445 U.S. 222 (1980)
In 1975 and 1976 Vincent Chiarella worked as a markup man in the New York composing room of Pandick Press, a financial printer.1
Among the documents he handled were five announcements of corporate takeover bids.2 The identities of the acquiring and target corporations were concealed by blank spaces or false names.3 The true names were sent to the printer on the night of the final printing.4
Chiarella deduced the names of the target companies from other information contained in the documents.5 Without disclosing his knowledge, Chiarella purchased stock in the target companies.6 He sold the shares immediately after the takeover attempts were made public.7
By this method he realized a gain of slightly more than $30,000 in the course of fourteen months.8 The Securities and Exchange Commission subsequently began an investigation of his trading activities.9
In May 1977 Chiarella entered into a consent decree with the Commission in which he agreed to return his profits to the sellers of the shares.10 On the same day he was discharged by Pandick Press.11 In January 1978 he was indicted on seventeen counts of violating § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.12
After he unsuccessfully moved to dismiss the indictment, he was tried and convicted on all counts in the District Court.13 The Court of Appeals for the Second Circuit affirmed the conviction.14 The Supreme Court granted certiorari.15
Whether a person who learns from the confidential documents of one corporation that it is planning an attempt to secure control of a second corporation violates § 10(b) of the Securities Exchange Act of 1934 if he fails to disclose the impending takeover before trading in the target company's securities?16
No. Chiarella was not a corporate insider of the target companies.19 He received no confidential information from them.20 He had no prior dealings with the sellers.21 He was not their agent.22
He was not a fiduciary in whom the sellers had placed trust and confidence.23 The jury instructions permitted conviction if Chiarella willfully failed to inform sellers that he knew of a forthcoming takeover bid.24 The instructions effectively imposed a duty to the market as a whole rather than a specific relationship.25
Chiarella's conviction cannot stand because no duty to disclose arose from his relationship with the sellers.26
Related opinions on this issue
Justice Stevens agreed with the Court that Chiarella owed no duty of disclosure to the sellers of the target company securities.27 He noted that the conviction rested on the erroneous premise that Chiarella did owe them such a duty, and that the judgment of the Court of Appeals must therefore be reversed.28 Justice Stevens emphasized that the Court correctly left open the question whether the petitioner's breach of his duty of silence owed to the acquiring companies could give rise to criminal liability under Rule 10b-5.29
He observed that respectable arguments could be made on both sides of that issue.30 On one hand, breach of duty to the acquiring companies might constitute fraud in connection with the purchase or sale of securities.31 On the other hand, since the companies were not purchasers or sellers, it could be argued no actionable violation occurred.32
Justice Stevens concluded that the Court wisely left the resolution for another day and joined the Court's opinion.33 He stressed that the decision does not place any stamp of approval on Chiarella's actions or hold that similar conduct must be considered lawful in the future.34
Whether a duty to disclose under § 10(b) arises from the mere possession of nonpublic market information?35
No. The Court of Appeals had held that anyone who regularly receives material nonpublic information may not use that information to trade without an affirmative duty to disclose.38 This reasoning suffers from two defects.39 First, not every instance of financial unfairness constitutes fraudulent activity under § 10(b).40 Second, the element required to make silence fraudulent, a duty to disclose, is absent when the trader is a complete stranger who dealt with the sellers only through impersonal market transactions.41
No duty could arise from Chiarella's relationship with the sellers.42 He had no prior dealings with them.43 He was not a person in whom the sellers had placed their trust and confidence.44 Formulation of a broad duty between all participants in market transactions to forgo actions based on material nonpublic information departs radically from the established doctrine that duty arises from a specific relationship between two parties.45
Such a broad duty should not be undertaken absent explicit evidence of congressional intent.46
No duty to disclose arises from mere possession of nonpublic market information.47
Related opinions on this issue
Justice Brennan agreed that a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.48 He could not subscribe to the suggestion that no violation could be made out absent a breach of some duty arising out of a fiduciary relationship between buyer and seller.49 He stated that a person violates § 10(b) whenever he improperly obtains or converts to his own benefit nonpublic information which he then uses in connection with the purchase or sale of securities.50
Whether a conviction under § 10(b) and Rule 10b-5 can be affirmed on the basis of a theory that the defendant breached a duty to the acquiring corporation when that theory was not submitted to the jury?51
A criminal conviction cannot be affirmed on the basis of a theory not presented to the jury.52
No. In its brief to the Supreme Court the United States offered an alternative theory. It argued that Chiarella had breached a duty to the acquiring corporation. Chiarella acted upon information that he obtained by virtue of his position as an employee of a printer employed by the corporation.53 The jury was instructed only on the theory that Chiarella failed to disclose material nonpublic information to the sellers.54 The jury was not instructed on the nature or elements of a duty owed by Chiarella to anyone other than the sellers.55
Because a criminal conviction cannot be affirmed on the basis of a theory not presented to the jury, the Court declined to speculate whether such a duty exists or whether a breach constitutes a violation of § 10(b).56
The conviction cannot be affirmed on the alternative theory that Chiarella breached a duty to the acquiring corporation.57
Related opinions on this issue
Chief Justice Burger believed the jury instructions properly charged a violation of § 10(b) and Rule 10b-5 under a misappropriation theory.58 He read the instructions as requiring the jury to find that Chiarella obtained his trading advantage by misappropriating the property of his employer's customers.59 He noted that the charge stated Chiarella wrongfully took advantage of information acquired in the course of his confidential position at Pandick Press.60
He concluded that Chiarella misappropriated valuable nonpublic information entrusted to him in confidence.61 He exploited it by purchasing securities.62 Such conduct violates § 10(b) and Rule 10b-5.63
Joined by Justice Marshall
Justice Blackmun would have upheld the conviction even without resting it on a misappropriation theory.64 He viewed Chiarella's conduct as fraudulent within the meaning of § 10(b) and Rule 10b-5.65 The fraud arose because of his access to confidential material information that the honest investor could not legally obtain.66
He argued that the Court's requirement of a special relationship akin to fiduciary duty unduly minimizes the importance of access to confidential information.67 He stated that the approach places the federal securities laws in the rearguard of developments recognizing the unfairness of trading on structural informational advantages.68