791 F.2d 1024 (2d Cir. 1986)
In March 1981, R. Foster Winans began working as a reporter for the Wall Street Journal and one of the writers of the "Heard on the Street" column.1 From December 1981 through May 1983, David Carpenter worked as a news clerk at the Journal.2 Kenneth P. Felis was a stockbroker at Kidder Peabody who had been brought to the firm by Peter Brant, another Kidder Peabody broker and Felis' longtime friend.3
Since February 1981, Dow Jones distributed to all new employees "The Insider Story," a forty-page manual with seven pages devoted to the company's conflicts of interest policy.4 The district court found that both Winans and Carpenter knew company policy deemed all news material gleaned by an employee during the course of employment to be company property and required employees to treat nonpublic information learned on the job as confidential.5
Winans participated in a scheme with Brant, Felis, and Carpenter in which Winans provided the two stockbrokers with securities-related information scheduled to appear in "Heard" columns.6 Based on this advance information the brokers would buy or sell the subject securities. Carpenter, who was involved in a private personal relationship with Winans, served primarily as a messenger between the conspirators.7 Trading accounts were established in the names of Felis, Carpenter, Winans, Brant, David Clark, Western Hemisphere, and Stephen Spratt.8 During 1983 and early 1984, defendants made pre-publication trades on the basis of their advance knowledge of approximately twenty-seven Wall Street Journal "Heard" columns, generating net profits approaching $690,000.9
In November 1983, when Kidder Peabody's Compliance Department noticed a correlation between "Heard" articles and trading in the Felis and Clark accounts, Felis denied any impropriety.10 Felis and Brant moved funds among accounts to conceal the scheme, and Felis advised Stephen Spratt to change account names.11 When the SEC began inquiring, Clark and Brant made misstatements to agency officials, and Carpenter produced false invoices.12 On March 29, 1984, Winans and Carpenter voluntarily testified fully to the SEC.13 After a twenty-day non-jury trial in the United States District Court for the Southern District of New York before Judge Charles E. Stewart, Jr., Winans and Felis were convicted of securities fraud, mail and wire fraud, and conspiracy, while Carpenter was convicted of aiding and abetting.14 The defendants appealed to the Second Circuit.15
Whether a newspaper reporter, a news clerk, and a stockbroker may be held criminally liable under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for misappropriating from the Wall Street Journal material nonpublic information in the form of the newspaper's confidential schedule of forthcoming columns in connection with the purchase and sale of securities?16
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 proscribe an employee's unlawful misappropriation from his employer, a financial newspaper, of material nonpublic information in the form of the newspaper's forthcoming publication schedule, in connection with a scheme to purchase and sell securities to be analyzed or otherwise discussed in future columns in that newspaper.17
Yes. Winans, as an employee of the Wall Street Journal, breached a duty of confidentiality to his employer by misappropriating from the Journal confidential prepublication information regarding the timing and content of certain newspaper columns about which he learned in the course of his employment.18 The district court found that both Winans and Carpenter knew company policy deemed all news material gleaned by an employee during the course of employment to be company property and required employees to treat nonpublic information learned on the job as confidential. The scheme involved pre-publication trades on the basis of advance knowledge of approximately twenty-seven columns, generating net profits approaching $690,000.19
The fraud was perpetrated upon the Journal by sullying its reputation.20
The convictions based on the securities fraud substantive counts are affirmed because the misappropriation theory applies to the conversion of the Journal's confidential schedule in breach of the duty owed to the employer.21
Related opinions on this issue
Since the misappropriation theory cannot be interpreted so expansively as to encompass the activities of these defendants, the convictions for securities fraud should be reversed.22 No confidential securities information imparted by reason of any special relationship was purloined by these defendants.23 The publication schedule of the Wall Street Journal was not the non-public, confidential information stolen by the defendants.24
Harm to reputation, rather than to securities markets or market participants, never has been recognized as a proper subject for redress under section 10(b) or rule 10b-5.25
Whether the use of the Wall Street Journal's interstate mail and wire production and distribution channels in furtherance of a scheme to trade securities on the basis of misappropriated prepublication information supports convictions for mail fraud and wire fraud?26
Confidential and nonpublic commercial information may constitute fraudulently misappropriated property under the mail fraud statute.27 It is sufficient for liability that an employee has failed to disclose to his employer any material information he is under a fiduciary duty to disclose when the non-disclosure could or does result in harm to the employer.28
Yes. The scheme to misappropriate material nonpublic information regarding the Journal's forthcoming publications in breach of the employee's duty of confidentiality to the Journal in connection with securities transactions met the requirements for mail and wire fraud.29 Appellants knew that the use of interstate mail and wire services was a reasonably foreseeable consequence of the scheme.30 The mailings and wirings associated with the publication and distribution of the Wall Street Journal were a normal and customary part of that business.31
The convictions for mail fraud and wire fraud are affirmed because the concealment of material information under a duty to disclose threatened harm to the Journal's reputation for professionalism and integrity.32
Whether Winans and Felis may be convicted of conspiracy to commit securities fraud, mail fraud, wire fraud, and obstruction of justice?33
Yes. Winans and Felis participated in a scheme with Brant and Carpenter.36 Winans agreed to provide the stockbrokers with securities-related information scheduled to appear in Heard columns.37 The district court properly found the requisite agreement and scienter for the conspiracy to commit securities fraud, mail and wire fraud, and obstruction of justice.38
The convictions of Winans and Felis for conspiracy are affirmed except to the extent based on the Spratt trades.39
Whether Carpenter may be convicted of aiding and abetting the commission of securities fraud and mail and wire fraud?40
Yes. Carpenter, who was involved in a private personal relationship with Winans, served primarily as a messenger between the conspirators. He endorsed checks and allowed Winans to trade in his name in the Merrill Lynch and Schwab accounts.43 These actions satisfied the distinct standards for aiding and abetting despite his acquittal on the conspiracy charge.44
Carpenter's conviction for aiding and abetting is affirmed.45
Whether Winans' conviction for conspiracy extends to trades executed by Felis on behalf of Stephen Spratt?46
Conspiracy liability extends only to acts within the scope of the unlawful agreement or that were reasonably foreseeable consequences of it.47
No. The district court found that Felis used the information obtained from Winans beyond the scope of the original agreement.48 The record evidence supports the conclusion that Winans' trading agreement with Felis was limited to specific persons.49 Winans may not be found liable as to Felis' trades with or on behalf of Spratt.50
Winans' conviction for conspiracy involving the Spratt trades is reversed.51