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tend beyond conduct encompassed by $ 10(b)'s prohibition. See, e.g., Ernst & Ernst v. Hochfelder, 425 U. S. 185, 214. Under the “traditional” or “classical theory” of insider trading liability, a violation of § 10(b) and Rule 10b-5 occurs when a corporate insider trades in his corporation's securities on the basis of material, confidential information he has obtained by reason of his position. Such trading qualifies as a “deceptive device” because there is a relationship of trust and confidence between the corporation's shareholders and the insider that gives rise to a duty to disclose or abstain from trading. Chiarella v. United States, 445 U. S. 222, 228–229. Under the complementary “misappropriation theory” urged by the Government here, a corporate “outsider” violates $ 10(b) and Rule 106-5 when he misappropriates confidential information for securities trading purposes, in breach of a fiduciary duty owed to the source of the information, rather than to the persons with whom he trades. Pp. 650-653.
(b) Misappropriation, as just defined, is the proper subject of a $ 10(b) charge because it meets the statutory requirement that there be “deceptive” conduct "in connection with” a securities transaction. First, misappropriators deal in deception: A fiduciary who pretends loyalty to the principal while secretly converting the principal's information for personal gain dupes or defrauds the principal. A company's confidential information qualifies as property to which the company has a right of exclusive use; the undisclosed misappropriation of such information constitutes fraud akin to embezzlement. Cf. Carpenter v. United States, 484 U. S. 19, 25–27. Deception through nondisclosure is central to liability under the misappropriation theory. The theory is thus consistent with Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 473-476, a decision underscoring that $ 10(b) is not an all-purpose breach of fiduciary duty ban, but trains on conduct that is manipulative or deceptive. Conversely, full disclosure forecloses liability: Because the deception essential to the theory involves feigning fidelity to the information's source, if the fiduciary discloses to the source that he plans to trade on the information, there is no "deceptive device" and thus no $ 10(b) violation. Second, $ 10(b)'s requirement that the misappropriator's deceptive use of information be “in connection with the purchase or sale of [a] security” is satisfied by the misappropriation theory because the fiduciary's fraud is consummated not when he obtains the confidential information, but when, without disclosure to his principal, he uses the information in purchasing or selling securities. The transaction and the breach of duty coincide, even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information. Because undisclosed trading on the basis of misappropriated, nonpublic information both deceives the source of
the information and harms members of the investing public, the misappropriation theory is tuned to an animating purpose of the Exchange Act: to ensure honest markets, thereby promoting investor confidence. It would make scant sense to hold a lawyer-turned-trader 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 firm representing the bidder. The statute's text requires no such result. Pp. 653-659.
(c) The Eighth Circuit erred in holding that the misappropriation theory is inconsistent with $ 10(b). First, that court understood the theory to require neither misrepresentation nor nondisclosure; as this Court explains, however, deceptive nondisclosure is essential to $ 10(b) liability under the theory. Concretely, 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 made his conduct “deceptive” under $ 10(b). Second, the Eighth Circuit misread this Court's precedents when it ruled that, under Chiarella v. United States, 445 U. S. 222, 230, 232, 233; Dirks v. SEC, 463 U. S. 646, 655; and Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 191, only a breach of a duty to parties to a securities transaction, or, at the most, to other market participants such as investors, is sufficient to give rise to $ 10(b) liability. Chiarella, 445 U. S., at 238, 239, 240–243, 245, expressly left open the question of the misappropriation theory's validity, and Dirks, 463 U. S., at 665, 666–667, also left room for application of the misappropriation theory in cases such as this one. Central Bank's discussion concerned only private civil litigation under $ 10(b) and Rule 106-5, not criminal liability. Pp. 660-665.
. (d) Vital to this Court's decision that criminal liability may be sustained under the misappropriation theory is the Exchange Act's requirement that the Government prove that a person “willfully" violated Rule 106-5 in order to establish a criminal violation, and the Act's provision that a defendant may not be imprisoned for such a violation if he proves that he had no knowledge of the Rule. The requirement of culpable intent weakens O'Hagan's charge that the misappropriation theory is too indefinite to permit the imposition of criminal liability. See Boyce Motor Lines, Inc. v. United States, 342 U. S. 337, 342. The Eighth Circuit may address on remand O'Hagan's other challenges to his $ 10(b) and Rule 10b-5 convictions. Pp. 665–666.
2. As relevant to this case, the SEC did not exceed its rulemaking authority under $ 14(e) by adopting Rule 14e-3(a) without requiring a showing that the trading at issue entailed a breach of fiduciary duty. Section 14(e) prohibits “fraudulent ... acts ... in connection with any tender offer,” and authorizes the SEC to "define, and prescribe means reasonably designed to prevent, such acts.” Adopted under that statuSyllabus
tory authorization, Rule 14e-3(a) forbids any person to trade on the basis of material, nonpublic information that concerns a tender offer and that the person knows or should know has been acquired from an insider of the offeror or issuer, or someone working on their behalf, unless within a reasonable time before any purchase or sale such information and its source are publicly disclosed. Rule 14e-3(a) imposes a duty to disclose or abstain from trading whether or not the trader owes a fiduciary duty to respect the confidentiality of the information. In invalidating Rule 14e-3(a), the Eighth Circuit reasoned, inter alia, that $ 14(e) empowers the SEC to identify and regulate “fraudulent” acts, but not to create its own definition of “fraud"; that, under Schreiber v. Burlington Northern, Inc., 472 U. S. 1, 7–8, § 10(b) interpretations guide construction of $ 14(e); and that, under Chiarella, supra, at 228, a failure to disclose information can be "fraudulent" for $ 10(b) purposes only when there is a duty to speak arising out of a fiduciary or similar relationship of trust and confidence. This Court need not resolve whether the SEC's § 14(e) fraud-defining authority is broader than its like authority under $ 10(b), for 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. A prophylactic measure properly encompasses more than the core activity prohibited. Under $ 14(e), the SEC 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. See Schreiber, supra, at 11, n. 11. This Court must accord the SEC's assessment in that regard 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. In this case, the SEC's assessment is none of these. 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 proof problems that could enable sophisticated traders to escape responsibility for such trading, 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. Insofar as it serves to prevent the type of misappropriation charged against O'Hagan, the Rule is therefore a proper exercise of the SEC's prophylactic power under $ 14(e). This Court declines to consider in the first instance O'Hagan's alternate arguments that Rule 14e-3(a)'s prohibition of pre-offer trading conflicts with § 14(e) and violates due process. The Eighth Circuit may address on remand any such argument that O'Hagan has preserved. Pp. 666-677.
Opinion of the Court
3. This Court's rulings on the securities fraud issues require reversal of the Eighth Circuit's judgment on the mail fraud counts. O'Hagan's other arguments attacking the mail fraud convictions on alternate grounds, which have not been addressed by the Eighth Circuit, remain
open for consideration on remand. Pp. 677–678. 92 F. 3d 612, reversed and remanded.
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.*
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).
*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.
Opinion of the Court
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.
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 in