903 F.2d 75 (2nd Cir. 1990), 309, United States v. Chestman
|Docket Nº:||309, Docket 89-1276.|
|Citation:||903 F.2d 75|
|Party Name:||UNITED STATES of America, Appellee, v. Robert CHESTMAN, Defendant-Appellant.|
|Case Date:||May 02, 1990|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued Nov. 1, 1989.
Elkan Abramowitz, New York City (Alan J. Brudner, Obermaier, Morvillo & Abramowitz, P.C., New York City, of counsel), for defendant-appellant.
E. Scott Gilbert, Asst. U.S. Atty., New York City (Benito Romano, U.S. Atty. for S.D.N.Y., David E. Brodsky, Asst. U.S. Atty., New York City, and Daniel L. Goelzer, Gen. Counsel, Richard A. Kirby, Sr. Litigation Counsel, Andrew S. Bennett, Atty., S.E.C. Washington, D.C., of counsel), for appellee.
Before MINER and MAHONEY, Circuit Judges, and CARMAN, Judge. [*]
MINER, Circuit Judge:
Defendant-appellant Robert Chestman appeals from a judgment of conviction entered May 9, 1989, after a jury trial, in the United States District Court for the Southern District of New York (Walker, J.). Chestman was convicted of ten counts of securities fraud in violation of 15 U.S.C. Secs. 78j(b) ("section 10(b)"), 78ff (1988), 18 U.S.C. Sec. 2 (1988), and 17 C.F.R. Sec. 240.10b-5 (1988) ("rule 10b-5"); ten counts of fraudulent trading in connection with a tender offer in violation of 15 U.S.C. Secs. 78n(e) ("section 14(e)"), 78ff, 18 U.S.C. Sec. 2, and 17 C.F.R. Sec. 240.14e-3 ("rule 14e-3"); ten counts of mail fraud in violation of 18 U.S.C. Secs. 1341, 2; and one count of perjury in violation of 18 U.S.C. Sec. 1621.
On appeal Chestman contends that 1) the government failed to prove either a misappropriation of nonpublic information or the existence of a relationship of trust and confidence sufficient to establish the requisite duty under rule 10b-5; 2) the mail
fraud conviction must be reversed because the alleged victims lacked a cognizable property interest; 3) his perjury conviction was not supported by sufficient evidence; and 4) his conviction under rule 14e-3 was improper because the Securities and Exchange Commission (SEC) exceeded its rulemaking authority in promulgating the rule.
The judgment of conviction is reversed for the reasons that follow.
Robert Chestman was a stockbroker and financial advisor for the brokerage house of Gruntal & Co. (Gruntal). In 1982 Chestman met with Keith Loeb to discuss Loeb's transfer of various brokerage accounts to Gruntal with the aim of consolidating his accounts, specifically his holdings in Waldbaum, Inc. (Waldbaum), a public company with shares trading in the over-the-counter market. At that time, Loeb indicated that his wife, Susan, was the niece of Ira Waldbaum, the president and controlling shareholder of Waldbaum. Ira and his immediate family owned approximately 51% of the outstanding Waldbaum stock. Ira's sister, Shirley Witkin, owned a large block of the stock of Waldbaum, and her children, including Susan Loeb, owned less than 1%. During the course of Chestman's relationship with Loeb, Chestman executed for him several transactions involving Waldbaum restricted and common stock. In order to facilitate some of the trades, Loeb had to send Chestman a copy of his wife's birth certificate, which indicated that Susan Loeb was the daughter of Shirley Waldbaum Witkin.
In November 1986, Ira Waldbaum entered into negotiations for the sale of Waldbaum to the Great Atlantic and Pacific Tea Company, Inc. (A & P). A & P and Waldbaum executed a stock purchase agreement on November 21 requiring Ira, as attorney-in-fact for the Waldbaum family stockholders, to tender a controlling block of Waldbaum shares to A & P in exchange for payment of $50 per share. Ira told Shirley he would tender her shares as part of the sale to enable her to avoid the administrative problems of tendering after the public announcement. He also cautioned her "that [it was] not to be discussed" and was to remain confidential. She turned the stock over to Ira on November 24.
Susan Loeb became concerned when she could not locate her mother at home on the morning of November 24. When she spoke to her mother later that day, her mother revealed that she had gone out to turn the shares over to Ira. Mrs. Witkin told her daughter about the impending sale and stated that "it was very important that [she] didn't tell anybody about it because it could ruin the sale. And that financially it was going to be a beneficial thing." She further told Susan not to tell anyone except her husband. The next day, Susan told her husband about the sale and admonished him not to tell anyone because "it could possibly ruin the sale."
On November 26, Keith Loeb telephoned Chestman at 8:58 a.m. but was unable to contact him. The call from Loeb and the message "asap" was recorded on a message slip. Loeb testified that he spoke to Chestman by telephone from his factory in New Jersey sometime between 9 a.m. and 10:30 a.m., when he left for his office in New York City. Loeb told Chestman that he "had some definite, some accurate information" that Waldbaum was being sold at a "substantially higher" price than the market value of its stock. Loeb "asked [Chestman] what he thought I should do" with the information, but Chestman refused to give him a definite answer.
At 9:49 a.m. Chestman purchased 3000 shares of Waldbaum for himself at $24.65 per share. Between 11:31 a.m. and 12:35 p.m. Chestman purchased a total of 8000 shares for his discretionary accounts at prices ranging between $25.75 and $26.00 per share. Included in these purchases were 1000 shares for the Loeb account. He recorded all the discretionary account trades on his desk blotter but did not write Loeb's name next to the trade for the Loeb account.
Loeb testified that he again contacted Chestman before 4:00 p.m. and ordered the purchase of 1000 shares. Chestman denied
having spoken to Loeb before 9:49 a.m. and did not recall an order from Loeb later in the afternoon. Chestman's administrative assistant testified that Loeb called around 9 or 10 a.m., that he called a second time in the "late morning" or "early afternoon," and that, as of the second call, Loeb still had not spoken to Chestman.
The tender offer was announced at the close of trading on November 26, and the price of Waldbaum shares rose to $49.00 on the next trading day. On the following Saturday, Loeb received the confirmation slip, feigning surprise about the purchase in the presence of his wife.
In December, Keith Loeb learned that the National Association of Securities Dealers had commenced an investigation into the Waldbaum transactions. Loeb contacted Chestman who, according to Loeb, attempted to quell his fears. Chestman claimed he bought the stock for Loeb based upon research. Thereafter, Chestman allegedly asked Loeb about his "position," and Loeb stated "I guess it's the same thing."
On April 3, 1987, Loeb learned he was likely to be subpoenaed by the SEC. Loeb immediately contacted Chestman, who again stated that he bought the stock on the basis of his research. A similar conversation occurred on April 7. Loeb eventually entered into a cooperation agreement with the government by the terms of which he disgorged profits from 1000 shares and paid an additional fine.
Chestman appeared before the SEC in connection with the investigation on April 15, 1987. He testified that he did not recall speaking with Loeb on the morning of November 26 or receiving inside information. He asserted that the purchases of November 26 were the product of research, consistent with his previous purchases of Waldbaum and other retail food stocks and in accord with reports in trade publications and the unusually high trading volume of the stock on November 25.
At trial, Chestman maintained the position he had taken before the SEC. The jury convicted Chestman of ten counts of securities fraud, in violation of section 10(b) and rule 10b-5; ten counts of mail fraud; ten counts of fraud in connection with a tender offer under section 14(e) and rule 14e-3; and one count of perjury in connection with his testimony before the SEC.
I. Securities Fraud
Chestman was convicted on 10 counts charging him with violations of section 10(b) and rule 10b-5. With regard to the 1000 shares purchased on behalf of Keith Loeb, Chestman was convicted in Count 2 of aiding and abetting Loeb in misappropriating material non-public information in breach of Loeb's duty to the Waldbaum family. With regard to the purchases he made for himself and customers other than Loeb, Chestman was convicted on the remaining 9 counts for trading as a "tippee" of the same material non-public information purportedly appropriated by Loeb in breach of the duty of trust and confidence by which he was bound.
Rule 10b-5, promulgated pursuant to the rulemaking authority delegated under section 10(b) of the Securities Exchange Act, 15 U.S.C. Sec. 78j(b), makes it "unlawful for any person ... [t]o engage in any act ... which operates ... as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. Sec. 240.10b-5 (1988). Fraudulent securities practices of all kinds are encompassed by the rule, see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), which must be construed "not technically and restrictively, but flexibly to effectuate its remedial purposes." Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972) (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195, 84 S.Ct. 275, 284, 11 L.Ed.2d 237 (1963)). Included in the prohibited practices is the misappropriation of "valuable nonpublic information entrusted to [a person] in the utmost confidence." SEC v. Materia, 745 F.2d 197, 201 (2d Cir.1984), cert. denied, 471 U.S...
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