## Facts

- Waldbaum, Inc., a publicly traded supermarket chain, was controlled by Ira Waldbaum.
- In 1986, Ira agreed to a tender offer by A&P at a substantial premium and told certain family members, instructing confidentiality and offering to help tender their shares.
- Ira’s sister, Shirley Witkin, told her daughter, Susan Loeb, about the transaction and instructed secrecy; Susan told her husband, Keith Loeb, likewise stressing secrecy.
- Keith Loeb, a client of stockbroker Robert Chestman, told Chestman that Waldbaum would be acquired at a substantially higher price than current market.
- Before any public announcement, Chestman purchased Waldbaum stock for himself and for customers (including Loeb), then profited when the tender offer became public and the stock price increased.
- After an SEC investigation began, Loeb cooperated, disgorged profits, and paid a civil penalty; Chestman was criminally prosecuted.

## Issues

1. Whether SEC Rule 14e-3(a), promulgated under Exchange Act § 14(e), validly prohibits trading on material nonpublic tender-offer information without requiring proof of a fiduciary breach.
2. Whether, under Exchange Act § 10(b) and Rule 10b-5, misappropriation liability required proof that Loeb breached a fiduciary or similar relationship of trust and confidence to the information’s source, supporting tippee or aiding-and-abetting liability for Chestman.
3. Whether mail-fraud convictions could be sustained on a misappropriation-based “scheme to defraud” theory absent proof of such a duty.

## Decision

- The en banc court affirmed Chestman’s convictions under § 14(e) and Rule 14e-3(a) for trading in connection with a tender offer while in possession of material nonpublic information.
- The court reversed the § 10(b)/Rule 10b-5 convictions because the government failed to prove Loeb owed a fiduciary or fiduciary-like duty (or similar trust-and-confidence relationship) to the Waldbaum family or to his wife regarding the information.
- The court reversed the mail-fraud convictions because they rested on the same unproven duty premise as the misappropriation theory.
- The perjury conviction remained reversed (not altered in the en banc disposition).

## Legal Principles

- Under § 14(e), the SEC has broad authority to define and prevent fraudulent, deceptive, or manipulative acts in tender offers and may adopt prophylactic rules.
- Rule 14e-3(a) can prohibit trading on material nonpublic tender-offer information without requiring proof that the trader (or tipper) breached a fiduciary duty to the information source.
- Criminal liability under § 10(b) misappropriation theory requires misappropriation of confidential information through a breach of a fiduciary duty or a comparable relationship of trust and confidence.
- Ordinary family ties or marriage, without additional indicia of a legally cognizable duty (such as reliance, discretion, dominance, or control), do not automatically create the fiduciary-like duty required for § 10(b) misappropriation.
- Tippee (and aiding-and-abetting) liability under § 10(b) depends on an underlying breach by the tipper and the tippee’s knowledge (or reason to know) of that breach; absent a breach, tippee liability fails.
- Mail-fraud theories premised on misappropriation of confidential information similarly fail where the government cannot prove a duty of trust and confidence to the alleged victim.

## Conclusion

The Second Circuit upheld the SEC’s tender-offer trading prohibition under Rule 14e-3(a) as a valid § 14(e) rule that does not require a fiduciary-breach showing, but it reversed Chestman’s Rule 10b-5 and mail-fraud convictions because the government did not prove that the tipper’s family or marital relationships created the fiduciary-like duty necessary for misappropriation-based fraud.


United States v. Chestman, 947 F.2d 551 (2d Cir. 1991) (en banc)