• Introduction
• Pre-Securities Act Common Law Enforcement
• The Securities Exchange Act of 1934 - Principles of Full Disclosure
• Foundations of Fairness: The SEC Develops Theories and Rules on Corporate Disclosure
• The SEC Takes Command
• Counterattack From the Supreme Court
  • The Influence of Justice Powell
  • Chiarella v. United States
  • Dirks v. SEC
  • Carpenter v. United States
• Raising the Stakes
• Power of SEC Resilience
• Old Debate and New Rules: SEC Regulation of Insider Trading in the Global Marketplace

Fair To All People: The SEC and the Regulation of Insider Trading

Counterattack From the Supreme Court

Carpenter v. United States

The final case in which Justice Powell asserted his intellectual opposition to SEC policy was Carpenter v. United States.(42) Carpenter involved R. Foster Winans, a reporter for The Wall Street Journal, who worked on "Heard on the Street," a financial news column. He would pass information to David Carpenter, who would then pass it along to Kenneth Felis, a stockbroker. Based on the information which would appear in the next day's column, Felis would buy or sell stock in the affected companies. The defendants used the non-public information, which the newspaper considered its property, to net $690,000 from the scheme.

October 1, 1982 Washington, D.C.: United States President Ronald Reagan poses for a formal portrait with the judges of the United States Supreme Court. From left to right (standing) are: John Paul Stevens; Lewis. F. Powell, Jr.; William H. Rehnquist and Sandra Day O'Connor. Seated are: Thurgood Marshall; William J. Brennan, Jr.; Chief Justice Warren Burger; President Reagan; Byron White and Harry Blackmun. ©Bettmann/Corbis

At the lower court level, the SEC successfully argued that the civil liability of the defendants rested on their misappropriation of the information that they had shared with others, who used it to make profitable stock sales. After their criminal convictions of violating several federal criminal statutes and of violating insider trading rules on the basis of the misappropriation theory, the defendants appealed to the Supreme Court.

After an initial denial of certiorari, Justice Powell, who badly wanted to hear the case in order to reject the misappropriation theory once and for all, wrote a draft dissent from the Supreme Court's denial of certiorari which he circulated among the Justices. Powell argued that Carpenter's conduct was not illegal because, under his theory adopted in Chiarella, liability for failure to disclose material information about a transaction under Rule 10b-5 arose only if premised on a relationship of trust and confidence between parties to that transaction. Powell insisted that the common law of fraud was the only basis of any liability Carpenter could be convicted of under the statute.

Since previous cases did not support the proposition that the fiduciary duty an individual owed to his employee could support an action under Rule 10b-5, Powell argued that Carpenter's conduct did not violate the law.(43) This argument swayed Chief Justice Rehnquist and Justice O'Connor to join the draft dissent and grant certiorari. However, before the case was argued, Justice Powell retired; without Powell, the Supreme Court eventually split 4-4 on whether the misappropriation theory was valid for imposing Rule 10b-5 liability. That issue would not be finally decided by the Supreme Court for another ten years.

Powell proved a formidable foil to SEC lawyers working for an expansive reading of their authority under Rule 10b-5. His pre-Court experience and clear understanding of securities and corporate law allowed him to influence his colleagues on the Supreme Court and to delay, at least for a decade, the expansive advancing theories that the SEC proposed for insider trading regulation. Ironically, the takeover and insider trading scandals of the 1980s posed a different but still substantial challenge to the SEC's interpretation of their authority to regulate insider trading.

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