Sec v. Zandford

Citation535 U.S. 813
Decision Date03 June 2002
Docket NumberNo. 01-147.,01-147.
PartiesSECURITIES AND EXCHANGE COMMISSION <I>v.</I> ZANDFORD.
CourtUnited States Supreme Court

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Respondent broker persuaded William Wood, an elderly man, to open a joint investment account for himself and his mentally retarded daughter. The Woods gave respondent discretion to manage the account and a general power of attorney to engage in securities transactions without their prior approval. When Mr. Wood died a few years later, all of the money he had entrusted to respondent was gone. Respondent was subsequently indicted on federal wire fraud charges for, inter alia, selling securities in the Woods' account and making personal use of the proceeds. The Securities and Exchange Commission (SEC) then filed a civil complaint in the same District Court, alleging that respondent had violated § 10 of the Securities Exchange Act of 1934 (Act) and the SEC's Rule 10b-5 by engaging in a scheme to defraud the Woods and misappropriating their securities without their knowledge or consent. After respondent's conviction in the criminal case, the District Court granted the SEC summary judgment in the civil case. The Fourth Circuit reversed and directed the District Court to dismiss the complaint, holding that neither the criminal conviction nor the allegations in the complaint established that respondent's fraud was "in connection with the purchase or sale of any security." Because the scheme was to steal the Woods' assets, not to manipulate a particular security, and it had no relationship to market integrity or investor understanding, the court held that there was no § 10(b) violation.

Held: Assuming that the complaint's allegations are true, respondent's conduct was "in connection with the purchase or sale of any security." Among Congress' objectives in passing the Act was to ensure honest securities markets and thereby promote investor confidence after the 1929 market crash. Congress sought "`to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.'" Affiliated Ute Citizens of Utah v. United States, 406 U. S. 128, 151. To effectuate its remedial purposes, the Act should be construed flexibly, not technically and restrictively. The SEC has consistently adopted a broad reading of "in connection with the purchase or sale of any security," maintaining that a broker who accepts payment for securities that he never intends to deliver, or who sells securities with intent to misappropriate the proceeds, violates § 10(b) and Rule 10(b)-5. This interpretation of the statute's ambiguous text in the context of formal adjudication is entitled to deference. See United States v. Mead Corp., 533 U. S. 218, 229-230. Neither the SEC nor this Court has ever held that there must be a misrepresentation about a particular security's value in order to run afoul of the Act. This Court disagrees with respondent's claim that his misappropriation of the proceeds, though fraudulent, does not have the requisite connection with the sales, which were perfectly lawful. The securities sales and respondent's practices were not independent events. Taking the complaint's allegations as true, each sale was made to further his fraudulent scheme; and each was deceptive because it was neither authorized by, nor disclosed to, the Woods. In the aggregate, the sales are properly viewed as a course of business that operated as a fraud or deceit on a stockbroker's customer. As in Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6; Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc., 532 U. S. 588; and United States v. O'Hagan, 521 U. S. 642, all cases in which this Court found a § 10(b) violation, the SEC complaint here describes a fraudulent scheme in which the securities transactions and breaches of fiduciary duty coincide. Those breaches were therefore "in connection with" securities sales within § 10(b)'s meaning. Pp. 819-825.

238 F. 3d 559, reversed and remanded.

STEVENS, J., delivered the opinion for a unanimous Court.

Matthew D. Roberts argued the cause for petitioner. With him on the briefs were Acting Solicitor General Clement, Deputy Solicitor General Kneedler, David M. Becker, Jacob H. Stillman, Richard M. Humes, Katharine B. Gresham, and Susan S. McDonald.

Steven H. Goldblatt argued the cause for respondent. With him on the brief was Roy T. Englert, Jr.* JUSTICE STEVENS delivered the opinion of the Court.

The Securities and Exchange Commission (SEC) filed a civil complaint alleging that a stockbroker violated both § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. § 78j(b), and the SEC's Rule 10b-5, by selling his customer's securities and using the proceeds for his own benefit without the customer's knowledge or consent. The question presented is whether the alleged fraudulent conduct was "in connection with the purchase or sale of any security" within the meaning of the statute and the Rule.

I

Between 1987 and 1991, respondent was employed as a securities broker in the Maryland branch of a New York brokerage firm. In 1987, he persuaded William Wood, an elderly man in poor health, to open a joint investment account for himself and his mentally retarded daughter. According to the SEC's complaint, the "stated investment objectives for the account were `safety of principal and income.'" App. to Pet. for Cert. 27a. The Woods granted respondent discretion to manage their account and a general power of attorney to engage in securities transactions for their benefit without prior approval. Relying on respondent's promise to "conservatively invest" their money, the Woods entrusted him with $419,255. Before Mr. Wood's death in 1991, all of that money was gone.

In 1991, the National Association of Securities Dealers (NASD) conducted a routine examination of respondent's firm and discovered that on over 25 separate occasions, money had been transferred from the Woods' account to accounts controlled by respondent. In due course, respondent was indicted in the United States District Court for the District of Maryland on 13 counts of wire fraud in violation of 18 U. S. C. § 1343. App. to Pet. for Cert. 40a. The first count alleged that respondent sold securities in the Woods' account and then made personal use of the proceeds. Id., at 42a. Each of the other counts alleged that he made wire transfers between Maryland and New York that enabled him to withdraw specified sums from the Woods' accounts. Id., at 42a-50a. Some of those transfers involved respondent writing checks to himself from a mutual fund account held by the Woods, which required liquidating securities in order to redeem the checks. Respondent was convicted on all counts, sentenced to prison for 52 months, and ordered to pay $10,800 in restitution.

After respondent was indicted, the SEC filed a civil complaint in the same District Court alleging that respondent violated § 10(b) and Rule 10b-5 by engaging in a scheme to defraud the Woods and by misappropriating approximately $343,000 of the Woods' securities without their knowledge or consent. Id., at 27a. The SEC moved for partial summary judgment after respondent's criminal conviction, arguing that the judgment in the criminal case estopped respondent from contesting facts that established a violation of § 10(b).1 Respondent filed a motion seeking discovery on the question whether his fraud had the requisite "connection with" the purchase or sale of a security. The District Court refused to allow discovery and entered summary judgment against respondent. It enjoined him from engaging in future violations of the securities laws and ordered him to disgorge $343,000 in ill-gotten gains.

The Court of Appeals for the Fourth Circuit reversed the summary judgment and remanded with directions for the District Court to dismiss the complaint. 238 F. 3d 559 (2001). It first held that the wire fraud conviction, which only required two findings — (1) that respondent engaged in a scheme to defraud and (2) that he used interstate wire communications in executing the scheme — did not establish all the elements of a § 10(b) violation. Specifically, the conviction did not necessarily establish that his fraud was "in connection with" the sale of a security. Id., at 562.2 The court then held that the civil complaint did not sufficiently allege the necessary connection because the sales of the Woods' securities were merely incidental to a fraud that "lay in absconding with the proceeds" of sales that were conducted in "a routine and customary fashion," id., at 564. Respondent's "scheme was simply to steal the Woods' assets" rather than to engage "in manipulation of a particular security."

Id., at 565. Ultimately, the court refused "to stretch the language of the securities fraud provisions to encompass every conversion or theft that happens to involve securities." Id., at 566. Adopting what amounts to a "fraud on the market" theory of the statute's coverage, the court held that without some "relationship to market integrity or investor understanding," there is no violation of § 10(b). Id., at 563.

We granted the SEC's petition for a writ of certiorari, 534 U. S. 1015 (2001), to review the Court of Appeals' construction of the phrase "in connection with the purchase or sale of any security." Because the Court of Appeals ordered the complaint dismissed rather than remanding for reconsideration, we assume the allegations contained therein are true and affirm that disposition only if no set of facts would entitle petitioner to relief. See Hartford Fire Ins. Co. v. California, 509 U. S. 764, 811 (1993). We do not reach the question whether the record supports the District Court's grant of summary judgment in the SEC's favor — a question that requires all...

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