## Facts

- Charles Zandford, a stockbroker, persuaded William Wood, an elderly customer, to open a joint investment account with Wood’s adult daughter, who had significant mental disabilities.
- The Woods gave Zandford discretionary authority to manage the account and a general power of attorney to execute securities transactions without prior approval.
- From 1987 to 1990, Zandford sold securities in the Woods’ account and liquidated additional mutual fund shares held outside the account.
- Zandford diverted the sales proceeds for his own use, allegedly misappropriating approximately $343,000.
- Zandford was federally indicted and convicted on 13 counts of wire fraud based on the scheme involving sales of the Woods’ securities and diversion of proceeds.
- After the criminal case, the SEC filed a civil enforcement action alleging violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and § 17(a) of the Securities Act of 1933.
- The district court granted partial summary judgment for the SEC on the § 10(b)/Rule 10b-5 theory (excluding a churning claim).
- The Fourth Circuit reversed, holding the fraud was not “in connection with” the purchase or sale of a security because the scheme was to steal assets rather than to defraud in a securities transaction.

## Issues

1. Whether a broker’s scheme to sell a customer’s securities and misappropriate the proceeds constitutes fraud “in connection with the purchase or sale of any security” under § 10(b) and Rule 10b-5.

## Decision

- The Supreme Court unanimously reversed the Fourth Circuit.
- The Court held that, assuming the SEC’s allegations were true, Zandford’s conduct satisfied the “in connection with” requirement of § 10(b) and Rule 10b-5.
- The Court treated the alleged conduct as a single fraudulent scheme in which each securities sale was a step that enabled the misappropriation.
- The case was returned for further proceedings consistent with the holding that the SEC’s § 10(b)/Rule 10b-5 claim could proceed.

## Legal Principles

- § 10(b) should be construed flexibly in light of the securities laws’ remedial purpose of protecting investors and maintaining honest markets.
- Fraud is “in connection with” a securities transaction when the securities transactions and the deceptive conduct coincide as part of a single scheme.
- A § 10(b) violation does not require a misrepresentation about a particular security’s value; deceptive conduct can qualify even when the wrong is the broker’s misuse of trading authority.
- A broker’s sales of customer securities with intent to misappropriate the proceeds can fall within § 10(b) and Rule 10b-5 because the trades are the mechanism by which the fraud is executed.
- An agency’s reasonable interpretation of ambiguous statutory text, expressed through formal adjudicative positions, may warrant deference.

## Conclusion

The Court held that a broker who executes securities sales as part of a plan to steal the proceeds commits fraud “in connection with” the purchase or sale of securities, bringing the conduct within § 10(b) and Rule 10b-5.


SEC v. Zandford, 535 U.S. 813 (2002)