Carpenter v. United States – Oral Argument – October 07, 1987

Media for Carpenter v. United States

Audio Transcription for Opinion Announcement – November 16, 1987 in Carpenter v. United States


William H. Rehnquist:

Mr. Buchwald, you may proceed whenever you are ready.

Don D. Buchwald:

Mr. Chief Justice, and may it please the Court.

The convictions of Wall Street Journal reporter Foster Winans and his two co-defendants, should be reversed because what these defendants did is not securities fraud and it is not mail or wire fraud.

By way of overview with respect to the securities laws first, there are two principal reasons that we have as to why the securities fraud conviction should be reversed.

First, that securities fraud can only be committed on investors or persons who participate in securities transactions.

It is not something that can be committed upon a newspaper or upon a private employer who has not participated in the securities transaction and who has no interest in the purchase, sale, or value of the securities involved.

And second, that a private company work rule, such as the Wall Street Journal’s does not have the force of criminal law, particularly whereas here it is presented to employees as going beyond the requirements of the law.

This case involves a private wrong by Foster Wynans upon the Wall Street Journal which, if it became public, could adversely affect the newspaper’s reputation.

This kind of wrong, we submit, however one may view it, is simply not what was intended to be covered by the securities laws, even if the wrong is cast in terms of the misappropriation of information.

The securities laws were designed to protect market participants from fraud, and not employers form potential damage to their reputations.

Just as the mail and wire fraud statutes protect persons from fraud in their capacities as property holders, the laws proscribing securities fraud protect persons from fraud in their capacity as investors or participants in market transactions.

John Paul Stevens:

Mr. Buchwald, can I ask you a question right there?

Supposing… I know the theory of the case as… tried was a little different.

But supposing, on precisely the same facts, there had been an allegation in the indictment or the complaint, or whatever it was, that saidas, that said,

“as a by-product of this scheme, investors were injured, those who sold or purchased from, Winans? “

They just threw that in and then they proved it.

Would that amount to a… would there have been a violation then?

Don D. Buchwald:

There would not, Your Honor.

John Paul Stevens:

In that you could reasonably conclude that there was some injury to market participants as a result of this?

Don D. Buchwald:

We would submit that that would not suffice, that there must be fraud upon the market participants.

Here, Justice Stevens, what we have as Foster Winans’ trading on what he perceives will likely be the market impact of the accurate articles that he is writing and that, we submit, is no different than a situation where Salomon Bros. may trade knowing that their very well-known economist partner, Murray Kaufman is going to be making a speech in the afternoon, in which he gives his opinion that interest rates are going down, and Salomon Bros., in anticipation of the market impact of that speech, buys into sensitive stocks in the morning.

John Paul Stevens:

But in the short answer, you are saying that, taking these facts, even if they had alleged and proved adverse market impact as a result of the fraud, that would still not be a violation because… because what?

Don D. Buchwald:

Because a market participant must be defrauded in that capacity as a market participant, and that that is the reach of the securities laws.

It is not sufficient that there simply be a fraud, assuming that Winans’ conduct here vis-a-vis the Wall Street Journal is a fraud, which is a premise we dispute.

It is not sufficient that there be a fraud upon a third party, which who himself, has no interest in the purchase, sale or value of securities and is not participating in a securities transaction; and then that fraud somehow relates or impacts upon–

John Paul Stevens:

But why is this any less of a fraud on the market participants than if the information that gave him an advantage in trading was corporate information instead of information about the timing of his columns?

Don D. Buchwald:

–It would still not be a fraud on the market participants unless there was a pre-existing relationship between Mr. Winans in this case and the people selling him the stock that he buys in advance of the column, which gave rise to a duty to disclose that information.

John Paul Stevens:

But you never have that on a trade on the open market.

Don D. Buchwald:

Well, in the cosmic sense, that I think that the securities laws presume in the discloser’s staying… obligation exists even when you have open market transactions.

And the existence of that relationship occurs where you have a pre-existing relationship to the corporation whose securities are being traded; there, as in essence, say a fiduciary or trustee of the corporation’s information, the securities laws presume that you are a trustee or fiduciary of the information of all of the shareholders.

Antonin Scalia:

What if the insider uses inside information that pertains not to his own corporation but to another corporation that this corporation somehow, somehow happens to have acquired?

And he uses that to purchase shares of that other corporation… you would say that that would not be within the securities laws either?

Don D. Buchwald:

That that would not be in the securities laws because there is no… that is really the situation of Tiorello, where you have information that emanates from the acquiring company side, and you then use that information in the… to buy stock of the company to be purchased… the target company.

And while that Tiorello kind of situation is now covered by Rule 14e-3, the 10b analysis, it would not apply because there is no pre-existing relationship that gives rise to the duty to disclose.

Harry A. Blackmun:

Counsel, do you concede there was impropriety here, however?

Don D. Buchwald:

I think that there clearly was an ethical breach by Mr. Winans–

Harry A. Blackmun:

Is there any remedy for this kind of thing?

Don D. Buchwald:


There is the remedy that the Wall Street Journal took.

They fired him.

They wrote about him on the front page of their newspaper; went into every aspect of his personal life, both that relevant to the ethical breach and that not relevant to it, and effectively have drummed him out of the profession.

Harry A. Blackmun:

But there is no judicial remedy of any kind?

Don D. Buchwald:

There is no judicial remedy, Your Honor because there is no fraud that he has committed within the meaning of any state law, or within the meaning of any federal securities law.

There are potential civil remedies, if the Wall Street Journal can establish some kind of–

Sandra Day O’Connor:

But why is there no fraud sufficient for a mail fraud or wire fraud, purposes?

Don D. Buchwald:

–Justice O’Connor, there are I guess three main reasons that we have on the mail and wire fraud side.

Number one, that the simple… that the breach of a private policy: of the undisclosed breach, of a private policy, is not a criminal fraud.

Now number two, that here the only–

Sandra Day O’Connor:

But the cases have been pretty generous in looking at different schemes or artifices, as sufficing for purposes of a fraud.

Don D. Buchwald:

–I think that they have… that there has been, certainly pre-McNally, Your Honor, a tendency to be very expansive in the view of what is fraud, and that many cases in the Circuits have suggested that whenever one violates a rule of one’s employer, there is potential mail or wire fraud exposure.

Sandra Day O’Connor:

But you said there were three reasons.

You think there is no fraud?

We might disagree on that.

Now, what is the next reason?

Don D. Buchwald:

Our position is that, the kind of injury which is asserted here, namely a putative reputational injury, is not the kind of injury that is cognizable under the mail or wire fraud statutes.

Sandra Day O’Connor:

Well, it is more than that.

It is “reputation” with an economic effect.

I do not think any of our cases have dealt with it in such a way such as to indicate that could not be enough.

Don D. Buchwald:

But the suggestion, the process… the district court held not that there was, in fact, reputational harm here; not that Winans intended reputational harm, but that because he could contemplate that, if his unethical conduct was discovered and became public, though that was not his aim, obviously; that that could cause diminished reputation of the employer and that, in turn, could have economic impact on the Wall Street Journal.

Byron R. White:

Do you not think that the employer, that the Wall Street Journal had maybe a property right in its publication schedule?

Byron R. White:

Is that not a sort of a business secret?

Don D. Buchwald:

Well, the short answer, Justice White, is I think that there can be a property interest in the publication schedule, but the question is, in what way are they deprived of that property interest by Foster Winans’ conduct?

They… when I use–

Byron R. White:

Well, it was certainly no longer a secret that they, if they–

Don D. Buchwald:

–But, if Foster Winans, for example–

Byron R. White:

–have not been deprived, if they were trying to keep that secret and it is suddenly given out to a limited number of people, it is no longer a secret.

Don D. Buchwald:

–But the fact of secrecy has no independent value, we submit, except vis-a-vis, competitors.

If Foster Winans were to have told his mother about the interesting article that he had written that was going to appear on Monday’s newspaper, thought that would be a violation of the Wall Street Journal policy, it does not hurt.

There is no economic impact.

Byron R. White:

Whatever property interest the paper has is suddenly gone.

So you are really saying there are really no property interest that needs to be considered?

Don D. Buchwald:

What we are saying is, the only way that a property interest can be said to exist is in the exclusive use of the knowledge, and that that is a meaningful interest only vis-a-vis competitors.

Antonin Scalia:

Mr. Buchwald, why is that so?

I assume that, I assume that one reason the Wall Street Journal is purchased by a lot of people is that they read articles such as this one about a company that may contain public information, but it brings it all together and I say,

“gee, if I read that article and purchase that stock right away, I will get a rise of 30 points. “

let us say.

0 [Mirth.]

To the extent that Mr. Winans, or anybody else, leaks in advance the fact that this article is coming out, or using his, the knowledge that the article is coming out, to make a profit, the rise will not be 30 points; it will be 29 1/2 points.

I mean, he milked some of that rise.

Now, why is that not something of value to the Wall Street Journal?

Indeed, why would not the Wall Street Journal itself trade on the knowledge that it is coming out with an article?

The only explanation I have is that it knows that, if it traded on that, the jump would not be as much and its articles would not be as… have as much of an impression.

And therefore they would not sell as many newspapers.

Now why is that not something of value that he has taken away?

The half-point spread?

Don D. Buchwald:

The Journal itself, and very specifically, and at trial, through its testimony, disclaimed any intention of giving market advice to its readers, or to recommending or suggesting they buy or sell stocks.

Antonin Scalia:

People just read it from general interest?

0 [Mirth.]

Don D. Buchwald:

It does not seem to me that the Journal could claim to be defrauded with respect to a function which it specifically denies that it has.

And a purpose that it specifically disclaims with respect to the column.

Antonin Scalia:

Is it estoppel you are arguing here?


Is that why this theory cannot be used?

Don D. Buchwald:

This theory could not be used because it is not charged at all.

They were… the first time there is even mention of a potential value of the column as an investment advice vehicle to investors, which the Journal itself, therefore, has a property interest in, is in the supplemental post-McNally brief.

That argument was never made below.

Your Honors, if I might return to the… well, let me follow up the argument about reputation while we are here.

It seems to me, if you can follow a process of

“my ethical breach, which is not itself illegal conduct, but my ethical breach, if it is discovered, can cause reputational damage to my employer… that might have economic fallout; therefore I am guilty of a federal mail and wire fraud, assuming the requisite mailings and wires. “

What you have done, essentially, is elevated every employee ethical breach into a federal crime.

You have given federal prosecutors a vehicle, even though you start with conduct that is not illegal, for establishing a process, if it is discovered… though that is not intended, if the public therefore thinks less of your employer, though there is no finding that that occurred here, and indeed, every indication is that it did not occur here… and if that reputational damage can translate somehow into economic harm.

So all ethical breaches by employees are elevated to the status of federal crimes, and we submit that quite aside from trivializing the criminal law as that would do, and quite aside from federalizing the rules pertaining to employee ethical breaches, and quite aside from the enormous discretion that this places in the hands of prosecutors, that there are three additional reasons on the facts of this case why that putative reputational damage cannot translate into the kind of economic injury which McNally requires the schemers aim for.

Number one is, that on the facts of this case, and the testimony is undisputed, the Wall Street Journal had never made known its policy to the readers or to the public prior to the events of this case.

That it never appeared in the newspaper, and never appeared in any public filing of the Wall Street Journal’s… and therefore reliance by members of the public on the existence of the policy or on adherence to the policy, had never been invited.

The second reason is that the Court… this Court has held in construing the term, v. Davis, in the context of state deprivation of property without due process of law, that property does not include reputation.

And with respect to interpreting the 1868 civil rights amendment, the 14th Amendment, it seems to me that the relatively contemporaneous mail and wire fraud statute, we should not assume that Congress–

Sandra Day O’Connor:

Well, I think that in Paul v. Davis, the Court really just said that reputation alone, apart from some more tangible interest, such as employment, or so forth, would not.

So I think you are reading a lot more into that case than is warranted.

Don D. Buchwald:

–Justice O’Connor, the think about reputation, and the facts there, it were the case that, because the plaintiff there had been defamed and called a “pickpocket”, and therefore it was less likely that he would be employed by the bank as a teller, or less likely that he would get any one of a number of employment opportunities, the damage to reputation could only, as a theoretical level, as a putative injury concept, be stretched out to mean “potential economic harm”.

So it seems to us that, while I think Your Honor is quite correct, that Paul v. Davis simply went off on a “reputation” concept, reputation, the value of my name, the value of reputation, is the way it translates economically.

William H. Rehnquist:

Congress could, in the mail fraud statute, define v. Davis, could it not?

Don D. Buchwald:

I think that is clearly the case.

We do not mean to suggest that, because of the interpretation in one, but the relatively contemporaneous nature of the statute–

William H. Rehnquist:

But you say it has not done so yet?

Don D. Buchwald:

–That is correct, Your Honor.

And we believe that it would be unwise to do so for the very reason that we have here, that you elevate an ethical breach into a federal crime if the ethical breach, if discovered, could cause reputational injury.

William H. Rehnquist:

But your argument is only partly that it would be “unwise”, I take it.

Your argument is basically against constructive crimes.

Don D. Buchwald:

That is correct, Your Honor.

At… here, as I go through the litany of things that we believe are wrong with using reputational damage as the fulcrum for mail and wire fraud injury, the third reason that we would give here, is that there is simply no intent by these Petitioners to deprive the Wall Street Journal of its reputation.

Don D. Buchwald:

And we think that McNally has set forth a requirement in defining what is the “scheme” that there be an intent to deprive the victim of money or property.

Here the pre-McNally concurrent findings of fact below, were that, was that there was no intent and that, indeed, it was the aim of the… of Mr. Winans’ and the co-Petitioners, to maintain the reputation and the journalistic integrity of the articles, because, in the words of the courts below,

“only if that reputation were maintained. “

could their hopes, or their perception that the articles would have impact, and therefore that their trades would be profitable, only if it were maintained, could that arrangement succeed.

Turning, if I might, back to the mail and wire fraud… well, let me just address one other point with respect to the mail and wire fraud statute, and then turn to the securities law: we have also argued as a third grounds for reversal of the mail and wire fraud convictions, that the mailings and wirings here, what is alleged is that the printing of the Wall Street Journal articles, and that the mailings of the Wall Street Journal to subscribers the following day were “wires and mails” caused for the purpose for this scheme to deprive the Wall Street Journal of property.

And if one focuses on the publication schedule, or the exclusive use of the publication schedule is that which is deprived, even in this context of it not going to a competitor, of it not going to the New York Times, as the property that is deprived, on the facts here, that all occurs on the day preceding publication of the article, when there is a leak in the information, when the initial purchase of stock in anticipation of the article, occurs.

So if that is a cognizable property deprivation, it is something which has fully occurred before the wires, before the mailings, of the Wall Street Journal, and in no sense can those wires or mailings be said to be caused for the purpose of executing the scheme to defraud.

There is no fraud alleged here nor, in fact, was there a fraud upon the readers of the Journal or on the investors.

And so even though that subsequent publication may enable, may cause to exist, that process by which Winans believes he is going to be successful in the stock market, that is not the cognizable fraud that is alleged on the Wall Street Journal in the mail and wire fraud counts.

And therefore, these mailings and wires, if that language,

“cause for the purpose of executing. “

has any meaning, are not sufficient here.

With respect, if I might return to the securities law point: we believe that the requirement of fraud that the participants in market transactions, how investors be defrauded, follows from the language of the statute, for which the misappropriation theory is not a substitute.

One must, in each case where the government alleges that misappropriation has occurred, look to the particular conduct which the government asserts constitutes that misappropriation, and then determine if that conduct constitutes

“a manipulative or deceptive device or contrivance employed in connection with the purchase or sale of securities. “

as Section 10b requires, and is it a fraud, as Rule 10b-5 requires?

And those terms in turn, have come to have recognized meaning.


“manipulative or deceptive device or contrivance. “

prescribes conduct directed at investors.

The hoodwinking of investors, either indirectly through manipulations, watched sales, matched orders, things aimed at the market as a whole, but designed to affect individual investor conduct, or the

“hoodwinking of investors directly through deceptions, falsehoods, half-truths, or silence, where there is a duty to speak. “

And that fraud under Rule 10b-5 encompasses

“deceptions or manipulations designed to affect an investment decision to the economic detriment of a market participant, or to deprive a person of investment value. “

Virtually by definition, a private wrong endangering an employer’s reputation is not what the securities laws are about.

There are, when you have an alleged misappropriation, there are two directions that you look instead of the traditional one direction.

You look to see if the conduct defrauds the seller of the stock that you are buying, and you can look to see if the conduct defrauds the person or entity from whom this information is allegedly misappropriated.

And you ask yourself in each instance, “is that a securities fraud”?

With respect to that first view, is the seller defrauded?

That is not something that is alleged here because it could not be alleged under the Court’s holding in Chiarella that there is a

Don D. Buchwald:

“requirement of disclosure with respect to informational advantages only where there is a pre-existing relationship which gives rise to the duty to disclose. “

And with respect to the second view here, is there a securities fraud upon the entity from whom the information has been misappropriated… has the printer, Chiarella, defrauded the acquiring company in that case by virtue of the misappropriation, has Winans here committed a securities fraud upon the Wall Street Journal by virtue of misappropriation?

If the answer to that question is “yes”, in Chiarella, it is because the acquiring companies are defrauded in their capacity as investors and in their capacity as market participants.

And we submit that certainly is not the case with respect to the Wall Street Journal.

Your Honors, the whole notion that a private employer can make a special securities law for his employees simply does not make sense.

Here we had a Wall Street Journal rule presented to its employees as intended to go beyond the requirements of the law, and suddenly it has the force of the law.

Let us suppose that that rule said explicitly what we believe it means implicitly, namely that, here at the Wall Street Journal, we want to follow the highest ethical requirements, while we recognize that the equal access to information rule was not accepted by the Supreme Court majority in the Chiarella decision, we nonetheless believe that it represents a higher standard of ethics, which we want Wall Street Journal employees to follow, so that we may have the highest reputation.

“If you do not follow the equal access to information rule, your employment here will be terminated. “

That, in essence, is what happened here.

That, as a matter of internal policy, policy which the Wall Street Journal made up on pain of firing those who do not follow the policy, that by adopting that rule, the government claims that therefore the securities laws are changed with respect to the employees of the Wall Street Journal.

Your Honors, we submit that, if Congress wants to pass a statute which says that,

“utilization in the stock market of an informational advantage in violation of a private contract with anyone is a new species of crime. “

that is fine.

Because then we will all know what the rules are.

But to try to stuff that result, in effect, into existing securities fraud legislation, is simply to rewrite the law to give it a new ex post facto interpretation, and we submit, is contrary to the very integrity of the law.

Mr. Chief Justice, if I might reserve the balance of my time?

William H. Rehnquist:

Thank you, Mr. Buchwald.

We will hear now from General Fried.

Charles Fried:

Thank you, Mr. Chief Justice, and may it please the Court.

Just a few preliminary things to clear up.

It should be quite clear that, in our view, the property which was misappropriated here was not reputation.

It was confidential information.

That was the property.

And as to that, there was, of course, a very clear intent to deprive.

A very clear intent to misappropriate the confidential information.

William H. Rehnquist:

You are speaking now to the mail fraud count or to the securities count?

Charles Fried:

In fact, in that respect, I speak to both counts, but certainly to the mail fraud count.

The harm comes about via the reputation which was put at-risk.

The fact that they did not intend to get caught, I think, is not a particularly compelling… answer to that point.

Now, there is another issue that has been raised which, I feel, must be answered at the outset.

Antonin Scalia:

Excuse me, this would have been an offense even if there had never been any publication of the fact that this is what Winans did, putting the reputation at-risk constitutes damage?

Charles Fried:

Oh, it certainly does.

I think Judge Stewart, in his findings, and we set out this point in our, in a footnote in our Supplemental Brief, made the point very well.

The information was the property of the Wall Street Journal.

If somebody takes my car, Justice Scalia, and returns it with a full tank of gas and no dents, it is not okay for them to say, “oh, nothing happened”.

They have deprived me of my car.

True, they did not intend to get caught, and they did not get caught until they brought the car back.

But nevertheless they deprived me of my property and they put it at-risk in ways which I am entitled to prevent being put at-risk.

I am lucky there were no dents, but there might have been.

And I am entitled to control that property to prevent that happening.

That, I think is just what Judge Stewart meant in his findings.

Antonin Scalia:

Does not fraud ordinarily require that the same respect in which you are damaged I am benefitted?

For example, if someone pays me money to trick you into burning your house down, it does not seem to me I could be prosecuted for defrauding you of your house?

It would be a very strange use of the word, “defraud”.

I somehow have to get the benefit from what you are deprived of, and that is what I do not see here.

There may have been either an actual harm to the reputation, or a threat to the reputation, but it is not that same harm to the Wall Street Journal which constitutes the benefit to the person who allegedly did the defrauding.

Charles Fried:

In fact, I would differ there.

I think there is considerable symmetry between the mechanism of benefit, I would say, Justice Scalia, on one hand, and the mechanism of the potential harm on the other: the mechanism of benefit to Winans and his confederates is that people believe in this column and do not imagine that, in fact, all this stuff has been traded upon and it is just to be discounted.

If it were not for that conviction… your questions to Mr. Buchwald earlier pointed that out… if it were not for that conviction on the part of the readers, the fraud would not have its effect.

So the reputation is there on both sides.

It is the very thing that the Wall Street Journal is selling its newspapers on, on one hand.

Now, that is not very much money on any particular day, but over the years it mounts up.

That is the very thing the Journal is selling its newspapers on on the one hand, and it is the very thing which Winans and his confederates are profiting from on the other.

So I think that there is quite considerable–

Antonin Scalia:

But not what they sought to deprive the Journal of, as was pointed out by your opponent.

To the contrary, they did absolutely not want to deprive the Wall Street Journal of its reputation.

The continuation of its reputation was essential to their scheme.

They were not depriving it of its reputation.

Charles Fried:

–No, they were depriving it of the information.

The information was valuable to the Wall Street Journal and its confidentiality was valuable to the Wall Street Journal.

Charles Fried:

The fact that nobody outside knew what the column would be and what day it would run was valuable to the Journal and it was very valuable to Winans and his confederates.

And that is what they took.

Now, the point has been urged by Petitioners–

William H. Rehnquist:

“That” is what they took?

What precisely is “that”?

Charles Fried:

–The confidential information regarding the timing and the contents of the column.

That a column about… that a column saying that

“Digital Switch is going to have some good luck, we think. “

and the fact that that column was going to appear on Wednesday, “that fact” is what they misappropriated.

That fact was entrusted to them.

William H. Rehnquist:

So now you can misappropriate a fact?

Charles Fried:

The information.

What is being misappropriated is the information as to the timing and content of the column.

And you certainly can–

Sandra Day O’Connor:

And it was a confidential information which was then used by them in their scheme?

Charles Fried:


This Court, every Member of this Court recognized the nature of confidential information in an employment relation in the Snep case, where the Court said that,

“even in the absence of a written contract, an employee has the fiduciary obligation to protect confidential information obtained during the course of his employment. “

That is the duty which he breached.

That precisely is the–

Sandra Day O’Connor:

Now, does McNally bear on this problem?

Charles Fried:

–I think McNally is wholly irrelevant to this case.

Because McNally addressed a concern that the government was federalizing breaches which deprived… employers of the faithful service of their employees, and even more troublesome, breaches which somehow deprived state and local governments of good government and the faithful service of public service.

That is not the issue in this case.

In this case, the breach of loyalty, the same breach that the Court noticed in the Snep case, is the instrument, not the end, of the crime.

And the breach of loyalty is a constant feature of many garden variety frauds practiced upon employers–

William H. Rehnquist:

Snep was not a criminal case.

Charles Fried:

–Snep was not a criminal case, but Snep recognized that there is this duty of confidentiality.

And that duty of confidentiality is the very duty which Winans breached in this case.

William H. Rehnquist:

Yes, but if Congress wanted to say in so many words,

William H. Rehnquist:

“no person shall breach a duty of confidentiality to their employer. “

in these circumstances, the case would give one little trouble.

But Congress has spoken in very general terms and it seems to me you are kind of putting layers on the thing.

Charles Fried:

I hope not, because in speaking of fraud, Congress necessarily assumed the ordinary common law meaning of fraud.

Fraud can only take place, as is true of many property crimes, on the shoulders, as it were, of pre-existing relations within the civil law.

And the criminal cannot reach down and define all of those pre-existing relations before the crime can be said to have been “properly defined”.

So in the usual case, where there is a fraud, what you have?

A fraud through nondisclosure, what you have is a relationship of trust.

That relationship is not itself defined anywhere in the criminal–

Antonin Scalia:

Well, more than that, you have property, and that is what is hard to take here.

You are… I think what you have said is true; it builds on existing common law concepts, but one of those concepts is property.

And the property you are asserting that has been taken here is–

Charles Fried:

–Confidential information.

Antonin Scalia:

–is the fact of later publication and the date of the publication.

Charles Fried:

The confid… the property clearly is confidential information.

And we have to stand on that; we are quite comfortable standing on that.

It is quite a traditional, though intangible, form of property right.

This Court in Ruckleshouse v. Monsanto recognized trade secrets as property which would raise 5th Amendment concerns, so I see no difficulty in treating confidential information as a species of property.

Under the securities law, of course, one need not even find property with that degree of focus and specificity.

That is a requirement only under the mail fraud.

So in either event, I think we are not doing anything so far-out as petitioners suggest.

Antonin Scalia:

What is the closest criminal fraud case that you would have to this species of property?

What case of ours comes the closest?

A trade secret case, where a trade secret was purloined?

Charles Fried:

Well, there are McNally cases where trade secrets… where I believe confidential information, and Indeed, privacy rights were obtained, where somebody obtained access.

I am thinking of the Louderman case where there was access to private information, and that access was thought to be a kind-of interest that was protected by the mail and wire fraud statutes.

But here, in speaking of confidential information as property, I think we really are not even as far afield as that particular case would have got.

It is not–

William H. Rehnquist:

Is that a decision of this Court?

Charles Fried:

–It is not in this Court.

Charles Fried:

It is a Court of Appeals case.

John Paul Stevens:

General Fried, I am a little troubled because, are you claiming that the obtaining of this property, namely the information, was done by fraud?

Charles Fried:

The fraud, the information was misappropriated at the time either that Winans himself traded on it, as he did I think on at least one occasion, or when he communicated it to his confederates for the purpose of trading on it.

John Paul Stevens:

No, it was misused, as you say, but the acquisition of the information was not obtained by fraud?

Charles Fried:


If you want a common law equivalent, we would say,

“this property indeed was stolen, but the form of theft was embezzlement rather than larceny by trick or false pretenses. “

John Paul Stevens:

I am not contending the information was, there was nothing dishonest about his finding out when the column was going to be published, was there?

Charles Fried:


The initial acquisition of the information, at least at the outset or the scheme, he may have been entirely honest; it is the subsequent use of the information which had been entrusted to him, just like any other servant who is entrusted with property and who, perhaps, receives that property in quite good faith, but subsequently misappropriates it, is guilty of embezzlement.

John Paul Stevens:

I do not know how he is guilty of mail fraud?

Charles Fried:

Well, as this Court said in Grin v. Shine, “embezzlement is fraud”.

John Paul Stevens:

Yes, but you are saying that, to complete your elements of the crime, you have got to have the harm, and you say the harm is the injury to the reputation?

Charles Fried:

That is correct.

John Paul Stevens:

But yet you are saying it is different from the intangible right to honest and good government somehow, the intangible right to honest and good reporting, is different in intent.

I am worried about the McNally implications when you focus on this intangible interest in good reputation.

Charles Fried:

Well, I see this as very different from those concerns in McNally because what was the object of the fraud here was the confidential information, which does seem to be a familiar, though intangible, form of property.

John Paul Stevens:

But it is also an element to deprive the Wall Street Journal of its good reputation and so-forth.

Charles Fried:

The harm of its… the reputation is the harm.

It is not the property.

The reputation is the harm which the Wall Street Journal suffers, or which is at least put at-risk.

There is no need to show that it suffered harm.

John Paul Stevens:

But you do agree that some kind of harm of that nature beyond the acquisition of the property is an essential ingredient of the offense?

Charles Fried:

Well, I think of Mr. Buchwald’s example of Foster Winans telling his mother about this information just because he is a gossip.

I think that is quite different.

John Paul Stevens:

Yes, it is an essential element of the defense.

Charles Fried:

There has to be some kind of harm which is contemplated or risked.

I do not think that it has to actually eventuate.

John Paul Stevens:

If that is true, why is this “harm”, which I would call some sort of an intangible harm, why is that different than the “harm” in McNally?

Charles Fried:

Because in McNally, what was lacking, what was utterly lacking, was the depriving of anything like the property which in this case we have I would say we have in sufficient degree.

Charles Fried:

So we have the taking of the property and the only question is,

“how does depriving the Wall Street journal of this property harm it? “

If somebody takes your car, Justice Stevens, and it is up in the country, and you do not know about it, they have taken your property and then there is a further question,

“what harm has it done you? “

Those are two separate questions.

John Paul Stevens:

I understand that, but I suppose in a sense, one could say in McNally there was a property interest in controlling the placement of insurance and they acquired that without violating any laws by exercising their authority.

Charles Fried:

One might have said that, indeed.

I think we urged that on the Court… unsuccessfully.

0 [Mirth.]

But I think that we had, and we did not prevail, in part because the interest in being able to direct where insurance commissions will go is a rather unfamiliar species of property, while confidential information is an entirely familiar species of information.

Antonin Scalia:

I must say that the concept of putting something at-risk as harm sufficient to support a criminal charge is, it seems to me, rather strange.

It is not even harm sufficient to support a tort action, or we would have a lot of tort suits for near misses in traffic accidents–

0 [Mirth.]

–instead of even fender-benders.

Charles Fried:

With respect, Justice Scalia, in every trespass action, the harm is presumed in just the way it is presumed here.

Even though the person who trespasses upon your land and walks across to the other side without bending a twig, has done you no monetary harm.

So I think that there is nothing–

Antonin Scalia:

Is that the theory of it?

That he could have done you harm?

I never heard that theory espoused.

I thought that the theory is, he should not be on your land?

The harm is, he is on your land.

You have a right to have him off your land.

Charles Fried:

–And the harm here is he should not be trafficking in your confidential information even though as things may turn out through your own diligence, you can put a stop to the reputational loss which might otherwise come about.

Antonin Scalia:

Well, you just said that, but I do not know why that is self-evident, and I never heard it before?

I do not know why you think you even have to get to reputational harm.

They have appropriated the property and you say you presume that there is harm: your property is appropriated.

Charles Fried:

Well, Judge Stuart in the district court so-said–

Antonin Scalia:

I know that.

Charles Fried:

–and I think it is a very strong argument.

Charles Fried:

I am making a further argument if that should not be satisfactory to some members of the Court.

Byron R. White:

Now, a while ago you though there had to be something beyond the appropriation of the property?

Charles Fried:

Oh, I think the harm is presumed, Justice White.

If I thought there had to be something other than–

Byron R. White:

Well, it is like your car example, you… he took my car.

Charles Fried:

–He took my car, returned it, full tank of gas and no dents.


That is quite sufficient.

William H. Rehnquist:

Turn back the odometer.

Charles Fried:

Turn back the odometer?

0 [Mirth.]

John Paul Stevens:

Yes, but I thought really, and there is a misunderstanding on my… I thought you were saying, as a matter of law, even though there is no physical or pecuniary injury, there is a legal harm by his having taken something he was not entitled to?

Charles Fried:

Yes, oh, yes.

We certainly hold that, but we say there is the further harm which is the reputational harm.

And both harms were found by the district court, so we stand on both of them.

Now, a great deal has been made of the point that we are seeking here to criminalize work rules of an employer.

And with respect, I think that is a “red herring”.

The work rule is neither a necessary nor a sufficient condition of the kind of fraud which we say took place here.

The heart of the fraud here is that there is a relationship of trust and that somebody who is in that relationship of trust misappropriates what has been entrusted to him to the detriment of the one who trusts him.

Now, the work rule may simply set the context.

The contours, if you like, of what relationship of trust is.

So, for instance, if I may use a humble example, but one which I suppose happens every day: one employer may say to his employees,

“When you are travelling, we consider it a proper travel expense for reimbursement to charge laundry, telephone calls home, pay-television in your hotel room. “

and another employer might say,

“We have a work rule that no only-business expenses and all of those are private expenses. “

I take it that the employee who submits a hotel bill, including those items, to the second employer, and does it by mail and receives a check back by mail, has defrauded his employer because he is in a relationship of trust to him; the employer trusts him and the statement there is an implicit statement that he is playing by those rules, and he has broken the trust.

So the work rule is really just a part of the context of trust.

Byron R. White:

Well, General, do you think that this argument carries the day in the securities side of this case?

Charles Fried:

Oh, I think so.

I think very much so.

Charles Fried:

I think as to the securities–

Byron R. White:

You mean just the fact that he has defrauded his employer sustains the securities?

Charles Fried:

–I am glad you brought me back to the securities fraud issue, because the concern which Petitioners raise is that we are criminalizing ordinary frauds, and I think there was a fraud here; there was a breach of trust here via the securities law in an open-ended way.

I do not think that is so because the way in which the securities law makes sure that the fraud is securities-related, securities-focused, if you wish, is by the provision that the fraud which the rule says can be committed on any person… not a market participant… by any person, must be in connection with the purchase and sale of securities.

Now, we maintain that, obviously, this fraud, and a palpable fraud it was, was a fraud that was committed in connection with the purchase and sale of securities.

How could it have been more closely connected?

Were it not for the purchase and sale of securities, there would have been no point.

The whole point and purpose was that: were it not for the purchase and sale of securities, the rule which he broke would have no point.

Were it not for the purchase and sale and securities, the reputational harm which was suffered would not be present.

So the connection was intimate.

Antonin Scalia:

General Fried, can I… will you tell me why this hypothetical is not covered by the mail fraud statute, or perhaps it is?

I am employer of the Fred M. Smith Company, and Mr. Smith tells… one of his employees asks him, you know,

“What does “M” stand for? “

And Smith says,

“Well, I will tell you this just in confidence. “

He is a trusted employee;

“It is Marmaduke. “

“I am really very ashamed of it. “

The employee writes to a newspaper and says,

“You know, Fred M. Smith’s middle name is “Marmaduke”. “

And he gets some… he gets five bucks from the newspaper for that.

Is that mail fraud?

Charles Fried:

No, it is not.

Antonin Scalia:

Why not?

Charles Fried:

Well, I am confident in saying it is not.

And now let us try and figure out why not?

Antonin Scalia:


0 [Mirth.]

I believe you so far.

Charles Fried:

I would say that it is not because there is no harm.

Charles Fried:

There is no breach of trust, and I say that–

Antonin Scalia:

The mere taking of the confidential information is the harm is what you said before.

And the mere using of it for your own advantage… it does not matter if the car is harmed or not.

The mere taking of it was enough.

Charles Fried:

–Because, because… the notion of “confidential information”, the notion of “confidential information” and of “trust”–

Antonin Scalia:

Doesn’t involve “Marmaduke”?


Charles Fried:

–are both concepts which are intended to have enough weight and seriousness not to cover every trivial peccadillo.

This was not a trivial peccadillo.

It netted the defendants almost $700,000.

Antonin Scalia:

Well, you might draw the line there; others might draw the line between a genuine trade secret of the sort that is used in manufacturing processes or something like that, and the mere fact that an article is going to appear in the Wall Street Journal several months from now You have to draw the line somewhere, right?

Charles Fried:

In that respect, I would draw it where the Court drew it in the Snep case.

It seems to me that is quite sufficient.


Byron R. White:


Fried, what if there had been no Wall Street Journal work rule?

Would either the mail fraud count or the securities count be good?

Could it be good without that rule?

Charles Fried:

–In the absence of such a work rule, for instance, if Winans had worked for the Daily Scalper instead of the Wall Street Journal, I would suppose that they would not have been given the context of the relationship that there existed, there would have been no understanding, no mutual understanding, that this kind of action is a breach of trust.

The work rule does not have to be spelled out in order to make it plain that a particular course of conduct is an act of disloyalty or is not an act of disloyalty.

But the work rule here made it clear beyond peradventure that there was disloyalty.

I do not know if the financial writers for the New York Times have been made aware of a similar work rule, but if there is an understanding that that is the nature of the relation, that is quite sufficient.

Now, I would like to address briefly the question about what the securities laws are directed against, because Petitioners say they are

“directed against protection from fraud of those persons who are trading in this particular case. “

What the statute says is that,

“in general, the securities laws are directed at procuring or assuring honest securities markets. “

And in specific, they say via 10b-5,

“fraud against any person in connection. “

Now, in this case, it seems to me that what has been done is not at all a parody of information theory, not at all.

Because, what we are saying is that,

Charles Fried:

“when you trade you should be on the lookout for trading against people who are smarter than you are, luckier than you are: better informed than you are… but not against people who have stolen the information which they are trading on. “

Because that kind of vigilance encourages what I would call a “cascading deterioration” of the honesty of the securities markets of the sort which the charge, at least in Chiarella, did not.

Where you think that somebody may have learned something, perhaps as an eavesdropper… well, perhaps by accident, through greatest diligence… well that is just the kind of incentive you want to put out.

But I do not think you want to put out an incentive to go out and steal information yourself, so that you can make good on the stock market.

Byron R. White:

So it is a federal securities crime for any embezzler of money to buy securities?

Charles Fried:

Decidedly not.

Because the embezzler does not commit his fraud in connection with–

Byron R. White:

The only reason he embezzled was to buy.

Just like this fellow.

The only reason he stole this information was to buy stock.

Charles Fried:

–He… Justice White–

Byron R. White:

You said the connection was “palpable”.

Charles Fried:

–He had the money, the embezzler did, and he could have committed it to the parimutuel, or to the numbers racket, or to a poker game; he chose to commit it to the stock market.

Byron R. White:

Yes, but on the facts of the case, the reason he embezzled it was to buy securities.

Charles Fried:

Yes, but he might have changed–

Byron R. White:

Well, but he did not.

Charles Fried:

–his mind and the harm would have been there–

Byron R. White:

But he did not.

Charles Fried:

–and the money in his pocket.

Byron R. White:

But he did not.

He just went to buy securities.

He got the money and went right across the street.

Charles Fried:

The crime is completed and fully identified at the moment he has the money in his pocket.

What he does with it next–

Byron R. White:

Why can you not say that in this case?

Charles Fried:

–No, because the crime is not completed in this case until Winans either trades on the information himself–

Byron R. White:

Oh, I do not know.

He gave it to his co-conspirators.

Charles Fried:

–for the purpose of trading.

Byron R. White:


Charles Fried:

If he just told it to his mother to satisfy gossip interests, there would have been no effects.

But he communicated for the purpose of trading.

If there are no further question, I thank the Court.

William H. Rehnquist:

Thank you General Fried.

Mr. Buchwald, you have two minutes remaining.

Don D. Buchwald:

Thank you, Your Honor.

Very briefly, on the mail and wire fraud analysis in the deprivation of information point: We believe that all roads lead to a putative reputational damage, is what the government is talking about.

Here you have lawfully acquired information.

When you use information, unlike a car, you are not depriving the other person of that information either permanently, temporarily, or partially.

And the cutoff point, it seems to us, as to where information takes on some kind of property value in anything even remotely resembling a McNally sense, is either when you use the information in competition with your employer, or where you are giving the information to a competitor to use in competition; in essence in a trade secret sense.

With respect to General Fried’s suggestion that, the in connection with requirement is satisfied if the scheme is for the purpose of buying or selling stocks, in addition to the example which Justice White gave, the example of obtaining information from a prominent investment advisor, if I join the Joe Granville hotline with a bounced check and no intention actually of paying Mister Granville for his advice and I then get a telegram in return for my one thousand dollar bounced check, saying that he recommends XYZ company and then I now go out and buy the stock in XYZ, under the government’s theory, that would be a securities fraud, because it is for the purpose of trading in securities.

And essentially, because the government wishes to move away from these examples of the embezzlement, and the use of information fraudulently obtained from an investment advisor, they place a limiting principle of fairness on the market, which we believe cannot be found on the market, which we believe is not and cannot be found, in the language of xx.

William H. Rehnquist:

Your time has expired, Mr. Buchwald.

The case is submitted.