dirks, Chiarella, or O’Hagan. Br. 30. To the contrary, the fact that
these cases are not cited is telling evidence that they are not relevant.
Manipulations. In ATSI Comm., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99
100 (2d Cir. 2007), this Court held that market manipulation violates Rule
10b-5 “regardless of whether there is a fiduciary relationship between
transaction participants.” See SEC Br. 52-53. Dorozhko responds that
“[m]anipulative as used in Rule 10(b) is a term of art that has been given a
specific meaning,” and that manipulation is a different concept from
“deception.” Br. 30-31. The holding of ATSI , however, is not that
manipulation is “manipulative,” but that manipulation is “deceptive.”
Section 10(b) authorizes the Commission to adopt rules forbidding both
“manipulative” and “deceptive” devices. Rule 10b-5 forbids fraudulent
conduct but does not use the word “manipulative.” This Court concluded
that Rule 10b-5 nonetheless prohibits market manipulation because
manipulation involves “willful conduct designed to deceive or defraud
investors by controlling or artificially affecting the price of securities,” 493
F.3d at 100 (quoting Hochfelder, 425 U.S. at 199) (emphasis added), and that
24
Rule 10b-5 required a showing that the manipulation was “aimed at
deceiving investors,” id.
b.
Other decisions, including those from four other
circuits, also hold that breach of fiduciary duty is
not required when a defendant engages in active
deception.
Another decision from this Circuit is Caiola v. Citibank, 295 F.3d 312, 331
(2d Cir. 2002), where a customer brought a securities fraud claim against
his bank alleging “material misrepresentations concerning [the bank’s
investment] strategy.” The bank argued that the customer failed to state a
claim because he was told that the bank “would not be his fiduciary or
advisor.” Id. This Court rejected the bank’s argument, holding that “the
lack of an independent duty” to disclose its hedging strategy “is not, under
such circumstances, a defense to Rule 10b-5 liability because upon choosing
to speak, one must speak truthfully about material issues.” Id.12
12
This Court cited, inter alia, Rubin v. Schottenstein, Zox & Dunn, 143 F.3d
263, 267-68 (6th Cir. Cir. 1998) (even if an attorney representing the seller in
a securities transaction does not have an “independent duty” to volunteer
information to a prospective buyer, “he assumes a duty to provide
complete and non-misleading information with respect to subjects on
which he undertakes to speak”), and Ackerman v. Schwartz, 947 F.2d 841,
848 (7th Cir. 1991) (distinguishing Chiarella on the ground that “the lack of
an independent duty does not excuse a material lie,” citing Basic).
25
Similarly, in Semerenko v. Cendant Corp., 223 F.3d 165, 187 n.14 (3d Cir.
2000) the court declined to dismiss plaintiffs’ claims on the asserted ground
that plaintiffs had not alleged breach of a fiduciary duty. The court
explained that Chiarella and Dirks apply to allegations “that the defendants
failed to disclose material facts,” but noted that “[t]hough defendants who
are neither fiduciaries nor insiders generally are not under a duty to
disclose material information, they subject themselves to liability under
§10(b) and Rule 10b-5 when they make affirmative misrepresentations.”
The issue has come up several times in the context of options trading.
For instance, in Fry v. UAL Corp., 84 F.3d 936, 937-38 (7th Cir. 1996) (Posner,
J.), the issuer of the underlying stock argued that it could not be held liable
under Section 10(b) for misrepresentations affecting the owners of options
on its stock because an issuer does not have a fiduciary duty to options
holders. The court agreed that there was no fiduciary obligation, but
rejected defendant’s argument that this was a valid defense. It
distinguished Chiarella because the “duty not to make misrepresentations
does not depend on the existence of a fiduciary relationship,” citing Basic,
485 U.S. at 240 n.18. Otherwise, the court observed, “very little fraud
26
would be actionable. The garden-variety fraud in which the seller of a
product misrepresents its qualities to the buyer would not be, because a
seller is not his buyer’s fiduciary.” Id. 13
C.
The fact that Rule 14e-3, which prohibits certain trading in
connection with tender offers, does not require a breach of
fiduciary duty has no bearing on whether Section 10(b)
imposes a fiduciary requirement in cases of affirmative
misstatement.
Dorozhko makes a confused argument that the Commission’s adoption
in 1980 of Rule 14e-3 under Section 14(e) of the Exchange Act somehow
proves that Section 10(b) requires a breach of fiduciary duty. Br. 32-35. In
contrast to Section 10(b), which prohibits only conduct contrary to
Commission rules or regulations, Section 14(e) has a self-operative
13
Other decisions reaching the same conclusion in the options context are
Deutschman v. Beneficial Corp., 841 F.2d 502, 506 (3d Cir. 1988), cert. denied,
490 U.S. 1114 (1989) (Chiarella and Dirks are “simply not relevant to the
distinct issue of affirmative misrepresentations affecting a market in
securities” because “[n]othing in those opinions . . . can be construed to
require the existence of a fiduciary relationship between a section 10(b)
defendant and the victim of that defendant’s affirmative
misrepresentation”), and Backman v. Polaroid Corp., 893 F.2d 1405, 1429-30
(1st Cir. 1990) (“plaintiffs’ arguments on appeal focus on allegedly
misleading statements” that constituted “misleading conduct,” “the issue
of affirmative misrepresentations is distinct from the context of insider
trading, and presents a situation where . . . the language of Chiarella do[es]
not apply”).
27
provision that directly prohibits misleading statements and fraudulent,
deceptive and manipulative practices in connection with any tender offer
without the need for Commission rulemaking. See O’Hagan, 521 U.S. at
671-72.14 Section 14(e) also has a rulemaking provision that gives the
Commission authority to adopt rules and regulations that “define, and
prescribe means reasonably designed to prevent, such acts and practices as
are fraudulent, deceptive, or manipulative.”
Acting pursuant to the rulemaking authority, the Commission has
adopted Rule 14e-3, which imposes a disclose or abstain requirement on
those in possession of certain nonpublic information in connection with a
tender offer. The details of the Rule are not important here. All that is
relevant to Dorozhko’s argument is that breach of a fiduciary duty is not an
element of a violation Rule 14e-3. Instead, all that need be shown under
Rule 14e-3 is that the defendant had the specified nonpublic information
and that he traded without disclosing. See O’Hagan, 521 U.S. at 669
14
Section 14(e) and Rule 14e-3 are reproduced in the Addendum to this
brief.
28
(upholding Rule 14e-3 as a means reasonably designed to prevent
fraudulent, deceptive or manipulative acts and practices).
Dorozhko claims that the Commission adopted Rule 14e-3 because it
perceived Chiarella as “limiting Rule 10(b)’s scope to situations in which the
trading party breached a duty of trust,” including, Dorozhko believes,
situations where there have been affirmative misrepresentations. Br. 34.
To the contrary, Rule 14e-3 is not at all concerned with cases in which
someone has engaged in affirmative deception. Rather, the Rule was
adopted to address situations in which there is a failure to make disclosure.
Specifically, Rule 14e-3 was adopted as a prophylactic measure because
trading without disclosure in breach of a fiduciary duty is particularly
likely in the context of a tender offer, and also unusually difficult to prove
given that there are often a fairly wide circle of people with confidential
information. See O’Hagan, 521 U.S. at 674-676; United States v. Chestman, 947
29
F.2d 551, 559(2d Cir. 1991) (en banc), cert. denied, 503 U.S. 1004 (1992).15
These concerns are not implicated when a defendant engages in
affirmative deceptive conduct, and adoption of Rule 14e-3 sheds no light
on the law applicable to misstatements. Thus, the Commission explained
in the Adopting Release for Rule 14e-3 that “[t]he Court’s analysis in
Chiarella does not alter existing standards of liability under Section 10(b)
and Rule 10b-5 in cases where the defendant has made affirmative
statements in connection with the purchase or sale of a security.” Tender
Offers, Exchange Act Rel. 33-6239 & 34-17120, 45 Fed. Reg. 60410, at n.9
(1980). Both before and after Chiarella, affirmative deception in connection
with a tender offer is covered by the self-operative portion of Section 14(e),
while an affirmative misrepresentation in connection with the purchase or
sale of securities (including purchases and sales involving tender offers) is
prohibited by Section 10(b) and Rule 10b-5, with no requirement for a
15
Even the academic source that Dorozhko quotes to advance his
Rule 14e-3 argument (Opp. at 34-35) does not agree that a breach of
fiduciary duty is a necessary condition under Rule 10b-5, but instead notes
that Rule 10b-5 had “its genesis in the common law tort of deceit,” and a
person “committed the tort of deceit under common law if they
affirmatively misrepresented material facts.” See Kathleen Coles, The
Dilemma of the Remote Tippee, 41 Gonz. L. Rev. 181, 187 n.31 (2005-06).
30
breach of fiduciary duty under either Section. See, e.g., SEC v. Bilzerian, 29
F.3d 689, 695 (D.C. Cir. 1994) (affirming that a defendant who made
misrepresentations in his tender offer violated both Section 10(b) and
Section 14(e) even though his securities laws violations “did not arise from
a position of authority in a brokerage firm, or from any other position for
that matter . . . [t]hey resulted from actions he took as an investor”) (original
emphasis); Billard v. Rockwell Intern. Corp., 683 F.2d 51, 56-57 (2d Cir. 1982)
(noting that there could be viable claims under both Sections 10(b) and
14(e) for misrepresenting that experts have advised the offeror that a
tender offer price is fair).
C ONCLUSION
For the foregoing reasons, and for the reasons set forth in the
Commission’s opening brief, if this Court agrees both that a breach of
fiduciary duty is not always required under Section 10(b) and that hacking
is deceptive, this Court should direct the district court to grant a
preliminary injunction and continue the asset freeze. Alternatively, if this
Court decides not to review the issue of whether hacking is deceptive, but
31
agrees that Section 10(b) can be violated absent a breach of fiduciary duty,
this Court should reverse the district court’s denial of a preliminary
injunction, remand for the district court to consider the deception issue in
the first instance, and keep the asset freeze in effect pending the district
court’s consideration of that issue.
Respectfully submitted,
B RIAN G. C ARTWRIGHT
General Counsel
A NDREW N. V OLLMER
Deputy General Counsel
JACOB H. S TILLMAN
Solicitor
______________________
M ARK P ENNINGTON
Assistant General Counsel
D AVID L ISITZA
Attorney
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-8010
(202) 551-5015 (Lisitza)
August 2008
32
C ERTIFICATE OF C OMPLIANCE
Pursuant to Fed. R. App. P. 32(a)(7)(C)
I hereby certify that, pursuant to Fed. R. App. P. 32(a)(7)(C), the
attached brief is proportionately spaced, has a typeface of 14 points or
more, and contains 6,507 words.
Dated: August 4, 2008
____________________________
David Lisitza
Securities and Exchange Commission
100 F St., N.E.
Washington, D.C. 20549-8010
(202) 551-5015
33
C ERTIFICATE OF S ERVICE
I hereby certify that, on this day, I caused the original and 10 copies
of the foregoing brief to be sent by overnight delivery (as well as one
electronic copy) to
Catherine O’Hagan Wolfe
Clerk of Court
U.S. Court of Appeals for the Second Circuit
The Daniel Patrick Moynihan Courthouse
500 Pearl Street
New York, NY 10007
and two copies of the foregoing brief (and one electronic copy) to be sent
by overnight delivery
Charles A. Ross, Esq.
Christopher L. Padurano, Esq.
Charles A. Ross & Associates
111 Broadway
Suite 1401
New York, NY 10006
cross@carossassoc.com; cpadurano@carossassoc.com
Dated: August 4, 2008
__________________________
David Lisitza
34
ADDENDUM
T ABLE OF C ONTENTS FOR THE A DDENDUM
Page
S ECTION 14(e), 15 U.S.C. 78n(e)
A-1
R ULE 14e-3, 17 C.F.R. 240.14e-3
A-2
Section 14(e), 15 U.S.C. 78n(e)
(e) Untrue statement of material fact or omission of fact with respect to
tender offer
It shall be unlawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made, in the light of the circumstances under which they are
made, not misleading, or to engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection with any tender offer or
request or invitation for tenders, or any solicitation of security holders in
opposition to or in favor of any such offer, request, or invitation. The
Commission 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.
A-1
Rule 14e-3, 17 C.F.R. 240.14e-3
Transactions in securities on the basis of material, nonpublic information in
the context of tender offers.
(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 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 are publicly disclosed by press release or otherwise.
A-2
(b) A person other than a natural person shall not violate paragraph (a) of
this section if such person shows that:
(1) The individual(s) making the investment decision on behalf of such
person to purchase or sell any security described in paragraph (a) of this
section or to cause any such security to be purchased or sold by or on
behalf of others did not know the material, nonpublic information; and
(2) Such person had implemented one or a combination of policies and
procedures, reasonable under the circumstances, taking into
consideration the nature of the person’s business, to ensure that
individual(s) making investment decision(s) would not violate
paragraph (a) of this section, which policies and procedures may
include, but are not limited to, (i) those which restrict any purchase, sale
and causing any purchase and sale of any such security or (ii) those
which prevent such individual(s) from knowing such information.
(c) Notwithstanding anything in paragraph (a) of this section to contrary,
the following transactions shall not be violations of paragraph (a) of this
section:
(1) Purchase(s) of any security described in paragraph (a) of this section
by a broker or by another agent on behalf of an offering person; or
(2) Sale(s) by any person of any security described in paragraph (a) of
this section to the offering person.
A-3
(d)
(1) As a means reasonably designed to prevent fraudulent, deceptive or
manipulative acts or practices within the meaning of section 14(e) of the
Act, it shall be unlawful for any person described in paragraph (d)(2) of
this section to communicate material, nonpublic information relating to
a tender offer to any other person under circumstances in which it is
reasonably foreseeable that such communication is likely to result in a
violation of this section except that this paragraph shall not apply to a
communication made in good faith,
(i) To the officers, directors, partners or employees of the offering
person, to its advisors or to other persons, involved in the planning,
financing, preparation or execution of such tender offer;
(ii) To the issuer whose securities are sought or to be sought by such
tender offer, to its officers, directors, partners, employees or advisors
or to other persons, involved in the planning, financing, preparation
or execution of the activities of the issuer with respect to such tender
offer; or
(iii) To any person pursuant to a requirement of any statute or rule or
regulation promulgated thereunder.
(2) The persons referred to in paragraph (d)(1) of this section are:
(i) The offering person or its officers, directors, partners, employees
or advisors;
A-4
(ii) The issuer of the securities sought or to be sought by such tender
offer or its officers, directors, partners, employees or advisors;
(iii) Anyone acting on behalf of the persons in paragraph (d)(2)(i) of
this section or the issuer or persons in paragraph (d)(2)(ii) of this
section; and
(iv) Any person in possession of material information relating to a
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 any of the above.
A-5
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.