United States v. O'Hagan, 521 U.S. 642, 4 (1997)

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Cite as: 521 U. S. 642 (1997)


tory authorization, Rule 14e-3(a) forbids any person to trade on the basis of material, nonpublic information that concerns a tender offer and that the person knows or should know has been acquired from an insider of the offeror or issuer, or someone working on their behalf, unless within a reasonable time before any purchase or sale such information and its source are publicly disclosed. Rule 14e-3(a) imposes a duty to disclose or abstain from trading whether or not the trader owes a fiduciary duty to respect the confidentiality of the information. In invalidating Rule 14e-3(a), the Eighth Circuit reasoned, inter alia, that § 14(e) empowers the SEC to identify and regulate "fraudulent" acts, but not to create its own definition of "fraud"; that, under Schreiber v. Burlington Northern, Inc., 472 U. S. 1, 7-8, § 10(b) interpretations guide construction of § 14(e); and that, under Chiarella, supra, at 228, a failure to disclose information can be "fraudulent" for § 10(b) purposes only when there is a duty to speak arising out of a fiduciary or similar relationship of trust and confidence. This Court need not resolve whether the SEC's § 14(e) fraud-defining authority is broader than its like authority under § 10(b), for Rule 14e-3(a), as applied to cases of this genre, qualifies under § 14(e) as a "means reasonably designed to prevent" fraudulent trading on material, nonpublic information in the tender offer context. A prophylactic measure properly encompasses more than the core activity prohibited. Under § 14(e), the SEC may prohibit acts not themselves fraudulent under the common law or § 10(b), if the prohibition is reasonably designed to prevent acts and practices that are fraudulent. See Schreiber, supra, at 11, n. 11. This Court must accord the SEC's assessment in that regard 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. In this case, the SEC's assessment is none of these. 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 proof problems that could enable sophisticated traders to escape responsibility for such trading, 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. Insofar as it serves to prevent the type of misappropriation charged against O'Hagan, the Rule is therefore a proper exercise of the SEC's prophylactic power under § 14(e). This Court declines to consider in the first instance O'Hagan's alternate arguments that Rule 14e-3(a)'s prohibition of pre-offer trading conflicts with § 14(e) and violates due process. The Eighth Circuit may address on remand any such argument that O'Hagan has preserved. Pp. 666-677.


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