United States v. Chestman

947 F.2d 551, cert. denied, 503 U.S. 1004 (2nd Cir. 1991)

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Nature of the Case

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Facts

Ira Waldbaum was the controlling stockholder of Waldbaum, Inc., a corporation owning a large supermarket chain. In 1986, Ira agreed to sell the corporation to A&P. The sale was to take place at $50 per share with the current market price being $25. Ira told his sister who, despite admonishes to keep quiet, told her daughter, who told her husband, who told his broker, Chestman (D). D bought 3,000 shares for his own account at $24.65 per share and purchased an additional 8,000 shares for his clients' discretionary accounts at prices ranging from $25.75 to $26.00 per share. One of the discretionary accounts was the Loeb account, for which D bought 1,000 shares. Loeb called D a second time and ordered another 1,000 shares. Before the SEC and at trial, D claimed that he had purchased Waldbaum stock based on his own research supported by reports in trade publications as well as the unusually high trading volume of the stock on November 25. He denied having spoken to Loeb on the day of the trades. At the close of trading on November 26, the tender offer was publicly announced, and the stock rose to $49 per share the next business day. A grand jury returned an indictment for insider trading and perjury: ten counts of fraudulent trading in connection with a tender offer in violation of Rule 14e-3(a), ten counts of securities fraud in violation of Rule 10b-5, ten counts of mail fraud, and one count of perjury in connection with his testimony before the SEC. The district court thereafter denied D's motion to dismiss the indictment. D was found guilty on all counts. D appealed. He claimed that Rule 14e-3(a) was invalid because the SEC had exceeded its statutory authority in promulgating a rule that dispensed with one of the common law elements of fraud. He also argued that there was insufficient evidence to sustain his Rule 10b-5, mail fraud, and perjury convictions. A panel reversed D's convictions on all counts, issuing three separate opinions on the Rule 14e-3(a) charges. A majority of the active judges of the Court voted to rehear in banc the panel's decision with respect to the Rule 14e-3(a), Rule 10b-5, and mail fraud convictions.