NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D.C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press. SUPREME COURT OF THE UNITED STATES -------- No. 96-842 -------- UNITED STATES, PETITIONER v. JAMES HERMAN O'HAGAN __ ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT [June 25, 1997] JUSTICE GINSBURG delivered the opinion of the Court. This case concerns the interpretation and enforcement of S10(b) and S14(e) of the Securities Exchange Act of 1934, and rules made by the Securities and Exchange Commission pursuant to these provisions, Rule 10b-5 and Rule 14e-3(a). Two prime questions are presented. The first relates to the misappropriation of material, nonpublic information for securities trading; the second concerns fraudulent practices in the tender offer setting. In particular, we address and resolve these issues: (1) Is a person who trades in securities for personal profit, using confidential information misappropriated in breach of a fiduciary duty to the source of the information, guilty of violating S10(b) and Rule 10b-5? (2) Did the Commission exceed its rulemaking authority by adopting Rule 14e-3(a), which proscribes trading on undisclosed information in the tender offer setting, even in the absence of a duty to disclose? Our answer to the first question is yes, and to the second question, viewed in the context of this case, no. I Respondent James Herman O'Hagan was a partner in the law firm of Dorsey & Whitney in Minneapolis, Minnesota. In July 1988, Grand Metropolitan PLC 96-842 - OPINION 2 UNITED STATES v. O'HAGAN __ (Grand Met), a company based in London, England, retained Dorsey & Whitney as local counsel to represent Grand Met regarding a potential tender offer for the common stock of the Pillsbury Company, headquartered in Minneapolis. Both Grand Met and Dorsey & Whitney took precautions to protect the confidentiality of Grand Met's tender offer plans. O'Hagan did no work on the Grand Met represen- tation. Dorsey & Whitney withdrew from representing Grand Met on September 9, 1988. Less than a month later, on October 4, 1988, Grand Met publicly announced its tender offer for Pillsbury stock. On August 18, 1988, while Dorsey & Whitney was still representing Grand Met, O'Hagan began purchasing call options for Pillsbury stock. Each option gave him the right to purchase 100 shares of Pillsbury stock by a specified date in September 1988. Later in August and in September, O'Hagan made additional purchases of Pillsbury call options. By the end of September, he owned 2,500 unexpired Pillsbury options, apparently more than any other individual investor. See App. 85, 148. O'Hagan also purchased, in September 1988, some 5,000 shares of Pillsbury common stock, at a price just under $39 per share. When Grand Met announced its tender offer in October, the price of Pillsbury stock rose to nearly $60 per share. O'Hagan then sold his Pillsbury call options and common stock, making a profit of more than $4.3 million. The Securities and Exchange Commission (SEC or Commission) initiated an investigation into O'Hagan's transactions, culminating in a 57-count indictment. The indictment alleged that O'Hagan defrauded his law firm and its client, Grand Met, by using for his own trad- ing purposes material, nonpublic information regarding Grand Met's planned tender offer. Id., at 8. (Ftnote. 1) According (Ftnote. 1) ___ ____________________ 1) As evidence that O'Hagan traded on the basis of nonpublic information 1) misappropriated from his law firm, the Government relied on a conversation between O'Hagan and the Dorsey & Whitney partner heading the firm's Grand Met representation. That conversation allegedly took place shortly before August 26, 1988. See Brief for United States 4. O'Hagan urges that the Government's evidence does not show he traded on the basis of nonpublic information. O'Hagan points to news reports on August 18 and 22, 1988, that Grand Met was interested in acquiring Pillsbury, and to an earlier, August 12, 1988, news report that Grand Met had put up its hotel chain for auction to raise funds for an acquisi- tion. See Brief for Respondent 4 (citing App. 73-74, 78-80). O'Hagan's challenge to the sufficiency of the evidence remains open for consideration on remand. 96-842 - OPINION UNITED STATES v. O'HAGAN 3 __ to the indictment, O'Hagan used the profits he gained through this trading to conceal his previous embezzlement and conversion of unrelated client trust funds. Id., at 10. (Ftnote. 2) O'Hagan was charged with 20 counts of mail (Ftnote. 2) ___ fraud, in violation of 18 U. S. C. S1341; 17 counts of securities fraud, in violation of S10(b) of the Securities Exchange Act of 1934 (Exchange Act), 48 Stat. 891, 15 U. S. C. S78j(b), and SEC Rule 10b-5, 17 CFR S240.10b-5 (1996); 17 counts of fraudulent trading in connection with a tender offer, in violation of S14(e) of the Exchange Act, 15 U. S. C. S78n(e), and SEC Rule 14e-3(a), 17 CFR S240.14e-3(a) (1996); and 3 counts of violating federal money laundering statutes, 18 U. S. C. SS1956(a)(1)(B)(i), 1957. See App. 13-24. A jury con- victed O'Hagan on all 57 counts, and he was sentenced to a 41-month term of imprisonment. A divided panel of the Court of Appeals for the Eighth Circuit reversed all of O'Hagan's convictions. 92 F. 3d 612 (1996). Liability under S10(b) and Rule 10b-5, the Eighth Circuit held, may not be grounded on the ____________________ 2) O'Hagan was convicted of theft in state court, sentenced to 30 months' 2) imprisonment, and fined. See State v. O'Hagan, 474 N. W. 2d 613, 615, 623 _____ ________ (Minn. App. 1991). The Supreme Court of Minnesota disbarred O'Hagan from the practice of law. See In re O'Hagan, 450 N. W. 2d 571 (Minn. 1990). ______________ 96-842 - OPINION 4 UNITED STATES v. O'HAGAN __ "misappropriation theory" of securities fraud on which the prosecution relied. Id., at 622. The Court of Appeals also held that Rule 14e-3(a) - which ___ prohibits trading while in possession of material, nonpublic information relating to a tender offer - exceeds the SEC's S14(e) rulemaking authority because the rule contains no breach of fiduciary duty requirement. Id., at 627. ___ The Eighth Circuit further concluded that O'Hagan's mail fraud and money laundering convictions rested on violations of the securities laws, and therefore could not stand once the securities fraud convictions were reversed. Id., at 627-628. Judge Fagg, dissenting, stated that he would recognize and ___ enforce the misappropriation theory, and would hold that the SEC did not exceed its rulemaking authority when it adopted Rule 14e-3(a) without requiring proof of a breach of fiduciary duty. Id., at 628. ___ Decisions of the Courts of Appeals are in conflict on the propriety of the misappropriation theory under S10(b) and Rule 10b-5, see infra this page and _____ n. 3, and on the legitimacy of Rule 14e-3(a) under S14(e), see infra, at 25. We ______ granted certiorari, 519 U. S. ___ (1997), and now reverse the Eighth Circuit's judgment. II We address first the Court of Appeals' reversal of O'Hagan's convictions under S10(b) and Rule 10b-5. Following the Fourth Circuit's lead, see United States _____________ v. Bryan, 58 F. 3d 933, 943-959 (1995), the Eighth Circuit rejected the ______ misappropriation theory as a basis for S10(b) liability. We hold, in accord with several other Courts of Appeals, (Ftnote. 3) that criminal liability under (Ftnote. 3) S10(b) ____________________ 3) See, e.g., United States v. Chestman, 947 F. 2d 551, 566 (CA2 1991) (en 3) _____ _____________ _________ banc), cert. denied, 503 U. S. 1004 (1992); SEC v. Cherif, 933 F. 2d 403, 410 ___ _______ (CA7 1991), cert. denied, 502 U. S. 1071 (1992); SEC v. Clark, 915 F. 2d 439, ___ ______ 453 (CA9 1990). 96-842 - OPINION UNITED STATES v. O'HAGAN 5 __ may be predicated on the misappropriation theory. (Ftnote. 4) (Ftnote. 4) A In pertinent part, S10(b) of the Exchange Act provides: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange - . . . . . "(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U. S. C. S78j(b). The statute thus proscribes (1) using any deceptive device (2) in connection with the purchase or sale of securities, in contravention of rules prescribed by the Commission. The provision, as written, does not confine ____________________ 4) Twice before we have been presented with the question whether criminal 4) liability for violation of S10(b) may be based on a misappropriation theory. In Chiarella v. United States, 445 U. S. 222, 235-237 (1980), the jury had received _________ ______________ no misappropriation theory instructions, so we declined to address the question. See infra, at 17. In Carpenter v. United States, 484 U. S. 19, 24 (1987), the ______ _________ ______________ Court divided evenly on whether, under the circumstances of that case, convictions resting on the misappropriation theory should be affirmed. See Aldave, The Misappropriation Theory: Carpenter and Its Aftermath, 49 Ohio St. _________ L. J. 373, 375 (1988) (observing that "Carpenter was, by any reckoning, an un- _________ usual case," for the information there misappropriated belonged not to a company preparing to engage in securities transactions, e.g., a bidder in a corporate _____ acquisition, but to the Wall Street Journal). 96-842 - OPINION 6 UNITED STATES v. O'HAGAN __ its coverage to deception of a purchaser or seller of securities, see United ______ States v. Newman, 664 F. 2d 12, 17 (CA2 1981); rather, the statute reaches any ______ _______ deceptive device used "in connection with the purchase or sale of any security." Pursuant to its S10(b) rulemaking authority, the Commission has adopted Rule 10b-5, which, as relevant here, provides: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, "(a) To employ any device, scheme, or artifice to defraud, [or] . . . . . "(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, "in connection with the purchase or sale of any security." 17 CFR S240.10b-5 (1996). Liability under Rule 10b-5, our precedent indicates, does not extend beyond conduct encompassed by S10(b)'s prohibition. See Ernst & Ernst v. Hochfelder, _____________ ___________ 425 U. S. 185, 214 (1976) (scope of Rule 10b-5 cannot exceed power Congress granted Commission under S10(b)); see also Central Bank of Denver, N. A. v. _____________________________ First Interstate Bank of Denver, N. A., 511 U. S. 164, 173 (1994) ("We have _______________________________________ refused to allow [private] 10b-5 challenges to conduct not prohibited by the text of the statute."). Under the "traditional" or "classical theory" of insider trading liability, S10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a "deceptive device" under S10(b), we have affirmed, because "a relationship of trust and confidence [exists] between the 96-842 - OPINION UNITED STATES v. O'HAGAN 7 __ shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." Chiarella v. _________ United States, 445 U. S. 222, 228 (1980). That relationship, we recognized, ______________ "gives rise to a duty to disclose [or to abstain from trading] because of the `necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . . uninformed . . . stockholders.'" Id., at 228-229 (citation ___ omitted). The classical theory applies not only to officers, directors, and other permanent insiders of a corporation, but also to attorneys, accountants, consultants, and others who temporarily become fiduciaries of a corporation. See Dirks v. SEC, 463 U. S. 646, 655, n. 14 (1983). _____ ____ The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates S10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. See Brief for United States 14. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information. The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities. The classical theory targets a corporate insider's breach of duty to shareholders with whom the insider transacts; the misappropriation theory outlaws trading on the basis of nonpublic information by a corporate "outsider" in breach of a duty 96-842 - OPINION 8 UNITED STATES v. O'HAGAN __ owed not to a trading party, but to the source of the information. The misappropriation theory is thus designed to "protec[t] the integrity of the securities markets against abuses by `outsiders' to a corporation who have access to confidential information that will affect th[e] corporation's security price when revealed, but who owe no fiduciary or other duty to that corporation's shareholders." Ibid. _____ In this case, the indictment alleged that O'Hagan, in breach of a duty of trust and confidence he owed to his law firm, Dorsey & Whitney, and to its client, Grand Met, traded on the basis of nonpublic information regarding Grand Met's planned tender offer for Pillsbury common stock. App. 16. This conduct, the Government charged, constituted a fraudulent device in connection with the purchase and sale of securities. (Ftnote. 5) (Ftnote. 5) B We agree with the Government that misappropriation, as just defined, satisfies S10(b)'s requirement that chargeable conduct involve a "deceptive device or contrivance" used "in connection with" the purchase or sale of securities. We observe, first, that misappropriators, as the Government describes them, deal in deception. A fiduciary who "[pretends] loyalty to the principal while secretly converting the principal's information for personal gain," Brief for United States ____________________ 5) The Government could not have prosecuted O'Hagan under the classical 5) theory, for O'Hagan was not an "insider" of Pillsbury, the corporation in whose stock he traded. Although an "outsider" with respect to Pillsbury, O'Hagan had an intimate association with, and was found to have traded on confidential information from, Dorsey & Whitney, counsel to tender offeror Grand Met. Under the misappropriation theory, O'Hagan's securities trading does not escape Exchange Act sanction, as it would under the dissent's reasoning, simply because he was associated with, and gained nonpublic information from, the bidder, rather than the target. 96-842 - OPINION UNITED STATES v. O'HAGAN 9 __ 17, "dupes" or defrauds the principal. See Aldave, Misappropriation: A General Theory of Liability for Trading on Nonpublic Information, 13 Hofstra L. Rev. 101, 119 (1984). We addressed fraud of the same species in Carpenter v. United States, 484 _________ ______________ U. S. 19 (1987), which involved the mail fraud statute's proscription of "any scheme or artifice to defraud," 18 U. S. C. S1341. Affirming convictions under that statute, we said in Carpenter that an employee's undertaking not to reveal _________ his employer's confidential information "became a sham" when the employee provided the information to his co-conspirators in a scheme to obtain trading profits. 484 U. S., at 27. A company's confidential information, we recognized in Carpenter, qualifies as property to which the company has a right of _________ exclusive use. Id., at 25-27. The undisclosed misappropriation of such ___ information, in violation of a fiduciary duty, the Court said in Carpenter, __________ constitutes fraud akin to embezzlement - "`the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another.'" Id., ___ at 27 (quoting Grin v. Shine, 187 U. S. 181, 189 (1902)); see Aldave, 13 Hofstra ____ ______ L. Rev., at 119. Carpenter's discussion of the fraudulent misuse of confi- _________ dential information, the Government notes, "is a particularly apt source of guidance here, because [the mail fraud statute] (like Section 10(b)) has long been held to require deception, not merely the breach of a fiduciary duty." Brief for United States 18, n. 9 (citation omitted). Deception through nondisclosure is central to the theory of liability for which the Government seeks recognition. As counsel for the Government stated in explanation of the theory at oral argument: "To satisfy the common law rule that a trustee may not use the property that [has] been entrusted [to] him, there would have to be consent. To satisfy the requirement of the Securities Act that there be no deception, there would 96-842 - OPINION 10 UNITED STATES v. O'HAGAN __ only have to be disclosure." Tr. of Oral Arg. 12; see generally Restatement (Second) of Agency SS390, 395 (1958) (agent's disclosure obligation regarding use of confidential information). (Ftnote. 6) (Ftnote. 6) The misappropriation theory advanced by the Government is consistent with Santa Fe Industries, Inc. v. Green, 430 U. S. 462 (1977), a decision _________________________ ______ underscoring that S10(b) is not an all-purpose breach of fiduciary duty ban; rather, it trains on conduct involving manipulation or deception. See id., at ___ 473-476. In contrast to the Government's allegations in this case, in Santa Fe ________ Industries, all pertinent facts were disclosed by the persons charged with ___________ violating S10(b) and Rule 10b-5, see id., at 474; therefore, there was no ___ deception through nondisclosure to which liability under those provisions could attach, see id., at 476. Similarly, full disclosure forecloses liability under ___ the misappropriation theory: Because the deception essential to the misappro- priation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no "deceptive device" and thus no S10(b) violation - although the fiduciary-turned-trader may remain liable under state law for breach of a duty of loyalty. (Ftnote. 7) (Ftnote. 7) ____________________ 6) Under the misappropriation theory urged in this case, the disclosure 6) obligation runs to the source of the information, here, Dorsey & Whitney and Grand Met. Chief Justice Burger, dissenting in Chiarella, advanced a broader _________ reading of S10(b) and Rule 10b-5; the disclosure obligation, as he envisioned it, ran to those with whom the misappropriator trades. 445 U. S., at 240 ("a person who has misappropriated nonpublic information has an absolute duty to disclose that information or to refrain from trading"); see also id., at 243, ___ n. 4. The Government does not propose that we adopt a misappropriation theory of that breadth. 7) Where, however, a person trading on the basis of material, nonpublic 7) information owes a duty of loyalty and confidentiality to two entities or persons - for example, a law firm and its client - but makes disclosure to only one, the trader may still be liable under the misappropriation theory. 96-842 - OPINION UNITED STATES v. O'HAGAN 11 __ We turn next to the S10(b) requirement that the misappropriator's deceptive use of information be "in connection with the purchase or sale of [a] security." This element is satisfied because the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information. See Aldave, 13 Hofstra L. Rev., at 120 ("a fraud or deceit can be practiced on one person, with resultant harm to another person or group of persons"). A misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public. See id., ___ at 120-121, and n. 107. The misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities. Should a misappropriator put such information to other use, the statute's prohibition would not be implicated. The theory does not catch all conceivable forms of fraud involving confidential infor- mation; rather, it catches fraudulent means of capitalizing on such information through securities transactions. The Government notes another limitation on the forms of fraud S10(b) reaches: "The misappropriation theory would not . . . apply to a case in which a person defrauded a bank into giving him a loan or embezzled 96-842 - OPINION 12 UNITED STATES v. O'HAGAN __ cash from another, and then used the proceeds of the misdeed to purchase securities." Brief for United States 24, n. 13. In such a case, the Government states, "the proceeds would have value to the malefactor apart from their use in a securities transaction, and the fraud would be complete as soon as the money was obtained." Ibid. In other words, money can buy, if not anything, then at _____ least many things; its misappropriation may thus be viewed as sufficiently detached from a subsequent securities transaction that S10(b)'s "in connection with" requirement would not be met. Ibid. _____ The dissent's charge that the misappropriation theory is incoherent because information, like funds, can be put to multiple uses, see post, at 4-8, misses _____ the point. The Exchange Act was enacted in part "to insure the maintenance of fair and honest markets," 15 U. S. C. S78b, and there is no question that fraudulent uses of confidential information fall within S10(b)'s prohibition if the fraud is "in connection with" a securities transaction. It is hardly remarkable that a rule suitably applied to the fraudulent uses of certain kinds of information would be stretched beyond reason were it applied to the fraud- ulent use of money. The dissent does catch the Government in overstatement. Observing that money can be used for all manner of purposes and purchases, the Government urges that confidential information of the kind at issue derives its value only from its ____ utility in securities trading. See Brief for United States 10, 21; post, at 4-6 _____ (several times emphasizing the word "only"). Substitute "ordinarily" for "only," and the Government is on the mark. (Ftnote. 8) (Ftnote. 8) ____________________ 8) The dissent's evident struggle to invent other uses to which O'Hagan 8) plausibly might have put the nonpublic information, see post, at 7, is telling. _____ It is imaginative to suggest that a trade journal would have paid O'Hagan dollars in the millions to publish his information. See Tr. of Oral Arg. 36-37. Counsel for O'Hagan hypothesized, as a nontrading use, that O'Hagan could have "misappropriat[ed] this information of [his] law firm and its client, deliver[ed] it to [Pillsbury], and suggest[ed] that [Pillsbury] in the future . . . might find it very desirable to use [O'Hagan] for legal work." Id., at ___ 37. But Pillsbury might well have had large doubts about engaging for its legal work a lawyer who so stunningly displayed his readiness to betray a client's confidence. Nor is the Commission's theory "incoherent" or "inconsistent," post, at 1, 14, for failing to inhibit use of confidential information for _____ "personal amusement . . . in a fantasy stock trading game," post, at 7. _____ 96-842 - OPINION UNITED STATES v. O'HAGAN 13 __ Our recognition that the Government's "only" is an overstatement has provoked the dissent to cry "new theory." See post, at 9-11. But the very case on which _____ the dissent relies, Motor Vehicle Mfrs. Assn. of United States, Inc. v. State ________________________________________________ _____ Farm Mut. Automobile Ins. Co., 463 U. S. 29 (1983), shows the extremity of that ______________________________ charge. In State Farm, we reviewed an agency's rescission of a rule under the ___________ same "arbitrary and capricious" standard by which the promulgation of a rule under the relevant statute was to be judged, see id., at 41-42; in our decision ___ concluding that the agency had not adequately explained its regulatory action, see id., at 57, we cautioned that a "reviewing court should not attempt itself ___ to make up for such deficiencies," id., at 43. Here, by contrast, Rule 10b-5's ___ promulgation has not been challenged; we consider only the Government's charge that O'Hagan's alleged fraudulent conduct falls within the prohibitions of the rule and S10(b). In this context, we acknowledge simply that, in defending the Government's interpretation of the rule and statute in this Court, the Government's lawyers have pressed a solid point too far, something lawyers, occasionally even judges, are wont to do. The misappropriation theory comports with S10(b)'s language, which requires deception "in connection with the purchase or sale of any security," not deception of an identifiable purchaser or seller. The theory is also 96-842 - OPINION 14 UNITED STATES v. O'HAGAN __ well-tuned to an animating purpose of the Exchange Act: to insure honest securities markets and thereby promote investor confidence. See 45 Fed. Reg. 60412 (1980) (trading on misappropriated information "undermines the integrity of, and investor confidence in, the securities markets"). Although informa- tional disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappro- priated nonpublic information is unchecked by law. An investor's informational disadvantage vis-a ' -vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill. See Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 356 (1979) ("If the market is thought to be systematically populated with . . . transactors [trading on the basis of misappropriated information] some investors will refrain from dealing altogether, and others will incur costs to avoid dealing with such transactors or corruptly to overcome their unerodable informational advantages."); Aldave, 13 Hofstra L. Rev., at 122-123. In sum, considering the inhibiting impact on market participation of trading on misappropriated information, and the congressional purposes underlying S10(b), it makes scant sense to hold a lawyer like O'Hagan a S10(b) violator if he works for a law firm representing the target of a tender offer, but not if he works for a law firm representing the bidder. The text of the statute requires no such result. (Ftnote. 9) The misappropriation at (Ftnote. 9) ____________________ 9) As noted earlier, however, see supra, at 9-10, the textual requirement 9) ______ of deception precludes S10(b) liability when a person trading on the basis of nonpublic information has disclosed his trading plans to, or obtained authorization from, the principal - even though such conduct may affect the securities markets in the same manner as the conduct reached by the mis- appropriation theory. Contrary to the dissent's suggestion, see post, at 11-13, _____ the fact that S10(b) is only a partial antidote to the problems it was designed to alleviate does not call into question its prohibition of conduct that falls within its textual proscription. Moreover, once a disloyal agent discloses his imminent breach of duty, his principal may seek appropriate equitable relief under state law. Furthermore, in the context of a tender offer, the principal who authorizes an agent's trading on confidential information may, in the Commission's view, incur liability for an Exchange Act violation under Rule 14e-3(a). 96-842 - OPINION UNITED STATES v. O'HAGAN 15 __ issue here was properly made the subject of a S10(b) charge because it meets the statutory requirement that there be "deceptive" conduct "in connection with" securities transactions. C The Court of Appeals rejected the misappropriation theory primarily on two grounds. First, as the Eighth Circuit comprehended the theory, it requires neither misrepresentation nor nondisclosure. See 92 F. 3d, at 618. As we just explained, however, see supra, at 8-10, deceptive nondisclosure is essential to ______ the S10(b) liability at issue. Concretely, in this case, "it [was O'Hagan's] failure to disclose his personal trading to Grand Met and Dorsey, in breach of his duty to do so, that ma[de] his conduct `deceptive' within the meaning of [S]10(b)." Reply Brief 7. Second and "more obvious," the Court of Appeals said, the misappropriation theory is not moored to S10(b)'s requirement that "the fraud be `in connection with the purchase or sale of any security.'" See 92 F. 3d, at 618 (quoting 15 U. S. C. S78j(b)). According to the Eighth Circuit, three of our decisions reveal that S10(b) liability cannot be predicated on a duty owed to the source of nonpublic information: Chiarella v. United States, 445 U. S. 222 (1980); _________ ______________ Dirks v. SEC, 463 U. S. 646 (1983); and Central Bank of Denver, N. A. v. First _____ ____ _____________________________ _____ Interstate __________ 96-842 - OPINION 16 UNITED STATES v. O'HAGAN __ Bank of Denver, N. A., 511 U. S. 164 (1994). "[O]nly a breach of a duty to ______________________ parties to the securities transaction," the Court of Appeals concluded, "or, at the most, to other market participants such as investors, will be sufficient to give rise to S10(b) liability." 92 F. 3d, at 618. We read the statute and our precedent differently, and note again that S10(b) refers to "the purchase or sale of any security," not to identifiable purchasers or sellers of securities. Chiarella involved securities trades by a printer employed at a shop that _________ printed documents announcing corporate takeover bids. See 445 U. S., at 224. Deducing the names of target companies from documents he handled, the printer bought shares of the targets before takeover bids were announced, expecting (correctly) that the share prices would rise upon announcement. In these transactions, the printer did not disclose to the sellers of the securities (the target companies' shareholders) the nonpublic information on which he traded. See ibid. For that trading, the printer was convicted of violating S10(b) and _____ Rule 10b-5. We reversed the Court of Appeals judgment that had affirmed the conviction. See id., at 225. ___ The jury in Chiarella had been instructed that it could convict the defendant _________ if he willfully failed to inform sellers of target company securities that he knew of a takeover bid that would increase the value of their shares. See id., ___ at 226. Emphasizing that the printer had no agency or other fiduciary relationship with the sellers, we held that liability could not be imposed on so broad a theory. See id., at 235. There is under S10(b), we explained, no ___ "general duty between all participants in market transactions to forgo actions based on material, nonpublic information." Id., at 233. Under established ___ doctrine, we said, a duty to disclose or abstain from trading "arises from a specific relationship between two parties." Ibid. _____ 96-842 - OPINION UNITED STATES v. O'HAGAN 17 __ The Court did not hold in Chiarella that the only relationship prompting _________ ____ liability for trading on undisclosed information is the relationship between a corporation's insiders and shareholders. That is evident from our response to the Government's argument before this Court that the printer's misappropriation of information from his employer for purposes of securities trading - in violation of a duty of confidentiality owed to the acquiring companies - constituted fraud in connection with the purchase or sale of a security, and thereby satisfied the terms of S10(b). Id., at 235-236. The Court declined to ___ reach that potential basis for the printer's liability, because the theory had not been submitted to the jury. See id., at 236-237. But four Justices found ___ merit in it. See id., at 239 (Brennan, J., concurring in judgment); id., at ___ ___ 240-243 (Burger, C. J., dissenting); id., at 245 (Blackmun, J., joined by Mar- ___ shall, J., dissenting). And a fifth Justice stated that the Court "wisely le[ft] the resolution of this issue for another day." Id., at 238 (STEVENS, J., ___ concurring). Chiarella thus expressly left open the misappropriation theory before us _________ today. Certain statements in Chiarella, however, led the Eighth Circuit in the _________ instant case to conclude that S10(b) liability hinges exclusively on a breach of duty owed to a purchaser or seller of securities. See 92 F. 3d, at 618. The Court said in Chiarella that S10(b) liability "is premised upon a duty to _________ disclose arising from a relationship of trust and confidence between parties to __________________ a transaction," 445 U. S., at 230 (emphasis added), and observed that the ______________ printshop employee defendant in that case "was not a person in whom the sellers had placed their trust and confidence," see id., at 232. These statements ___ rejected the notion that S10(b) stretches so far as to impose "a general duty between all participants in market transactions to forgo actions based on material, nonpublic information," id., at 233, and we confine them to that ___ context. The state- 96-842 - OPINION 18 UNITED STATES v. O'HAGAN __ ments highlighted by the Eighth Circuit, in short, appear in an opinion carefully leaving for future resolution the validity of the misappropriation theory, and therefore cannot be read to foreclose that theory. Dirks, too, left room for application of the misappropriation theory in cases ______ like the one we confront. (Ftnote. 10) Dirks involved an investment analyst who (Ftnote. 10) _____ had received information from a former insider of a corporation with which the analyst had no connection. See 463 U. S., at 648-649. The information indicated that the corporation had engaged in a massive fraud. The analyst investigated the fraud, obtaining corroborating information from employees of the corporation. During his investigation, the analyst discussed his findings with clients and investors, some of whom sold their holdings in the company the analyst suspected of gross wrongdoing. See id., at 649. ___ The SEC censured the analyst for, inter alia, aiding and abetting S10(b) and ___________ Rule 10b-5 violations by clients and investors who sold their holdings based on the nonpublic information the analyst passed on. See id., at 650-652. In the ___ SEC's view, the analyst, as a "tippee" of corporation insiders, had a duty under S10(b) and Rule 10b-5 to refrain from communicating the nonpublic information to persons likely to trade on the basis of it. See id., at 651, 655-656. This ___ Court found no such obligation, see id., at 665-667, and repeated the key point ___ made in Chiarella: There is no "`general duty between all participants in __________ market transactions to forgo actions based on material, nonpublic information.'" Id., at 655 (quoting Chiarella, 445 U. S., at 233); see Aldave, ___ __________ 13 Hofstra L. Rev., at 122 (misappropriation theory bars only "trading on the basis of information ____________________ 10) The Eighth Circuit's conclusion to the contrary was based in large part 10) on Dirks's reiteration of the Chiarella language quoted and discussed above. _____ _________ See 92 F. 3d 612, 618-619 (1996). 96-842 - OPINION UNITED STATES v. O'HAGAN 19 __ that the wrongdoer converted to his own use in violation of some fiduciary, contractual, or similar obligation to the owner or rightful possessor of the information"). No showing had been made in Dirks that the "tippers" had violated any duty by _____ disclosing to the analyst nonpublic information about their former employer. The insiders had acted not for personal profit, but to expose a massive fraud within the corporation. See Dirks, 463 U. S., at 666-667. Absent any violation ______ by the tippers, there could be no derivative liability for the tippee. See id., ___ at 667. Most important for purposes of the instant case, the Court observed in Dirks: "There was no expectation by [the analyst's] sources that he would keep ______ their information in confidence. Nor did [the analyst] misappropriate or illegally obtain the information . . . ." Id., at 665. Dirks thus presents no ___ _____ suggestion that a person who gains nonpublic information through misap- propriation in breach of a fiduciary duty escapes S10(b) liability when, without alerting the source, he trades on the information. Last of the three cases the Eighth Circuit regarded as warranting disapproval of the misappropriation theory, Central Bank held that "a private plaintiff may ____________ not maintain an aiding and abetting suit under S10(b)." 511 U. S., at 191. We immediately cautioned in Central Bank that secondary actors in the securities ____________ markets may sometimes be chargeable under the securities Acts: "Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or _______________________ seller of securities relies may be liable as a primary violator under 10b-5, ___________________________ assuming . . . the requirements for primary liability under Rule 10b-5 are met." Ibid. (emphasis added). The Eighth Circuit isolated the statement just quoted _____ and drew from it the conclusion that S10(b) covers only deceptive statements or omissions on which purchasers and sellers, and per- 96-842 - OPINION 20 UNITED STATES v. O'HAGAN __ haps other market participants, rely. See 92 F. 3d, at 619. It is evident from the question presented in Central Bank, however, that this Court, in the quoted _____________ passage, sought only to clarify that secondary actors, although not subject to aiding and abetting liability, remain subject to primary liability under S10(b) and Rule 10b-5 for certain conduct. Furthermore, Central Bank's discussion concerned only private civil litigation ____________ under S10(b) and Rule 10b-5, not criminal liability. Central Bank's reference ____________ to purchasers or sellers of securities must be read in light of a longstanding limitation on private S10(b) suits. In Blue Chip Stamps v. Manor Drug Stores, ________________ __________________ 421 U. S. 723 (1975), we held that only actual purchasers or sellers of securities may maintain a private civil action under S10(b) and Rule 10b-5. We so confined the S10(b) private right of action because of "policy consider- ations." Id., at 737. In particular, Blue Chip Stamps recognized the abuse ___ ________________ potential and proof problems inherent in suits by investors who neither bought nor sold, but asserted they would have traded absent fraudulent conduct by others. See id., at 739-747; see also Holmes v. Securities Investor Protection ___ ______ ______________________________ Corporation, 503 U. S. 258, 285 (1992) (O'CONNOR, J., concurring in part and ____________ concurring in judgment); id., at 289-290 (SCALIA, J., concurring in judgment). ___ Criminal prosecutions do not present the dangers the Court addressed in Blue ____ Chip Stamps, so that decision is "inapplicable" to indictments for violations of ___________ S10(b) and Rule 10b-5. United States v. Naftalin, 441 U. S. 768, 774, n. 6 _____________ _________ (1979); see also Holmes, 503 U. S., at 281 (O'CONNOR, J., concurring in part and ______ concurring in judgment) ("[T]he purchaser/seller standing requirement for private civil actions under S10(b) and Rule 10b-5 is of no import in criminal prosecutions for willful violations of those provisions."). In sum, the misappropriation theory, as we have 96-842 - OPINION UNITED STATES v. O'HAGAN 21 __ examined and explained it in this opinion, is both consistent with the statute and with our precedent. (Ftnote. 11) Vital to our decision that criminal (Ftnote. 11) liability may be sustained under the misappropriation theory, we emphasize, are two sturdy safeguards Congress has provided regarding scienter. To establish a criminal violation of Rule 10b-5, the Government must prove that a person "will- fully" violated the provision. See 15 U. S. C. S78ff(a). (Ftnote. 12) Furthermore, a defendant may not be imprisoned for (Ftnote. 12) violating Rule 10b-5 if he proves that he ____________________ 11) The United States additionally argues that Congress confirmed the 11) validity of the misappropriation theory in the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), S2(1), 102 Stat. 4677, note following 15 U. S. C. S78u-1. See Brief for United States 32-35. ITSFEA declares that "the rules and regulations of the Securities and Exchange Commission under the Secu- rities Exchange Act of 1934 . . . governing trading while in possession of material, nonpublic information are, as required by such Act, necessary and appropriate in the public interest and for the protection of investors." Note following 15 U. S. C. S78u-1. ITSFEA also includes a new S20A(a) of the Exchange Act expressly providing a private cause of action against persons who violate the Exchange Act "by purchasing or selling a security while in possession of material, nonpublic information"; such an action may be brought by "any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased . . . or sold . . . securities of the same class." 15 U. S. C. S78t-1(a). Because we uphold the misappropriation theory on the basis of S10(b) itself, we do not address ITSFEA's significance for cases of this genre. 12) In relevant part, S32 of the Exchange Act, as set forth in 15 U. S. C. 12) S78ff(a), provides: "Any person who willfully violates any provision of this chapter . . . or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter . . . shall upon conviction be fined not more than $1,000,000, or imprisoned not more than 10 years, or both . . .; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." 96-842 - OPINION 22 UNITED STATES v. O'HAGAN __ had no knowledge of the rule. See ibid. (Ftnote. 13) O'Hagan's charge that the (Ftnote. 13) _____ misappropriation theory is too indefinite to permit the imposition of criminal liability, see Brief for Respondent 30-33, thus fails not only because the theory is limited to those who breach a recognized duty. In addition, the statute's "requirement of the presence of culpable intent as a necessary element of the offense does much to destroy any force in the argument that application of the [statute]" in circumstances such as O'Hagan's is unjust. Boyce Motor ___________ Lines, Inc. v. United States, 342 U. S. 337, 342 (1952). ___________ ______________ The Eighth Circuit erred in holding that the misappropriation theory is inconsistent with S10(b). The Court of Appeals may address on remand O'Hagan's other challenges to his convictions under S10(b) and Rule 10b-5. III We consider next the ground on which the Court of Appeals reversed O'Hagan's convictions for fraudulent trading in connection with a tender offer, in violation of S14(e) of the Exchange Act and SEC Rule 14e-3(a). A sole question is before us as to these convictions: Did the Commission, as the Court of Appeals held, exceed its rulemaking authority under S14(e) when it adopted Rule 14e-3(a) without requiring a showing that the trading at issue entailed a breach of fiduciary duty? We hold that the Commission, in this regard and to the extent relevant to this case, did not exceed its authority. The governing statutory provision, S14(e) of the Exchange Act, reads in relevant part: "It shall be unlawful for any person . . . to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer . . . . ____________________ 13) The statute provides no such defense to imposition of monetary fines. 13) See ibid. _____ 96-842 - OPINION UNITED STATES v. O'HAGAN 23 __ The [SEC] shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative." 15 U. S. C. S78n(e). Section 14(e)'s first sentence prohibits fraudulent acts in connection with a tender offer. This self-operating proscription was one of several provisions added to the Exchange Act in 1968 by the Williams Act, 82 Stat. 454. The section's second sentence delegates definitional and prophylactic rulemaking authority to the Commission. Congress added this rulemaking delegation to S14(e) in 1970 amendments to the Williams Act. See S5, 84 Stat. 1497. Through S14(e) and other provisions on disclosure in the Williams Act, (Ftnote. 14) Congress sought to ensure that shareholders "confronted by a (Ftnote. 14) cash tender offer for their stock [would] not be required to respond without adequate information." Rondeau v. Mosinee Paper Corp., 422 U. S. 49, 58 (1975); _______ __________________ see Lewis v. McGraw, 619 F. 2d 192, 195 (CA2 1980) (per curiam) ("very purpose" _____ ______ ____________ of Williams Act was "informed decisionmaking by shareholders"). As we recognized in Schreiber v. Burlington Northern, Inc., 472 U. S. 1 (1985), _________ ________________________ Congress designed the Williams Act to make "disclosure, rather than court- ____________________ 14) In addition to S14(e), the Williams Act and the 1970 amendments added 14) to the Exchange Act the following provisions concerning disclosure: S13(d), 15 U. S. C. S78m(d) (disclosure requirements for persons acquiring more than five percent of certain classes of securities); S13(e), 15 U. S. C. S78m(e) (authorizing Commission to adopt disclosure requirements for certain repurchases of securities by issuer); S14(d), 15 U. S. C. S78n(d) (disclosure requirements when tender offer results in offeror owning more than five percent of a class of securities); S14(f), 15 U. S. C. S78n(f) (disclosure requirements when tender offer results in new corporate directors constituting a majority). 96-842 - OPINION 24 UNITED STATES v. O'HAGAN __ imposed principles of `fairness' or `artificiality,' . . . the preferred method of market regulation." Id., at 9, n. 8. Section 14(e), we explained, ___ "supplements the more precise disclosure provisions found elsewhere in the Williams Act, while requiring disclosure more explicitly addressed to the tender offer context than that required by S10(b)." Id., at 10-11. ___ Relying on S14(e)'s rulemaking authorization, the Commission, in 1980, promulgated Rule 14e-3(a). That measure provides: "(a) If any person has taken a substantial step or steps to commence, or has commenced, a tender offer (the `offering person'), it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the [Exchange] Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from: "(1) The offering person, "(2) The issuer of the securities sought or to be sought by such tender offer, or "(3) Any officer, director, partner or employee or any other person acting on behalf of the offering person or such issuer, to purchase or sell or cause to be purchased or sold any of such securities or any securities convertible into or exchangeable for any such securities or any option or right to obtain or to dispose of any of the foregoing securities, unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed by press release or otherwise." 17 CFR S240.14e-3(a) (1996). As characterized by the Commission, Rule 14e-3(a) is a 96-842 - OPINION UNITED STATES v. O'HAGAN 25 __ "disclose or abstain from trading" requirement. 45 Fed. Reg. 60410 (1980). (Ftnote. 15) The Second Circuit concisely described the rule's thrust: (Ftnote. 15) "One violates Rule 14e-3(a) if he trades on the basis of material nonpublic information concerning a pending tender offer that he knows or has reason to know has been acquired `directly or indirectly' from an insider of the offeror or issuer, or someone working on their behalf. Rule 14e-3(a) is a disclosure provision. It creates a duty in those traders who fall within its ambit to abstain or disclose, without regard to whether the trader owes a ___________________________________________ pre-existing fiduciary duty to respect the confidentiality of the ___________________________ information." United States v. Chestman, 947 F. 2d 551, 557 (1991) (en banc) ______________ ________ (emphasis added), cert. denied, 503 U. S. 1004 (1992). See also SEC v. Maio, 51 F. 3d 623, 635 (CA7 1995) ("Rule 14e-3 creates a duty ___ ____ to disclose material non-public information, or abstain from trading in stocks implicated by an impending tender offer, regardless of whether such information ______________________________________ was obtained through a breach of fiduciary duty.") (emphasis added); SEC v. _______________________________________________ ___ Peters, 978 F. 2d 1162, 1165 (CA10 1992) (as written, Rule 14e-3(a) has no ______ fiduciary duty requirement). In the Eighth Circuit's view, because Rule 14e-3(a) applies whether or not the trading in question breaches a fiduciary duty, the regulation exceeds the SEC's S14(e) rulemaking authority. See 92 F. 3d, at 624, 627. Contra, Maio, 51 ____ F. 3d, at 634-635 (CA7); Peters, 978 F. 2d, at 1165-1167 (CA10); Chestman, 947 ______ ________ F. 2d, at 556-563 (CA2) (all holding Rule 14e-3(a) a proper exercise of SEC's statutory authority). In support of its holding, ____________________ 15) The rule thus adopts for the tender offer context a requirement 15) resembling the one Chief Justice Burger would have adopted in Chiarella for _________ misappropriators under S10(b). See supra, at 10, n. 6. ______ 96-842 - OPINION 26 UNITED STATES v. O'HAGAN __ the Eighth Circuit relied on the text of S14(e) and our decisions in Schreiber _________ and Chiarella. See 92 F. 3d, at 624-627. _________ The Eighth Circuit homed in on the essence of S14(e)'s rulemaking authorization: "[T]he statute empowers the SEC to `define' and `prescribe means reasonably designed to prevent' `acts and practices' which are `fraudulent.'" Id., at 624. All that means, the Eighth Circuit found plain, is that the SEC ___ may "identify and regulate," in the tender offer context, "acts and practices" the law already defines as "fraudulent"; but, the Eighth Circuit maintained, the SEC may not "create its own definition of fraud." Ibid. (internal quotation _____ marks omitted). This Court, the Eighth Circuit pointed out, held in Schreiber that the word _________ "manipulative" in the S14(e) phrase "fraudulent, deceptive, or manipulative acts or practices" means just what the word means in S10(b): Absent misrepresentation or nondisclosure, an act cannot be indicted as manipulative. See 92 F. 3d, at 625 (citing Schreiber, 472 U. S., at 7-8, and n. 6). Section 10(b) __________ interpretations guide construction of S14(e), the Eighth Circuit added, see 92 F. 3d, at 625, citing this Court's acknowledgment in Schreiber that S14(e)'s _________ "`broad antifraud prohibition' . . . [is] modeled on the antifraud provisions of S10(b) . . . and Rule 10b-5," 472 U. S., at 10 (citation omitted); see id., ___ at 10-11, n. 10. For the meaning of "fraudulent" under S10(b), the Eighth Circuit looked to Chiarella. See 92 F. 3d, at 625. In that case, the Eighth Circuit recounted, _________ this Court held that a failure to disclose information could be "fraudulent" under S10(b) only when there was a duty to speak arising out of "`a fiduciary or other similar relationship of trust and confidence.'" Chiarella, 445 U. S., _________ at 228 (quoting Restatement (Second) of Torts S551(2)(a) (1976)). Just as S10(b) demands a showing of a breach of fiduciary duty, so such a breach is necessary to make out a S14(e) violation, the Eighth Circuit 96-842 - OPINION UNITED STATES v. O'HAGAN 27 __ concluded. As to the Commission's S14(e) authority to "prescribe means reasonably designed to prevent" fraudulent acts, the Eighth Circuit stated: "Properly read, this provision means simply that the SEC has broad regulatory powers in the field of tender offers, but the statutory terms have a fixed meaning which the SEC cannot alter by way of an administrative rule." 92 F. 3d, at 627. The United States urges that the Eighth Circuit's reading of S14(e) misapprehends both the Commission's authority to define fraudulent acts and the Commission's power to prevent them. "The `defining' power," the United States submits, "would be a virtual nullity were the SEC not permitted to go beyond common law fraud (which is separately prohibited in the first [self-operative] sentence of Section 14(e))." Brief for United States 11; see id., at 37. ___ In maintaining that the Commission's power to define fraudulent acts under S14(e) is broader than its rulemaking power under S10(b), the United States questions the Court of Appeals' reading of Schreiber. See id., at 38-40. _________ ___ Parenthetically, the United States notes that the word before the Schreiber _________ Court was "manipulative"; unlike "fraudulent," the United States observes, "`manipulative' . . . is `virtually a term of art when used in connection with the securities markets.'" Id., at 38, n. 20 (quoting Schreiber, 472 U. S., at ___ __________ 6). Most tellingly, the United States submits, Schreiber involved acts alleged _________ to violate the self-operative provision in S14(e)'s first sentence, a sentence containing language similar to S10(b). But S14(e)'s second sentence, containing the rulemaking authorization, the United States points out, does not track S10(b), which simply authorizes the SEC to proscribe "manipulative or deceptive device[s] or contrivance[s]." Brief for United States 38. Instead, S14(e)'s rulemaking prescription tracks S15(c)(2)(D) of the Exchange Act, 15 U. S. C. S78o(c)(2)(D), which concerns 96-842 - OPINION 28 UNITED STATES v. O'HAGAN __ the conduct of broker-dealers in over-the-counter markets. See Brief for United States 38-39. Since 1938, see 52 Stat. 1075, S15(c)(2) has given the Commission authority to "define, and prescribe means reasonably designed to prevent, such [broker-dealer] acts and practices as are fraudulent, deceptive, or manipulative." 15 U. S. C. S78o(c)(2)(D). When Congress added this same rulemaking language to S14(e) in 1970, the Government states, the Commission had already used its S15(c)(2) authority to reach beyond common law fraud. See Brief for United States 39, n. 22. (Ftnote. 16) (Ftnote. 16) We need not resolve in this case whether the Commission's authority under S14(e) to "define . . . such acts and practices as are fraudulent" is broader than the Commission's fraud-defining authority under S10(b), for we agree with the United States that Rule 14e-3(a), as applied to cases of this genre, qualifies under S14(e) as a "means reasonably designed to prevent" fraudulent trading on material, nonpublic information in the tender offer context. (Ftnote. 17) A prophylactic measure, because its (Ftnote. 17) ____________________ 16) The Government draws our attention to the following measures: 17 CFR 16) S240.15c2-1 (1970) (prohibiting a broker-dealer's hypothecation of a customer's securities if hypothecated securities would be commingled with the securities of another customer, absent written consent); S240.15c2-3 (1970) (prohibiting transactions by broker-dealers in unvalidated German securities); S240.15c2-4 (1970) (prohibiting broker-dealers from accepting any part of the sale price of a security being distributed unless the money received is promptly transmitted to the persons entitled to it); S240.15c2-5 (1970) (requiring broker-dealers to provide written disclosure of credit terms and commissions in connection with securities sales in which broker-dealers extend credit, or participate in arranging for loans, to the purchasers). See Brief for United States 39, n. 22. 17) We leave for another day, when the issue requires decision, the 17) legitimacy of Rule 14e-3(a) as applied to "warehousing," which the Government describes as "the practice by which bidders leak advance information of a tender offer to allies and encourage them to purchase the target company's stock before the bid is announced." Reply Brief 17. As we observed in Chiarella, one of the _________ Commission's purposes in proposing Rule 14e-3(a) was "to bar warehousing under its authority to regulate tender offers." 445 U. S., at 234. The Government acknowledges that trading authorized by a principal breaches no fiduciary duty. See Reply Brief 17. The instant case, however, does not involve trading autho- rized by a principal; therefore, we need not here decide whether the Commission's proscription of warehousing falls within its S14(e) authority to define or prevent fraud. 96-842 - OPINION UNITED STATES v. O'HAGAN 29 __ mission is to prevent, typically encompasses more than the core activity prohibited. As we noted in Schreiber, S14(e)'s rulemaking authorization gives _________ the Commission "latitude," even in the context of a term of art like "manipulative," "to regulate nondeceptive activities as a `reasonably designed' means of preventing manipulative acts, without suggesting any change in the meaning of the term `manipulative' itself." 472 U. S., at 11, n. 11. We hold, accordingly, that under S14(e), the Commission may prohibit acts, not themselves fraudulent under the common law or S10(b), if the prohibition is "reasonably designed to prevent . . . acts and practices [that] are fraudulent." 15 U. S. C. S78n(e). (Ftnote. 18) (Ftnote. 18) Because Congress has authorized the Commission, in S14(e), to prescribe legislative rules, we owe the Commission's judgment "more than mere deference or weight." Batterton v. Francis, 432 U. S. 416, 424-426 (1977). Therefore, in _________ _______ determining whether Rule 14e-3(a)'s "disclose or abstain from trading" requirement is reasonably designed to prevent fraudulent acts, we must accord the Commission's assessment "controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute." Chevron U. S. A. Inc. v. _____________________ Natural Resources Defense Council, Inc., 467 U. S. 837, 844 (1984). In this ______________________________________ case, we conclude, the Commission's ____________________ 18) The Commission's power under S10(b) is more limited. See supra, at 6 18) ______ (Rule 10b-5 may proscribe only conduct that S10(b) prohibits). 96-842 - OPINION 30 UNITED STATES v. O'HAGAN __ assessment is none of these. (Ftnote. 19) (Ftnote. 19) In adopting the "disclose or abstain" rule, the SEC explained: "The Commission has previously expressed and continues to have serious concerns about trading by persons in possession of material, nonpublic infor- mation relating to a tender offer. This practice results in unfair disparities in market information and market disruption. Security holders who purchase from or sell to such persons are effectively denied the benefits of disclosure and the substantive protections of the Williams Act. If furnished with the information, these security holders would be able to make an informed investment decision, which could involve deferring the purchase or sale of the securities until the material information had been disseminated or until the tender offer has been commenced or terminated." 45 Fed. Reg. 60412 (1980) (footnotes omitted). The Commission thus justified Rule 14e-3(a) as a means necessary and proper to assure the efficacy of Williams Act protections. The United States emphasizes that Rule 14e-3(a) ____________________ 19) The dissent urges that the Commission must be precise about the 19) authority it is exercising - that it must say whether it is acting to "define" or to "prevent" fraud - and that in this instance it has purported only to define, not to prevent. See post, at 18-19. The dissent sees this precision in _____ Rule 14e-3(a)'s words: "it shall constitute a fraudulent . . . act . . . within the meaning of section 14(e) . . . ." We do not find the Commission's rule vulnerable for failure to recite as a regulatory preamble: We hereby exercise our authority to "define, and prescribe means reasonably designed to prevent, . . . [fraudulent] acts." Sensibly read, the rule is an exercise of the Commission's full authority. Logically and practically, such a rule may be conceived and defended, alternatively, as definitional or preventive. 96-842 - OPINION UNITED STATES v. O'HAGAN 31 __ reaches trading in which "a breach of duty is likely but difficult to prove." Reply Brief 16. "Particularly in the context of a tender offer," as the Tenth Circuit recognized, "there is a fairly wide circle of people with confidential information," Peters, 978 F. 2d, at 1167, notably, the attorneys, investment ______ bankers, and accountants involved in structuring the transaction. The availability of that information may lead to abuse, for "even a hint of an upcoming tender offer may send the price of the target company's stock soaring." SEC v. Materia, 745 F. 2d 197, 199 (CA2 1984). Individuals entrusted with ___ _______ nonpublic information, particularly if they have no long-term loyalty to the issuer, may find the temptation to trade on that information hard to resist in view of "the very large short-term profits potentially available [to them]." Peters, 978 F. 2d, at 1167. ______ "[I]t may be possible to prove circumstantially that a person [traded on the basis of material, nonpublic information], but almost impossible to prove that the trader obtained such information in breach of a fiduciary duty owed either by the trader or by the ultimate insider source of the information." Ibid. The _____ example of a "tippee" who trades on information received from an insider illustrates the problem. Under Rule 10b-5, "a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic infor- mation only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach." Dirks, 463 U. S., at 660. To show that a tippee _____ who traded on nonpublic information about a tender offer had breached a fiducia- ry duty would require proof not only that the insider source breached a fiduciary duty, but that the tippee knew or should have known of that breach. "Yet, in most cases, the only parties to the [information transfer] will be the insider and the alleged tippee." Peters, 978 F. 2d, at ______ 96-842 - OPINION 32 UNITED STATES v. O'HAGAN __ 1167. (Ftnote. 20) (Ftnote. 20) In sum, it is a fair assumption that trading on the basis of material, nonpublic information will often involve a breach of a duty of confidentiality to the bidder or target company or their representatives. The SEC, cognizant of the proof problem that could enable sophisticated traders to escape responsibility, placed in Rule 14e-3(a) a "disclose or abstain from trading" command that does not require specific proof of a breach of fiduciary duty. That prescription, we are satisfied, applied to this case, is a "means reasonably designed to prevent" fraudulent trading on material, nonpublic information in the tender offer context. See Chestman, 947 F. 2d, at 560 ________ ("While dispensing with the subtle problems of proof associated with demonstrating fiduciary breach in the problematic area of tender offer insider trading, [Rule 14e-3(a)] retains a close nexus between the prohibited conduct and the statutory aims."); accord, Maio, 51 F. 3d, at 635, and n. 14; Peters, ____ ______ 978 F. 2d, at 1167. (Ftnote. 21) Therefore, insofar as it serves to prevent the (Ftnote. 21) type of misappropriation charged against O'Hagan, Rule ____________________ 20) The dissent opines that there is no reason to anticipate difficulties 20) in proving breach of duty in "misappropriation" cases. "Once the source of the [purloined] information has been identified," the dissent asserts, "it should be a simple task to obtain proof of any breach of duty." Post, at 20. To test _____ that assertion, assume a misappropriating partner at Dorsey & Whitney told his daughter or son and a wealthy friend that a tender for Pillsbury was in the offing, and each tippee promptly purchased Pillsbury stock, the child borrowing the purchase price from the wealthy friend. The dissent's confidence, post, at _____ 20, n. 12, that "there is no reason to suspect that the tipper would gratuitously protect the tippee," seems misplaced. 21) The dissent insists that even if the misappropriation of information 21) from the bidder about a tender offer is fraud, the Commission has not explained why such fraud is "in connection with" a tender offer. Post, at 19. What else, _____ one can only wonder, might such fraud be "in connection with"? 96-842 - OPINION UNITED STATES v. O'HAGAN 33 __ 14e-3(a) is a proper exercise of the Commission's prophylactic power under S14(e). (Ftnote. 22) (Ftnote. 22) As an alternate ground for affirming the Eighth Circuit's judgment, O'Hagan urges that Rule 14e-3(a) is invalid because it prohibits trading in advance of a tender offer - when "a substantial step . . . to commence" such an offer has been taken - while S14(e) prohibits fraudulent acts "in connection with any tender offer." See Brief for Respondent 41-42. O'Hagan further contends that, by covering pre-offer conduct, Rule 14e-3(a) "fails to comport with due process on two levels": The rule does not "give fair notice as to when, in advance of a tender offer, a violation of S14(e) occurs," id., at 42; and it "disposes of any ___ scienter requirement," id., at 43. The Court of Appeals did not address these ___ arguments, and O'Hagan did not raise the due process points in his briefs before that court. We decline to consider these contentions in the first instance. (Ftnote. 23) The Court of Appeals may address on remand any arguments (Ftnote. 23) O'Hagan has preserved. IV Based on its dispositions of the securities fraud convictions, the Court of Appeals also reversed O'Hagan's convictions, under 18 U. S. C. S1341, for mail fraud. See 92 F. 3d, at 627-628. Reversal of the securities ____________________ 22) Repeating the argument it made concerning the misappropriation theory, 22) see supra, at 21, n. 11, the United States urges that Congress confirmed Rule ______ 14e-3(a)'s validity in ITSFEA, 15 U. S. C. S78u-1. See Brief for United States 44-45. We uphold Rule 14e-3(a) on the basis of S14(e) itself and need not address ITSFEA's relevance to this case. 23) As to O'Hagan's scienter argument, we reiterate that 15 U. S. C. 23) S78ff(a) requires the Government to prove "willful[l] violat[ion]" of the securities laws, and that lack of knowledge of the relevant rule is an affirmative defense to a sentence of imprisonment. See supra, at 21-22. _____ 96-842 - OPINION 34 UNITED STATES v. O'HAGAN __ convictions, the Court of Appeals recognized, "d[id] not as a matter of law require that the mail fraud convictions likewise be reversed." Id., at 627 ___ (citing Carpenter, 484 U. S., at 24, in which this Court unanimously affirmed __________ mail and wire fraud convictions based on the same conduct that evenly divided the Court on the defendants' securities fraud convictions). But in this case, the Court of Appeals said, the indictment was so structured that the mail fraud charges could not be disassociated from the securities fraud charges, and absent any securities fraud, "there was no fraud upon which to base the mail fraud charges." 92 F. 3d, at 627-628. (Ftnote. 24) (Ftnote. 24) The United States urges that the Court of Appeals' position is irreconcilable with Carpenter: Just as in Carpenter, so here, the "mail fraud charges are __________ _________ independent of [the] securities fraud charges, even [though] both rest on the same set of facts." Brief for United States 46-47. We need not linger over this matter, for our rulings on the securities fraud issues require that we reverse the Court of Appeals judgment on the mail fraud counts as well. (Ftnote. 25) (Ftnote. 25) ____________________ 24) The Court of Appeals reversed respondent's money laundering convictions 24) on similar reasoning. See 92 F. 3d, at 628. Because the United States did not seek review of that ruling, we leave undisturbed that portion of the Court of Appeals' judgment. 25) The dissent finds O'Hagan's convictions on the mail fraud counts, but 25) not on the securities fraud counts, sustainable. Post, at 23-24. Under the _____ dissent's view, securities traders like O'Hagan would escape SEC civil actions and federal prosecutions under legislation targeting securities fraud, only to be caught for their trading activities in the broad mail fraud net. If misappropriation theory cases could proceed only under the federal mail and wire fraud statutes, practical consequences for individual defendants might not be large, see Aldave, 49 Ohio St. L. J., at 381, and n. 60; however, "propor- tionally more persons accused of insider trading [might] be pursued by a U. S. Attorney, and proportionally fewer by the SEC," id., at 382. Our decision, of ___ course, does not rest on such enforcement policy considerations. 96-842 - OPINION UNITED STATES v. O'HAGAN 35 __ O'Hagan, we note, attacked the mail fraud convictions in the Court of Appeals on alternate grounds; his other arguments, not yet addressed by the Eighth Circuit, remain open for consideration on remand. * * * The judgment of the Court of Appeals for the Eighth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion. It is so ordered. _________________