## Facts

- Victor Teicher, through Victor Teicher & Co., L.P., traded securities in anticipation of mergers, acquisitions, and tender offers; Ross Frankel worked as a research analyst in Drexel Burnham Lambert’s arbitrage department.
- The government alleged that Teicher and Frankel executed trades in multiple issuers’ stocks and options while in possession of material, nonpublic information about impending corporate transactions.
- The inside information was supplied through three primary channels: a lawyer at a large law firm, a trader at a brokerage firm, and an investment bank research analyst.
- These sources obtained the information through their work on confidential transactions, misappropriated it in breach of duties of trust and confidence, and passed it to Teicher and Frankel.
- Trading activity showed repeated patterns of positions taken shortly before public announcements and resulting profits; the government used timing, volume, and profit patterns, along with testimony about information flow, to prove the scheme.
- Frankel took steps to conceal the conduct, including destruction of documents related to trading and false sworn statements to the SEC.

## Issues

1. Whether the jury could be instructed that insider-trading liability under § 10(b)/Rule 10b-5 (and related tender-offer fraud provisions) may be based on trading while knowingly in possession of material, nonpublic information obtained through misappropriation, without separate proof that the information caused each trade.
2. Whether the district court properly instructed the jury on scienter and the distinction between “knowing possession” and “use” of inside information.
3. Whether the evidence was sufficient and whether alleged trial errors (including evidentiary and conspiracy-instruction claims) warranted reversal.

## Decision

- The Second Circuit affirmed all convictions entered after a jury trial in the Southern District of New York.
- The court held it was not instructional error to permit conviction where defendants traded while knowingly in possession of material, nonpublic information obtained through a fiduciary-type breach, even absent separate proof that the information motivated each trade.
- The court concluded the instructions, read as a whole, required findings of materiality and fraudulent intent sufficient to avoid conviction based on innocent or accidental possession.
- The court upheld the tender-offer fraud convictions under Rule 14e-3 on a possession-based standard consistent with the rule’s prohibition.
- The court found the evidence sufficient to support the insider-trading, conspiracy, fraud, perjury, and obstruction counts and rejected additional claims of trial error.

## Legal Principles

- Under the misappropriation theory, insider-trading fraud consists of misappropriating confidential information for securities-trading purposes in breach of a duty owed to the information’s source; tippees who trade with the required mental state may be criminally liable.
- For criminal insider trading under § 10(b) and Rule 10b-5 in a misappropriation case, trading while knowingly in possession of material, nonpublic information can satisfy the conduct element; the government need not separately prove the information was the actual cause of each trade when scienter and materiality are properly charged.
- “Knowing possession” at the time of trading is strong circumstantial evidence of use and may support an inference of wrongful intent when combined with proof of the underlying breach and knowledge of that breach.
- Rule 14e-3 may impose liability for trading while in possession of material, nonpublic tender-offer information under the circumstances specified by the rule, without requiring proof that the trader was a corporate insider.

## Conclusion

The Second Circuit affirmed convictions arising from an arbitrage insider-trading scheme, holding that in misappropriation-based prosecutions the jury may be instructed that trading while knowingly in possession of material, nonpublic, misappropriated information can establish liability without separate proof that the information prompted each trade, so long as materiality and fraudulent intent are required.


United States v. Teicher, 987 F.2d 112 (2d Cir. 1993)