## Facts

- Manhattan Casualty Company, a New York insurer, was placed in liquidation; the Superintendent of Insurance sued as liquidator on Manhattan’s behalf.
- Bankers Life agreed to sell all Manhattan stock to Begole for $5,000,000.
- Begole and Bourne allegedly planned to fund the stock purchase using Manhattan’s own assets rather than their own money.
- Through financing arrangements involving Irving Trust and a note broker, a $5,000,000 check was obtained to close the stock purchase, and Sweeny was installed as Manhattan’s president after Begole gained control.
- Manhattan then sold its U.S. Treasury bonds for approximately $4.85 million; together with additional Manhattan cash, $5,000,000 was credited to Manhattan’s account and used to pay off the $5,000,000 check used to buy Manhattan’s stock.
- To conceal the depletion of Manhattan’s assets, Irving Trust issued another $5,000,000 check to Manhattan, which was used to obtain a $5,000,000 certificate of deposit in Manhattan’s name at Belgian-American Bank.
- The certificate of deposit allegedly was a sham asset because it was assigned away and used as collateral for another entity’s loan, leaving Manhattan effectively stripped of assets.

## Issues

1. Whether a complaint states a claim under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 when a corporation is allegedly injured by deception tied to the sale of securities it owned, even if the alleged wrong is misappropriation of sale proceeds rather than a distorted market transaction.
2. What satisfies the requirement that fraud occur “in connection with the purchase or sale of any security” under § 10(b) and Rule 10b-5.
3. Whether a corporate seller of securities may qualify as a defrauded seller for purposes of § 10(b) and Rule 10b-5.

## Decision

- The Supreme Court unanimously reversed the Second Circuit and remanded.
- The Court held the complaint adequately alleged deception “in connection with” the sale of securities because the bond sale and handling of proceeds were used as part of the fraudulent scheme that injured Manhattan.
- The Court rejected limitations that would confine § 10(b) and Rule 10b-5 to cases involving a defrauded “traditional” investor, exchange trading, or market-tainting misconduct.

## Legal Principles

- § 10(b) and Rule 10b-5 reach the use of deceptive devices employed in connection with a securities purchase or sale, even if the alleged fraud centers on the diversion or misappropriation of the transaction’s proceeds.
- The “in connection with” element is met where a securities transaction is an integral step in a deceptive scheme that causes loss to the purchaser or seller, including a corporate seller.
- Coverage does not depend on whether the transaction occurred on an exchange or in an organized market.
- It is not a defense that the ultimate economic harm may fall on the corporation’s creditors or policyholders rather than on outside market investors.

## Conclusion

The Court held that federal securities antifraud law can apply when a corporation is allegedly looted through deceptive conduct tied to the sale of its securities holdings, because misappropriation of proceeds effected through deception can constitute fraud “in connection with” a securities transaction under § 10(b) and Rule 10b-5.


Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971)