## Facts

- Neil T. Naftalin, a broker-dealer firm president, executed a fraudulent short-selling scheme.
- He placed orders through multiple brokers to sell shares he did not own while falsely representing he owned the shares.
- He intended to cover the short sales by later buying the shares at lower prices before delivery.
- The market price rose sharply before delivery, preventing him from obtaining and delivering the shares.
- Because Naftalin failed to deliver, brokers could not deliver to purchasers and borrowed stock to complete delivery.
- Brokers later bought in replacement shares at higher prices to return borrowed stock, causing substantial broker losses.
- Investor-purchasers were insulated from direct loss, while brokers bore the financial harm.
- The government charged Naftalin with eight counts of violating Securities Act of 1933 § 17(a)(1) by employing a “device, scheme, or artifice to defraud” in the offer or sale of securities.

## Issues

1. Whether Securities Act § 17(a)(1) is limited to frauds directed at investors/purchasers, or also covers frauds in the offer or sale of securities that harm brokers or other market participants.
2. Whether misrepresentations made to brokers in the course of executing securities sales satisfy the requirement that the fraud occur “in” the “offer or sale” of securities.

## Decision

- The Supreme Court reversed the Eighth Circuit and reinstated Naftalin’s convictions.
- The Court held that § 17(a)(1) prohibits frauds against brokers as well as investors.
- The Court concluded that Naftalin’s misrepresentations to brokers were part of a fraudulent scheme occurring “in” the offer or sale of securities, even though brokers, not purchasers, suffered the loss.

## Legal Principles

- Securities Act § 17(a)(1) is not confined to fraud “upon the purchaser”; it reaches any “device, scheme, or artifice to defraud” occurring “in” the offer or sale of securities.
- The statute requires a connection between the fraud and an offer or sale, but does not require that the deception occur at any particular phase of the selling transaction.
- The presence of “upon the purchaser” in § 17(a)(3) does not limit § 17(a)(1); each subsection targets distinct categories of misconduct, and limiting language in one subsection is not implied in another.
- The Securities Act’s purposes include protecting market integrity and deterring fraudulent practices generally, not solely preventing direct investor injury.

## Conclusion

The Court held that § 17(a)(1) broadly covers fraudulent schemes carried out in securities offers or sales, and criminal liability may attach even when the immediate victims are brokers rather than investor-purchasers.


United States v. Naftalin, 441 U.S. 768 (1979)