United States v. Carpenter
Citation: 484 U.S. 19 (Supreme Court, 1987)
Facts
R. Foster Winans was a Wall Street Journal reporter who co-wrote the influential “Heard on the Street” column, which routinely moved stock prices. Winans, in breach of the Journal’s confidentiality policy, tipped his roommate and a stockbroker about upcoming columns before they were published. The tippees traded on the advance information and shared profits with Winans. The government charged Winans with securities fraud under Rule 10b-5 and with mail and wire fraud.
Issue
Whether trading on material nonpublic information misappropriated from an employer (not from a corporate insider of the issuer) constitutes securities fraud under Rule 10b-5.
Holding
The Court was evenly divided (4-4) on the § 10(b) misappropriation theory, thereby affirming conviction without establishing a national precedent. However, all eight justices unanimously upheld the mail and wire fraud convictions, holding that confidential business information is a form of “property” whose misappropriation violates the fraud statutes.
Rule
The misappropriation theory — adopted and confirmed by the full Court in United States v. O’Hagan (1997) — holds that a person commits securities fraud under § 10(b) when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information (here, the employer). The deception is practiced on the employer (or source), not the corporate issuer, distinguishing the theory from the classical insider trading theory. O’Hagan: the fraud is in the deception of the source, which occurs in connection with securities trading.
Significance
Carpenter is taught primarily as the precursor to O’Hagan and the springboard for the misappropriation theory that dramatically expanded insider trading liability beyond corporate insiders and their tippees. Together, Carpenter and O’Hagan define the outer limits of Rule 10b-5 insider trading: anyone who misappropriates confidential information and trades on it — even if they have no relationship to the corporation whose securities they trade — may be criminally and civilly liable. The case is also significant for the mail and wire fraud ruling on “property” in intangible confidential information.