947 F.2d 551 (2nd Cir. 1991), 309, United States v. Chestman

Docket Nº:309, Docket 89-1276.
Citation:947 F.2d 551
Party Name:UNITED STATES of America, Appellee, v. Robert CHESTMAN, Defendant-Appellant.
Case Date:October 07, 1991
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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947 F.2d 551 (2nd Cir. 1991)

UNITED STATES of America, Appellee,

v.

Robert CHESTMAN, Defendant-Appellant.

No. 309, Docket 89-1276.

United States Court of Appeals, Second Circuit

October 7, 1991

Argued Nov. 9, 1990.

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Elkan Abramowitz, New York City (Alan J. Brudner, Barbara L. Hartung, Alan P. Williamson, Morvillo, Abramowitz & Grand, New York City, of counsel), for appellant.

David E. Brodsky, Asst. U.S. Atty., S.D.N.Y. (Roger S. Hayes, Acting U.S. Atty. for S.D.N.Y., Gerard E. Lynch, Asst. U.S. Atty., S.D.N.Y., New York City, of counsel), for appellee.

Paul Gonson, Sol., S.E.C., Washington, D.C. (James R. Doty, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Richard A. Kirby, Sr. Litigation Counsel, Brian Bellardo, Sr. Sp. Counsel, Randall W. Quinn, Rada L. Potts, S.E.C., Washington, D.C., of counsel), for amicus curiae S.E.C.

Before OAKES, Chief Judge, FEINBERG, [*] MESKILL, NEWMAN, KEARSE, CARDAMONE, WINTER, PRATT, MINER, ALTIMARI, MAHONEY and McLAUGHLIN, Circuit Judges.

ON REHEARING IN BANC

MESKILL, Circuit Judge, joined by CARDAMONE, PRATT, MINER and ALTIMARI, Circuit Judges:

In this rehearing in banc, we consider for the first time the validity of Rule 14e-3(a), 17 C.F.R. § 240.14e-3(a), which was promulgated by the Securities and Exchange Commission (SEC) under section 14(e) of the 1934 Act, 15 U.S.C. § 78n(e); we then reexamine two familiar landmarks of the securities fraud landscape, section 10(b) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78j(b), and the mail fraud statute, 18 U.S.C. § 1341. The issues spring from the alleged insider trading of defendant Robert Chestman. A jury found Chestman guilty of thirty-one counts of insider trading and perjury: (1) ten counts of fraudulent trading in connection with a tender offer in violation of section 14(e), 18 U.S.C. § 2, and Rule 14e-3(a), 1 (2) ten counts of securities fraud in violation of section 10(b), 18 U.S.C. § 2, and 17 C.F.R. § 240.10b-5 (1988) (Rule 10b-5), (3) ten counts of mail fraud in violation of the mail fraud statute and 18 U.S.C. § 2, and (4) one count of perjury in violation of 18 U.S.C. § 1621. A panel of this Court reversed Chestman's convictions in their entirety. 903 F.2d 75 (2d Cir.1990).

On in banc reconsideration, we conclude that the Rule 14e-3(a) convictions should be affirmed and that the Rule 10b-5 and mail fraud convictions should be reversed. We vacate the panel's decision on all three issues. We did not rehear the appeal from the perjury conviction and, as a result, the panel's reversal of that conviction stands.

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BACKGROUND

Robert Chestman is a stockbroker. Keith Loeb first sought Chestman's services in 1982, when Loeb decided to consolidate his and his wife's holdings in Waldbaum, Inc. (Waldbaum), a publicly traded company that owned a large supermarket chain. During their initial meeting, Loeb told Chestman that his wife was a granddaughter of Julia Waldbaum, a member of the board of directors of Waldbaum and the wife of its founder. Julia Waldbaum also was the mother of Ira Waldbaum, the president and controlling shareholder of Waldbaum. From 1982 to 1986, Chestman executed several transactions involving Waldbaum restricted and common stock for Keith Loeb. To facilitate some of these trades, Loeb sent Chestman a copy of his wife's birth certificate, which indicated that his wife's mother was Shirley Waldbaum Witkin.

On November 21, 1986, Ira Waldbaum agreed to sell Waldbaum to the Great Atlantic and Pacific Tea Company (A & P). The resulting stock purchase agreement required Ira to tender a controlling block of Waldbaum shares to A & P at a price of $50 per share. Ira told three of his children, all employees of Waldbaum, about the pending sale two days later, admonishing them to keep the news quiet until a public announcement. He also told his sister, Shirley Witkin, and nephew, Robert Karin, about the sale, and offered to tender their shares along with his controlling block of shares to enable them to avoid the administrative difficulty of tendering after the public announcement. He cautioned them "that [the sale was] not to be discussed," that it was to remain confidential.

In spite of Ira's counsel, Shirley told her daughter, Susan Loeb, on November 24 that Ira was selling the company. Shirley warned Susan not to tell anyone except her husband, Keith Loeb, because disclosure could ruin the sale. The next day, Susan told her husband about the pending tender offer and cautioned him not to tell anyone because "it could possibly ruin the sale."

The following day, November 26, Keith Loeb telephoned Robert Chestman at 8:59 a.m. Unable to reach Chestman, Loeb left a message asking Chestman to call him "ASAP." According to Loeb, he later spoke with Chestman between 9:00 a.m. and 10:30 a.m. that morning and told Chestman that he had "some definite, some accurate information" that Waldbaum was about to be sold at a "substantially higher" price than its market value. Loeb asked Chestman several times what he thought Loeb should do. Chestman responded that he could not advise Loeb what to do "in a situation like this" and that Loeb would have to make up his own mind.

That morning Chestman executed several purchases of Waldbaum stock. At 9:49 a.m., he bought 3,000 shares for his own account at $24.65 per share. Between 11:31 a.m. and 12:35 p.m., he purchased an additional 8,000 shares for his clients' discretionary accounts at prices ranging from $25.75 to $26.00 per share. One of the discretionary accounts was the Loeb account, for which Chestman bought 1,000 shares.

Before the market closed at 4:00 p.m., Loeb claims that he telephoned Chestman a second time. During their conversation Loeb again pressed Chestman for advice. Chestman repeated that he could not advise Loeb "in a situation like this," but then said that, based on his research, Waldbaum was a "buy." Loeb subsequently ordered 1,000 shares of Waldbaum stock.

Chestman presented a different version of the day's events. Before the SEC and at trial, he claimed that he had purchased Waldbaum stock based on his own research. He stated that his purchases were consistent with previous purchases of Waldbaum stock and other retail food stocks and were supported by reports in trade publications as well as the unusually high trading volume of the stock on November 25. He denied having spoken to Loeb about Waldbaum stock on the day of the trades.

At the close of trading on November 26, the tender offer was publicly announced. Waldbaum stock rose to $49 per share the next business day. In December 1986 Loeb learned that the National Association

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of Securities Dealers had started an investigation concerning transactions in Waldbaum stock. Loeb contacted Chestman who, according to Loeb, "reassured" him that Chestman had bought the stock for Loeb's account based on his research. Loeb called Chestman again in April 1987 after learning of an SEC investigation into the trading of Waldbaum stock. Chestman again stated that he bought the stock based on research. Similar conversations ensued. After one of these conversations, Chestman asked Loeb what his "position" was, Loeb replied, "I guess it's the same thing." Loeb subsequently agreed, however, to cooperate with the government. The terms of his cooperation agreement required that he disgorge the $25,000 profit from his purchase and sale of Waldbaum stock and pay a $25,000 fine.

A grand jury returned an indictment on July 20, 1988, charging Chestman with the following counts of insider trading and perjury: ten counts of fraudulent trading in connection with a tender offer in violation of Rule 14e-3(a), ten counts of securities fraud in violation of Rule 10b-5, ten counts of mail fraud, and one count of perjury in connection with his testimony before the SEC. The district court thereafter denied Chestman's motion to dismiss the indictment. 704 F.Supp. 451 (S.D.N.Y.1989). After a jury trial, Chestman was found guilty on all counts.

Chestman appealed. He claimed that Rule 14e-3(a) was invalid because the SEC had exceeded its statutory authority in promulgating a rule that dispensed with one of the common law elements of fraud. He also argued that there was insufficient evidence to sustain his Rule 10b-5, mail fraud and perjury convictions.

A panel of this Court reversed Chestman's convictions on all counts, issuing three separate opinions on the Rule 14e-3(a) charges. 903 F.2d 75 (2d Cir.1990). Familiarity with the panel's opinions is assumed.

A majority of the active judges of the Court voted to rehear in banc the panel's decision with respect to the Rule 14e-3(a), Rule 10b-5, and mail fraud convictions. We directed the parties to file additional briefs on these issues and heard oral argument on November 9, 1990.

DISCUSSION

  1. Rule 14e-3(a)

    Chestman challenges his Rule 14e-3(a) convictions on three grounds. He first contends that the SEC exceeded its rulemaking authority when it promulgated Rule 14e-3(a). He then argues that the government presented insufficient evidence to support these convictions. Finally, he contends that his convictions should be overturned on due process notice grounds. We begin with his facial attack on the validity of Rule 14e-3(a).

    1. Validity of Rule 14e-3(a)

    Chestman's first challenge concerns the validity of a rule prescribed by the SEC pursuant to a congressional delegation of rulemaking authority. The question presented is whether Rule 14e-3(a) represents a proper exercise of the SEC's statutory authority. While we have not heretofore addressed this question, several district court judges in this Circuit have...

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