Chiarella v. United States

RESPONDENT:United States

DOCKET NO.: 78-1202
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 445 US 222 (1980)
ARGUED: Nov 05, 1979
DECIDED: Mar 18, 1980

Stanley S. Arkin – Argued the cause for the petitioner
Stephen M. Shapiro – Argued the cause for the respondent

Facts of the case

Petitioner Vincent Chiarella worked in the composing room of Pandick Press (Pandick), a financial printer. An acquiring corporation hired Pandick to produce announcements of corporate takeover bids. Although the identities of the acquiring and target corporations were concealed, Chiarella was able to deduce the names of the target companies. Without disclosing his knowledge, Chiarella purchased stock in the target companies and sold the shares immediately after the takeover bids were made public. Chiarella realized slightly more than $30,000 in profits from his trading activities. The Securities and Exchange Commission (SEC) then investigated Chiarella’s trading activities. Chiarella entered into a consent decree with the SEC in which he agreed to return the profits he made to the sellers of the shares. A few months later, Chiarella was indicted on seventeen counts of violating Section 10(b) of the Securities Exchange Act of 1934 (1934 Act) and SEC Rule 10b-5. Section 10(b) of the 1934 Act prohibits the use “in connection with the purchase or sale of any security” of “any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” Rule 10b-5, promulgated under Section 10(b), makes it unlawful for any person to “employ any device, scheme, or artifice to defraud . . . in connection with the purchase or sale of any security.” Chiarella was convicted at trial and the Court of Appeals for the Second Circuit affirmed his conviction.


Did Chiarella violate Section 10(b) of the 1934 Act by failing to disclose the impending takeover before trading in the target company’s securities?

Media for Chiarella v. United States

Audio Transcription for Oral Argument – November 05, 1979 in Chiarella v. United States

Audio Transcription for Opinion Announcement – March 18, 1980 in Chiarella v. United States

Warren E. Burger:

The judgment and opinion in Chiarella against the United States will be announced by Mr. Justice Powell.

Lewis F. Powell, Jr.:

This case is here on certiorari to the United States Court of Appeals for the Second Circuit.

Petitioner, an employee of a financial printing firm in New York, was convicted in a criminal prosecution of violating Section 10 (b) of the Securities Exchange Act of 1934 and Rule 10b-5 adopted pursuant to that Act.

His conviction was affirmed by the Second Circuit.

As an employee of a printing firm, he had access to nonpublic information as to takeover bids that were to be made to stockholders of target corporations.

Petitioner used that information to purchase stock in target companies.

He made these purchases through stock exchanges but did not disclose the nonpublic information to the sellers of the stock.

In this way, he made substantial profits.

The question in this case is whether petitioner’s failure to disclose the nonpublic information constituted a fraud within the meaning of Section 10 (b).

The answer to this question turns on whether petitioner owed a duty to the sellers from whom he purchased.

For reasons stated in the opinion of the Court filed today, we hold that a duty to disclose under this statute does not arise from the mere possession of nonpublic market information.

It also was argued here that petitioner breached a duty to the acquiring corporation, that is the corporation that planned to make the takeover bids, but this theory was not presented to the trial jury and accordingly, we do not decide whether or not such a duty exist.

Section 10 (b) of the Act is drawn in quite general terms.

This is a criminal prosecution and nothing in the legislative history suggests a congressional intent to create a duty and consequent criminal liability upon persons such as petitioner who are not corporate insiders, not fiduciaries and not persons in whom the sellers had placed their trust or confidence.

Accordingly, we reversed the judgment of the Court of Appeals.

Mr. Justice Stevens has filed a concurring opinion.

Mr. Justice Brennan concurs in the judgment.

The Chief Justice has filed a dissenting opinion.

Mr. Justice Blackmun, with whom Mr. Justice Marshall joins, also has filed a dissenting opinion.

Warren E. Burger:

Thank you, Mr. Justice Powell.