No. 96-842


on writ of certiorari to the united states court of appeals for the eighth circuit

[June 25, 1997]

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

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

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

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

Unlike the majority, however, I cannot accept the Commission's interpretation of when a deceptive device is "use[d] . . . in connection with" a securities transaction. Although the Commission and the majority at points seem to suggest that any relation to a securities transaction satisfies the "in connection with" requirement of §10(b), both ultimately reject such an overly expansive construction and require a more integral connection between the fraud and the securities transaction. The majority states, for example, that the misappropriation theory applies to undisclosed misappropriation of confidential information "for securities trading purposes," ante, at 7, thus seeming to require a particular intent by the misappropriator in order to satisfy the "in connection with" language. See also ante, at 11 (the "misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no risk profits through the purchase or sale of securities") (emphasis added); ante, at 11-12 (distinguishing embezzlement of money used to buy securities as lacking the requisite connection). The Commission goes further, and argues that the misappropriation theory satisfies the "in connection with" requirement because it "depends on an inherent connection between the deceptive conduct and the purchase or sale of a security." Brief for United States 21 (emphasis added); see also ibid. (the "misappropriated information had personal value to respondent only because of its utility in securities trading") (emphasis added).

The Commission's construction of the relevant language in §10(b), and the incoherence of that construction, become evident as the majority attempts to describe why the fraudulent theft of information falls under the Commission's misappropriation theory, but the fraudulent theft of money does not. The majority correctly notes that confidential information "qualifies as property to which the company has a right of exclusive use." Ante, at 9. It then observes that the "undisclosed misappropriation of such information, in violation of a fiduciary duty, . . . constitutes fraud akin to embezzlement--the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." Ibid. (citations and internal quotation marks omitted). [n.1] So far the majority's analogy to embezzlement is well taken, and adequately demonstrates that undisclosed misappropriation can be a fraud on the source of the information.

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

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

"is satisfied because the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide." Ante, at 11.

The majority later notes, with apparent approval, the Government's contention that the embezzlement of funds used to purchase securities would not fall within the misappropriation theory. Ante, at 11-12 (citing Brief for United States 24, n. 13). The misappropriation of funds used for a securities transaction is not covered by its theory, the Government explains, because "the proceeds would have value to the malefactor apart from their use in a securities transaction, and the fraud would be complete as soon as the money was obtained." Brief for United States 24, n. 13; see ante, at 12 (quoting Government's explanation).

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

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

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

. . . . .

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

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

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

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

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

. . . . .

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

. . . . .

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

"[Counsel]: Exactly.

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

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

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

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

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

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

Any of these activities would have deprived Grand Met of its right to "exclusive use," ante, at 9, of the information and, if undisclosed, would constitute "embezzlement" of Grand Met's informational property. Under any theory of liability, however, these activities would not violate §10(b) and, according to the Commission's monetary embezzlement analogy, these possibilities are sufficient to preclude a violation under the misappropriation theory even where the informational property was used for securities trading. That O'Hagan actually did use the information to purchase securities is thus no more significant here than it is in the case of embezzling money used to purchase securities. In both cases the embezzler could have done something else with the property, and hence the Commission's necessary "connection" under the securities laws would not be met. [n.2] If the relevant test under the "in connection with" language is whether the fraudulent act is necessarily tied to a securities transaction, then the misappropriation of confidential information used to trade no more violates §10(b) than does the misappropriation of funds used to trade. As the Commission concedes that the latter is not covered under its theory, I am at a loss to see how the same theory can coherently be applied to the former. [n.3]

The majority makes no attempt to defend the misappropriation theory as set forth by the Commission. Indeed, the majority implicitly concedes the indefensibility of the Commission's theory by acknowledging that alternative uses of misappropriated information exist that do not violate the securities laws and then dismissing the Government's repeated explanations of its misappropriation theory as mere "overstatement." Ante, at 12. Having rejected the Government's description of its theory, the majority then engages in the "imaginative" exercise of constructing its own misappropriation theory from whole cloth. Thus, we are told, if we merely "[s]ubstitute `ordinarily' for `only' " when describing the degree of connectedness between a misappropriation and a securities transaction, the Government would have a winner. Ibid. Presumably, the majority would similarly edit the Government's brief to this Court to argue for only an "ordinary," rather than an "inherent connection between the deceptive conduct and the purchase or sale of a security." Brief for United States 21 (emphasis added).

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

Whether the majority's new theory has merit, we cannot possibly tell on the record before us. There are no findings regarding the "ordinary" use of misappropriated information, much less regarding the "ordinary" use of other forms of embezzled property. The Commission has not opined on the scope of the new requirement that property must "ordinarily" be used for securities trading in order for its misappropriation to be "in connection with" a securities transaction. We simply do not know what would or would not be covered by such a requirement, and hence cannot evaluate whether the requirement embodies a consistent and coherent interpretation of the statute. [n.4] Moreover, persons subject to this new theory, such as respondent here, surely could not and cannot regulate their behavior to comply with the new theory because, until today, the theory has never existed. In short, the majority's new theory is simply not presented by this case, and cannot form the basis for upholding respondent's convictions.

In upholding respondent's convictions under the new and improved misappropriation theory, the majority also points to various policy considerations underlying the securities laws, such as maintaining fair and honest markets, promoting investor confidence, and protecting the integrity of the securities markets. Ante, at 12, 14. But the repeated reliance on such broad sweeping legislative purposes reaches too far and is misleading in the context of the misappropriation theory. It reaches too far in that, regardless of the overarching purpose of the securities laws, it is not illegal to run afoul of the "purpose" of a statute, only its letter. The majority's approach is misleading in this case because it glosses over the fact that the supposed threat to fair and honest markets, investor confidence, and market integrity comes not from the supposed fraud in this case, but from the mere fact that the information used by O'Hagan was nonpublic.

As the majority concedes, because "the deception essential to the misappropriation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no `deceptive device' and thus no §10(b) violation." Ante, at 10 (emphasis added). Indeed, were the source expressly to authorize its agents to trade on the confidential information--as a perk or bonus, perhaps--there would likewise be no §10(b) violation. [n.5] Yet in either case--disclosed misuse or authorized use--the hypothesized "inhibiting impact on market participation," ante, at 14, would be identical to that from behavior violating the misappropriation theory: "Outsiders" would still be trading based on nonpublic information that the average investor has no hope of obtaining through his own diligence. [n.6]

The majority's statement that a "misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public," ante, at 11 (emphasis added), thus focuses on the wrong point. Even if it is true that trading on nonpublic information hurts the public, it is true whether or not there is any deception of the source of the information. [n.7] Moreover, as we have repeatedly held, use of nonpublic information to trade is not itself a violation of §10(b). E.g., Chiarella, 445 U. S., at 232-233. Rather, it is the use of fraud "in connection with" a securities transaction that is forbidden. Where the relevant element of fraud has no impact on the integrity of the subsequent transactions as distinct from the nonfraudulent element of using nonpublic information, one can reasonably question whether the fraud was used in connection with a securities transaction. And one can likewise question whether removing that aspect of fraud, though perhaps laudable, has anything to do with the confidence or integrity of the market.

The absence of a coherent and consistent misappropriation theory and, by necessary implication, a coherent and consistent application of the statutory "use or employ, in connection with" language, is particularly problematic in the context of this case. The Government claims a remarkable breadth to the delegation of authority in §10(b), arguing that "the very aim of this section was to pick up unforeseen, cunning, deceptive devices that people might cleverly use in the securities markets." Tr. of Oral Arg. 7. As the Court aptly queried, "[t]hat's rather unusual, for a criminal statute to be that open ended, isn't it?" Ibid. Unusual indeed. Putting aside the dubious validity of an open ended delegation to an independent agency to go forth and create regulations criminalizing "fraud," in this case we do not even have a formal regulation embodying the agency's misappropriation theory. Certainly Rule 10b-5 cannot be said to embody the theory--although it deviates from the statutory language by the addition of the words "any person," it merely repeats, unchanged, §10(b)'s "in connection with" language. Given that the validity of the misappropriation theory turns on the construction of that language in §10(b), the regulatory language is singularly uninformative. [n.8]

Because we have no regulation squarely setting forth some version of the misappropriation theory as the Commission's interpretation of the statutory language, we are left with little more than the Commission's litigating position or the majority's completely novel theory that is not even acknowledged, much less adopted, by the Commission. As we have noted before, such positions are not entitled to deference and, at most, get such weight as their persuasiveness warrants. Metropolitan Stevedore Co. v. Rambo, 521 U. S. ___, ___, ___, n. 10 (1997) (slip op., at 17, 19, n. 10). Yet I find wholly unpersuasive a litigating position by the Commission that, at best, embodies an inconsistent and incoherent interpretation of the relevant statutory language and that does not provide any predictable guidance as to what behavior contravenes the statute. That position is no better than an ad hoc interpretation of statutory language and in my view can provide no basis for liability.

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

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

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

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

"(1) The offering person,

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

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

As the majority acknowledges, Rule 14e-3(a) prohibits a broad range of behavior regardless of whether such behavior is fraudulent under our precedents. See ante, at 25 (rule applies " `without regard to whether the trader owes a pre-existing fiduciary duty to respect the confidentiality of the information' ") (quoting United States v. Chestman, 947 F. 2d 551, 557 (CA2 1991) (en banc), cert. denied, 503 U.S. 1004 (1992)) (emphasis omitted).

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

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

"under §14(e), the Commission may prohibit acts, not themselves fraudulent under the common law or §10(b), if the prohibition is `reasonably designed to prevent . . . acts and practices [that] are fraudulent.' " Ante, at 29 (quoting 15 U.S.C. § 78n(e)).

According to the majority, prohibiting trading on nonpublic information is necessary to prevent such supposedly hard to prove fraudulent acts and practices as trading on information obtained from the buyer in breach of a fiduciary duty, ante, at 31-32, and possibly "warehousing," whereby the buyer tips allies prior to announcing the tender offer and encourages them to purchase the target company's stock, ante, at 28-29, n. 17. [n.9]

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

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

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

Insofar as the Rule 14e-3(a) purports to "define" acts and practices that "are fraudulent," it must be measured against our precedents interpreting the scope of fraud. The majority concedes, however, that Rule 14e-3(a) does not prohibit merely trading in connection with fraudulent nondisclosure, but rather it prohibits trading in connection with any nondisclosure, regardless of the presence of a pre-existing duty to disclose. Ante, at 25. The Rule thus exceeds the scope of the Commission's authority to define such acts and practices as "are fraudulent." [n.10]

Turning to the Commission's second justification for Rule 14e-3(a), although I can agree with the majority that §14(e) authorizes the Commission to prohibit non fraudulent acts as a means reasonably designed to prevent fraudulent ones, I cannot agree that Rule 14e-3(a) satisfies this standard. As an initial matter, the Rule, on its face, does not purport to be an exercise of the Commission's prophylactic power, but rather a redefinition of what "constitute[s] a fraudulent, deceptive, or manipulative act or practice within the meaning of §14(e)." That Rule 14e-3(a) could have been "conceived and defended, alternatively, as definitional or preventive," ante, at 30, n. 19, misses the point. We evaluate regulations not based on the myriad of explanations that could have been given by the relevant agency, but on those explanations and justifications that were, in fact, given. See State Farm, 463 U. S., at 43, 50. Rule 14e-3(a) may not be "[s]ensibly read" as an exercise of "preventive" authority, ante, at 30, n. 19; it can only be differently so read, contrary to its own terms.

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

Even on its own merits, the Commission's prophylactic justification fails. In order to be a valid prophylactic regulation, Rule 14e-3(a) must be reasonably designed not merely to prevent any fraud, but to prevent persons from engaging in "fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer." 15 U.S.C. § 78n(e) (emphasis added). Insofar as Rule 14e-3(a) is designed to prevent the type of misappropriation at issue in this case, such acts are not legitimate objects of prevention because the Commission's misappropriation theory does not represent a coherent interpretation of the statutory "in connection with" requirement, as explained in Part I, supra. Even assuming that a person misappropriating information from the bidder commits fraud on the bidder, the Commission has provided no coherent or consistent explanation as to why such fraud is "in connection with" a tender offer, and thus the Commission may not seek to prevent indirectly conduct which it could not, under its current theory, prohibit directly. [n.11]

Finally, even further assuming that the Commission's misappropriation theory is a valid basis for direct liability, I fail to see how Rule 14e-3(a)'s elimination of the requirement of a breach of fiduciary duty is "reasonably designed" to prevent the underlying "fraudulent" acts. The majority's primary argument on this score is that in many cases " `a breach of duty is likely but difficult to prove.' " Ante, at 31 (quoting Reply Brief for United States 16). Although the majority's hypothetical difficulties involved in a tipper tippee situation might have some merit in the context of "classical" insider trading, there is no reason to suspect similar difficulties in "misappropriation" cases. In such cases, Rule 14e-3(a) requires the Commission to prove that the defendant "knows or has reason to know" that the nonpublic information upon which trading occurred came from the bidder or an agent of the bidder. Once the source of the information has been identified, it should be a simple task to obtain proof of any breach of duty. After all, it is the bidder itself that was defrauded in misappropriation cases, and there is no reason to suspect that the victim of the fraud would be reluctant to provide evidence against the perpetrator of the fraud. [n.12] There being no particular difficulties in proving a breach of duty in such circumstances, a rule removing the requirement of such a breach cannot be said to be "reasonably designed" to prevent underlying violations of the misappropriation theory.

What Rule 14e-3(a) was in fact "designed" to do can be seen from the remainder of the majority's discussion of the Rule. Quoting at length from the Commission's explanation of the Rule in the Federal Register, the majority notes the Commission's concern with " `unfair disparities in market information and market disruption.' " Ante, at 30 (quoting 45 Fed. Reg. 60412 (1980)). In the Commission's further explanation of Rule 14e-3(a)'s purpose--continuing the paragraph partially quoted by the majority--an example of the problem to be addressed is the so called "stampede effect" based on leaks and rumors that may result from trading on material, nonpublic information. 45 Fed. Reg. 60413. The majority also notes (but does not rely on) the Government's contention that it would not be able to prohibit the supposedly problematic practice of "warehousing"--a bidder intentionally tipping allies to buy stock in advance of a bid announcement--if a breach of fiduciary duty were required. Ante, at 28-29, n. 17 (citing Reply Brief for United States 17). Given these policy concerns, the majority notes with seeming approval the Commission's justification of Rule 14e-3(a) "as a means necessary and proper to assure the efficacy of Williams Act protections." Ante, at 30.

Although this reasoning no doubt accurately reflects the Commission's purposes in adopting Rule 14e-3(a), it does little to support the validity of that Rule as a means designed to prevent such behavior: None of the above described acts involve breaches of fiduciary duties, hence a Rule designed to prevent them does not satisfy §14(e)'s requirement that the Commission's Rules promulgated under that section be "reasonably designed to prevent" acts and practices that "are fraudulent, deceptive, or manipulative." As the majority itself recognizes, there is no " `general duty between all participants in market transactions to forgo actions based on material, nonpublic information,' " and such duty only " `arises from a specific relationship between two parties.' " Ante, at 16 (quoting Chiarella, 445 U. S., at 233). Unfair disparities in market information, and the potential "stampede effect" of leaks, do not necessarily involve a breach of any duty to anyone, and thus are not proper objects for regulation in the name of "fraud" under §14(e). Likewise (as the Government concedes, Reply Brief for United States 17), "warehousing" is not fraudulent given that the tippees are using the information with the express knowledge and approval of the source of the information. There simply would be no deception in violation of a duty to disclose under such circumstances. Cf. ante, at 9-10 (noting Government's concession that use of bidder's information with bidder's knowledge is not fraudulent under misappropriation theory).

While enhancing the overall efficacy of the Williams Act may be a reasonable goal, it is not one that may be pursued through §14(e), which limits its grant of rulemaking authority to the prevention of fraud, deceit, and manipulation. As we have held in the context of §10(b), "not every instance of financial unfairness constitutes fraudulent activity." Chiarella, 445 U. S., at 232. Because, in the context of misappropriation cases, Rule 14e-3(a) is not a means "reasonably designed" to prevent persons from engaging in fraud "in connection with" a tender offer, it exceeds the Commission's authority under §14(e), and respondent's conviction for violation of that Rule cannot be sustained.

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

As I read the indictment, it does not materially differ from the indictment in Carpenter v. United States, 484 U.S. 19 (1987). There, the Court was unanimous in upholding the mail fraud conviction, id., at 28, despite being evenly divided on the securities fraud counts, id., at 24. I do not think the wording of the indictment in the current case requires a finding of securities fraud in order to find mail fraud. Certainly the jury instructions do not make the mail fraud count dependent on the securities fraud counts. Rather, the counts were simply predicated on the same factual basis, and just because those facts are legally insufficient to constitute securities fraud does not make them legally insufficient to constitute mail fraud. [n.13] I therefore concur in the judgment of the Court as it relates to respondent's mail fraud convictions.


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

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

3 The majority is apparently unimpressed by the example of a misappropriator using embezzled information for personal amusement in a fantasy stock trading game, finding no need for the Commission to "inhibit" such recreational uses. Ante, at 12-13, n. 8. This argument, of course, misses the point of the example. It is not that such a use does or should violate the securities laws yet is not covered by the Commission's theory; rather, the example shows that the misappropriation of information is not "only" or "inherently" tied to securities trading, and hence the misappropriation of information, whatever its ultimate use, fails the Commission's own test under the "in connection with" requirement of §10(b) and Rule 10b-5.

4 Similarly, the majority's assertion that the alternative uses of misappropriated information are not as profitable as use in securities trading, ante, at 12, n. 8, is speculative at best. We have no idea what is the best or most profitable use of misappropriated information, either in this case or generally. We likewise have no idea what is the best use of other forms of misappropriated property, and it is at least conceivable that the best use of embezzled money, or securities themselves, is for securities trading. If the use of embezzled money to purchase securities is "sufficiently detached," ante, at 12, from a securities transaction, then I see no reason why the non "inherent" use of information for securities trading is not also "sufficiently detached" under the Government's theory. In any event, I am at a loss to find in the statutory language any hint of a "best use" requirement for setting the requisite connection between deception and the purchase or sale of securities.

The majority's further claim that it is unremarkable that "a rule suitably applied to the fraudulent uses of certain kinds of information would be stretched beyond reason were it applied to the fraudulent use of money," ante, at 12, is itself remarkable given that the only existing "rule" is Rule 10b-5, which nowhere confines itself to information and, indeed, does not even contain the word. And given that the only "reason" offered by the Government in support of its misappropriation theory applies (or fails to apply) equally to money or to information, the application of the Government's theory in this case is no less "beyond reason" that it would be as applied to financial embezzlement.

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

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

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

8 That the Commission may purport to be interpreting its own rule, rather than the statute, cannot provide it any greater leeway where the Rule merely repeats verbatim the statutory language on which the entire question hinges. Furthermore, as even the majority recognizes, Rule 10b-5 may not reach beyond the scope of §10(b), ante, at 6, and thus the Commission is obligated to explain how its theory fits within its interpretation of §10(b) even if it purports to be interpreting its own derivative rule.

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

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

11 I note that Rule 14e-3(a) also applies to persons trading upon information obtained from an insider of the target company. Insofar as the Rule seeks to prevent behavior that would be fraudulent under the "classical theory" of insider trading, this aspect of my analysis would not apply. As the majority notes, however, the Government "could not have prosecuted O'Hagan under the classical theory," ante, at 8, n. 5, hence this proviso has no application to the present case.

12 Even where the information is obtained from an agent of the bidder, and the tippee claims not to have known that the tipper violated a duty, there is still no justification for Rule 14e-3(a). First, in such circumstances the tipper himself would have violated his fiduciary duty and would be liable under the misappropriation theory, assuming that theory were valid. Facing such liability, there is no reason to suspect that the tipper would gratuitously protect the tippee. And if the tipper accurately testifies that the tippee was (falsely) told that the information was passed on without violating the tipper's own duties, one can question whether the tippee has in fact done anything illegal, even under the Commission's misappropriation theory. Given that the fraudulent breach of fiduciary duty would have been complete at the moment of the tip, the subsequent trading on that information by the tippee might well fail even the Commission's own construction of the "in connection with" requirement. See supra, at 5-8. Thus, even if the tipper might, in some circumstances, be inclined to protect the tippee, see ante, at 32, n. 20, it is doubtful that the tippee would have violated the misappropriation theory in any event, and thus preventing such nonviolations cannot justify Rule 14e-3(a). Second, even were this scenario a legitimate concern, it would at most justify eliminating the requirement that the tippee "know" about the breach of duty. It would not explain Rule 14e-3(a)'s elimination of the requirement that there be such a breach.

13 While the majority may find it strange that the "mail fraud net" is broader reaching than the securities fraud net, ante, at 34, n. 25, any such supposed strangeness--and the resulting allocation of prosecutorial responsibility between the Commission and the various United States Attorneys--is no business of this Court, and can be adequately addressed by Congress if it too perceives a problem regarding jurisdictional boundaries among the Nation's prosecutors. That the majority believes that, upon shifting from securities fraud to mail fraud prosecutions, the "practical consequences for individual defendants might not be large," ibid., both undermines the supposed policy justifications for today's decision and makes more baffling the majority's willingness to go to such great lengths to save the Commission from itself.